[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Proposed Rules]
[Pages 3926-4065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30508]
[[Page 3925]]
Vol. 79
Thursday,
No. 15
January 23, 2014
Part II
Securities and Exchange Commission
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17 CFR Parts 230, 232, 239, et al.
Proposed Rule Amendments for Small and Additional Issues Exemptions
Under Section 3(b) of the Securities Act; Proposed Rule
Federal Register / Vol. 79 , No. 15 / Thursday, January 23, 2014 /
Proposed Rules
[[Page 3926]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, 240 and 260
[Release Nos. 33-9497; 34-71120; 39-2493; File No. S7-11-13]
RIN 3235-AL39
Proposed Rule Amendments for Small and Additional Issues
Exemptions Under Section 3(b) of the Securities Act
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: We are proposing rule amendments to Regulation A to implement
Section 401 of the Jumpstart Our Business Startups Act. Section 401 of
the JOBS Act added Section 3(b)(2) to the Securities Act, which directs
the Commission to adopt rules exempting offerings of up to $50 million
of securities annually from the registration requirements of the
Securities Act. The proposed rules include issuer eligibility
requirements, content and filing requirements for offering statements
and ongoing reporting requirements for issuers.
DATES: Comments should be received by March 24, 2014.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
Use the Commission's Internet comment forms (http://www.sec.gov/rules/proposed.shtml);
Send an email to [email protected]. Please include
File Number S7-11-13 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments:
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-11-13. This file
number should be included on the subject line if email is used. To help
us process and review your comments more efficiently, please use only
one method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street NE., Room 1580,
Washington, DC 20549. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Zachary O. Fallon, Special Counsel;
Shehzad K. Niazi, Attorney-Advisor; or Karen C. Wiedemann, Attorney
Fellow; Office of Small Business Policy, Division of Corporation
Finance, at (202) 551-3460, U.S. Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We propose to amend Rules 251 through 263
\1\ under Regulation A.\2\
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\1\ 17 CFR 230.251 through 230.263.
\2\ 17 CFR 230.251 through 230.263.
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We also propose to revise Form 1-A,\3\ rescind Form 2-A,\4\ and
create four new forms, Form 1-K (annual updates), Form 1-SA (semiannual
updates), Form 1-U (current reporting), and Form 1-Z (exit report).
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\3\ 17 CFR 239.90.
\4\ 17 CFR 239.91.
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We further propose to revise Rule 4a-1 \5\ under the Trust
Indenture Act \6\ to increase the dollar ceiling of the exemption from
the requirement to issue securities pursuant to an indenture, and to
amend Rule 15c2-11 \7\ of the Securities Exchange Act of 1934 (the
``Exchange Act'') \8\ to permit an issuer's ongoing reports filed under
Regulation A to satisfy a broker-dealer's obligations to review and
maintain certain information about an issuer's quoted securities. In
addition, we propose a technical amendment to Exchange Act Rule 15c2-11
to amend subsection (d)(2)(i) of the rule to update the outdated
reference to the ``Schedule H of the By-Laws of the National
Association of Securities Dealers, Inc.'' which is now known as the
``Financial Industry Regulatory Authority, Inc.'' and to reflect the
correct rule reference.
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\5\ 17 CFR 260.4a-1.
\6\ 15 U.S.C. 77aaa et seq.
\7\ 17 CFR 240.15c2-11.
\8\ 15 U.S.C. 78a et seq.
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As a result of the proposed revisions to Regulation A, conforming
and technical amendments would be made to Rule 157(a),\9\ in order to
reflect amendments to Section 3(b) of the Securities Act, and Rule
505(b)(2)(iii),\10\ in order to reflect the proposed changes to Rule
262 of Regulation A. Additionally, Item 101(a) \11\ of Regulation S-T
\12\ would be revised to reflect the mandatory electronic filing of all
issuer initial filing and ongoing reporting requirements under proposed
Regulation A. The portion of Item 101(c)(6) \13\ of Regulation S-T
dealing with paper filings related to a Regulation A offering, and Item
101(b)(8) \14\ of Regulation S-T dealing with the optional electronic
filing of Form F-X by Canadian issuers, would therefore be rescinded.
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\9\ 17 CFR 230.157(a).
\10\ 17 CFR 230.505(b)(2)(iii).
\11\ 17 CFR 232.101(a).
\12\ 17 CFR 232.10 et seq.
\13\ 17 CFR 232.101(c)(6).
\14\ 17 CFR 232.101(b)(8).
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Table of Contents
I. Introduction and Background
A. JOBS Act Section 401
B. Current Regulation A
C. Use of Regulation A
D. The Section 3(b)(2) Exemption
II. Proposed Amendments to Regulation A
A. Overview
B. Scope of Exemption
1. Eligible Issuers
2. Eligible Securities
3. Offering Limitations and Secondary Sales
4. Investment Limitation
5. Integration
6. Treatment Under Section 12(g)
7. Liability Under Section 12(a)(2)
C. Offering Statement
1. Electronic Filing; Delivery Requirements
2. Non-Public Submission of Draft Offering Statements
3. Form and Content
4. Continuous or Delayed Offerings and Offering Circular
Supplements
5. Qualification
D. Solicitation of Interest (``Testing the Waters'')
E. Ongoing Reporting
1. Continuing Disclosure Obligations
2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing
Reporting Under Regulation A
3. Exchange Act Registration of Regulation A Securities
4. Exit Report on Form 1-Z
F. Insignificant Deviations From a Term, Condition or
Requirement
G. Bad Actor Disqualification
H. Relationship With State Securities Law
I. Regulation A in Comparison to Other Methods of Capital
Formation
J. Additional Considerations Related to Smaller Offerings
K. Regulation A Offering Limitation
L. Technical and Conforming Amendments
III. General Request for Comment
IV. Economic Analysis
A. Economic Baseline
1. Current Methods of Raising up to $50 Million of Capital
2. Liquidity Considerations
3. Investors in Offerings of up to $50 Million
B. Analysis of Proposed Rules
1. General Considerations
2. Scope of Exemption
3. Offering Statement
4. Solicitation of Interest (``Testing the Waters'')
5. Ongoing Reporting Requirements
6. Bad Actor Disqualification
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7. Relationship With State Securities Law
8. Effect of Regulation A on OTC Markets and Dealer
Intermediation
C. Request for Comment
V. Paperwork Reduction Act
A. Background
B. Estimate of Issuers
C. Estimate of Issuer Burdens
1. Regulation A (Form 1-A and Form 2-A)
2. Form 1-K: Annual Report
3. Form 1-SA: Semiannual Report
4. Form 1-U: Current Reporting
5. Form 1-Z: Exit Report
6. Form ID Filings
D. Collections of Information Are Mandatory
E. Request for Comment
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for the Proposed Action
B. Objectives
C. Legal Basis
D. Small Entities Subject to the Proposed Rules
E. Reporting, Recordkeeping, and Other Compliance Requirements
F. Duplicative, Overlapping or Conflicting Federal Rules
G. Significant Alternatives
H. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Basis and Text of Proposed Amendments
I. Introduction and Background
A. JOBS Act Section 401
This rulemaking would implement a statutory directive under the
Jumpstart Our Business Startups Act (the ``JOBS Act'') \15\ to create a
new exemption from registration under the Securities Act of 1933 (the
``Securities Act'') for small offerings. Section 401 of the JOBS Act
amended Section 3(b) of the Securities Act by designating existing
Section 3(b), the Commission's exemptive authority for offerings of up
to $5 million, as Section 3(b)(1), and creating a new Section 3(b)(2).
New Section 3(b)(2) directs the Commission to adopt rules adding a
class of securities exempt from the registration requirements of the
Securities Act for offerings of up to $50 million of securities within
a twelve-month period. Issuers conducting offerings in reliance on
Section 3(b)(2) would be required to follow terms and conditions
established by the Commission, and, where applicable, to make ongoing
disclosure.
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\15\ Public Law 112-106, 126 Stat. 306.
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Congress enacted Section 3(b)(2) against a background of public
commentary suggesting that Regulation A, an exemption for small issues
originally adopted by the Commission in 1936 under the authority of
Section 3(b) of the Securities Act,\16\ should be expanded and updated
to make it more useful to small companies.\17\ Section 3(b)(2) requires
us to engage in rulemaking that is meant to increase the use of
Regulation A, thereby helping to make capital available to small
companies.\18\
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\16\ SEC Release No. 33-632 (Jan. 21, 1936). Prior to
codification as such, Regulation A was a collection of individual
rules issued by the Federal Trade Commission and the Commission
during the period of 1933-1936. Each such rule exempted particular
classes of securities from registration under the Securities Act.
Regulation A's initial annual offering limit was raised from
$100,000 to $300,000 in 1945, $500,000 in 1970, $1.5 million in
1978, and to its current level of $5 million in 1992.
\17\ H.R. Rep. No. 112-206 (2011), at 3-4. See also Remarks and
prepared statements of William Hambrecht, CEO of WR Hambrecht + Co.,
(``A confluence of . . . reasons . . . has made Regulation A a poor
alternative for small growth-oriented companies seeking to raise
development capital and also explains why the offering mechanism has
virtually disappeared from the capital raising landscape.''), and
Michael Lempres, Asst. General Counsel, SVB Financial Group,
(``Regulation A has not proved to be a useful capital raising
vehicle for small issuers. . . . An average of eight filings a year,
with a maximum amount of $5 million each, proves the irrelevance of
Regulation A as it stands today. It simply is not a viable vehicle
for raising funds and is providing benefit to neither companies nor
investors.'') before the H. Comm. on Fin. Serv. for the 111th
Congress, Serial No. 111-168 (December 8, 2010), available at:
http://archives.financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1381; Remarks and prepared statement of
David Weild, Sr. Advisor, Grant Thorton, (``[A]n increase to the
Regulation A [offering] ceiling will provide a less costly and more
effective alternative for smaller, entrepreneurial companies that
want to access the public capital markets. It may also enable
smaller, growth-oriented companies to access the public market at an
earlier stage in their growth cycle.'') before the H. Comm. on Fin.
Serv., Subcommittee on Capital Markets and Gov't Sponsored Entities
for the 112th Congress, Serial No. 112-19 (March 16, 2011),
available at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231755; Remarks and prepared statements of
Professor John C. Coffee, Columbia Law School (``[I]n 2010 only
seven offerings went effective under Regulation A (which is based on
Section 3(b)). Most issuers saw Section 3(b) as unattractive (in
comparison to a private placement under Regulation D) both because
of Section 3(b)'s low ceiling (i.e., $5 million) and the need to
file an offering document that is reviewed by the SEC.''), before
the U.S. Senate Comm. on Banking, Housing and Urban Affairs
(December 1, 2011), available at: http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=a96c1bc1-b064-4b01-a8ad-11e86438c7e5; U.S. Government Accountability Office
(GAO), Factors that May Affect Trends in Regulation A Offerings
(July 2012) (available at: http://www.gao.gov/assets/600/592113.pdf).
\18\ H.R. Rep. No. 112-206, at 3 (2011) (``The low number of
Regulation A filings--each for the maximum amount of $5 million--
demonstrates that a revision to Regulation A is necessary. To
increase the use of Regulation A offerings and help make capital
available to small companies, Representative Schweikert introduced
H.R. 1070, which increases the offering threshold to $50
million.'').
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To implement Section 401 of the JOBS Act, as mandated by Section
3(b)(2), we have endeavored to craft a workable revision of Regulation
A that would both promote small company capital formation and provide
for meaningful investor protection. We propose to amend Regulation A to
create two tiers of offerings: Tier 1, for offerings of up to $5
million in a twelve-month period, and Tier 2, for offerings of up to
$50 million in a twelve-month period. Both Tiers would be subject to
basic requirements as to issuer eligibility, disclosure, and other
matters, drawn from the current provisions of Regulation A and updated
in some areas to align Regulation A with current practice for
registered offerings. In addition to these basic requirements, Tier 2
offerings would be subject to additional requirements, including the
provision of audited financial statements, ongoing reporting
obligations, and certain limitations on sales.
B. Current Regulation A
Currently, Regulation A permits unregistered public offerings of up
to $5 million of securities in any twelve-month period by non-reporting
U.S. and Canadian companies, including no more than $1.5 million of
securities offered by securityholders of the company.\19\ The exemption
requires that an offering statement on Form 1-A be filed with the
Commission.\20\ Filings are made on paper,\21\ rather than
electronically, and are subject to staff review. The offering statement
must be ``qualified,'' \22\ which, in the absence of a delaying
notation, would occur without Commission action on the 20th calendar
day after filing.\23\ The core of the offering statement is the
offering circular, a disclosure document much like an abbreviated
version of the prospectus in a registered offering.\24\ The offering
circular, which must be delivered to prospective purchasers,\25\ can be
in a
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question-and-answer format or a more traditional narrative disclosure
format.\26\
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\19\ 17 CFR 230.251(a), (b). Under Rule 251(b), affiliates
resales are prohibited unless the issuer has had net income from
continuing operations in at least one of its last two fiscal years.
\20\ 17 CFR 230.251(d), 17 CFR 230.252.
\21\ 17 CFR 232.101(c)(6).
\22\ 17 CFR 230.251(g). See also 17 CFR 200.30-1(b)(2)
(delegated authority to authorize the qualification of offering
statements under Regulation A to the Director of the Division of
Corporation Finance).
\23\ The qualification process under Regulation A is similar to
the process of a registration statement being declared effective
under the Securities Act. As with registration, the staff review
process for an offering circular generally takes more than the 20
calendar days provided by rule, even taking into account that pre-
qualification amendments to an offering statement restart the 20
calendar-day period. Issuers include a delaying notation on Form 1-A
to ensure that both the issuer and staff reviewing the offering
statement have completed the review process before an offering
statement is qualified.
\24\ 17 CFR 230.253.
\25\ 17 CFR 230.251(d).
\26\ Form 1-A, Part II (Offering Circular), 17 CFR 239.90.
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Regulation A permits issuers to communicate with potential
investors, or ``test the waters'' for potential interest in the
offering, before filing the offering statement.\27\ Any solicitation
material used to test the waters must be submitted to the Commission
not later than the time of first use and must contain a required legend
or disclaimer.\28\
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\27\ 17 CFR 230.254.
\28\ 17 CFR 230.254(b)(2). Testing the waters solicitation
materials must state: (i) That no money is being solicited or will
be accepted, if sent in response; (ii) that no sales will be made or
commitment to purchase accepted until delivery of an offering
circular that includes complete information about the issuer and the
offering; (iii) that an indication of interest by a prospective
purchaser is non-binding; and (iv) the identity of the chief
executive officer of the issuer and a brief description of the
issuer's business and products.
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Regulation A offering circulars are required to contain issuer
financial statements,\29\ but the financial statements are not required
to be audited unless the issuer otherwise has audited financial
statements available.\30\ Qualification of a Regulation A offering
statement does not trigger reporting obligations under the Exchange
Act. A Regulation A offering is a public offering, with no prohibition
on general solicitation and general advertising. Securities sold under
Regulation A are not ``restricted securities'' under the Securities Act
and, therefore, are not subject to the limitations on resale that apply
to securities sold in private offerings.\31\
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\29\ 17 CFR 230.253(a).
\30\ Form 1-A, Part F/S, 17 CFR 239.90. Market participants have
indicated that the laws of some states may require audited financial
statements for offerings conducted under Regulation A.
\31\ See, e.g., 17 CFR 230.502(d); see also Rule 144 (17 CFR
230.144).
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Because Regulation A offerings are exempt from the registration
requirements of the Securities Act, issuers and other offering
participants are not subject to the liability provisions of Section 11
of the Securities Act. Instead, other anti-fraud and civil liability
provisions of the securities laws, including Sections 12(a)(2) and 17
of the Securities Act, Section 10(b) of the Exchange Act and Exchange
Act Rule 10b-5, apply to the offer and sale of securities in reliance
upon Regulation A.\32\ Securities offerings conducted pursuant to
Regulation A are subject to state securities law registration and
qualification requirements, unless an exemption is available under
state law.
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\32\ See SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at
fn. 57 (discussing the anti-fraud and civil liability provisions
applicable to Regulation A).
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C. Use of Regulation A
In recent years, Regulation A offerings have been rare in
comparison to offerings conducted in reliance on other Securities Act
exemptions or on a registered basis. From 2009 through 2012, there were
19 qualified Regulation A offerings for a total offering amount of
approximately $73 million.\33\ During the same period, there were
approximately 27,500 offerings of up to $5 million (i.e., at or below
the cap on Regulation A offering size), for a total offering amount of
approximately $25 billion, claiming a Regulation D exemption, and 373
offerings of up to $5 million, for a total offering amount of
approximately $840 million, conducted on a registered basis. In 2012
alone, there were eight qualified Regulation A offerings for a total
offering amount of approximately $34.5 million, compared to
approximately 7,700 Regulation D offerings of up to $5 million for a
total offering amount of approximately $7 billion, and 52 registered
offerings of up to $5 million for a total offering amount of
approximately $132 million.\34\
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\33\ One qualified offering involved a dividend reinvestment
plan by an issuer that did not include an offering amount.
\34\ The figures cited above are derived from information
contained in the Commission's EDGAR database and the S&P Capital IQ
database. See also Section IV. below for a discussion on the usage
of current methods of raising capital of up to $50 million.
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Section 402 of the JOBS Act required the Comptroller General to
conduct a study on the impact of state ``Blue Sky'' laws on offerings
conducted under Regulation A, and to report its findings to Congress.
The resulting U.S. Government Accountability Office (``GAO'') report to
Congress indicates that various factors may have influenced the use of
Regulation A, including the type of investors businesses seek to
attract, the process of filing the offering statement with the
Commission, state securities law compliance, and the cost-effectiveness
of Regulation A relative to other exemptions.\35\
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\35\ Factors that May Affect Trends in Regulation A Offerings,
GAO-12-839 (July 2012) (available at: http://www.gao.gov/assets/600/592113.pdf). The GAO report concludes that it is unclear whether
increasing the Regulation A offering ceiling from $5 million to $50
million will improve the utility of the exemption.
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D. The Section 3(b)(2) Exemption
Section 401 of the JOBS Act imposes a number of requirements for
the rules the Commission must adopt under Section 3(b)(2), and also
provides for the exercise of Commission discretion in setting
additional terms and conditions for the exemption.
The mandatory provisions, in addition to the $50 million annual
offering limit, include:
Features based on the current provisions of Regulation A:
the securities may be offered and sold publicly;
the securities are not ``restricted securities'' within
the meaning of federal securities laws and regulations;
the civil liability provisions of Section 12(a)(2) of the
Securities Act would apply to offers and sales of the securities; and
issuers may solicit interest in the offering before filing
an offering statement;
A new requirement for issuers to file audited financial
statements with the Commission annually; \36\ and
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\36\ JOBS Act Section 401(a)(2).
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A limitation on the types of securities eligible for
exemption under Section 3(b)(2) to equity securities, debt securities,
and debt securities convertible into or exchangeable for equity
interests, including any guarantees of such securities.
The Commission, in its discretion, may determine to include other
terms, conditions, or requirements, including:
electronic filing of offering materials, the form and
content of which would be prescribed by the Commission, including
audited financial statements, issuer business description, issuer
financial condition, issuer corporate governance principles, use of
investor funds, and other appropriate matters;
``bad actor'' disqualification provisions (which, if
included, must be substantially similar to the regulations adopted
under Section 926 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'')); \37\ and
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\37\ Public Law 111-203, Sec. 926, 124 Stat. 1376, 1851 (July
21, 2010). Among other things, Section 926 required the issuance of
disqualifying rules substantially similar to the ``bad actor''
disqualification provisions of Rule 262 of existing Regulation A.
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periodic disclosures regarding the issuer, its business
operations, financial condition, corporate governance principles, use
of investor funds, and other appropriate matters.\38\
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\38\ JOBS Act Section 401(a)(2).
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Section 401 of the JOBS Act also requires the Commission to review
the $50 million offering limit not later than two years after enactment
of the JOBS Act and every two years thereafter and, if the Commission
decides not to increase the amount, requires that it report its
reasoning to Congress.
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II. Proposed Amendments to Regulation A
A. Overview
Title IV of the JOBS Act amended Section 3(b) of the Securities Act
to add Section 3(b)(2), which, subject to various terms and conditions,
directs the Commission to enact rules that add a class of securities
exempt from the registration provisions of the Securities Act. Prior to
the amendment, Section 3(b) contained the statutory authority relied
upon to establish current Regulation A. Although the JOBS Act amended
Section 3(b) to designate this existing authority as Section 3(b)(1)
and add new Section 3(b)(2), it did not amend the existing statutory
authority of Regulation A or direct the Commission to amend specific
rules adopted thereunder.\39\ We propose to implement this JOBS Act
mandate by expanding Regulation A into two tiers: Tier 1, for offerings
of up to $5 million; and Tier 2, for offerings of up to $50
million.\40\ The proposals for offerings under Tier 1 and Tier 2 build
on current Regulation A, and preserve, with some modifications,
existing provisions regarding issuer eligibility, offering circular
contents, testing the waters, and ``bad actor'' disqualification. We
also propose to modernize the Regulation A filing process for all
offerings and align practice in certain areas with prevailing practice
for registered offerings, to create additional flexibility and
streamline compliance for Regulation A issuers. Issuers in Tier 2
offerings would be required to include audited financial statements in
their offering documents and to file annual, semiannual and current
reports with the Commission, and purchasers in Tier 2 offerings would
be subject to certain limitations on their investment. The differences
between Tier 1 and Tier 2 offerings are described more fully below.
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\39\ Cf. Title II of the JOBS Act, Public Law 112-106, Sec. 201
(directing the Commission to amend Rule 506 of Regulation D, 17 CFR
230.506).
\40\ An issuer of $5 million or less of securities could elect
to proceed under either Tier 1 or Tier 2.
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In developing the current proposals, we considered the statutory
language of JOBS Act Section 401, the legislative history, the current
Regulation A exemption, comment letters received to date on Title IV of
the JOBS Act \41\ and recent recommendations of the Commission's
Government-Business Forum on Small Business Capital Formation,\42\ the
Advisory Committee on Small and Emerging Companies,\43\ and the Equity
Capital Formation Task Force.\44\
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\41\ To facilitate public input on JOBS Act rulemaking before
the issuance of rule proposals, the Commission has invited members
of the public to make their views known on various JOBS Act
initiatives in advance of any rulemaking by submitting comment
letters to the Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. Comment letters received to date on
Title IV of the JOBS Act are available at: http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml.
\42\ Prior recommendations of the Commission's Government-
Business Forum on Small Business Capital Formation (``Small Business
Forum'') are available at: http://www.sec.gov/info/smallbus/sbforum.shtml.
\43\ Prior recommendations of the Advisory Committee on Small
and Emerging Companies (``Advisory Committee'') are available at:
http://www.sec.gov/info/smallbus/acsec.shtml.
\44\ Equity Capital Task Force, From the On-Ramp to the Freeway:
Refueling Job Creation and Growth by Reconnecting Investors with
Small-Cap Companies, presentation to the U.S. Dep't. of Treasury
(November 11, 2013), available at: http://www.equitycapitalformationtaskforce.com/ (``ECTF Report'').
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Following are the key provisions of the proposed amendments to
Regulation A:
Scope of the exemption:
Tier 1: annual offering limit of $5 million, including no
more than $1.5 million on behalf of selling securityholders.
Tier 2: annual offering limit of $50 million, including no
more than $15 million on behalf of selling securityholders.
Update the restrictions on issuer eligibility to exclude
from Regulation A issuers that are or have been subject to any order of
the Commission pursuant to Section 12(j) of the Exchange Act entered
within five years before the filing of the offering statement.
Update the restrictions on issuer eligibility to exclude
from Regulation A issuers that have not filed with the Commission the
ongoing reports required by the proposed rules during the two years
immediately preceding the filing of an offering statement.
Limit the amount of securities an investor can purchase in
a Tier 2 offering to no more than 10% of the greater of annual income
and net worth.
Exclude asset-backed securities, as defined in Regulation
AB, from the list of eligible securities.
Update the safe harbor from integration and provide
additional guidance on the potential integration of offerings conducted
concurrently with, or close in time after, a Regulation A offering.
Solicitation materials:
Permit issuers to ``test the waters'' or solicit interest
in a potential offering with the general public either before or after
the filing of the offering statement, so long as any solicitation
materials used after publicly filing the offering statement are
preceded or accompanied by a preliminary offering circular or contain a
notice informing potential investors where and how the most current
preliminary offering circular can be obtained. This requirement could
be satisfied by providing the uniform resource locator (``URL'') where
the preliminary offering circular or the offering statement may be
obtained on EDGAR.
Qualification, communications, and offering process:
Require issuers and intermediaries in the prequalification
period to deliver a preliminary offering circular to prospective
purchasers at least 48 hours in advance of sale.
Modernize the qualification, communications, and offering
process in Regulation A to reflect analogous provisions of the
Securities Act registration process: \45\
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\45\ See Securities Offering Reform, SEC Rel. No. 33-8591 (July
19, 2005) [70 FR 44722].
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Permit issuers and intermediaries to satisfy their
delivery requirements as to the final offering circular under an
``access equals delivery'' model when the final offering circular is
filed and available on EDGAR;
Require issuers that sell to prospective purchasers in
reliance on the delivery of a preliminary offering circular to, not
later than two business days after completion of the sale, provide the
purchasers with a copy of the final offering circular or a notice that
the sale occurred pursuant to a qualified offering statement that
includes the URL where the final offering circular or to the offering
statement of which such final offering circular is part may be obtained
and contact information sufficient to notify a purchaser where a
request for a final offering circular can be sent and received in
response; and
Permit issuers to file offering circular supplements after
qualification of the offering statement in certain circumstances in
lieu of post-qualification amendments, including to provide the types
of information that may be excluded from a prospectus under Rule 430A.
Permit continuous or delayed offerings under the proposed
rules, but require issuers in continuous or delayed Tier 2 offerings to
be current in their annual and semiannual reporting obligations.
Permit issuers to qualify additional securities in
reliance on Regulation A by filing a post-qualification amendment to a
qualified offering statement.
Offering statement:
[[Page 3930]]
Require issuers to electronically file offering statements
with the Commission.
Permit the non-public submission of offering statements
and amendments for review by Commission staff before filing such
documents with the Commission, so long as all such documents are
publicly filed not later than 21 calendar days before qualification.
Eliminate the Model A (Question-and-Answer) disclosure
format under Part II (Offering Circular) of Form 1-A.
Update and clarify the Model B (Narrative) disclosure
format under Part II of Form 1-A (renaming it as Offering Circular),
while continuing to permit the use of Part I of Form S-1 narrative
disclosure as an alternative.
Allow an offering statement to be qualified only by order
of the Commission rather than, in the absence of a delaying notation on
the offering statement, without Commission action on the 20th calendar
day after filing.
Require issuers in a Tier 2 offering to include audited
financial statements in their offering circulars.
Require all issuers to file balance sheets for the two
most recently completed fiscal year ends (or for such shorter time that
they have been in existence).
Permit issuers to provide financial statements in Form 1-A
that are dated not more than nine months before the date of non-public
submission or filing, and require issuers to include financial
statements in Form 1-A that are dated not more than nine months before
qualification, with the most recent annual or interim balance sheet not
older than nine months. If interim financial statements are required,
they must cover a period of at least six months.
Ongoing reporting:
Require issuers that conduct a Tier 1 offering to
electronically file a Form 1-Z exit report with the Commission not
later than 30 calendar days after termination or completion of a
qualified Regulation A offering to provide information about sales in
such offering and to update certain issuer information.
Require issuers that conduct a Tier 2 offering to
electronically file with the Commission annual and semiannual reports,
as well as current event updates.
Require issuers that conduct a Tier 2 offering to, where
applicable, provide special financial reports to provide information to
investors in between the time the financial statements are included in
Form 1-A and the issuer's first periodic report due after qualification
of the offering statement.
Permit the ongoing reports filed by an issuer conducting a
Tier 2 offering to be used to satisfy a broker-dealer's obligations
under Exchange Act Rule 15c2-11.
Provide that issuers conducting Tier 2 offerings would
exit the Regulation A ongoing reporting regime when they become subject
to the ongoing reporting requirements of Section 13 of the Exchange
Act, and may exit the Regulation A reporting regime at any time by
filing a Form 1-Z exit report after completing reporting for the fiscal
year in which the offering statement was qualified, so long as the
securities of each class to which the offering statement relates are
held of record by fewer than 300 persons and offers or sales made in
reliance on a qualified Regulation A offering statement are not
ongoing.
Require issuers that conduct a Tier 2 offering to include
in their first annual report after termination or completion of a
qualified Regulation A offering, or in their Form 1-Z exit report,
information about sales in the terminated or completed offering and to
update certain issuer information.
Eliminate the requirement that issuers file a Form 2-A
with the Commission to report sales and the termination of sales made
under Regulation A every six months after qualification and within 30
calendar days after the termination, completion, or final sale of
securities in the offering.
``Bad actor'' disqualification provisions:
Substantially conform the ``bad actor'' disqualification
provisions of Rule 262 to new Rule 506(d) and add a new disclosure
requirement similar to Rule 506(e).
Application of state securities laws:
In light of the total package of investor protections
proposed to be included in the implementing rules for Regulation A,
provide for the preemption of state securities law registration and
qualification requirements for securities offered or sold to
``qualified purchasers,'' defined to be all offerees of securities in a
Regulation A offering and all purchasers in a Tier 2 offering.
B. Scope of Exemption
1. Eligible Issuers
Section 401 of the JOBS Act does not include any express issuer
eligibility requirements.\46\ Currently, Regulation A is limited to
companies organized in and with their principal place of business
inside the United States or Canada. It is unavailable to:
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\46\ Section 3(b)(2)(G)(ii) specifies that if the Commission
chooses to enact so-called ``bad actor'' disqualification
provisions, such provisions must be substantially similar to the
regulations adopted in accordance with Section 926 of the Dodd-Frank
Act. Proposed ``bad actor'' disqualification provisions are
discussed below in Section II.F.
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companies subject to the ongoing reporting requirements of
Section 13 or 15(d) of the Exchange Act (``reporting companies'');
companies registered or required to be registered under
the Investment Company Act of 1940 (``investment companies''); \47\
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\47\ 15 U.S.C. 80a-1 et seq. (``Investment Company Act''). The
proposed rules would clarify the current exclusion of business
development companies from Regulation A. See SEC Rel. No. 33-6924,
at fn. 65 (noting that companies registered or required to be
registered under the Investment Company Act of 1940, including
business development companies, are prohibited from using Regulation
A).
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development stage companies that have no specific business
plan or purpose or have indicated their business plan is to engage in a
merger or acquisition with an unidentified company or companies
(``blank check companies''); \48\ and
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\48\ Rule 251(a)(3); see also SEC Rel. No. 33-6949 [57 FR 36442]
(July 30, 1992), at fn. 50 (clarifying that blank check companies
regardless of whether they are issuing penny stock are precluded
from relying on Regulation A).
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issuers of fractional undivided interests in oil or gas
rights, or similar interests in other mineral rights.\49\
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\49\ Regulation B formerly provided exemptive relief for such
issuers. Regulation B was rendered obsolete in light of other
exemptions, such as those afforded issuers under Section 4(a)(2) of
the Securities Act and Regulation D, and was rescinded in May 1996.
See SEC Release No. 33-7300 [61 FR 30398] (May 31, 1996).
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Several commenters have suggested that the expanded exemption
should continue to be unavailable to blank check companies,\50\ two of
which also suggested that the exemption should be unavailable to
special purpose acquisition companies (``SPACs'').\51\ Two commenters
suggested that business development companies (``BDCs'') should be
permitted to rely on
[[Page 3931]]
the exemption,\52\ and also suggested that shell companies should no
longer be permitted to rely on Regulation A.\53\ One commenter
expressed concern over allowing BDCs, as well as real estate investment
trusts (``REITs''), to rely on the exemption without additional entity-
specific disclosure requirements,\54\ while another suggested that
REITs should be allowed to rely on the exemption without additional
disclosure obligations.\55\ One commenter suggested that the Commission
permit reporting companies, and foreign private issuers \56\ that
expressly consent to Exchange Act Section 10(b) liability, to rely on
the exemption.\57\ One commenter proposed limiting the availability of
the exemption to non-reporting companies, and to operating companies,
while continuing to make the exemption unavailable to pooled investment
funds.\58\
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\50\ Letter from Catherine T. Dixon, Chair, Federal Regulation
of Securities Committee, American Bar Association, Sept. 7, 2012
(``ABA Letter''); Letter from William R. Hambrecht, Chairman and
CEO, WR Hambrecht + Co., Jan. 4, 2013 (``WR Hambrecht + Co.
Letter''); Letter from A. Heath Abshure, President, North American
Securities Administrators Association (``NASAA''), April 10, 2013
(``NASAA Letter 2''); see also Letter from Robert R. Kaplan, Jr. and
Mark A. Cleaves, Kaplan Voekler Cunningham & Frank PLC (``Kaplan
Voekler''), May 14, 2013 (Kaplan Voekler Letter 2'').
\51\ NASAA Letter 2; WR Hambrecht + Co. Letter; see also Kaplan
Voekler Letter 2 (noting that there are important distinctions
between SPACs, blank check companies, and shell companies). A SPAC
is a type of blank check company created specifically to pool funds
in order to finance a merger or acquisition opportunity within a set
timeframe.
\52\ ABA Letter (suggesting that permitting BDCs to rely on
Regulation A would be consistent with the policy goals behind
enactment of Section 3(b)(2) of the Securities Act, and Commission
staff guidance on the JOBS Act and the treatment of BDCs as emerging
growth companies under Title I of the JOBS Act); WR Hambrecht + Co.
Letter (suggesting that permitting BDCs to rely on Regulation A
would be consistent with the policy goals behind enactment of
Section 3(b)(2) of the Securities Act). A BDC is a closed-end
company that, among other things, is operated for the purpose of
making investments in certain types of securities, and makes
available to issuers of such securities significant managerial
assistance. See Section 2(a)(48) of the Investment Company Act.
\53\ ABA Letter; WR Hambrecht + Co. Letter. A shell company is a
company that has, or at any time previously has had, no or nominal
operations, and either no or nominal assets, assets consisting
solely of cash or cash equivalents, or assets consisting of any
amount of cash and cash equivalents and nominal other assets. 17 CFR
230.405; see also 17 CFR 144(i)(1)(i).
\54\ NASAA Letter 2 (citing the unique ``nature and timing of
[such companies'] capital formation and investment strategies, fee
structures, and liquidity, necessitate disclosure fitting for these
specific entities.''). We solicit comment on potential BDC- and
REIT-specific disclosure in Section II.C.3.b. below.
\55\ Kaplan Voekler Letter 2. A REIT is a company that owns and
generally operates income-producing real estate or real estate-
related assets. See Sections 856 through 859 of Internal Revenue
Code, 26 U.S.C. 856-859; see also general discussion of REIT
characteristics in SEC Rel. No. IC-29778 (Aug. 31, 2011) [76 FR
55300], at 55302. Among other things, a REIT must have the bulk of
its assets and income connected to real estate investment and must
distribute at least 90 percent of its taxable income to shareholders
annually in the form of dividends.
\56\ Under Rule 405 (17 CFR Sec. 230.405), a foreign private
issuer is any foreign issuer--other than a foreign government--
except an issuer meeting the following conditions as of the last
business day of its most recently completed second fiscal quarter:
(i) More than 50 percent of the outstanding voting securities of
such issuer are directly or indirectly owned of record by residents
of the United States; and
(ii) Any of the following:
(A) The majority of the executive officers or directors are
United States citizens or residents;
(B) More than 50 percent of the assets of the issuer are located
in the United States; or
(C) The business of the issuer is administered principally in
the United States.
\57\ ABA Letter.
\58\ WR Hambrecht + Co. Letter.
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We propose to add two new categories of ineligible issuers to, but
to otherwise maintain, Regulation A's existing issuer eligibility
requirements. As proposed, the exemption would continue to be available
to companies organized in, and with their principal place of business
inside, the United States or Canada. Under the proposal, the exemption
would continue to be unavailable to Exchange Act reporting companies,
investment companies, blank check companies, certain issuers
disqualified from participation in such offerings under the ``bad
actor'' provisions of Rule 262, as proposed to be amended,\59\ and to
issuers of fractional undivided interests in oil or gas rights, or
similar interests in other mineral rights.\60\
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\59\ See discussion in Section II.G. below.
\60\ See proposed Rules 251(b) and 262.
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Additionally, we propose to make the exemption unavailable to
issuers that have not filed with the Commission the ongoing reports
required by the proposed rules during the two years immediately
preceding the filing of a new offering statement (or for such shorter
period that the issuer was required to file such reports).\61\ We
recently proposed a similar eligibility requirement for issuers in our
proposed rules for securities-based crowdfunding transactions pursuant
to Section 4(a)(6) of the Securities Act.\62\ We believe that our rules
for ongoing reporting in Regulation A, as proposed to be amended, would
benefit investors by enabling them to consider updated information
about the issuer, make informed investment decisions, facilitate the
development of an efficient secondary market in such securities, and
would enhance our ability to analyze and monitor the Regulation A
market. We therefore believe fulfilling an obligation to file ongoing
reports pursuant to proposed Regulation A is an important investor
protection that should be a factor in determining issuer eligibility.
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\61\ See Section II.E.1. below for a discussion on proposed
ongoing reporting requirements applicable to Tier 1 and Tier 2
offerings.
\62\ See SEC Rel. No. 33-9470 (Oct. 23, 2013), at 36 [78 FR
66427] (proposed rules for Regulation Crowdfunding under Title III
of the JOBS Act) and proposed Rule 100(b)(5) of Regulation
Crowdfunding.
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We further propose to exclude from the category of eligible issuers
under Regulation A issuers that are or have been subject to an order by
the Commission denying, suspending, or revoking the registration of a
class of securities pursuant to Section 12(j) of the Exchange Act that
was entered within five years before the filing of the offering
statement. Under Section 12(j) of the Exchange Act, an issuer's
securities registered under the Exchange Act may be subject to a
denial, suspension, or revocation of registration pursuant to an order
by the Commission if, after notice and opportunity for a hearing, the
Commission finds that the issuer of such securities has failed to
comply with any of the provisions of, or the rules and regulations
enacted under, the Exchange Act. We do not believe that issuers that,
after notice and opportunity for a hearing, are or have been subject to
such orders by the Commission within a five-year period immediately
preceding the filing of the offering statement should benefit from the
provisions of Regulation A, as proposed to be amended. We would
therefore exclude such issuers from the category of eligible issuers.
We solicit comment on the proposed issuer eligibility requirements,
the suggestions made in the advance comments to date, and on the issues
discussed below.
Request for Comment
1. As proposed, in addition to the two newly proposed issuer
eligibility requirements, should we otherwise maintain the existing
categories of Regulation A issuer eligibility requirements? Why or why
not? If not, which categories of issuer eligibility requirements should
we alter, and why? Please explain.
2. As proposed, should we add an additional issuer eligibility
requirement to exclude issuers that have not filed with the Commission
the ongoing reports required by the proposed rules during the two years
immediately preceding the filing of a new offering statement (or for
such shorter period that the issuer was required to file such reports)?
If so, should we only require issuers to be current in their Regulation
A ongoing reporting at the time of the filing of a new offering
statement in order to be eligible? Alternatively, should we consider a
time period other than two years? Why or why not?
3. As proposed, should we add an additional issuer eligibility
requirement to exclude issuers that are or have been subject to an
order by the Commission denying, suspending, or revoking the
registration of a class of securities pursuant to Section 12(j) of the
Exchange Act that was entered within five years before the filing of
the offering
[[Page 3932]]
statement? Why or why not? If not, please explain. Alternatively,
should we alter the proposed five-year period during which an issuer
could not have been subject to an order by the Commission pursuant to
Section 12(j) to cover a longer or shorter period of time? Why or why
not? If so, please explain.
a. U.S. Nexus Other Than Organization and Domicile
We are seeking comment on whether we should expand availability of
the Regulation A exemption to issuers that may not satisfy domicile-
based requirements, particularly those that have a substantial United
States nexus, such as certain foreign companies with domestic
operations, or domestic subsidiaries of foreign multinational
companies.\63\
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\63\ A domestic subsidiary of a foreign multinational company
(i.e., one organized in the United States or Canada) would be
eligible to rely on Regulation A if its principal place of business
were located in the United States or Canada.
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As its name suggests, one goal of the JOBS Act was the creation of
jobs within the United States.\64\ Expansion of issuer eligibility to
include foreign issuers with a substantial U.S. nexus may serve to
better implement the JOBS Act goal of domestic job creation. According
to statistics from the U.S. Department of Commerce's Bureau of Economic
Analysis (``BEA''), many American jobs are created not only by U.S.
companies, but by the U.S. affiliates of foreign multinational
companies.\65\ According to the report, total U.S. employment by
majority-owned U.S. affiliates of foreign multinational companies rose
in 2011 at nearly twice the rate of employment in the U.S. private-
industry sector as a whole.\66\ As the BEA data suggest, domestic job
creation is not necessarily dependent on company domicile or principal
place of business.\67\
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\64\ See, e.g., H.R. Rep. No. 112-206, at 4 (2012) (``Small
companies are critical to economic growth in the United States.
Amending Regulation A to make it viable for small companies to
access capital will permit greater investment in these companies,
resulting in economic growth and jobs. By reducing the regulatory
burden and expense of raising capital from the investing public,
[Title IV of the JOBS Act] will boost the flow of capital to small
businesses and fuel America's most vigorous job-creation
machine.'').
\65\ See Anderson, Thomas, U.S. Dep't of Commerce, Bureau of
Econ. Analysis, Summary Estimates for Multinational Companies:
Employment, Sales, and Capital Expenditures for 2011 (Apr. 18, 2013)
(``BEA Release 13-16''), at Table 3, available at: http://www.bea.gov/newsreleases/international/mnc/2013/_pdf/mnc2011.pdf.
The BEA's advance summary estimates for 2011 show total employment
of approximately 22.9 million workers by U.S. parents of
multinational companies (some of which are themselves foreign-
owned), accounting for approximately one-fifth of total U.S. private
sector employment, and total employment of approximately 5.6 million
workers by majority-owned U.S. affiliates of foreign multinational
companies, accounting for approximately five percent of total U.S.
private sector employment. Id. at 1-2. As some U.S. parents of
multinational companies are themselves foreign-owned, there is some
overlap between the employment figures of U.S. parents of
multinational companies and U.S. affiliates of foreign multinational
companies. For more information on multinational companies, see
http://www.bea.gov/iTable/index_MNC.cfm.
\66\ BEA Release 13-16, at 2.
\67\ See id.; see also Matthew J. Slaughter, American Companies
and Global Supply Networks: Driving U.S. Economic Growth and Jobs by
Connecting with the World, Business Roundtable et al. (January
2013), at 9, available at: http://businessroundtable.org/uploads/studies-reports/downloads/BRT-SlaughterPaper-singles-Dec21.pdf
(noting that both U.S.-headquartered multinational companies and
foreign-headquartered multinational companies that operate in the
U.S. create tens of millions of well-paying jobs domestically).
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Currently, Regulation A is limited to companies organized, and with
their principal place of business, in the United States or Canada.\68\
The Commission could make the Regulation A exemption available to all
non-U.S. issuers, rather than only Canadian issuers. Additionally, we
could subject issuers to conditions intended to ensure that the capital
raised in the offering is put to work in the United States. For
example, we could add a requirement that a minimum percentage of the
offering proceeds be used in the United States, in connection with the
issuer's domestic operations.\69\ Such a requirement could, however, be
difficult to administer because of challenges in delineating domestic
versus foreign operations and in tracing use of proceeds.
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\68\ The Commission originally proposed the elimination of
Canadian issuers from the Regulation A exemptive scheme in 1992 on
the grounds that such issuers rarely used the exemption. See SEC
Rel. No. 33-6924, at 19. In response to public comment, however,
this proposal was not adopted. SEC Rel. No. 33-6949, at 36443. No
Canadian issuers have qualified an offering in reliance on
Regulation A since 2002.
\69\ Cf. Rule 147. 17 CFR 230.147. Rule 147 is a safe harbor
from registration under Section 3(a)(11) of the Securities Act.
Section 3(a)(11) is more commonly known as the intrastate exemption,
and requires, among other things, that issuers conducting an
intrastate offering use at least 80% of the net proceeds of the
offering in connection with their business operations in the
relevant state.
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Alternatively, issuer eligibility under Regulation A could be
extended to ``domestic issuers,'' defined as any issuer that is not a
foreign government or a ``foreign private issuer.'' \70\ Domestic
issuers would, in general, have a demonstrated presence in the United
States, which could increase the likelihood that proceeds from the
offering are used within the United States.\71\ We could limit issuer
eligibility further by adding a condition that most of the offering
proceeds be used in connection with the issuer's U.S. domestic
operations.
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\70\ In Regulation S (17 CFR 230.901 et seq.), a ``domestic
issuer'' is defined as any issuer other than a ``foreign
government'' or ``foreign private issuer.'' 17 CFR 230.902(e). A
``foreign government'' means the government of any foreign country
or of any political subdivision of a foreign country. See 17 CFR
230.405. See fn. 56. above for the definition of a ``foreign private
issuer.''
\71\ The Commission previously used the term ``domestic
issuers'' in the proposed amendments to Regulation A in 1992 to
refer to entities organized and with a principal place of business
in the United States. See SEC Rel. No. 33-6924, at 19, 156.
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Request for Comment
4. Should issuer eligibility to rely on Regulation A continue to
require an issuer to be organized under the laws of the United States
or Canada with a principal place of business in the United States or
Canada? Or should Regulation A be limited to issuers organized and with
a principal place of business in the United States, thereby excluding
Canadian issuers? Should Regulation A be made available to ``domestic
issuers'' as described above, or to all issuers, including foreign
private issuers? Is there a reason to treat Canadian issuers
differently from other foreign issuers? What would the impact be on
issuers, investors, and other market participants if the issuer
eligibility criteria were broadened? Please explain.
5. If we modify or eliminate current requirements regarding
domicile and principal place of business, should we limit availability
of the exemption in some other way that reflects a U.S. nexus? If so,
how should we define, or in what ways should we limit the availability
of the exemption to issuers that demonstrate, a U.S. nexus? Are there
criteria we could use that would be easy to administer? If so, what
criteria?
6. If we extend issuer eligibility to include foreign private
issuers, should we require express consent from such issuers to
Exchange Act Section 10(b) liability? \72\ Should we consider requiring
additional or alternative conditions for the eligibility of such
issuers? Why or why not? Should we make other changes in Regulation A
to accommodate such issuers? For example, as proposed with respect to
Canadian issuers,\73\ should we permit all non-U.S. issuers to prepare
their financial statements using International Financial Reporting
Standards (IFRS) as issued by the International Accounting
[[Page 3933]]
Standards Board (IASB), rather than U.S. Generally Accepted Accounting
Principles (U.S. GAAP)?
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\72\ In 2010, the U.S. Supreme Court held that Section 10(b) of
the Exchange Act, 15 U.S.C. 78j(b), covers only transactions in
securities listed on domestic exchanges, and securities purchased or
sold domestically. Morrison v. National Australia Bank Ltd., 130 S.
Ct. 2869 (2010). But see, Section 929P(b) of the Dodd-Frank Act,
Public Law 111-203, Sec. 929P(b).
\73\ See discussion in Section II.C.3.b(2). below.
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b. Additional and Alternative Types of Issuers
As noted above, we propose not to amend Regulation A's existing
prohibitions on use of the exemption by investment companies registered
or required to be registered under the Investment Company Act,
including BDCs; blank check companies and SPACs; and issuers of
fractional undivided interests in oil or gas rights, or similar
interests in other mineral rights. As proposed, shell companies that do
not meet the definition of ``blank check company'' would continue to be
able to rely on the exemption.\74\ We seek comment on whether to permit
BDCs, blank check companies and SPACs, and oil, gas and mineral
interest rights issuers to rely on Regulation A, as well as on the
potential exclusion of shell companies.
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\74\ A shell company that is a development stage company with no
specific business plan or purpose would not be an eligible issuer
under the exclusion for blank check companies.
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BDCs. BDCs are a type of closed-end company operated for the
purpose of making investments in small, developing, or financially
troubled companies. Typically, BDCs are subject to the registration and
reporting requirements of the Securities Act and Exchange Act. The
Investment Company Act requires BDCs to have at least 70% of their
investment portfolio in eligible portfolio companies and certain other
assets at the time they make any new investment.\75\ Rules 2a-46 and
55a-1 of the Investment Company Act define eligible portfolio companies
to include all private companies and companies whose securities are
listed on a national securities exchange but have an aggregate market
value of less than $250 million, or that met such requirements at the
time of the BDC's initial investment in such company.\76\ Currently,
BDCs are able to rely on Regulation E \77\ for offerings of up to $5
million in any twelve-month period. Extension of Regulation A issuer
eligibility to BDCs could assist small companies with capital formation
by indirectly providing such companies--otherwise qualifying as
eligible portfolio companies--with greater access to investment
capital. As noted above, however, one commenter expressed concern about
the potential extension of Regulation A to BDCs absent disclosure
requirements that are more appropriately tailored for these
issuers.\78\
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\75\ See Section 2(a)(48) of the Investment Company Act.
\76\ 17 CFR 270.2a-46; 17 CFR 270.55a-1.
\77\ 17 CFR 230.601 et seq.
\78\ NASAA Letter 2; see also fn. 54 above.
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Blank Check Companies and SPACs. By its terms, the definition of
blank check companies under the federal securities laws can include
early stage and startup companies with no specific business plans.\79\
Extension of Regulation A issuer eligibility to include companies with
characteristics that are similar to blank check companies could
therefore be consistent with Title IV's goal of increasing the capital
formation options for smaller companies.\80\ As noted above, however,
some commenters have expressed concern about, and recommended against,
permitting blank check companies and SPACs to use Regulation A.\81\ As
currently proposed, blank check companies and SPACs would not be
permitted to rely on the exemption. We seek comment on whether the
Commission should revisit this exclusion, and, if so, on what basis.
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\79\ A blank check company is a development stage company that
has no specific business plan or purpose or has indicated its
business plan is to engage in a merger or acquisition with an
unidentified company or companies or other entity. See 17 CFR
230.419.
\80\ See fn. 85 below. The Commission recently acknowledged, in
proposing rules for securities-based crowdfunding transactions under
Section 4(a)(6) of the Securities Act, the challenges associated
with distinguishing between early stage companies that can provide
information sufficient to support such transactions and those whose
business plan is so indeterminate that they may not be able to
provide adequate information. See SEC Rel. No. 33-9470, at 37.
\81\ See fn. 89 below; see also fn. 51 above for the definition
of a SPAC.
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Shell Companies. A shell company is a company that has, or at any
time previously has had, no or nominal operations, and either no or
nominal assets, assets consisting solely of cash or cash equivalents,
or assets consisting of any amount of cash and cash equivalents and
nominal other assets.\82\ Shell companies are not expressly excluded
from Regulation A, although any shell company that met the definition
of a blank check company would be excluded on that basis. As noted
above, some commenters have suggested that the Commission consider an
express exclusion for shell companies.\83\ At their earliest stages of
development, however, many small early stage and startup companies have
limited operations and few, if any, assets. We anticipate that some
Regulation A issuers would be startups where it may be uncertain as to
whether they fall within the shell company definition.\84\ We believe,
however, that Regulation A, as proposed to be amended, is intended to
provide smaller companies, including early stage companies, the
opportunity to raise capital from the general public in a manner that
is consistent with the proposed rules. In our view, excluding such
companies from proposed Regulation A would be contrary not only to the
provisions of current Regulation A, but also to Title IV of the JOBS
Act.\85\ We do not therefore propose to exclude shell companies from
reliance on Regulation A. For the same reasons we are soliciting
comment on potential blank check companies' access to, or exclusion
from, the exemptive scheme; however, we also seek comment on whether
shell companies should be prohibited from relying on Regulation A.
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\82\ 17 CFR 230.405; see also 17 CFR 144(i)(1)(i).
\83\ ABA Letter; WR Hambrecht + Co. Letter (suggesting that
shell company access to Regulation A is inconsistent with the JOBS
Act because such companies do not promote job creation).
\84\ But see SEC Rel. No. 33-8869 (December 6, 2007) at fn. 172
(``Rule 144(i)(1)(i) is not intended to capture a `startup company,'
or, in other words, a company with a limited operating history, in
the definition of a reporting or non-reporting shell company, as we
believe that such a company does not meet the condition of having
`no or nominal operations.' '').
\85\ H.R. Rep. No. 112-206, at 4 (2012) (``Small companies are
critical to economic growth in the United States. Amending
Regulation A to make it viable for small companies to access capital
will permit greater investment in these companies, resulting in
economic growth and jobs. By reducing the regulatory burden and
expense of raising capital from the investing public, [Title IV of
the JOBS Act] will boost the flow of capital to small businesses and
fuel America's most vigorous job-creation machine.'').
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Operating Companies. We are also seeking comment on whether we
should take a different approach with respect to issuer eligibility
requirements and, instead of prohibiting blank check company access to
the exemption (as is currently proposed and consistent with current
Regulation A), to limit availability of the exemption to companies
satisfying a new definition of ``operating company.'' \86\ The
Commission previously proposed to limit Regulation A to operating
companies in 1992.\87\ Though not adopted at that time, the Commission
proposed to make the exemption available only ``to raise funds to put
into the operations of an actual business and not simply for
investment.'' The proposal would have specifically excluded ``those
enterprises with the principal business of investing or reinvesting
funds in securities, properties, commodities, business
[[Page 3934]]
opportunities or similar media of speculative opportunity.'' \88\ Along
the same lines, we seek comment on whether we should exclude certain
non-operating companies from Regulation A. We could, for example, limit
availability of the exemption to operating companies, defined to
include issuers that have generated total revenue in excess of a
certain amount (e.g., $1,000,000) over a certain period of time (e.g.,
its prior two fiscal years) through the provision of goods or services,
or based on similar or different criteria intended to facilitate access
to the proposed rules by small companies. Adopting an operating company
definition could more effectively eliminate the types of blank check
companies, SPACs, and shell companies that are not otherwise the
intended beneficiaries of Regulation A from eligibility, an issue we
discuss above, request comment on below, and about which several
commenters have expressed concern.\89\
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\86\ An operating company definition would not alter our current
proposal to continue to prohibit reporting company and investment
company reliance on Regulation A.
\87\ See SEC Rel. No. 33-6924, at 20-21.
\88\ Id. The adopting release noted that partnerships or certain
other entities organized primarily for investment purposes had
historically been eligible to use Regulation A, and that after
consideration of public comment it was appropriate to continue to
make the exemption available to such issuers. See SEC Rel. No. 33-
6949, at 36443.
\89\ ABA Letter (``The purpose and goal of Section 3(b)(2)
should . . . be to expand the capital raising opportunities
available to operating companies. We are concerned about the
possibility of abuse should non-operating companies be able to rely
on the exemption. The Commission's proposed rules should . . .
provide that Section 3(b)(2) will not be available for use by
issuers that are blank check companies or shell companies and should
define ``eligible issuer'' for purposes of Section 3(b)(2) to
exclude specifically these types of issuers.''); WR Hambrecht + Co.
Letter (suggesting limiting Regulation A issuers to operating
companies, and prohibiting reliance on the exemption by blank check
companies, SPACs, and shell companies); NASAA Letter 2 (indicating
that offerings by blank check companies and SPACs are generally
prohibited as fraudulent offerings under state securities laws).
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Issuers of Interests in Mineral Rights. Issuers of fractional
undivided interests in oil or gas rights, or similar interests in other
mineral rights, have historically been prohibited from relying on
Regulation A. Instead, such issuers were permitted to conduct offerings
in reliance on Regulation B.\90\ Regulation B was rescinded in 1996,
however, as it was deemed no longer necessary in light of other
exemptions available to these types of issuers, such as Section 4(a)(2)
of the Securities Act and Regulation D.\91\ In light of the elimination
of Regulation B and the current ability of such issuers to conduct
offerings under, e.g., Rule 506 of Regulation D, we seek comment on
whether such issuers should continue to be ineligible to rely on
Regulation A, or should now be permitted to conduct offerings under
Regulation A.
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\90\ Regulation B was an exemption from registration under the
Securities Act relating to fractional undivided interests in oil or
gas. See 17 CFR 230.300-230.346 (1995).
\91\ See SEC Release No. 33-7300 (May 31, 1996) [61 FR 30397].
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Request for Comment
7. Should we amend Regulation A to make BDCs eligible to rely on
it? Why or why not? Would it raise particular concerns about investor
protection? If so, please explain.
8. Would extension of Regulation A issuer eligibility to BDCs be
inconsistent with the exemption's current prohibition on use by
reporting companies? If so, should we limit the extension of Regulation
A issuer eligibility to only non-Exchange Act reporting BDCs? If not,
should we permit BDC ongoing reporting under the Exchange Act to
satisfy their reporting obligations under Regulation A? \92\ If
Regulation A eligibility were extended to BDCs, should other rules be
amended to require additional disclosure about such issuers? If so,
what specific additional disclosure should we require about BDCs?
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\92\ See Section II.E. below for a discussion of an issuer's
ongoing reporting obligations under proposed Regulation A.
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9. Should we extend Regulation A issuer eligibility to include
blank check companies? Or would such an extension be inconsistent with
the intent of Title IV of the JOBS Act, or the Commission's investor
protection mandate? Why or why not?
10. If all or some segment of blank check companies are permitted
to rely on Regulation A, should we specifically exclude SPACs from
being able to rely on the exemption? Why or why not?
11. Should we amend Regulation A to make shell companies ineligible
to rely on it? Or would the exclusion of shell companies from
Regulation A be too broad, such that many small companies or startups
would become ineligible to rely on the exemption?
12. Should we limit access to Regulation A to issuers that qualify
as ``operating companies''? If so, should we use the operating company
definition described above, or some modified version? Please include a
discussion of the effects on issuer access to the exemption that would
result from using such a definition as a condition to issuer
eligibility.
13. Should we reconsider the continued prohibition on use of the
Regulation A exemptive scheme by issuers of fractional undivided
interest in oil or gas rights, or similar interests in other mineral
rights? If so, please explain. Are there risks associated with this
type of issuer that merit maintaining Regulation A's current
prohibition on use by such issuers?
14. Are there other limitations on issuer eligibility that we
should consider? Alternatively, are there other types of issuers that
could benefit from Regulation A, as proposed to be amended? Please
provide data, if available, on the impact of imposing fewer, more, or
different limitations on issuer eligibility than we have proposed.
c. Potential Limits on Issuer Size
Regulation A currently limits the size of offerings that can be
conducted under the exemption, but not the size of issuers eligible to
rely on the exemption. We do not currently propose any issuer size-
based limitations and to date we have not received any public comment
on this issue. While we appreciate that limitations on offering size
may, to some extent, create a practical limitation on the ability of
larger issuers to rely on Regulation A, we are soliciting comment on
potentially limiting access to Regulation A on the basis of issuer
size.
We could, for example, look to the standards for ``smaller
reporting companies'' and limit availability of the exemption to
issuers with less than $75 million in public float, or, if unable to
calculate the public float, less than $50 million in annual
revenue.\93\ Alternatively, consistent with a recent recommendation by
the Commission's Advisory Committee on Small and Emerging Companies
(``Advisory Committee'') as to the appropriate size limits for
``smaller reporting companies,'' \94\ we could limit access to
Regulation A to companies with a public float of up to $250 million,
or, if unable to calculate the public float, less than $100 million in
annual revenue.\95\ Limiting access to the exemption on the basis of
issuer size might more effectively target the segment of the market
that Congress sought to assist by
[[Page 3935]]
enacting Title IV of the JOBS Act. We solicit comment below on whether
the reference to ``public float'' would be an appropriate metric for
the non-reporting companies using Regulation A.
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\93\ See 17 CFR 229.10(f).
\94\ See SEC Rel. No. 33-9258 (Sept. 12, 2011) [76 FR 57769]
(the Advisory Committee was formed to provide the Commission with
advice on its rules, regulations, and policies as they relate to,
among other things, capital raising by emerging privately-held small
businesses and publicly traded companies with less than $250 million
in public float), available at: http://www.sec.gov/rules/other/2011/33-9258.pdf.
\95\ Recommendations Regarding Disclosure and Other Requirements
for Smaller Public Companies, Securities and Exchange Commission,
Advisory Committee on Small and Emerging Companies (February 1,
2013), at 2-3 (the Advisory Committee recommendation was made in the
context of potentially revising the definition of a smaller
reporting company), available at: http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf.
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Request for Comment
15. Should we limit availability of the Regulation A exemption to
smaller issuers? Or does the $50 million annual offering limit
effectively limit availability of the exemption to smaller issuers such
that the Commission need not consider issuer size-based limitations?
Why or why not? Should we use issuer size-based limitations to
determine the imposition of certain requirements of proposed Regulation
A such as the on-going disclosure requirements?
16. If we include size-based issuer eligibility requirements, is a
test based on the smaller reporting company public float and revenue
thresholds appropriate for potential Regulation A issuers? Should we
look to the higher thresholds recommended by the Advisory Committee, or
other size thresholds? Alternatively, are there better metrics on which
to determine issuer size-based eligibility (e.g., an assets test)?
Would the concept of public float have any applicability to non-
reporting companies, or to repeat Regulation A issuers, which could
develop a trading market for their securities?
d. Reporting Companies
We do not propose to make Regulation A available to companies that
are subject to the reporting requirements of Section 13 of the Exchange
Act.\96\ Before the amendments to Regulation A adopted in 1992,
reporting companies were permitted to conduct offerings in reliance on
Regulation A, provided they were current in their public reporting.\97\
In 1992, however, the Commission determined that it was no longer
necessary to permit reporting companies to rely on the exemption in
light of the small business integrated registration and reporting
system adopted at that time.\98\ Simplified registration and reporting
forms under Regulation S-B were presumed to meet the capital raising
needs of reporting small business issuers.\99\ As a result, reporting
companies were excluded from the Regulation A exemptive scheme.\100\
While the forms and form of the disclosure rules that apply to smaller
issuers has changed since that time, their content is substantially the
same as in 1992.\101\
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\96\ As discussed in Section II.E.3. below, however, we solicit
comment on whether we should permit Regulation A issuers to register
under the Exchange Act by means of a simplified process under
certain circumstances.
\97\ 17 CFR 230.252(f) (1992).
\98\ SEC Rel. No. 33-6949, at 36443.
\99\ ``Small business issuers'' were defined as companies with
annual revenues of less than $25 million whose voting stock does not
have a public float of $25 million or more. Id., at 36446.
\100\ SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at
9771.
\101\ In 2007, the Commission rescinded Regulation S-B (enacted
in tandem with the 1992 amendments to Regulation A, see SEC Rel. No.
33-6949), eliminated the SB forms and the definition of ``small
business issuer,'' and adopted the current smaller reporting company
regime. See SEC Rel. No. 33-8876 (Dec. 19, 2007) [73 FR 934].
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The two public comments we have received to date on this issue take
opposing positions on whether Regulation A should be available to
reporting companies. One commenter suggested that reporting companies
should be allowed to rely on the exemption because it would permit
issuers to conduct a public offering of unrestricted securities that is
less burdensome, quicker and less expensive than a public offering
subject to full Securities Act registration (e.g., by permitting
issuers to incorporate by reference Exchange Act reports into an
abbreviated offering statement).\102\ This commenter suggested that
reporting company access could be limited on the basis of the issuer's
size.\103\ The other commenter suggested that reporting companies
should not be permitted to rely on Regulation A, but companies should
be permitted to become a reporting company by means of a Regulation A
offering.\104\
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\102\ ABA Letter.
\103\ Id. (suggesting reporting company access to the exemptive
scheme should be limited to issuers with less than $1 billion in
revenue).
\104\ WR Hambrecht + Co. Letter.
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Given the availability of scaled disclosure requirements for
Securities Act registration and Exchange Act reporting by smaller
reporting companies, we continue to believe that reporting companies
would not necessarily benefit from access to Regulation A, as proposed
to be amended. We therefore do not propose to permit reporting
companies to rely on the proposed rules. We are soliciting comment,
however, on whether reporting companies should be permitted to rely on
Regulation A.
Request for Comment
17. Should we amend issuer eligibility requirements to permit
reporting companies to rely on the Regulation A exemption? Why or why
not? Would reporting companies find Regulation A a useful means of
raising capital? How would such a change affect issuers, investors,
financial intermediaries, and other market participants?
18. If reporting companies were permitted to rely on Regulation A,
should we impose limitations on their use of the exemption? For
example, should reporting companies be eligible to use Regulation A
only for a limited period of time, e.g., a three-year period after they
begin Exchange Act reporting? Or should we limit reporting company
access to the exemptive scheme on the basis of issuer size?
19. If reporting companies are permitted to rely on Regulation A,
should the availability of the exemption be conditioned on being
current with Exchange Act reporting requirements,\105\ which would be
consistent with ongoing use of Regulation A? \106\ Additionally, if
reporting companies are permitted to rely on the exemption, should such
companies be permitted to satisfy their disclosure requirements under
Regulation A through incorporation by reference to their previous or
ongoing reports filed under the Exchange Act? Or, as proposed with
respect to issuers of Regulation A securities that register such
securities under the Exchange Act, if reporting companies are permitted
to rely on Regulation A, should the Regulation A reporting obligation
for such issuers be suspended altogether for the duration of any
obligation to file ongoing reports under the Exchange Act? \107\
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\105\ As noted above, before the 1992 amendments to Regulation
A, reporting companies were permitted to conduct offerings in
reliance on Regulation A, provided they were current in their
Exchange Act reporting obligations. See former Rule 252(f), 17 CFR
230.252(f) (1991).
\106\ See discussion on proposed issuer eligibility requirements
in Section II.B.1. above; see also proposed Rule 251(b)(7).
\107\ See discussion in Section II.E. below.
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2. Eligible Securities
Section 3(b)(3) of the Securities Act limits the availability of
any exemption enacted under Section 3(b)(2) to ``equity securities,
debt securities, and debt securities convertible or exchangeable into
equity interests, including any guarantees of such securities.'' \108\
On the basis of the statutory language, it is unclear which types of
securities were meant to be excluded, although there is some evidence
that suggests the exemption is meant for ordinary--and not exotic--
securities.\109\ We solicit
[[Page 3936]]
comment on the types of securities that should be excluded, if any,
consistent with the statutory mandate.
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\108\ 15 U.S.C. 77c(b)(3).
\109\ Small Company Capital Formation Act of 2011: Markup of
H.R. 1070 before the H. Comm. on Fin. Serv. for the 112th Congress,
157 Cong. Rec. 89, (daily ed. June 21, 2011), available at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=247453.
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We propose to limit the types of securities eligible for sale under
both Tier 1 and Tier 2 of Regulation A to the specifically enumerated
list of securities in Section 3(b)(3), with the exception of asset-
backed securities. Asset-backed securities are subject to the
provisions of Regulation AB, an appropriately-tailored regulatory
regime enacted to cover such securities that was not in effect when
Regulation A was last updated in 1992.\110\ We do not believe that
Title IV of the JOBS Act was enacted to facilitate the issuance of
asset-backed securities, nor do we believe that Regulation A's
disclosure requirements are suitable for offerings of such securities.
We therefore propose to exclude asset-backed securities from the list
of eligible securities under Regulation A.
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\110\ Regulation AB, 17 CFR 229.1100 et seq., was enacted in
2005. See SEC Rel. No. 33-8518 (Dec. 22, 2004). Asset-backed
securities are defined in Rule 1101(c)(1) to generally mean a
security that is primarily serviced by the cash flows of a discrete
pool of receivables or other financial asset, either fixed or
revolving, that by their terms convert into cash within a finite
time period.
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Request for Comment
20. As proposed, should we exclude asset-backed securities from the
list of eligible securities under Regulation A? Why or why not? If
asset-backed securities were eligible to be sold under Regulation A,
what changes would be required to Form 1-A and the other proposed
Regulation A forms to accommodate these issuers?
21. Should any additional types of securities be specifically
excluded from offerings conducted in reliance on Regulation A? If so,
what types of securities, and why? Should the rules provide more
specificity as to the types of securities that are included or excluded
from Regulation A offerings? What effects could excluding specified
types of securities from Regulation A offerings have on issuers,
investors, and other market participants?
3. Offering Limitations and Secondary Sales
Regulation A currently permits offerings of up to $5 million of
securities in any twelve-month period, including up to $1.5 million of
securities offered by selling securityholders.\111\ Section 3(b)(2)(A)
provides that the aggregate offering amount of all securities offered
and sold within the prior twelve-months in reliance on Section 3(b)(2)
shall not exceed $50 million. As noted above, we propose to amend
Regulation A to create two tiers of requirements: Tier 1, for offerings
of up to $5 million of securities in a twelve-month period; and Tier 2,
for offerings of up to $50 million of securities in a twelve-month
period.\112\ Proposed Tier 1 would reflect the same offering size
limitations that currently apply under Regulation A. Proposed Tier 2
would reflect the Section 3(b)(2) offering size limitation.\113\ We
believe issuers raising smaller amounts of capital may benefit from a
tiered system that affords two options for capital formation based on
differing disclosure and other requirements.
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\111\ Rule 251(b), 17 CFR 230.251(b).
\112\ If the offering included securities that were convertible,
exercisable or exchangeable for other securities, the offer and sale
of the underlying securities would also be required to be qualified
and the aggregate offering price would include the aggregate
conversion, exercise, or exchange price of such securities,
regardless of when they become convertible, exercisable or
exchangeable. This differs from the approach taken in registered
offerings that involve similar securities, but we believe would
simplify compliance.
\113\ Offerings of up to $5 million could be conducted under
either Tier 1 or Tier 2.
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We believe sales by selling securityholders to be an important part
of the exemptive scheme and therefore propose to preserve in Tier 1
Regulation A's current limitation of no more than $1.5 million of
securities offered by selling securityholders, and permit Tier 2
offerings to include up to $15 million of securities offered by selling
securityholders. Sales by selling securityholders have been permissible
under Regulation A in one form or another since 1940.\114\ Initially,
sales by an issuer and sales by a ``controlling stockholder'' were
treated as separate categories of exempt transactions; the offering
amount of each respective category was not aggregated for purposes of
determining the maximum offering amount available under the
exemption.\115\ Later, Regulation A contained a single offering ceiling
for all sales of an issuer's securities during a twelve-month period,
while each category of seller had a different permissible maximum
selling amount.\116\ In 1972, the Commission returned to the concept of
separate categories of seller transactions, each of which contained an
independent offering ceiling.\117\ For example, at that time, Rule
254(a) required issuer and affiliate sales in any twelve-month period
to be aggregated against the then-current $500,000 offering ceiling
with any one affiliate being limited to $100,000 in offers in any
twelve-month period.\118\ Sales by non-affiliates were excluded from
the $500,000 offering ceiling, and any one such seller was permitted to
offer up to $100,000, but, in the aggregate with other such non-issuer/
affiliate sellers in an amount of no more than $300,000 in any twelve-
month period.\119\ In 1992, the Commission returned to a single
offering ceiling for all sales of an issuer's securities in a twelve-
month period, and limited all secondary sales to its current $1.5
million limit (representing 30% of the maximum offering limit permitted
in a primary offering), aggregated with issuer sales during the same
period for a total of up to $5 million.\120\
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\114\ SEC Rel. No. 33-2410 (December 3, 1940) [5 FR 4749].
\115\ Id.
\116\ See, e.g., Rule 254(a), 17 CFR 230.254(a) (1956), cited in
SEC Rel. No. 33-3663 (July 31, 1956) [21 FR 5739], at 5741.
Additionally, at this time, secondary sales by certain newly
organized or unproven entities were prohibited. Id., at 5739.
\117\ See SEC Rel. No. 33-5225 (Jan 10, 1972) [37 FR 599].
\118\ Id.
\119\ Id.
\120\ See SEC Rel. No. 33-6949, at 36443; see also Rule 251(b).
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Two commenters recommended permitting secondary sales by selling
securityholders in the expanded exemptive scheme.\121\ One such
commenter suggested that removing the limitation on the amount of
securities available for resale by selling securityholders would
decrease the cost of capital for smaller issuers and encourage greater
investment in companies by increasing a potential investors liquidity
options.\122\ The other suggested adopting a limitation similar to the
current Regulation A provision in order to encourage investment in
companies and improve the liquidity options of investors.\123\ Both
commenters suggested removing current restrictions on affiliate resales
in Rule 251(b),\124\ which prohibits such sales when the issuer has not
had net income from continuing operations in at least one of its last
two fiscal years.
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\121\ ABA Letter; WR Hambrecht + Co. Letter.
\122\ ABA Letter.
\123\ WR Hambrecht + Co. Letter.
\124\ 17 CFR 230.251(b).
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Another commenter, however, urged the Commission to prohibit
selling securityholders, such as venture capital and private equity
firms, from relying on the expanded exemption.\125\ In this commenter's
view, superior negotiating power at the time of such parties' initial
investment and greater access to information about the issuer should
disqualify such parties from the
[[Page 3937]]
exemption because, while maintaining such advantages, they may seek to
offload their investment on the general public (and, sometimes against
the wishes of the issuer itself).\126\ This commenter further argued
that selling securityholder offerings do not provide capital to the
issuer or contribute to job creation.\127\ Alternatively, the commenter
suggested that if selling securityholders are permitted to rely on the
exemption, the Commission should require approval of a majority of the
issuer's independent directors as a pre-condition to any sales.\128\
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\125\ NASAA Letter 2.
\126\ Id.
\127\ Id.
\128\ Id.
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Selling securityholder access to Regulation A has been a
historically important feature of the exemptive scheme. We believe it
would continue to be an important part of Regulation A, as proposed to
be amended. Allowing selling securityholders access to avenues for
liquidity should encourage investment in companies seeking to raise
capital.\129\ Thus, we believe that allowing selling securityholders to
sell securities under Regulation A would facilitate capital formation
and be consistent with Title IV of the JOBS Act.
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\129\ See discussion in Section IV.B.2.c. below.
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We do not propose to amend Regulation A to eliminate the ability of
selling securityholders to conduct secondary offerings.\130\ Consistent
with the existing provisions of Regulation A, we propose to permit
sales by selling securityholders up to 30% of the maximum amount
permitted under the applicable offering limitation ($1.5 million in any
twelve-month period for Tier 1 and $15 million in any twelve-month
period for Tier 2). Sales by selling securityholders under either Tier
would be aggregated with sales of Regulation A securities by the issuer
and other selling securityholders for purposes of calculating the
maximum permissible amount of securities that may be sold during any
twelve-month period.
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\130\ See proposed Rule 251(a).
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In addition, we propose to eliminate the last sentence of Rule
251(b), which prohibits affiliate resales unless the issuer has had net
income from continuing operations in at least one of its last two
fiscal years. This provision was originally adopted in Regulation A in
1956 to prohibit secondary sales of securities of certain new companies
and companies without net income in at least one of their last two
fiscal years\131\ in order ``to correct . . . the threat of the `bail-
out' by the promoters and insiders of their securities holdings.''
\132\ When the Commission amended Regulation A in 1992, it maintained
these restrictions in modified form, by limiting them to affiliate
resales where the issuer had no net income from continuing operations
in at least one of its last two fiscal years.\133\
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\131\ See SEC Rel. No. 33-3663, at 5739.
\132\ SEC Ann. Rep. 29 (1956).
\133\ See SEC Rel. No. 33-6924, at fn. 59; see also Rule 251(b).
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While one commenter has expressed concern that affiliates of an
issuer could use an informational advantage to sell securities in
unsuccessful ventures at the expense of the investing public,\134\ we
are not persuaded that the absence of net income is necessarily a
meaningful indicator of enhanced risk that this could occur. Further,
the Commission's current disclosure review and qualification processes
and enforcement programs are significantly more sophisticated and
robust than they were in the 1950s. In addition, today's proposed rules
for Regulation A include revised ``bad actor'' disqualification
provisions and additional issuer eligibility requirements aimed at
limiting the market participants that have access to the
exemption.\135\
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\134\ NASAA Letter 2.
\135\ See discussions in Section II.G. (Bad Actor
Disqualification) below, and Section II.B.1. (Eligible Issuers)
above.
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We also do not believe that a focus on issuers that have not had
net income from continuing operations in at least one of its last two
fiscal years would be appropriately tailored for startup and early
stage companies that may devote large portions of their resources to
startup expenses and research and development.\136\ In this market, net
income from continuing operations may not be a material data point in
the evaluation of an investment opportunity.\137\ In addition, as
mentioned above, some commenters have argued that limiting the
liquidity options of selling securityholders, including sales by
affiliates of the issuer, may discourage investment in the issuer in
the first instance and increase the issuer's cost of capital.\138\
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\136\ See ABA Letter; WR Hambrecht + Co. Letter.
\137\ See ECTF Report.
\138\ See ABA Letter; WR Hambrecht + Co. Letter.
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On balance, we believe that investor protections provided by
Regulation A, as proposed to be amended, support the elimination of the
current restriction on affiliate resales, particularly in light of the
potential benefits of permitting secondary sales. We therefore do not
propose to carry this provision forward in amended Regulation A.
Request for Comment
22. Should we consider different annual offering thresholds for
selling securityholder sales than the proposed $1.5 million limitation
for Tier 1 offerings and $15 million limitation for Tier 2 offerings?
Why or why not? If so, should sales in reliance on Regulation A by
selling securityholders be permitted up to the annual offering ceiling
for each respective Tier, or limited at a different threshold? Should
we limit sales by selling securityholders to a percentage of the total
amount offered in conjunction with a primary offering of Regulation A
securities over a given period of time, or to Regulation A offerings
where primary securities are offered? Alternatively, should we prohibit
all sales by selling securityholders in Regulation A? Why or why not?
23. Should the rules treat sales by non-affiliate selling
securityholders as a separate category of exempt transaction, as was
once the case under Regulation A, and not aggregate such sales with
issuer sales for purposes of determining the maximum offering amount
available under the exemption? If so, should non-affiliate resales be
permitted up to the applicable annual offering ceiling, or limited at a
different threshold?
24. If selling securityholders are permitted to rely on Regulation
A, should we impose eligibility requirements or other limitations on
those securityholders? For example, should we require selling
securityholders to have owned the securities offered for resale under
Regulation A for a specified period of time before resale? If so, why
and what should the relevant holding period be (e.g. six months or
twelve months before initial submission or filing of the offering
statement)? If the rules impose a holding period before securities can
be offered for resale under Regulation A, should the holding period
only apply to affiliates? Or to all selling securityholders?
25. Does the existing Rule 251(b) requirement that an issuer have
net income from continuing operations in each of its last two fiscal
years, in order for an affiliate to be able to conduct a secondary sale
in reliance on Regulation A, have continuing validity, and should we
therefore retain this provision? Why or why not? Please explain.
4. Investment Limitation
Regulation A does not currently limit the amount of securities an
investor can purchase in a qualified Regulation A offering. We
recognize, however, that with the increased annual offering
[[Page 3938]]
limitation provided in Section 3(b)(2) comes a risk of commensurately
increased investor losses. To address that risk, Title IV of the JOBS
Act mandates certain investor protections\139\ and suggests that the
Commission consider others as part of its Section 3(b)(2)
rulemaking.\140\ Additionally, we believe that Congress recognized in
Section 3(b)(2) that certain other investor protections--not directly
contemplated by Title IV of the JOBS Act--may be necessary in the
revised regulation. To that end, Section 3(b)(2)(G) indicates that the
Commission may include in the expanded exemption ``such other terms,
conditions, or requirements . . . necessary in the public interest and
for the protection of investors . . . .''
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\139\ See Section 3(b)(2)(D) (expressly providing for Section
12(a)(2) liability for any person offering or selling Section
3(b)(2) securities); Section 3(b)(2)(F) (requiring issuers to file
audited financial statements with the Commission annually).
\140\ See Section 3(b)(2)(G) (inviting the Commission to
consider, among other things, requiring audited financial statements
in the offering statement and implementing bad actor
disqualification provisions); Section 3(b)(4) (inviting the
Commission to consider implementing ongoing reporting requirements).
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Consistent with Section 3(b)(2)(G) and the Commission's investor
protection mandate, in addition to the disclosure, reporting and other
requirements of Regulation A, we propose to limit the amount of
securities investors can purchase in a Tier 2 offering to no more than
10% of the greater of their annual income and their net worth.\141\ For
this purpose, annual income and net worth would be calculated for
individual purchasers as provided in the accredited investor definition
under Rule 501 of Regulation D.\142\
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\141\ If securities that are convertible, exercisable or
exchangeable for other securities are being purchased by an
investor, the proposed investment limitation would include the
aggregate conversion, exercise, or exchange price of such
securities, in addition to the purchase price. This treatment
corresponds to the treatment of such securities for purposes of
calculating the offering cap.
\142\ 17 CFR 230.501.
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We believe that this proposed new requirement could usefully
augment the other requirements for Tier 2 offerings. Limiting the
amount of securities that a potential investor could invest in a Tier 2
offering to 10% of the greater of the investor's annual income and net
worth would help to mitigate any concern that an investor may not be
able to absorb the potential loss of the investment.\143\ The
additional investor protection afforded by such a loss limitation is
similar to the provisions for our recently proposed rules for
securities-based crowdfunding transactions under Section 4(a)(6) of the
Securities Act.\144\ We believe that an investment limitation for Tier
2 offerings, coupled with the additional investor protection
requirements discussed above and more fully below, could protect
investors in Tier 2 offerings in a similar way as the proposed rules
for securities-based crowdfunding transactions.
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\143\ An underwriter in a firm commitment underwritten
Regulation A offering, or participating broker-dealer that is
involved in stabilization activities with respect to an offering of
Regulation A securities would not be considered an investor that is
subject to the proposed investment limitations.
\144\ See Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C.
77d(a)(6)(ii), and SEC Rel. No. 33-9470. In Section 4(a)(6),
Congress outlined a new exemption for securities-based crowdfunding
transactions intended to take advantage of the internet and social
media to facilitate capital-raising by the general public, or crowd.
In that provision, Congress established limitations on the amount of
securities an investor could acquire through this type of offering,
as well as a variety of other investor protections, including
disclosure requirements and the use of regulated intermediaries.
See, generally, the requirements for issuers and intermediaries set
forth in Title III of the JOBS Act, Public Law 112-106, 126 Stat.
306, Sec. Sec. 301-305.
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Under the proposal, issuers would be required to make investors
aware of the investment limitations,\145\ but would otherwise be able
to rely on an investor's representation of compliance with the proposed
investment limitation unless the issuer knew, at the time of sale, that
any such representation was untrue. We are mindful of the privacy
issues and practical difficulties associated with verifying individual
income and net worth, and do not therefore propose to require investors
to disclose personal information to issuers in order to verify
compliance with the investment limitation.\146\ We are, however,
soliciting comment below on whether verification of the income and net
worth limit should be required.
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\145\ See cover page of the offering circular of proposed Form
1-A.
\146\ Investors may, for example, be reluctant to provide
issuers with their Internal Revenue Service (IRS) Form W-2 (Wage and
Tax Statement) in order to verify compliance with the proposed
annual income investment limitation or to disclose documents, such
as bank or investment account statements, that would verify net
worth. Relatedly, issuers may have difficulty ascertaining the
veracity or comprehensiveness of any documentation provided to them
by investors. Cf. SEC Rel. No. 33-9415 (July 10, 2013) [78 FR 4471],
at II.B (discussing verification of accredited investor status for
private offerings under Rule 506(c) of Regulation D).
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Request for Comment
26. As proposed, should we impose investment limitations on
investors in Tier 2 offerings? Or does Regulation A, as proposed to be
amended, have sufficient investor protections for Tier 2 offerings,
such that an investment limitation for investors is not necessary? Why
or why not?
27. Are the proposed investment limitations appropriate in the
context of a Tier 2 offering? Why or why not? What impact would the
proposed investment limitation restriction have on issuers and
investors? Should the proposed limitations on investment not apply to
accredited investors? Are there other investment limitation criteria we
should consider? For example, should we impose a limitation based on a
percentage of total investment assets in addition to, or instead of,
annual income or net worth?
28. Alternatively, should the investment limitation be higher or
lower than the 10% proposed? If so, what percentage and why would that
percentage be appropriate? Would the proposed investment limitation be
appropriate for investors that are entities rather than natural
persons? Should we establish a minimum annual investment amount,
similar to $2,000 annual investment that would be permitted under our
proposed crowdfunding rules, that all investors could make in
Regulation A offerings irrespective of their income and net worth? Why
or why not?
29. Should the proposed investment limitation apply on a per
offering basis, as proposed? Or should the limitation apply on an
aggregated basis, across all investments in Regulation A securities?
Why or why not? If the limitation were to apply on an aggregated basis,
how should the limitation apply? Should we limit the provision so that
only Regulation A offerings close in time (for example, within a
twelve-month period), or otherwise related, would be aggregated in the
10% calculation?
30. Should we permit issuers, as proposed, to rely on an investor's
representation of compliance with the 10% investment limitation, unless
the issuer has knowledge that any such representation was untrue? Why
or why not? If not, what level of inquiry or verification should
issuers have to perform in order to ensure compliance with the
requirement? Should the issuer and its intermediaries be required to
have a reasonable belief that the investor certification can be relied
upon (e.g., should they be required to conduct further investigation if
they have reason to believe that the certification is untrue)? Why or
why not? If we permit issuers to rely on an investor's representation
regarding compliance with the 10% investment limitation, as proposed,
should we require the representation to be made in a particular form,
such as an investor questionnaire? Should we require the issuer to
provide disclosure or educational materials in connection with the
representation?
[[Page 3939]]
5. Integration
Existing Rule 251(c) of Regulation A governs the integration of
Regulation A offerings with other offerings.\147\ This provision
provides that offerings under Regulation A are not to be integrated
with any of the following:
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\147\ 17 CFR 230.251(c). The integration doctrine seeks to
prevent an issuer from improperly avoiding registration by
artificially dividing a single offering into multiple offerings such
that Securities Act exemptions would apply to multiple offerings
that would not be available for the combined offering.
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prior offers or sales of securities; or
subsequent offers and sales of securities that are:
registered under the Securities Act, except as provided in
Rule 254(d); \148\
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\148\ Rule 254(d) provides a safe harbor for an issuer that has
a bona fide change of intention and decides to register an offering
under the Securities Act after soliciting interest in a Regulation A
offering, but without having filed the related offering statement.
To take advantage of the safe harbor, such issuers must wait at
least 30 calendar days from the date of the last solicitation of
interest before filing a registration statement for the offering
with the Commission. 17 CFR 230.254(d). Under existing Regulation A,
issuers are not allowed to solicit interest in an offering after
filing the offering statement with the Commission. See discussion in
Section II.D. below.
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made in reliance on Rule 701 under the Securities Act;
made pursuant to an employee benefit plan;
made in reliance on Regulation S; or
made more than six months after completion of the
Regulation A offering.
We believe Regulation A's existing integration safe harbors provide
issuers, particularly smaller issuers whose capital needs often change,
with valuable certainty as to the contours of a given offering and its
eligibility for an exemption from Securities Act registration. To date,
the public comment we received on integration suggested we maintain
Regulation A's existing integration provisions.\149\ We propose,
subject to certain exceptions discussed below, to generally preserve
the existing Regulation A integration safe harbors.\150\ We also
propose to provide additional guidance on the potential integration of
offerings conducted concurrently with, or close in time after, a
Regulation A offering.
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\149\ ABA Letter.
\150\ Existing Rule 254(d) of Regulation A would become proposed
Rule 255(e).
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The safe harbor from integration provided by existing Rule 251(c)
expressly provides that any offer or sale made in reliance on
Regulation A will not be subject to integration with any other offer or
sale made either before the commencement of, or more than six months
after, the completion of the Regulation A offering.\151\ In other
words, for transactions that fall within the provisions of existing
Rule 251(c), issuers do not have to conduct an independent integration
analysis under the provisions of, for example, another rule-based
exemption in order to determine whether, under the terms of that rule,
the two offerings would be treated as one for purposes of qualifying
for an exemption. This bright-line rule assists issuers in analyzing
certain transactions, but does not address the issue of potential
offers or sales that occur concurrently with, or close in time after, a
Regulation A offering.
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\151\ Contra Rule 502(a) of Regulation D, 17 CFR 230.502(a),
which states that offers and sales made more than six months before
the start, or after the completion, of a Regulation D offering will
not be considered part of that Regulation D offering.
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Currently, the note to Rule 251(c) indicates that, if the
provisions of the safe harbor are unavailable, offers and sales may
still not be integrated with the Regulation A offering depending on the
particular facts and circumstances, so there is no presumption that
offerings outside the integration safe harbors should be
integrated.\152\ Additionally, we believe that an offering made in
reliance on Regulation A should not be integrated with another exempt
offering made by the issuer, provided that each offering complies with
the requirements of the exemption that is being relied upon for the
particular offering.\153\ For example, an issuer conducting a
concurrent exempt offering for which general solicitation is not
permitted would need to be satisfied that purchasers in that offering
were not solicited by means of the offering made in reliance on
Regulation A, including without limitation any ``testing the waters''
communications.\154\ Alternatively, an issuer conducting a concurrent
exempt offering for which general solicitation is permitted could not
include in any such general solicitation an advertisement of the terms
of an offering made in reliance on Regulation A that would not be
permitted under Regulation A. An issuer conducting, for example, a
concurrent Rule 506(c) offering could not include in its Rule 506(c)
general solicitation materials an advertisement of a concurrent
Regulation A offering, unless that advertisement also included the
necessary legends for, and otherwise complied with, Regulation A.\155\
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\152\ The note cites to the guidance provided in SEC Rel. No.
33-4552 (Nov. 6, 1962) [27 FR 11316], which states the Commission's
traditional five-factor test for integration.
\153\ We recently proposed a similar approach to integration in
the context of offerings under the proposed provisions for
securities-based crowdfunding transactions pursuant to Title III of
the JOBS Act. See SEC Rel. No. 33-9470, text accompanying fn. 33-34.
\154\ For a concurrent offering under Rule 506(b), an issuer
would have to conclude that purchasers in the Rule 506(b) offering
were not solicited by means of a Regulation A general solicitation.
For example, the issuer may have had a preexisting substantive
relationship with such purchasers. Otherwise, the solicitation
conducted in connection with the Regulation A offering may preclude
reliance on Rule 506(b). See also SEC Rel. No. 33-8828 (Aug. 3,
2007) [72 FR 45116].
\155\ See discussion in Section II.D. below.
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In addition to this approach to integration, we propose to add to
the list of safe harbor provisions subsequent offers or sales of
securities made pursuant to the proposed rules for securities-based
crowdfunding transactions under Title III of the JOBS Act. Given the
unique capital formation method available to issuers and investors in
the proposed rules for securities-based crowdfunding transactions and
the small dollar amounts involved, we do not propose to integrate
offers or sales of such securities that occur subsequent to the
commencement of any offers or sales of securities made in reliance on
Regulation A.\156\
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\156\ See SEC Rel. No. 33-9470. An issuer contemplating a
securities-based crowdfunding transaction pursuant to Section
4(a)(6) subsequent to any offers or sales conducted in reliance on
Regulation A, as proposed to be amended, should look to the proposed
rules for securities-based crowdfunding transactions to ensure
compliance with the advertising provisions of that proposed
exemption.
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We further propose to amend Rule 254(d) to provide that where an
issuer decides to register an offering after soliciting interest in a
contemplated, but abandoned, Regulation A offering, any offers made
pursuant to Regulation A would not be subject to integration with the
registered offering, unless the issuer engaged in solicitations of
interest in reliance on Regulation A to persons other than qualified
institutional buyers (``QIBs'') and institutional accredited investors
permitted by Section 5(d) \157\ of the Securities Act.\158\ An issuer
(and any underwriter, broker, dealer, or agent used by the issuer in
connection with the proposed offering) soliciting interest in a
Regulation A offering to persons other than QIBs and institutional
accredited investors must wait at least 30 calendar days between the
last such solicitation of interest in the Regulation A offering and the
filing of the registration statement with the Commission.\159\ We
believe these updated provisions are necessary, given the broad
permissible target audience of Regulation A solicitations, the proposed
expanded use of solicitation materials in Regulation A discussed more
fully in Section II.D. below, and the addition of
[[Page 3940]]
similar provisions for registered offerings under Section 5(d).
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\157\ 15 U.S.C. 77e(d).
\158\ See proposed Rule 255(e).
\159\ Id.
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Request for Comment
31. As proposed, should we adopt an integration safe harbor in
Regulation A that largely follows the existing provisions of Rule
251(c), while adding the exemption provided by the proposed JOBS Act
crowdfunding rules into the list of safe harbors for subsequent offers
or sales? Why or why not? Should we alter or add additional provisions
to the list of safe harbors for subsequent offers or sales? If so,
please provide supporting analysis for your suggestions. For example,
should we reduce the six-month period in Rule 251(c)(2)(v)?
32. Should we amend the provisions of Rule 254(d), as
proposed,\160\ to take into account the expanded use of solicitation
materials in Regulation A, the ability of emerging growth companies to
solicit interest from certain types of investors under Title I of the
JOBS Act, and the potential effect that an abandoned Regulation A
offering, in which an issuer solicited interest from potential
investors, may have on that issuer's ability to immediately thereafter
register the offering under the Securities Act? Why or why not? Are
there any alternative approaches for the interaction of these two
provisions in the context of an abandoned Regulation A offering
followed immediately thereafter by a registered offering? If so, please
explain.
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\160\ See proposed Rule 255(e).
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6. Treatment Under Section 12(g)
Exchange Act Section 12(g) requires, among other things, that an
issuer with total assets exceeding $10,000,000 and a class of equity
securities held of record by either 2,000 persons, or 500 persons who
are not accredited investors, register such class of securities with
the Commission.\161\ Unlike Title III of the JOBS Act, which includes a
provision regarding the treatment under Section 12(g) of securities
issued in securities-based crowdfunding transactions pursuant to
Section 4(a)(6) of the Securities Act, Title IV does not include a
provision regarding how Regulation A issuers should be treated under
Section 12(g).
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\161\ 15 U.S.C. 78l(g).
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Section 12(g) was originally enacted by Congress as a way to ensure
that investors in over-the-counter securities about which there was
little or no information, but which had a significant shareholder base,
were provided with ongoing information about their investment.\162\ As
discussed more fully below, Regulation A, as proposed to be amended,
would require issuers that conducted Tier 2 offerings to provide
ongoing information to their investors, albeit somewhat less than is
required of an Exchange Act reporting company. If securities issued
under Regulation A were to be excluded for purposes of determining
record holders under Section 12(g), a company may never become subject
to mandatory Exchange Act reporting as a result of selling securities
under Regulation A, regardless of how many shareholders it has or
whether such shareholders were accredited investors. Alternatively, if
Regulation A issuers that conducted Tier 2 offerings were current in
their ongoing reporting were exempt from registration under Section
12(g), or their obligations to register were suspended, issuers would
have the ability to remain in the Regulation A reporting regime on a
long-term basis, irrespective of growth in their shareholder base.
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\162\ See, generally, Report of the Special Study of Securities
Markets of the Securities and Exchange Commission, House Document
No. 95, House Committee on Interstate and Foreign Commerce, 88th
Cong., 1st Sess. (1963), at 60-62.
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One commenter suggested we provide a conditional exemption from
mandatory Exchange Act reporting under Section 12(g) for emerging
growth companies that have conducted a Regulation A offering and comply
with its ongoing reporting requirements; otherwise, emerging growth
companies that may cross the Section 12(g) asset and record holder
thresholds following a Regulation A offering would be disincentivized
from relying on the exemption.\163\ In the commenter's view, the
exemption from Section 12(g) could be temporary and lapse once the
issuer obtains a non-affiliate market capitalization of $250
million.\164\
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\163\ Letter from Michael L. Zuppone, Paul Hastings LLP, Nov.
26, 2013 (``Paul Hastings Letter'').
\164\ The commenter suggested $250 million of non-affiliate
market capitalization to accord with the threshold the Commission
set for defining the mandate of its Advisory Committee on Small and
Emerging Companies. See fn. 94 above.
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We believe, however, that the Section 12(g) record holder threshold
continues to provide an important baseline, above which issuers should
be subject to the more expansive disclosure and compliance obligations
of the Exchange Act. We are not proposing to exempt Regulation A
securities from the requirements of Section 12(g) or to provide that
issuers that are current in their Regulation A ongoing reporting under
Tier 2 would be exempt from Section 12(g) or have their obligations to
register under Section 12(g) suspended. We do, however, solicit comment
as to whether a Section 12(g) exemption or suspension should be
provided.
Request for Comment
33. Should Regulation A securities be exempt from Section 12(g),
either conditionally or otherwise? Would an exemption from Section
12(g) encourage Regulation A issuers to continue ongoing reporting
under the proposed rules for Tier 2 offerings, where such issuers might
otherwise cease reporting? \165\
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\165\ See discussion in Section IV.B.2.f. below.
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34. Does Section 12(g) continue to serve as a valuable proxy for
market interest in the equity securities of an issuer issued pursuant
to Regulation A, such that an issuer that crosses its asset and record
holder thresholds should become subject to mandatory Exchange Act
reporting? Why or why not?
7. Liability Under Section 12(a)(2)
The liability provisions of Section 12(a)(2) of the Securities Act
apply to any public offering of securities by use of an oral
communication or prospectus that includes a material misleading
statement or material misstatement of fact.\166\ Section 3(b)(2)(D) of
the Securities Act provides that ``[t]he civil liability provision in
section 12(a)(2) [of the Securities Act] shall apply to any person
offering or selling [Regulation A] securities.'' Therefore, consistent
with current Regulation A,\167\ sellers of Regulation A securities
would have liability under Section 12(a)(2) to investors for any offer
or sale by means of an offering circular or an oral communication that
includes a material misleading statement or material misstatement of
fact.\168\
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\166\ 15 U.S.C. 77l(a)(2).
\167\ See SEC Rel. No. 33-6924, at fn. 57.
\168\ Regulation A prohibits sales until the Form 1-A has been
qualified. See Rule 251(d)(2), 17 CFR 230.251(d)(2); cf. Securities
Offering Reform, SEC Rel. No. 33-8591, at 173 et seq. (discussing
Section 12(a)(2) liability in the context of information conveyed at
the time of sale).
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C. Offering Statement
Section 3(b)(2)(G)(i) gives the Commission discretion to require an
offering statement in such form and with such content as it determines
necessary in the public interest and for the protection of investors.
The provision permits electronic filing of offering statements, and
provides a non-exhaustive list of potential content that may be
required in the offering statement, including audited financial
statements, a description of the issuer's business operations,
financial condition, corporate governance principles, use of
[[Page 3941]]
investor funds, and other appropriate matters.
1. Electronic Filing; Delivery Requirements
Currently, Regulation A offering statements are filed with the
Commission in paper form.\169\ The paper filing process does not align
with the Commission's electronic filing requirements for issuers in
registered offerings \170\ or notices in connection with offerings
under Regulation D.\171\ The Commission has required electronic filing
of registration statements since 1996,\172\ and of Form D filings since
2009.\173\ Requiring offering statements to be filed electronically
rather than on paper may reduce potential logistical problems and
delays that can occur with the receipt, processing and dissemination of
paper filings by the Commission for issuers seeking to raise capital
under Regulation A. Electronic filing would facilitate a more efficient
review process for such filings by Commission staff by allowing the
offering and related materials, once submitted or filed, to be rapidly
processed and disseminated internally. In addition, paper submissions--
while publicly available in a technical sense--are not widely or
immediately accessible. Electronic filing of offering statements could
facilitate investor and market access to the information contained in
offering statements in a more efficient way than paper filings do.
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\169\ 17 CFR 232.101(c)(6). There are no filing fees associated
with filing a Form 1-A with the Commission. See Section 6(b) of the
Securities Act, 15 U.S.C. 77f(b) (permitting the recovery of costs
of services to the government only with respect to registered
offerings).
\170\ Offerings registered under the Securities Act are required
to be filed electronically on the Commission's Electronic Data
Gathering, Analysis, and Retrieval System (EDGAR) system. See Rule
101(a)(1)(i) of Regulation S-T (17 CFR 232.101(a)(1)(i)).
\171\ Issuers relying on Regulation D are required to
electronically file a notice of sales on Form D with the Commission.
See Rule 101(a)(1)(xiii) of Regulation S-T (17 CFR
232.101(a)(1)(xiii)); see also Rule 503 of Regulation D (17 CFR
230.503). Form D is also required for offerings under Section
4(a)(5) of the Securities Act.
\172\ See SEC Rel. No. 33-6977 (Feb. 23, 1993) [58 FR 14628].
Foreign private issuers have been required to file their
registration statements electronically since 2002. SEC Rel. No. 33-
8099 (May 16, 2002).
\173\ See SEC Rel. No. 33-8891 (Feb. 6, 2008) [73 FR 10592].
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In Section 3(b)(2)(G)(i), Congress gave the Commission discretion
to require issuers to file their offering statements electronically.
Commenters are generally supportive of electronic filing.\174\
Consistent with these comments and the language of Section
3(b)(2)(G)(i), we propose to require Regulation A offering statements
to be filed with the Commission electronically on the EDGAR
system.\175\
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\174\ ABA Letter; WR Hambrecht + Co.; Kaplan Voekler Letter 2;
see also Letter from George W. Beard, Managing Member, Beacon
Investment Partners LLC (DE), Oct. 5, 2012 (``Beacon Investment
Letter''). See also Final Report of the 30th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation
16, at 31 (Nov. 17, 2011) (available at: http://www.sec.gov/info/smallbus/gbfor30.pdf).
\175\ In conjunction with this proposed change, the portion of
Item 101(c)(6) of Regulation S-T (17 CFR 232.101(c)(6)) dealing with
filings related to Regulation A offerings would be rescinded.
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As proposed, amended Form 1-A would consist of three parts:
an eXtensible Markup Language (XML) based fillable form,
which would capture key information about the issuer and its offering
using an easy to fill out online form, similar to Form D,\176\ with
drop-down menus, indicator boxes or buttons, and text boxes, while also
assisting issuers in determining their ability to rely on the
exemption. The XML-based fillable form would enable the convenient
provision of information to the Commission, and support the assembly
and transmission of such information to EDGAR, without requiring the
issuer to purchase or maintain additional software or technology; \177\
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\176\ 17 CFR 239.500.
\177\ Part I (Notification) of Form 1-A. As discussed more fully
in Section II.C.3.a. below, the cover page and Part I of current
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
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a text file attachment containing the body of the
disclosure document and financial statements, formatted in HyperText
Markup Language (HTML) or American Standard Code for Information
Interchange (ASCII) to be compatible with the EDGAR filing system;
\178\ and
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\178\ Part II (Offering Circular) of Form 1-A. See discussion in
Section II.C.3.b. below.
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text file attachments, containing the exhibits index and
the exhibits to the offering statement, formatted in HTML or ASCII to
be compatible with the EDGAR filing system.\179\
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\179\ Part III (Exhibits) of Form 1-A. See discussion in Section
II.C.3.c. below.
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We further propose to require all other documents required to be
submitted or filed with the Commission in conjunction with a Regulation
A offering, such as ongoing reports, to be submitted or filed
electronically on EDGAR.\180\
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\180\ See discussion regarding proposed ongoing reporting
requirements at Section II.E. below. Consistent with current
Regulation A, there would be no filing fees associated with
Regulation A, as proposed to be amended.
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We believe this proposed approach to electronic filing would be
both practical and useful for issuers of Regulation A securities,
investors in such securities, other market participants, and the
Commission staff who work with issuers throughout the qualification
process. Issuers would maintain better control over their filing
process, reduce the printing costs associated with filing seven copies
of the offering statement and any amendments with the Commission,
obtain immediate confirmation of acceptance of an offering statement,
and ultimately save time in the qualification process. Investors would
gain real-time access to the information contained in Regulation A
filings.\181\ The efficiency of the Regulation A market should improve
with the increased accessibility of information about Regulation A
issuers and offerings. Additionally, as with registered offerings,
EDGAR would allow the Commission to store, process, and disseminate
filings in a more efficient manner, which may, in turn, improve the
efficiency of the staff review and qualification processes.
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\181\ Investors would not, however, have immediate access to
non-public submissions of draft offering statements. See discussion
in Section II.C.2. below.
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As proposed, electronic filing would also facilitate the capture of
important financial and other information about Regulation A issuers
and offerings that would enable the Commission and market participants
to monitor and analyze any market that develops in Regulation A
securities, including, for example, issuer size, issuer location, key
financial metrics, summary information about securities offered and
offering amounts, the jurisdictions in which offerings take place, and
expenses associated with the offering.\182\
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\182\ The specific disclosure requirements included in the XML-
based fillable form are discussed more fully in Section II.C.3.a.
below.
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We appreciate, however, that requiring EDGAR filing would impose
costs on issuers that currently are not required to enter the EDGAR
filing system or format their disclosure documents in ways that the
EDGAR system can accept. For that reason, we are soliciting comment on
whether electronic filing should be mandated for Regulation A
offerings.
If electronic filing on EDGAR is required, one commenter suggested
that the Commission propose for Regulation A offering circulars an
analog to the ``access equals delivery'' model for prospectuses under
Securities Act Rule 172.\183\ Currently, Regulation A prohibits sales
pursuant to a qualified offering statement unless a preliminary
offering circular or final offering circular is furnished to an
investor at least 48
[[Page 3942]]
hours before the mailing of the confirmation of sale, and the final
offering circular is delivered to the investor with the confirmation of
sales (unless delivered at any earlier time).\184\ By comparison, under
Rule 172, a final prospectus in a registered offering is deemed to
precede or accompany a security for sale for purposes of Section
5(b)(2) of the Securities Act as long as the final prospectus meeting
the requirements of Section 10(a) of the Securities Act is filed with
the Commission on EDGAR.\185\ Additionally, Rule 172(a), which provides
an exemption from Section 5(b)(1) of the Securities Act, permits
issuers to send written confirmations and notices of allocations after
effectiveness of a registration statement without being accompanied or
preceded by a final prospectus, so long as the registration statement
is effective and the final prospectus is filed with the
Commission.\186\
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\183\ Kaplan Voekler Letter 2.
\184\ Rule 251(d)(2).
\185\ 17 CFR 230.172(b); see also Securities Offering Reform,
SEC Rel. No. 33-8591, at 245 (discussing Rule 172). This provision
also applies where the issuer will make a good faith and reasonable
effort to file the final prospectus with the Commission as part of
the registration statement within the required Rule 424 time period.
17 CFR 230.172(c)(3). Currently, there is no analog in Regulation A
to filings permitted in the registered context under Rule 424,
although one commenter has suggested we consider one. See Kaplan
Voekler Letter 2; see also discussion in Section II.C.3. below and
text accompanying fn. 235.
\186\ 17 CFR 230.172(a); see also Securities Offering Reform,
SEC Rel. No. 33-8591, at 251 (discussing Rule 172(a)).
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We are proposing an access equals delivery model for Regulation A
final offering circulars. The expanded use of the Internet and
continuing technological developments suggest that we should consider
alternative methods of final offering circular delivery for Regulation
A, particularly given that the regulation has not been substantively
updated since 1992. Where, upon qualification of an offering statement,
sales of Regulation A securities occur on the basis of offers made
using a preliminary offering circular, issuers and intermediaries could
presume that investors have access to the Internet, and would be
permitted to satisfy their delivery requirements for the final offering
circular if it is filed and available on EDGAR.\187\ We further propose
to require issuers to include a notice in any preliminary offering
circular they use that would inform potential investors that the issuer
may satisfy its delivery obligations for the final offering circular
electronically. As with registered offerings, we propose to permit
dealers, during the aftermarket delivery period, to be deemed to
satisfy their final offering circular delivery requirements if it is
filed and available on EDGAR.\188\
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\187\ Cf. Securities Offering Reform, SEC Rel. No. 33-8591, at
244.
\188\ See proposed Rule 251(d)(2)(ii) for the dealer aftermarket
delivery requirements.
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Further, consistent with prior Commission releases on the use of
electronic media for delivery purposes, ``electronic-only'' offerings
of Regulation A securities would not be prohibited under the proposed
rules for Regulation A.\189\ In such offerings, however, an issuer and
its participating intermediaries would have to obtain the consent of
investors to the electronic delivery of:
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\189\ An electronic-only offering is an offering in which
investors are permitted to participate only if they agree to accept
the electronic delivery of all documents and other information in
connection with the offering. See SEC Rel. No. 34-37182 (May 9,
1996) [61 FR 24644] (Use of Electronic Media by Broker-Dealers,
Transfer Agents and Investment Advisers for Delivery of Information)
and SEC Rel. No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of
Electronic Media).
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the preliminary offering circular and other information,
but not the final offering circular, in instances where, upon
qualification, the issuer plans to sell Regulation A securities based
on offers made using a preliminary offering circular; and
all documents and information, including the final
offering circular, when the issuer sells Regulation A securities based
on offers conducted during the post-qualification period using a final
offering circular.
We further propose to maintain the existing requirements of Rule
251(d)(2)(ii), which requires dealers to deliver a copy of the current
offering circular to purchasers for sales that take place within 90
calendar days after qualification,\190\ but to otherwise update and
amend Rule 251(d)(2)(i), which currently requires that a preliminary or
final offering circular be furnished to prospective purchasers at least
48 hours before the mailing of the confirmation of sale. When
originally adopted in 1973, Regulation A's offering circular delivery
requirements aligned with the prospectus delivery requirements for
registered offerings.\191\ In the intervening time, prospectus delivery
requirements have changed,\192\ with no corresponding updates to
Regulation A. Notably, the Commission formalized its 48-hour
preliminary prospectus delivery requirement in 1982 by amending
Exchange Act Rule 15c2-8 to require only broker-dealers participating
in a registered offering of securities by a non-reporting issuer to
deliver a preliminary (and not final) prospectus at least 48 hours in
advance of the mailing of the confirmation of sale.\193\
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\190\ See proposed Rule 251(d)(2)(ii). As proposed, this
provision clarifies the date on which dealer delivery obligations
commence in the context of continuous or delayed offerings pursuant
to proposed Rule 251(d)(3).
\191\ See SEC Rel. No. 33-5277 (July 26, 1972) (noting that
there should be no distinction in the delivery requirements of
Regulation A offerings and registered offerings, and therefore
proposing (and eventually adopting) rules requiring delivery of the
offering circular 48 hours in advance of mailing of a confirmation
of sale.); SEC Rel. No. 33-6075 (June 1, 1979) [44 FR 33362], at
33363-64 (permitting for the first time the use of a preliminary
offering circular in Regulation A offerings, and imposing the same
delivery requirements for such preliminary offering circulars as
were then in effect for registered offerings).
\192\ See SEC Rel. No. 33-6383 (March 3, 1982) [47 FR 11380]
(Integrated Disclosure Release, which, among other things, added
Exchange Act Rule 15c2-8, 17 CFR 240.15c2-8, which requires broker-
dealers participating in a registered offering of securities of a
non-reporting issuer to deliver a copy of the preliminary prospectus
to any prospective purchaser at least 48 hours before the mailing of
the confirmation of sale.); see also Securities Offering Reform, SEC
Rel. No. 33-8591, at 173 et seq. and 241 et seq. (discussing
information conveyed at time of sale for purposes of Section
12(a)(2) liability and prospectus delivery requirement reforms).
\193\ SEC Rel. No. 33-6383, at 11400. The advance delivery
requirements do not, however, apply in the context of registered
offerings by issuers subject to a reporting obligation under Section
13 or 15(d) of the Exchange Act. Before the addition of Rule 15c2-
8(b), the Commission required assurances that the managing
underwriter had taken reasonable steps to send investors a
preliminary prospectus at least 48 hours in advance of mailing
confirmations of sale before accelerating effectiveness of a
registration statement. See SEC Rel. No. 33-4968 (May 1, 1969) [34
FR 7235]. Cf. 17 CFR 230.460 (Distribution of Preliminary Prospectus
in Registered Offerings).
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We believe the delivery of the preliminary offering circular to
potential investors before they make an investment decision remains an
important investor protection that should be preserved in Regulation A,
particularly in light of the proposed expanded use of ``testing the
waters'' solicitation materials to include the period of time after
non-public submission or filing of the offering statement discussed
further in Section II.D. below.\194\ We also recognize the need to
update and amend Regulation A's offering circular delivery requirements
to accord with the requirements of broker-dealers in the context of
registered offerings. We therefore propose to amend Rule 251(d)(2)(i)
to require issuers and participating broker-dealers to deliver only a
preliminary offering circular to prospective purchasers \195\ at least
48
[[Page 3943]]
hours in advance of sale when a preliminary offering circular is used
during the prequalification period to offer such securities to
potential investors.\196\ Unlike Exchange Act Rule 15c2-8, this
delivery requirement would apply to both issuers and participating
broker-dealers.\197\ We believe this is an important investor
protection that should apply to issuers in advance of sale, and is
consistent with current Regulation A.\198\ Consistent with current Rule
251(d)(1)(iii), we propose to continue to require a final offering
circular to accompany or precede any written communications that
constitute an offer in the post-qualification period.\199\
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\194\ Cf. Securities Offering Reform, SEC Rel. No. 33-8591, at
245 (noting that access equals delivery is not appropriate for
preliminary prospectus delivery obligations in IPOs because it is
important for potential investors to be sent the preliminary
prospectus).
\195\ Prospective purchasers would include any person that has
indicated an interest in purchasing the Regulation A securities
before qualification, including, but not limited to, those investors
that respond to an issuer's solicitation materials. See proposed
Rule 251(d)(2)(i).
\196\ In accordance with time of sale provisions discussed in
Securities Offering Reform, see SEC Rel. No. 33-8591, at p. 173 et
seq., we propose to base the 48-hour period in advance of ``sale''
rather than the ``mailing of the confirmation of sale.'' See also
Section II.D. below for a discussion of the delivery requirements
for solicitation materials used after publicly filing the offering
statement.
\197\ Cf. Exchange Act Rule 3a4-1, 17 CFR 240.3a4-1 (Associated
persons of an issuer deemed not to be brokers). Issuers would be
able to rely on reasonable assurances of delivery from participating
broker-dealers to satisfy their delivery obligations.
\198\ Cf. 17 CFR 230.460 (Distribution of Preliminary Prospectus
in Registered Offerings). Additionally, with continued improvements
in information and communication technologies, we believe direct
public offerings (i.e., offerings conducted by an issuer without the
involvement of an underwriter) may become a more attractive option
for certain issuers. For that reason, it is important that the
advance preliminary offering circular delivery requirements for
participating broker-dealers apply equally to issuers.
\199\ See proposed Rule 251(d)(1)(iii). Consistent with Rule
172(a) in the context of registered offerings, issuers and
intermediaries sending written confirmations and notices of
allocation in the post-qualification period would be allowed to rely
on the EDGAR filing of the final offering circular to satisfy any
delivery requirements under Rule 251(d)(1)(iii). For a discussion of
Rule 172(a), see Securities Offering Reform, SEC Rel. No. 33-8591,
at 251.
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In addition to the revised delivery requirements discussed above,
we propose to add a provision analogous to Rule 173.\200\ Currently,
Regulation A requires the delivery of a final offering circular to the
purchaser with the confirmation of sale, unless it has been delivered
already.\201\ The proposed provision would allow issuers and
participating broker-dealers that satisfy the 48-hour requirement by
furnishing a preliminary offering circular to, not later than two
business days after completion of the sale, provide the purchaser with
a copy of the final offering circular or a notice stating that the sale
occurred pursuant to a qualified offering statement. As proposed, the
notice must include the URL \202\ where the final offering circular, or
the offering statement of which such final offering circular is part,
may be obtained on EDGAR and contact information sufficient to notify a
purchaser where a request for a final offering circular can be sent and
received in response.
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\200\ 17 CFR 230.173.
\201\ 17 CFR 230.251(d)(2)(i)(C).
\202\ In the case of an electronic-only offering, the notice
must include an active hyperlink to the final offering circular or
to the offering statement of which such final offering circular is
part.
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We propose to allow an issuer to withdraw an offering statement,
with the Commission's consent, if none of the securities that are the
subject of such offering statement have been sold and such offering
statement is not the subject of a Commission order temporarily
suspending a Regulation A exemption.\203\ Under the proposed rules, the
Commission also would be able to declare an offering statement
abandoned if the offering statement has been on file with the
Commission for nine months without amendment and has not become
qualified.\204\ These withdrawal and abandonment procedures are similar
to the ones that apply to reporting companies.
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\203\ See proposed Rule 259(a).
\204\ See proposed Rule 259(b).
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Request for Comment
35. Should the rules require the electronic filing of Regulation A
offering and related documents on EDGAR, as proposed? Why or why not?
Please address expected costs of electronic filings and benefits to
both issuers and investors of having these documents available in
electronic format. Alternatively, for Tier 1 offerings, what would be
the benefits, if any, of maintaining Regulation A's current paper
filing system for offering statements and related documents? Should we
maintain paper filing for issuers conducting Tier 1 Regulation A
offerings? Why or why not?
36. As proposed, should we require issuers to file the body of the
disclosure document, financial statements, and text file attachments,
containing the exhibits index and the exhibits to the offering
statement, electronically in a HTML or ASCII format that is compatible
with the EDGAR filing system? Or should we permit the filing of
offering and related materials in Portable Document Format (PDF) or in
some other format that is readily accessible to smaller issuers to
constitute an official filing with the Commission under Regulation S-T?
\205\
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\205\ See 17 CFR 232.104 (Unofficial PDF copies included in an
electronic submission).
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37. Should we adopt, as proposed, an access equals delivery model
for final offering circular delivery requirements, in which case
investors would be presumed to have access to the Internet, and issuers
and intermediaries could satisfy their delivery requirements if the
final offering circular were filed with the Commission on EDGAR? \206\
Or should we maintain our existing requirement that issuers deliver to
purchasers a final offering circular with the mailing of the
confirmation of sale to such purchasers (if not delivered previously)?
Why or why not?
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\206\ Kaplan Voekler Letter 2.
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38. Should we update, as proposed, the delivery requirements in
Rule 251(d)(2)(i) to maintain advance delivery requirements of
preliminary offering circulars, while eliminating the requirement that
issuers and broker-dealers participating in the distribution of
Regulation A securities pursuant to an offering statement deliver a
final offering circular to investors at least 48 hours before sale? Why
or why not? Would updating this provision, as proposed, be inconsistent
with the rationale behind similar updates to prospectus delivery
requirements for registered offerings? Why or why not?
39. While not currently proposed, should we adopt a provision
similar to Exchange Act Rule 15c2-8(b), which would only require the
advance delivery of a preliminary offering circular in the context of
offerings by issuers not already subject to an ongoing reporting
obligation under Regulation A? Similarly, should we adopt an analog to
Rule 174(b),\207\ which applies to registered offerings, so that a
dealer would not have an aftermarket delivery obligation to purchasers
of Regulation A securities to the extent the issuer of such securities
is subject to an ongoing reporting obligation under Regulation A
immediately before the time of filing the offering statement? Or, in
such circumstances, should we only require dealer aftermarket delivery
for a 25 calendar-day period? Why or why not?
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\207\ 17 CFR 230.174(b).
---------------------------------------------------------------------------
40. In conjunction with the proposed access equals delivery model
for final offering circular delivery requirements, should we adopt, as
proposed, a provision analogous to Rule 173? If so, should compliance
with that requirement be made a condition of Regulation A? Why or why
not? Does the rationale behind Rule 173 apply to Regulation A
offerings? \208\
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\208\ See Securities Offering Reform, SEC Rel. No. 33-8591, at
p. 173 et seq.
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[[Page 3944]]
2. Non-Public Submission of Draft Offering Statements
Unlike Title I of the JOBS Act,\209\ Title IV does not provide for
confidential submissions of offering statements under Regulation A.
Commenters, however, supported providing issuers with the option of
confidential submission of offering statements under Regulation A.\210\
We propose to allow the non-public submission of draft offering
statements by issuers of Regulation A securities. We note, however,
that such submissions would not be subject to the statutorily-mandated
confidentiality of draft IPO registration statements confidentially
submitted by ``emerging growth companies'' \211\ under Title I of the
JOBS Act.\212\
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\209\ Title I of the JOBS Act permits emerging growth companies
to confidentially submit draft registration statements to the
Commission for nonpublic review, provided the initial confidential
submission and all amendments thereto are publicly filed not later
than 21 calendar days before the issuer conducts its roadshow. See
Section 106(a) of Title I, which added subsections 5(d) and 6(e) to
the Securities Act.
\210\ Letter from Jonathan C. Guest, McCarter & English, LLP,
July 10, 2012 (``McCarter & English Letter''); ABA Letter; WR
Hambrecht + Co. Letter.
\211\ Under Section 2(a)(19) of the Securities Act, an
``emerging growth company'' is defined as, among other things, an
issuer that had total annual gross revenues of less than $1 billion
during its most recently completed fiscal year. 15 U.S.C.
77b(a)(19).
\212\ Under Section 6(e)(2) of the Securities Act, confidential
submissions of draft registration statements by emerging growth
companies are protected from compelled disclosure under the Freedom
of Information Act (FOIA) (5 U.S.C. 552). There is no similar
provision under Section 3(b) of the Securities Act. Issuers
requesting confidential treatment of draft offering statement
submissions under Regulation A could submit such documents under
cover of the Commission's Rule 83. See 17 CFR 200.83.
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Under Regulation A's proposed non-public submission of draft
offering statement provisions, issuers whose securities have not been
previously sold pursuant to a qualified offering statement under
Regulation A or an effective registration statement under the
Securities Act would be permitted to submit to the Commission a draft
offering statement for non-public review. As with the confidential
submission of draft registration statements, all non-public submissions
of draft offering statements would be submitted via EDGAR. The initial
non-public submission, all non-public amendments thereto, and
correspondence with Commission staff regarding such submissions would
be required to be publicly filed as exhibits to the offering statement
not less than 21 calendar days before qualification of the offering
statement.\213\ Unlike emerging growth companies, which must publicly
file any confidential submissions not later than 21 calendar days
before a road show, the timing requirements for filing by issuers
seeking qualification under Regulation A would not depend on whether or
not the issuer conducts a road show.\214\
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\213\ The timing is consistent with the guidance provided to
emerging growth companies under Title I of the JOBS Act, where such
issuers do not ``test the waters'' under Section 5(d) or otherwise
conduct a traditional road show. See JOBS Act Frequently Asked
Questions on Confidential Submission Process for Emerging Growth
Companies, Question 9 (April 10, 2012), available at: http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm.
\214\ Regulation A's proposed testing the waters provisions
would encompass a variety of activities, including activities that
could constitute a traditional road show. See Section II.D. below
for a discussion on the timing and requirements for the use of
testing the waters solicitation materials under Rule 254 as proposed
to be amended.
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Request for Comment
41. As proposed, should the rules permit the non-public submission
of draft offering statements under Regulation A? Would there be any
adverse impact on public investors of permitting the non-public
submission of offering statements?
42. Is the proposed requirement of public filing at least 21
calendar days before qualification appropriate? Should public filing be
required sooner or later than proposed?
43. Should the availability of non-public submission of Regulation
A offering statements be limited, as proposed, to issuers whose
securities have not been previously sold pursuant to a qualified
offering statement under Regulation A or an effective registration
statement under the Securities Act, in a manner similar to the
limitation under Title I of the JOBS Act on the use of confidential
submissions to issuers that have not previously sold common equity
securities pursuant to an effective registration statement? Or should
issuers be permitted to use the non-public submission provisions more
than once?
44. As proposed, should issuers that non-publicly submit an
offering statement under Regulation A be required to request
confidential treatment under the cover of the Commission's Rule 83? Or
should we adopt a new rule relating to confidential treatment of draft
offering statements in Regulation A?
3. Form and Content
Section 3(b)(2)(G)(i) of the Securities Act \215\ identifies
certain requirements that the Commission may include, among others, in
the requirements for offerings relying on the exemption. The
requirements largely follow the existing offering statement
requirements of Form 1-A.\216\ For example, financial statements,\217\
a description of the issuer's business operations,\218\ financial
condition,\219\ and use of investor funds \220\ are all currently
required disclosures in Form 1-A. Additionally, Form 1-A requires
issuers to disclose, among other things, their contact information, the
price or method for calculating the price of the securities being
offered, information about the issuer's property, results of
operations, directors, officers, significant employees and certain
beneficial owners, material agreements and contracts, past securities
sales, material factors that make an investment in the issuer
speculative or risky, dilution, the plan of distribution for the
offering, executive and director compensation, and conflicts of
interest and related party transactions. As with Regulation A
generally, however, Form 1-A has not been substantively revised by the
Commission since 1992.
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\215\ See JOBS Act Section 401(a)(2).
\216\ The primary exception is the suggestion that issuers be
required to submit audited financial statements. Currently, the
financial statements required under Regulation A are required to be
audited only if the issuer has them available.
\217\ See Form 1-A, Part II, Part F/S.
\218\ Id., Part II, e.g., Model B, Item 6. (Description of
Business).
\219\ Id., e.g., Part F/S.
\220\ Id., e.g., Item 5. (Use of Proceeds to Issuer).
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Currently, Form 1-A consists of three parts: Part I (Notification),
Part II (Offering Circular), and Part III (Exhibits). Part I of Form 1-
A calls for certain basic information about the issuer and proposed
offering that is necessary to determine the availability of the
exemption.\221\ For example, the existence of any ``bad actor''
disqualifications under Rule 262 and the presence of proposed affiliate
sales in the absence of issuer net income from operations in at least
one of the last two fiscal years,\222\ both of which may affect
availability of the exemption, are required to be disclosed in Part I.
Part I is filed with the Commission and publicly available, but is not
required to be provided to investors.\223\
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\221\ See SEC Rel. No. 33-6275 (Jan. 9, 1981) [46 FR 2637], at
2638.
\222\ See Rule 251(b).
\223\ See Rule 251(d)(2); see also SEC Rel. No. 33-6275, at
2639.
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Part II of the offering statement consists of an offering
circular--similar to the prospectus in a registration statement--which
serves as the primary disclosure document to investors of the material
facts about the issuer, its
[[Page 3945]]
securities, and the offering. Issuers organized as corporations are
given the option of following any one of three disclosure formats in
Part II:
Model A (Question-and-Answer Format); \224\
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\224\ Model A is based on the North American Securities
Administrators Association's (NASAA) Form U-7, also known as the
Small Company Offering Registration (SCOR) form, adopted April 28,
1989. See http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-forms/.
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Model B, a somewhat scaled version of Form S-1 that
largely follows the Commission's disclosure standards in effect for
registration statements when Model B was adopted in 1981; \225\ and
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\225\ See SEC Rel. No. 33-6275 [46 FR 2637], at 2639-40; SEC
Rel. No. 33-6924 [57 FR 9768], at 9771.
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Part I of Form S-1.\226\
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\226\ 17 CFR 239.11. Issuers choosing Part I of Form S-1 must,
however, follow the financial statement requirements of Form 1-A,
Part F/S.
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Issuers organized in non-corporate form, such as limited partnerships
and limited liability companies, have the option of using either Model
B or Part I of Form S-1. Part F/S of the offering circular--containing
financial statements and notes--is required disclosure for all issuers.
Part III requires an exhibits index and a description of exhibits
required to be filed as part of the offering statement.
Commenters generally supported maintaining Regulation A's existing
Form 1-A, with modifications and updates to implement the provisions of
the JOBS Act.\227\ While some commenters supported simplifying the form
or paring it down to focus on matters of greatest significance,\228\
one commenter supported a more expansive disclosure regime.\229\ This
commenter suggested that the Commission coordinate with the States to
create a single disclosure document that would address disclosure from
both a federal and state securities law perspective. In the opinion of
this commenter, a single form with heightened disclosure is better than
a less-comprehensive federal form that would thereafter require
additional disclosure items (and review) by state securities
regulators.\230\ According to this commenter, the need for robust
disclosure is magnified by the increase in the annual offering amount
and by an issuer's ability to solicit indications of interest before
filing the offering statement, engage in general solicitation, and sell
to investors regardless of investor qualifications.\231\
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\227\ ABA Letter; WR Hambrecht + Co.; NASAA Letter 2.
\228\ Letter from Thomas D. O'Rourke, President, Alpine
Ventures, Sept. 26, 2012 (``Alpine Ventures Letter''); Letter from
Rutheford B. Campbell, Jr., William L. Matthews Professor of Law,
University of Kentucky, Nov. 13, 2012 (``Campbell Letter''); see
also Letter from Richard Lacey, Small Business Owner, April 23, 2012
(``Lacey Letter'') (suggesting the form should be simple); Letter
from William Klehm, Fallbrook Technologies, September 23, 2013
(``Fallbrook Letter'') (suggesting, among other things, that
Regulation A should be simple and user-friendly); Letter from Og
Oggilby, Bank Clerk, Jan. 22, 2013 (``Oggilby Letter'') (suggesting
relaxed regulations on the sale of securities of small companies).
But see Letter from David R. Burton, General Counsel, National Small
Business Association (``NSBA''), June 12, 2012 (``NSBA Letter'')
(suggesting the Commission not modify or update Regulation A other
than by raising the annual offering limitation to $50 million).
\229\ Letter from Jack Herstein, President, NASAA, July 3, 2012
(``NASAA Letter 1'') (suggesting that heightened disclosure is
better than a less-comprehensive federal form that would thereafter
require additional disclosure items (and review) by state securities
regulators); NASAA Letter 2.
\230\ NASAA Letter 1.
\231\ NASAA Letter 2.
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Separately, one commenter suggested that the Commission implement
an offering statement scaled on the basis of offering size.\232\
Another commenter suggested that the Commission consider requiring the
scaled disclosure requirements available to smaller reporting companies
in Form 1-A, while also: (i) Focusing disclosure on matters of the
greatest significance, (ii) limiting risk factors to those deemed
important, (iii) requiring disclosure of valuation assessments (for all
offerings made at a fixed price) and internal projections used to set
budgets as well as a discussion of management's expectations of future
performance, (iv) encouraging the use and filing of research reports,
and (v) if Section 3(b)(2) securities are permitted to list on a
national securities exchange simultaneously with qualification of the
offering statement, incorporating some Form 10 \233\ disclosure
requirements into Form 1-A.\234\
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\232\ Campbell Letter (suggesting scaled disclosure in three
tiers for offerings of: $0-up to $1 million; over $1 million-up to
$5 million; over $5 million-up to $50 million).
\233\ 17 CFR 249.210.
\234\ WR Hambrecht + Co. Letter; see also Letter from Karl M.
Sjogern, April 25, 2013 (``Sjogern Letter'') (suggesting any issuer
of equity securities should be required to disclose the valuation it
has given itself given the terms of the offering, and to discuss the
factors it considered when setting its valuation).
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One commenter suggested that the Commission update its rules
regarding revisions to the offering statement during the post-
qualification period in light of anticipated continuous, best efforts
offerings.\235\ The commenter suggested that the current rule, which
requires any updated or revised offering circular to be filed as an
amendment to the offering statement and requalified in accordance with
Rule 252,\236\ places an unnecessary burden on issuers. This commenter
suggested that the Commission adopt rules analogous to those for
registered offerings where most information meeting the undertaking
requirements of Item 512 of Regulation S-K \237\ requires a post-
effective registration statement, and other updates to the prospectus
in such registration statement may be filed pursuant to Rule 424.\238\
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\235\ Kaplan Voekler Letter 2. See related requests for comment
in Section II.C.4. below.
\236\ See Rule 253(e)(3).
\237\ 17 CFR 229.512.
\238\ 17 CFR 230.424.
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We propose to maintain Form 1-A's existing three-part structure--
Part I (Notification), Part II (Offering Circular), and Part III
(Exhibits)--while making various revisions and updates to the Form.
a. Part I (Notification)
Part I of Form 1-A serves as a notice of certain basic information
about the issuer and its proposed offering, which also helps to confirm
the availability of the exemption.\239\ We propose to continue to
require the disclosure of this information in modified and updated
form. The current paper version of Part I of Form 1-A would be
converted into an online XML-based fillable form with indicator boxes
or buttons and text boxes and filed online with the Commission.\240\
The information would be publicly available on EDGAR, as an online data
cover sheet, but not otherwise required to be distributed to
investors.\241\ The fillable form would enable issuers to provide
information in a convenient medium--without the requirement for
specialty software--that would capture relevant data about the issuer
and its offering in a structured format to facilitate analysis of the
Regulation A market and Regulation A issuers by the Commission, other
regulators, third-party data providers, and market participants. As
noted above, the XML-based fillable form would enable the convenient
provision of information to the Commission, and support the assembly
and transmission of such information to EDGAR. Facilitating the capture
of important
[[Page 3946]]
financial and other information about Regulation A issuers and
offerings in the proposed XML-based fillable form would enable the
Commission and market participants to monitor any developing market in
Regulation A securities and the types of issuers relying on the
exemption.
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\239\ SEC Rel. No. 33-6275 [46 FR 2637], at 2638.
\240\ As proposed, the cover page to current Form 1-A would be
eliminated as a standalone requirement, while portions of the
information required on the cover page would be combined with Item 1
of Part I of Form 1-A in the XML fillable form.
\241\ The Commission would disseminate the information in a
format that provides normal text for reading and XML-tagged data for
analysis. With the exception of the items that focus issuers on
eligibility to use Regulation A, much of the information called for
in the XML-based fillable form is also required to be disclosed to
investors in Part II of Form 1-A.
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The information collected in Part I would continue to focus issuers
on eligibility to use Regulation A, and would allow Commission staff
reviewing the filings to more easily make a determination about the
conditions to the availability of the exemption. If adopted, this could
conserve issuer time and resources and enhance the efficiency of review
by Commission staff. If, after compiling the information elicited by
Part I, an issuer determined that it was ineligible to rely on
Regulation A, it could choose to register its offering or, if
available, conduct an exempt offering in reliance on a different
exemption from registration.
The proposed notification in Part I of Form 1-A would require
disclosure in response to the following items:
Item 1. Issuer Information
Item 2. Issuer Eligibility
Item 3. Application of Rule 262 (``bad actor''
disqualification and disclosure)
Item 4. Summary Information Regarding the Offering and
other Current or Proposed Offerings
Item 5. Jurisdictions in Which Securities are to be
Offered
Item 6. Unregistered Securities Issued or Sold Within One
Year
As proposed, Item 1 (Issuer Information), Item 2 (Issuer
Eligibility), Item 3 (Application of Rule 262 (``bad actor''
disqualification and disclosure)), Item 4 (Summary Information
Regarding the Offering and other Current or Proposed Offerings), and
Item 6 (Unregistered Securities Issued or Sold Within One Year) would
represent substantive changes to Part I.
Item 1 (Issuer Information) would require information
about the issuer's identity, industry, number of employees, financial
statements and capital structure, as well as contact information.\242\
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\242\ As proposed, some of the information in Item 1, such as
the name of the issuer, jurisdiction of incorporation, contact
information, primary Standard Industrial Classification Code Number,
and I.R.S. Employer Identification Number is currently required to
be included on the cover page of Form 1-A. We propose to eliminate
the cover page of Form 1-A and to move the relevant information from
the cover page into Item 1 of Part I.
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Item 2 (Issuer Eligibility) would require the issuer to
certify that it meets various proposed issuer eligibility criteria.
Item 3 (Application of Rule 262 (``bad actor''
disqualification and disclosure)) would require the issuer to certify
that no disqualifying events have occurred and to indicate whether
related disclosure is included in the offering circular (i.e., events
that would have been disqualifying but occurred before the effective
date of the amendments to Regulation A).\243\
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\243\ See discussion of proposed Rule 262(a)(3) and (a)(5) in
Section II.G. below.
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Item 4 (Summary Information Regarding the Offering and
other Current or Proposed Offerings) would include indicator boxes or
buttons and text boxes eliciting information about the offering
(including whether the issuer was conducting a Tier 1 or Tier 2
offering, amount and type of securities offered, proposed sales by
selling securityholders and affiliates, type of offering, estimated
aggregate offering price of any concurrent offerings pursuant to
Regulation A, anticipated fees in connection with the offering, and the
names of auditors, legal counsel, underwriters, and certain others
providing services in connection with the offering).
Item 5 (Jurisdictions in Which Securities are to be
Offered) would include data collection about the jurisdiction in which
the securities are to be offered.
Item 6 (Unregistered Securities Issued or Sold Within One
Year), which largely restates existing Item 5 to Part I, would
eliminate the requirement to provide the names and identities of the
persons to whom unregistered securities were issued.
We propose to eliminate Item 1 (Significant Parties) of current
Part I, which requires disclosure of the names, business address, and
residential address of all the persons covered by current Rule 262.
Instead, we propose to only require narrative disclosure in Part II of
Form 1-A, as proposed, when the issuer has determined that a relevant
party has a disclosable ``bad actor'' event.\244\ We propose to
eliminate Item 3 of current Part I because we propose to eliminate the
current restrictions on affiliate resales under Rule 251(b).\245\
Information regarding the amount of proposed secondary sales and the
existence of affiliate sales in the offering, however, would continue
to be disclosed in Item 4, as proposed. Item 6 (Other Present or
Proposed Offerings) and Item 9 (Use of a Solicitation of Interest
Document) of current Part I would be incorporated into proposed Item 4
(Summary Information Regarding the Offering and Other Current or
Proposed Offerings). We also propose to eliminate Item 7 (Marketing
Arrangements) and Item 8 (Relationship with Issuer of Experts Named in
Offering Statement) of current Part I, as disclosure of this
information is required in Part II (Offering Circular).
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\244\ See discussion in Section II.G. below.
\245\ The primary purpose of current Item 3 (Affiliate Sales) in
Part I of Form 1-A is to ensure compliance with certain restrictions
on affiliate resales under Rule 251(b). See discussion in Section
II.B.3. above.
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b. Part II (Offering Circular)
(1) Narrative Disclosure
As noted above, Part II (Offering Circular) in existing Form 1-A
provides issuers with three options for their narrative disclosure:
Model A, Model B, and Part I of Form S-1.\246\ The use of these three
options has not been revisited, nor have the Model A and Model B
formats been substantively revised by the Commission, since their
introduction in 1992.\247\ In the context of a broader effort to update
Regulation A and make it more useful for market participants, we
believe that the form and content of the Regulation A Offering Circular
is in need of reconsideration. In this regard, we propose to eliminate
Model A as a disclosure option, to update and retain Model B as a
disclosure option (renaming it ``Offering Circular''), and to continue
to permit issuers to rely on Part I of Form S-1 to satisfy the
disclosure obligations of Part II of Form 1-A.
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\246\ Non-corporate issuers are not permitted to use Model A.
\247\ Before the 1992 amendments to Regulation A, Model B was
the only format permissible in Regulation A. See SEC Rel. No. 33-
6275 [46 FR 2637]. Model A and Part I of Form S-1 were added as
additional issuer options at that time. Model B has not been
substantively revised or revisited since it was introduced by the
Commission in 1981. See SEC Rel. No. 33-6924 [57 FR 9768], at 9771.
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Model A. Model A was first introduced as an option for corporate
issuers' Regulation A offering statements in 1992. The basis for the
form was the Small Company Offering Registration, or SCOR, form
developed by NASAA, in coordination with state securities
administrators and the securities bar, working through the ABA's State
Regulation of Securities Committee.\248\ Model A was intended to
[[Page 3947]]
provide corporate issuers with a ``balanced approach to the capital
raising process, providing a registration form that small businesses
can easily use at a reduced cost while still maintaining investor
protection.'' \249\ In practice, however, Model A has been used much
less frequently than Model B, and offerings using Model A have
generally taken significantly longer to qualify than those using Model
B or Part I of Form S-1.\250\ Commission staff who review Regulation A
filings indicate that Model A's question-and-answer disclosure format
often results in disclosure that lacks uniformity and is hard to
follow. While the question-and-answer approach taken in Model A may
help focus corporate issuers on crucial disclosure issues, we are not
convinced that the disclosure format results in clear and
understandable disclosure being provided to investors. We therefore
propose to eliminate Model A from the narrative disclosure options in
Part II of Form 1-A.
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\248\ NASAA's Form U-7 (Small Company Offering Registration) was
first approved for use in connection with certain securities
offerings by NASAA in 1989. See NASAA's Web site on SCOR Forms,
available at: http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-forms/. It was later revised by NASAA in
1999. The revised version has not been approved for use in
connection with Regulation A by the Commission. In its comment
letter, NASAA suggested that the Commission consider allowing
revised Form U-7 to be used in connection with the Section 3(b)(2)
exemption. See NASAA Letter 2.
\249\ SEC Rel. No. 33-6924, at 23-24.
\250\ From 2002 through 2012, approximately 21% of qualified
Regulation A offerings have used Model A, 66% have used Model B and
13% have used Form S-1. During the same period, the average time
required for an offering to qualify was 301 days for offerings using
Model A, 220 days for offerings using Model B and 167 days for
offerings using Form S-1. One reason that Model A is used less
frequently may be that it was not updated to correspond to the
version of the SCOR form adopted by NASAA in 1999, so an issuer may
not be able to use the same disclosure document in connection with
Regulation A that it can use for state securities regulation
disclosure.
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Model B. Model B disclosure was first introduced by the Commission
in 1981, and was the only available disclosure format at that
time.\251\ It was preserved as a disclosure option in the 1992
amendments to Regulation A.\252\ It has not been substantively updated
or revised since 1981.
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\251\ See SEC Rel. No. 33-6275.
\252\ See SEC Rel. No. 33-6949, at 36444.
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Model B was originally the product of a Commission review of the
disclosure practices of Regulation A issuers under Model B's
predecessor, Schedule I.\253\ The Commission found that Regulation A's
then-existing disclosure guidance and rules did not provide
sufficiently detailed directions for the types of offerings that were
being conducted under Regulation A.\254\ As a result, issuers and their
counsel often looked to the existing disclosure guides for the
preparation of registration statements \255\ for guidance on disclosure
under Regulation A.\256\ Such disclosure, however, lacked uniformity,
and caused delays in the Commission staff review and comment
process.\257\ Model B was a codification by the Commission of the
disclosure standards that, in practice, were being applied to
Regulation A offerings at that time.\258\ As enacted, Model B was not
intended to increase the disclosure obligations of issuers. Rather, in
addition to removing uncertainty as to the content of required
disclosures, Model B's more comprehensive and uniform set of disclosure
standards was intended to reduce an issuer's total time spent preparing
and amending the offering circular, and the Commission staff's time
spent reviewing and commenting on it. The result was offering statement
disclosure that closely followed the disclosure requirements then in
effect for registration statements, but scaled for smaller
issuers.\259\
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\253\ SEC Rel. No. 33-6275, at 2638.
\254\ Id.
\255\ See, e.g., SEC Rel. No. 33-4936 (Dec. 9, 1968) [33 FR
18617] (Guides for Preparation and Filing of Registration
Statements).
\256\ SEC Rel. No. 33-6275, at 2638.
\257\ Id.
\258\ Id.
\259\ As an example of the variances between Form 1-A and
registered offering disclosure, Item 10 of Part II of Form 1-A
called for disclosure of record ownership of voting securities by
management and certain securityholders, whereas Form S-18, a
simplified registration form available to certain corporate issuers
going public for the first time before 1992, called for broader
disclosure of beneficial ownership of such securities. See SEC Rel.
No. 33-6275, at 2640. This distinction between Form 1-A and
registered offering disclosure (on Form S-1) remains today.
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Form S-1. The 1992 amendments to Regulation A also permitted
issuers to draft offering circular disclosure based on the narrative
disclosure requirements for registered offerings found in the then-
newly created Form SB-1.\260\ When Form SB-1 was rescinded as part of
the simplification and modernization of requirements for small
businesses, including the adoption of the smaller reporting company
concept, Form 1-A was revised to permit issuers to follow the narrative
disclosure provisions of Part I of Form S-1.\261\ Thus, issuers are
currently able to provide narrative disclosure under Part I of Form S-1
based on the disclosure requirements for smaller reporting companies
(if applicable) or for larger companies that do not fall within the
definition of a smaller reporting company.\262\
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\260\ Form SB-1 replaced Form S-18. See SEC Rel. No. 33-6949, at
36442.
\261\ See SEC Rel. No. 33-8876, at 166.
\262\ An issuer that qualifies as a smaller reporting company on
the basis of public float or revenue (see, e.g., Exchange Act Rule
12b-2, 17 CFR 240.12b-2) may follow the narrative disclosure
requirements in Part I of Form S-1 that apply to such companies.
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Form S-1 and the narrative disclosure requirements of Regulation S-
K have been revised numerous times since the introduction of Model B
disclosure in 1981 to reflect evolving disclosure requirements and
standards. Model B disclosure, however, has remained essentially
unchanged, as a version of Part I of Form S-1 circa 1981, scaled for
smaller issuers. Thus, while eliciting disclosure of largely the same
information, Model B and Part I of Form S-1 contain different item
numbers and language.
Proposed Offering Circular. We propose to retain Model B (which, in
light of the proposed elimination of Model A, will be renamed
``Offering Circular'') as a disclosure option under Part II of Form 1-
A, updated as detailed below in accordance with Title IV of the JOBS
Act and to reflect developments in disclosure requirements for
registered offerings since 1981. Updates to the Offering Circular would
also incorporate the disclosure guidelines in the Securities Act
Industry Guides and guidance on the disclosure requirements applicable
to limited partnerships and limited liability companies.\263\
Additionally, we propose to continue to permit issuers to comply with
Part II of Form 1-A by providing the narrative disclosure required in
Part I of Form S-1.
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\263\ See Item 7(c)-(d) to Part II of proposed Form 1-A; see
also SEC Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting
forth the Commission's view on the disclosure requirements for
limited partnerships).
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We solicit comment as to whether it would be more appropriate to
eliminate Model B disclosure altogether, and, in its place, to require
issuers to follow the disclosure and form requirements of Part I of
Form S-1, while maintaining Model B-specific disclosures where noted.
As with the proposed updates to Model B, to the extent the Commission
chose to require disclosure that tracks Part I of Form S-1, it would
not increase the disclosure obligations of issuers except where noted
below.
We are aware that eliminating Model A and updating Model B may
raise concerns about an increase in the disclosure required for a
Regulation A offering. Our proposal would create new requirements for
audited financial statements (consistent with the JOBS Act requirement
of the annual filing of audited financial statements) and for a section
containing management's discussion and analysis (MD&A) of the issuer's
liquidity, capital resources, and results of operations.\264\
Consistent with
[[Page 3948]]
the requirements of current Form 1-A, issuers that have not generated
revenue from operations during each of the three fiscal years
immediately before the filing of the offering statement would be
required to describe their plan of operations for the twelve months
following qualification of the offering statement.\265\ Otherwise, it
is not intended to substantially alter current Model B disclosure
requirements.
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\264\ While not currently an express disclosure requirement in
Model B, some disclosure requirements similar to MD&A are included
in Form 1-A. Disclosure similar to the MD&A required in registered
offerings would provide potential investors with meaningful
information upon which to make an investment decision. The proposed
MD&A disclosure requirements would provide issuers with
comprehensive guidance as to the specific requirements of such
disclosure. The primary differences between the MD&A we propose to
require in Form 1-A and the MD&A required under Item 303 of
Regulation S-K, 17 CFR 229.303, are discussed below.
\265\ See Item 6(3)(i) of Model B of Part II of Form 1-A.
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As proposed, Offering Circular disclosure in Part II of Form 1-A
would cover:
Basic information about the issuer and the offering,
including identification of any underwriters and disclosure of any
underwriting discounts and commissions (Item 1: Cover Page of Offering
Circular);
Material risks in connection with the offering (Item 3:
Summary and Risk Factors);
Material disparities between the public offering price and
the effective cash costs for shares acquired by insiders during the
past year (Item 4: Dilution);
Plan of distribution for the offering, including the
disclosure required by Item 7 (Marketing Arrangements) of Part I of
current Form 1-A and disclosure regarding selling securityholders (Item
5: Plan of Distribution and Selling Securityholders);
Use of proceeds (Item 6: Use of Proceeds to Issuer);
Business operations of the issuer for the prior three
fiscal years (or, if in existence for less than three years, since
inception) (Item 7: Description of Business);
Material physical properties (Item 8: Description of
Property);
Discussion and analysis of the issuer's liquidity and
capital resources and results of operations through the eyes of
management covering the two most recently completed fiscal years; and,
for issuers that have not received revenue from operations during each
of the three fiscal years immediately before the filing of the offering
statement, the plan of operations for the twelve months following
qualification of the offering statement, including a statement about
whether the issuer anticipates that it will be necessary to raise
additional funds within the next six months (Item 9: Management's
Discussion and Analysis of Financial Condition and Results of
Operations);
Identification of directors, executive officers and
significant employees with a discussion of any family relationships
within that group, business experience during the past five years, and
involvement in certain legal proceedings during the past five years
(Item 10: Directors, Executive Officers and Significant Employees);
Executive compensation data for the most recent fiscal
year for the three highest paid officers or directors (Item 11:
Compensation of Directors and Officers);
Beneficial ownership of voting securities by executive
officers, directors, and 10% owners (Item 12: Security Ownership of
Management and Certain Securityholders);
Transactions with related persons, promoters and certain
control persons (Item 13: Interest of Management and Others in Certain
Transactions);
The material terms of the securities being offered (Item
14: Securities Being Offered);
Two years of financial statements, which for Tier 2
offerings would be required to be audited. Tier 1 offerings would be
required to provide audited financial statements to the extent the
issuer had prepared them for other purposes; \266\ and
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\266\ Financial statement requirements are discussed more fully
in Section II.C.3.b(2). below.
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Any events that would have triggered disqualification of
the offering under Rule 262 if the issuer could not rely on the
provisions in proposed Rule 262(b)(1).\267\
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\267\ See discussion of disqualification provisions in Section
II.G. below. We propose to require this ``bad actor'' disclosure
even if the issuer elects to follow the Part I of Form S-1
disclosure format.
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The proposed content of the Offering Circular would update the
disclosure requirements in some respects to more closely align
Regulation A disclosure with the smaller reporting company disclosure
requirements for registered offerings, while certain scaled elements
exclusive to Model B would be retained.\268\ The changes would result
in more detailed instructions on issuer disclosure in the MD&A section
of the Offering Circular, as well as a description of the issuer's
business for a period of three years (as opposed to current Model B's
five-year requirement), with the added disclosure of any legal
proceedings material to the issuer's business or financial condition.
These changes would make Offering Circular disclosure more akin to what
is required of smaller reporting companies in a prospectus, but more
limited in certain respects. Additionally, as with registered offerings
by smaller reporting companies, issuers would be required to disclose
beneficial ownership of their voting securities, as opposed to record
ownership of voting and non-voting securities. Lastly, as to
transactions with related persons, promoters and certain control
persons, issuers would no longer be required to disclose such
transactions in excess of $50,000 in the prior two years (or similar
transactions currently contemplated), but rather to follow the
requirements for smaller reporting company disclosure of transactions
during the prior two fiscal years that exceed the lesser of $120,000 or
1% of the average total assets at year end for the last two completed
fiscal years.\269\
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\268\ We are not proposing, however, to include in the Offering
Circular all disclosures required of smaller reporting companies
under Regulation S-K. For example, we do not propose to include in
the Offering Circular disclosure required of certain issuers by the
Dodd-Frank Act regarding conflict minerals, payments made by
resource extraction issuers, see SEC Rel. No. 34-67717 (Aug. 22,
2012) [77 FR 56365], pay ratio, pay for performance, hedging, or
clawbacks. We also do not propose to require Regulation A issuers to
provide disclosure regarding the market price of and dividends on
common equity and related stockholder matters under Item 201 of
Regulation S-K, 17 CFR 229.201, changes in and disagreements with
accountants under Item 304 of Regulation S-K, 17 CFR 229.304,
corporate governance matters under Item 407 of Regulation S-K, 17
CFR 229.407, and the determination of offering price under Item 505
of Regulation S-K, 17 CFR 229.505.
\269\ See 17 CFR 229.404(d)(1).
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With the exception of the requirements for disclosure of beneficial
ownership, material legal proceedings, and related party transactions
for certain issuers,\270\ these proposed updates should not result in
an overall increase in an issuer's disclosure obligations. For example,
as mentioned above, issuers would be required to provide fewer years of
business description and certain issuers would have a higher threshold
for reporting transactions with related persons than current Model
B.\271\ Further, issuers would be permitted to provide more streamlined
disclosure of dilutive transactions with insiders by no longer being
required to present a dilution table based on the net tangible book
value per share of the issuer's securities.\272\ Additionally, while
issuers would be provided with more detailed instructions on MD&A
[[Page 3949]]
disclosure, similar disclosure is already called for under current
requirements.\273\ The proposed MD&A disclosure would clarify existing
requirements and save issuers time by providing more express guidance
regarding the type of information and analysis that should be included.
We believe the clearer requirements should also lead to improved MD&A
disclosure, which would provide investors with better visibility into
management's perspective on the issuer's financial condition and
operations. Investors would also receive the benefit of disclosure that
is more consistent across issuers in both registered offerings and
Regulation A offerings.
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\270\ As proposed, issuers that have $5 million (or less) in
average total assets at year end for the last two completed fiscal
years would be required to disclose related party transactions at a
lower threshold (i.e., 1% or more) than under the requirements of
current Model B, which requires the disclosure of transactions in
excess of $50,000 in the prior two years.
\271\ See id.
\272\ See Item 4 (Dilution) to the Offering Circular in Part II
of Form 1-A.
\273\ MD&A disclosure is specifically required by Model A. Model
B calls for similar information in Item 6, which requires disclosure
of the characteristics of the issuer's operations or industry that
may have a material impact upon the issuer's future financial
performance. Item 6 also requires disclosure of the issuer's plan of
operations and short-term liquidity if the issuer has not received
revenue from operations during each of the three fiscal years
immediately prior to filing the offering statement.
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Issuers providing disclosure in the Offering Circular would retain
most of the scaled disclosure provisions currently found in Model B. We
propose to continue to permit Regulation A issuers to:
provide simplified executive compensation data for the
three highest paid officers and directors in tabular form for the most
recent fiscal year; \274\
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\274\ Cf. Item 402(l)-(r) of Regulation S-K, 17 CFR 229.402(l)-
(r), which requires more extensive disclosure and tabular
information for the two most recent fiscal years.
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disclose 10% beneficial owners of voting securities; \275\
and
---------------------------------------------------------------------------
\275\ Cf. Item 403 of Regulation S-K, 17 CFR 229.403, which
requires disclosure of beneficial owners of more than 5% of voting
securities.
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follow fewer specific disclosure requirements for the
description of business section.\276\
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\276\ Compare the requirements of Item 6 of Model B, Part II of
Form 1-A with the more prescriptive requirements of Item 11 of Form
S-1 and Item 101 of Regulation S-K, 17 CFR 229.101.
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Additionally, the Offering Circular would, in comparison to Model B
of Form 1-A, contain more express MD&A disclosure requirements and
guidance.\277\ These requirements would not, however, be as extensive
as those contained in Item 303 of Regulation S-K.\278\ For example, the
Offering Circular would include detailed guidance and requirements
similar to Item 303 with respect to liquidity, capital resources, and
results of operations, including the most significant trend
information,\279\ but would not require disclosure (in the normal
course) of off-balance sheet arrangements or contractual
obligations.\280\ As with the treatment of smaller reporting companies
under Item 303(d), Regulation A issuers would only be required to
disclose information about the issuer's results of operations for the
two most recently completed fiscal years. Further, consistent with
existing Form 1-A, issuers that have not generated revenue from
operations during each of the three fiscal years immediately before the
filing of the offering statement would have to describe their plan of
operations for the twelve months following qualification of the
offering statement, including a statement about whether, in the
issuer's opinion, it will be necessary to raise additional funds within
the next six months to implement the plan of operations.\281\
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\277\ The requirements for financial statements in Part F/S of
Part II of Form 1-A are discussed in Section II.C.3.b(2). below.
\278\ 17 CFR 229.303 (Management's discussion and analysis of
financial condition and results of operations in the context of
registered offerings).
\279\ 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
\280\ During the course of the qualification process, Commission
staff reviewing the offering statement may request the disclosure of
such information, where the disclosure of such information would be
material to an understanding of the issuer's financial condition.
\281\ See Form 1-A, Model B, at Item 6 (Description of
Business).
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Consistent with the treatment of issuers in registered offerings,
we further propose to permit issuers to incorporate by reference into
Part II of the Form 1-A certain items previously submitted or filed on
EDGAR. Incorporation by reference would be limited to documents
publicly submitted or filed under Regulation A, such as Form 1-A and
Form 1-K, and their exhibits. In order to be permitted to incorporate
by reference, issuers would have to be subject to the ongoing reporting
obligations for Tier 2 offerings.\282\ Issuers would be required to
describe the information incorporated by reference, which would be
required to be accompanied by a separate hyperlink to the relevant
document on EDGAR, which need not remain active after the filing of the
related offering statement.
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\282\ Issuers following the Offering Circular disclosure model
would be permitted to incorporate by reference Items 2 through 14,
whereas issuers following the narrative disclosure in Part I of Form
S-1 would be permitted to incorporate by reference Items 3 through
11 of Part I of Form S-1. See General Instruction III to proposed
Form 1-A. As with Model B, the item numbers in the Offering Circular
model of proposed Part II of Form 1-A and Part I of Form S-1 do not
align.
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(2) Financial Statements
Part F/S of Form 1-A currently requires issuers in Regulation A
offerings to provide the following financial statements prepared in
accordance with U.S. GAAP:
a balance sheet as of a date within 90 days before filing
the offering statement (or as of an earlier date, not more than six
months before filing, if the Commission approves upon a showing of good
cause) but, for filings made more than 90 days after the end of the
issuer's most recent fiscal year, the balance sheet must be dated as of
the end of the fiscal year;
statements of income, cash flows, and stockholders' equity
for each of the two fiscal years preceding the date of the most recent
balance sheet, and for any interim period between the end of the most
recent fiscal year and the date of the most recent balance sheet;
financial statements of significant acquired businesses;
and
pro forma information relating to significant business
combinations.
As noted above, the financial statements are not required to be
audited unless the issuer has already obtained an audit of its
financial statements for another purpose. If the issuer has audited
financial statements, the qualifications and reports of the auditor
must meet the requirements of Article 2 of Regulation S-X \283\ and the
audit must be conducted in accordance with U.S. Generally Accepted
Auditing Standards (GAAS) or the standards of the Public Company
Oversight Board (PCAOB), but auditors are not required to be registered
with the PCAOB.\284\
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\283\ 17 CFR 210.1 et seq.
\284\ See Form 1-A, Part F/S.
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We have not received extensive comment on the potential financial
statement requirements for issuers under Title IV of the JOBS Act. One
commenter suggested audited financial statements should be required for
all offerings.\285\ Another commenter urged the Commission to prohibit
the use of financial projections unless they are reviewed, and filed
along with the issuance of an unqualified opinion, by a licensed
certified public accountant.\286\ Another commenter suggested--while
discussing offering statements generally--that the Commission should
consider scaling financial statement requirements on the basis of
offering size.\287\
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\285\ WR Hambrecht + Co. Letter.
\286\ NASAA Letter 2.
\287\ Campbell Letter.
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We propose to generally maintain the existing financial statement
requirements of current Part F/S for Tier 1 offerings, while requiring
issuers in Tier 2 offerings to file audited financial
[[Page 3950]]
statements in Part F/S.\288\ Specifically, we propose to require all
issuers to file balance sheets as of the two most recently completed
fiscal year ends (or for such shorter time that they have been in
existence), instead of the current requirement to file a balance sheet
as of only the most recently completed fiscal year end. In light of the
requirement in Part F/S for issuers to provide statements of income,
cash flows, and stockholders' equity for each of the two fiscal years
preceding the date of the most recent balance sheet, we believe issuers
would already have the additional balance sheet or be in a position to
easily generate the additional balance sheet at minimal additional
cost, and that comparison between the two balance sheets would provide
valuable additional information. Financial statements for U.S.-
domiciled issuers would be required to be prepared in accordance with
U.S. GAAP, as is currently the case. We propose, however, to permit
Canadian issuers to prepare financial statements in accordance with
either U.S. GAAP or International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB).\289\
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\288\ See paragraph (c) of Part F/S of Form 1-A. An issuer
offering up to $5 million that elects to conduct a Tier 2 offering
would be required, in addition to filing audited financial
statements in the offering statement, to provide ongoing reports to
the Commission on the proposed annual and semiannual basis, with
interim current event updates, see Section II.E.1. below, and only
be permitted to terminate their ongoing reporting obligation by
satisfying the requirements for filing a Form 1-Z described in
Section II.E.4. below.
\289\ If the financial statements comply with IFRS as issued by
the IASB, such compliance must be unreservedly and explicitly stated
in the notes to the financial statements and the auditor's report
must include an opinion on whether the financial statements comply
with IFRS as issued by the IASB. See General Rule (a)(2) to Part F/S
of proposed Form 1-A. Cf. Item 17(c) of Form 20-F.
---------------------------------------------------------------------------
In general, issuers conducting Tier 1 offerings must follow the
requirements for the form and content of their financial statements set
out in Part F/S, rather than following the requirements in Regulation
S-X. However, in certain less common circumstances, such as for an
acquired business or subsidiary guarantors, Part F/S directs issuers
conducting Tier 1 offerings to comply with certain portions of
Regulation S-X, which provides guidance on the financial statements
required in such transactions.\290\
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\290\ We propose to update the requirements for financial
statements of businesses acquired or to be acquired in Part F/S to
refer to the requirements of Rule 8-04 of Regulation S-X. We also
propose to provide specific references to the relevant provisions of
Regulation S-X regarding the requirements for financial statements
of guarantors and the issuers of guaranteed securities (Rule 3-10 of
Regulation S-X), financial statements of affiliates whose securities
collateralize an issuance of securities (Rule 3-16 of Regulation S-
X), and financial statements provided in connection with oil and gas
producing activities (Rule 4-10 of Regulation S-X). The financial
statements provided in these circumstances would only be required to
be audited to the extent the issuer had already obtained an audit of
its financial statements for other purposes.
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For all Tier 2 offerings, however, issuers would be required to
follow the financial statement requirements of Article 8 of Regulation
S-X, as if the issuer conducting a Tier 2 offering were a smaller
reporting company, unless otherwise noted in Part F/S. This requirement
would include any financial information with respect to acquired
businesses required by Rule 8-04 and 8-05 of Regulation S-X.\291\
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\291\ Issuers would, however, follow paragraph (a)(3) of Part F/
S of Form 1-A with respect to the age of the financial statements
and the periods to be presented.
---------------------------------------------------------------------------
As with current Regulation A, financial statements in a Tier 1
offering would not be required to be audited. However, we also propose
to maintain Regulation A's existing requirement that, if an issuer
conducting a Tier 1 offering has already obtained an audit of its
financial statements for other purposes, and that audit was performed
in accordance with U.S. generally accepted auditing standards or the
auditing standards of the PCAOB, and the auditor was independent
pursuant to Rule 2-01 of Regulation S-X, then those audited financial
statements must be filed. The auditor may, but need not be, registered
with the PCAOB.
Issuers conducting Tier 2 offerings would, by contrast, be required
to have their financial statements audited. As with Tier 1 offerings,
the auditor of financial statements being filed as part of a Tier 2
offering must be independent under Rule 2-01 of Regulation S-X and must
comply with the other requirements of Article 2 of Regulation S-X, but
need not be PCAOB-registered.\292\ Issuers conducting Tier 2 offerings
would, however, be required to provide financial statements that are
audited in accordance with the standards of the PCAOB. In addition to
auditing standards, PCAOB standards include requirements on auditor
ethics, independence and quality control that, in comparison to the
auditing standards of U.S. GAAS, could improve the quality of the audit
and the financial statements provided to investors in potentially
larger Tier 2 offerings.
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\292\ See Part F/S of Form 1-A (referencing Article 2 of
Regulation S-X, 17 CFR 210.2-01 et seq.).
---------------------------------------------------------------------------
Additionally, we propose to update the Form 1-A financial statement
requirements to be consistent with the proposed timetable for ongoing
reporting.\293\ Under Regulation A, as currently in effect, issuers are
required to prepare a balance sheet as of a date not more than 90 days
before filing the offering statement, or not more than six months
before filing if the Commission approves upon a showing of good
cause.\294\ If the financial statements are filed more than 90 days
after the end of the issuer's most recently completed fiscal year, the
financial statements must include that fiscal year.\295\ In practice,
however, Commission staff reviewing Form 1-A filings routinely affords
issuers the six-month accommodation, subject to the requirement that
financial statements must otherwise be dated as of the end of the most
recently completed fiscal year if filed more than 90 days after the end
of such fiscal year.
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\293\ Our proposals for ongoing reporting are discussed in
Section II.E. below.
\294\ See Form 1-A, Part F/S.
\295\ Id.
---------------------------------------------------------------------------
We propose to extend the permissible age of financial statements in
Form 1-A to nine months, in order to permit the provision of financial
statements that are updated on a timetable consistent with our proposed
requirement for semiannual interim reporting.\296\ We also propose to
add a new limitation on the age of financial statements at
qualification, under which an offering statement could not be qualified
if the date of the balance sheet included under Part F/S were more than
nine months before the date of qualification.\297\ For filings made
more than three months after the end of the issuer's most recent fiscal
year, the balance sheet would be required to be dated as of the end of
the most recent fiscal year.\298\ For filings made more than nine
months after the end of the issuer's most recent fiscal year, the
balance sheet would be required to be dated no earlier than as of six
months after the end of the most recent fiscal year.\299\ If interim
financial statements are required, they would be required to cover a
period of at least six months.\300\ Requiring issuers to file
[[Page 3951]]
interim financial statements no older than nine months and covering a
minimum of six months would have the beneficial effect of eliminating
what could otherwise be a requirement for certain issuers to provide
quarterly interim financial statements during the qualification process
and would be consistent with the timing of our proposed ongoing
reporting requirements.\301\ We propose to generally maintain the
timing requirement of existing Form 1-A concerning the date after which
an issuer must provide financial statements dated as of the most
recently completed fiscal year, but to change the interval from 90
calendar days to three months, which we believe would simplify
compliance.
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\296\ This age of financial statements requirement is also
consistent with the treatment of foreign private issuers in the
context of registered offerings. See Division of Corporation
Finance's Financial Reporting Manual, at 6620, available at: http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf#topic6.
\297\ Currently, Form 1-A does not expressly limit the age of
financial statements at qualification. In practice, however,
Commission staff requires issuers to update financial statements
before qualification to the extent such financial statements no
longer satisfy Form 1-A's requirements for the age of financial
statements at the time of filing.
\298\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
\299\ Id.
\300\ See paragraph (a)(3)(iv) to Part F/S of proposed Form 1-A.
\301\ See discussion in Section II.E.1.b. below (Semiannual
Reports on Form 1-SA).
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We solicit comment below on whether issuers conducting Tier 2
offerings should be required to provide their financial statements to
the Commission and on their corporate Web sites in interactive data
format using the eXtensible Business Reporting Language (XBRL).\302\ We
have not received any public comment on this issue to date and do not
propose any such requirement. If the Commission were to adopt any such
requirement, as with registered offerings, the interactive data would
have to be provided as an exhibit to the offering statement filed with
the Commission. On the same basis and subject to the same
qualifications, interactive data would be required for all periodic and
current reporting, as well as for the annual audited financial
statements. Filers would be required to prepare their interactive data
using the list of tags the Commission specifies and submit them with
any supporting files the EDGAR Filer Manual prescribes.\303\
Interactive data would be required for the complete set of their
financial statements, which includes the face financial statements and
all footnotes.\304\ Filers would be required to tag every financial
statement line item and ``detail tag'' the footnotes by tagging each
amount.
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\302\ Data becomes interactive when it is labeled or ``tagged''
using a computer markup language such as XBRL that software can
process for analysis. For a discussion of current financial
statement interactive data requirements, see SEC Rel. No. 33-9002
(Jan. 30, 2009) [74 FR 6776]. Financial statements for issuers
seeking to qualify Tier 1 offerings may be treated differently
because audited financial statements may not be required in the
offering statements of such issuers.
\303\ The EDGAR Filer Manual is available at: http://www.sec.gov/info/edgar/edmanuals.htm.
\304\ 17 CFR 210.12-01 et seq.
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c. Part III (Exhibits)
We have not received any comments about the exhibits that should be
filed with the offering statement.\305\ We propose to continue to
permit issuers to incorporate by reference certain information in
documents filed under Regulation A that is already available on EDGAR,
but, in addition to the requirement to describe the information
incorporated by reference, issuers would be required to include a
hyperlink to such exhibit on EDGAR.\306\ As proposed, such issuers
would also have to be subject to the ongoing reporting obligations for
Tier 2 offerings. To the extent post-qualification amendments to
offering statements must include audited financial statements, the
consent of the certifying accountant to the use of such accountant's
certificate in connection with the amended financial statements must be
included.\307\ Additionally, and consistent with the requirements of
existing Regulation A, any solicitation materials used by the issuer
would have to be included as an exhibit to the offering statement at
the time of non-public submission or filing.
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\305\ Part III (Exhibits) of Form 1-A currently requires issuers
to file the following exhibits with the offering statement:
Underwriting agreement; Charter and by-laws; Instrument defining the
rights of securityholders; Subscription agreement; Voting trust
agreement; Material contracts; Material foreign patents; Plan of
acquisition, reorganization, arrangement, liquidation, or
succession; Escrow agreements; Consents; Opinion re legality; Sales
material; ``Test the water'' material; Appointment for agent for
service of process; and any additional exhibits the issuer may wish
to file.
\306\ See General Instruction III to proposed Form 1-A and
discussion in Section II.C.3.b(1). above regarding incorporation by
reference in Part II of Form 1-A. The hyperlink must be active at
the time of filing, but need not remain active after filing.
\307\ This is consistent with current practice under Regulation
A, but would be made an express requirement under the proposed
rules. See proposed Rule 252(h)(1)(ii).
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d. Signature Requirements
Under current Regulation A, an issuer must file seven copies of the
offering statement with the Commission, at least one of which must be
manually signed.\308\ In light of the proposed electronic filing
requirements for Regulation A offering materials discussed above,\309\
however, issuers would no longer be required to file a manually signed
copy of the Form 1-A with the Commission.\310\ Similar to the
requirement for issuers in the context of registered offerings, issuers
would instead be required to manually sign a copy of the offering
statement before or at the time of filing that would have to be
retained by the issuer for a period of five years.\311\ Issuers would
be required to produce the manually signed copy to the Commission, upon
request.\312\
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\308\ See Rule 252(e).
\309\ See discussion in Section II.C.1. above.
\310\ This proposed requirement would also apply to any Form 1-A
non-publicly submitted to the Commission.
\311\ See Instruction 2 to Signatures in Form 1-A; cf. Rule
402(e), 17 CFR 230.402(e).
\312\ Id.
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Additionally, if the issuer filing a Form 1-A under current
Regulation A is a Canadian issuer, its authorized representative in the
United States is required to sign the offering statement.\313\ This
requirement corresponds to a similar requirement under Section 6 of the
Securities Act for filings of registration statements by foreign
issuers.\314\ We propose to eliminate this requirement under Regulation
A. Offerings qualified under Regulation A are not subject to the
liability provisions of Section 11 of the Securities Act, and having a
signatory in the United States does not provide purchasers with
significant additional protections. In addition, we propose to maintain
the requirement that Canadian issuers file a Form F-X \315\ to provide
an express consent to service of process in connection with offerings
qualified under Form 1-A. This treatment is similar to requirements for
Canadian companies making filings under the multijurisdictional
disclosure system.\316\
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\313\ See Rule 252(f) and Instruction 1 to Signatures of Form 1-
A.
\314\ 15 U.S.C. 77f(a).
\315\ 17 CFR 239.42.
\316\ See SEC Rel. No. 33-6902 (June 21, 1991) [56 FR 30036]
(adopting the multijurisdictional disclosure system).
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Request for Comment
45. Should we continue to require a Part I (Notification) to be
filed as part of the offering statement on Form 1-A? If so, should we
require additional (or less) information in Part I than is currently
required or proposed? If so, provide justifications for such
disclosure.
46. As proposed, what would be the costs and benefits associated
with requiring an issuer, as part of the electronic filing process, to
enter key information about itself and its securities on a formatted
cover sheet to accompany the EDGAR-formatted text file attachment?
47. Some market participants have urged us to simplify the
disclosure requirements associated with Regulation A in order to
facilitate more cost-effective capital formation by small
companies.\317\ Most commenters,
[[Page 3952]]
however, have not made specific suggestions. Are there particular
disclosure requirements associated with Regulation A that are most in
need of simplification? Are there currently required disclosures that
could be modified? Alternatively, are there any disclosure standards,
not currently required or proposed in Regulation A, that should be
included as disclosure requirements in the new Form 1-A? If so, which
disclosure could be reduced or eliminated, or should be included?
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\317\ Alpine Ventures Letter; Campbell Letter; Lacey Letter;
Oggilby Letter.
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48. As proposed, should we continue to maintain certain disclosure
requirements in the proposed Offering Circular, while updating others
to be more in line with the disclosure required of smaller reporting
companies? If not, why not? Please provide suggestions as to what
disclosure should be preserved in the Offering Circular or updated to
accord with the smaller reporting company requirements in the context
of registered offerings.
49. Should we provide for scaled narrative disclosure in Form 1-A
based on the size of the issuer or size of the offering? Why or why
not? If so, on what size-based attributes of an issuer or the offering
should we base any such scaled disclosure requirements and what types
of scaled disclosure would be applicable to each resulting category?
50. Should we update and provide more specific guidance as to the
MD&A section required to be included in the Offering Circular, as
proposed? Is there any additional guidance we should provide?
51. As proposed, and consistent with the requirements of smaller
reporting companies under Item 303 of Regulation S-K, should we permit
Regulation A issuers to provide only two years of information about
their results of operations? Why or why not? Are there any other
specific provisions from Item 303 of Regulation S-K that would (or
would not) be appropriate for the types of issuers likely to rely on
Regulation A? If so, please explain why any such provision should (or
should not) apply.
52. Should we continue to require, as proposed, the disclosure of
an issuer's plan of operations for the twelve months following
qualification of the offering statement? Why or why not? Alternatively,
is this disclosure requirement appropriate for the types of issuers
likely to rely on Regulation A? If not, why not?
53. Should we consider adding a disclosure requirement in Part II
of Form 1-A that would require issuers to disclose the value of the
issuer prior to the contemplated Regulation A offering (i.e., pre-money
value)? If so, are there any practical limitations on the ability of
issuers with complicated capital structures to provide investors with
an accurate figure or basis for such a calculation? Should we also
consider requiring disclosure of how the price to the public of the
securities being offered was determined?
54. Would it be an efficiency to issuers if we were to eliminate
the proposed Offering Circular disclosure format, and instead have Form
1-A refer issuers item-by-item to Form S-1 requirements, while
preserving--where noted in Form 1-A itself--Model B-specific scaling?
Alternatively, should we continue to allow issuers to use Part I of
Form S-1 as a separate disclosure option in Part II of Form 1-A? Why or
why not?
55. Should we make changes to the exhibit requirements of Part III
of Form 1-A in addition to those proposed? For example, should we
change the standard for filing material contracts by specifically
excluding certain types of contracts?
56. As proposed, should we permit issuers that are current in their
Tier 2 reporting obligations to incorporate by reference certain
information in documents filed under Regulation A into Part II of the
offering statement, while also requiring issuers to include a hyperlink
to such information on EDGAR? Why or why not? If so, should we also
permit successor entities to incorporate by reference to the extent
their predecessors were eligible? Why or why not? If we permit the
incorporation by reference of information already available on EDGAR,
should we exclude shell companies or any other types of entities from
being able to rely on any such accommodation? \318\ Why or why not?
Should issuers be permitted to incorporate by reference to Exchange Act
reports and documents filed in connection with registered offerings?
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\318\ Shell companies (other than business combination shell
companies) are currently unable to incorporate by reference prior
Exchange Act reports in Form S-1. See General Instruction VII.D. to
Form S-1.
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57. Should we alter the proposed period of time in which an issuer
must have been current in their ongoing reporting in order to be able
to incorporate by reference certain information into Part II of Form 1-
A that is already available on EDGAR? If so, what period of time should
apply to any requirement that an issuer be current in filing its
ongoing reports?
58. Instead of the proposed general requirement that issuers must
file audited financial statements for Tier 2 offerings, should the
rules require audited financial statements at a different threshold
(e.g., for all offerings--whether under Tier 1 or Tier 2--in excess of
the $500,000 requirement for audited financial statements set forth
under the Commission's proposed crowdfunding exemption pursuant to
Section 4(a)(6) of the Securities Act, or for all Regulation A
offerings)? Are there other characteristics of an offering, other than
the aggregate offering amount, that should trigger the audited
financial statement requirement, such as public float or asset size of
the issuer? If so, which other characteristics?
59. For Tier 2 offerings, should the financial statement updating
requirement be changed from the proposed requirements in Part F/S of
Form 1-A that would permit issuers to file financial statements based
on a balance sheet dated within nine months of non-public submission or
filing, but must otherwise be dated as of the end of the most recently
completed fiscal year, if non-publicly submitted or filed three months
after the end of such fiscal year? Or should Part F/S of Form 1-A
require updating for Tier 2 offerings on a schedule similar to what
would be required in a registered offering by a smaller reporting
company? Why or why not?
60. As proposed, should we require issuers to file balance sheets
for the two most recently completed fiscal years, instead of the
current requirement to file a balance sheet for only the most recently
completed fiscal year? Why or why not?
61. As proposed, should we permit Canadian issuers to prepare their
financial statements using IFRS as issued by the IASB, rather than U.S.
GAAP? If so, as noted above in Section II.B.1.a., to the extent we
extend issuer eligibility to include foreign private issuers, should we
permit all foreign private issuers to prepare their financial
statements using IFRS as issued by the IASB, rather than U.S. GAAP?
62. As proposed, in Tier 1 offerings should we only refer to
Regulation S-X when describing the auditor independence and compliance
requirements of Article 2 and the financial statement requirements
relating to guarantors and issuers of guaranteed securities, affiliates
whose securities collateralize an issuance, or issuers engaged in oil
and gas producing activities? Should we clarify the financial statement
requirements in other specific situations? Instead of referring to
Regulation S-X, should we develop new standards appropriate for Tier 1
offerings?
63. As proposed, should we permit issuers that do not qualify as a
smaller
[[Page 3953]]
reporting company to only provide two years of audited financial
statements for Tier 2 offerings? Or should we require such issuers to
file three years of financial statements? Why or why not?
64. As proposed, should we require that, when audited financial
statements are required to be filed in Part F/S for Tier 2 offerings,
those audits be conducted in accordance with PCAOB standards?
Alternatively, as with existing Regulation A, should we require the
financial statements audit to be performed in accordance with U.S. GAAS
or the PCAOB standards? Should we require auditors to be PCAOB-
registered? Why or why not?
65. Would there be a cost difference to issuers of requiring audits
in Tier 2 offerings to be conducted in accordance PCAOB standards, as
proposed, compared to U.S. GAAS? Would there be a benefit to investors?
66. Would there be a cost difference to issuers if, in addition to
requiring auditors to conduct the audits in Tier 2 offerings in
accordance with PCAOB standards, as proposed, we also required auditors
to be PCAOB-registered? Would there be a benefit to investors?
67. Should we require interactive data tagging of financial
statements included in Regulation A offering statements? If so, should
we require interactive data for all Regulation A offerings, or only
Tier 2 offerings? What effect would the cost of compliance with any
interactive data tagging requirements have on the issuers likely to
rely on Regulation A? If we require interactive data tagging, should we
implement a phase-in period for such tagging and detailed footnote and
schedule tagging?
68. As noted above in Section II.B.1.b. discussing issuer
eligibility, in order to address concerns regarding the use of
Regulation A by REITs (and on the potential use by BDCs) absent
additional REIT- (or BDC-) specific disclosures, should we require
additional disclosure by REITs (and BDCs, if ultimately permitted to
rely on the exemption)? Why or why not? If so, please make specific
recommendations as to the form and content of any such additional
disclosure.
69. As proposed, should we continue to permit issuers to
incorporate by reference certain information into Part III (Exhibits)
of the offering statement that was previously filed on EDGAR, while
also requiring issuers to be subject to a Tier 2 reporting obligation?
Or, as with current Regulation A, should we permit issuers to
incorporate by reference in Part III of Form 1-A certain information
irrespective of their obligation to file ongoing reports under Tier 2
of Regulation A? Why or why not?
70. As proposed, should we require issuers to retain manually
signed copies of the offering statement for a period of five years? Or
should we consider an alternative retention period? Alternatively,
should we eliminate the requirement altogether in favor of alternative
signature methods (e.g., electronic signatures)? Why or why not?
71. As proposed, should we eliminate the requirement that Form 1-A
be signed by an authorized representative in the United States when the
filer is a Canadian issuer? Should we, as proposed, require Canadian
issuers to file a Form F-X to provide an express consent to service of
process in connection with offerings qualified under Form 1-A? Why or
why not? If so, should Form F-X be required to be filed by Canadian
issuers in connection with other filings under Regulation A, including
proposed new Form 1-K, Form 1-SA, Form 1-U, or Form 1-Z? \319\ Why or
why not?
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\319\ The proposed rules for ongoing reporting, and related
forms, are discussed in Section II.E.1. below.
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4. Continuous or Delayed Offerings and Offering Circular Supplements
Rule 251(d)(3) currently allows for continuous or delayed offerings
under Regulation A if permitted by Rule 415.\320\ By reference to the
undertakings of Item 512(a) of Regulation S-K,\321\ Rule 415 does not
necessarily require every change in the information contained in a
prospectus to a registration statement in a continuous offering to be
reflected in a post-effective amendment.\322\ On the other hand,
Regulation A requires every revised or updated offering circular in a
continuous offering to be filed as an amendment to the offering
statement to which it relates and requalified in a process analogous to
the Commission staff review, comment and qualification process for
initial offering statements.\323\ The requalification process can be
costly and time consuming for smaller issuers conducting continuous
offerings of securities pursuant to Regulation A.\324\ As discussed
more fully below, we propose to clarify in the proposed rules for
Regulation A the scope of permissible continuous or delayed offerings
and the related concept of offering circular supplements.
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\320\ 17 CFR 230.415.
\321\ 17 CFR 230.415(a)(3).
\322\ See 17 CFR 229.512(a)(1) (requiring issuers to file a
post-effective amendment for purposes of an update under Section
10(a)(3) of the Securities Act, to reflect any facts or events
arising after effectiveness that, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, or to include, subject to certain
exceptions, any material information with respect to the plan of
distribution not previously disclosed (or material changes to
information previously disclosed) in the registration statement).
\323\ See Rule 253(e); Rule 252(h)(1).
\324\ See Kaplan Voekler Letter 2.
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Rule 415 attempts to promote efficiency and cost savings in the
securities markets by allowing for the registration of certain
traditional and other shelf offerings.\325\ When Rule 415 was adopted,
the Commission recognized that certain traditional shelf offerings have
been allowed by administrative practice for many years despite the
absence of such a rule.\326\ Since Rule 415 only addresses registered
offerings, however, the precise scope of continuous or delayed
offerings under Regulation A has been unclear. We believe that proposed
Regulation A should continue to allow for certain traditional shelf
offerings to promote flexibility, efficiency, and to reduce unnecessary
offerings costs.\327\ However, we propose to condition the ability to
sell securities in a continuous or delayed offering on being current
with ongoing reporting requirements at the time of sale. We believe
this additional condition will not impose incremental costs on issuers,
which are in any case required to update their offering statement and
to file such ongoing reports, and will insure parity of information in
secondary markets.
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\325\ See SEC Rel. No. 33-6499 [48 FR 52889] (Nov. 23, 1983)
(noting the efficiency and cost savings issuers experienced during
the eighteen month trial period for a previous temporary version of
the rule).
\326\ Certain ``traditional shelf offerings'' have been allowed
since at least 1968 by the Commission's guides for the preparation
and filing of registration statements, such as Guide 4, and related
administrative practice. See id.; see also SEC Rel. No. 33-4936 [33
FR 18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission
guides).
\327\ See SEC Rel. No. 33-6499, at IV.A. (``[T]he procedural
flexibility afforded by the Rule enables a registrant to time its
offering to avail itself of the most advantageous market conditions
. . . registrants are able to obtain lower interest rates on debt
and lower dividend rates on preferred stock, thereby benefiting
their existing shareholders. The flexibility provided by [Rule 415]
also permits variation in the structure and terms of securities on
short notice, enabling registrants to match securities with the
current demands of the marketplace.'').
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To provide clarity regarding the application of Rule 415 concepts
to Regulation A offerings, we propose to add a provision to Regulation
A similar to Rule 415, but with limitations we believe would be
appropriate in the context of Regulation A. The provision would
establish time limits similar to those in Rule 415 and make conforming
changes as necessary.\328\
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\328\ Proposed Rule 251(d)(3).
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[[Page 3954]]
The proposed rule would provide for continuous or delayed offerings
for the following types of offerings:
securities offered or sold by or on behalf of a person
other than the issuer or its subsidiary;
securities offered and sold pursuant to a dividend or
interest reinvestment plan or an employee benefit plan of the issuer;
securities issued upon the exercise of outstanding
options, warrants, or rights;
securities issued upon conversion of other outstanding
securities;
securities pledged as collateral; or
securities the offering of which commences within two
calendar days after the qualification date, will be made on a
continuous basis, may continue for a period in excess of 30 days from
the date of initial qualification, and will be offered in an amount
that, at the time the offering statement is qualified, is reasonably
expected to be offered and sold within two years from the initial
qualification date.\329\
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\329\ Id.
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The Rule 415 offerings we have not proposed to incorporate into
Regulation A are those that would not have been available under
existing Regulation A, such as those requiring securities to be
registered on Form S-3 or Form F-3 or those conducted by issuers
ineligible to use Regulation A,\330\ as well as certain offerings that
we do not currently believe would be appropriate to include in the
Regulation A framework. For example, transactions typically done on
Form S-4, such as acquisition shelf business combination transactions,
would be excluded under the proposed rules. Further, we propose to
prohibit all ``at the market'' offerings under Regulation A.\331\ While
it is possible that a market in Regulation A securities may develop
that is capable of supporting primary and secondary at the market
offerings, rather than permit such offerings at the outset, we believe
that any Regulation A market that develops on the basis of the proposed
rules should be monitored in the short term to determine whether the
exemption would be an appropriate method for such offerings going
forward. Further, an offering sold at fluctuating market prices may not
be appropriate within the context of an exemption that is contingent
upon not exceeding a maximum offering size. We do, however, seek
comment as to whether the provision should permit primary and/or
secondary offerings conducted in reliance on Regulation A to be sold at
market prices.
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\330\ Rule 415(a)(1)(xi) discusses investment companies and
BDCs.
\331\ See proposed Rule 251(d)(3)(ii).
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Under the proposed rules, changes in the information contained in
the offering statement would no longer necessarily trigger an
obligation to amend.\332\ Offering circulars for continuous Regulation
A offerings would continue to be required to be updated, and the
offering statements to which they relate requalified, annually to
include updated financial statements, and otherwise as necessary to
reflect facts or events arising after qualification which, in the
aggregate, represent a fundamental change in the information set forth
in the offering statement.\333\ In addition to post-qualification
amendments to the offering statement that must be qualified, however,
we also propose to allow issuers to use offering circular supplements
in certain situations.\334\ Further, we propose to permit issuers in
continuous offerings to qualify additional securities in reliance on
Regulation A by a post-qualification amendment.\335\
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\332\ See proposed Rule 252(h)(1).
\333\ Proposed Rule 252(h)(2). See also discussion in Section
II.E.1. below.
\334\ One commenter suggested that such supplements be
permitted. See Kaplan Voekler Letter 2.
\335\ See note to proposed Rule 253(b).
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The proposed rules would build on Regulation A to create a regime
similar to what is permissible for registered offerings, and would draw
from and adapt the language in Rule 424, Item 512 of Regulation S-K,
and Rule 430A \336\ to do so. Although filing a post-qualification
amendment and a review by the Commission staff remains appropriate in
some circumstances, we recognize that additional flexibility could be
provided in other circumstances. Under the proposed rules, we borrow
from the experience in registered offerings under Rule 415 to permit
offering circular supplements for continuous or delayed offerings where
the offering statement is not required to be amended by Regulation A
and there is no fundamental change in the offering statement's
disclosure. We also propose to allow the use of offering circular
supplements for final pricing information, where the offering statement
is qualified on the basis of a bona fide price range estimate.\337\
Additionally, offering circulars would be permitted to omit information
with respect to the underwriting syndicate analogous to the provisions
for registered offerings under Rule 430A.\338\ The volume of securities
(the number of equity securities or aggregate principal amount of debt
securities) to be offered would not, however, be allowed to be
omitted.\339\ As proposed, an offering circular supplement could also
be used to indicate a decrease in the volume of, or to change the price
range of, the securities offered in reliance on a qualified offering
statement under Regulation A, provided that, in the aggregate, such
changes represent no more than a 20% change from the maximum aggregate
offering price calculable using the information in the qualified
offering statement.\340\ In such circumstances, offering circular
supplements would not be available where the maximum aggregate offering
price resulting from any changes in the price of the securities would
exceed the offering amount limitation set forth in proposed Rule 251(a)
or if the increase in aggregate offering price would result in a Tier 1
offering becoming a Tier 2 offering. Allowing for the use of offering
circular supplements in the situations outlined above would not alter
the legal determination as to whether such information must be provided
to investors, but would align Regulation A with prevailing market and
Commission staff practices.\341\
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\336\ 17 CFR 230.430A.
\337\ See proposed Rule 252(h). Relatedly, the Commission noted
in the 1992 amendments to Regulation A that pricing information
under Rule 430A did not necessarily need to be included in the final
offering circular. See SEC Rel. No. 33-6949, at fn. 58. As proposed,
the bona fide price range estimate could not exceed $2 for offerings
where the upper end of the range is $10 or less and 20% if the upper
end of the price range is over $10. See proposed Rule 253(b)(2).
\338\ See proposed Rule 253(b) (also permitting the omission of
underwriting discounts or commissions, discounts or commissions to
dealers, amount of proceeds, conversion rates, call prices and other
items dependent upon the offering price, delivery dates, and terms
of the securities dependent upon the offering date, so long as
certain conditions are met); Cf. Rule 430A, 17 CFR 430A.
\339\ See proposed Rule 253(b)(4).
\340\ See note to proposed Rule 253(b); Cf. Instruction to
paragraph (a) in Rule 430A(a), 17 CFR 230.430A(a).
\341\ Cf. SEC Rel. No. 33-6714 [52 FR 21252] (June 5, 1987)
(noting that the adoption of Rule 430A and the related changes to
the procedures set forth in Rule 424 were ``intended to simplify and
reduce filing obligations without reducing investor protection.'').
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We further propose provisions similar to Rule 424 that would
require issuers omitting certain information from an offering statement
at the time of qualification, in reliance on proposed Rule 253(b), to
file such information as an offering circular supplement no later than
two business days following the earlier of the date of determination of
such pricing information or the date of first use of the offering
circular after qualification.\342\ Further, these proposed provisions
would require offering circulars that contain substantive
[[Page 3955]]
changes (other than information omitted in reliance on proposed Rule
253(b)) in information previously provided in the last offering
circular to be filed within five business days after the date such
offering circular is first used after qualification.\343\ Offering
circular supplements that are not filed within the required time frames
provided by the proposed rules would be required to be filed as soon as
practicable after the discovery of the failure to file.\344\ We are
soliciting comment on the scope of changes that should require a post-
qualification amendment instead of an offering circular supplement.
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\342\ See proposed Rule 253(g).
\343\ See proposed Rule 253(g)(2).
\344\ See proposed Rule 253(g)(4).
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Request for Comment
72. Should Regulation A continue to permit traditional shelf
offerings, as proposed? Are there types of transactions not currently
covered by Rule 415 that should be included in the rules relating to
continuous offerings under Regulation A? If so, provide justification
for including those transactions in Regulation A.
73. Should we use the time limits for continuous offerings found in
Rule 415 for similar Regulation A offerings or should we lengthen or
shorten such requirements? If so, please suggest new time limits and
explain why they are preferable to the proposed time limits.
74. As proposed, should we permit continuous offerings that would
be offered in an amount that, at the time the offering statement is
qualified, the issuer reasonably expects to offer and sell within two
years from the initial qualification date? Or should we limit this time
period to one year from the initial qualification date?
75. We propose to no longer require issuers to amend an offering
statement every time any information contained in the offering
statement is changed, as is currently required in Rule 252(h), and
instead require amendments to the offering statement to be filed and
requalified annually to include updated financial statements, and
otherwise as necessary to reflect facts or events arising after
qualification which, in the aggregate, represent a fundamental change
in the information set forth in the offering statement. Are there other
types of changes in information or disclosure that should require a
post-qualification amendment that must be qualified, rather than an
offering circular supplement? Should we use a standard different from
the ``fundamental change'' standard proposed, which is based on Item
512(a) of Regulation S-K? Please provide justifications for your
suggested approach.
76. As proposed, should we permit issuers to qualify additional
securities in reliance on Regulation A by filing a post-qualification
amendment to a qualified offering statement? Why or why not?
77. As proposed, should we adopt provisions similar to Rule 430A
that would permit issuers to omit certain information with respect to,
among other things, the underwriting syndicate and related information
analogous to the provisions for registered offerings under Rule 430A?
Why or why not? Additionally, as proposed, should we permit decreases
to the volume of, or deviations from the price range of, the securities
offered in reliance on Regulation A within the described limits?
78. As proposed, should we include in Regulation A provisions
similar to Rule 424, which would require issuers relying on proposed
Rule 253(b) to omit certain information from an offering statement at
the time of qualification to file such information as an offering
circular supplement no later than two business days following the
earlier of the date of determination of such pricing information or the
date of first use of the offering circular after qualification? Why or
why not? Additionally, as proposed, should we require offering
circulars that contain substantive changes (other than information
omitted in reliance on proposed Rule 253(b)) in information previously
provided in the last offering circular to be filed within five business
days after the date such offering circular is first used after
qualification? Why or why not?
79. Should we consider additional or alternative amendments to the
proposed provisions for continuous offerings and offering circular
supplements? Why or why not? If so, please explain.
80. As proposed, Regulation A is not specifically designed for
business combination transactions. While such transactions, outside the
context of acquisition shelf business combination transactions, are not
prohibited, would Part II of proposed Form 1-A provide for appropriate
disclosure of business combination transactions? Why or why not? If so,
what additional narrative or financial disclosure provisions, if any,
should apply to issuers with respect to such transactions?
81. As proposed, should the rules preclude primary and secondary at
the market offerings? Or should the rules only preclude primary at the
market offerings? Why or why not? If the rules should not prohibit at
the market offerings how should the offering size be calculated for
purpose of determining whether the offering exceeds the proposed
applicable annual offering amount limitations? Please explain.
5. Qualification
Under Regulation A, an offering statement is generally only
qualified by order of the Commission in a manner similar to a
registration statement being declared effective.\345\ In such
instances, the issuer includes a delaying notation on the cover of the
Form 1-A that states the offering statements shall only be qualified by
order of the Commission.\346\ In order to remove a delaying notation,
an issuer must file an amendment to the offering statement indicating
that the offering statement will become qualified on the 20th calendar
day after filing.\347\ An offering statement that does not include a
delaying notation will be qualified without Commission action on the
20th calendar day after filing.\348\
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\345\ See Rule 252(g)(2).
\346\ Id.
\347\ See Rule 252(g)(3).
\348\ See Rule 252(g)(1).
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We propose to alter the qualification process of existing
Regulation A. As proposed, an offering statement could only be
qualified by order of the Commission, and the process associated with
the delaying notation would be eliminated. This not only conforms to
the general practice of issuers under both Regulation A and registered
offerings, but eliminates the risk that an issuer may exclude a
delaying notation either in error or in an effort to become qualified
automatically without review and comment by the Commission staff. Given
our proposed electronic filing processes,\349\ scaled disclosure
requirements for Tier 1 and Tier 2 offerings,\350\ and the preemption
of state securities law registration and qualification requirements for
Tier 2 offerings,\351\ we believe it is appropriate to ensure that the
Commission staff has a chance to review and comment on the offering
statement before it becomes effective. We do, however, solicit comment
on whether we should retain provisions for the automatic effectiveness
of an offering statement in a manner similar to the current rules, in
order to provide issuers with some flexibility and control over the
timing of the qualification process.
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\349\ See discussion in Section II.C.1. above.
\350\ See discussion in Section II.C.3. above.
\351\ See discussion in Section II.H. below.
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Request for Comment
82. Should we amend the qualification process, as proposed, so that
an offering statement can only
[[Page 3956]]
become qualified by order of the Commission? Or should we preserve the
existing qualification provisions of Regulation A, which permit
offering statements to become qualified without an order of the
Commission on the 20th calendar day after filing? Why or why not? What
effect, if any, would this have on issuers and their ability to control
the timing of the qualification process?
D. Solicitation of Interest (``Testing the Waters'')
Under Securities Act Section 3(b)(2)(E), issuers are to be
permitted to test the waters for interest in an offering before filing
an offering statement on such terms and conditions as the Commission
prescribes. Testing the waters is currently permitted under Rule 254 of
Regulation A, which requires, among other things, that issuers submit
all solicitation material to the Commission no later than the time of
first use. Issuers are further required to file all solicitation
materials used in reliance on Rule 254 as an exhibit under Part III of
Form 1-A, and are prohibited from making sales under Regulation A until
20 calendar days after the last publication or delivery of such
materials. Under Rule 254(b)(3), issuers must cease using test the
waters solicitation materials after the initial filing of the offering
statement.
Testing the waters under Rule 254 of Regulation A is different from
testing the waters for a registered offering by an emerging growth
company under Section 5(d) of the Securities Act. Under Section 5(d),
testing the waters is limited to communications with QIBs and
institutional accredited investors. Under current Rule 254, however,
there is no limitation on the type of investors that may be solicited,
as the provision is meant to assist smaller issuers in evaluating
potential interest in a public offering before incurring costs
associated with preparing mandated disclosure documents.\352\ New
Securities Act Section 3(b)(2)(E) also does not limit the type of
investors that may be solicited, but instead specifies that we can
prescribe terms and conditions. We do not believe it is appropriate to
adopt provisions in proposed Regulation A that are more restrictive
than currently exist in Rule 254 and therefore do not propose to alter
the permissible target audience of testing the waters materials.
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\352\ SEC Rel. No. 33-6924, at 10-11 (discussing the capital
needs of smaller companies, and, in comparison to ``limited
[private] offerings to more sophisticated professional investors,''
the need to facilitate greater ``access to the public market[s] for
startup and developing companies, and . . . lower[] the costs for
small businesses that undertake to have their securities traded in
the public market.'').
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While one commenter suggested that the Commission permit the use of
solicitation materials before the filing of an offering statement,\353\
another commenter simply suggested that all such solicitation materials
be made readily available.\354\ Another commenter suggested that, in
addition to the existing requirements of Rule 254(b)(2), the Commission
limit the use of testing the waters materials before the filing of an
offering statement to solicitations conducted by registered broker-
dealers or solicitations in firm commitment underwritings.\355\
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\353\ McCarter & English Letter.
\354\ Beacon Investment Letter.
\355\ NASAA Letter 2.
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Testing the waters was first proposed and approved for use in
Regulation A in 1992, to address the risk that small companies faced
when expending funds to prepare for an offering of securities without
knowing whether there would be any interest in the offering.\356\ We do
not believe, however, that the existing provisions of Rule 254 have
proven as useful as originally intended. We are concerned that the
amount of time that typically elapses between initial filing of the
Form 1-A and qualification (which, on average, from 2002 through 2012
was approximately 241 days) may limit the possible benefits of testing
the waters in advance of initial filing. In addition, we understand
that testing the waters activities may not be permissible under many
state securities laws.
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\356\ SEC Rel. No. 33-6924, at 12.
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To address the potential impact of the review period, we propose to
permit issuers to use testing the waters solicitation materials both
before and after the offering statement is filed, subject to issuer
compliance with the rules on filing and disclaimers.\357\ In our view,
to do otherwise would unnecessarily limit the intended benefits to
issuers of testing the waters. As with existing Regulation A, investor
protections with respect to such solicitation materials would remain in
place, as these materials remain subject to the antifraud and other
civil liability provisions of the federal securities laws.\358\ In
addition, under the proposal, testing the waters materials used by an
issuer or its intermediaries after publicly filing an offering
statement would be required to include a current preliminary offering
circular or contain a notice informing potential investors where and
how the most current preliminary offering circular can be obtained.
This requirement could be satisfied by providing the URL where the
preliminary offering circular or the offering statement may be obtained
on EDGAR.
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\357\ This timing is similar to the ``testing the waters''
permitted for emerging growth companies under new Section 5(d) of
the Securities Act, added by the JOBS Act, which can also be
conducted both before and after filing of a registration statement.
Under Section 5(d), no legending or disclaimers are required, but
testing the waters is limited to potential investors that are
``qualified institutional buyers'' or institutional ``accredited
investors.''
\358\ The Commission's antifraud liability provisions in Section
17 of the Securities Act, 15 U.S.C. 77q, apply to any person who
commits fraud in connection with the offer or sale of securities.
Section 3(b)(2)(D) of the Securities Act, 15 U.S.C. 77c(b)(2)(D),
states that the civil liability provisions of Section 12(a)(2) apply
to any person offering or selling securities under Regulation A. See
also SEC Rel. No. 33-6924, at fn. 48.
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Since we propose to require issuers to publicly file their offering
statements not later than 21 calendar days before qualification, this
timing requirement would ensure that, at a minimum, any solicitation
made in the 21 calendar days before the earliest date of potential
sales of securities would be conducted using the most recent version of
preliminary offering circular.\359\ While the proposed expansion on use
of solicitation materials after filing would potentially result in
investors receiving more sales literature in marketed offerings, in
such circumstances, potential investors would also be afforded more
time with the preliminary offering circular before making an investment
decision.\360\ Issuers and intermediaries that use testing the waters
materials after publicly filing the offering statement would be
required to update and redistribute--through any electronic or print
media or television or radio broadcast distribution channels previously
relied upon by the issuer or its intermediaries to market the offering
during this period--such material to the extent that either the
material itself or the preliminary offering circular attached
thereafter becomes inadequate or inaccurate in any material
respect.\361\
[[Page 3957]]
Additionally, whether or not an issuer or its intermediaries tests the
waters, as provided for by proposed Regulation A, such parties would
remain obligated in the pre-qualification period to deliver a copy of
the preliminary offering circular to prospective purchasers at least 48
hours in advance of sale under proposed Rule 251(d)(2)(i).\362\
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\359\ See discussion of non-public submissions of offering
statements in Section II.C.2. above, which proposes to require an
issuer to file its offering statement with the Commission not later
than 21 calendar days before qualification.
\360\ Cf. The Regulation of Securities Offerings, SEC Rel. No.
33-7606A, at 78 (Nov. 17, 1998) [63 FR 67174] (discussing the
importance of providing a preliminary prospectus in conjunction with
the distribution of sales materials).
\361\ Issuers would not, however, be required to update and
redistribute solicitation materials to the extent that: i) any such
changes occur only with respect to the preliminary offering
circular, ii) no similar changes are required in the solicitation
materials previously relied upon, and iii) such materials included
(when originally distributed) a URL where the preliminary offering
circular or the offering statement filed on the issuer's EDGAR
filing page and that URL continues to link to the most recent
version of the preliminary offering circular.
\362\ Proposed Rule 251(d)(2)(i) is discussed in Section II.C.1.
above.
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We further propose to amend the Rule 254 requirements for
submission or filing of solicitation material, so that such material
would be submitted or filed as an exhibit when the offering statement
is either submitted for non-public review or filed (and updated for
substantive changes in such material after the initial non-public
submission or filing) but would no longer be required to be submitted
at or before the time of first use. This approach is generally
consistent with the Commission staff's treatment of solicitation
materials used by emerging growth companies under Title I of the JOBS
Act, with two exceptions:
solicitation materials used in Regulation A offerings
would be required to be filed; \363\ and
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\363\ In practice, however, Commission staff reviewing filings
by emerging growth companies regularly requests and receives such
material as part of the review process to ensure consistency between
the information contained in the solicitation materials and the
registration statement. See 17 CFR 230.418 (Supplemental
Information).
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solicitation materials used by Regulation A issuers that
file an offering statement with the Commission would be publicly
available as a matter of course.\364\
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\364\ Where an issuer non-publicly submits an offering statement
under Regulation A that is later abandoned before filing, and where
that issuer properly submitted the offering statement pursuant to a
confidential treatment request pursuant to Commission Rule 83 (17
CFR 200.83), the offering statement and solicitation materials may,
under certain circumstances, qualify for an exemption from
production pursuant to the FOIA. See http://www.sec.gov/foia/conftreat.htm for more information. Such materials, however, will be
publicly available on EDGAR if, and when, an offering statement is
eventually filed with the Commission.
---------------------------------------------------------------------------
We believe this approach would be consistent with the 1992
amendments to Regulation A that first allowed issuers to test the
waters, and would make the use of solicitation materials more
beneficial for issuers and investors, reduce the filing requirements
for issuers, and entirely eliminate the filing requirement for issuers
that, after testing the waters, decide not to proceed with an offering.
Additionally, from an investor protection standpoint, it is important
to note that sales under Regulation A may occur only under a qualified
offering statement that reflects staff review and comment, including,
where appropriate, disclosure addressing potentially incomplete or
misleading statements made in test the waters solicitation material.
For this reason, in addition to the statutory language of Section
3(b)(2)(E), which indicates that ``issuer[s] may solicit interest in
the offering,'' we do not believe it is necessary, as one commenter
suggested, to limit the availability of this provision to solicitations
carried out by registered broker-dealers or by underwriters in firm
commitment underwritings.\365\
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\365\ See NASAA Letter 2 (suggests limiting the use of
solicitation materials to solicitations made by broker-dealers, or
in the context of firm commitment underwritten offerings).
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Currently, Rule 254(b)(2) requires all soliciting materials to bear
a legend or disclaimer indicating: (i) That no money or other
consideration is being solicited, and if sent, will not be accepted;
(ii) that no sales will be made or commitments to purchase accepted
until a complete offering circular is delivered; (iii) that a
prospective purchaser's indication of interest is non-binding; and (iv)
the identity of the issuer's chief executive officer and a brief
description of the issuer's business and products.\366\ We propose to
amend Rule 254(b)(2)(ii) to more closely follow similar provisions in
the context of registered offerings.\367\ The amended language would
recognize that, similar to the framework for registered offerings,
sales made pursuant to Regulation A would be contingent upon the
qualification of the offering statement, not the delivery of a final
offering circular. Additionally, to provide greater flexibility when
using solicitation materials, we propose to eliminate the requirement
in Rule 254(b)(2)(iv) to identify the issuer's chief executive officer,
business, and products.
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\366\ 17 CFR 230.254(b)(2).
\367\ See Rule 134(d), 17 CFR 230.134(d), (required disclaimer
for solicitations of interest in registered offerings).
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Further, as noted above, we do not propose to limit testing the
waters to QIBs and institutional accredited investors (as is currently
the case with testing the waters under Title I of the JOBS Act), as we
do not believe it is appropriate to adopt provisions in proposed
Regulation A that are more restrictive than currently exist in the
regulation.
Request for Comment
83. As proposed, should we differentiate between the requirements
for the use of testing the waters materials before the issuer publicly
files an offering statement and after filing (when it is proposed that
a preliminary offering circular would have to be provided)? Why or why
not? Is the proposed time period during which a preliminary offering
circular would be required to be provided together with testing the
waters materials appropriate, or should it be longer or shorter? Is the
48-hour period for the delivery of a preliminary offering circular
under proposed Rule 251(d)(2)(i) sufficient to address any concerns
about the use of solicitation materials at or near the time of
qualification? \368\ Should we distinguish between the use of testing
the waters materials after an offering statement is non-publicly
submitted versus publicly filed?
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\368\ See discussion of delivery requirements in Section II.C.1.
above.
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84. Should we amend Rule 254, as proposed, so that solicitation
material would no longer be required to be submitted to the Commission
at or before the time of first use? If not, in the absence of a
confidential treatment request under Commission Rule 83 (17 CFR
200.83), should solicitation material be made publicly available
immediately after submission on EDGAR? Or, as proposed, should we only
require solicitation materials to be publicly available when included
as an exhibit to an offering statement that is filed with the
Commission not later than 21 calendar days before the offering
statement is qualified?
85. Is the legend or disclaimer required to be included in the
solicitation materials under proposed Rule 254 appropriately tailored
for the likely recipients of such materials in Regulation A offerings?
Why or why not? Should solicitation materials used by the issuer and
its intermediaries before the initial public filing of the offering
statement be required to include specific information about the issuer
or the offering similar to current rules? If so, what information
should be required?
86. While not currently proposed, should we limit the use of
testing the waters materials to communications with QIBs and
institutional accredited investors in order to be consistent with the
treatment of emerging growth companies under Title I of the JOBS Act?
Would QIBs or institutional accredited investors be the likely target
audience for issuers testing the waters in reliance on Regulation A?
Why or why not? As proposed, should issuers and intermediaries that use
testing the waters materials after publicly filing an offering
statement be required to update and redistribute--through any
electronic or print media or television or
[[Page 3958]]
radio broadcast distribution channels previously relied upon by the
issuer or its intermediaries to market the offering during this
period--such material if either the material itself or the preliminary
offering circular attached thereafter becomes inadequate or inaccurate
in any material respect? \369\ Why or why not? Would this requirement
unduly limit the utility, and potentially raise the costs, of testing
the waters after publicly filing an offering statement, or would it
help to ensure that issuers and intermediaries that solicit interest in
a potential offering during this period of time do so in a measured and
judicious manner? Please explain.
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\369\ But see fn. 361 above for an exception to the general
requirements for updates and redistribution.
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87. Should we make the submission or filing of solicitation
materials a condition to the Regulation A exemption, such that an
issuer that fails to submit such materials as part of an offering
statement submitted for non-public review, or to file such materials as
part of a filed offering statement, loses its ability to rely on the
exemption? If so, should we provide for a cure period for inadvertent
failures to submit or file solicitation materials as an exhibit to an
offering statement?
E. Ongoing Reporting
Currently, Regulation A requires issuers to file a Form 2-A with
the Commission every six months after qualification to report sales
under Regulation A, with a final filing due within 30 calendar days
after the termination, completion, or final sale of securities in the
offering.\370\ Section 3(b)(2) requires issuers to provide annual
audited financial information on an ongoing basis, and expressly
provides that the Commission may consider whether additional ongoing
reporting should be required. Specifically, Section 3(b)(4) grants the
Commission authority to require issuers ``to make available to
investors and file with the Commission periodic disclosures regarding
the issuer, its business operations, its financial condition, its
corporate governance principles, its use of investor funds, and other
appropriate matters, and also provide for the suspension and
termination of such requirement.''
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\370\ See 17 CFR 230.257; see also 17 CFR 239.91 (Form 2-A).
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Most commenters agree that the Commission should require some form
of ongoing reporting in revised Regulation A, but differ on the degree
and frequency of such reporting.\371\ In general, the comments received
acknowledge that the Commission's task in determining the appropriate
level of ongoing reporting requires balancing the risks of imposing
issuer disclosure requirements that are too prescriptive \372\ or
onerous \373\ with the risks of providing too little information to
either support,\374\ or adequately protect investors in,\375\ the
secondary market. Some commenters suggested that the Commission require
ongoing reporting only to the extent necessary to support an active
secondary market, such as by requiring quarterly and material event
reporting,\376\ or semiannual performance updates.\377\ Alternatively,
one commenter suggested that the Commission only require annual filings
under a two-year pilot program to determine whether such reports,
without more, provide sufficient information to the market.\378\ One
commenter suggested that ongoing reporting requirements under
Regulation A should be similar to, but less onerous than, Exchange Act
reporting.\379\ This commenter suggested that the rules require
periodic reports that follow the disclosure requirements applicable to
smaller reporting companies, or those of Exchange Act Rule 15c2-11. In
its view, though, current reporting in a fashion similar to Form 8-K
under the Exchange Act might be too burdensome for smaller issuers,
while the OTC Markets' proprietary Alternative Reporting System might
be more appropriate. The commenter also suggested that, if required,
current reporting should be limited to material agreements, financial
obligations, unregistered sales of securities, changes in accountants,
changes in and the compensation of directors and officers, and charter
amendments. Another commenter suggested periodic reporting that is less
prescriptive than Exchange Act reporting, and using Form 1-A disclosure
requirements as a base.\380\ Several commenters suggested that--to the
extent the Commission permits Regulation A offerings to be
simultaneously listed, or approved for listing, on a national
securities exchange--it should permit Exchange Act reporting to satisfy
Title IV's ongoing reporting requirements.\381\ Another commenter
suggested that any ongoing reporting requirements eventually adopted
should be meaningful enough to provide investors with current
information about issuers and to permit better informed investment
decisions.\382\
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\371\ See, e.g., Letter from Mike Liles, Jr., Attorney, Karr
Tuttle Campbell, April 12, 2012 (``Karr Tuttle Letter''); Letter
from Kurt N. Schacht, CFA, Managing Director, Standards and
Financial Market Integrity, and Linda L. Rittenhouse, Director,
Capital Markets Policy, CFA Institute, Aug. 16, 2012 (``CFA
Institute Letter''); Fallbrook Letter. But see Letter from Robert R.
Kaplan, Jr., Esq., Kaplan Voekler, May 10, 2012 (``Kaplan Voekler
Letter 1'') (suggesting that, in light of the relative costs to
issuers in smaller dollar amount offerings, the Commission not
require ongoing reports for Regulation A offerings of up to $5
million in securities annually); NSBA Letter (suggesting the only
change the Commission should make in Regulation A is raising the
dollar limitations from $5 million to $50 million); see also ECTF
Report (suggesting ongoing periodic reporting that is reasonable in
scope and balances investor protection concerns with regulatory and
compliance costs).
\372\ ABA Letter.
\373\ McCarter & English Letter.
\374\ Kaplan Voekler Letter 1.
\375\ NASAA Letter 1; NASAA Letter 2.
\376\ Kaplan Voekler Letter 1.
\377\ CFA Institute Letter.
\378\ Fallbrook Letter.
\379\ McCarter & English Letter.
\380\ ABA Letter.
\381\ ABA Letter; WR Hambrecht + Co. Letter.
\382\ NASAA Letter 1; NASAA Letter 2.
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The sole advance comment received on how and when to permit
terminating ongoing reports suggested that the Commission permit
automatic termination (or suspension) of ongoing reporting obligations
in a fashion similar to that permitted under Section 15(d) of the
Exchange Act.\383\ That is, the Commission should allow ongoing
reporting to be suspended as to any fiscal year, other than the fiscal
year in which the offering was qualified, if at the beginning of such
fiscal year the securities of the class sold in the offering are held
of record by fewer than 300 persons.
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\383\ ABA Letter.
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We are mindful that an ongoing reporting regime that is suitable
for one type of entity and its investor base may prove too onerous for
another entity or provide its investors with more or more frequent
information than they necessarily need or seek, resulting in undue
costs to the issuer. In the discussion and proposals that follow, we
have endeavored to address the potential added costs and benefits
associated with the provision of ongoing information about issuers of
Regulation A securities to investors in such securities and any market
that develops as a result.
1. Continuing Disclosure Obligations
As noted above, Regulation A currently requires issuers to file a
Form 2-A with the Commission to report sales and the termination of
sales made under Regulation A every six months after qualification and
within 30 calendar days after the termination, completion, or final
sale of securities in
[[Page 3959]]
the offering.\384\ The summary information about the issuer and its
offering required to be disclosed in the Form 2-A is intended to
provide the Commission with valuable data about Regulation A offerings
and the effectiveness of Regulation A as a capital formation tool for
smaller issuers. Currently, however, issuers of securities under
Regulation A often neglect to file the form, thereby limiting the
amount and utility of the data received.\385\ We propose to rescind
Form 2-A, but to continue to require Regulation A issuers to file the
information generally disclosed in Form 2-A with the Commission
electronically on EDGAR.\386\ We believe that summary information and
data about an issuer and its Regulation A offering, however, is most
valuable when obtained after the offering is completed or terminated.
We therefore propose to require issuers to disclose such information
only after the termination or completion of the offering. Issuers
conducting Tier 1 offerings would be required to provide this
information on Part I of proposed new Form 1-Z not later 30 calendar
days after termination or completion of the offering,\387\ while
issuers conducting Tier 2 offerings would be required to provide this
information on either Part I of Form 1-Z at the time of filing an exit
report or proposed new Form 1-K as part of their annual report.
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\384\ See 17 CFR 230.257; see also 17 CFR 239.91 (Form 2-A).
\385\ Currently, the filing of the Form 2-A is not a condition
to an issuer's ability to rely on Regulation A. See Rule 257, 17 CFR
230.257. As proposed, the filing of the information required under
current Form 2-A would not be a condition to an issuer's ability to
rely on Regulation A for the current offering, but would affect the
issuer's ability to conduct a follow-on Regulation A offering in the
future. See the discussion in Section II.B.1. above regarding
proposed issuer eligibility requirements.
\386\ We do not propose to continue to require issuers to
disclose the use of proceeds currently disclosed in Form 2-A, as
issuers must disclose this information in Part II of Form 1-A and
any changes in the use of proceeds after qualification not
previously disclosed would require issuers to determine whether a
post-qualification amendment or offering circular supplement is
necessary. See discussion of continuous or delayed offerings and
offering circular supplements in Section II.C.4. above.
\387\ Proposed new Form 1-Z (exit report) is discussed in
Section II.E.4. below.
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As proposed, issuers in Tier 2 offerings would be subject to a
Regulation A ongoing reporting regime that would, in addition to filing
summary information on a recently completed offering and annual reports
on proposed new Form 1-K, require issuers to file semiannual updates on
proposed new Form 1-SA, current event reporting on proposed new Form 1-
U, and to provide notice to the Commission of the suspension of their
ongoing reporting obligations on Part II of proposed new Form 1-Z. All
of these reports would be filed electronically on EDGAR.
We are concerned that uniform ongoing reporting requirements for
all issuers of Regulation A securities could disproportionately affect
issuers in smaller offerings.\388\ For that reason, we do not propose
to require any ongoing reporting for issuers conducting Tier 1
offerings, other than the summary information discussed above, which is
already required under the existing rules.\389\ Section 3(b)(2)(F)
requires issuers to file audited financial statements with the
Commission annually, which does not apply to current Regulation A.\390\
While Section 3(b)(2) directs the Commission to ``add a class of
securities exempted pursuant to this section,'' it does not also direct
the Commission to supplant the provisions associated with the existing
class of securities exempted under Section 3(b)(1) and Regulation A. We
therefore propose to preserve this aspect of current Regulation A for
Tier 1 offerings. As proposed, however, issuers in smaller offerings
would have the option to conduct a Tier 2 offering and subject
themselves to the more expansive ongoing reporting regime and otherwise
comply with the proposed Tier 2 requirements.\391\
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\388\ See also Kaplan Voekler Letter 1 (recommending that, in
light of the relative costs to issuers in smaller dollar amount
offerings, the Commission not require ongoing reports for Regulation
A offerings of up to $5 million in securities annually).
\389\ See proposed Rule 257(a).
\390\ As noted in Section I.A. above, current Regulation A was
issued under Section 3(b)(1) of the Securities Act.
\391\ An issuer offering up to $5 million in a Tier 2 offering
would, in addition to providing ongoing reports to the Commission on
the proposed annual and semiannual basis, with interim current event
updates, be required to file audited financial statements in the
offering statement, see Section II.C.3.b(2). above, and may be
required to file a Form 1-Z to terminate its ongoing reporting
obligations as described in Section II.E.4. below.
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We believe the proposed approach to ongoing reporting should
support a regular flow of information about issuers conducting Tier 2
offerings, which would benefit investors and foster the development of
a market in such securities, without imposing unnecessary costs on
issuers that elect to conduct a Tier 1 offering. We believe our
proposal strikes an appropriate balance between the investor
protections associated with the provision of ongoing information about
an existing or contemplated investment to potential investors and our
goal of facilitating capital formation for smaller companies by not
requiring too heavy a reporting obligation.
The following are the proposed ongoing reporting requirements for
Tier 2 offerings:
a. Annual Reports on Form 1-K
Proposed new Form 1-K would be comprised of two parts: Part I
(Notification) and Part II (Information to be included in the report).
(1) Part I (Notification)
As with Part I of Form 1-A,\392\ Part I of Form 1-K would be an
online XML-based fillable form that would include certain basic
information about the issuer, prepopulated on the basis of information
previously disclosed in Part I of Form 1-A, which can be updated by the
issuer at the time of filing. Additionally, if, at the time of filing
the Form 1-K, an issuer has terminated or completed a qualified
Regulation A offering, we propose to require the issuer to provide
certain updated summary information about itself and the offering in
Part I, including, e.g., the date the offering was qualified and
commenced, the number of securities qualified, the number of securities
sold in the offering, the price of the securities, any fees associated
with the offering, and the net proceeds to the issuer. As discussed
above, this information is generally already required to be disclosed
under current Regulation A on Form 2-A, which we propose to eliminate.
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\392\ See discussion in Section II.C.3.a. above.
---------------------------------------------------------------------------
The portion of the fillable form relating to a completed Regulation
A offering would appear when the issuer indicates in Part I that the
offering has terminated or been completed. Issuers would only be
required to fill out the XML-based portion of Part I that relates to
the summary information on a terminated or completed offering once.
Alternatively, an issuer that elects to terminate its ongoing reporting
obligation under Regulation A after terminating or completing an
offering, in a fiscal year other than the fiscal year in which the
offering statement was qualified, but before reporting the required
summary information on Form 1-K,\393\ could satisfy its obligation to
file the summary offering information in Part I of Form 1-K by filing a
Form 1-
[[Page 3960]]
Z (exit report) that includes such information.\394\
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\393\ An issuer that has completed a Regulation A offering under
Tier 2 in a fiscal year other than the fiscal year in which the
offering was qualified could, however, continue filing the ongoing
reports required in Tier 2 offerings in order to, for example,
continually provide updated information to its shareholder or to
broker-dealers for purposes of proposed Exchange Act Rule 15c2-11.
See discussion in Section II.E.2. below.
\394\ For a discussion of the requirements for terminating an
ongoing reporting obligation under Regulation A and proposed new
Form 1-Z, see Section II.E.4. below.
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The summary information disclosed would facilitate analysis of
Regulation A offerings by the Commission, other regulators, third-party
data providers, and market participants, while facilitating the capture
of important summary information about an offering that would enable
the Commission to monitor the use and effectiveness of Regulation A as
a capital formation tool.\395\ The fillable form would enable issuers
to provide the required information in a convenient medium and only
capture relevant data about the recently terminated or completed
Regulation A offering. The required disclosure would be publicly
available on EDGAR. As with proposed requirements for Part I of Form 1-
A, Part I of Form 1-K would not require the issuer to obtain specialty
software.
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\395\ See also discussion in Section II.E.4.a. below.
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(2) Part II (Information To Be Included in the Report)
As with Part II of Form 1-A, Part II of Form 1-K would be submitted
electronically by the issuer as a text file attachment containing the
body of the disclosure document and financial statements, formatted in
HTML or ASCII to be compatible with the EDGAR filing system. Part II
would contain information about the issuer and its business based on
the financial statement and narrative disclosure requirements of Form
1-A. Form 1-K would further permit issuers to incorporate by reference
certain information previously filed on EDGAR, but require issuers to
include a hyperlink to such material on EDGAR.\396\ Form 1-K would
cover:
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\396\ The hyperlink to EDGAR need only be active at the time of
filing of the Form 1-K.
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Business operations of the issuer for the prior three
fiscal years (or, if in existence for less than three years, since
inception);
Transactions with related persons, promoters, and certain
control persons;
Beneficial ownership of voting securities by executive
officers, directors, and 10% owners;
Identities of directors, executive officers, and
significant employees, with a description of their business experience
and involvement in certain legal proceedings;
Executive compensation data for the most recent fiscal
year for the three highest paid officers or directors;
MD&A of the issuer's liquidity, capital resources, and
results of operations covering the two most recently completed fiscal
years; \397\ and
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\397\ As proposed, Form 1-K would not include the additional
MD&A disclosure required in Form 1-A for issuers that have not
received revenue from operations during each of the three fiscal
years immediately before the filing of the offering statement. See
discussion in Section II.C.3.b(1). above.
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Two years of audited financial statements.
We anticipate that issuers would generally be able to use the offering
materials as a basis to prepare their ongoing disclosure.
We propose that Form 1-K includes financial statements prepared on
the same basis, and subject to the same requirements as to audit
standards and auditor independence, as the financial statements
required in the Regulation A offering circular for Tier 2
offerings.\398\ Form 1-K would be required to be filed within 120
calendar days after the issuer's fiscal year end. A manually-signed
copy of the Form 1-K would have to be executed by the issuer and
related signatories before or at the time of filing and retained by the
issuer for a period of five years.\399\ Issuers would be required to
produce the manually signed copy to the Commission, upon request.\400\
Any amendments to the form would have to comply with the requirements
of the applicable items and be filed under cover of Form 1-K/A.\401\
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\398\ See Section II.C.3.b(2). above.
\399\ See General Instruction C. to proposed Form 1-K.
\400\ Id.
\401\ See proposed Rule 257(c) (also requiring the signature on
behalf of an authorized representative of the issuer and the
inclusion of any specified certifications).
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b. Semiannual Reports on Form 1-SA
We are proposing semiannual interim reporting for Regulation A
issuers. We believe this would strike an appropriate balance between
the need to provide information to the market and the cost of
compliance for smaller issuers. Issuers would be required to provide
semiannual updates on proposed Form 1-SA that, much like Form 10-Q,
would consist primarily of financial statements and MD&A.\402\ Unlike
Form 10-Q, however, Form 1-SA would not, among other things, require
disclosure about quantitative and qualitative market risk, controls and
procedures, updates to risk factors, or defaults on senior securities,
as we believe such disclosure is not applicable to, or appropriately-
tailored for, issuers in the context of an ongoing report under
Regulation A.\403\ In addition, Form 1-SA would require disclosure of
updates otherwise reportable on Form 1-U. Financial statements included
in semiannual reports would not be required to be audited or reviewed
by independent auditors. Form 1-SA would permit issuers to incorporate
by reference certain information previously filed on EDGAR, but require
issuers to include a hyperlink to such material on EDGAR.\404\
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\402\ See Part I (Financial Information) of Form 10-Q, 17 CFR
249.308a.
\403\ See Item 3 and Item 4 of Part I of Form 10-Q.
\404\ The hyperlink to EDGAR need only be active at the time of
filing of the Form 1-SA.
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We propose to require that Form 1-SA be filed within 90 calendar
days after the end of the issuer's second fiscal quarter. A manually-
signed copy of the Form 1-SA would have to be executed by the issuer
and related signatories before or at the time of filing and retained by
the issuer for a period of five years.\405\ Issuers would be required
to produce the manually signed copy to the Commission, upon
request.\406\ Any amendments to the form would have to comply with the
requirements of the applicable items and be filed under cover of Form
1-SA/A.\407\
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\405\ See General Instruction C. to proposed Form 1-SA.
\406\ Id.
\407\ See proposed Rule 257(c).
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c. Current Reports on Form 1-U
In addition to the annual report on Form 1-K and semiannual report
on Form 1-SA, we further propose to require issuers to submit current
reports on Form 1-U. Issuers would be required to submit such reports
in the following events:
Fundamental changes in the nature of business; \408\
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\408\ A fundamental change in the nature of an issuer's business
would include major and substantial changes in the issuer's business
or plan of operations or changes reasonably expected to result in
such changes, such as significant acquisitions or dispositions, or
the entry into, or termination of, a material definitive agreement
that has or will result in major and substantial changes to the
nature of an issuer's business or plan of operations.
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Bankruptcy or receivership;
Material modification to the rights of securityholders;
Changes in the issuer's certifying accountant;
Non-reliance on previous financial statements or a related
audit report or completed interim review;
Changes in control of the issuer;
Departure of the principal executive officer, principal
financial officer, or principal accounting officer; and
Unregistered sales of 5% or more of outstanding equity
securities.
[[Page 3961]]
As proposed, the requirement that issuers file a Form 1-U in the event
they experience, or would reasonably expect to experience, a
fundamental change in the nature of their business would incorporate
aspects of each of Item 1.01, 1.02 and 2.01 of Form 8-K under the
Exchange Act and change the threshold for reporting from a materiality
to a fundamental change standard.\409\ Under the proposal, Form 1-U
would be required to be filed within four business days after the
occurrence of any such event, and, where applicable, permit issuers to
incorporate by reference certain information previously filed on EDGAR,
but require issuers to include a hyperlink to such material on
EDGAR.\410\ A manually-signed copy of the Form 1-U would have to be
executed by the issuer and related signatories before or at the time of
filing and retained by the issuer for a period of five years.\411\
Issuers would be required to produce the manually signed copy to the
Commission, upon request.\412\ Any amendments to the Form 1-U would
have to comply with the requirements of the applicable items, and be
filed under cover of Form 1-U/A.\413\
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\409\ See Form 8-K, Item 1.01 (Entry into a Material Definitive
Agreement), Item 1.02 (Termination of a Material Definitive
Agreement), and Item 2.01 (Completion of Acquisition or Disposition
of Assets), 17 CFR 249.308.
\410\ The hyperlink to EDGAR need only be active at the time of
filing of the Form 1-U.
\411\ See General Instruction C to proposed Form 1-U.
\412\ Id.
\413\ See proposed Rule 257(c).
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d. Special Financial Reports on Form 1-K and Form 1-SA
While not currently a requirement of Regulation A, we propose to
require issuers conducting Tier 2 offerings to provide special
financial reports analogous to those required under Exchange Act Rule
15d-2.\414\ The special financial report would require audited
financial statements for the issuer's last completed fiscal year to be
filed not later than 120 calendar days after qualification of the
offering statement if the offering statement did not include such
financial statements. The special financial report would require
semiannual financial statements for the first six months of the
issuer's fiscal year, which may be unaudited, to be filed 90 calendar
days after qualification of the offering statement if the offering
statement did not include such financial statements and the offering
statement was qualified in the second half of the issuer's current
fiscal year. The special financial report would be filed under cover of
Form 1-K if it included audited year-end financial statements and under
cover of Form 1-SA if it included semiannual financial statements for
the first six months of the issuer's fiscal year. The financial
statement and auditing requirements would follow the requirements of
those forms. Similarly to the special financial report under Exchange
Act Rule 15d-2, the issuer would indicate on the front page of the
applicable form that only financial statements are included. This
report would serve to close lengthy gaps in financial reporting between
the financial statements included in Form 1-A and the issuer's first
periodic report due after qualification of the offering statement.
---------------------------------------------------------------------------
\414\ 17 CFR 240.15d-2.
---------------------------------------------------------------------------
e. Reporting by Successor Issuers
Where in connection with a succession by merger, consolidation,
exchange of securities, acquisition of assets or otherwise, securities
of an issuer that is not subject to the reporting requirements of
Regulation A, as proposed to be amended, are issued to the holders of
any class of securities of an issuer that is subject to ongoing
reporting under Tier 2, we propose to require the issuer succeeding to
that class of securities to continue filing reports required for Tier 2
offerings on the same basis as would have been required of the original
issuer. The successor issuer may, however, suspend or terminate its
reporting obligations on the same basis as the original issuer under
proposed Rule 257(d).\415\
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\415\ See Section II.E.4. below for a discussion of the
suspension or termination of disclosure obligations.
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Request for Comment
88. Would the proposed requirement that issuers conducting Tier 2
offerings file annual, semiannual, and current reports provide a
meaningful benefit for investors by helping to foster a transparent
market for securities issued under Regulation A? Should this
requirement apply to all issuers of securities under Regulation A,
regardless of whether the issuer is conducting a Tier 1 or Tier 2
offering? Alternatively, should we not impose ongoing reporting
requirements beyond the statutory mandate of annual audited financial
statements? Or should we require only annual reporting of the type of
information required by proposed Form 1-K, without interim periodic
reporting or current updates? Should we require only annual reporting
and current updates? If we require interim periodic reporting, should
it be quarterly instead of the proposed semiannual reporting
requirement? Should quarterly or semiannual financial statements be
required to be reviewed by an independent auditor?
89. While not currently proposed, should we exempt issuers
conducting Tier 1 offerings from the requirement to report certain
summary information about the issuer and the offering after termination
or completion of the offering? Alternatively, should issuers conducting
Tier 1 offerings be required to report on a more frequent basis than
currently proposed? Why or why not?
90. If we exempt some issuers from ongoing reporting, should we do
so on the basis of criteria other than offering size, such as issuer
size or whether the issuer has taken steps to foster a secondary market
for their securities? Why or why not?
91. Should the rules require issuers that conduct a Tier 2 offering
to file their annual report on new Form 1-K within 120 calendar days of
the fiscal year end, and their semiannual report on new Form 1-SA with
90 calendar days of the end of the second fiscal quarter, as proposed?
Or should we require such issuers to file reports on a different
timetable? For example, should the timetable be the same as for non-
accelerated filers under the Exchange Act, who are required to file
annual reports within 90 calendar days of the fiscal year end and
interim periodic reports within 45 calendar days of the end of a fiscal
quarter? What effect, if any, would altering the proposed filing
deadlines for annual and semiannual reporting have on the costs to
issuers of preparing such reports? Please provide supporting data, if
possible.
92. As proposed, does the new Form 1-K provide for the disclosure
of adequate information about the issuer on an annual basis? Similarly,
does the new Form 1-SA provide for the disclosure of adequate
information about the issuer on a semiannual basis? Or should the
form(s) require more (or less) disclosure? If so, what additional
disclosure should the form(s) require, or what items of proposed
disclosure should not be required? Please explain.
93. Should we require current updates, as proposed on new Form 1-U?
If not, please explain why. If we require current reporting, should we
include more, fewer, or different triggering events for current
reporting than are currently proposed? Should the requirement to
provide current reporting apply to all Regulation A issuers? Is there
an appropriate segment of Regulation A issuers, other than as proposed,
for which current reporting
[[Page 3962]]
would be the most useful or should otherwise be required?
94. Does the proposed requirement that issuers disclose material
transactions that would result in, or would reasonably be expected to
result in, fundamental changes to the issuer's business or corporate
events on new Form 1-U provide enough guidance to issuers? If not,
should we provide more guidance as to what constitutes a material
transaction or corporate event? If so, please provide suggestions.
95. As proposed, should we permit issuers to incorporate by
reference certain information into the Form 1-K, Form 1-SA and Form 1-U
that was previously filed on EDGAR under Regulation A, while also
requiring issuers to include a hyperlink to such exhibit on EDGAR? Why
or why not? Should we permit issuers to incorporate by reference
information from other documents, such as Exchange Act reports or
Securities Act registration statements?
96. As proposed, should we require special financial reporting
similar to that which is required for a registered offering under
Exchange Act Rule 15d-2? As proposed, should the rules require audited
financial statements for the issuer's last completed fiscal year to be
filed 120 calendar days after qualification of the offering statement
if the offering statement did not include such financial statements or,
alternatively, require semiannual financial statements for the first
six months of the issuer's fiscal year to be filed 90 calendar days
after qualification of the offering statement if the offering statement
did not include such financial statements and the issuer's first
required periodic report would be a Form 1-SA? Why or why not?
97. As proposed, should issuers that succeed to a class of
securities, in connection with a succession by merger, consolidation,
exchange of securities, acquisition of assets or otherwise, that are
currently subject to a Tier 2 ongoing reporting obligation, as proposed
to be amended, be required to continue filing reports on the same basis
as would have been required of the original issuer? Why or why not?
Please explain.
98. Would the proposed ongoing reporting requirements and
termination provisions of Regulation A induce companies to migrate to
the Regulation A capital raising and reporting regime, such that we may
see a decline in smaller reporting companies subject to full Exchange
Act reporting? \416\ If so, what effect would any population shift of
issuers in the registered and reporting regime under the Securities Act
and Exchange Act migrating to the Regulation A exemptive scheme have on
investor protection?
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\416\ See discussion of proposed termination of ongoing
reporting requirements under Regulation A in Section II.E.4. below.
---------------------------------------------------------------------------
2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing
Reporting Under Regulation A
Exchange Act Rule 15c2-11 governs broker-dealers' publication of
quotations for securities in a quotation medium other than a national
securities exchange.\417\ The Commission adopted Rule 15c2-11 in 1971
to prevent fraudulent and manipulative trading schemes that had arisen
in connection with the distribution and trading of certain unregistered
securities.\418\ The rule prohibits broker-dealers from publishing
quotations (or submitting quotations for publication) in a ``quotation
medium'' for covered over-the-counter securities without first
reviewing basic information about the issuer, subject to certain
exceptions.\419\ A broker-dealer also must have a reasonable basis for
believing that the issuer information is accurate in all material
respects and that it was obtained from a reliable source.
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\417\ 17 CFR 240.15c2-11.
\418\ SEC Rel. No. 34-9310 (Sept. 13, 1971) [36 FR 18641]. See
17 CFR 240.15c2-11(e)(1) (defining quotation medium as any
``interdealer quotation system'' or any publication or electronic
communications network or other device which is used by brokers or
dealers to make known to others their interest in transactions in
any security, including offers to buy or sell at a stated price or
otherwise, or invitations of offers to buy or sell).
\419\ See SEC Rel. No. 34-29094 (April 17, 1991) [56 FR 19148].
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A broker-dealer can, however, satisfy its obligations under Rule
15c2-11 if it has reviewed and maintained in its records certain
specified information. The particular information that is required by
the rule varies depending on the nature of the issuer, including, among
other things:
For an issuer that has filed a registration statement
under the Securities Act, a copy of the prospectus;
for an issuer that has filed an offering statement under
the Securities Act pursuant to Regulation A, a copy of the offering
circular; or
for an issuer subject to ongoing reporting under Sections
13 or 15(d) of the Exchange Act, the issuer's most recent annual report
and any quarterly or current reports filed thereafter.\420\
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\420\ A broker-dealer can also satisfy its review requirements
under Rule 15c2-11 by reviewing certain information published
pursuant to a Rule 12g3-2(b) exemption for foreign issuers that
claim the registration exemption or information specified in
paragraph (a)(5) of the Rule for non-reporting issuers.
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We believe that the proposed ongoing reports for Tier 2 offerings
under Regulation A, which would update the narrative and financial
statement disclosures previously provided in Form 1-A on an annual and
semi-annual basis, with additional provisions for current reporting,
should also satisfy a broker-dealer's obligations under Rule 15c2-11 to
review and maintain records of basic information about an issuer and
its securities. We propose to amend Rule 15c2-11 to permit an issuer's
ongoing reports filed in a Tier 2 offering under Regulation A to
satisfy a broker-dealer's obligations to review specified information
about an issuer and its security before publishing a quotation for a
security (or submitting a quotation for publication) in a quotation
medium.\421\ The single comment we have received to date on the
interaction of Rule 15c2-11 and Regulation A also advocated this
approach.\422\
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\421\ In addition, we are proposing a technical amendment to
Rule 15c2-11 to amend subsection (d)(2)(i) of the rule to update the
outdated reference to the ``Schedule H of the By-Laws of the
National Association of Securities Dealers, Inc.'' which is now
known as the ``Financial Industry Regulatory Authority, Inc.'' and
to reflect the correct rule reference.
\422\ McCarter & English Letter.
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We are also soliciting comment on other potential effects that Tier
2 ongoing reporting under Regulation A could have under other
provisions of the federal securities laws. For example, it may be
appropriate for timely ongoing Regulation A reporting under Tier 2 to
constitute ``adequate current public information'' for purposes of
paragraph (c) of Rule 144.\423\ Currently, most non-reporting issuers
can satisfy the Rule 144 current public information requirement if
there is publicly available the information specified in paragraphs
(a)(5)(i) to (a)(5)(xiv) and (a)(5)(xvi) of Rule 15c2-11.\424\ This
information consists of:
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\423\ 17 CFR 230.144(c).
\424\ 17 CFR 230.144(c)(2). Issuers that are insurance companies
are subject to different requirements.
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The exact name of the issuer and any predecessor;
The address of its principal executive offices;
The state of incorporation, if it is a corporation;
The exact title and class of the security;
The par or stated value of the security;
The number of shares or total amount of the securities
outstanding as of the end of the issuer's most recent fiscal year;
The name and address of the transfer agent;
[[Page 3963]]
The nature of the issuer's business;
The nature of products or services offered;
The nature and extent of the issuer's facilities;
The name of the chief executive officer and members of the
board of directors;
The issuer's most recent balance sheet and profit and loss
and retained earnings statements;
Similar financial information for such part of the two
preceding fiscal years as the issuer or its predecessor has been in
existence;
Whether the broker or dealer initiating or resuming
quotation or any associated person is affiliated, directly or
indirectly with the issuer; and
Whether the quotation is being submitted or published
directly or indirectly on behalf of the issuer, or any director,
officer or any person, directly or indirectly the beneficial owner of
more than 10 percent of the outstanding units or shares of any equity
security of the issuer, and, if so, the name of such person, and the
basis for any exemption under the federal securities laws for any sales
of such securities on behalf of such person.\425\
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\425\ 17 CFR 240.15c2-11(a)(5).
With the exception of the last two items, all of this information would
be included in our proposed ongoing Regulation A reporting for Tier 2
offerings.
We are also soliciting comment on whether ongoing Regulation A
reporting for Tier 2 offerings should satisfy the information
requirements of paragraph (d)(4) of Rule 144A.\426\ Under that
provision, holders of Rule 144A securities must have the right to
obtain from the issuer, upon request, a very brief statement of the
nature of the issuer's business and the products and services it
offers, the issuer's most recent balance sheet and profit and loss and
retained earnings statements, and similar financial statements for each
of the two preceding fiscal years, which information must be
``reasonably current.'' \427\
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\426\ 17 CFR 230.144A(d)(4).
\427\ Id.
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Request for Comment
99. In a Tier 2 offering, should the review of an issuer's most
recent annual report and any semiannual or current reports filed under
Regulation A, as contemplated in this proposal, satisfy a broker-
dealer's obligation to review company information in order to quote a
security in the over-the-counter market pursuant to Exchange Act Rule
15c2-11? Why or why not? Should the annual or other forms require
additional information in order for a broker-dealer to be able to rely
on such information for purposes of quotations under Rule 15c2-11?
100. Should ongoing Regulation A reports in Tier 2 offerings be
deemed to provide ``adequate current public information'' about the
issuer for purposes of paragraph (c) of Rule 144? Why or why not? What
impact would broadening Rule 144 in this way have on affiliate resales
of securities of Regulation A issuers? What impact would broadening
Rule 144 in this way have on investors?
101. Should ongoing Regulation A reports in Tier 2 offerings
satisfy the informational requirements of paragraph (d)(4) of Rule
144A? Why or why not? Are investors or Regulation A issuers likely to
benefit?
3. Exchange Act Registration of Regulation A Securities
Under Section 15(d) of the Exchange Act, an issuer that has had a
Securities Act registration statement declared effective must comply
with the periodic reporting requirements of the Exchange Act.\428\
Qualification of a Regulation A offering statement does not have the
same effect. An issuer of Regulation A securities would not take on
Exchange Act reporting obligations unless it separately registered a
class of securities under Section 12 of the Exchange Act, or conducted
a registered public offering.
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\428\ While issuers with a Section 15(d) reporting obligation
are required to file the same periodic reports as issuers that have
registered a class of securities under Section 12, Section 15(d)
reporting issuers are not subject to additional Exchange Act
obligations (e.g., proxy rules, short-swing profit rules, and
beneficial ownership reporting) that apply to Exchange Act
registrants.
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An issuer registering a class of securities under Section 12 of the
Exchange Act must file either a Form 10 \429\ or Form 8-A \430\ with
the Commission. Form 10 is the general form an issuer must use for
Exchange Act registration, while Form 8-A is a short-form registration
statement. An issuer must use a Form 10 if, at the time it files its
registration statement, it is not already subject to a Section 13 or
Section 15(d) reporting obligation. An issuer may use Form 8-A if it is
already subject to the provisions of either Section 13 or Section
15(d). Additionally, when an issuer that is not already subject to the
provisions of either Section 13 or 15(d) plans to list its securities
on a national securities exchange contemporaneously with the
effectiveness of a Securities Act registration statement, the
Commission staff will not object if that issuer files a Form 8-A in
lieu of a Form 10, in order for the issuer to avoid having to restate
the contents of its Securities Act registration statement in its
Exchange Act registration statement.\431\
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\429\ 17 CFR 249.210. Foreign private issuers must file a Form
20-F, 17 CFR 249.220f, or, where available, a Form 8-A.
\430\ 17 CFR 249.208a.
\431\ See SEC Rel. No. 34-38850 (Sept. 2, 1997) [62 FR 39755],
at 39757 (``[A]n issuer registering an initial public offering will
be permitted to use Form 8-A even though it will not be subject to
reporting until after the effectiveness of that Securities Act
registration statement.'').
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Issuers conducting offerings under Regulation A that seek to list
the securities on a national securities exchange or otherwise enter the
Exchange Act registration system would be required to file Form 10 in
order to do so. We solicit comment, however, on whether we should
provide a simplified means for Regulation A issuers to register a class
of securities under the Exchange Act by, for example, permitting such
issuers to file a Form 8-A rather than a Form 10 in conjunction with,
or following, the qualification of a Regulation A offering statement on
Form 1-A, as some commenters have suggested.\432\ The 2010 Government-
Business Forum on Small Business Capital Raising made a similar
recommendation.\433\ Proponents of this approach argue that it would
facilitate IPOs and encourage Exchange Act registration and the listing
of securities on national securities exchanges, which would provide
benefits to both issuers and investors.\434\
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\432\ ABA Letter; WR Hambrecht + Co. Letter.
\433\ See Final Report of the 29th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation
5, at 18 (Nov. 18, 2010) (suggesting that issuers be permitted to
file reports under Section 13 of the Exchange Act for a one-year
period following a Regulation A offering, and thereafter file a Form
8-A to register the securities under Section 12 of the Exchange Act)
(available at: http://www.sec.gov/info/smallbus/gbfor29.pdf).
\434\ ABA Letter; WR Hambrecht + Co. Letter.
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We also invite comment on ways to facilitate secondary market
trading in the securities of Regulation A issuers, such as by
encouraging the development of ``venture exchanges'' or other trading
venues that are focused on attracting such issuers. The Commission's
Advisory Committee on Small and Emerging Companies, for example, has
recommended the establishment of separate U.S. equity markets for small
and emerging companies, which it believes could encourage initial
public offerings of the securities of these companies.\435\ One
commenter similarly
[[Page 3964]]
expressed support for the creation of an equity market venture exchange
populated with small and emerging growth companies.\436\ In recent
years, the Commission has approved more flexible listing standards for
an exchange designed for smaller issuers,\437\ and some alternative
trading systems today trade small company stocks.\438\ We solicit
comment on how these or similar market models might be used by
Regulation A issuers, and how they can be made more viable for
facilitating secondary markets for small issuers.
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\435\ Recommendation Regarding Separate U.S. Equity Market for
Securities of Small and Emerging Companies, Securities and Exchange
Commission, Advisory Committee on Small and Emerging Companies
(February 1, 2013), available at: http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-emerg-co-ltr.pdf.
\436\ Paul Hastings Letter.
\437\ See SEC Rel. No. 34-64437 (May 6, 2011) [76 FR 27710].
\438\ See, e.g., Global OTC (f/k/a ArcaEdge), Shares Post
Financial Corporation, Second Market, Inc., and OTC Link LLC.
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Request for Comment
102. While not currently proposed, should we permit issuers to
register under the Exchange Act classes of securities that are
qualified under Regulation A by allowing them to file a Form 8-A rather
than a Form 10? Why or why not? Would providing a short form
registration encourage more Regulation A issuers to list their
securities on national securities exchanges? Conversely, would
permitting eligible issuers to use their Regulation A offering
statement in conjunction with a Form 8-A reduce the likelihood that
such issuers would use the Securities Act registration process,
including the ``IPO on-ramp'' provisions of Title I of the JOBS Act?
Would it serve the intended purpose of Regulation A to make such an
accommodation?
103. The disclosure and financial statement requirements of
Regulation A, currently and as proposed to be amended, require fewer
items of disclosure or less detailed information than Securities Act
registrants are required to provide. Would it cause confusion in the
market or otherwise create risks for investors if issuers could
transition from Regulation A disclosure in Form 1-A to Exchange Act
registration without filing Form 10 or providing all the information
otherwise called for by Form 10 or Form S-1? Alternatively, while not
currently proposed, should simplified Exchange Act registration be
available only for issuers that prepare an offering circular based on
Part I of Form S-1?
104. What effect, if any, would the ongoing reporting obligations
of Section 13 of the Exchange Act have on an issuer considering the
potential use of Form 8-A in conjunction with a Regulation A offering
as the means by which to become an Exchange Act reporting issuer? Would
ongoing reporting under Section 13 of the Exchange Act be an attractive
alternative for Regulation A issuers? Or some subset of Regulation A
issuers? Please explain.
105. While not currently proposed, should we make Form 8-A
available in connection with issuers that are subject to ongoing
reporting requirements under Regulation A? Why or why not? Do the
proposed ongoing reporting requirements in Regulation A, in addition to
the requirement to meet the listing standards of, and be certified by,
a national securities exchange provide an adequate justification for
the extension of the Form 8-A accommodation to issuers subject to such
an obligation? \439\ Or should we provide a different means of
simplified Exchange Act registration for issuers subject to an ongoing
reporting obligation under Regulation A? Please explain.
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\439\ See discussion of proposed Regulation A ongoing reporting
requirements in Section II.E. above.
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106. Would encouraging the development of ``venture exchanges'' or
other trading venues that are focused on attracting such issuers
facilitate secondary market trading in the securities of Regulation A
issuers? If so, how? How could the Commission adjust the regulatory
regime to provide for a more viable secondary market for small issuers,
with sufficient participation by liquidity providers, that maintains
investor protections and fair and orderly markets?
4. Exit Report on Form 1-Z
a. Summary Information on Terminated or Completed Offerings
As discussed in Section II.E.1. above, we propose to rescind Form
2-A, but to continue to require Regulation A issuers to file the
information generally disclosed in Form 2-A with the Commission
electronically on EDGAR. Consistent with the related portion of
proposed new Form 1-K,\440\ the Form 2-A information would be converted
into an online XML-based fillable form with indicator boxes or buttons
and text boxes and filed electronically with the Commission as Part I
of proposed new Form 1-Z (exit report). Issuers conducting Tier 1
offerings would be required to provide this information on Form 1-Z not
later 30 calendar days after termination or completion of the offering,
while issuers conducting Tier 2 offerings would be required to provide
this information on Form 1-Z at the time of filing the exit report, if
not previously provided on Form 1-K as part of their annual
report.\441\ The summary offering information disclosed on Form 1-Z
would be publicly available on EDGAR, but not otherwise required to be
distributed to investors.
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\440\ See also discussion in Section II.C.1. (Electronic Filing;
Delivery Requirements) and Section II.C.3.a. (Part I (Notification))
above.
\441\ See Section II.E.1.a. above for a discussion of the
requirements for proposed new Form 1-K.
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The XML-based fillable form would enable issuers to provide
information in a convenient medium and capture relevant data about the
recently terminated or completed Regulation A offering. As with the
related portions of Form 1-K discussed above, the fillable form would
be available online and not require issuers to obtain specialty
software. The summary information disclosed would, however, facilitate
analysis of Regulation A offerings by the Commission, other regulators,
third-party data providers, and market participants. Additionally,
facilitating the capture of important summary information about an
offering would enable the Commission to monitor the use and
effectiveness of Regulation A as a capital formation tool.
As noted above in the related proposals for Form 1-K, the summary
information collected in Form 1-Z would include the date the offering
was qualified and commenced, the number of securities qualified, the
number of securities sold in the offering, the price of the securities,
any fees associated with the offering, and the net proceeds to the
issuer.
b. Termination or Suspension of Tier 2 Disclosure Obligations
In light of the proposed ongoing reporting obligations for Tier 2
offerings, we are proposing to permit issuers that conduct a Tier 2
offering to terminate or suspend their ongoing reporting obligations on
a basis similar to the provisions that allow issuers to suspend their
ongoing reporting obligations under Section 13 and Section 15(d) of the
Exchange Act.\442\ We acknowledge that, similar to the Exchange Act
reporting context, there may be circumstances when an issuer would like
to exit the reporting system. We received a comment letter that
suggested we adopt a provision similar to Section 15(d) of the
Securities Act that would permit an issuer to automatically
[[Page 3965]]
terminate its Regulation A reporting obligation as to any fiscal year,
other than the year in which the offering was made, if at the beginning
of such fiscal year, the securities of the class sold in reliance on
Regulation A are held of record by fewer than 300 persons.\443\ We
propose to permit an issuer in a Tier 2 offering that has filed all
ongoing reports required by Regulation A for the shorter of (i) the
period since the issuer became subject to such reporting obligation, or
(ii) its most recent three fiscal years and the portion of the current
year preceding the date of filing Form 1-Z to immediately suspend its
ongoing reporting obligation under Regulation A at any time after
completing reporting for the fiscal year in which the offering
statement was qualified, if the securities of each class to which the
offering statement relates are held of record by fewer than 300 persons
and offers or sales made in reliance on a qualified offering statement
are not ongoing.\444\ In such circumstances, an issuer's obligation to
continue to file ongoing reports in a Tier 2 offering under Regulation
A would be suspended immediately upon the filing of a notice to the
Commission on Part II of proposed new Form 1-Z. A manually-signed copy
of the Form 1-Z would have to be executed by the issuer and related
signatories before or at the time of filing and retained by the issuer
for a period of five years.\445\ Issuers would be required to produce
the manually signed copy to the Commission, upon request.\446\
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\442\ See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange
Act Rule 12h-3, 17 CFR 240.12h-3.
\443\ ABA Letter.
\444\ See proposed Rule 257(d)(2).
\445\ See Instruction to proposed Form 1-Z.
\446\ Id.
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We further propose that issuers' obligations to file ongoing
reports in a Tier 2 offering under Regulation A would be automatically
suspended upon registration of a class of securities under Section 12
of the Exchange Act or registration of an offering of securities under
the Securities Act, such that Exchange Act reporting obligations would
always supersede ongoing reporting obligations under Regulation A. If
an issuer terminates or suspends its reporting obligations under the
Exchange Act and the issuer would be eligible to suspend its Regulation
A reporting obligation by filing a Form 1-Z at that time, the ongoing
reporting obligations would terminate automatically and no Form 1-Z
filing would be required to terminate the issuer's Regulation A
reporting obligation. If the issuer would not be eligible to file a
Form 1-Z at that time, it would need to recommence its Regulation A
reporting with the report covering any financial period not completely
covered by a registration statement or Exchange Act report.\447\
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\447\ See proposed Rule 257(d)(1) and (e).
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Request for Comment
107. As currently proposed, should we modify the current
requirement in Regulation A that issuers file a Form 2-A to report
sales and the termination of sales made under Regulation A to instead
require issuers conducting Tier 1 offerings to report such information
only after the termination or completion of the offering on Part I of
proposed new Form 1-Z and issuers in Tier 2 offerings to report such
information on either Part I of Form 1-Z or proposed new Form 1-K? Why
or why not?
108. Is there any additional information about an issuer's recently
completed or terminated Regulation A offering that should be required
to be disclosed? Alternatively, should we not require any disclosure of
summary information about an issuer's recently completed Regulation A
offering? Why or why not?
109. Should we permit issuers to suspend their reporting
obligations in a Tier 2 offering under Regulation A, as proposed, when
they take on Exchange Act reporting obligations? Should we otherwise
alter the proposed provisions regarding the suspension or termination
of an issuer's ongoing reporting obligations in Tier 2 offering? Should
issuers in Tier 2 offerings be able to suspend or terminate ongoing
reporting under Regulation A on some other basis? For example, should
we permit issuers to terminate their ongoing reporting obligations
immediately upon completion of the offering, provided, at that time,
they have less than 300 holders of record? Why or why not? Should we
require a Form 1-Z filing for issuers that would be eligible to
immediately file that form upon the suspension or termination of their
Exchange Act reporting obligations?
110. Should we alter the number of record holders below which an
issuer in a Tier 2 offering can suspend or terminate its ongoing
reporting obligations from the proposed 300 record holders? Or should
we alter the threshold below which certain types of issuers that are
subject to a Tier 2 ongoing reporting obligation would be able to
suspend or terminate reporting (e.g., 2,000 or 500 holders of record)?
For example, similar to the provisions of Title VI of the JOBS Act,
should we allow banks and bank holding companies to terminate their
ongoing Regulation A reporting obligations by falling below a higher
threshold of record holders (e.g., 1,200 holders of record)? \448\ Or
should we increase or decrease the number of record holders below which
all issuers in Tier 2 offerings, irrespective of issuer-type, could
suspend or terminate their ongoing reporting obligations? Why or why
not? Please explain.
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\448\ See Title VI of the JOBS Act, Public Law 112-106,--601
(Capital Expansion).
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F. Insignificant Deviations From a Term, Condition or Requirement
Currently, Rule 260 provides that certain insignificant deviations
from a term, condition or requirement of Regulation A will not result
in the issuer's loss of the exemption from registration under Section 5
of the Securities Act.\449\ Under Rule 260, the provisions of current
Rule(s) 251(a) (issuer eligibility), 251(b) (aggregate offering price),
251(d)(1) (offers) and 251(d)(3) (continuous or delayed offerings) of
Regulation A are, however, deemed to be significant to the offering as
a whole, and any deviations from these provisions would result in the
issuer's loss of the exemption. We have not received any comment on
Rule 260, nor do we propose to amend the rule. We do, however, solicit
comment on whether the provision should be amended to, for example,
alter the list of significant deviations.
---------------------------------------------------------------------------
\449\ 17 CFR 230.260.
---------------------------------------------------------------------------
Request for Comment
111. Should we amend Rule 260 to alter the list of deviations that
would be deemed significant to the offering as a whole? Why or why not?
If so, which provision(s) should be amended? Alternatively, are there
other provisions within Rule 260 that should be amended? If so, please
state which provisions and describe why they should be amended.
G. Bad Actor Disqualification
Under Securities Act Section 3(b)(2)(G)(ii), the Commission has
discretion to issue rules disqualifying certain ``felons and other `bad
actors' '' from using the new exemption. Such rules, if adopted, must
be ``substantially similar'' to those adopted to implement Section 926
of the Dodd-Frank Act, which requires the Commission to adopt
disqualification rules for securities offerings under Rule 506 of
Regulation D. The Commission adopted the disqualification provisions
required by Section 926 in Rule 506(d), and a
[[Page 3966]]
related disclosure requirement in Rule 506(e).\450\
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\450\ SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]. The
Commission recently proposed rules substantially similar to those
adopted pursuant Section 926 of the Dodd-Frank Act in the proposing
release for securities-based crowdfunding transactions under Title
III of the JOBS Act. See SEC Rel. No. 33-9470, at 284.
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All commenters on potential ``bad actor'' disqualification
provisions in the context of Title IV of the JOBS Act suggest that the
Commission apply the same standards for bad actor disqualification
under Regulation A as under Rule 506.\451\ One commenter further
suggested that the Commission adopt uniform disqualification rules
across Regulation D, Section 4(a)(5), and the expanded Regulation A
exemption.\452\
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\451\ ABA Letter; WR Hambrecht + Co. Letter; NASAA Letter 2;
Kaplan Voekler Letter 2. See also Final Report of the 31st Annual
SEC Government-Business Forum on Small Business Capital Formation,
Recommendation 13B, at 25 (Nov. 15, 2012) (available at: http://www.sec.gov/info/smallbus/gbfor31.pdf).
\452\ NASAA Letter 2.
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Regulation A currently provides for the disqualification of ``bad
actors'' in Rule 262.\453\ We propose to amend Rule 262 to include bad
actor disqualification provisions in substantially the same form as
recently adopted under Rule 506(d), but without the categories of
covered persons specific to fund issuers, which would not be eligible
to use Regulation A under the proposal.\454\ Such ``bad actor''
disqualification requirements would disqualify securities offerings
from reliance on Regulation A if the issuer or other relevant persons
(such as underwriters, placement agents, and the directors, officers
and significant shareholders of the issuer) have been convicted of, or
are subject to court or administrative sanctions for, securities fraud
or other violations of specified laws.
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\453\ 17 CFR 230.262.
\454\ See proposed Rule 262.
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Under the proposed amendment, the disqualification provisions would
apply to the following categories of persons (``covered persons''):
The issuer and any predecessor of the issuer or affiliated
issuer;
any director, executive officer, or other officer
participating in the offering, general partner, or managing member of
the issuer;
any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power;
any promoter connected with the issuer in any capacity at
the time of filing of the offering statement or any offers or sales
after qualification;
any underwriter or person that has been or will be paid
(directly or indirectly) remuneration for solicitation of purchasers in
connection with sales of securities in the offering;
any general partner or managing member of any such
solicitor; and
any director, executive officer or other officer
participating in the offering of any such underwriter or solicitor or
of a general partner or managing member of any such underwriter or
compensated solicitor.
An offering would be disqualified from reliance on the Regulation A
exemption if any covered person had been the subject of the following
disqualifying events:
Criminal convictions (felony or misdemeanor) entered
within five years before the filing of the offering statement in the
case of issuers, their predecessors and affiliated issuers, and ten
years in the case of other covered persons:
In connection with the purchase or sale of any security;
involving the making of a false filing with the
Commission; or
arising out of the conduct of the business of an
underwriter, broker, dealer, municipal securities dealer, investment
adviser, or paid solicitor of purchasers of securities; \455\
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\455\ See proposed Rule 262(a)(1).
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Court injunctions and restraining orders, including any
order, judgment, or decree of any court of competent jurisdiction,
entered no more than five years before the filing of the offering
statement, that, at the time of such filing, restrains or enjoins such
person from engaging or continuing to engage in any conduct or
practice:
In connection with the purchase or sale of any security;
involving the making of a false filing with the
Commission; or
arising out of the conduct of the business of an
underwriter, broker, dealer, municipal securities dealer, investment
adviser, or paid solicitor of purchasers of securities; \456\
---------------------------------------------------------------------------
\456\ See proposed Rule 262(a)(2).
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Final orders issued by state securities, banking, credit
union, and insurance regulators, federal banking regulators, the U.S.
Commodity Futures Trading Commission, and the National Credit Union
Administration that at the time of filing of the offering statement
either:
Bar the covered person from association with any entity
regulated by the regulator issuing the order, or from engaging in the
business of securities, insurance or banking, or from savings
association or credit union activities; or
are based on a violation of any law or regulation that
prohibits fraudulent, manipulative, or deceptive conduct within the
last ten years; \457\
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\457\ See proposed Rule 262(a)(3).
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Commission disciplinary orders entered pursuant to Section
15(b) or 15(B)(c) of the Exchange Act or Section 203(e) or (f) of the
Investment Advisers Act of 1940 (the ``Advisers Act'') that, at the
time of filing of the offering statement:
Suspend or revoke a person's registration as a broker,
dealer, municipal securities dealer, or investment adviser;
place limitations on the activities, functions, or
operations of such person; or
bar such person from being associated with any entity or
from participating in the offering of any penny stock; \458\
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\458\ See proposed Rule 262(a)(4).
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Commission cease and desist orders entered no more than
five years before the filing of the offering statement that, at the
time of such filing, order the person to cease and desist from
committing or causing a violation or future violation of any scienter-
based anti-fraud provision of the federal securities laws or Section 5
of the Securities Act; \459\
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\459\ See proposed Rule 262(a)(5).
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Suspension or expulsion from membership in, or suspension
or a bar from association with a member of, an SRO, i.e., a registered
national securities exchange or a registered national or affiliated
securities association for any act or omission to act constituting
conduct inconsistent with just and equitable principles of trade; \460\
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\460\ See proposed Rule 262(a)(6).
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Stop orders applicable to a registration statement and
orders suspending the Regulation A exemption for an offering statement
that an issuer filed or in which the person was named as an underwriter
no more than five years before the filing of the offering statement,
and proceedings pending at the time of such filing as to whether such a
stop or suspension order should be issued; \461\ and
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\461\ See proposed Rule 262(a)(7).
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U.S. Postal Service false representation orders including
temporary or preliminary orders entered no more than five years before
the filing of the offering statement.\462\
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\462\ See proposed Rule 262(a)(8).
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The proposed triggering events are substantially the same as the
triggering events included in Rule 506(d).\463\ We believe that
creating a uniform set of
[[Page 3967]]
bad actor triggering events should simplify diligence, particularly for
issuers that may engage in different types of exempt offerings. It
could also foster the creation of third-party databases or other data
sources regarding bad actors that could aid issuers in conducting
diligence. As noted above, however, the proposed rules in Regulation A
would specify that an order must bar the covered person at the time of
filing \464\ of the offering statement, as opposed to the requirement
in Rule 506(d) that the order must bar the covered person at the time
of the relevant sale. This clarification accords with the current
provisions of Rule 262 and is appropriate in the context of Regulation
A because there is no filing requirement before the time of first sale
in Rule 506.\465\
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\463\ 17 CFR 230.506(d).
\464\ In order to simplify the application of the rules, we do
not propose to require that an order bar the covered person at the
time of non-public submission of the offering statement. As a
practical matter, if a covered person is involved with a proposed
Regulation A offering at the time of non-public submission or
filing, the issuer would be ineligible to qualify the offering in
reliance on Regulation A under either circumstance.
\465\ Under Rule 503 of Regulation D, issuers must file a notice
of sales on Form D no later than 15 calendar days after the first
sale of securities. 17 CFR 230.503(a).
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We further propose a reasonable care exception under Regulation A
on a basis consistent with Rule 506.\466\ Under proposed Rule
262(b)(4), an issuer would not lose the benefit of the Regulation A
exemption if it could show that it did not know, and in the exercise of
reasonable care could not have known, of the existence of a
disqualification.
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\466\ See proposed Rule 262(b)(4).
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Proposed Rule 262 is very similar in substance to existing Rule
262, although the format is different. In its current form, Rule 262
provides three different categories of offering participants and
related persons, with different disqualification triggers for each
category. The amendments we propose are based on a simplified framework
of potentially disqualified persons and disqualifying events, which
aligns with Rule 506(d). The covered persons are the same as under
current Rule 262, except that the proposal includes references to
managing members of limited liability companies and, like Rule 506(d),
would cover compensated solicitors of investors in addition to
underwriters; executive officers and other officers participating in
the offering, rather than all officers, of the issuer and any
underwriter or compensated solicitor; and beneficial owners of 20% or
more of the issuer's outstanding voting equity securities, calculated
on the basis of voting power, rather than beneficial owners of 10% of
any class of the issuer's equity securities. The proposals would also
add two new disqualification triggers: proposed Rule 262(a)(3), which
covers final orders and bars of certain state and other federal
regulators, and proposed Rule 262(a)(5), which covers Commission cease-
and-desist orders relating to violations of scienter-based anti-fraud
provisions of the federal securities laws or Section 5 of the
Securities Act. Finally, the proposals include a ``reasonable care''
exception modeled on the Rule 506(d) provision. We believe these
changes to Rule 262 are appropriate in light of the Section
3(b)(2)(G)(ii) mandate and the benefits of creating a more uniform set
of standards for all exemptions that include bad actor
disqualification.\467\
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\467\ If adopted, the amendments to Rule 262 would also
effectively modify the bad actor disqualification provisions of Rule
505 of Regulation D, which incorporate Rule 262 by reference. We are
proposing technical amendments to Rule 505 to update the citations
to Rule 262.
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Under the proposal, offerings that would have been disqualified
from reliance on Regulation A under Rule 262 as currently in effect
would continue to be disqualified. Triggering events that are not
currently covered by Rule 262--namely, the events specified in proposed
Rule 262(a)(3) and 262(a)(5)--and that pre-date effectiveness of any
rule amendments would not cause disqualification, but would be required
to be disclosed on a basis consistent with new Rule 506(e).
Specifically, issuers would be required to indicate in Part I of Form
1-A that disclosure of triggering events that would have triggered
disqualification, but occurred before the effective date of the
Regulation A amendments, will be provided in Part II of Form 1-A.\468\
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\468\ As discussed in Section II.C.3.a. above, Part I of Form 1-
A focuses, in part, on issuer eligibility, and forces issuers to
make an eligibility determination at the outset of filling out Form
1-A, while also facilitating quick eligibility determinations by
Commission staff reviewing Regulation A offering materials.
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In addition to soliciting comment on the proposed amendments to
Rule 262, we are also soliciting comment more broadly on the
interpretation of the phrase ``voting equity securities,'' as it
appears in ``any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power,'' a category of covered persons in Rule 506(d) and proposed Rule
201(r)(2) of Regulation Crowdfunding, as well as in Rule 262, as
proposed to be amended. When we adopted Rule 506(d), we did not define
``voting equity securities,'' but rather indicated that our initial
intention would be to consider securities as voting equity securities
if ``securityholders have or share the ability, either currently or on
a contingent basis, to control or significantly influence the
management and policies of the issuer through the exercise of a voting
right.'' \469\ In light of numerous questions and concerns raised about
the implications of such an interpretation, however, we are
reconsidering our initial views. In particular, we are concerned that
our initial interpretation may be overbroad, and that a ``bright-line''
test may be more workable and would facilitate compliance. We are
therefore soliciting comment about alternative interpretations of the
phrase ``voting equity securities'' as it appears in current and
proposed bad actor disqualification rules.
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\469\ SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729], text
accompanying fn. 62.
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Request for Comment
112. Should we amend Rule 262, as proposed, to align with Rule
506(d)? Are there proposed amendments to the covered persons or
disqualification triggering events of Rule 262 that we should not make?
Why not? Are there other amendments consistent with the statutory
mandate of Section 3(b)(2)(G)(ii) that we should consider?
113. How should the phrase ``voting equity securities'' as it
appears in ``any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power'' in Rule 506(d), proposed Rule 201(r)(2) of Regulation
Crowdfunding, and Rule 262 as proposed to be amended, be interpreted?
Should we interpret it consistently with the definition of ``voting
securities'' in Rule 405, as equity securities ``the holders of which
are presently entitled to vote for the election of directors''? Are
there factors other than the current ability to vote for directors (or
their equivalents) that should be taken into account?
H. Relationship With State Securities Law
Commenters have suggested that the cost of state securities law
compliance, which they identify as an obstacle to the use of existing
Regulation A, would discourage market participants from using the new
exemption. In addition, as discussed previously, Section 402 of the
JOBS Act required the Comptroller General to conduct a study on the
impact of state ``blue sky'' laws on
[[Page 3968]]
offerings conducted under Regulation A, and to report its findings to
Congress. The resulting GAO report to Congress indicates that state
securities laws were among several central factors that may have
contributed to the lack of use of Regulation A.\470\
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\470\ See Section I.C. above.
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NASAA recently proposed a coordinated review process for Regulation
A offerings, which, if implemented, could potentially reduce the state
law disclosure and compliance obligations of Regulation A issuers.\471\
As proposed, the coordinated review program would permit issuers to
file Regulation A offering materials with the states using an
electronic filing depository system currently in development by NASAA.
The administrator of the coordinated review program would select a lead
disclosure examiner and, where applicable, a lead merit examiner, which
would be responsible for drafting and circulating a comment letter to
the participating jurisdictions, and for seeking resolution of those
comments with the issuer and its counsel. The draft review protocol
also contemplates that certain NASAA statements of policy would be
modified or would not apply to offerings undergoing coordinated review.
There are a number of open questions about the proposal: Whether NASAA
will adopt a coordinated review program as proposed; if the proposal
were to be adopted in the future, how many states would elect to
participate; when such a program, if adopted, could be implemented; and
if adopted as proposed, whether the protocol would address the concerns
related to state securities law compliance identified by the GAO and
commenters.\472\ NASAA has stated that its members broadly support the
proposed program and would be able to implement it promptly.\473\
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\471\ See NASAA Release, dated October 30, 2013, Notice of
Request for Public Comment: Proposed Coordinated Review Program for
Section 3(b)(2) Offerings (the comment period for NASAA's proposal
was scheduled to close on November 30, 2013), available at: http://www.nasaa.org/27427/notice-request-public-comment-proposed-coordinated-review-program-section-3b2-offerings/.
\472\ See, e.g., GAO-12-839, at 14 (discussing the varying
standards and degrees of stringency applied during the qualification
and review process in merit review states); see also Paul Hastings
Letter.
\473\ Letter from Andrea Seidt, President, NASAA, December 12,
2013 (``NASAA Letter 3''). If the proposed coordinated review
program were not adopted by every state, we could consider adoption
of a ``qualified purchaser'' definition that would provide
preemption as to the non-participating states.
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In the absence of any such coordinated review, issuers would be
required to analyze and comply with separate registration or
qualification requirements, or to identify and comply with applicable
exemptions, in each state in which they intend to offer or sell
securities under revised Regulation A, as is currently the case under
Regulation A. Depending on the nature of any such coordinated review
process, state securities laws could impose additional requirements and
limitations on offerings beyond those imposed by Regulation A, either
currently or as proposed to be amended.\474\
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\474\ For example, under the proposed coordinated review
protocol, Regulation A offerings would be subject to most aspects of
current NASAA policies regarding lock-up of shares held by promoters
and disclosure and procedural requirements for loans and other
material transactions involving issuer affiliates.
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As a result, most commenters strongly supported some form of state
securities law preemption.\475\ Section 18 of the Securities Act
generally provides for exemption from state law registration and
qualification requirements for certain categories of securities,
defined as ``covered securities.'' \476\ Although Section 401(b) of the
JOBS Act does not itself exempt offerings made under Section 3(b)(2)
and the related rules from state law registration and qualification
requirements, it did add Section 18(b)(4)(D) to the Securities Act.
That provision states that Section 3(b)(2) securities are covered
securities for purposes of Section 18 if they are ``offered or sold on
a national securities exchange'' or ``offered or sold to a qualified
purchaser, as defined by the Commission pursuant to [Section 18(b)(3)]
with respect to that purchase or sale.'' Section 18(b)(3) provides that
``the Commission may define the term `qualified purchaser' differently
with respect to different categories of securities, consistent with the
public interest and the protection of investors.''
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\475\ Karr Tuttle Letter; Letter from Robert J. Tresslar, Title
Company Data Provider, Property Tax Lien Investor, June 28, 2012
``Tresslar Letter''; McCarter & English Letter; ABA Letter; Letter
from Paul Getty, Managing Director, Satwik Ventures LLC, Nov. 7,
2012 (``Satwik Ventures Letter''); Campbell Letter; WR Hambrecht +
Co. Letter; Kaplan Voekler Letter 2; Fallbrook Letter; Paul Hastings
Letter. See also Final Report of the 29th Annual SEC Government-
Business Forum on Small Business Capital Formation, Recommendation
7B, at 19 (Nov. 18, 2010) (available at: http://www.sec.gov/info/smallbus/gbfor29.pdf); Final Report of the 30th Annual SEC
Government-Business Forum on Small Business Capital Formation,
Recommendation 8, at 30 (Nov. 17, 2011) (available at: http://www.sec.gov/info/smallbus/gbfor30.pdf); Final Report of the 31st
Annual SEC Government-Business Forum on Small Business Capital
Formation, Recommendations 12 and 14, at 25 (Nov. 15, 2012)
(available at: http://www.sec.gov/info/smallbus/gbfor31.pdf); ECTF
Report (Recommendations 1.2, 1.3, and 1.4).
\476\ See Section 18(c), 15 U.S.C. 77r(c). State securities
regulators retain authority to impose certain filing and fee
requirements and general antifraud enforcement authority with
respect to covered securities. See Section 18(c), 15 U.S.C. 77r(c).
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Some commenters suggested that the Commission preempt state
securities laws by permitting Section 3(b)(2) securities to be listed
and traded on a national securities exchange,\477\ others suggested
preemption by means of a ``qualified purchaser'' definition,\478\ while
others still suggested some combination of both approaches.\479\
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\477\ See, e.g., Karr Tuttle Letter.
\478\ See, e.g., Tresslar Letter; McCarter & English Letter;
Campbell Letter; Kaplan Voekler Letter 2; see also Final Report of
the 31st Annual SEC Government-Business Forum on Small Business
Capital Formation, Recommendations 12 and 14, at 25 (Nov. 15, 2012);
ECTF Report (Recommendation 1.3).
\479\ See, e.g., ABA Letter; Satwik Ventures Letter; WR
Hambrecht + Co. Letter.
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Commenters advocating listing and trading of Section 3(b)(2)
securities on a national securities exchange have suggested we permit
such listing without attendant registration of the securities under
Section 12(b) of the Exchange Act \480\ or through short-form Exchange
Act registration on Form 8-A.\481\ Commission action would not be
required to effect the preemption of state securities laws for
Regulation A securities that are listed or traded on an exchange. Under
Section 18(b)(1) of the Securities Act, any securities that are listed
or authorized for listing on a national securities exchange are exempt
from state securities law registration and qualification
requirements.\482\ Section 401(b) of the JOBS Act in effect restated
this provision specifically for Regulation A securities, by adding
Section 18(b)(4)(D)(i) to the Securities Act.\483\ We expect, however,
that this approach to preemption will have limited impact, because many
Regulation A issuers would not meet the standards for listing on a
national securities exchange.\484\
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\480\ Karr Tuttle Letter (suggesting a lower tier of exchange-
listed security).
\481\ WR Hambrecht + Co. Letter (suggesting upper tier exchange
listing, but on a shorter form Exchange Act registration statement);
see also Final Report of the 29th Annual SEC Government-Business
Forum on Small Business Capital Formation, Recommendation 5, at 18
(Nov. 18, 2010) (available at: http://www.sec.gov/info/smallbus/gbfor29.pdf).
\482\ Section 18(b)(1), 15 U.S.C. 77r(b)(1).
\483\ Section 18(b)(4)(D)(i) uses the language ``offered or sold
on a national securities exchange,'' whereas Section 18(b)(1) uses
the language, ``listed, or authorized for listing, on a national
securities exchange.''
\484\ See also ECTF Report. As discussed in Section II.E.3.
above, we solicit comment on whether we should facilitate the
listing of Regulation A securities on a national securities exchange
by permitting issuers to file a short-form Exchange Act registration
statement on Form 8-A concurrently with the qualification of a
Regulation A offering statement.
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[[Page 3969]]
From those commenters advocating preemption through a qualified
purchaser definition, suggested definitions included:
Any purchaser in a Regulation A offering; \485\
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\485\ Campbell Letter.
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Any purchaser meeting a specified net worth standard, set
at or lower than the current ``accredited investor'' definition in Rule
501 of Regulation D; \486\
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\486\ Tresslar Letter; McCarter & English Letter; ABA Letter;
Satwik Ventures Letter; WR Hambrecht + Co. Letter. See also Final
Report of the 31st Annual SEC Government-Business Forum on Small
Business Capital Formation, Recommendation 14, at 25 (Nov. 15, 2012)
(available at: http://www.sec.gov/info/smallbus/gbfor31.pdf).
---------------------------------------------------------------------------
Any purchaser meeting a net worth or income test based on
thresholds below accredited investor thresholds, combined with an
investment cap; \487\ or
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\487\ Kaplan Voekler Letter 2.
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Any purchaser who purchased through a registered broker-
dealer.\488\
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\488\ ABA Letter; WR Hambrecht + Co. Letter; Paul Hastings
Letter (suggesting that, in addition to primary offerings, the
qualified purchaser definition apply in connection with secondary
trading in Regulation A securities, where the issuer is subject to
an ongoing reporting obligation under Regulation A); see also ECTF
Report (Recommendation 1.2).
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One commenter stated that it did not object to the Commission's
defining ``qualified purchaser'' for Section 3(b)(2) securities, but
objected to a definition based on transactions effected through a
broker-dealer or on purchaser criteria commensurate with or less
stringent than current ``accredited investor'' thresholds.\489\ In its
view, Congress intended a qualified purchaser definition under Section
18(b)(3) of the Securities Act to require investor qualifications
greater than those provided in the accredited investor definition, and
sales through broker-dealers do not provide adequate protections.\490\
This commenter suggested that ``qualified purchaser'' could be defined
based on existing definitions of ``qualified purchaser'' in the
Investment Company Act \491\ or ``qualified client'' in Rule 205 under
the Investment Advisers Act.\492\
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\489\ NASAA Letter 2; see also NASAA Letter 3 (indicating
NASAA's concerns with the Commission's use of either the ``qualified
purchaser'' or ``accredited investor'' definition in the context of
implementing rules for Section 3(b)(2) of the Securities Act).
\490\ NASAA Letter 2; see also NASAA Letter 3. Section 18(b)(3)
was enacted under the National Securities Markets Improvement Act of
1996 (NSMIA), Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
\491\ 15 U.S.C. 80a-2(a)(51). For natural persons to be
``qualified purchasers'' under this definition, they must own at
least $5 million in investment assets.
\492\ 17 CFR 275.205-3. For natural persons to be ``qualified
clients,'' they must have at least $1 million in assets under
management with the investment adviser or have a net worth of more
than $2 million, excluding the value of their primary residence.
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In light of the issues raised by commenters and in the GAO study,
we are concerned that the costs associated with state securities law
compliance may deter issuers from using Regulation A, even if the
increased cap on offering size and other proposals intended to make
Regulation A more workable are implemented. This could significantly
limit the possible impact of an amended Regulation A as a tool for
capital formation. We believe that the addition of Section
18(b)(4)(D)(ii) of the Securities Act, which specifically refers to a
``qualified purchaser'' definition that would apply to transactions
under the new 3(b)(2) exemption, suggests that it is appropriate for us
to consider including such a definition in our rulemaking to implement
Title IV of the JOBS Act.
We also believe that Regulation A, as we propose to amend it, would
provide substantial protections to purchasers. Under the proposed
amendments, a Regulation A offering statement would continue to provide
substantive narrative and financial disclosures about the issuer,
including an MD&A discussion. The proposed electronic filing
requirement, including the structured data in Part I of the offering
circular, would provide ready access to key information about the
issuer and the offering, and would facilitate analysis of the offering
in relation to comparable opportunities. We expect that Regulation A
offering statements would continue to receive the same level of
Commission staff review as registration statements. Additional investor
protections would be afforded by Regulation A's limitations on eligible
issuers and ``bad actor'' disqualification provisions, which we are
proposing to expand.
The requirements for Tier 2 offerings would provide further
protection, because the financial statements contained in the offering
circular would be required to be audited, the issuer would have an
obligation to provide ongoing reporting to purchasers, and such
purchasers would be limited in the percentage of income or net worth
that could be invested in a single offering. Ongoing reporting would
assure a continuing flow of information to investors and could support
the development of secondary markets for Regulation A securities,
offering the prospect of reduced investor risk through liquidity.
The approach to investor protection for Tier 2 of Regulation A is
in some ways similar to the approach taken under Title III of the JOBS
Act and our recently proposed rules for securities-based crowdfunding
transactions under Section 4(a)(6) of the Securities Act.\493\ In
Section 4(a)(6), Congress outlined a new exemption for securities-based
crowdfunding transactions intended to take advantage of the internet
and social media to facilitate capital-raising by the general public,
or crowd. In that provision, Congress directly preempted state
securities laws relying, in part, on a variety of investor protections,
including disclosure requirements, the use of regulated intermediaries
and limitations on the amount of securities an investor could acquire
through this type of offering required by the JOBS Act.\494\
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\493\ See Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C.
77d(a)(6)(ii), and SEC Rel. No. 33-9470.
\494\ See, generally, the requirements for issuers and
intermediaries and state securities law preemption set forth in
Title III of the JOBS Act, Public Law 112-106, 126 Stat. 306,
Sec. Sec. 301-305.
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Like the proposed provisions for securities-based crowdfunding,
Regulation A--both as currently in effect and as proposed to be
amended--is available to all types of investors, and therefore we
believe it should include certain appropriate investor protections. We
believe that the substantial investor protections embedded in the
issuer eligibility conditions, limitations on investment, disclosure
requirements, qualification process and ongoing reporting requirements
of proposed Tier 2 of Regulation A, in combination, could address
potential concerns that may arise as a result of the preemption of
state securities law registration and qualification requirements.
We therefore propose to define the term ``qualified purchaser'' for
certain purposes under Regulation A. As proposed, ``qualified
purchasers'' in a Regulation A offering would consist of:
(i) All offerees; and
(ii) All purchasers in a Tier 2 offering.\495\
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\495\ See Proposed Rule 256.
We believe that this approach would protect offerees and investors in
Regulation A securities, while streamlining compliance and reducing
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transaction costs.
We believe it would be appropriate to preempt blue sky requirements
with respect to all offerees in a Regulation A offering, in order to
make Regulation A a workable approach to capital raising. Issuers
relying on Regulation A should be able to communicate with potential
investors about their offerings using the
[[Page 3970]]
internet, social media, and other means of widespread communication,
without concern that such communications might trigger registration
requirements under state law. We believe this is consistent with
Section 3(b)(2)(E) of the Securities Act and the ``testing the waters''
provisions of Rule 254 of existing Regulation A, which we are proposing
to expand, and that it would result in reduced costs to issuers seeking
capital while maintaining investor protections.\496\
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\496\ We understand that some state securities regulators do not
require the registration of broadly advertised offerings such as
internet offerings, if the advertisement indicates, directly or
indirectly, that the offering is not available to residents of that
state. See, e.g., Washington State Dep't of Financial Institutions,
Securities Act Policy Statement--16, available at: http://dfi.wa.gov/sd/securitiespolicy.htm#ps-16; see also NASAA Reports ]
7,040 (regarding NASAA resolution, dated January 7, 1996, which
encourages states to take appropriate steps to exempt from
securities registration offers of securities over the Internet).
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Alternatively, we could import existing ``qualified purchaser''
definitions from other regulatory regimes. These other regimes may not,
however, account for the regulatory protections and limited offering
size of Regulation A, or the likelihood that issuers that target
investors meeting these other standards could choose to rely on other
Securities Act exemptions, such as Regulation D, rather than Regulation
A. We could also consider the involvement of a regulated intermediary
or advisor in a transaction as, or as part of, the basis for such a
definition. Such intermediaries may, however, increase costs to issuers
and investors without commensurate investor protection benefits.
Finally, we could consider a broad definition such that any purchaser
in any Regulation A offering would be treated as a ``qualified
purchaser.'' Our preliminary view is that the investment limitations,
enhanced disclosure and ongoing reporting obligations associated with
Tier 2 would meaningfully bolster the protections otherwise embedded in
Regulation A, and justify a difference in treatment to offerings
conducted pursuant to Tier 1.
We believe the proposed ``qualified purchaser'' definition for Tier
2 offerings would help to make Regulation A a more workable means of
capital formation. We are soliciting comment, however, on whether we
should adopt such a definition or an alternative definition and, if so,
what it should require. In particular, we are mindful that, if NASAA
and its members are able to implement a coordinated review program for
Regulation A offerings, the costs to issuers of state law registration
and qualification requirements and the time required for qualification
may be substantially lower in the future. We solicit comment below on
whether, rather than adopting a definition of ``qualified purchaser''
for Regulation A as proposed, we should wait to determine whether such
a coordinated review program can be finalized, adopted and successfully
implemented and, if so, whether such a program would sufficiently
address current concerns about the costs of blue sky compliance.\497\
We solicit comment on the extent to which state securities law
registration and qualification requirements may affect the use of
Regulation A, as proposed to be amended. We will also consult with the
states and consider any changes to the states' processes and
requirements for reviewing offerings before we adopt final amendments.
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\497\ If the proposed coordinated review program were not
adopted by every state, we could consider whether a ``qualified
purchaser'' definition that would provide preemption as to the non-
participating states would be appropriate.
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Request for Comment
114. Should we preempt state securities law registration and
qualification requirements for certain Regulation A offerings by
adopting a definition of ``qualified purchaser,'' as proposed? Why or
why not? Please explain. In responding to this question and the
questions below, please address both the practical implications of
preemption for capital formation and the impact on investor protection.
115. Is there any potential alternative approach by which we might
address the concern raised by commenters and the GAO that state
securities regulation poses a significant impediment to the use of
Regulation A? \498\ In particular, could NASAA's proposed coordinated
review program be effectively implemented in the near term? If NASAA
implements a coordinated review program, should we consider changes to
the proposed ``qualified purchaser'' definition or other provisions of
the proposed rules? Are there other methods to streamline state review,
such as a process based on review or qualification in a single state?
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\498\ See related discussion and requests for comment in Section
II.I. below.
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116. Does proposed Tier 2 of Regulation A include sufficient
investor protections to justify the preemption of state securities law
registration and qualification requirements for offerings sold to
``qualified purchasers,'' defined as proposed or otherwise? If not, are
there additional investor protections that would justify such
preemption? What are they?
117. As proposed, should we adopt a ``qualified purchaser''
definition for purposes of Regulation A to include all offerees and all
purchasers in a Tier 2 offering? Is it appropriate, as proposed, to
treat all offerees as qualified purchasers? Is it appropriate to treat
all purchasers in a Tier 2 offering as qualified purchasers, or should
we impose additional limitations (based on, for example, an income
threshold, a net worth threshold and/or an investment assets
threshold)? Should we base the definition of ``qualified purchasers''
on the Investment Company Act definition of that term, or on the
definition of ``qualified client'' under the Investment Advisers Act?
Alternatively, should we define all accredited investors as qualified
purchasers, as has been previously proposed? \499\ Why or why not?
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\499\ See SEC Rel. No. 33-8041 (Dec. 19, 2001) [66 FR 66839].
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118. Are there other approaches we should consider to defining
``qualified purchaser'' for Regulation A offerings? For example, should
we define ``qualified purchaser'' as any offeree or purchaser in a
Regulation A offering by an issuer that meets certain criteria--for
example, specified financial criteria or operating or other criteria
indicative of reduced risk? Or should we define it based on attributes
of the offering that may reduce risk to investors (e.g., firm
commitment underwritten offerings or offerings through a registered
broker-dealer)? Alternatively, should we consider a ``qualified
purchaser'' definition that reflects some attributes of the purchaser,
issuer and offering?
119. Should we consider defining ``qualified purchaser''
unconditionally, as all offerees and all purchasers in any Regulation A
offering? Would such a definition better address potential burdens to
capital formation under Regulation A? If so, how? Would such a
definition provide sufficient investor protections to support the
preemption of state securities law registration and qualification
requirements? If not, what would support unconditional preemption of
state securities laws? Please explain.
120. In addition to providing blue sky preemption for Tier 2
offerings, should we also consider providing preemption for some or all
resales of Regulation A securities? Would the need to comply with blue
sky laws prevent the development of a liquid secondary market for
Regulation A securities?
121. Would the preemption of state securities law registration and
[[Page 3971]]
qualification requirements provided by Section 18(b)(1) of the
Securities Act for securities that are listed or authorized for listing
on a national securities exchange be a viable option for many
Regulation A issuers? Why or why not?
I. Regulation A in Comparison to Other Methods of Capital Formation
As noted above, in developing the proposals, we have attempted to
create a workable exemption that both promotes small company capital
formation and provides for meaningful investor protections. In that
context, we are mindful that issuers have a range of possible
approaches to capital-raising, including Securities Act registration
and other exemptions from registration, such as the statutory exemption
under Section 4(a)(2) of the Securities Act, Rules 504, 505 and 506
under Regulation D \500\ and Section 4(a)(6) of the Securities Act and
the proposed rules for a crowdfunding exemption.\501\
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\500\ The Regulation D market is large, in recent years
approaching the size of the registered market. See Vladimir Ivanov
and Scott Bauguess, Capital Raising in the U.S.: An Analysis of
Unregistered Offerings Using the Regulation D Exemption, 2009-2012
(July 2013), available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
\501\ See SEC Rel. No. 33-9470.
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Request for Comment
122. How does Regulation A, as proposed to be amended, compare--in
terms of the type of companies that may use the exemption, its
requirements, and its potential effectiveness--to other methods of
capital raising that issuers may choose for small offerings? How would
it compare to the proposed crowdfunding exemption? Either by reference
to today's proposals or more generally, are there ways in which
Regulation A could be amended that would make it a more usable
exemption?
J. Additional Considerations Related to Smaller Offerings
As noted above, in recent years, Regulation A offerings have been
rare. Commenters \502\ and the GAO identified a number of factors that
have influenced the use of Regulation A in its current form, including
the process of filing the offering statement with the Commission, state
securities law compliance, the types of investors businesses seek to
attract, and the cost-effectiveness of Regulation A relative to other
exemptions.\503\ In developing the proposals, we have attempted to
create a more efficient and effective method to raise capital that
incorporates important investor protections. We also have been
cognizant of how issuers seeking to raise relatively smaller amounts of
capital could consider a range of possible approaches to capital-
raising.\504\
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\502\ See, e.g., Karr Tuttle Letter; Lacey Letter; Kaplan
Voekler Letters 1 and 2; McCarter & English Letter; ABA Letter;
Alpine Ventures Letter; Campbell Letter; WR Hambrecht + Co. Letter;
and Oggilby Letter.
\503\ See fn. 35 above.
\504\ These methods include, for example, Rules 504, 505 and 506
under Regulation D and Section 4(a)(6) of the Securities Act and the
proposed rules for a crowdfunding exemption. See Section II.I.
above.
---------------------------------------------------------------------------
Under our proposal, offerings for up to $5 million that are
conducted under Tier 1 would benefit from the proposed updates to
Regulation A's filing and qualification processes, but the proposed
amendments would not otherwise substantially alter the existing
exemption for such offerings.\505\ We are mindful of the possibility
that additional changes to Tier 1 could expand its use by, and thus
potentially benefit, issuers conducting smaller offerings. An
intermediate tier between proposed Tier 1 and Tier 2 could also
potentially help increase the effectiveness of Regulation A for smaller
offerings by, among other things, permitting additional modifications
to requirements in light of the size of the offering. We are soliciting
comment on additional considerations with respect to Tier 1 and an
intermediate tier for offerings incrementally larger than Tier 1
offerings and how they would affect investor protection and capital
formation.
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\505\ See Kaplan Voekler Letter 1 (suggesting updating the
filing and qualification processes of, but otherwise preserving a
separate $5 million tier based on, existing Regulation A in the
revised exemption); see also Beacon Investment Letter (suggesting
existing Regulation A be preserved as a separate exemption from the
implementing rules for Title IV of the JOBS Act).
---------------------------------------------------------------------------
Request for Comment
123. As proposed, and as is currently the case for Regulation A,
state law registration and qualification requirements would not be
preempted for Tier 1 offerings. Issuers in offerings of up to $5
million could also elect to proceed under Tier 2, which would provide
for preemption by complying with the additional requirements for Tier 2
(investment limitations, audited financial statements in the offering
statement and ongoing reporting). Are there circumstances in which we
should provide for preemption for Tier 1 offerings? If so, what are the
circumstances? Should we consider including in Tier 1 certain elements
of Tier 2, such as investment limitations, audited financial statements
in the offering statement, or ongoing reporting, or some combination of
these requirements in order to provide for preemption? Should we
consider including requirements that draw on those for other approaches
to capital-raising? If so, which requirements should we include and
why? If we require ongoing reporting for issuers that have conducted
Tier 1 offerings, should the substance or frequency of the requirements
be different from the requirements proposed for Tier 2, such as
requiring only an annual report consisting of annual financial
statements and a cover sheet or only an annual report, or an annual
report and current updates but no semiannual report?
124. Should we consider adding an intermediate tier for offerings
exceeding $5 million but significantly less than the $50 million (e.g.,
$10 million) limitation for Tier 2? Why or why not? If so, what would
be an appropriate annual offering limitation for any such intermediate
tier? What requirements of Tier 1 and Tier 2 (e.g., audited financial
statements, investor limitations) should or should not apply to any
such intermediate tier? Should those requirements be modified with
respect to the intermediate tier? If so, how? Should we consider other
requirements? How would such requirements compare to requirements for
other avenues of capital-raising that an issuer might choose? Should
offerings made using this intermediate tier be preempted from state law
registration and qualification requirements? If so, under what
circumstances should we provide for preemption?
125. If an issuer undergoes a registration or qualification process
that complies with the coordinated review protocol proposed and being
developed by NASAA,\506\ assuming such a program is adopted and fully
implemented, should an offering under Tier 1 or any potential
intermediate tier also be subject to review, in whole or in part, by
the Commission's staff? Why or why not? Should the Commission's rules
specify the scope or other requirements of any such coordinated review?
What standards would apply to the review and what would the review
entail (e.g., would the state review for compliance with state law
requirements, compliance with requirements of the federal securities
laws and Commission rules and forms, or both)?
---------------------------------------------------------------------------
\506\ See discussion in Section II.H. above.
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126. Should we provide for preemption in a Tier 1 offering or an
offering conducted pursuant to the requirements for any potential
intermediate tier if an issuer undergoes a registration or
qualification process in
[[Page 3972]]
a single state? If we develop a process based on registration or
qualification in a single state for Tier 1 offerings or for offerings
conducted pursuant to the requirements for an intermediate tier, how
should it be determined which state would review and qualify the
offering? Should we specify how the issuer would determine the state
for review (e.g., the state of the issuer's principal place of business
or the state in which the issuer is incorporated)? If an offering were
subject to a single state review, should the offering also be subject
to review, in whole or in part, by the Commission's staff? Why or why
not? Would the answer depend on whether the state had a disclosure or
merit review program? Should the Commission's rules specify the scope
or other requirements of any such state review? What role, if any,
would other states have in any such state review? What standards would
apply to the review and what would the review entail (e.g., would the
state review for compliance with state law requirements, compliance
with requirements of the federal securities laws and Commission rules
and forms, or both)? How would allowing a single state review or
qualification process affect the filing choices made by issuers and the
regulatory choices made by states? Would such a process enhance or
diminish the comparability and consistency of state regulatory
frameworks? If so, how? What would be the impact of such a process on
investor protection and capital formation?
K. Regulation A Offering Limitation
As noted above, Section 401 of the JOBS Act requires the Commission
to review the $50 million offering limit not later than two years after
enactment of the JOBS Act and every two years thereafter and, if the
Commission decides not to increase the amount, requires that it report
its reasoning to Congress.\507\ The first such review must be completed
by April 5, 2014. We solicit comment on whether the Commission should
adopt an offering amount under Regulation A, as proposed to be amended,
that is higher than the $50 million limitation for offerings in a
twelve-month period provided in Section 3(b)(2) of the Securities Act.
---------------------------------------------------------------------------
\507\ See discussion in Section I.D. above.
---------------------------------------------------------------------------
Request for Comment
127. As proposed to be amended, and consistent with Section
3(b)(2), should we limit offerings conducted in reliance on Regulation
A in a twelve-month period to $50 million? Or should the Commission
adopt an offering limit under Regulation A that is higher than $50
million in a twelve-month period? \508\ Why or why not? If so, what
would be an appropriate threshold for offerings in a twelve-month
period conducted in reliance on Regulation A, as proposed to be
amended?
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\508\ See Section 3(a)(5) of the Securities Act (requiring the
review of the Section 3(b)(2) offering limit every two years after
enactment of Title IV of the JOBS Act). 15 U.S.C. 77c(b)(5).
---------------------------------------------------------------------------
L. Technical and Conforming Amendments
We propose to amend existing Rules 251-263 \509\ under Regulation
A.\510\ The proposed rule amendments take into account changes to
Regulation A associated with the addition of Section 3(b)(2) \511\ to
the Securities Act,\512\ and the proposals detailed in this release.
---------------------------------------------------------------------------
\509\ 17 CFR 230.251 through 230.263.
\510\ 17 CFR 230.251 through 230.263.
\511\ 15 U.S.C. 77c(b)(2).
\512\ 15 U.S.C. 77a et seq.
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In connection with these actions, we propose to revise Form 1-
A,\513\ to rescind Form 2-A,\514\ and to create four new forms, Form 1-
K (annual updates), Form 1-SA (semiannual updates), Form 1-U (current
reporting), and Form 1-Z (exit report).
---------------------------------------------------------------------------
\513\ 17 CFR 239.90.
\514\ 17 CFR 239.91.
---------------------------------------------------------------------------
We also propose to revise Rule 4a-1 \515\ under the Trust Indenture
Act \516\ to increase the dollar ceiling of the exemption from the
requirement to issue securities pursuant to an indenture, and to amend
Rule 15c2-11 \517\ of the Exchange Act \518\ to permit an issuer's
ongoing reports filed under Regulation A to satisfy a broker-dealer's
obligations to review and maintain certain information about an
issuer's quoted securities. In addition, we are proposing a technical
amendment to Exchange Act Rule 15c2-11 to amend subsection (d)(2)(i) of
the rule to update the outdated reference to the ``Schedule H of the
By-Laws of the National Association of Securities Dealers, Inc.'' which
is now known as the ``Financial Industry Regulatory Authority, Inc.''
and to reflect the correct rule reference.
---------------------------------------------------------------------------
\515\ 17 CFR 260.4a-1.
\516\ 15 U.S.C. 77aaa et seq.
\517\ 17 CFR 240.15c2-11.
\518\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------
As a result of the proposed revisions to Regulation A, conforming
and technical amendments would be made to Rule 157(a),\519\ in order to
reflect amendments to Section 3(b) of the Securities Act, and Rule
505(b)(2)(iii),\520\ in order to reflect the proposed changes to Rule
262 of Regulation A. Additionally, Item 101(a) \521\ of Regulation S-T
\522\ would be revised to reflect the mandatory electronic filing of
all issuer initial filing and ongoing reporting requirements under
proposed Regulation A. The portion of Item 101(c)(6) \523\ of
Regulation S-T dealing with paper filings related to a Regulation A
offering, and Item 101(b)(8) \524\ of Regulation S-T dealing with the
optional electronic filing of Form F-X by Canadian issuers, would
therefore be rescinded.
---------------------------------------------------------------------------
\519\ 17 CFR 230.157(a).
\520\ 17 CFR 230.505(b)(2)(ii).
\521\ 17 CFR 232.101(a).
\522\ 17 CFR 232.10 et seq.
\523\ 17 CFR 232.101(c)(6).
\524\ 17 CFR 232.101(b)(8).
---------------------------------------------------------------------------
III. General Request for Comment
We solicit comment, both specific and general, on each component of
the proposals. We request and encourage any interested person to submit
comments regarding:
the proposals that are the subject of this release;
additional or different revisions to Regulation A; and
other matters that may have an effect on the proposals
contained in this release.
Comment is solicited from the point of view of both issuers and
investors, as well as of capital formation facilitators, such as
broker-dealers, and other regulatory bodies, such as state securities
regulators. Any interested person wishing to submit written comments on
any aspect of the proposal is requested to do so. With regard to any
comments, we note that such comments are of particular assistance to us
if accompanied by supporting data and analysis of the issues addressed
in those comments. We urge commenters to be as specific as possible.
IV. Economic Analysis
As discussed above, Title IV of the JOBS Act requires the
Commission to adopt rules under Section 3(b)(2) of the Securities Act
exempting from Securities Act registration the offer and sale of
securities that, in the aggregate, shall not exceed $50 million in a
twelve-month period. Congress enacted Section 3(b)(2) against a
background of public commentary suggesting that Regulation A, an
existing exemption for offerings of up to $5 million in a twelve-month
period adopted under Section 3(b)(1) of the Securities Act, should be
expanded and updated to make it more useful to small companies.
We are mindful of the costs imposed by, and the benefits to be
obtained from, our rules. Securities Act Section 2(b) and Exchange Act
Section 3(f) require
[[Page 3973]]
us, when engaging in rulemaking that requires us to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition and capital
formation. Exchange Act Section 23(a)(2) requires us, when adopting
rules under the Exchange Act, to consider the impact that any new rule
would have on competition and not to adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
The discussion below addresses the economic effects of the proposed
rules, including the likely costs and benefits of the proposed rules,
as well as the likely effect of the proposed rules on efficiency,
competition and capital formation. The proposed rules include
provisions mandated by the statute as well as provisions that rely on
the Commission's discretionary authority. As a result, while many of
the costs and benefits of the proposed rules stem from the statutory
mandate of Title IV, certain costs and benefits are affected by the
discretion we propose to exercise in connection with implementing this
mandate. For purposes of this economic analysis, we address the costs
and benefits resulting from the mandatory statutory provisions and our
exercise of discretion together, because the two types of benefits and
costs are not separable. We also analyze the potential costs and
benefits of significant alternatives to what is proposed.
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed rules.
A. Economic Baseline \525\
The baseline for our economic analysis of proposed amendments to
Regulation A, including the baseline for our consideration of the
effects of the proposed rules on efficiency, competition and capital
formation, is a description of market conditions today, in which
companies seeking to raise capital through securities offerings must
register the offer and sale of securities under the Securities Act
unless they can rely on an exemption from registration under the
federal securities laws. The baseline also includes a description of
investors in offerings of similar amounts and a discussion of liquidity
considerations that impact issuers' choice of capital markets.
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\525\ Several rules mandated by the JOBS Act have been proposed
by the Commission and one has been adopted recently. These rules may
affect the economic baseline for proposed Regulation A, but because
of data limitations the analysis below cannot account for potential
changes that may result from other Commission actions. For example,
pursuant to Title II the Commission recently amended Rule 506 of
Regulation D to permit issuers relying on the exemption in Rule
506(c) to use general solicitation or general advertising, subject
to certain conditions. See SEC Rel. No. 33-9415. This recent change
could increase the use of Regulation D, but the sample of Regulation
D offerings analyzed below does not include offerings utilizing this
amendment.
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1. Current Methods of Raising up to $50 Million of Capital
While there are a number of factors that companies consider when
determining how to raise capital, a key consideration is whether to
issue securities through a registered public offering or through an
offering that is exempt from Securities Act registration and ongoing
Exchange Act financial reporting requirements. The choice of offering
method may also depend on the size of the issuer and the amount of new
capital sought. Registered offerings entail initial and ongoing fixed
costs that can weigh more heavily on smaller companies, providing
incentive to remain private and to pursue capital outside of public
markets. As we describe throughout this economic analysis, the proposed
amendments to Regulation A are intended to provide small issuers access
to sources for capital unavailable through other offering exemptions
without imposing the full registration and ongoing reporting
requirements of a registered public offering. This section describes
the various currently available offering methods and prevalence of
their use.
a. Exempt Offerings
Currently, small companies can raise capital by relying on an
exemption from registration under the Securities Act, such as Section
3(a)(11),\526\ Section 4(a)(2),\527\ Regulation D \528\ and Regulation
A.\529\ Each of these exemptions, however, includes restrictions that
may limit its utility for small companies. For example, the exemption
under Securities Act Section 3(a)(11) is limited to intrastate
offerings, and Regulation D offerings may limit or prohibit
participation by unaccredited investors. Additionally, offerings
relying on Regulation A require submission of offering materials to,
and qualification of the offering statement by, the Commission, and may
require qualification or registration in multiple states.\530\ The
table below summarizes the main features of each exemption.
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\526\ Under Securities Act Section 3(a)(11), except as expressly
provided, the provisions of the Securities Act (including the
registration requirement under Securities Act Section 5) do not
apply to a security that is ``part of an issue offered and sold only
to persons resident within a single State or Territory, where the
issuer of such security is a person resident and doing business
within, or, if a corporation, incorporated by and doing business
within, such State or Territory.'' 15 U.S.C 77c(a)(3)(a)(11).
\527\ Securities Act Section 4(a)(2) provides that the
provisions of the Securities Act shall not apply to ``transactions
by an issuer not involving a public offering.'' 15 U.S.C.
77d(4)(a)(2).
\528\ Regulation D contains three rules providing exemptions
from the registration requirements, allowing some companies to offer
and sell their securities without having to register the securities
with the SEC. 17 CFR 230.504, 505, 506.
\529\ See release text Section I.B. above for a description of
the current terms and conditions of Regulation A.
\530\ See Rutheford B. Campbell, Regulation A: Small Business'
Search for a Moderate Capital, 31 Del. J. Corp. L. 77, 106 (2005).
See also GAO-12-839, ``Factors that May Affect Trends in Regulation
A Offerings'', (July 3, 2012).
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering limit Issuer and investor Filing Resale Blue Sky Law
Type of offering \531\ Solicitation requirements requirement restrictions preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)............... None.............. No limitations.... All issuers and None............. Restricted in No.
investors must be some cases \532\.
resident in state.
Section 4(a)(2)................ None.............. No general All investors must meet None............. Restricted No.
solicitation. sophistication and securities.
access to information
test.
[[Page 3974]]
Regulation A................... $5 million with ``Testing the U.S. or Canadian File ``testing No............... No.
$1.5 million waters'' issuers, excluding the waters''
limit on permitted before investment companies, materials, Form
secondary sales. filing; general blank-check companies, 1-A, Form 2-A.
solicitation and reporting
permitted after companies.
qualification.
Rule 504 Regulation D.......... $1 million........ General Excludes investment File Form D \534\ Restricted in No.
solicitation companies, blank-check some cases \535\.
permitted in some companies, and
cases \533\. reporting companies.
Rule 505 Regulation D.......... $5 million........ No general Unlimited accredited File Form D \536\ Restricted No.
solicitation. investors and 35 non- securities.
accredited investors.
Rule 506 Regulation D.......... None.............. General Unlimited accredited File Form D \539\ Restricted Yes.
solicitation investors. Limitations securities.
permitted in some on unaccredited
cases \537\. investors \538\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\531\ Aggregate offering limit on securities sold within a twelve-month period.
\532\ Resale restrictions are determined by state securities laws, which typically restrict in-state resales for a one-year period.
\533\ No general solicitation or advertising are permitted unless registered in a state requiring the use of a substantive disclosure document or sold
under state exemption for sales to accredited investors with general solicitation.
\534\ Filing is not a condition of the exemption.
\535\ Restricted unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited
investors.
\536\ Filing is not a condition of the exemption.
\537\ No general solicitation or advertising is permitted under Rule 506(b). General solicitation and general advertising permitted under Rule 506(c),
provided all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited investor status.
\538\ Under Rule 506(b), offerings may involve an unlimited number of accredited investors and up to 35 non-accredited investors. Under Rule 506(c), all
purchasers must be accredited investors.
\539\ Filing is not a condition of the exemption.
While we do not have adequate data on offerings relying on an
exemption under Section 3(a)(11) or Section 4(a)(2), certain data
available related to Regulation D and Regulation A filings allow us to
gauge how frequently issuers currently use these exemptions when
raising capital.
(1) Regulation A Offerings
Companies rarely rely on existing Regulation A when raising
capital. The chart below, from the GAO study,\540\ reports the number
of filed and qualified Regulation A offerings in fiscal years 1992 to
2011.\541\ Specifically, the GAO notes that the number of filed
Regulation A offerings decreased from 116 in 1997 to 19 in 2011. The
number of qualified offerings dropped from 57 in 1998 to 1 in fiscal
year 2011.
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\540\ See Factors That May Affect Trends in Regulation A
Offerings, U.S. Government Accountability Office (Jul. 3, 2012),
available at http://www.gao.gov/products/GAO-12-839 (``GAO
Report'').
\541\ A Regulation A offering is considered ``filed'' when the
Commission receives a potential issuer's offering materials through
Form 1-A. A Regulation A offering is considered qualified after the
Commission has reviewed the offering materials and certified that
all conditions have been met. Therefore, offerings that are filed
and not qualified are either pending, withdrawn, or abandoned.
[GRAPHIC] [TIFF OMITTED] TP23JA14.000
[[Page 3975]]
Based on information submitted in 1,001 Form 1-A filings between
1993 and 2012, there were 914 unique Regulation A issuers during this
period. Of these, 439 offerings by 393 unique issuers were qualified by
SEC staff. Examination of these filings shows that 80% of the offerings
were for equity. Although issuers may include up to $1.5 million in
secondary sales under existing regulations, more than 95% of Regulation
A offerings included only primary shares. Analysis of industry
composition indicates that many of the issuers operate in the financial
industry (49%). In the year of the offering, the median financial
industry issuer had assets and annual revenue of $29.3 million and $2.9
million respectively, while the median non-financial industry issuer
had assets of $188,000 and annual revenue of $34,000.
Section 402 of the JOBS Act required the GAO to study the impact of
blue sky laws on Regulation A offerings. The GAO examined (1) trends in
Regulation A filings, (2) differences in state registration of
Regulation A filings, and (3) factors that may have affected the number
of Regulation A filings. In its July 2012 report on Regulation A, the
GAO cited four central factors affecting the use of Regulation A
offerings: (1) Costs associated with compliance with state securities
regulations, or ``blue sky laws''; (2) the availability of alternative
offering methods exempt from registration, such as Regulation D
offerings; (3) costs associated with the filing and qualification
process with the SEC; and (4) the type of investors businesses sought
to attract.
As identified by the GAO, compliance with state securities laws may
currently affect the use of existing Regulation A. While state
securities law filing fees are likely not significant in any particular
state (filing fees are, on average, approximately $1000 in every
state), such fees can become non-trivial when the offering extends
across multiple states.\542\ For example, state securities law filing
fees averaged $35,000 in initial public offerings under $50
million.\543\ Legal and compliance costs for issuers seeking to offer
securities in multiple states may be significant for issuers due to
myriad differences in securities laws and applicable procedures across
states. Inconsistencies in state laws and exemptions, as well as in the
process of registration or qualification of an offering under state
law, can result in an expensive, drawn-out process for issuers that
could adversely affect their efforts to raise capital in a timely and
cost-effective manner.
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\542\ See Paul Hastings Letter, at 2 and Exhibit A (citing
estimated costs of state securities law filings under Section
3(b)(2) of $50,000 to $70,000); Cf. Regulation D Rule 506 Blue Sky
Filing Chart available at http://americansaferetirements.com/agents/wp-content/uploads/2012/09/Blue-Sky-Filing-Chart-Reg-D-506-.pdf.
\543\ This calculation is based on data provided by Capital IQ
and is obtained from S-1 filings from 1996-2012 which reports six
categories of IPO-related fees, shown in more detail in the ``IPO-
related fees'' table below.
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The GAO also identified costs associated with the filing and
qualification process for Regulation A offerings as a potential reason
for its current limited use. As described above, a business that relies
on Regulation A must file an offering statement with the Commission
that is subject to review by Commission staff and must be qualified
before the offering can proceed. From 2002 through 2012, Regulation A
filings took an average of 241 days to qualify.\544\ While some of this
timeframe reflects delays associated with the paper filing method, most
of the delay results from the concurrent review by state securities
regulators and the fact that the review process may encompass several
rounds of discussion between Commission staff and issuers. It may also
take longer to qualify when issuers fail to provide all required
information in their filings or to address all questions from previous
correspondence with the Commission. Issuer size may also be related to
the speed at which offerings are qualified. For example, larger
companies (i.e., those with total assets greater than the median ($1.4
million) for all qualified Regulation A offerings) navigate the
qualifying process on average 97 days faster than smaller
companies.\545\
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\544\ This estimate is based on the initial Form 1-A filing and
the last Form 1-A filing through which the offering was qualified.
The median number of calendar days for an offering to be qualified
was approximately 189. The fastest offering qualified in 4 calendar
days and the slowest offering took 693 calendar days.
\545\ Id. It is also possible that because most of the larger
Regulation A issuers are financial institutions, such as banks and
trusts, which are regulated and disclose more information than other
Regulation A issuers, they are able to prepare offering materials
relatively quickly and easily, based on information they are
required to provide to other regulators.
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Unlike other exemptions, existing Regulation A permits offerings to
an unlimited number of unaccredited investors, provided that the total
amount sold does not exceed $5 million in a twelve-month period.
Further, securities sold under existing Regulation A have no
restrictions on resale. As discussed below, Regulation A issuers
currently have limited involvement in secondary markets.
(2) Regulation D Offerings
Based on information available to us, it appears that the most
common way to issue up to $50 million of securities is in reliance on a
Regulation D offering exemption. Regulation D includes three rules
providing exemptions from the registration requirements of the
Securities Act. Specifically, as described in the table above, eligible
issuers can rely on Rule 504 to raise up to $1 million within a twelve-
month period, Rule 505 to raise up to $5 million within a twelve-month
period, and Rule 506 to raise an unlimited amount. As the table notes,
the three rules have different requirements that affect their use. In
total, based on analysis of issuer offering details reported on Form D,
Regulation D accounts for approximately $900 billion in annual capital
raising.\546\ During the 2009 to 2012 period, most issuers chose to
raise capital by relying on Rule 506, even when their offering
permitted reliance on Rule 504 or Rule 505.\547\
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\546\ These exclude issuances of pooled investment vehicles.
\547\ This tendency could, in part, be attributed to two
features of Rule 506: Blue sky law preemption and an unlimited
offering amount. See also Factors That May Affect Trends in
Regulation A Offerings, U.S. Government Accountability Office (Jul.
3, 2012), available at http://www.gao.gov/products/GAO-12-839.
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During 2012, there were nearly 22,000 Regulation D offerings
reported on Form D. Of these, approximately 12,000 would meet the
conditions of Regulation A, as proposed to be amended, which excludes
offerings by reporting companies, foreign issuers and investment
companies, and offerings of interests in claims on natural resources.
The following table reports the breakdown of Regulation D filings from
2012 for all issuers that would be eligible to use Regulation A, as
proposed to be amended.\548\
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\548\ These numbers are calculated using data from raw Form D's
filed with the Commission. We have adjusted for amended filings by
dropping old filings if an amended filing exists. This analysis
excludes filings from issuers relying on Regulation D as a pooled
investment fund.
[[Page 3976]]
Regulation D Offerings During 2012 by Issuers Eligible To Rely on Regulation A \549\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 504 Rule 505 Rule 506
Offering size ---------------------------------------------------------------------------------------------------------------------
<$1M <$5M <$5M $5M-$50M >$50M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Reg A Eligible............ Yes................... Yes................... Yes................... No................... No
Proposed Reg A Eligible........... Yes................... Yes................... Yes................... Yes.................. No
Number of filings................. 385................... 142................... 7,202................. 2,784................ 330
Median offering amount ($ 0.4................... 1.0................... 1.0................... 10.0................. 88.9
millions).
Average offering amount ($ 0.5................... 1.3................... 1.4................... 13.7................. 481
millions).
Average amount raised (% of 62.2.................. 67.9.................. 72.1.................. 72.7................. 76.4
offering) \550\.
Portion with unaccredited 62.1.................. 36.8.................. 7.8................... 5.0.................. 8.2
investors (% of deals).
Average fees (% of funds raised).. 0.1................... 0.2................... 0.7................... 0.7.................. 0.8
Median number of investors........ 4..................... 4..................... 5..................... 8.................... 12
--------------------------------------------------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in natural resources, and issuers who failed
to sell any securities.
As shown in the table above, most Regulation D offerings that would
be eligible for Regulation A under the proposed rules are relying on
Rule 506 of Regulation D. A comparison of Rule 506 offerings over $50
million to those below $50 million shows that larger offerings involve
more investors and have generally raised a greater percentage of the
amount of capital sought at the time of the Form D filing. This
evidence indicates potentially higher success rates for larger
offerings, although this cannot be confirmed because there is no
requirement for issuers to file an amended Form D at the completion of
an offering.
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\549\ Id.
\550\ The total offering amount is not always equivalent to the
total amount raised at the time of filing. Regulation D permits
filing a Form D before completion of the fundraising round. Thus for
most companies, the difference between the total offering amount and
amount raised results from filing a Form D before securing all funds
promised. In addition, some companies (usually pooled investment
funds) use Form D for open-ended offerings.
---------------------------------------------------------------------------
Most Regulation D issuers elect not to disclose their revenue range
in their Form D filings. The following table shows the breakdown of the
issuers potentially eligible to rely on Regulation A that did not
disclose, and those that elected to disclose a revenue range for
offerings made in 2012.
Amount Raised Through Regulation D Offerings in 2012 by Issuers Eligible To Rely on Regulation A, by Issuer
Revenue Range.\551\
----------------------------------------------------------------------------------------------------------------
Frequency Frequency Avg. raised
Revenue range offering < offering $5M- ($ millions)
$5M $50M offering <$50M
----------------------------------------------------------------------------------------------------------------
Not Applicable \552\............................................ 141 92 4.7
Decline to Disclose............................................. 4,543 2091 4.3
No revenues..................................................... 1,353 264 1.4
$1-$1,000,000................................................... 1,168 118 1.0
$1,000,001-$5,000,000........................................... 315 64 2.1
$5,000,001-$25,000,000.......................................... 132 93 3.8
$25,000,001-$100,000,000........................................ 53 41 7.7
Over $100,000,000............................................... 24 21 6.9
----------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in
natural resources, and issuers who failed to sell any securities.
If issuers that disclose a revenue range are representative of all
Form D filers, then nearly half of the issuers that file Form D have no
revenues. The portion of issuers without revenues is noteworthy because
debt is not likely to be a feasible source of capital for companies
without regular cash flows.
---------------------------------------------------------------------------
\551\ Id.
\552\ These could be Regulation D issuers (non-registered
investment companies) that manage assets and report net asset value,
for example, REITS, or spillover from the ``No revenues'' category.
---------------------------------------------------------------------------
b. Registered Offerings
Companies seeking to raise capital without being subject to the
restrictions under exempt offerings can register the offer and sale of
securities under the Securities Act.
The following figure shows the frequency of IPOs each year for
companies issuing above or below $50 million.\553\ Consistent with many
previous observations about the recent IPO market, the number of IPOs,
particularly those under $50 million, has fallen dramatically since the
late 1990s.\554\
---------------------------------------------------------------------------
\553\ There were approximately 25 registered initial public
offerings up to $50 million in 2012 according to data from Capital
IQ.
\554\ See, e.g., D. Weild and E. Kim, A wake-up call for
America, 2009. In 2011, the Treasury Department hosted a conference
on access to capital to better understand how to restore access to
capital for emerging companies. The conference featured the findings
of an IPO task force comprised of a number of experienced venture
capitalists, investment bankers, and lawyers. Their findings provide
a number of possible explanations for the decline in the number of
IPOs, including that 92% of the surveyed CEOs listed the
``Administrative Burden of Public Reporting'' as being one of the
most significant challenges of an IPO.
---------------------------------------------------------------------------
[[Page 3977]]
[GRAPHIC] [TIFF OMITTED] TP23JA14.001
One possible reason for the decreasing number of IPOs under $50
million is that public offerings may be too costly to be a viable
alternative for some small companies.\556\ In particular, commissions
paid to underwriters average 7% for IPOs, 5% for seasoned public
issuances, and 1% for bond issuances.\557\ Issuers conducting
registered public offerings must also pay Commission registration fees
and FINRA filing fees, legal and accounting fees and expenses, transfer
agent and registrar fees, costs associated with periodic reporting
requirements and other regulatory requirements and various other fees.
Two surveys concluded that regulatory compliance costs of IPOs average
$2.5 million initially, followed by an ongoing $1.5 million per
year.\558\
---------------------------------------------------------------------------
\555\ The data is provided by Capital IQ and this sample
excludes offerings from blank check companies and non-Canadian
foreign issuers.
\556\ See also Gao, Xiaohui, Jay R. Ritter, and Zhongyan Zhu.
Where have all the IPOs gone?, Working Paper, University of Florida,
2012 (suggesting, among other things, that acquisitions have
partially supplanted the traditional IPO as an exit path for smaller
companies).
\557\ See, e.g., H. Chen and J. Ritter (2000), The Seven Percent
Solution, Journal of Finance 55, pp. 1105-1131; S. Corwin (2000),
The Determinants of Underpricing for Seasoned Equity Offers, Journal
of Finance 58 pp. 2249-2279; L. Fang (2005), Investment Bank
Reputation and the Price and Quality of Underwriting Services,
Journal of Finance 60, pp. 2729-2761.
\558\ See IPO Task Force, Rebuilding the IPO On-Ramp, 9 (Oct.
20, 2011), available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
---------------------------------------------------------------------------
Because of the fixed-cost nature of many of the fees associated
with public offerings, size may be one of the most important
determinates of whether an offering is made available to the public. As
shown in the scatter plot below, there is a downward trend in IPO-
related fees (excluding underwriter and printing costs and reported as
a percentage of offering proceeds) as offering size increases.\559\
---------------------------------------------------------------------------
\559\ Fee information is compiled by Capital IQ and is obtained
from S-1 filings from 1996-2012 which reports six categories of IPO-
related fees. The analysis includes four of the fees: legal,
accounting, blue sky, and registration, which we collectively refer
to as ``compliance fees''.
---------------------------------------------------------------------------
[[Page 3978]]
[GRAPHIC] [TIFF OMITTED] TP23JA14.002
For offerings below $50 million, the fixed cost components of legal
and accounting-related fees, as a percentage of offering size, are
particularly burdensome. In the table below, which reports the six fee
types reported in Form S-1, offerings less than $50 million incur
compliance related fees that are on average nearly twice those incurred
by larger offerings, measured as a percentage of proceeds.
IPO-Related Fees as a Percentage of Offering Size for Offerings Completed From 1996 to 2012.
----------------------------------------------------------------------------------------------------------------
Offerings $5- Offering >
All offerings $50 million $50 million
(N=4868) % (N = 2017) % (N = 2851) %
----------------------------------------------------------------------------------------------------------------
Total Fees...................................................... 9.55 11.15 8.44
Compliance Fees............................................. 1.39 1.91 1.03
Registration Fees....................................... 0.03 0.04 0.02
Blue Sky Fees........................................... 0.03 0.07 0.01
Accounting Fees................................................. 0.53 0.72 0.40
Legal Fees.............................................. 0.80 1.08 0.60
Underwriter Fees............................................ 6.45 6.87 6.17
Printing Fees............................................... 0.32 0.47 0.22
----------------------------------------------------------------------------------------------------------------
Analysis excludes offerings from non-Canadian foreign issuers and blank-check companies.
Additional statistical analysis \560\ of these fees using
regression methodologies shows that fees have increased by
approximately six basis points per year since 1996, and that these fees
have increased disproportionately more for small offerings than for
large offerings. For example, fees related to offerings over $50
million increased by approximately 50 basis points from 2000 to 2010,
while fees related to offerings below $50 million increased by 100
basis points over the same period.
---------------------------------------------------------------------------
\560\ We tested for statistical significance in the relationship
between fees and issue size using regression analysis of fees
disclosed in S-1 filings. The data is from Capital IQ, which
tabulates S-1 and other filings. Due to the abnormal distribution of
IPO-related fees, we use quantile regressions. Fees were calculated
as described in the table above. The sample eliminates all
observations by issuers who would be ineligible for the proposed
Regulation A exemption. Finally, we determine that fees have
increased more rapidly for smaller issuers by including an
interaction term of issuance date with offering size.
---------------------------------------------------------------------------
In addition to increased compliance costs, there are a number of
other possible explanations for the decline in IPOs. For example, one
benefit of a public listing is the increased liquidity that results
from access to retail investors; however, catering to retail owners can
involve investor relations challenges and liability-related costs.\561\
A second explanation for the decline of IPOs could result if current
offerings are
[[Page 3979]]
concentrated in high-technology sectors that are sensitive to R&D-
related disclosure requirements, which could potentially cause issuers
to rely more on private capital sources.\562\ Access to capital may
also be especially time-sensitive for the types of companies most
likely to make small offerings, rendering these companies unwilling to
go through a potentially lengthy registration process. It is also
possible that directors and officers of companies looking to raise less
than $50 million may not want to subject themselves to the increased
liability and takeover threats that come with dispersed ownership.\563\
Finally, the decline of public offerings could result from macro-
economic effects on investment opportunities in the economy and the
cost of capital.\564\
---------------------------------------------------------------------------
\561\ For instance, the 2011 IPO Task-Force survey results
indicate that 88% of CEOs that had completed an IPO listed
``Managing Public Communications Restrictions'' as one of the most
significant challenges brought on by becoming a reporting company.
\562\ Campbell, Tim S. (1979), Optimal investment financing
decisions and the value of confidentiality, Journal of Financial and
Quantitative Analysis: pp. 913-924.
\563\ Burkart, Mike, Denis Gromb, and Fausto Panunzi (2000),
Agency conflicts in public and negotiated transfers of corporate
control, The Journal of Finance 55.2, pp. 647-677.
\564\ Lowry, Michelle (2003), Why does IPO volume fluctuate so
much?, Journal of Financial Economics 67.1, pp. 3-40.
---------------------------------------------------------------------------
Companies that have completed an IPO often continue to raise
capital through follow-on offerings. In 2012, public follow-on
offerings accounted for $155 billion, $4 billion of which came from
offerings less than $50 million,\565\ which is significantly more than
the amount raised through IPOs over the same period, suggesting that
follow-on offerings (also known as ``seasoned equity offerings'')
comprise a prevalent source of capital for companies.\566\
---------------------------------------------------------------------------
\565\ There were approximately 211 public follow-on offerings in
2012 according to data from Thompson Reuters SDC.
\566\ These estimates are based on our analysis of data on
seasoned equity offerings from Thompson Financials SDC Platinum and
excludes offerings from non-Canadian foreign issuers.
---------------------------------------------------------------------------
c. Private Debt Offerings
Companies with regular cash flows often rely on debt as a source of
capital; however, borrowing may not be a cost effective option for many
early-stage companies as they may face large information asymmetries
with investors, irregular cash-flow projections, insufficient assets to
offer as collateral, and high external monitoring costs.\567\ For
example, an internet start-up company without steady revenues might
have trouble securing a loan or a line of credit from a bank because it
would have difficulty signaling the quality of its business model and
ability to repay. Conversely, an owner of a restaurant franchise could
reasonably rely on regular cash flows and its own credit history to
support a loan application. Additionally, some companies may find loan
requirements imposed by financial institutions difficult to meet. For
example, financial institutions generally require a borrower to provide
collateral and/or a guarantee by owners,\568\ which some companies may
not be able to or may be reluctant to provide.\569\
---------------------------------------------------------------------------
\567\ Robb, Alicia M., and David T. Robinson, The capital
structure decisions of new firms, No. w16272, National Bureau of
Economic Research, 2010.
\568\ Approximately 92% of all small business debt to financial
institutions is secured, and owners of the firm guarantee about 52%
of that debt. See Berger, Allen N., and Gregory F. Udell.
Relationship lending and lines of credit in small firm finance.
Journal of Business (1995): 351-381.
\569\ Some of these companies might instead rely on trade
credit, which can be an important source of capital for young firms.
See, e.g. Petersen, Mitchell A., and Raghuram G. Rajan, Trade
credit: theories and evidence, Review of Financial Studies 10.3
(1997): 661-691; and Murfin, Justin, and Ken Njoroge, The Implicit
Costs of Trade Credit Borrowing by Large Firms., working paper.
---------------------------------------------------------------------------
2. Liquidity Considerations
As described above, various financing options are available to
small companies looking to raise up to $50 million of capital. For many
companies, access to liquid markets is an important consideration as
they compare the merits of these options.
There are important differences in liquidity for securities issued
in a registered offering or under Regulation D or Regulation A.
Securities in registered offerings that meet listing requirements
benefit from the liquidity of listing on a national securities
exchange. Conversely, securities sold under Regulation D are relatively
illiquid due to restrictions that prohibit resale in the public market
for up to a year. Although securities issued under Regulation A are
freely tradable, they typically trade in over-the-counter markets (if
at all), as these issuers may not meet listing standards of a national
securities exchange or be willing or able to bear the costs of ongoing
reporting.\570\ In fact, a much larger proportion of the qualified
Regulation A offerings from 2001 to 2012 are quoted in the OTC market
than listed on a national securities exchange; although most of these
offerings are not currently quoted on OTC markets.\571\
---------------------------------------------------------------------------
\570\ See, e.g., Sanger and Peterson, 1990; Harris,
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
\571\ This conclusion is based on a review of three databases
with coverage of OTC markets: CapitalIQ, iMetrix, and OTC quote.
---------------------------------------------------------------------------
More generally, OTC-traded securities are significantly less liquid
than those listed on a national securities exchange.\572\ Existing
studies of bid-ask spreads, trading volume, and price volatility find
statistically lower liquidity in OTC securities and a comparison group
\573\ of similar securities listed on a national securities
exchange.\574\
---------------------------------------------------------------------------
\572\ See, e.g., Sanger and Peterson, 1990; Harris,
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
\573\ Choosing a comparison set of companies with similar
characteristics, such as market capitalization, helps isolate the
effect of trading venue on liquidity.
\574\ Ang, A., Shtauber, A., & Tetlock, P. Asset pricing in the
Dark: The Cross Section of OTC Stocks (July 1, 2013). Netspar
Discussion Paper No. 11/2010-093, available at SSRN: http://ssrn.com/abstract=1817542 or http://dx.doi.org/10.2139/ssrn.1817542.
Review of Financial Studies, forthcoming. The study analyzes 486 OTC
stocks and compares them with a benchmarked (size-based) sample of
listed stocks.
---------------------------------------------------------------------------
There is also evidence that illiquidity is especially expensive for
companies that trade on OTC markets.\575\ A recent study finds OTC-
traded securities differ from listed securities in that they are
primarily held by retail investors and have a larger illiquidity return
premium.\576\ One explanation for the higher liquidity premium is the
likelihood of increased asymmetric information,\577\ as the cost of
illiquidity is largest for securities whose issuers choose not to
disclose financial information and that are primarily held by retail
investors.\578\ The desire of issuers to alleviate this illiquidity
discount may explain why many OTC quoted companies that are not
required to report financial information under the Exchange Act
voluntarily provide limited financial information to investors.\579\
---------------------------------------------------------------------------
\575\ Id.
\576\ Id.
\577\ Lev, Baruch. Toward a theory of equitable and efficient
accounting policy. Accounting Review (1988): 1-22.
\578\ Ang, A., Shtauber, A., & Tetlock, P. 2011. Asset pricing
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of
Financial Studies, forthcoming. The study analyzes 486 OTC stocks
and compares them a benchmark group of listed stocks.
\579\ Analysis by staff in the Division of Economic and Risk
Analysis found that in 2012, there were more than 700 companies
quoted through the OTC Markets Group platform that provided limited
financial information to qualify as OTC Pink Limited Information
securities, which are quoted in a tier above firms that do not
provide financial information.
---------------------------------------------------------------------------
3. Investors in Offerings of up to $50 Million
The various methods of raising up to $50 million in capital may
attract different types of investors. For example, as discussed above,
Regulation A and public offerings have no limit on the number of
unaccredited investors that can participate. In contrast,
[[Page 3980]]
offerings under Rule 506(b) of Regulation D are limited to a maximum of
35 unaccredited investors.
Data from Form D filings suggests that unaccredited investors are
not significantly involved in Regulation D offerings of up to $50
million. While unaccredited investors can and do participate in
Regulation D offerings, offerings involving unaccredited investors are
typically smaller than those that do not involve unaccredited
investors. In 2012, we estimate that there were approximately 220,000
investor participations in nearly 11,000 Regulation D offerings of
below $50 million by issuers that would be eligible for exemption under
Regulation A, as proposed to be amended.\580\ Of these offerings,
approximately 9.4% involved at least one unaccredited investor.
Offerings to exclusively accredited investors averaged 12 investors per
offering and raised an average of $3.7 million per offering. In
contrast, an average of 107 investors participated in offerings that
involved at least one unaccredited investor and raised an average of
$1.5 million.\581\
---------------------------------------------------------------------------
\580\ These numbers are based on analysis by the Division of
Economic and Risk Analysis of initial Form D filings submitted
during calendar year 2012. The estimated total number of investor
participations is likely greater than the actual number of
Regulation D investors because investors could have participated in
more than one offering.
\581\ Because some investors participate in multiple offerings,
these numbers likely overestimate the actual number of unique
investors in these reported offerings.
---------------------------------------------------------------------------
As of 2010, 8.7 million U.S. households, or 7.4% of all U.S.
households, qualified as accredited investors based on the net worth
standard in the definition of ``accredited investor,'' \582\ which is
substantially larger than the total number of investors that reported
as having participated in an unregistered offering, but considerably
less than the total number of retail investors, which we estimate could
be as high as 33 million.\583\ Thus the current pool of investors
eligible to participate in Regulation A offerings and public offerings
is substantially larger than the estimated total number of accredited
investors or current levels of investor participation in the private
offering market.
---------------------------------------------------------------------------
\582\ See analysis presented in SEC Rel. No. 33-9415 (July 10,
2013) [78 FR 44771].
\583\ Id.
---------------------------------------------------------------------------
B. Analysis of Proposed Rules
1. General Considerations
The impact of the proposed rules on the level and efficiency of
capital formation will depend on the extent to which companies use the
new offering method to raise capital that would not otherwise have been
available to them. It will also depend on the extent to which companies
elect to rely on Regulation A, as proposed to be amended, in place of
existing offering methods. As discussed above, many companies finance
their operations and investments with credit from banks and other
financial entities.\584\ Other companies, particularly early-stage and
high growth companies, seek capital through equity-based financing
because they do not have sufficient collateral or the revenue streams
necessary to support the fixed repayment schedule of debt
financing.\585\ These companies often seek capital from institutional
or accredited investors through offerings that are exempt from
registration because the minimum fixed costs of going public through a
registered offering can be disproportionately large for small
issuers.\586\ But private offerings impose restrictions on resale,
offering amounts, or participating investors in ways that can limit the
ability to raise capital and may not be attractive to some small
companies or investors.
---------------------------------------------------------------------------
\584\ Berger, Allen N., and Gregory F. Udell, 1998, The
economics of small business finance: The roles of private equity and
debt markets in the financial growth cycle, Journal of Banking &
Finance 22.6, pp. 613-673.
\585\ Id.
\586\ See Section I.A. above.
---------------------------------------------------------------------------
The proposed amendments to Regulation A are intended to provide
small issuers access to sources for capital unavailable through other
offering exemptions without imposing the full registration and ongoing
reporting requirements of a registered public offering. Hence, it is
likely that companies seeking to raise capital through an offering
conducted under Regulation A, as proposed to be amended, would have
been able to access to capital through private offerings or registered
public offerings. In this respect, the impact of the proposed
Regulation A amendments on capital formation could be redistributive in
nature, but with potentially significant positive effects on capital
formation and allocative efficiency by providing the issuers less
costly access to capital than alternative offering methods and by
providing unaccredited (retail) investors with additional investment
opportunities.
The potential future use of an amended Regulation A depends largely
on the perceived trade-off between the costs of qualification and
ongoing disclosure requirements and the potential benefits to issuers
from access to a broad investor base and secondary market
liquidity.\587\ For example, companies considering a traditional IPO
may alternatively consider issuing securities pursuant to Regulation A,
as amended, if they believe that the benefits of reduced disclosure
requirements offset the potential loss of secondary market liquidity
that may result from an issuer's inability to have its securities
quoted on platforms that are available only for Exchange Act-registered
securities. Alternatively, companies considering seeking capital from
institutional or accredited investors through a private offering might
consider an offering under amended Regulation A if they believe that
there is a more dispersed investor base, which could include retail
investors, willing to provide capital at a lower cost.
---------------------------------------------------------------------------
\587\ The Commission also recognizes that other important
considerations could affect the use of Regulation A as proposed to
be amended. In particular, as explained above, the GAO study of
Regulation A offerings found that blue sky law compliance was a
primary factor in the infrequent reliance on Regulation A. Because
we are proposing to define qualified purchasers in a way that has
the potential to include a large percentage of Regulation A
investors, we believe that compliance costs associated with blue sky
laws will be eliminated for most offerings, making them similar to
Regulation D offerings and registered offerings in this respect.
---------------------------------------------------------------------------
We preliminarily believe that an approach that generally preserves
existing Regulation A while also introducing an option that allows
issuers to raise greater amounts of capital without state review but
with additional disclosure requirements is a prudent first step to
adapting Regulation A for larger offerings. We believe this approach
balances the trade-offs among compliance costs, investor protection,
and benefits associated with liquidity and access to investors. We
recognize, however, that this approach may limit the use of Regulation
A for certain issuers, and we accordingly are requesting comment on
additional considerations for smaller offerings. For example, the
ongoing reporting obligations of a Tier 2 offering may be
proportionately more burdensome for smaller issuers that are looking to
raise substantially less than $50 million, and may not provide the same
benefit to smaller issuers that are not pursuing secondary market
liquidity. For these issuers, it may also not be reasonable to pursue a
Tier 1 offering because the $5 million maximum issuance threshold may
be insufficient in light of costs associated with the existing offering
process. We recognize that observing market behavior under the proposed
approach would provide information that would allow us to assess the
need for modifications to the proposed
[[Page 3981]]
approach, which also could be made when the Commission considers the
efficacy of the $50 million threshold, as mandated by Congress every
two years.
The disclosure requirements that we are proposing account for the
trade-offs identified above and are guided by current and past market
experiences. For example, prior to 1999, securities traded over-the-
counter (OTC) and quoted on the OTC Bulletin Board (OTCBB) interdealer
quotation system were not required to be Exchange Act reporting
companies. In January 1999, the SEC approved an OTCBB eligibility rule
that required companies whose securities are quoted on OTCBB to file
periodic financial reports under the Exchange Act or with their primary
regulator if not the SEC.\588\ One study evaluating this change found
improved liquidity at companies that were already providing periodic
reports, or that chose to comply with Exchange Act reporting
requirements to remain eligible for quotation on OTCBB.\589\
Approximately three-fourths of the companies that were not already
reporting chose not to satisfy the new eligibility requirement by
becoming an Exchange Act reporting company and instead entered less
regulated and less liquid OTC markets, indicating that, for these
companies, the expected costs associated with mandatory public
reporting under the Exchange Act outweighed the expected liquidity
benefits.\590\
---------------------------------------------------------------------------
\588\ See Order Granting Approval of Proposed Rule Change and
Amendment No. 1 from the National Association of Securities Dealers,
Inc. Relating to Microcap Initiatives-Amendments to NASD Rules 6530
and 6540, Exchange Act Release No. 34-40878 (Jan. 4, 1999), 64 FR
1255 (Jan. 8, 1999).
\589\ Bushee, Brian J., and Christian Leuz, (2005), Economic
consequences of SEC disclosure regulation: Evidence from the OTC
bulletin board, Journal of Accounting and Economics 39.2, pp. 233-
264.
\590\ Id.
---------------------------------------------------------------------------
The Tier 2 reporting requirements are substantially less than
Exchange Act reporting requirements, but greater than what is currently
required for an exemption from registration under the existing
Regulation A rules and those under Regulation D. The following table
shows a selection of commonly filed reports for Exchange Act registered
companies and the analogous form, if any, that would be required for
securities issued under Regulation A, as proposed to be amended, or
Regulation D.
Overview Comparison of Differences in Reporting Requirements for Offerings Exempt Under Regulation D, Regulation A, Regulation A as Proposed To Be
Amended and Registered Offerings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed regulation Proposed regulation
Common disclosure types Regulation D Current regulation A A tier 1 A tier 2 Registered \591\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering document or notice.... D \592\................ 1-A................... 1-A................... 1-A................... S-1
Auditors....................... ....................... ...................... ...................... No requirement for a PCAOB-registered
PCAOB-registered Auditor.
Auditor.
Report of material events...... ....................... ...................... ...................... 1-U................... 8-K
Interim report................. ....................... ...................... ...................... 1-SA.................. 10-Q
Annual report.................. ....................... ...................... ...................... 1-K................... 10-K
Termination of registration.... ....................... 2-A................... 1-Z................... 1-Z................... 15
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tier 2 reporting requirements are also greater than what is
proposed to be required under Tier 1. We believe that it is appropriate
to require some additional disclosure from issuers of larger offerings
up to $50 million in order to better protect investors under the new
Regulation A regime.
---------------------------------------------------------------------------
\591\ This comparison does not cover offerings by foreign
private issuers.
\592\ Form D is a notice of sale under Regulation D, not a
disclosure document, although certain disclosures are required.
Regulation D does not require filing of a disclosure document with
the Commission, and does not generally impose disclosure
requirements except when sales are made to purchasers that are not
accredited investors. See Rule 502(b), 17 CFR 230.502(b).
---------------------------------------------------------------------------
We recognize that even if the proposed rules reduce compliance
costs and require sufficient disclosure to enable investors,
particularly retail investors, to make informed capital allocation
decisions, some issuers may still prefer other offering exemptions.
Preferences for other offering exemptions could be particularly strong
given that general solicitation is now permissible in certain cases
under Rule 506(c). In particular, it is possible that issuers relying
on Rule 506(c) may now be in a better position to identify
institutional and accredited investors, such that seeking capital from
a broader retail investor base is not required or desired. In addition,
eliminating the ban on general solicitation for certain Rule 506
offerings may encourage new trading platforms for privately placed
securities once their resale restrictions are lifted. While secondary
markets for private offerings are unlikely to achieve the same level of
liquidity of OTC or other listing venues, it is nonetheless possible
that trading platforms could achieve levels of liquidity sufficient to
allow certain types of securityholders (like founders and other
affiliated owners) to exit once resale restrictions are lifted.
2. Scope of Exemption
a. Eligible Issuers
Under the proposed rules, and consistent with current Regulation A
eligibility requirements, eligible issuers include any companies
organized and with their principal place of business inside the United
States or Canada excluding investment companies, reporting companies,
blank check companies, and issuers of claims on natural resources, and
certain disqualified ``bad actors''. We also propose to exclude some
issuers that are currently eligible to rely on Regulation A.
Specifically, the Commission is proposing to exclude from eligibility
issuers that are subject to a denial, suspension, or revocation order
by the Commission pursuant to Section 12(j) of the Exchange Act within
the five years immediately preceding the filing of the offering
statement and issuers that have not filed required ongoing reports
pursuant to Regulation A, as proposed to be amended, in the two-year
period immediately preceding the filing of a new offering statement.
The proposed changes to the Regulation A eligibility requirements
would have benefits and costs. In particular, we believe that the
proposed exclusion from eligibility of issuers that have not complied
with ongoing reporting requirements in the two-year period immediately
preceding the filing of a new offering statement would
[[Page 3982]]
incentivize issuers that intend to rely on Regulation A in the future
to comply with ongoing reporting requirements, which would allow
investors to make better informed investment decisions. This exclusion,
however, should not impose additional burdens or costs on issuers that
would not have already been incurred with the proposed ongoing
reporting requirements of Regulation A.
The Commission is also proposing to exclude from eligibility
issuers that are subject to a denial, suspension, or revocation order
by the Commission pursuant to Section 12(j) of the Exchange Act within
the five years immediately preceding the filing of the offering
statement. This exclusion may incentivize Exchange Act registrants to
comply with their obligations, and would prevent companies with a
history of reporting non-compliance from relying on Regulation A. We
also recognize that this exclusion could prevent offerings by issuers
that intend to comply with Regulation A requirements despite a history
of Exchange Act non-compliance, which could limit capital formation in
certain situations.
The proposed rules continue to exclude non-Canadian foreign issuers
from use of Regulation A, but, as discussed above, we are soliciting
comment about the alternative of amending Regulation A to expand
eligibility to additional foreign issuers. Allowing participation by
non-Canadian foreign issuers could increase competition between foreign
and domestic issuers for U.S.-based investor capital. This increased
competition could raise the cost of capital for Regulation A issuers to
the extent that there is not a commensurate increase in the supply of
Regulation A capital. It is also possible, however, that expanding
eligibility to use Regulation A to non-Canadian foreign issuers could
attract additional investor capital to the market such that the change
would not have a material impact on domestic issuers' cost of capital.
The proposed rules also continue to exclude blank-check companies.
We believe that this exclusion is appropriate given the potential
difficulty for retail investors to evaluate the investment
opportunities posed by these issuers, particularly because the issuers
do not explicitly identify investment opportunities at the time of
offering. The continued exclusion of blank check companies could
prevent some legitimate early-stage companies that would otherwise be
eligible issuers from relying on Regulation A.
We are not proposing to amend the existing exclusion of companies
subject to the ongoing reporting requirements of Section 13 or 15(d) of
the Exchange Act (``reporting companies''). As an alternative, we could
amend Regulation A to expand the category of eligible issuers to
include reporting companies. Although reporting companies do
occasionally rely on exemptions for private placements, we believe that
many reporting companies generally would not benefit from eligibility
to rely on Regulation A as proposed to be amended. In particular,
reporting companies are subject to Exchange Act reporting requirements
that are more extensive than those proposed for Regulation A, so would
not benefit from the reduced disclosure requirements; although
reporting companies could potentially benefit from the liability
standards conferred by reliance on Regulation A, and such issuers that
do not have the class of securities being offered already listed, or
are not simultaneously listing, on a national securities exchange could
potentially benefit from blue sky law preemption. Nonetheless, we
believe that the benefits of amending Regulation A to permit reporting
companies to rely on the exemption are minimal.\593\
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\593\ This exemption does not bar reporting companies from
suspending or terminating their reporting obligations and then
relying on Regulation A. This option could appeal even to large
reporting companies if they are not looking to raise more than $50
million of new capital. Many follow-on offerings, for example, are
for less than $50 million, as discussed above. This could have both
benefits (in the form of reduced transaction costs and compliance
costs for issuers) and costs (in the form of reduced accountability
and reduced information available to investors).
---------------------------------------------------------------------------
The proposed rules also continue to exclude investment companies
and BDCs. If, as an alternative, the Commission were to permit
investment companies to use Regulation A, offerings from investment
companies could increase investment opportunities for retail investors.
Additionally, the Commission recognizes that permitting investment
companies to rely on Regulation A could enhance capital formation
indirectly. Specifically, if the use of proposed Regulation A decreased
the cost of capital for investment companies and those savings were
passed through to the company recipients of the investment companies'
capital, expanding the eligibility for Regulation A to investment
companies could potentially enhance capital formation.\594\
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\594\ Brewer, Elijah, et al. (1996), Performance and access to
government guarantees: The case of small business investment
companies, Economic Perspectives--Federal Reserve Bank of Chicago
20, pp. 16-30.
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b. Eligible Securities and Maximum Offering Size
Consistent with the statute, the proposed rules increase the
maximum offering size from $5 million to $50 million of ``equity
securities, debt securities, and debt securities convertible or
exchangeable to equity interests, including any guarantees of such
securities.'' The proposed rules exclude asset-backed securities
(``ABS'') from eligibility. As discussed above, the Commission does not
believe that ABS issuers are the intended beneficiaries of the mandated
expansion of Regulation A. ABS are designed to pool the risk of
already-issued loans and other financial assets, and, in this respect,
do not constitute new capital formation. We recognize, however, that
allowing ABS offerings under Regulation A could, in certain cases,
lower the cost of capital for underlying borrowers whose loans are
eventually securitized by ABS issuers and therefore indirectly
facilitate capital formation.\595\
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\595\ This indirect effect may result because, due to bank
accounting standards and capital requirements, securitization allows
banks sponsoring ABS issuers to move assets off balance sheet,
freeing up capital for additional loans. The resulting increase in
capital available for lending could lead to lower borrowing costs
for all borrowers down the capital supply chain. See, e.g.,
Pennacchi, George G. (1995), Loan sales and the cost of bank
capital, The Journal of Finance 43, no. 2, pp. 375-396.; Carlstrom,
Charles T., and Katherine A. Samolyk (1995), Loan sales as a
response to market-based capital constraints, Journal of Banking &
Finance 19, no. 3, pp. 627-646.
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Although there are potential indirect benefits from allowing ABS
offerings under Regulation A, we believe that, in practice, Regulation
A would have little appeal to ABS issuers if available. Most ABS
offerings are much larger than the maximum allowable offer size under
the proposed rules. Average ABS offering sizes are generally well over
$50 million.\596\ Because of their large size, unregistered ABS
offerings--for which Regulation A might be an alternative offering
method--currently target Qualified Institutional Buyers (QIBs) under
Rule 144A. For these reasons, we do not believe excluding ABS from
eligibility for Regulation A will have an adverse effect on capital
formation.
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\596\ Our analysis indicates that from 2011-2013, 2.9% of ABS
issuances were below $50 million. This calculation uses the AB Alert
and CM Alert databases and includes only private label (non-GSE) ABS
deals.
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As explained above, we are proposing to increase the maximum
offering size of Regulation A offerings by introducing two tiers of
offerings. Tier 1 offerings may be up to $5 million and Tier 2
offerings may be up to $50 million. As compared to the current rules,
the
[[Page 3983]]
increase in the offering limit for some Regulation A offerings should
significantly lower issuance costs as a proportion of proceeds to the
extent that issuers face certain fixed costs or costs that do not
otherwise scale in proportion to offering size. This could make
Regulation A, as proposed to be amended, more cost effective and
attractive for issuers than existing Regulation A.\597\
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\597\ Section 401 of the JOBS Act also requires the Commission
to review the $50 million offering limit not later than two years
after enactment of the JOBS Act and every two years thereafter and,
if the Commission decides not to increase the amount, requires that
it report its reasoning to Congress. This requirement will benefit
issuers and investors by establishing a regular schedule for the
Commission to review whether the offering limit remains appropriate
or should be increased.
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Increasing the maximum offering size could lead to improved
liquidity of the securities sold in offerings under Regulation A as
proposed to be amended, to the extent that larger issuances permit
greater breadth of ownership.\598\ This would be of particular benefit
to companies that have a greater interest in floating their securities
in the public market for the purpose of creating liquidity than in
raising capital. Greater investor participation, particularly retail
investor participation, could increase investors' demand for liquidity,
resulting in more frequent trading and further increases in liquidity.
As a result of improved liquidity, current and potential investors in
larger Regulation A offerings could more easily unwind their
investments and at lower cost, thus making such investments more
attractive.
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\598\ Grullon, Gustavo, George Kanatas, and James P. Weston,
Advertising, breadth of ownership, and liquidity, Review of
Financial Studies 17.2, pp. 439-461. The study shows that large
issuances permit greater analyst coverage, which leads to higher
breadth of ownership.
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The increase in maximum offering size could also increase the
potential feasibility and value of intermediation services, such market
making and analyst coverage, with respect to Regulation A securities.
These services require sufficient investor demand for securities and
information following the issuance because market makers and analysts
are generally compensated on a per transaction or subscription basis.
The presence of these intermediation services could also have a
positive impact on investor participation and aftermarket liquidity of
Regulation A offerings, providing further demand for such services. It
is also possible, however, that even the large increase in maximum
offering size included in the statute and proposed rules would not be
sufficient to make such services economically feasible. \599\
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\599\ For instance, one prominent study finds that firm size is
an important predictor of analyst coverage. See Barth, Mary E., Ron
Kasznik, and Maureen F. McNichols., Analyst coverage and intangible
assets. Journal of Accounting Research 39.1 (2001): 1-34.
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Lastly, the increased maximum offering size could make Regulation A
more attractive to larger or more mature companies that are in less
need of capital than business start-ups. For these issuers, secondary
market liquidity may be the primary goal of an offering, and it is
possible that their resulting market capitalization could be much
greater than the maximum offering size.\600\ It is not clear whether
existing OTC markets would be able to supply the liquidity necessary
for large issuers.
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\600\ For instance, an issuer that floats 20% of its shares at
$50 million would be valued at $250 million following the issuance.
For this issuer, secondary market liquidity may facilitate
subsequent offerings by founders, employees, affiliates, and other
pre-issuance shareholders who are seeking a partial or full exit of
their holdings.
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c. Limitations on Secondary Sales
We propose to permit sales by selling securityholders of up to $1.5
million in Tier 1 offerings and to $15 million in Tier 2 offerings in
any twelve-month period, which represents 30% of the total maximum
offering size.\601\ This percentage is consistent with the current
Regulation A rules, which permit secondary sales of up to $1.5 million,
or 30% of the $5 million maximum offering size. The proposed rules
would also eliminate current Rule 251(b), which prohibits resales by
affiliated parties unless the issuer has had operating income in at
least one of the last two years.\602\ As discussed above, selling
securityholder access to Regulation A has historically been an
important part of the exemptive scheme, and for some issuers, secondary
market liquidity and the ability for significant company insiders and
affiliates to exit all or a portion of their holdings in the issuer may
be a more important consideration than the ability to raise new
capital.\603\ Hence, we believe that removing the limitation on
affiliate resales would have negligible costs and could enhance capital
formation and allocative efficiency of capital; however, it is also
possible that the limit on resales would not be a constraint on selling
securityholders in most instances. The table below shows that if the
proposed $15 million resale cap for Regulation A Tier 2 offerings had
been applied to registered offerings conducted in 2012, only a small
fraction of offerings below $50 million would have been affected.
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\601\ So, for example, an offering under $5 million but
involving secondary sales in excess of $1.5 million would require
exemption under section 3(b)(2) of the Exchange Act and would
therefore be a Tier 2 offering.
\602\ Tier 1 offerings may still be subject to state law
limitations on secondary sales and sales from affiliates.
\603\ For example, see Rydqvist, Kristian, and Kenneth
H[ouml]gholm (1995), Going public in the 1980s: evidence from
Sweden, European Financial Management 1.3, pp. 287-315.
Overview by Offering Size of the Percent of Registered Offerings Conducted in 2012 That Would Have Been Affected
by a $15 Million Limit on Secondary Sales
----------------------------------------------------------------------------------------------------------------
Initial public offerings Follow-on public offerings
\604\ (millions) \605\ (millions)
-----------------------------------------------------------
<$5 % $5-$50 % >$50 % <$5 % $5-$50 % >$50 %
----------------------------------------------------------------------------------------------------------------
Average percentage of proceeds to existing 0.0 1.4 13.4 2.8 5.1 21.7
shareholders sales.................................
Percentage offerings with proceeds to existing n/a 0.8 26.5 n/a 0.0 6.2
shareholders > $15 million.........................
----------------------------------------------------------------------------------------------------------------
[[Page 3984]]
Permitting these secondary sales provides exit options for company
founders, employees, and institutional investors, such as private
equity or venture capital investors, which can have a positive effect
on capital formation. For instance, because these investors consider
available exit options before participating in a new venture,
permitting secondary sales increases the incentives to make the
original investment.\606\ Allowing these exits could also facilitate an
optimal re-allocation of human capital. In particular, entrepreneurs
and venture capitalists have valuable talents and allowing them to exit
may free their attention for new projects and business ventures, and
allow them to make investments not otherwise possible.\607\ In turn,
their exits facilitate new investment opportunities for investors with
different skills and risk preferences, and potentially a more
appropriate investor base for an issuer.
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\604\ These estimates use data provided by Capital IQ and are
calculated by comparing the total IPO proceeds to the proceeds from
the IPO that went to incumbent shareholders as disclosed on Form S-
1.
\605\ These estimates use SCD data provided by Thompson
Analytics and, as above, these numbers are calculated by comparing
total offering proceeds to the proceeds that went to incumbent
shareholders.
\606\ Cumming, Douglas J., and Jeffrey G. MacIntosh (2003),
Venture-capital exits in Canada and the United States, The
University of Toronto Law Journal 53.2, pp. 101-199.
\607\ Zhang, Junfu (2011), The advantage of experienced start-up
founders in venture capital acquisition: Evidence from serial
entrepreneurs, Small Business Economics 36.2, pp. 187-208. Also see,
Gompers, P., A. Kovner, J. Lerner, D. Scharfstein (2006), Skill vs.
luck in entrepreneurship and venture capital: Evidence from serial
entrepreneurs, No. w12592. National Bureau of Economic Research.
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As an alternative, we could increase the cap on secondary sales
above the proposed $1.5 million for Tier 1 offerings and $15 million
for Tier 2 offerings. Increasing the cap on secondary sales could
provide additional exit options for incumbent shareholders, which could
indirectly increase capital formation because exiting investors could
more quickly redeploy their capital into new projects and business
ventures.
It is also possible that increasing the cap on secondary sales
could lead to better monitoring of the underwriter or placement agent
if used, as the selling securityholders have incentives to ensure that
the underwriter values the securities and conducts the offering so as
to maximize the value of their investment.\608\ Finally, increasing the
cap on secondary share offerings could result in more dispersed
ownership, resulting in better liquidity in the secondary resale
market. As described above, an increase in the portion of securities
sold to the public generally increases investor participation and the
breadth of ownership. The exit of a large shareholder that accounts for
an increase in public float has the benefit of changing the composition
of shareholders to those that do not have access to non-public
information about the issuer's operations and that predominantly trade
based on liquidity needs or publicly available information. Studies
show that this can result in lower spreads because it minimizes the
inventory risk that dealers face.\609\
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\608\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2,
pp. 723-752.
\609\ Bharath, S. and Amy Dittmar (2010), Why Do Firms Use
Private Equity to Opt Out of Public Markets?, Review of Financial
Studies 23(5), pp. 1771-1818.
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Increasing the permitted amount of secondary sales could also
result in potential costs. In particular, it is often argued that the
incentives of company management are better aligned with other
shareholders when managers hold a significant equity interest in the
company.\610\ Specifically, it can be important for insiders to retain
some ownership stake to ensure that the incentives of directors and
officers are aligned.\611\ Hence, it is possible that affiliate sales,
if too large, could be detrimental to purchasing investors. However,
there is no conclusive evidence that affiliate sales are associated
with poor post-offering performance in the context of IPOs, \612\ and
there is some evidence that affiliate sales are associated with
positive post-IPO performance, as the selling affiliates have
incentives to monitor and limit rent capture by underwriters.\613\
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\610\ See, e.g., Jensen, Michael C., and William H. Meckling
(1978), Theory of the firm: Managerial behavior, agency costs and
ownership structure, Journal of Financial Economics 3.4, pp. 305-
360.
\611\ Core, John E., Robert W. Holthausen, and David F. Larcker
(1999), Corporate governance, chief executive officer compensation,
and firm performance, Journal of Financial Economics 51.3, pp. 371-
406.; Mehran, Hamid (1995), Executive compensation structure,
ownership, and firm performance, Journal of Financial Economics
38.2, pp. 163-184.
\612\ Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah.
Ownership and operating performance of companies that go public.
Journal of Financial Economics 44.3 (1997): 281-307.
\613\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2,
pp. 723-752.
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There may also be investor protection benefits in some cases from
precluding affiliate sales by limiting transactions between informed
investors (affiliates) and uninformed investors, such as retail
investors. These potential benefits may be limited, as buyers are aware
that they are less informed than affiliates and consequently, security
prices should generally reflect these asymmetries at the time of the
offering.\614\ Investors also may prefer to transact with affiliates in
an offering because affiliates assume additional liability for
misstatements in the offering documents. Thus affiliates may be
sensitive to the risks of exploiting uninformed investors during an
offering in which they are selling securities. For example, some
empirical evidence suggests venture capitalists avoid reputational
consequences of selling over-valued securities to uninformed investors
during IPOs.\615\ Furthermore, we believe that state oversight of
affiliate sales in Tier 1 offerings and the proposed investment
limitation and financial statement and disclosure requirements for Tier
2 offerings could provide additional investor protection.
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\614\ Easley, David, and Maureen O'Hara (2004), Information and
the cost of capital, The Journal of Finance 59.4, 1553-1583.
\615\ Lin, Timothy H., and Richard L. Smith (1998), Insider
reputation and selling decisions: the unwinding of venture capital
investments during equity IPOs, Journal of Corporate Finance 4.3,
pp. 241-263.
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Using an operating income criterion for permitting secondary sales
could promote investor confidence with respect to issuer viability by
reducing the incidence of insiders offloading investments in companies
that are not financially viable. However, the Commission believes that
doing so may result in an under- or over-inclusion of companies that
are viable investment opportunities because there is no single
criterion that would provide an accurate measure of the financial
health of all companies that could rely on Regulation A.\616\
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\616\ Indeed, one study suggests that standard accounting
measures are often poor indicators of financial health in small
companies. Davila, Antonio, and George Foster (2005), Management
accounting systems adoption decisions: evidence and performance
implications from early-stage/startup companies, The Accounting
Review 80.4, pp. 1039-1068.
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d. Investment Limitation
Regulation A currently does not place any limitations on the amount
of securities that may be purchased by an investor. As explained above,
we are proposing that purchasers of Tier 2 offerings be limited to
investing no more than 10% of the greater of the investor's annual
income and net worth.\617\ By limiting investment size in Tier 2
Regulation A offerings in that way, the
[[Page 3985]]
proposed rules could limit potential losses to investors; however, they
could also limit potential gains.
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\617\ Annual income and net worth would be calculated for
individual purchasers as provided in the accredited investor
definition in Rule 501 of Regulation D. See 17 CFR 230.501. For
example, individuals' net worth calculations would exclude the value
of their primary residence.
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The proposed rules would permit issuers to rely on investors'
representation that they are investing no more than 10% of their net
worth and annual income. The ability to rely on investor
representations should help to mitigate potential costs that issuers
could incur in relation to this requirement. At the same time, we
realize that investors might make inaccurate representations, whether
intentionally or not, which could expose these investors to the risk of
increased losses.
It is also possible that preventing investors from investing more
than 10% of the greater of their income and net worth in a Tier 2
Regulation A offering could limit capital formation, particularly if
potential purchasers of Tier 2 offerings are not able to meet minimum
investment sizes that may be required by some issuers.\618\ While these
issuers could require smaller minimum investment sizes, doing so may
entail searching for, and involving more, investors that contribute to
a smaller portion of the offering, which could increase transaction
costs. If issuers maintain minimum investment sizes, the proposed rules
could limit investor participation in Tier 2 offerings.
---------------------------------------------------------------------------
\618\ For example, in 2012 approximately half of the Regulation
D offerings that would have been eligible for reliance on Regulation
A included a minimum investment amount; the median minimum
investment amount was $20,000.
---------------------------------------------------------------------------
Furthermore, in some settings, it may be beneficial for issuers to
involve large investments from some types of investors in Regulation A
offerings. For example, it could be beneficial to allow company
officers to invest a substantial portion of their net worth in an
offering as a mechanism to align the officers' incentives with those of
the other securityholders. While we recognize that limiting investment
size could result in less capital being raised by issuers in Regulation
A offerings, we believe that preventing investors from exposing more
than 10% of the greater of their income or net worth in a Tier 2
offering could enhance investor protection by limiting potential
losses.
As an alternative, we could also require that purchasers of Tier 1
offerings, like purchasers of Tier 2 offerings, be limited to investing
no more than 10% of the greater of their annual income and net worth.
We believe, however, that because Tier 1 offerings would continue to be
subject to additional state oversight, any benefit associated with
limiting the investment size in Tier 1 offerings could potentially be
eclipsed by state-level protections. We also recognize that Tier 1
offerings would be subject to fewer reporting obligations and other
investor protections than Tier 2 offerings, which could make investor
losses due to fraud more likely under Tier 1.
e. Integration
We are proposing to allow companies to conduct other exempt
offerings that would not be integrated with an offering made in
reliance on Regulation A under the proposed amendments, as long as the
company complies with the requirements of the exemption relied upon for
the particular offering. We could have selected an alternative that
would have aggregated the amounts offered in reliance on Regulation A
with the amounts offered pursuant to other exempt offerings. Under such
an alternative, the amounts raised in other exempt offerings would
count toward the maximum offering amount under Regulation A. Compared
to this alternative, the ability of issuers to conduct other exempt
offerings that would not count toward the maximum offering amount under
Regulation A would allow issuers to raise more capital.
f. Exclusion From Section 12(g)
As amended by the JOBS Act, Section 12(g) of the Exchange Act
requires, among other things, that an issuer with total assets
exceeding $10 million and a class of securities held of record by
either 2,000 persons, or 500 persons who are not accredited investors,
register such class of securities with the Commission.\619\ As
explained above, the JOBS Act includes a provision regarding the
treatment under Section 12(g) of securities issued in securities-based
crowdfunding transactions pursuant to Section 4(a)(6) of the Securities
Act, but did not provide a similar provision in Section 3(b)(2). We are
not proposing to exempt Regulation A securities from the requirements
of Section 12(g).
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\619\ See Section 501 of the JOBS Act.
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As discussed above and in more detail below, the intent of the
proposed rules is to provide sufficient financial disclosure to help
investors make informed decisions while limiting the costs imposed on
issuers for doing so. We believe that the limited required initial and
ongoing disclosures, as proposed, accomplish this objective. If
Regulation A issuers cross the shareholder of record threshold
described above, however, they would no longer benefit from the limited
Regulation A disclosure environment and would be subject to the more
comprehensive periodic reporting requirements under the Exchange Act.
This may not have significant economic consequences for issuers that
are prepared to list on a national securities exchange and would
otherwise be required to register with the Commission under Section
12(b) and become subject to Exchange Act reporting requirements. For
issuers that do not wish to list on a national securities exchange or
do not meet listing requirements, the additional disclosure burden
could provide incentive to take actions that would allow them to
deregister and cease reporting.\620\ In this case, the benefits of the
Regulation A environment would be lost to the issuer's securityholders.
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\620\ Leuz, Christian, Alexander Triantis, and Tracy Yue Wang
(2008), Why do firms go dark? Causes and economic consequences of
voluntary SEC deregistrations, Journal of Accounting and Economics
45.2, pp. 181-208.
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Because of the manner in which shareholders of record are
tabulated, the likelihood of a Regulation A issuer triggering the 12(g)
threshold is low if not triggered at the time of offering. In
particular, beneficial owners of Regulation A issuers who hold their
shares at a broker are not counted as a record holder. Their shares,
held in ``street name,'' are counted at the broker level, so that each
brokerage at which there is a least one beneficial owner would
constitute one shareholder of record. Because of this treatment, the
number of shareholders of record is often significantly less than the
number of beneficial owners.\621\
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\621\ Langevoort, Donald, and Robert Thompson,
Publicness' in Contemporary Securities Regulation after
the JOBS Act, Georgetown Law Journal, pp. 12-002.
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g. Liability Under Section 12(a)(2)
Consistent with current Regulation A, sellers of securities under
Regulation A as proposed to be amended would be subject to liability to
investors under Section 12(a)(2) for any offer or sale by means of an
offering circular or an oral communication that includes a material
misleading statement or material misstatement of fact. We believe that
this would continue to benefit investors by encouraging issuers and
selling securityholders to truthfully disclose all relevant facts
associated with an offering, which in turn would allow potential
investors to better assess the merits of the offering and make informed
decisions. We do not expect this requirement to impose any significant
costs beyond the liability already incurred by current Regulation A
issuers.
[[Page 3986]]
In the context of registered transactions, Section 11 liability
applies not only to the issuer and underwriter but also, in certain
circumstances, to other specified persons, including the accountants,
attorneys and other experts involved in preparing the registration
statement. In contrast, Section 12(a)(2) liability applies by its terms
only to sellers, and does not extend to ``those who merely assist in
another's solicitation efforts.'' \622\ Therefore, we anticipate that
auditors and placement agents may not demand as much compensation for
bearing the legal risks associated with participation in Regulation A
offerings as they would for offerings subject to Section 11 liability.
We recognize, however, that Section 12(a)(2) liability may result in
lower levels of scrutiny by such intermediaries and may therefore
expose investors to additional risks.
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\622\ Pinter v. Dahl 486 U.S. 622 (1988), at 651 fn. 21.
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3. Offering Statement
We are proposing a number of modifications to the offering
statement required under Regulation A. Under current Regulation A,
offering materials are submitted to the Commission in paper form. We
are proposing to require electronic submission of offering materials so
that these materials can more easily be made available to the public.
As discussed in detail above, electronic submission has numerous
benefits to issuers and investors. For example, electronic filing
allows offering materials to be more easily accessed and analyzed by
regulators, investors, and financial market researchers. We anticipate
the effect of providing electronic access to offering materials to the
public will promote liquidity and pricing efficiency for the issued
securities. We also recognize that electronic filing on EDGAR may
impose costs on issuers, as discussed below.
We also are proposing a number of modifications to Form 1-A
intended to streamline the type of information included in the offering
circular. In general, we are proposing to maintain Form 1-A's three-
part structure and to make various revisions and updates to the form.
For Part I, the substantive additions to Regulation A items are: issuer
eligibility, bad actor disqualification and disclosure, and a summary
of key issuer financial information and offering details. Since most of
this information is already contained in other offering materials, the
additional reporting burden in Part I of the Form 1-A should not entail
significantly higher costs in terms of time or out-of-pocket expenses.
Regulation A issuers currently are required to file their offering
statements on paper. Paper documents are difficult to process both for
the Commission and for investors, analysts, and other researchers. The
proposed rules require issuer and offering details in Part I of Form 1-
A to be reported in XML format that once filed with the Commission will
be machine readable. This format will allow for more efficient reviews
and the systematic tracking of offering particulars by investors,
regulators, and other market participants such as financial market data
aggregators.
The rule also proposes eliminating one of the three alternate
models for providing narrative disclosure under Part II of the offering
statement. Currently, issuers can choose between Model A (for issuers
that are corporations only), Model B, and Part 1 of Form S-1 as
described in the release. Elimination of Model A, wherein issuers
provided disclosure in a question-and-answer format, is unlikely to
affect most issuers, as historically, only about 20% of issuers have
elected to use Model A. Eliminating Model A also addresses regulators'
concerns about possible confusion that could result from the lack of
uniformity of information presented in the question-and-answer in the
format. Issuers continue to have the option of using Form S-1.
The proposed changes to Model B include statutorily required
disclosures and a section containing management discussion and analysis
of the issuer's liquidity, capital resources, and business operations.
As discussed in more detail below, these additional items may impose
costs on the issuer, while providing important information to
investors.
Consistent with JOBS Act requirements with regard to ongoing
reporting by Regulation A issuers, we are proposing to require offering
materials to include audited financial statements, but only for issuers
conducting a Tier 2 offering. The benefits of audited financial
statements should provide investors with greater confidence in the
accuracy and quality of the financial statements of issuers seeking to
raise larger amounts of capital. We understand that audited financial
statements could entail significant costs to issuers, and that the
costs of an audit may discourage the use of Regulation A as proposed to
be amended. Based on a compilation of data submitted by reporting
companies, the average cost of an audit for offerings of less than $50
million is approximately $114,000.\623\ Additionally, the proposed
rules do not require that the auditor be PCAOB registered, which could
reduce the cost of an audit for some issuers.
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\623\ See Audit Analytics, Auditor-Fees, available at http://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee
database contains fee data disclosed by SEC reporting companies in
electronic filings since January 1, 2001.
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The proposed amendments also include a limitation on the age of
financial statements at the time of qualification or filing (on these
dates, financial statement data must not be older than nine months).
This provision ensures that qualification is based on information that
closely reflects a company's current financial condition. The
additional costs from these changes are somewhat mitigated by decreases
in disclosure requirements regarding the issuer's business and
transactions with related persons. The higher level of disclosure
would, however, enable investors to have better information for making
their investment decisions.
The proposed rules would also allow for continuous or delayed
offerings of eligible securities by an eligible issuer under Regulation
A, on a basis analogous to shelf registration under Rule 415 for
registered offerings, although acquisition shelves would not be
permitted under Regulation A. Unlike existing Regulation A, the
proposed rules also restrict at-the-market shelf offerings. Issuers
would need to update their offering circulars annually and after the
second fiscal quarter, the same timetable as is proposed to apply for
ongoing reporting requirements.
The current Regulation A rules allow for continuous or delayed
offerings under Rule 415, but Rule 415 only discusses registered
offerings, which may have caused confusion in its application to
Regulation A. The provisions in Regulation A as proposed explicitly
allow for continuous or delayed offerings and would provide greater
clarity. It would now be clear that eligible issuers would have greater
flexibility to select the timing of their offerings based on
macroeconomic conditions such as interest rates and market volatility,
or other company specific factors that may contribute to a successful
offering.\624\ Issuers would not have to wait for the Commission or a
state regulator to complete what can sometimes be a lengthy review
process. These factors should contribute to more timely financing
decisions and higher capital market efficiency. For example,
[[Page 3987]]
existing research for Rule 415 offerings in the registered offering
market shows that costs of intermediation in shelf offerings, and
consequently the cost of raising equity through shelf registration, is
lower than through traditional registration.\625\
---------------------------------------------------------------------------
\624\ Bayless, Mark and Susan Chaplinsky, 1996, ``Is there a
window of opportunity for seasoned equity issuance?'' Journal of
Finance 51, 253-278.
\625\ Bethel, Jennifer and Laurie Krigman, ``Managing the Cost
of Issuing Common Equity: The Role of Registration Choice'',
Quarterly Journal of Finance and Accounting, 47 (4) (2008), pp. 57-
85.
---------------------------------------------------------------------------
Excluding at the market offerings will avoid situations where sales
at fluctuating market prices result in a breach of the offering ceiling
or the cap on secondary sales. Issuers could thus avoid losing their
exemption under Regulation A due to unanticipated market factors. While
eligible issuers have to file periodic updates and amendments as
described above, they have the flexibility to file only a supplement to
the offering circular if there were no fundamental changes. Hence, the
cost to issuers of having the flexibility to make a continuous or
delayed offering could be minimal.
4. Solicitation of Interest (``Testing the Waters'')
Consistent with Title IV of the JOBS Act, the proposed rules permit
issuers to ``test the waters'' by soliciting interest in the offering.
Regulation A issuers would be allowed to use all forms of
communications with all potential investors in these communications.
Under current Regulation A, testing the waters is permitted only until
the offering statement is filed with the Commission, and solicitation
material is required to be filed prior to or concurrent with first use.
Under the proposal, testing the waters would be permitted both before
and after filing of the offering statement, and testing the water
materials would be required to be filed with the Commission at the time
of initial submission of the offering statement, and would be updated
thereafter.
In general, allowing issuers to gauge interest through testing the
waters may reduce uncertainty regarding whether an offering could be
completed successfully. If after testing the waters, the issuer is not
confident that it will attract sufficient investment, the issuer can
consider alternate methods of raising capital and thereby avoid the
costs of an unsubscribed or under-subscribed offering. Allowing
solicitation prior to filing enables issuers to determine market
interest in their securities before incurring the costs of preparing
and filing an offering statement.
By expanding the permissible scope of testing the waters, the
proposed rules could have several benefits. In particular, allowing
issuers to advertise their intention to raise capital prior to
qualification of the offering statement could decrease the time
required to raise the desired amount of capital. This option may be
useful for smaller companies, especially early-stage companies, which
may find it too costly to solicit through intermediaries. Thus, at
least for some companies, the proposed rules could lead to lower search
costs and therefore lower issuance costs. The expansion of testing the
waters could also increase the type and extent of information available
to investors, which could lead to more efficient prices for the offered
securities.
In addition, to the extent that the proposed rules permit testing
the waters for an expanded period of time, investors who previously
found it difficult to find investment opportunities in private
offerings may be able to find and potentially invest in a larger and
more diverse pool of investment opportunities, allowing investors to
more efficiently allocate their capital. The net effect would be to
enhance both capital formation and allocative efficiency. Further,
requiring issuers to attach the offering statement to their testing the
waters materials (or providing information about where it can be
accessed) would allow investors to be fully aware of the details of the
offering material in a timely manner that would support sound
investment decisions.
We recognize that there would also be potential costs associated
with expanding the use of testing the waters. In particular, to the
extent that testing the waters increases under the proposed rules, the
proposed rules could result in increased levels of inappropriate and
potentially fraudulent activity, because solicitation of these
offerings can be directed towards all investors, including non-
accredited and unsophisticated investors. To some extent, these costs
are mitigated by the application of Section 12(a)(2) and the general
antifraud provisions of the federal securities laws. By expanding the
scope of permissible testing the waters, the proposed amendments could
also lead to investor confusion about how to process the different
disclosure materials they receive. For example, investors already aware
of an impending offering through testing the waters materials may
neglect to read the offering circular, which could be substantively
different from the material distributed when testing the waters.
The Commission could require submission of testing the waters
materials before or concurrent with first use, allowing regulators to
better assess how testing the waters is used to gauge investor interest
prior to filing of the offering statement. Requiring initial submission
of testing the waters materials could increase costs for issuers that
decide not to proceed with the offering after testing the waters.
Requiring submission before filing the offering circular could decrease
issuers' willingness to test the waters and could potentially limit the
overall reliance on Regulation A. Any additional solicitation materials
that could result from requiring early submission would also lead to an
increase in the amount of material available for investors about the
offering, which could increase confusion and the costs incurred by
investors evaluating their investment opportunities.
5. Ongoing Reporting Requirements
Requiring limited ongoing disclosure could improve investor
decision-making and ultimately benefit issuers by improving the price
efficiency of securities issued through an amended Regulation A
offering, to the extent that secondary markets for these securities
develop. Ongoing financial disclosures and mandatory disclosures of key
material events would allow existing and potential future investors to
periodically update their expectations of the issuer's prospects and
act accordingly. By standardizing the content, timing, and form of
these disclosures, the proposed amendments would make it easier for
investors to compare information across issuers than if disclosure
decisions were otherwise left to voluntary, bilateral arrangements
between issuers and investors, as would be the case without mandatory
disclosures. Hence, the proposed amendments to require ongoing
disclosure under Regulation A would eliminate many potential
differences in disclosures between issuers that could otherwise impair
the capital allocation decisions of investors,\626\ particularly to the
extent that such securities trade in OTC markets.
---------------------------------------------------------------------------
\626\ See, e.g., Luigi Zingales (2009), The Future of Securities
Regulation, Journal of Accounting Review, Vol 47, pp. 391-425.
---------------------------------------------------------------------------
More generally, the proposed ongoing disclosure requirements should
result in fewer information asymmetries between issuers and their
investors than currently exist for securities offered under the
existing Regulation A or other exempt offering methods. The enhanced
disclosure requirements should help improve the ability of investors
with different risk preferences to identify investment opportunities
best suited for
[[Page 3988]]
their risk tolerance. They will provide investors with a useful
benchmark with which to evaluate the performance of other companies,
both within and outside of the proposed Regulation A market. This
enhanced information environment should improve the allocative
efficiency of capital and facilitate the subsequent transfer of issued
securities in secondary markets, allowing for more efficient pricing
and liquidity.\627\
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\627\ See Graham, J., C. Harvey and S. Rajgopal (2005), The
Economic Implications of Corporate Financial Reporting. Journal of
Accounting and Economics 40, pp. 3-73; Durnev, A., R. Morck and B.
Yeung (2003), Value Enhancing Capital Budgeting and Firm-Specific
Stock Returns Variation, Journal of Finance 59, pp. 65-106.
---------------------------------------------------------------------------
In addition to the direct costs of preparing the mandatory
disclosures, issuers of securities in a Regulation A offering under the
proposed rules would be subject to potential indirect disclosure costs
by revealing to their competitors and other market participants
information about their business not previously required to be
disclosed.\628\ For these issuers, ongoing reporting requirements under
Regulation A may render alternative offering methods more appealing,
such as Rule 506(c) of Regulation D, which allows general solicitation
but does not impose any ongoing disclosure requirements.
---------------------------------------------------------------------------
\628\ Campbell, Tim S (1979), ``Optimal investment financing
decisions and the value of confidentiality.'' Journal of Financial
and Quantitative Analysis, pp. 913-924.
---------------------------------------------------------------------------
Nonetheless, the indirect costs of increased disclosures are
present for any issuer seeking improved liquidity through access to
public capital markets and a broader investor base that includes
unaccredited investors. Enhanced disclosure is likely to improve the
liquidity of the securities of Regulation A issuers in the secondary
market, particularly for securities that are traded in the OTC
market.\629\ As discussed above, there is a positive feedback effect
from increased liquidity, whereby increased trading engenders more
accurate pricing by incorporating a greater number of investors' views.
More accurate pricing, in turn, encourages greater investor
participation and greater liquidity, and provides investors with more
accurate information. Increased price efficiency can also facilitate a
lower cost of capital by lessening the discount investors otherwise
place on illiquid securities and securities for which there is
increased risk of asymmetric information. Hence, there would be
significant indirect effects of improving capital formation.
---------------------------------------------------------------------------
\629\ Ang, A., Shtauber, A., & Tetlock, P. (2011). Asset Pricing
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of
Financial Studies, forthcoming.
---------------------------------------------------------------------------
a. Periodic Reporting Requirements
Currently, Regulation A issuers do not have ongoing reporting
obligations. Under the proposed amendments, issuers that conducted Tier
2 offerings would be required to provide annual audited financial
statements on Form 1-K. The Commission is further proposing that
issuers that conducted Tier 2 offerings provide a semi-annual update on
Form 1-SA and current event reporting on Form 1-U. These proposed
requirements are more extensive, in terms of breadth and frequency,
than those for current Regulation A offerings and those for other
exempt offerings.\630\ The proposed additional disclosures are intended
to reduce the information asymmetries between companies that conduct
Tier 2 offerings and their potential investors, both at the time of the
offering, through the disclosure document, and on an ongoing basis, via
ongoing reporting. While we considered whether we should require
certain additional disclosures to be provided in structured data
format, the proposed rules do not require these disclosures to be
machine readable. Not requiring structured data should help to limit
costs to issuers while still providing meaningful information to
investors. While not requiring a structured data format could limit the
ability for investors, academics, regulators and other market
participants to analyze firms relying on Regulation A, as proposed to
be amended, we do not believe it is advisable to impose such a
requirement on issuers relying on the exemption.
---------------------------------------------------------------------------
\630\ Small private companies, such as those that might consider
a Regulation A offering, typically do not disclose information as
frequently or as extensively as public companies, if at all.
Moreover, unlike public companies, small private companies are not
required to have their financial statements audited or to hire an
independent third party to certify the information disclosed.
---------------------------------------------------------------------------
b. Current Event Reporting Requirements
As discussed above, in addition to the proposed annual and semi-
annual reporting requirements, the proposed rules include several
event-based disclosure requirements, similar to the event-based
reporting of reporting companies on Form 8-K. These events, like the
ongoing financial performance of a company, can be important
determinants in an investor's capital allocation decision. The direct
cost of reporting these events is often minimal, particularly to the
extent that the disclosed information is simply the announcement of a
new development, such as the sale of an unregistered security. Of the
26 relevant current reporting items on Form 8-K, listed in the table
below, eleven are proposed to be required to be reported, in whole or
in part, by issuers that conducted Tier 2 offerings.
------------------------------------------------------------------------
Description of event
8-K Item No. triggering reporting Proposed Regulation A
obligation requirement
------------------------------------------------------------------------
Section 1--Registrant's Business and Operations
------------------------------------------------------------------------
Item 1.01............. Entry into a Material Sometimes.
Definitive Agreement.
Item 1.02............. Termination of a Sometimes.
Material Definitive
Agreement.
Item 1.03............. Bankruptcy or Yes.
Receivership.
Item 1.04............. Mine Safety--Reporting No.
of Shutdowns and
Patterns of Violations.
------------------------------------------------------------------------
Section 2--Financial Information
------------------------------------------------------------------------
Item 2.01............. Completion of Sometimes.
Acquisition or
Disposition of Assets.
Item 2.02............. Results of Operations No.
and Financial Condition.
Item 2.03............. Creation of a Direct No.
Financial Obligation or
an Obligation under an
Off-Balance Sheet
Arrangement of a
Registrant.
Item 2.04............. Triggering Events That No.
Accelerate or Increase
a Direct Financial
Obligation or an
Obligation under an Off-
Balance Shelf
Arrangement.
Item 2.05............. Costs Associated with No.
Exit or Disposal
Activities.
[[Page 3989]]
Item 2.06............. Material Impairments.... No.
------------------------------------------------------------------------
Section 3--Securities and Trading Markets
------------------------------------------------------------------------
Item 3.01............. Notice of Delisting or N/A.
Failure to Satisfy a
Continued Listing Rule
or Standard; Transfer
of Listing.
Item 3.02............. Unregistered Sales of Yes.
Equity Securities.
Item 3.03............. Material Modification to Yes.
Rights of Security
Holders.
------------------------------------------------------------------------
Section 4--Matters Related to Accountants and Financial Statements
------------------------------------------------------------------------
Item 4.01............. Changes in Registrant's Yes.
Certifying Accountant.
Item 4.02............. Non-Reliance on Yes.
Previously Issued
Financial Statements or
a Related Audit Report
or Completed Interim
Review.
------------------------------------------------------------------------
Section 5--Corporate Governance and Management
------------------------------------------------------------------------
Item 5.01............. Changes in Control of Yes.
Registrant.
Item 5.02............. Departure of Directors Sometimes.\631\
or Certain Officers;
Election of Directors;
Appointment of Certain
Officers; Compensatory
Arrangements of Certain
Officers.
Item 5.03............. Amendments to Articles No.
of Incorporation or
Bylaws; Change in
Fiscal Year.
Item 5.04............. Temporary Suspension of No.
Trading Under
Registrant's Employee
Benefit Plans.
Item 5.05............. Amendments to the No.
Registrant's Code of
Ethics, or Waiver of a
Provision of the Code
of Ethics.
Item 5.06............. Change in Shell Company No.
Status.
Item 5.07............. Submission of Matters to No.
a Vote of Security
Holders.
Item 5.08............. Shareholder Director No.
Nominations.
------------------------------------------------------------------------
Section 6--Asset-Backed Securities (N/A)
Sections 7-9--Other
------------------------------------------------------------------------
Item 7.01............. Regulation FD Disclosure No.
Item 8.01............. Other Events............ Optional.
Item 9.01............. Financial Statements and Sometimes.
Exhibits.
------------------------------------------------------------------------
We have chosen to require the reporting of key current events based
on our assessment of their potential usefulness to investors in these
types of offerings and issuers and based on the suggestions of
commenters. For instance, we are proposing to require the disclosure of
certain events that directly affect the rights of securityholders
(Items 3.02 and 3.03). Because sales of securities provide important
information about an issuer's capital structure and could dilute
existing shareholders, these events can have direct securities pricing
implications. We are also proposing to require issuers to disclose
changes in their certifying accountant or non-reliance on previously
issued financial statements or a related audit report (Items 4.01 and
4.02). We believe that these items are relevant information for
investors who rely on the information made available to them through
the issuer's periodic reporting, and it is important for investors to
know if financial statements could be incorrect or compromised in some
way.
---------------------------------------------------------------------------
\631\ Form 1-U focuses on officers, as discussed in the release.
---------------------------------------------------------------------------
We also propose requiring disclosure of certain meaningful
corporate events. Bankruptcy (Item 1.03) can have direct effects on
valuation as it changes a number of obligations of the issuer,\632\ the
fiduciary duties of executive officers and directors,\633\ and can
potentially call into question the claims of existing securities to
issuer assets and cash flows.\634\ Similarly, reorganizations, such as
takeovers (Item 5.01), debt restructuring and mergers (Items 1.01,
1.02, and 2.01), change companies' obligations and organizational
structure in ways that can have a material impact on security prices.
---------------------------------------------------------------------------
\632\ For example, the automatic stay provision suspends
contractual obligations.
\633\ Firms nearing the ``zone of insolvency'' have a
responsibility to maximize ``enterprise value'', which is generally
not the same as firm value, as it can include the value of providing
employment, among other things.
\634\ Renegotiation plans are subject to approval from a
majority of owners of the ``fulcrum'' security which can be
difficult to determine.
---------------------------------------------------------------------------
Finally, we propose requiring the disclosure of changes in issuer
management, which can have direct implications on the issuer's future
prospects and security prices.\635\ Therefore we believe disclosure of
management changes would benefit investors.
---------------------------------------------------------------------------
\635\ Murphy, Kevin J., and Jerold L. Zimmerman (1993),
Financial performance surrounding CEO turnover. Journal of
Accounting and Economics 16.1 pp. 273-315.
---------------------------------------------------------------------------
c. Termination or Suspension of Reporting Requirements
The proposed rules allow for a termination or suspension of an
issuer's ongoing reporting obligations if the number of record holders
of the class of securities to which the Regulation A offering statement
relates falls below 300 persons or suspension upon registration of a
class of securities under Section 12 of the Exchange Act or
registration of an offering of securities under the Securities Act.
For Tier 2 issuers, which are subject to substantial ongoing
reporting requirements, the option for suspending or terminating the
Regulation A reporting obligations could be beneficial, especially for
issuers that are not seeking secondary market liquidity, and smaller
issuers for which the fixed costs of complying with the ongoing
disclosure requirements would weigh more heavily.\636\ The option to
suspend or terminate periodic reporting might be costly for investors
because it would decrease the amount of information available about the
issuer, making it
[[Page 3990]]
more difficult to monitor the issuer and accurately price its
securities or to find a trading venue that would allow liquidation of
the investment. Suspension or termination of reporting might
particularly adversely affect minority investors if the lack of current
financial or other material information, and/or the presence of large
inside or affiliate shareholders could make it easier for controlling
shareholders to expropriate capital from minority investors. In most
cases we propose to require Tier 2 issuers to notify the Commission
upon suspension or termination of reporting requirements through Form
1-Z, which for Tier 2 issuers, will request information regarding the
reason for the suspension or termination. To the extent that ongoing
reporting is suspended due to registration of a class of securities
under the Exchange Act, investors may benefit from enhanced reporting
under the Exchange Act requirements.
---------------------------------------------------------------------------
\636\ See Request for Comment 90 above (seeking comment on,
among other things, whether we should exempt some issuers from
ongoing reporting on the basis of whether such issuer has taken
steps to foster a secondary market for their securities).
---------------------------------------------------------------------------
Although Tier 1 issuers are not subject to periodic and current
event reporting requirements, we propose to require issuers of Tier 1
offerings to notify the Commission of their terminated reporting
obligation using Form 1-Z upon completion of the offering. Under the
proposed rules, Form 1-Z would take the place of Form 2-A, which is
currently required upon completion of a Regulation A offering. For Tier
1 issuers, Form 1-Z will require issuers to provide updated information
regarding some features of the completed offering, such as the final
proceeds raised net of fees.\637\ This information will allow the
Commission to monitor whether issuers can reliably raise the projected
amount of capital in Regulation A offerings. Form 1-Z would elicit
limited summary information about the completed offering and the
issuer, would not require any additional information from issuers that
would not have been forecasted and provided in the offering materials
of Tier 1 issuers and, therefore, should not impose substantial
additional costs on the issuer.
---------------------------------------------------------------------------
\637\ We do not propose to require notification of the
completion of a Tier 2 offering as the information will be included
in other ongoing reporting materials required from issuers of Tier 2
offerings.
---------------------------------------------------------------------------
6. Bad Actor Disqualification
We propose to amend Rule 262 to include bad actor disqualification
provisions in substantially the same form recently adopted under Rule
506(d), but without the categories of covered persons specific to fund
issuers, which are not proposed to be eligible to use Regulation
A.\638\ We believe that the proposed disqualification provisions are
not likely to impose significant incremental costs on issuers and other
covered persons because the proposed rules are substantially similar to
the disqualification provisions under existing Regulation A and other
exemptions.
---------------------------------------------------------------------------
\638\ See proposed Rule 262.
---------------------------------------------------------------------------
The proposed rules likely would induce issuers to implement
measures to restrict bad actor participation in offerings made in
reliance on Regulation A, which could help reduce the potential for
fraud in these types of offerings. If disqualification standards lower
the risk premium associated with the presence of bad actors in
securities offerings, any resulting reduction in fraud could also
reduce the cost of raising capital to issuers that rely on Regulation A
as proposed to be amended. In addition, the requirement that issuers
determine whether any covered persons are subject to disqualification
might reduce the need for investors to do their own investigations and
could therefore increase efficiency.
The proposed disqualification provisions likely would also impose
costs on issuers, other covered persons and investors. If issuers are
disqualified from participating in offerings made in reliance on
proposed Regulation A, they may experience increased costs in raising
capital through alternative methods. These costs could hinder potential
investment opportunities for such issuers, which could have negative
effects on capital formation. In addition, issuers may incur personnel
costs to avoid the participation of covered persons who are subject to
disqualifying events. Issuers also might incur costs by restructuring
share ownership to avoid beneficial ownership of more than 20% from
individuals subject to disqualifying events. Finally, issuers might
incur costs by devoting resources to seeking disqualification waivers.
As discussed above, we are also proposing a reasonable care
exception under Regulation A on a basis consistent with Rule 506.\639\
We anticipate that the reasonable care exception also would impose
benefits and costs. For example, a reasonable care exception could
encourage capital formation by enabling Regulation A offerings to go
forward, where issuers might have been deterred from relying on
Regulation A if they risked potential liability under Section 5 of the
Securities Act for unknown disqualifying events. This exception could
increase the potential for fraud by limiting issuers' incentive to
determine whether bad actors are involved with their offerings. We also
recognize that some issuers might incur costs associated with
conducting and documenting their factual inquiry into possible
disqualifications. The rule's flexibility about the nature and extent
of the factual inquiry required could increase these costs because
uncertainty could drive issuers to misunderstand requirements for
compliance; however, the flexibility would allow an issuer to tailor
its factual inquiry as appropriate to its particular circumstance,
thereby potentially reducing costs associated with conducting the
inquiry.
---------------------------------------------------------------------------
\639\ See proposed Rule 262(b)(4).
---------------------------------------------------------------------------
The proposed requirement that issuers disclose matters that would
have triggered disqualification, had such matters occurred after the
effective date of proposed Regulation A, also would impose costs and
benefits. The proposed disclosure requirement would likely reduce
issuer costs, relative to the cost of disqualification. This approach
would not preclude the participation of past bad actors, whose
disqualifying events occurred prior to the effective date of the
proposed rules, which could expose investors to the risks that arise
when bad actors are associated with an offering. Nevertheless,
investors would benefit by having access to such information that could
inform their investment decisions. Disclosure of triggering events may
also make it more difficult for issuers to attract investors, and
issuers may experience some or all of the impact of disqualification as
a result. Some issuers may, accordingly, choose to exclude involvement
from prior bad actors to avoid such disclosures.
We believe the inclusion of Commission cease-and-desist orders in
the list of disqualifying events would not impose a significant,
incremental cost on issuers and other covered persons because many
might already be subject to Commission cease-and-desist orders or may
already be disqualified on the basis of orders issued by state
regulators, federal banking regulators and the National Credit Union
Administration.\640\ The inclusion of Commission cease-and-desist
orders in the list of disqualifying events might change how settlement
negotiations are conducted between respondents and the Commission, and
the Commission could grant an appropriate waiver from disqualification.
---------------------------------------------------------------------------
\640\ See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]
(``Bad Actor'' adopting release).
---------------------------------------------------------------------------
Under the proposed rules, orders issued by the CFTC would trigger
[[Page 3991]]
disqualification to the same extent as orders of the regulators
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state
securities, insurance and banking regulators, federal banking agencies
and the National Credit Union Administration). We believe that
including orders of the CFTC would result in the similar treatment, for
disqualification purposes, of comparable sanctions. In this regard, we
note that the conduct that would typically give rise to CFTC sanctions
is similar to the type of conduct that would result in disqualification
if it were the subject of sanctions by another financial services
industry regulator. This provision should enable the disqualification
rules to more effectively screen out bad actors.
7. Relationship With State Securities Law
As explained above, Regulation A offerings are subject to
registration or qualification under state ``blue sky laws,'' unless the
offering is made to ``qualified purchasers'' (as the Commission may
define that term) or is offered or sold on a national securities
exchange. Compliance with blue sky law requirements can impose
significant costs, predominantly as a result of having to coordinate
independent reviews across multiple regulatory regimes when issuers are
offering securities to investors in multiple states.\641\
---------------------------------------------------------------------------
\641\ See discussion in Section IV.A.1.a. above regarding the
determinates of trends in Regulation A issuances.
---------------------------------------------------------------------------
The GAO study of Regulation A offerings found that blue sky law
compliance was one of four central factors in the infrequent reliance
on Regulation A.\642\ Commenters have also raised the importance of
state securities law preemption to the utilization of Regulation
A.\643\ As discussed above, we are concerned that the costs associated
with state securities law compliance may deter issuers from using
Regulation A, even if the increased cap on offering size and other
proposals intended to make Regulation A more workable are implemented.
This would limit the possible impact of an amended Regulation A as a
tool for capital formation. We believe that Regulation A, as we propose
to amend it for Tier 2 offerings, would provide substantial protections
to purchasers. Under the proposed amendments, a Regulation A offering
statement would continue to provide substantive narrative and financial
disclosures about the issuer, including an MD&A discussion. We expect
that Regulation A offering statements would continue to receive the
same level of Commission staff review as registration statements.
Additional investor protections would be afforded by Regulation A's
limitations on eligible issuers and ``bad actor'' disqualification
provisions, which we are proposing to expand. In addition, the
requirements for Tier 2 offerings would provide further protection by
requiring the audited financial statements in the offering circular, an
obligation for issuers to provide ongoing reporting to purchasers, and
a limitation on the percentage of annual income or net worth that an
investor could invest in a single offering. Ongoing reporting would
assure a continuing flow of information to investors and could support
the development of secondary markets for Regulation A securities,
offering the prospect of reduced investor risk through liquidity.
---------------------------------------------------------------------------
\642\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
\643\ See Fallbrook Letter (``It cannot be understated as to how
critical state securities law preemption is to ensuring the
Regulation A+ Rules are user-friendly and attractive for utilization
by growing companies.'').
---------------------------------------------------------------------------
Based on these requirements, we are proposing to define the term
``qualified purchasers'' for purposes of Regulation A to include all
offerees in a Regulation A offering and all purchasers in a Tier 2
Regulation A offering. Therefore, as proposed, Tier 1 offerings would
be subject to state registration and qualification requirements to the
same extent as offerings under current Regulation A, whereas such
requirements would be preempted for Tier 2 offerings.
Because state registration requirements were cited as a central
factor in the infrequent reliance on Regulation A,\644\ we believe that
by eliminating these costs of state law compliance for Tier 2 offerings
issuers may be more likely to rely on amended Regulation A relative to
the current rules under Regulation A, which do not preempt state
securities laws.\645\ We believe that this definition could facilitate
capital formation, as suggested in several comment letters.\646\ It is
also possible that the preemption of state securities laws for Tier 2
offerings could attract issuers away from offerings conducted under
Rule 506, which also provides preemption of state laws, but restricts
resales. Given that in 2012 the majority of Rule 506 offerings by
eligible issuers were less than $50 million, some shift from Rule 506
to Regulation A is possible; however, we are unable to quantify its
magnitude. The infrequent and issuer-specific use of existing
Regulation A makes it difficult to identify general findings about the
effect of preemption on Regulation A, as proposed to be amended, and to
quantify the potential effects of defining qualified purchasers to
include all offerees in a Regulation A offering and all purchasers in
Tier 2 offerings made under the proposed amendments.
---------------------------------------------------------------------------
\644\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
\645\ See discussion in Section IV.A.1.a. above.
\646\ See, e.g., Campbell Letter, Kaplan Voekler Letter, WR
Hambrecht + Co. Letter, and Tresslar Letter.
---------------------------------------------------------------------------
We recognize that the proposal could impose some costs. For
example, because the types of issuers and investors that would
participate in Regulation A offerings could vary by state, state-
specific securities requirements may potentially be tailored to the
specific investors and issuers involved in these transactions. It is
possible that state securities regulators could provide a meaningful
level of investor protection for certain offerings because of greater
familiarity with local issuers and investors.
As a policy alternative, we could permit one or a subset of states
to qualify certain Regulation A offerings either in place of, or in
addition to, federal qualification. This alternative could allow state
securities regulators to provide a comparable level of oversight, while
still limiting the costs associated with requiring issuers to undergo
multiple review processes. Depending on how this alternative is
implemented, it may not result in comparable review. For example, if
state review is conducted by a single state, issuers could seek review
from the state with the least stringent standards and could therefore
increase the level of fraud in Regulation A offerings. A potentially
greater risk of fraud could negatively affect both investors and
issuers, which may find it more expensive to raise capital using
Regulation A, as proposed to be amended, if investors demand higher
returns because of any perceived increase in the risk associated with
this type of offering. The Commission also recognizes that there are a
number of alternative definitions of qualified purchaser that we could
propose. One alternative that we could have selected is to define as a
``qualified purchaser'' any purchaser in any Regulation A offering.
Compared to the definition in the proposed rulemaking, such a broad
definition would allow Tier 1 Regulation A offerings to qualify for the
state law preemption, which in turn would decrease the cost of such
offerings and potentially enhance capital formation. However, the
resulting loss of state review for Tier 1
[[Page 3992]]
offerings, combined with the absence of the additional investor
protections included in Tier 2, could increase the likelihood of fraud
in these offerings.
Other alternatives can be broadly categorized as relying on
attributes of the investor, the issuer, and/or the offering. We discuss
these alternatives in greater detail below.
We could have selected a policy alternative that defines as a
``qualified purchaser'' any purchaser who meets a specified income or
net worth standard that is set either lower or higher than the current
``accredited investor'' definition in Rule 501 of Regulation D.
Compared to the definition in the proposed rulemaking, such an
alternative could limit the number of offerings that would qualify for
state preemption because some investors that purchased securities in
Tier 2 offerings would not satisfy these alternative definitions.
However, such alternatives might allow the preemption of blue sky law
for Tier 1 offerings, which are not subject to the same reporting and
other obligations proposed for Tier 2. Limiting eligible investors
could result in higher offering costs for potential Regulation A
issuers but could also lower the likelihood of fraud in Regulation A
offerings compared to the proposed rules.
Another policy alternative that we could have adopted is to define
a ``qualified purchaser'' as any purchaser who purchases securities in
a Regulation A offering through a registered broker-dealer. Such an
alternative could have limited the number of offerings that would
qualify for state preemption because some investors might not use
broker-dealers when participating in Tier 2 offerings. Such a
limitation could result in higher offering costs for issuers.
Additionally, such an alternative could have increased the cost to
investors participating in Tier 2 offerings because they would have to
pay broker-dealer fees. On the other hand, the presence of registered
broker-dealers, who presumably perform due diligence on potential
investments, could result in lower likelihood of fraud in this market
compared to the proposed rules, and could support blue sky preemption
for Tier 1 offerings as well as Tier 2 offerings.
In addition, we could have defined qualified purchasers as
investors in a Regulation A offering in which the issuer meets
specified conditions. For example, the definition could require that
the issuer meet some financial criteria, or that the issuer meet some
governance requirements. The potential advantage of defining qualified
purchaser according to attributes of the issuer is that indicators of
fraud or risky investments are often characteristics of the issuer
(e.g. shell companies, financially distressed companies, etc.).
Therefore, a definition based on issuer attributes might effectively
identify the investments most in need of additional regulatory
oversight. However, it may be difficult to identify criteria that
effectively distinguish between fraudulent or excessively risky
investments and safer investments, given the wide variety of potential
issuers. For example, a high degree of leverage would be indicative of
financial distress in some companies, but could be optimal in others.
Lastly, we could have used attributes of the offering, other than
or in addition to the proposed requirements for Tier 2, to define
qualified purchasers. For example, qualified purchasers could be
defined in relation to offerings in which issuers and agents of the
issuer assume increased liability for material misstatements and
omissions, offerings over a certain size, or offerings with a firm
commitment underwriting. While some of these factors are correlated
with the riskiness of the offering, using a definition based on these
factors could prompt issuers to sub-optimally modify features of the
offering in order to avoid state regulation.
We considered the policy alternative suggested by one commenter to
preempt blue sky laws with respect to secondary sales of Regulation A
securities in addition to preempting blue sky laws governing primary
offerings.\647\ If blue sky laws pertaining to resales affect the
ability to conduct or the cost of transactions involving Regulation A
securities, preemption of sales in addition to offers could help
facilitate liquid secondary markets, and could therefore enhance
capital formation. We are currently unaware of any evidence suggesting
that blue sky laws inhibit trading in OTC markets; therefore, we are
not proposing to preempt blue sky laws with respect to secondary sales
of Regulation A securities at this time.
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\647\ See Paul Hastings Letter.
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8. Effect of Regulation A on OTC Markets and Dealer Intermediation
For securities issued in Regulation A offerings that end up trading
on the OTC market, the proposed new Tier 2 disclosure requirements
would provide timely and relevant issuer information to broker-dealers
that initiate quotations and make markets in these securities and to
investors in these securities. This information would be much more
detailed than what is currently required for non-reporting issuers
under Rule 15c2-11 and reported on Form 211. Similarly, for issuers
with existing securities trading on the OTC market, the disclosure
proposed to be required under Tier 2 would supplement the issuer
information otherwise used by broker-dealers when relying on the
existing piggyback exception of Rule 15c2-11.\648\ For Tier 2 issuers,
the proposed new periodic reporting requirements, including audited
financials, would allow broker-dealers to obtain more current
information about these issuers more frequently and at lower cost.
Thus, broker-dealers quoting securities for such issuers under Rule
15c2-11 would have a more robust basis for believing that the issuer
information is accurate. The availability of more current information
about Tier 2 issuers would likely improve the pricing efficiency and
reduce the likelihood of fraud in the OTC market for their securities.
We expect this effect to be much stronger for issuers that do not
currently provide voluntary disclosure to the OTC market. The overall
effect of the required disclosure would also depend on what fraction of
Regulation A securities eventually trade on the OTC market and on how
many current OTC participants decide to make offerings under Regulation
A.
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\648\ Rule 15c2-11(a)(5) currently provides that issuer
information must be made available upon request to any person
expressing an interest in a transaction in that issuer's security
with the broker-dealer. This requirement may have little practical
effect because only the first broker-dealer to publish quotations
must have the information, and an investor might find it difficult
to identify that broker-dealer. In fact, that broker-dealer may no
longer be publishing quotations.
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A particular set of OTC-listed companies--those that cease
reporting and, if necessary, delist from national securities
exchanges--might find the proposed rules attractive for raising
capital. As mentioned above, the proposed Tier 2 disclosure
requirements are less stringent than those applicable to reporting
companies. Companies that delist from national exchanges might be able
to use Regulation A offerings to raise capital as well as maintain
liquid securities in the OTC market. The potential effect of the
proposed rules on companies that delist from national securities
exchanges is difficult to predict. Companies that would like to
maintain liquidity for their securities trading in the OTC market and
face a less burdensome disclosure regime than entailed by Exchange Act
registration might find Regulation A useful. On the other hand,
companies that delist from national securities exchanges because they
want to minimize disclosure and
[[Page 3993]]
cease reporting might find the proposed disclosure requirements under
Regulation A too burdensome, and might prefer other offering methods to
raise capital (e.g., Regulation D).
The potential future use of Regulation A could also depend on the
willingness of financial intermediaries such as placement agents or
underwriters to participate in offerings. For example, in registered
offerings, underwriters are frequently used to identify potential
investors and are primarily responsible for facilitating a successful
distribution of the offered securities. Some commenters claim that
underwriters are generally unwilling to participate in small offerings
because the commissions are not sufficient to warrant their
involvement.\649\ If the services of financial intermediaries continue
to be limited for small offerings under Regulation A as proposed to be
amended, it could be difficult for Regulation A issuers to place all
offered securities. As noted in the GAO report,\650\ increasing the
allowed maximum Regulation A offering amount may make placement agents
more inclined to participate in offerings because they would be able to
collect more compensation from larger offerings. Furthermore,
underwriter costs for offerings under Regulation A as proposed to be
amended may be lower than for registered public offerings because
underwriters would not take on liability under Section 11 of the
Securities Act (although they could be liable as sellers under Section
12(a)(2)). Finally, if the requirements for qualification of Regulation
A offerings are substantially lighter than the requirements for
registered offerings, an underwriting market could develop to provide
expedient Regulation A underwriting services.
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\649\ See, e.g., Karr Tuttle Letter.
\650\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
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C. Request for Comment
Throughout this release, we have discussed the anticipated costs
and benefits of the proposed rules and their potential impact on
efficiency, competition and capital formation. We request and encourage
any interested person to submit comments regarding the proposed rules,
our analysis of the potential effects of the rules and other matters
that may have an effect on the proposed rules. We request comment from
the point of view of issuers, investors and other market participants.
With regard to any comments, we note that such comments are of
particular assistance to us if accompanied by supporting data and
analysis of the issues addressed in those comments. We also are
interested in comments on the qualitative benefits and costs we have
identified and any benefits and costs we may have overlooked. We urge
commenters to be as specific as possible.
Request for Comment
128. What types of companies (e.g., in terms of size, industry,
age, etc.) would most likely rely on the amended Regulation A
exemption? Would Exchange Act reporting companies, which are ineligible
to rely on proposed Regulation A, consider raising additional capital
through Regulation A by first terminating or suspending their reporting
requirements?
129. Are investors in private companies likely to use the amended
Regulation A exemption to exit their investments? Would eliminating
current Rule 251(b), which prohibits resales by affiliated parties
unless the issuer has had operating income in at least one of the last
two years, affect fraud in this market?
130. How likely is the amended Regulation A exemption to attract
companies that are considering a traditional IPO? What types of
companies (e.g., in terms of size, industry, age, etc.) would prefer a
Regulation A offering to a traditional IPO? How would the cost of a
traditional IPO compare to the cost of a Regulation A offering? Could a
Regulation A offering serve as a stepping stone for a future
traditional IPO or a national securities exchange listing?
131. How likely is the amended Regulation A exemption to attract
companies that are considering offerings relying on Rule 506(b) or Rule
506(c) of Regulation D? What would be the costs and benefits from
relying on the amended Regulation A exemption versus Rule 506(b) or
Rule 506(c) of Regulation D? Please provide estimates, where possible.
132. What is the economic effect of the proposed investment
limitation in Tier 2 Regulation A offerings? What types of issuers and
investors are most likely to be affected by this restriction? Will this
restriction enhance investor protection? What would be the economic
effect of imposing a similar restriction on Tier 1 Regulation A
offerings?
133. Would the amended Regulation A exemption attract
intermediaries (e.g., broker-dealers or underwriters) to the market for
Regulation A offerings? How would the presence of intermediaries change
the cost structure for Regulation A issuers? Would the amended
Regulation A exemption make it economically feasible for intermediaries
to serve as market makers and provide research and analyst coverage?
Would the presence of intermediaries likely increase the chances that a
wider variety of investors will participate in Regulation A offerings?
134. Do the proposed disclosure requirements help ensure that
investors have a reasonable understanding of the risks and costs of
investing in Regulation A securities? If not, what additional
requirements would further mitigate the associated risks? How would the
costs and benefits of the requirements compare to the costs and
benefits of the disclosure that currently exists for securities offered
under the current Regulation A requirements? How would the costs and
benefits compare to other exempt offering methods? Please provide
estimates, where possible.
135. How would the proposed preemption of state blue sky laws for
offerings made to qualified purchasers, as we propose to define that
term, affect the costs and benefits of Tier 1 and Tier 2 Regulation A
offerings? Please provide estimates, where possible. Would the proposed
blue sky law preemption affect fraud and investor protection and
capital formation in this market?
136. The Commission is interested in receiving comments, views,
estimates and data on all aspects of the proposal and the following:
Expected size of the Regulation A market (e.g., number of
offerings, number of issuers, size of offerings, number of investors,
etc., as well as information comparing these estimates to the current
baseline);
Overall economic impact of the proposed rules; and
Any other aspect of the economic analysis.
137. What would be the economic impact of the policy alternatives
discussed in the proposed rules?
V. Paperwork Reduction Act
A. Background
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\651\ We are submitting the proposal to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\652\ The titles for the collections of information are:
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\651\ 44 U.S.C. 3501 et seq.
\652\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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[[Page 3994]]
(1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number
3235-0286);
(2) ``Form 1-K'' (a proposed new collection of information);
(3) ``Form 1-SA'' (a proposed new collection of information);
(4) ``Form 1-U'' (a proposed new collection of information);
(5) ``Form 1-Z'' (a proposed new collection of information);
(6) ``Form ID'' (OMB Control Number 3235-0328).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. We are applying for OMB control
numbers for the proposed new collections of information in accordance
with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned
a control number to each new collection. Responses to these new
collections of information would be mandatory for issuers raising
capital under Regulation A.
B. Estimate of Issuers
The number, type and size of the issuers that would participate in
offerings of securities under Regulation A, as proposed to be amended,
is uncertain, but data regarding current market practices may help
identify the number and characteristics of potential issuers that may
offer and sell securities in reliance on the proposed rules.\653\ We
estimate that there are currently approximately 22 Regulation A filings
by issuers per year.\654\ While it is not possible to predict the
number of filings by issuers relating to offerings made in reliance on
the proposed amendments to Regulation A, for purposes of this analysis,
we estimate that the number would be 250 offerings per year. We base
this estimate on (i) the current approximate number of issuers that, on
average in recent years, filed a Form 1-A to qualify a Regulation A
offering of securities under the existing rules, plus (ii) 95 percent
of the estimated number of registered offering of securities of up to
$50 million,\655\ plus (iii) an additional four offerings that either
would not otherwise occur or would have been conducted in reliance on
another exemption from Securities Act registration, such as Regulation
D.\656\ We believe issuers that have either previously relied on
Regulation A or have offered securities in amounts up to the revised
offering ceiling of $50 million in a twelve-month period would be
similar to the potential issuers that may participate in offerings of
securities under Regulation A as proposed to be amended.
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\653\ See Section I.C. above for a discussion of the data
regarding current market practices.
\654\ From 2009 through 2012, there were 87 Form 1-As filed with
the Commission, and 19 qualified offering statements during this
same period. See also figures for current use of Regulation A in
Section I.C. above.
\655\ See figures and graphs for registered offerings cited in
Section IV. above (citing approximately 236 registered initial
public offerings or follow-on offerings of up to $50 million in
calendar year 2012).
\656\ See figures and graphs for registered and exempt offerings
under Regulation D cited in Section IV.A.1.a(2). above (citing
approximately 12,000 issuances of up to $50 million in reliance on
Regulation D in calendar year 2012).
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C. Estimate of Issuer Burdens
1. Regulation A (Form 1-A and Form 2-A)
Currently, Regulation A requires issuers to file a Form 1-A:
Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds
with the Commission. Regulation A has 1.00 administrative burden hour
associated with it, while current Form 1-A takes approximately 608.00
hours to prepare and Form 2-A takes approximately 12.00 hours to
prepare.\657\ We do not anticipate that the 1.00 administrative burden
hour associated with Regulation A would change as a result of the
proposal. As discussed more fully below, we believe the burden hours
associated with Form 1-A would change, while Form 2-A and the
associated burden hours would be eliminated as a result of today's
proposal.\658\
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\657\ See Form 1-A at 1; Form 2-A at 1.
\658\ See discussion in Section II.E.1. above.
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Under the proposed rules, an issuer conducting a transaction in
reliance on Regulation A would be able to conduct either a Tier 1
offering or a Tier 2 offering.\659\ In either case, a Regulation A
issuer would continue to be required to file with the Commission
specified disclosures on a Form 1-A: Offering Statement.\660\ An issuer
also would file amendments to Form 1-A to reflect comments from
Commission staff and to disclose material changes in the disclosure
previously provided to the Commission or investors.\661\ In light of
the proposed electronic filing requirements for Regulation A offering
materials discussed above,\662\ issuers would no longer be required to
file a manually signed copy of the Form 1-A with the Commission.\663\
Issuers would, however, be required to manually sign a copy of the
offering statement before or at the time of non-public submission or
filing that would have to be retained by the issuer for a period of
five years and produced to the Commission, upon request.\664\ As
issuers are currently required to manually sign the Form 1-A and file
it with the Commission, we do not anticipate the proposed Form 1-A
retention requirement would alter an issuer's compliance burden. As
proposed, Form 1-A is similar to existing Form 1-A. In some instances,
Form 1-A, as proposed, would contain fewer disclosure items than
existing Form 1-A (e.g., Part I (Notification) of Form 1-A would not
require disclosure of ``Affiliate Sales''; Part II (Offering Circular)
of Form 1-A would require a description of the issuer's business for a
period of three years, rather than five years). Part II of Form 1-A
would no longer permit disclosure in reliance on the Model A disclosure
format, but direct issuers to follow the provisions of Model B (renamed
``Offering Circular'') or Part I of Form S-1.\665\ In other instances,
Form 1-A would contain more disclosure items than existing Form 1-A
(e.g., Part I of Form 1-A would require additional disclosure of
certain summary information regarding the issuer and the offering; Part
II of Form 1-A would require a more detailed management discussion and
analysis of the issuer's liquidity and capital resources and results of
operations). Form 1-A would require disclosure similar to that required
in a Form S-1 registration statement for registered offerings under the
Securities Act, but it would require fewer disclosure items (e.g., it
would require less disclosure about the compensation of officers and
directors, and less detailed management discussion and analysis of the
issuer's liquidity and capital resources and results of operations)
and, under certain circumstances, not require issuers to file audited
financial statements.\666\
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\659\ See discussion in Section II.B.3. above.
\660\ See 17 CFR 239.91 (Form 1-A) (OMB Control Number 3235-
0286) and proposed Rule 252.
\661\ See proposed Rule 252(h).
\662\ See discussion in Section II.C.1. above.
\663\ See discussion in Section II.C.3.d. above.
\664\ See Instruction 2. to Signatures in Form 1-A.
\665\ See discussion at Section II.C.3.b. above.
\666\ See discussion in Section II.C.3.b. above.
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We expect that issuers relying on proposed Regulation A for Tier 1
offerings of up to $5 million in a twelve-month period would largely be
at a similar stage of development to issuers relying on existing
Regulation A and would therefore not experience an increased compliance
burden with proposed Form 1-A. Given the increased annual offering
threshold of $50 million, however, we expect that issuers conducting
Tier 2 offerings pursuant to proposed Regulation A may be at a more
advanced stage of
[[Page 3995]]
development than issuers offering securities at a lower threshold. In
such cases, the complexity of the required disclosure and, in turn, the
burden of compliance with the requirements of proposed Form 1-A may be
greater for some issuers than for issuers relying on existing Form 1-
A.\667\ We estimate that the total burden to prepare and file proposed
Form 1-A, including any amendments to the form, would increase on
average across all issuers in comparison to existing Form 1-A to
approximately 750.00 hours.\668\ We believe that the burden hour
response of proposed Form 1-A would be greater than the current
estimated 608.00 burden hours per response, but would not be as great
as the current estimated 972.32 burden hours per response for Form S-1.
We estimate that the issuer would internally carry 75 percent of the
burden of preparation and that outside professionals \669\ retained by
the issuer at an average cost of $400 per hour would carry 25
percent.\670\
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\667\ As noted above, we estimate the burden per response for
preparing existing Form 1-A to be 608.00 hours. See Form 1-A at 1.
\668\ By comparison, we estimate the burden per response for
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
\669\ For example, an issuer may address certain disclosure
requirements internally, but retain an outside professional to
assist in the preparation of the financial statements.
\670\ The costs of retaining outside professionals may vary
depending on the nature of the professional services. For purposes
of this PRA analysis, however, we estimate that such costs would be
an average of $400/hour, which is consistent with the rate we
typically estimate for outside legal services used in connection
with public company reporting.
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We estimate that compliance with the requirements of a Form 1-A
provided in connection with transactions made in reliance on proposed
Regulation A would require 187,500 burden hours (250 offering
statements x 750.00 hours/offering statement) in aggregate each year,
which corresponds to 140,625 aggregated hours carried by the issuer
internally (250 offering statements x 750.00 hours/offering statement x
0.75) and aggregated costs of $18,750,000 (250 offering statements x
750.00 hours/offering statement x 0.25 x $400) for the services of
outside professionals. These estimates include the time and cost of
collecting the information, preparing and reviewing disclosure, filing
documents and retaining records. In deriving our estimates, we
recognize that the burdens likely would vary among individual issuers
based on a number of factors, including the stage of development of the
business, the amount of capital an issuer seeks to raise and the number
of years since inception of the business. We believe that some issuers
would experience costs in excess of the average and some issuers may
experience less than the average costs.
2. Form 1-K: Annual Report
Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to file
an annual report with the Commission on Form 1-K: Annual Report.\671\ A
manually-signed copy of the Form 1-K would have to be executed by the
issuer and related signatories before or at the time of electronic
filing, retained by the issuer for a period of five years and, if
requested, produced to Commission.\672\ We do not anticipate that the
proposed requirement to retain a manually-signed copy of the Form 1-K
would affect an issuer's compliance burden. We believe the compliance
burden on disclosure provided in Form 1-K would be less than the
compliance burden associated with reporting required under Exchange Act
Section 13 or 15(d). We also believe the burden would be more analogous
to the compliance burden attendant to proposed Form 1-A. Unlike the
disclosure required in Form 1-A, however, offering-specific disclosure
in Form 1-K would not be required. Additionally, under certain
circumstances, an issuer would also be required to disclose information
similar to the information previously required of issuers on Form 2-
A.\673\ Unlike the disclosure previously required on Form 2-A, however,
an issuer would not be required to provide disclosure about the use of
proceeds. We estimate that the burden to prepare and file a Form 1-K
would be less than that required to prepare and file a Form 1-A. We
estimate that compliance with proposed Form 1-K would result in a
burden of 600.00 hours per response.\674\ We further estimate that 75
percent of the burden of preparation would be carried by the issuer
internally and that 25 percent would be carried by outside
professionals \675\ retained by the issuer at an average cost of $400
per hour.\676\ While we do not know the exact number of issuers that
will seek to qualify offerings in excess of $5 million in a twelve-
month period in reliance on proposed Regulation A, we estimate 75
percent of all issuers filing a Form 1-A (or 188 issuers, 250 issuers x
.75) will enter the proposed ongoing reporting regime and therefore be
required to file proposed Form 1-K.
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\671\ See proposed Rule 257(b)(1).
\672\ See General Instruction C. to proposed Form 1-K and
related discussion in Section II.E.1.a. above.
\673\ See discussion in Section II.E.1.a. above.
\674\ We estimate that the burden of preparing the information
required by Form 1-K would be approximately 3/4 of the burden for
the Form 1-A due to the lack of offering-specific disclosure and an
issuer's ability to update previously-provided disclosure.
\675\ See fn. 669 above.
\676\ See fn. 670 above.
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We estimate that compliance with the requirements of Form 1-K for
issuers with an ongoing reporting obligation under proposed Regulation
A would require 112,800 burden hours (188 issuers x 600.00 hours/
issuer) in the aggregate each year, which corresponds to 84,600 hours
carried by the issuer internally (188 issuers x 600.00 hours/issuer x
0.75) and costs of $11,280,000 (188 issuers x 600.00 hours/issuer x
0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to file
a semiannual report with the Commission on Form 1-SA: Semiannual
Report.\677\ A manually-signed copy of the Form 1-SA would have to be
executed by the issuer and related signatories before or at the time of
electronic filing, retained by the issuer for a period of five years
and, if requested, produced to Commission.\678\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-SA would affect an issuer's compliance burden. Issuers would be
required to provide semiannual updates on proposed Form 1-SA, which,
much like a Form 10-Q,\679\ would consist primarily of financial
statements and MD&A. Unlike Form 10-Q, Form 1-SA would not require
disclosure regarding quantitative and qualitative market risk or
controls and procedures.\680\ We estimate, however, that on balance the
reduction in burden attributable to eliminating these two items in Form
1-SA would be offset by the increased burden associated with requiring
financial statement disclosure covering six months, rather than three
months. We therefore believe the per response compliance burden of Form
1-SA would be similar to the compliance burden for issuers filing a
Form 10-Q under the Exchange Act.\681\ Therefore,
[[Page 3996]]
for purposes of this PRA, we estimate that the burden to prepare and
file a Form 1-SA would equal the burden to prepare and file Form 10-Q,
which we have previously estimated as 187.43 hours per response.\682\
Unlike proposed Form 1-K, Form 1-SA does not require the provision of
audited financial statements. We therefore believe, in comparison to
Form 1-K, issuers filing a Form 1-SA will be able to handle more of the
required disclosures internally. Accordingly, we estimate that 85
percent of the burden of preparation would be carried by the issuer
internally and that 15 percent would be carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.\683\
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\677\ See proposed Rule 257(b)(3).
\678\ See General Instruction C. to proposed Form 1-SA and
related discussion in Section II.E.1.b. above.
\679\ 17 CFR 249.308a.
\680\ See discussion in Section II.E.1.b. above.
\681\ Issuers would, however, have to file Form 1-SA, a
semiannual report, less frequently than Form 10-Q, a quarterly
report.
\682\ See Form 10-Q, at 1.
\683\ See fn. 670 above.
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We estimate that compliance with the requirements of Form 1-SA for
issuers with an ongoing reporting obligation under proposed Regulation
A would require 23,428.75 burden hours (188 issuers x 187.43 hours/
issuer) in the aggregate each year, which corresponds to 19,914.44
hours carried by the issuer internally (188 issuers x 187.43 hours/
issuer x 0.85) and costs of $1,405,725 (188 issuers x 187.43 hours/
issuer x 0.15 x $400) for the services of outside professionals.
4. Form 1-U: Current Reporting
Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to
promptly file current reports on proposed Form 1-U with the
Commission.\684\ A manually-signed copy of the Form 1-U would have to
be executed by the issuer and related signatories before or at the time
of electronic filing, retained by the issuer for a period of five years
and, if requested, produced to Commission.\685\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-U would affect an issuer's compliance burden. Issuers would be
required to file such reports in the event they experience certain
corporate events, much the same way as issuers subject to an ongoing
reporting obligation under the Exchange Act file current reports on
Form 8-K.\686\ The requirement to file a Form 1-U, however, would be
triggered by significantly fewer corporate events than those that
trigger a reporting requirement on a Form 8-K, and, as proposed, the
form itself would be slightly less burdensome for issuers to fill
out.\687\ Thus, the frequency of filing the required disclosure and the
burden to prepare and file a Form 1-U would be considerably less than
for Form 8-K. We estimate that the burden to prepare and file each
current report would be 5.00 hours. While we do not know for certain
how often an issuer would experience a corporate event that would
trigger a current report filing on Form 1-U, we estimate that many
issuers may not experience a corporate event that triggers reporting,
while others may experience multiple events that trigger reporting. On
average, we estimate that an issuer would be required to file one
current report annually.\688\ Therefore, we estimate that an issuer's
compliance with proposed Form 1-U would result in an annual aggregate
burden of 5.00 hours (1.00 current report annually x 5.00 hours per
current report) per issuer.
---------------------------------------------------------------------------
\684\ See proposed Rule 257(b)(4).
\685\ See General Instruction C. to proposed Form 1-U and
related discussion in Section II.E.1.c. above.
\686\ We estimate the burden per response for preparing a Form
8-K to be 5.71 hours. See Form 8-K, at 1.
\687\ See discussion at Section II.E.1.c. above.
\688\ We have previously estimated that on average issuers file
one current report on Form 8-K annually. Although we believe that
the frequency of filing a Form 1-U would be considerably less than a
Form 8-K, to be conservative, we are estimating that each issuer
would be required to file one Form 1-U per year.
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As with Form 1-SA, we estimate that 85 percent of the burden of
preparation would be carried by the issuer internally and that 15
percent would be carried by outside professionals retained by the
issuer at an average cost of $400 per hour.\689\ We estimate that
compliance with the requirements of Form 1-U would require 940 burden
hours (188 issuers x 1 current report annually x 5.00 hours per current
report) in aggregate each year, which corresponds to 799 hours carried
by the issuer internally (188 issuers x 5.00 hours/issuer/year x 0.85)
and costs of $56,400 (188 issuers x 5.00 hours/issuer/year x 0.15 x
$400) for the services of outside professionals.
---------------------------------------------------------------------------
\689\ See fn. 670 above.
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5. Form 1-Z: Exit Report
Under the proposed rules, all Regulation A issuers would be
required to file a notice under cover of Form 1-Z: Exit Report. Issuers
conducting Tier 1 offerings would be required to file Part I of Form 1-
Z that would disclose information similar to the information previously
required of issuers on Form 2-A.\690\ Issuers conducting Tier 2
offerings would also be required to disclose the same information as
issuers conducting Tier 1 offerings in Part I of Form 1-Z, unless
previously reported by the issuer on Form 1-K. Issuers conducting Tier
2 offerings would also be required to fill out Part II of Form 1-Z in
order to notify investors and the Commission that it will no longer
file and provide annual reports pursuant to the requirements of
Regulation A.\691\ In Tier 2 offerings, an issuers' obligations to file
ongoing reports could be terminated at any time after completion of
reporting for the fiscal year in which the offering statement was
qualified,\692\ if the securities of each class to which the offering
statement relates are held of record by fewer than 300 persons and
offers and sales made in reliance on a qualified offering statement are
not ongoing. A manually-signed copy of the Form 1-Z would have to be
executed by the issuer and related signatories before or at the time of
electronic filing, retained by the issuer for a period of five years
and, if requested, produced to Commission.\693\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-Z would affect an issuer's compliance burden. We estimate that
50 percent of issuers with an ongoing reporting obligation under
proposed Regulation A (or 94 issuers, 188 issuers with an ongoing
reporting obligation x .50 of issuers filing a Form 1-Z) would file a
Form 1-Z in the second fiscal year after qualification of the offering
statement. Although we believe that the vast majority of issuers
subject to ongoing reporting under Regulation A would qualify for
termination in the second fiscal year after qualification, we believe
that only half or 50 percent of such issuers would actually choose to
terminate their reporting obligations. An issuer may have many reasons,
such as a desire to facilitate continued quotations in the over-the-
counter (``OTC'') markets pursuant to proposed revisions to Exchange
Act Rule 15c2-11,\694\ to continue reporting even though entitled to
terminate reporting.
---------------------------------------------------------------------------
\690\ See discussion in Section II.E.1.a. above.
\691\ See proposed Rule 257(d).
\692\ See proposed Rule 252(h)(2).
\693\ See Instruction to proposed Form 1-Z and related
discussion in Section II.E.4. above.
\694\ See discussion in Section II.E.2. above.
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The Form 1-Z would be similar to the Form 15 that issuers file to
provide notice of termination of the registration of a class of
securities under Exchange Act Section 12(g) or to provide notice of the
suspension of the duty to file reports required by Exchange Act
Sections 13(a) or 15(d).\695\ Therefore, we estimate that compliance
with the proposed Form 1-Z would result in a similar burden as
compliance with Form 15, a burden of 1.50 hours per response. We
estimate
[[Page 3997]]
that compliance with proposed Form 1-Z would result in a burden of 141
hours (94 issuers filing Form 1-Z x 1.50 hours/issuer) in the aggregate
during the second fiscal year after qualification of the offering
statement for issuers terminating their reporting obligations.
---------------------------------------------------------------------------
\695\ We currently estimate the burden per response for
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------
6. Form ID Filings
Under the proposed rules, an issuer would be required to file
specified disclosures with the Commission on EDGAR.\696\ We anticipate
that many issuers relying on proposed Regulation A for the first time
would not have previously filed an electronic submission with the
Commission and so would need to file a Form ID. Form ID is the
application form for access codes to permit filing on EDGAR. The
proposed rules would not change the form itself, but we anticipate that
the number of Form ID filings would increase due to an increase in
issuers relying on proposed Regulation A. For purposes of this PRA
discussion, we estimate that 75 percent of the issuers who would seek
to offer and sell securities in reliance on proposed Regulation A would
not have previously filed an electronic submission with the Commission
and would, therefore, be required to file a Form ID. As noted above, we
estimate that approximately 250 issuers per year would seek to offer
and sell securities in reliance on proposed Regulation A, which would
correspond to approximately 188 additional Form ID filings. As a
result, we estimate the additional annual burden would be approximately
28.20 hours (188 filings x 0.15 hours/filing).\697\
---------------------------------------------------------------------------
\696\ See proposed Rules 252 and 257.
\697\ We currently estimate the burden associated with Form ID
is 0.15 hours per response. See Form ID at 1.
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D. Collections of Information Are Mandatory
The collections of information required under proposed Rules 251
through 263 would be mandatory for all issuers seeking to rely on the
Regulation A exemption. Responses on Form 1-A, Form 1-K, Form 1-SA,
Form 1-U and Form 1-Z would not be confidential, although issuers may
request confidential treatment for certain materials submitted in
conjunction with the filings.\698\ It is anticipated that most of this
material would be made public when the offering is qualified. A Form 1-
A that is submitted by an issuer with a confidential treatment request
and later abandoned before being publicly filed with the Commission and
responses on Form ID would, however, remain non-public, absent a
request for such information under the Freedom of Information Act.\699\
The hours and costs associated with preparing and filing forms and
retaining records constitute reporting and cost burdens imposed by the
collection of information requirements.
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\698\ See Commission Rule 83, 17 CFR 200.83.
\699\ 5 U.S.C. 552. The Commission's regulations that implement
the Freedom of Information Act are at 17 CFR 200.80 et seq.
---------------------------------------------------------------------------
E. Request for Comment
The Commission invites comment on all of the above estimates.
Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission requests comment in
order to: (1) Evaluate whether the proposed collections of information
are necessary for the proper performance of our functions, including
whether the information would have practical utility; (2) evaluate the
accuracy of our estimate of the burden of the proposed collections of
information; (3) determine whether there are ways to enhance the
quality, utility and clarity of the information to be collected; and
(4) evaluate whether there are ways to minimize the burden of the
proposed collections of information on those who respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the proposed collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should also send a copy of their comments to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100
F Street NE., Washington, DC 20549-1090, with reference to File No. S7-
11-13. Requests for materials submitted to OMB by the Commission, with
regard to these collections of information, should be in writing, with
reference to File No. S7-11-13, and they should be submitted to the
Securities and Exchange Commission, Office of FOIA Services, 100 F
Street NE., Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collections of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.
VI. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to the following:
proposed amendments to Rules 251 through 263 of Regulation
A, Form 1-A, Rule 4a-1 under the Trust Indenture Act, Rule 15c2-11
under the Exchange Act, and Item 101 of Regulation S-T;
proposed new Forms 1-K, 1-SA, 1-U, and 1-Z; and
the proposed rescission of Form 2-A.
A. Reasons for the Proposed Action
The proposed rule amendments, new forms, and rescission of Form 2-A
are designed to implement the requirements of Section 3(b)(2) of the
Securities Act and to make certain conforming changes based on our
proposed amendments to Regulation A. Section 3(b)(2) directs the
Commission to adopt rules adding a class of securities exempt from the
registration requirements of the Securities Act for offerings of up to
$50 million of securities within a twelve-month period, subject to
various additional terms and conditions set forth in Section 3(b)(2) or
as provided for by the Commission as part of the rulemaking process.
B. Objectives
Our primary objective is to implement Section 401 of the JOBS Act,
as mandated by Section 3(b)(2), by expanding and updating Regulation A
in a manner that makes public offerings of up to $50 million less
costly and more flexible while providing a framework for regulatory
oversight to protect investors. In so doing, we have endeavored to
craft a workable revision of Regulation A that would both promote small
company capital formation and provide for meaningful investor
protection. We believe that issuers, particularly small businesses,
benefit from having a wide range of capital-raising strategies
available to them, and that an expanded and updated Regulation A could
serve as a valuable option that augments the exemptions more frequently
relied upon, thereby facilitating capital formation for small
businesses.
C. Legal Basis
The amendments are being proposed under the authority set forth in
Sections 3(b), 19 and 28 of the Securities Act of 1933, as amended, and
Section 401 of the JOBS Act.\700\
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\700\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
---------------------------------------------------------------------------
D. Small Entities Subject to the Proposed Rules
For purposes of the Regulatory Flexibility Act, under our rules, an
[[Page 3998]]
issuer (other than an investment company) is a ``small business'' or
``small organization'' if it has total assets of $5 million or less as
of the end of its most recent fiscal year and is engaged or proposing
to engage in an offering of securities which does not exceed $5
million.\701\
---------------------------------------------------------------------------
\701\ 17 CFR 230.157. We note that currently this rule refers to
``the dollar limitation prescribed by Section 3(b) of the Securities
Act.'' As noted earlier in this release, the JOBS Act amended
Section 3(b) of the Securities Act. The former Section 3(b) is now
Section 3(b)(1), and a new Section 3(b)(2) was added. To retain the
meaning of 17 CFR 230.157, we are proposing a technical correction
to replace the reference to ``Section 3(b)'' with a reference to
``Section 3(b)(1).''
---------------------------------------------------------------------------
While proposed Regulation A would be available for offerings of up
to $50 million in securities in a twelve-month period, only offerings
up to $5 million in securities in a twelve-month period would be
offerings by small entities. It is difficult to predict the number of
small businesses that would use proposed Regulation A due to the many
variables created by our proposed amendments. Nevertheless, we believe
that proposed Regulation A will increase the overall number of
Regulation A offerings of $5 million or less due to the ability to non-
publicly submit draft offering statements for review by the
Commission's staff, the expanded use of solicitation of interest
materials, the ability to electronically file and transmit offering
statements and offering circulars, the potential for preemption of
state regulatory review if the issuer elects to conduct a Tier 2
offering, and other significant changes summarized in Section II.A.
above.
Regulation A is currently limited to offerings with an aggregate
offering price of $5 million or less.\702\ From 2009 through 2012, 87
issuers filed offering statements and 19 offering statements were
qualified by the Commission, or an average of approximately 5 qualified
offering statements per year. Of the 19 offering statements that were
qualified, 12 included financial statements indicating that the issuer
had total assets of $5 million or less (as of the most recent balance
sheet included in such issuer's offering statement at the time of
qualification), or an average of approximately 3 qualified offering
statements per year in which the issuer indicated it had total assets
of $5 million or less. Based on these data, and for the reasons
discussed above, we believe that at least 3 small businesses will
conduct offerings under proposed Regulation A per year.
---------------------------------------------------------------------------
\702\ As explained in Section II.B.3. above, the aggregate
offering price under existing and proposed Regulation A includes
prior sales generated from Regulation A offerings that occurred in
the twelve months preceding the current offering.
---------------------------------------------------------------------------
E. Reporting, Recordkeeping, and Other Compliance Requirements
As discussed above in Section II.C., the proposed regulation
includes reporting, recordkeeping and other compliance requirements. In
particular, the proposed regulation would impose certain reporting
requirements on issuers offering and selling securities in a
transaction relying on the exemptions provided by Section 3(b) and
Regulation A. The proposed rules would require that issuers relying on
the exemption file with the Commission certain information specified in
Form 1-A about the issuer and the offering, including the issuer's
contact information; use of proceeds from the offering; price or method
for calculating the price of the securities being offered; business and
business plan; property; financial condition and results of operations;
directors, officers, significant employees and certain beneficial
owners; material agreements and contracts; and past securities
sales.\703\ Such issuers would also be required to provide information
on the material factors that make an investment in the issuer
speculative or risky; dilution; the plan of distribution for the
offering; executive and director compensation; conflicts of interest
and related party transactions; and financial statements. Similar to
existing Regulation A, for Tier 1 offerings, Form 1-A would not require
the financial statements to be audited unless the issuer has already
had them audited for another purpose.\704\
---------------------------------------------------------------------------
\703\ See discussion in Section II.C.3. above.
\704\ The distinction between a Tier 1 offering and Tier 2
offering are discussed in Section II.B.3. above.
---------------------------------------------------------------------------
As discussed above in Section II.E., issuers conducting Tier 2
offerings would also be required to file annual reports on proposed new
Form 1-K, semiannual updates on proposed new Form 1-SA, current event
reporting on proposed new Form 1-U, and to provide notice to the
Commission of the termination of their ongoing reporting obligations on
proposed new Form 1-Z. A Tier 1 offering would be limited to $5 million
in a twelve-month period. Issuers in a Regulation A offering that would
result in exceeding $5 million in a twelve-month period would be
required to comply with the requirements for Tier 2 offerings,
including being subject to ongoing reporting.
An issuer subject to the Tier 2 periodic and current event
reporting described above would be required to provide information
annually on Form 1-K, including the issuer's business and business
plan; conflicts of interest and related party transactions; executive
and director compensation; financial condition and results of
operations; and audited financial statements. The semiannual update on
Form 1-SA would consist primarily of unaudited, interim financial
statements for the issuer's first two fiscal quarters and information
regarding the issuer's financial condition and results of operations.
The current event reporting on Form 1-U would require issuers to
disclose certain major developments, including changes of control;
changes in the principal executive officer and principal financial
officer; fundamental changes in the nature of business; material
transactions or corporate events; unregistered sales of five percent or
more of outstanding equity securities; changes in the issuer's
certifying accountant; and non-reliance on previous financial
statements.
Unlike the other ongoing reporting requirements, Form 1-Z would
only be required for issuers in both Tier 1 and Tier 2 offerings to
report summary information about a completed or terminated Regulation A
offering. Issuers conducting Tier 2 offerings would, however, be
subject to the additional provision in Form 1-Z that relates to the
voluntary termination of an issuer's continuous reporting obligations
under Tier 2 and thus its use by small entities would be limited. Also,
the information that is required in Form 1-Z is minimal.
Although we estimated that approximately 188 issuers under proposed
Regulation A would enter the proposed ongoing reporting regime every
year, we believe that very few small businesses would do so. A small
business under our rules would only be required to file ongoing reports
under Regulation A if a Regulation A offering would result in exceeding
the Tier 1 annual offering limitation of $5 million in a twelve-month
period.
F. Duplicative, Overlapping or Conflicting Federal Rules
We believe that there are no federal rules that conflict with or
duplicate the proposed rules.
G. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the proposed amendments and
[[Page 3999]]
rules, we considered the following alternatives: (1) The establishment
of differing compliance or reporting requirements or timetables that
take into account the resources available to small entities; (2) the
clarification, consolidation or simplification of compliance and
reporting requirements under the rule for small entities; (3) the use
of performance rather than design standards; and (4) an exemption from
coverage of the rules, or any parts of the rules, for small entities.
We considered whether it is necessary or appropriate to establish
different compliance or reporting requirements, timetables, or to
clarify, consolidate, or simplify compliance and reporting requirements
under the proposed rules for small entities. With respect to using
performance rather than design standards, we used performance standards
to the extent appropriate under the statute. For example, issuers have
the flexibility to customize the presentation of certain disclosures in
their offering statements.\705\ We also considered whether there should
be an exemption from coverage of the rules, or any parts of the rule
for small entities. As discussed above, we do propose different
compliance reporting requirements for issuers of less than $5 million
that conduct an offering under Tier 1. For example, we are not
proposing to subject entities likely to be small entities to ongoing
reporting requirements and the requirement to provide audited financial
statements. We also considered providing additional reductions in the
disclosures required by Form 1-A for issuers of less than $5 million,
but we believe that different compliance requirements for Form 1-A
users may lead to investor confusion or reduced investor confidence in
Regulation A offerings, especially considering that the disclosure
requirements are already less than what is required by Form S-1 for
registered offerings. Further, we anticipate that the burden for
filling out a Form 1-A should be less for companies at an earlier stage
of development and with less extensive operations that are likely to be
small entities.\706\ For these reasons, we believe that small entities
should be covered by the proposed rules to the extent specified above.
We believe that the proposed rules should have limited impact on small
entities and we are not proposing to establish different compliance
requirements for small entities other than what we have proposed. We
do, however, seek comment on alternatives that may reduce any potential
adverse impact on small entities but accomplish similar objectives.
---------------------------------------------------------------------------
\705\ See Section II.C. above.
\706\ See discussion in Section V.C.1. above.
---------------------------------------------------------------------------
H. Request for Comment
We encourage comments with respect to any aspect of this initial
regulatory flexibility analysis. In particular, we request comments
regarding:
The number of small entities that may be affected by the
proposals;
The existence or nature of the potential impact of the
proposals on small entities discussed in the analysis; and
How to quantify the impact of the proposed rules.
We request members of the public to submit comments and ask them to
describe the nature of any impact on small entities they identify and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the final regulatory
flexibility analysis, if the proposals are adopted, and will be placed
in the same public file as comments on the proposed amendments
themselves.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\707\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\707\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
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An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
We request those submitting comments to provide empirical data and
other factual support for their views if possible.
VIII. Statutory Basis and Text of Proposed Amendments
The amendments and forms contained in this document are being
proposed under the authority set forth in Sections 3(b), 19 and 28 of
the Securities Act of 1933, as amended, and Section 401 of the JOBS
Act.\708\
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\708\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
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Text of Proposed Amendments
List of Subjects in 17 CFR Part 230, 232, 239, 240 and 260
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for part 230 is revised to read in part as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, Sec. 201(a), Sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Sec. 230.157 paragraph (a) is revised to read as follows:
Sec. 230.157 Small entities under the Securities Act for purposes of
the Regulatory Flexibility Act.
* * * * *
(a) When used with reference to an issuer, other than an investment
company, for purposes of the Securities Act of 1933, means an issuer
whose total assets on the last day of its most recent fiscal year were
$5 million or less and that is engaged or proposing to engage in small
business financing. An issuer is considered to be engaged or proposing
to engage in small business financing under this section if it is
conducting or proposes to conduct an offering of securities which does
not exceed the dollar limitation prescribed by section 3(b)(1) of the
Securities Act.
* * * * *
3. Revise the undesignated center heading and Sec. Sec. 230.251
through 230.263 to read as follows:
* * * * *
Regulation A
Sec.
230.251 Scope of exemption.
230.252 Offering statement.
230.253 Offering circular.
230.254 Preliminary offering circular.
230.255 Solicitation of interest communications.
230.256 Definition of ``qualified purchaser.''
230.257 Periodic and current reporting; exit report.
[[Page 4000]]
230.258 Suspension of the exemption.
230.259 Withdrawal or abandonment of offering statements.
230.260 Insignificant deviations from a term, condition or
requirement of Regulation A.
230.261 Definitions.
230.262 Disqualification provisions.
230.263 Consent to service of process.
* * * * *
0
4. Sec. Sec. 230.251 through 230.263 are revised to read as follows:
Sec. 230.251 Scope of exemption.
(a) Tier 1 and Tier 2. A public offer or sale of eligible
securities, as defined in Rule 261 (Sec. 230.261), that meets the
following terms and conditions shall be exempt under section 3(b) from
the registration requirements of the Securities Act of 1933 (the
``Securities Act'') (15 U.S.C. 77a et seq.):
(1) Offerings pursuant to Regulation A in which the sum of all cash
and other consideration to be received for the securities being offered
(``aggregate offering price'') plus the aggregate offering price for
all securities sold pursuant to other Regulation A offering statements
within the twelve months before the start of and during the current
offering of securities does not exceed $5,000,000, including not more
than $1,500,000 offered by all selling securityholders (``Tier 1
offerings''); and
(2) Offerings pursuant to Regulation A in which such sum does not
exceed $50,000,000, including not more than $15,000,000 offered by all
selling securityholders (``Tier 2 offerings'').
Note: Where a mixture of cash and non-cash consideration is to
be received, the aggregate offering price must be based on the price
at which the securities are offered for cash. Any portion of the
aggregate offering price attributable to cash received in a foreign
currency must be translated into United States currency at a
currency exchange rate in effect on or at a reasonable time before
the date of the sale of the securities. If securities are not
offered for cash, the aggregate offering price must be based on the
value of the consideration as established by bona fide sales of that
consideration made within a reasonable time, or, in the absence of
sales, on the fair value as determined by an accepted standard.
Valuations of non-cash consideration must be reasonable at the time
made. If convertible securities or warrants are being offered, the
underlying securities must also be qualified and the aggregate
offering price must include the conversion, exercise, or exchange
price of such securities.
(b) Issuer. The issuer of the securities:
(1) Is an entity organized under the laws of the United States or
Canada, or any State, Province, Territory or possession thereof, or the
District of Columbia, with its principal place of business in the
United States or Canada;
(2) Is not subject to section 13 or 15(d) of the Securities
Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78a et seq.)
immediately before the offering;
(3) Is not a development stage company that either has no specific
business plan or purpose, or has indicated that its business plan is to
merge with an unidentified company or companies;
(4) Is not an investment company registered or required to be
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.) or a business development company as defined in section 2(a)(48)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));
(5) Is not issuing fractional undivided interests in oil or gas
rights, or a similar interest in other mineral rights;
(6) Is not, and has not been, subject to any order of the
Commission entered pursuant to Section 12(j) of the Exchange Act (15
U.S.C. 78l(j)) within five years before the filing of the offering
statement;
(7) Has filed with the Commission all the reports it was required
to file, if any, pursuant to Rule 257 (Sec. 230.257) during the two
years before the filing of the offering statement (or for such shorter
period that the issuer was required to file such reports); and
(8) Is not disqualified under Rule 262 (Sec. 230.262).
(c) Integration with other offerings. Offers and sales made in
reliance on this Regulation A will not be integrated with:
(1) Prior offers or sales of securities; or
(2) Subsequent offers or sales of securities that are:
(i) Registered under the Securities Act, except as provided in Rule
255(e) (Sec. 230.255(e));
(ii) Made pursuant to Rule 701 (Sec. 230.701);
(iii) Made pursuant to an employee benefit plan;
(iv) Made pursuant to Regulation S (Sec. 230.901-905);
(v) Made more than six months after the completion of the
Regulation A offering; or
(vi) Made in reliance on Regulation Crowdfunding (Sec. 230.XX-XX).
Note: If these safe harbors do not apply, whether subsequent
offers and sales of securities will be integrated with the
Regulation A offering will depend on the particular facts and
circumstances. See Securities Act Release No. 4552 (November 6,
1962) [27 FR 11316].
(d) Offering conditions--(1) Offers.
(i) Except as allowed by Rule 255 (Sec. 230.255), no offer of
securities may be made unless a Form 1-A offering statement has been
filed with the Commission.
(ii) After the Form 1-A offering statement has been filed, but
before it is qualified:
(A) Oral offers may be made;
(B) Written offers pursuant to Rule 254 (Sec. 230.254) may be
made; and
(C) Communications pursuant to Rule 255 (Sec. 230.255) may be
made.
(iii) After the Form 1-A offering statement has been qualified, any
written offers must be accompanied with or preceded by the most recent
offering circular filed with the Commission for such offering.
(2) Sales.
(i) No sale of securities may be made until:
(A) The Form 1-A offering statement has been qualified;
(B) A Preliminary Offering Circular is delivered at least 48 hours
before the sale to any person that before qualification of the offering
statement had indicated an interest in purchasing securities in the
offering, including those persons that responded to an issuer's
solicitation of interest materials; and
(C) For Tier 2 offerings, no sale may be made to a purchaser if the
aggregate purchase price paid by such purchaser for securities in the
offering (including any conversion, exercise, or exchange price for
securities that are convertible, exercisable or exchangeable for other
securities) is more than ten percent (10%) of the greater of such
purchaser's annual income and net worth, based on the representations
of the purchaser (with annual income and net worth for natural person
purchasers determined as provided in Rule 501 (Sec. 230.501), provided
that the issuer does not know, at the time of sale, that any such
representation is untrue.
(ii) In a transaction that represents a sale by the issuer or an
underwriter, or a sale where there is not an exclusion or exemption
from the requirement to deliver a Final Offering Circular pursuant to
paragraph 251(d)(2)(iii) of this rule, each underwriter or dealer
selling in such transaction must deliver to each purchaser from it, not
later than two business days following the completion of such sale, a
copy of the Final Offering Circular or, in lieu of such Final Offering
Circular, a notice to the effect that the sale was made pursuant to a
qualified offering statement that includes the uniform resource locator
(``URL'') where the Final Offering Circular, or the offering statement
of which such Final Offering Circular is part, may be obtained on EDGAR
and contact information sufficient to notify a purchaser where a
[[Page 4001]]
request for a Final Offering Circular can be sent and received in
response. If the sale was by the issuer and was not effected by or
through an underwriter or dealer, the issuer is responsible for sending
the Final Offering Circular or notice.
(iii) Sales by a dealer (including an underwriter no longer acting
in that capacity for the security involved in such transaction) that
take place within 90 calendar days after the qualification of the
Regulation A offering statement may be made only if the dealer delivers
a copy of the current offering circular to the purchaser before or with
the confirmation of sale, provided that where an offering statement
relates to offerings to be made from time to time pursuant to paragraph
(d)(3) of this rule, such 90 calendar day period shall commence on the
day of the first bona fide offering of securities under such offering
statement; and
(3) Continuous or delayed offerings. (i) Continuous or delayed
offerings may be made under this Regulation A, so long as the offering
statement pertains only to:
(A) Securities that are to be offered or sold solely by or on
behalf of a person or persons other than the issuer, a subsidiary of
the issuer, or a person of which the issuer is a subsidiary;
(B) Securities that are to be offered and sold pursuant to a
dividend or interest reinvestment plan or an employee benefit plan of
the issuer;
(C) Securities that are to be issued upon the exercise of
outstanding options, warrants, or rights;
(D) Securities that are to be issued upon conversion of other
outstanding securities;
(E) Securities that are pledged as collateral; or
(F) Securities the offering of which will be commenced within two
calendar days after the qualification date, will be made on a
continuous basis, may continue for a period in excess of 30 days from
the date of initial qualification, and will be offered in an amount
that, at the time the offering statement is qualified, is reasonably
expected to be offered and sold within two years from the initial
qualification date. These securities may be offered and sold only if
not more than three years have elapsed since the initial qualification
date of the offering statement under which they are being offered and
sold; provided, however, that if a new offering statement has been
filed pursuant to this paragraph (d)(3)(i)(F), securities covered by
the prior offering statement may continue to be offered and sold until
the earlier of the qualification date of the new offering statement or
180 days after the third anniversary of the initial qualification date
of the prior offering statement. Before the end of such three-year
period, an issuer may file a new offering statement covering the
securities. The new offering statement must include all the information
that would be required at that time in an offering statement relating
to all offerings that it covers. Before the qualification date of the
new offering statement, the issuer may include as part of such new
offering statement any unsold securities covered by the earlier
offering statement by identifying on the cover page of the new offering
circular or the latest amendment the amount of such unsold securities
being included. The offering of securities on the earlier offering
statement will be deemed terminated as of the date of qualification of
the new offering statement. Securities may be sold pursuant this
paragraph (d)(3)(i)(F) only if the issuer is current in its annual and
semiannual filings pursuant to Rule 257(b) (Sec. 230.257(b)), at the
time of such sale.
(ii) At the market offerings, by or on behalf of the issuer or
otherwise, are not permitted under this Regulation A. As used in this
paragraph (d)(3)(ii), the term at the market offering means an offering
of equity securities into an existing trading market for outstanding
shares of the same class at other than a fixed price.
Sec. 230.252 Offering statement.
(a) Documents to be included. The offering statement consists of
the contents required by Form 1-A (Sec. 239.90 of this chapter) and
any other material information necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
(b) Paper, printing, language and pagination. Except as otherwise
specified in this rule, the requirements for offering statements are
the same as those specified in Rule 403 (Sec. 230.403) for
registration statements under the Act. No fee is payable to the
Commission upon either the submission or filing of an offering
statement on Form 1-A, or any amendment to an offering statement.
(c) Confidential treatment. A request for confidential treatment
may be made under Rule 406 (Sec. 230.406) for information required to
be filed, and Rule 83 (Sec. 200.83) for information not required to be
filed.
(d) Signatures. The issuer, its principal executive officer,
principal financial officer, principal accounting officer, and a
majority of the members of its board of directors or other governing
body, must sign the offering statement. If a signature is by a person
on behalf of any other person, evidence of authority to sign must be
filed, except where an executive officer signs for the issuer.
(e) How to file. The offering statement must be filed with the
Commission in electronic format by means of the Commission's Electronic
Data Gathering, Analysis and Retrieval System (``EDGAR'') in accordance
with the EDGAR rules set forth in Regulation S-T (17 CFR Part 232). The
offering statement must be signed in the manner prescribed by Form 1-A.
(f) Non-public submission. An issuer whose securities have not been
previously sold pursuant to a qualified offering statement under this
Regulation A or an effective registration statement under the
Securities Act may submit under Rule 83 (Sec. 200.83) a draft offering
statement to the Commission for non-public review by the staff of the
Commission before public filing, provided that the offering statement
shall not be qualified less than 21 calendar days after the public
filing of (1) the initial non-public submission, (2) all non-public
amendments with the Commission, and (3) all non-public correspondence
submitted by or on behalf of the issuer to the Commission staff
regarding such submissions (subject to any separately approved
confidential treatment request under paragraph (c) of this rule). Draft
offering statements must be submitted to the Commission in electronic
format by means of EDGAR in accordance with the EDGAR rules set forth
in Regulation S-T (17 CFR Part 232).
(g) Qualification. An offering statement and any amendment thereto
can be qualified only by order of the Commission.
(h) Amendments. (1)(i) Amendments to an offering statement must be
signed and filed in the same manner as the initial filing. The
amendment must be filed with the Commission in the manner set forth in
paragraph (e) of this rule. Amendments to an offering statement must be
filed under cover of Form 1-A and must be numbered consecutively in the
order in which filed.
(ii) Every amendment that includes audited financial statements
must include the consent of the certifying accountant to the use of
such accountant's certificate in connection with the amended financial
statements in the offering statement or offering circular and to being
named as having audited such financial statements.
(iii) Amendments solely relating to Part III of Form 1-A must
comply with
[[Page 4002]]
the requirements of paragraph (h)(1)(i) of this rule, except that such
amendments may be limited to the Part I of Form 1-A, an explanatory
note, and all of the information required by Part III of Form 1-A.
(2) Post-qualification amendments must be filed in the following
circumstances for ongoing offerings:
(i) At least every 12 months after the qualification date to
include the financial statements that would be required by Form 1-A as
of such date; or
(ii) To reflect any facts or events arising after the qualification
date of the offering statement (or the most recent post-qualification
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the offering
statement.
Sec. 230.253 Offering circular.
(a) Contents. An offering circular must include the information
required by Form 1-A for offering circulars.
(b) Notwithstanding paragraph (a) of this section, the offering
circular may omit information with respect to the public offering
price, underwriting syndicate (including any material relationships
between the issuer or selling securityholders and the unnamed
underwriters, brokers or dealers), underwriting discounts or
commissions, discounts or commissions to dealers, amount of proceeds,
conversion rates, call prices and other items dependent upon the
offering price, delivery dates, and terms of the securities dependent
upon the offering date; provided, that the following conditions are
met:
(1) The securities to be qualified are offered for cash.
(2) The outside front cover page of the offering circular includes
a bona fide estimate of the range of the maximum offering price and the
maximum number of shares or other units of securities to be offered or
a bona fide estimate of the principal amount of debt securities
offered, subject to the following conditions:
(i) The range must not exceed $2 for offerings where the upper end
of the range is $10 or less and 20% if the upper end of the price range
is over $10; and
(ii) The upper end of the range must be used in determining the
aggregate offering price under Rule 251(a) (Sec. 230.251(a)).
(3) The offering statement does not relate to securities to be
offered by competitive bidding.
(4) The volume of securities (the number of equity securities or
aggregate principal amount of debt securities) to be offered may not be
omitted in reliance on this paragraph (b).
Note: A decrease in the volume of securities offered or a change
in the bona fide estimate of the offering price range from that
indicated in the offering circular filed as part of a qualified
offering statement may be disclosed in the offering circular filed
with the Commission pursuant to Rule 253(g) (Sec. 230.253(g)), so
long as the decrease in the volume of securities offered or change
in the price range would not materially change the disclosure
contained in the offering statement at qualification.
Notwithstanding the foregoing, any decrease in the volume of
securities offered and any deviation from the low or high end of the
price range may be reflected in the offering circular supplement
filed with the Commission pursuant to Rule 253(g)(1) (Sec.
230.253(g)(1)) if, in the aggregate, the decrease in volume and/or
change in price represent no more than a 20% change from the maximum
aggregate offering price calculable using the information in the
qualified offering statement. In no circumstances may this paragraph
be used to offer securities where the maximum aggregate offering
price would result in the offering exceeding the limit set forth in
Rule 251(a) (Sec. 230.251(a)) for offerings under Regulation A or
if the change would result in a Tier 1 offering becoming a Tier 2
offering. An offering circular supplement may not be used to
increase the volume of securities being offered. Additional
securities may only be offered pursuant to a new offering statement
or post-qualification amendment qualified by the Commission.
(c) The information omitted from the offering circular in reliance
upon paragraph (b) of this rule must be contained in an offering
circular filed with the Commission pursuant to Rule 252(e) (Sec.
230.252(e)) and paragraph (g) of this rule; except that if such
offering circular is not so filed by the later of 15 business days
after the qualification date of the offering statement or 15 business
days after the qualification of a post-qualification amendment thereto
that contains an offering circular, the information omitted in reliance
upon paragraph (b) of this rule must be contained in a qualified post-
qualification amendment to the offering statement.
(d) Presentation of information.
(1) Information in the offering circular must be presented in a
clear, concise and understandable manner and in a type size that is
easily readable. Repetition of information should be avoided; cross-
referencing of information within the document is permitted.
(2) Where an offering circular is distributed through an electronic
medium, issuers may satisfy legibility requirements applicable to
printed documents by presenting all required information in a format
readily communicated to investors.
(e) Date. An offering circular must be dated approximately as of
the date it was filed with the Commission.
(f) Cover page legend. The cover page of every offering circular
must display the following statement highlighted by prominent type or
in another manner:
The United States Securities and Exchange Commission does not pass
upon the merits of or give its approval to any securities offered or
the terms of the offering, nor does it pass upon the accuracy or
completeness of any offering circular or other solicitation materials.
These securities are offered pursuant to an exemption from registration
with the Commission; however, the Commission has not made an
independent determination that the securities offered are exempt from
registration.
(g) Offering circular supplements.
(1) An offering circular that discloses information previously
omitted from the offering circular in reliance upon Rule 253(b) (Sec.
230.253(b)) must be filed with the Commission no later than two
business days following the earlier of the date of determination of the
offering price or the date such offering circular is first used after
qualification in connection with a public offering or sale.
(2) An offering circular that reflects information other than that
covered in paragraph (g)(1) of this rule that constitutes a substantive
change from or addition to the information set forth in the last
offering circular filed with the Commission must be filed with the
Commission no later than five business days after the date it is first
used after qualification in connection with a public offering or sales.
If an offering circular filed pursuant to this paragraph (g)(2)
consists of an offering circular supplement attached to an offering
circular that (i) previously had been filed or (ii) was not required to
be filed pursuant to paragraph (g) of this rule because it did not
contain substantive changes from an offering circular that previously
was filed, only the offering circular supplement need be filed under
paragraph (g) of this rule, provided that the cover page of the
offering circular supplement includes a cross reference to the date(s)
of the related offering circular and any offering circular supplements
thereto that together constitute the offering circular with respect to
the securities currently being offered or sold.
(3) An offering circular that discloses information, facts or
events covered in both paragraphs (g)(1) and (2) must be filed with the
Commission no later than
[[Page 4003]]
two business days following the earlier of the date of the
determination of the offering price or the date it is first used after
qualification in connection with a public offering or sales.
(4) An offering circular required to be filed pursuant to paragraph
(g) of this rule that is not filed within the time frames specified in
paragraph (g) must be filed pursuant to this paragraph (4) as soon as
practicable after the discovery of such failure to file.
(5) Each offering circular must be filed with the Commission in
electronic format by means of EDGAR in accordance with the EDGAR rules
set forth in Regulation S-T (17 CFR Part 232).
(6) Each offering circular filed under this rule must contain in
the upper right corner of the cover page the paragraph and subparagraph
of this rule under which the filing is made, and the file number of the
offering statement to which the offering circular relates.
Sec. 230.254 Preliminary offering circulars.
Before qualification of the required offering statement, but after
its filing, a written offer of securities may be made if it meets the
following requirements:
(a) The outside front cover page of the material bears the caption
Preliminary Offering Circular, the date of issuance, and the following
legend, which must be highlighted by prominent type or in another
manner:
An offering statement pursuant to Regulation A relating to these
securities has been filed with the Securities and Exchange Commission.
Information contained in this Preliminary Offering Circular is subject
to completion or amendment. These securities may not be sold nor may
offers to buy be accepted before the offering statement filed with the
Commission is qualified. This Preliminary Offering Circular shall not
constitute an offer to sell or the solicitation of an offer to buy nor
may there be any sales of these securities in any state in which such
offer, solicitation or sale would be unlawful before registration or
qualification under the laws of any such state. We may elect to satisfy
our obligation to deliver a Final Offering Circular by sending you a
notice within two business days after the completion of our sale to you
that contains the URL where the Final Offering Circular or the offering
statement in which such Final Offering Circular was filed may be
obtained.
(b) The Preliminary Offering Circular contains substantially the
information required in an offering circular by Form 1-A (Sec. 239.90
of this chapter), except that information that may be omitted under
Rule 253(b) (Sec. 230.253(b)) may be omitted if the conditions set
forth in Rule 253(b) are met.
(c) The Preliminary Offering Circular is filed as a part of the
offering statement.
Sec. 230.255 Solicitation of interest communications.
(a) At any time before the qualification of an offering statement,
including before the non-public submission or public filing of such
offering statement, an issuer or any person authorized to act on behalf
of an issuer may communicate orally or in writing to determine whether
there is any interest in a contemplated securities offering. Such
communications are deemed to be an offer of a security for sale for
purposes of the antifraud provisions of the federal securities laws. No
solicitation or acceptance of money or other consideration, nor of any
commitment, binding or otherwise, from any person is permitted until
qualification of the offering statement.
(b) The communications must:
(1) State that no money or other consideration is being solicited,
and if sent in response, will not be accepted;
(2) State that no offer to buy the securities can be accepted and
no part of the purchase price can be received until the offering
statement is qualified, and any such offer may be withdrawn or revoked,
without obligation or commitment of any kind, at any time before notice
of its acceptance given after the qualification date;
(3) State that a person's indication of interest involves no
obligation or commitment of any kind; and
(4) After the public filing of the offering statement:
(i) State from whom a copy of the most recent version of the
Preliminary Offering Circular may be obtained, including a phone number
and address of such person;
(ii) Provide the URL where such Preliminary Offering Circular or to
the offering statement in which such Preliminary Offering Circular was
filed may be obtained; or
(iii) Include a complete copy of the Preliminary Offering Circular.
(c) Any written communication under this rule may include a means
by which a person may indicate to the issuer that such person is
interested in a potential offering. This issuer may require the name,
address, telephone number, and/or email address in any response form
included pursuant to this paragraph (c).
(d) If solicitation of interest materials are used after the public
filing of the offering statement and such solicitation of interest
materials contain information that is inaccurate or inadequate in any
material respect, revised solicitation of interest materials must be
redistributed in a manner substantially similar to the manner in which
such materials were originally distributed. Notwithstanding the
foregoing in this paragraph (d), if the only information that is
inaccurate or inadequate is contained in a Preliminary Offering
Circular provided with the solicitation of interest materials pursuant
to paragraphs (b)(4)(i) or (b)(4)(ii) of this rule, no such
redistribution is required in the following circumstances:
(1) in the case of paragraph (b)(4)(i) of this rule, the revised
Preliminary Offering Circular will be provided to any persons making
new inquiries and will be recirculated to any persons making any
previous inquiries; or
(2) in the case of paragraph (b)(4)(ii) of this rule, the URL
continues to link directly to the most recent Preliminary Offering
Circular or to the offering statement in which such revised Preliminary
Offering Circular was filed.
(e) Where an issuer decides to register an offering under the
Securities Act after soliciting interest in a contemplated, but
abandoned, Regulation A offering, the Regulation A exemption for offers
would not be subject to integration with the registered offering,
unless the issuer engaged in solicitations of interest pursuant to this
rule to persons other than qualified institutional buyers and
institutional accredited investors permitted by Section 5(d) of the
Securities Act. In such circumstances, the issuer (and any underwriter,
broker, dealer, or agent used by the issuer in connection with the
proposed offering) must wait at least 30 calendar days between the last
such solicitation of interest in the Regulation A offering and the
filing of the registration statement with the Commission.
Sec. 230.256 Definition of ``qualified purchaser.''
For purposes of Section 18(b)(3) of the Securities Act [15 U.S.C.
77r(b)(3)], a ``qualified purchaser'' of a security offered or sold
pursuant to Regulation A means any offeree of such security and, in a
Tier 2 offering, any purchaser of such security.
Sec. 230.257 Periodic and current reporting; exit report.
(a) Tier 1: Exit report. Each issuer that has filed an offering
statement for a Tier 1 offering that has been qualified pursuant to
this Regulation A must file an exit report on Form 1-Z (Sec. 239.94)
not later than 30 calendar days after the termination or completion of
the offering.
[[Page 4004]]
(b) Tier 2: Periodic and current reporting. Each issuer that has
filed an offering statement for a Tier 2 offering that has been
qualified pursuant to this Regulation A must file with the Commission
the following periodic and current reports in electronic format by
means of EDGAR in accordance with the EDGAR rules set forth in
Regulation S-T (17 CFR Part 232):
(1) Annual reports. An annual report on Form 1-K (Sec. 239.91) for
the fiscal year in which the offering statement became qualified and
for any fiscal year thereafter, unless the issuer's obligation to file
such annual report is suspended under paragraph (d) of this rule.
Annual reports must be filed within the period specified in Form 1-K.
(2) Special financial report. (i) A special financial report if the
offering statement did not contain the following:
(A) audited financial statements for the issuer's last full fiscal
year (or for the life of the issuer if less than a full fiscal year)
preceding the fiscal year in which the issuer's offering statement
became qualified; or
(B) financial statements covering the first half of the issuer's
current fiscal year if the offering statement was qualified during the
second half of that fiscal year.
(ii) The special financial report described in paragraph
(a)(2)(i)(A) of this rule must be filed under cover of Form 1-K within
120 calendar days after the qualification date of the offering
statement and must include audited financial statements for such last
full fiscal year or other period, as the case may be. The special
financial report described in paragraph (a)(2)(i)(B) of this rule must
be filed under cover of Form 1-SA within 90 calendar days after the
qualification date of the offering statement and must include the
semiannual financial statements for the first half of the issuer's
fiscal year, which may be unaudited.
(iii) A special financial report must be signed in accordance with
the requirements of the form on which it is filed.
(3) Semiannual report. A semiannual report on Form 1-SA (Sec.
239.92) within the period specified in Form 1-SA. Semiannual reports
must cover the first half of each fiscal year of the issuer, commencing
with the first half of the fiscal year following the most recent fiscal
year for which full financial statements were included in the offering
statement, or, if the offering statement included financial statements
for the first half of the fiscal year following the most recent full
fiscal year, for the first half of the following fiscal year.
(4) Current reports. Current reports on Form 1-U (Sec. 239.93)
with respect to the matters and within the period specified in that
form, unless substantially the same information has been previously
reported to the Commission by the issuer under cover of Form 1-K or 1-
SA.
(5) Reporting by successor issuers. Where in connection with a
succession by merger, consolidation, exchange of securities,
acquisition of assets or otherwise, securities of any issuer that is
not required to file reports pursuant to paragraph (b) of this rule are
issued to the holders of any class of securities of another issuer that
is required to file such reports, the duty to file reports pursuant to
paragraph (b) of this rule shall be deemed to have been assumed by the
issuer of the class of securities so issued. The successor issuer must,
after the consummation of the succession, file reports in accordance
with paragraph (b) of this rule, unless that issuer is exempt from
filing such reports or the duty to file such reports is suspended under
paragraph (d).
(c) Amendments. All amendments to the reports described in
paragraphs (a) and (b) of this rule must be filed under cover of the
form amended, marked with the letter ``A'' to designate the document as
an amendment, e.g., ``1-K/A,'' and in compliance with pertinent
requirements applicable to such reports. Amendments filed pursuant to
this paragraph (c) must set forth the complete text of each item as
amended, but need not include any items that were not amended.
Amendments must be numbered sequentially and be filed separately for
each report amended. Amendments must be signed on behalf of the issuer
by a duly authorized representative of the issuer. An amendment to any
report required to include certifications as specified in the
applicable form must include new certifications by the appropriate
persons.
(d) Termination or suspension of duty to file reports. (1) The duty
to file reports under this rule shall be automatically suspended if and
so long as the issuer is subject to the duty to file reports required
by section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 15 U.S.C.
78o).
(2) The duty to file reports under paragraph (b) of this rule with
respect to a class of securities held of record (as defined in Rule
12g5-1 (Sec. 240.12g5-1)) by less than 300 persons shall be suspended
for such class of securities immediately upon filing with the
Commission an exit report on Form 1-Z (Sec. 239.94) if the issuer of
such class has filed all reports due pursuant to this rule before the
date of such Form 1-Z filing for the shorter of (i) the period since
the issuer became subject to such reporting obligation, or (ii) its
most recent three fiscal years and the portion of the current year
preceding the date of filing Form 1-Z. For the purposes of this
subsection, the term ``class'' shall be construed to include all
securities of an issuer that are of substantially similar character and
the holders of which enjoy substantially similar rights and privileges.
If the Form 1-Z is subsequently withdrawn or denied, the issuer must,
within 60 days, file with the Commission all reports which would have
been required if such exit report had not been filed. If the suspension
resulted from the issuer's merger into, or consolidation with, another
issuer or issuers, the notice must be filed by the successor issuer.
(3) The ability to suspend reporting, as described in paragraph
(d)(2) of this rule, is not available for any class of securities if
(i) during that fiscal year an offering statement was qualified or (ii)
at the time of filing of Form 1-Z, offers or sales of securities of
that class are being made pursuant to Regulation A.
(e) Termination of suspension of duty to file reports. If the duty
to file reports is suspended pursuant to paragraph (d)(1) of this rule
and such suspension ends because the issuer is no longer subject to the
duty to file reports under the Exchange Act, the issuer's obligation to
file reports under paragraph (b) of this rule shall:
(1) automatically terminate if the issuer is eligible to suspend
its duty to file reports under paragraph (d)(2)-(3); or
(2) recommence with the report covering any financial period after
that included in any registration statement or Exchange Act report.
Sec. 230.258 Suspension of the exemption.
(a) The Commission may at any time enter an order temporarily
suspending a Regulation A exemption if it has reason to believe that:
(1) No exemption is available or any of the terms, conditions or
requirements of Regulation A have not been complied with;
(2) The offering statement, any sales or solicitation of interest
material, or any report filed pursuant to Rule 257 (Sec. 230.257)
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements made, in light
of the circumstances under which they are made, not misleading;
(3) The offering is being made or would be made in violation of
section 17 of the Securities Act;
[[Page 4005]]
(4) An event has occurred after the filing of the offering
statement that would have rendered the exemption hereunder unavailable
if it had occurred before such filing;
(5) Any person specified in Rule 262(a) (Sec. 230.262(a)) has been
indicted for any crime or offense of the character specified in Rule
262(a)(1) (Sec. 230.262(a)(1)), or any proceeding has been initiated
for the purpose of enjoining any such person from engaging in or
continuing any conduct or practice of the character specified in Rule
262(a)(2) (Sec. 230.262(a)(2)), or any proceeding has been initiated
for the purposes of Rule 262(a)(3)-(8) (Sec. 230.262(a)(3)-(8)); or
(6) The issuer or any promoter, officer, director or underwriter
has failed to cooperate, or has obstructed or refused to permit the
making of an investigation by the Commission in connection with any
offering made or proposed to be made in reliance on Regulation A.
(b) Upon the entry of an order under paragraph (a) of this rule,
the Commission will promptly give notice to the issuer, any underwriter
and any selling securityholder:
(1) That such order has been entered, together with a brief
statement of the reasons for the entry of the order; and
(2) That the Commission, upon receipt of a written request within
30 calendar days after the entry of the order, will within 20 calendar
days after receiving the request, order a hearing at a place to be
designated by the Commission.
(c) If no hearing is requested and none is ordered by the
Commission, an order entered under paragraph (a) of this rule shall
become permanent on the 30th calendar day after its entry and shall
remain in effect unless or until it is modified or vacated by the
Commission. Where a hearing is requested or is ordered by the
Commission, the Commission will, after notice of and opportunity for
such hearing, either vacate the order or enter an order permanently
suspending the exemption.
(d) The Commission may, at any time after notice of and opportunity
for hearing, enter an order permanently suspending the exemption for
any reason upon which it could have entered a temporary suspension
order under paragraph (a) of this rule. Any such order shall remain in
effect until vacated by the Commission.
(e) All notices required by this rule must be given by personal
service, registered or certified mail to the addresses given by the
issuer, any underwriter and any selling securityholder in the offering
statement.
Sec. 230.259 Withdrawal or abandonment of offering statements.
(a) If none of the securities that are the subject of an offering
statement have been sold and such offering statement is not the subject
of a proceeding under Rule 258 (Sec. 230.258), the offering statement
may be withdrawn with the Commission's consent. The application for
withdrawal must state the reason the offering statement is to be
withdrawn, must be signed by an authorized representative of the issuer
and must be filed with the Commission in electronic format by means of
EDGAR in accordance with the EDGAR rules set forth in Regulation S-T
(17 CFR Part 232). Any withdrawn document will remain in the
Commission's files, as well as the related request for withdrawal.
(b) When an offering statement has been on file with the Commission
for nine months without amendment and has not become qualified, the
Commission may, in its discretion, declare the offering statement
abandoned. If the offering statement has been amended, the nine-month
period shall be computed from the date of the latest amendment.
Sec. 230.260 Insignificant deviations from a term, condition or
requirement of Regulation A.
(a) A failure to comply with a term, condition or requirement of
Regulation A will not result in the loss of the exemption from the
requirements of section 5 of the Securities Act for any offer or sale
to a particular individual or entity, if the person relying on the
exemption establishes that:
(1) The failure to comply did not pertain to a term, condition or
requirement directly intended to protect that particular individual or
entity;
(2) The failure to comply was insignificant with respect to the
offering as a whole, provided that any failure to comply with
paragraphs (a), (b), (d)(1) and (3) of Rule 251 (Sec. 230.251) shall
be deemed to be significant to the offering as a whole; and
(3) A good faith and reasonable attempt was made to comply with all
applicable terms, conditions and requirements of Regulation A.
(b) A transaction made in reliance upon Regulation A must comply
with all applicable terms, conditions and requirements of the
regulation. Where an exemption is established only through reliance
upon paragraph (a) of this rule, the failure to comply shall
nonetheless be actionable by the Commission under section 20 of the
Securities Act.
(c) This provision provides no relief or protection from a
proceeding under Rule 258 (Sec. 230.258).
Sec. 230.261 Definitions.
As used in this Regulation A, all terms have the same meanings as
in Rule 405 (Sec. 230.405), except that all references to registrant
in those definitions shall refer to the issuer of the securities to be
offered and sold under Regulation A. In addition, these terms have the
following meanings:
(a) Business day. Any day except Saturdays, Sundays or United
States federal holidays.
(b) Eligible securities. Equity securities, debt securities, and
debt securities convertible or exchangeable to equity interests,
including any guarantees of such securities, but not including asset-
backed securities as such term is defined in Item 1101(c) of Regulation
AB.
(c) Final offering circular. The more recent of (1) the current
offering circular contained in a qualified offering statement and (2)
the offering circular filed pursuant to Rule 253(g) (Sec. 230.253(g)),
or if the issuer is relying on Rule 253(b), the Final Offering Circular
is the offering circular filed pursuant to Rule 253(g)(1) or (3) (Sec.
230.253(g)(1) or (3)).
(d) Preliminary offering circular. The offering circular described
in Rule 254 (Sec. 230.254).
Sec. 230.262 Disqualification provisions.
(a) No exemption under this Regulation A shall be available for a
sale of securities if the issuer; any predecessor of the issuer; any
affiliated issuer; any director, executive officer, other officer
participating in the offering, general partner or managing member of
the issuer; any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power; any promoter connected with the issuer in any capacity at the
time of filing, any offer after qualification, or such sale; any person
that has been or will be paid (directly or indirectly) remuneration for
solicitation of purchasers in connection with such sale of securities;
any general partner or managing member of any such solicitor; or any
director, executive officer or other officer participating in the
offering of any such solicitor or general partner or managing member of
such solicitor:
(1) Has been convicted, within ten years before the filing of the
offering statement (or five years, in the case of issuers, their
predecessors and affiliated issuers), of any felony or misdemeanor:
[[Page 4006]]
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the offering statement, that, at the time of such filing, restrains or
enjoins such person from engaging or continuing to engage in any
conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(3) Is subject to a final order of a state securities commission
(or an agency or officer of a state performing like functions); a state
authority that supervises or examines banks, savings associations, or
credit unions; a state insurance commission (or an agency or officer of
a state performing like functions); an appropriate federal banking
agency; the U.S. Commodity Futures Trading Commission; or the National
Credit Union Administration that:
(i) At the time of the filing of the offering statement, bars the
person from:
(A) Association with an entity regulated by such commission,
authority, agency, or officer;
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative, or deceptive
conduct entered within ten years before such sale;
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15
U.S.C. 78 o (b) or 78 o -4(c)) or section 203(e) or (f) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at
the time of the filing of the offering statement:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer or investment adviser;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the offering statement that, at the time of
such filing, orders the person to cease and desist from committing or
causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the federal
securities laws, including without limitation section 17(a)(1) of the
Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-
5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78 o (c)(1)) and section 206(1) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
(ii) Section 5 of the Securities Act of 1933 (15 U.S.C. 77e).
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or Regulation A offering
statement filed with the Commission that, within five years before the
filing of the offering statement, was the subject of a refusal order,
stop order, or order suspending the Regulation A exemption, or is, at
the time of such filing, the subject of an investigation or proceeding
to determine whether a stop order or suspension order should be issued;
or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
offering statement, or is, at the time of such filing, subject to a
temporary restraining order or preliminary injunction with respect to
conduct alleged by the United States Postal Service to constitute a
scheme or device for obtaining money or property through the mail by
means of false representations.
(b) Paragraph (a) of this rule shall not apply:
(1) With respect to any order under Sec. 230.262(a)(3) or (a)(5)
that occurred or was issued before [effective date of rule];
(2) Upon a showing of good cause and without prejudice to any other
action by the Commission, if the Commission determines that it is not
necessary under the circumstances that an exemption be denied;
(3) If, before the filing of the offering statement, the court or
regulatory authority that entered the relevant order, judgment or
decree advises in writing (whether contained in the relevant judgment,
order or decree or separately to the Commission or its staff) that
disqualification under paragraph (a) of this rule should not arise as a
consequence of such order, judgment or decree; or
(4) If the issuer establishes that it did not know and, in the
exercise of reasonable care, could not have known that a
disqualification existed under paragraph (a) of this rule.
Instruction to paragraph (b)(4). An issuer will not be able to
establish that it has exercised reasonable care unless it has made, in
light of the circumstances, factual inquiry into whether any
disqualifications exist. The nature and scope of the factual inquiry
will vary based on the facts and circumstances concerning, among other
things, the issuer and the other offering participants.
(c) For purposes of paragraph (a) of this rule, events relating to
any affiliated issuer that occurred before the affiliation arose will
be not considered disqualifying if the affiliated entity is not:
(1) In control of the issuer; or
(2) Under common control with the issuer by a third party that was
in control of the affiliated entity at the time of such events.
(d) Disclosure of prior ``bad actor'' events. The issuer must
include in the offering circular a description of any matters that
would have triggered disqualification under paragraph (a) of this rule
but occurred before [effective date]. The failure to provide such
information shall not prevent an issuer from relying on Regulation A if
the issuer establishes that it did not know and, in the exercise of
reasonable care, could not have known of the existence of the
undisclosed matter or matters.
Note: An issuer will not be able to establish that it has
exercised reasonable care unless it has made, in light of the
circumstances, factual inquiry into whether any disqualifications
exist. The nature and scope of the factual inquiry will vary based
on the facts and circumstances concerning, among other things, the
issuer and the other offering participants.
Sec. 230.263 Consent to service of process.
(a) If the issuer is not organized under the laws of any of the
states of or the United States of America, it shall at the time of
filing the offering statement required by Rule 252 (Sec. 230.252),
[[Page 4007]]
furnish to the Commission a written irrevocable consent and power of
attorney on Form F-X (Sec. 239.42 of this chapter).
(b) Any change to the name or address of the agent for service of
the issuer shall be communicated promptly to the Commission through
amendment of the requisite form and referencing the file number of the
relevant offering statement.
* * * * *
0
5. Sec. 230.505(b)(2)(iii)(A) and (B) are revised, in part, to read as
follows:
Sec. 230.505 Exemption for limited offers and sales of securities not
exceeding $5,000,000.
* * * * *
(b) * * *
(2) * * *
(iii) * * *
(A) The term ``filing of the offering statement'' as used in Sec.
230.262 shall mean the first sale of securities under this section;
(B) The term ``underwriter'' as used in Sec. 230.262(a) shall mean
a person that has been or will be paid directly or indirectly
remuneration for solicitation of purchasers in connection with sales of
securities under this section; and
* * * * *
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
6. The authority citation for part 232 is revised to read in part as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; 18 U.S.C. 1350; and
Pub. L. 112-106, Sec. 401, 126 Stat. 313 (2012), unless otherwise
noted.
* * * * *
0
7. Sec. 232.101 is amended by:
0
a. Revising paragraph (a)(1)(vii) and (c)(6);
0
b. Adding paragraph (a)(1)(xvii); and
0
c. Reserving paragraph (b)(8).
The revisions, additions and reservations read as follows:
Sec. 232.101 Mandated electronic submissions and exceptions.
(a) * * *
(1) * * *
(vii) Form F-X (Sec. 239.42 of this chapter) when filed in
connection with a Form CB (Sec. Sec. 239.800 and 249.480 of this
chapter) or a Form 1-A (Sec. 239.90);
* * * * *
(xvii) Filings made pursuant to Regulation A (Sec. Sec. 230.251-
230.263 of this chapter).
* * * * *
(b) * * *
(8) [Reserved]
* * * * *
(c) * * *
(6) Filings on Form 144 (Sec. 239.144 of this chapter) where the
issuer of the securities is not subject to the reporting requirements
of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d),
respectively).
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
8. The authority citation for Part 239 is revised to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a),
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24,
80a-26, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, Sec. 401,
126 Stat. 313 (2012), unless otherwise noted.
* * * * *
0
9. Amend Form 1-A (referenced in Sec. 239.90) by revising it to read
as follows:
BILLING CODE 8011-01-P
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* * * * *
0
10. Revise Sec. 239.91 to read as follows:
Sec. 239.91 Form 1-K
This form shall be used for filing annual reports under Regulation
A (Sec. Sec. 230.251-230.263 of this chapter).
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0
12. Revise Sec. 239.92 to read as follows:
Sec. 230.92 Form 1-SA
This form shall be used for filing semiannual reports under
Regulation A (Sec. Sec. 230.251-230.263 of this chapter).
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0
13. Revise Sec. 239.93 to read as follows:
Sec. 230.93 Form 1-U
This form shall be used for filing current reports under Regulation
A (Sec. Sec. 230.251-230.263 of this chapter).
[[Page 4052]]
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* * * * *
0
13. Revise Sec. 239.94 to read as follows:
Sec. 230.94 Form 1-Z
This form shall be used to file an exit report under Regulation A
(Sec. Sec. 230.251-230.263 of this chapter).
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[[Page 4065]]
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
14. The authority citation for Part 240 is amended by revising the
sectional authority for Sec. 240.15c2-11 to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et. seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010), unless otherwise
noted.
* * * * *
Section 240.15c2-11 also issued under 15 U.S.C. 78j(b), 78o(c),
78q(a), 78w(a), and Pub. L. 112-106, Sec. 401, 126 Stat. 313
(2012).
* * * * *
0
15. Sec. 240.15c2-11 is amended by revising paragraphs (a)(3) and
(d)(2)(i) to read as follows:
Sec. 240.15c2-11 Initiation or resumption of quotations without
specific information.
* * * * *
(a) * * *
(3) A copy of the issuer's most recent annual report filed pursuant
to section 13 or 15(d) of the Act or pursuant to Regulation A
((Sec. Sec. 230.251-230.263 of this chapter), or a copy of the annual
statement referred to in section 12(g)(2)(G)(i) of the Act in the case
of an issuer required to file reports pursuant to section 13 or 15(d)
of the Act or an issuer of a security covered by section 12(g)(2)(B) or
(G) of the Act, together with any semiannual, quarterly and current
reports that have been filed under the provisions of the Act or
Regulation A by the issuer after such annual report or annual
statement; provided, however, that until such issuer has filed its
first annual report pursuant to section 13 or 15(d) of the Act or
pursuant to Regulation A, or annual statement referred to in section
12(g)(2)(G)(i) of the Act, the broker or dealer has in its records a
copy of the prospectus specified by section 10(a) of the Securities Act
of 1933 included in a registration statement filed by the issuer under
the Securities Act of 1933, other than a registration statement on Form
F-6, or a copy of the offering circular specified by Regulation A
included in an offering statement filed by the issuer under Regulation
A, that became effective or was qualified within the prior 16 months,
or a copy of any registration statement filed by the issuer under
section 12 of the Act that became effective within the prior 16 months,
together with any semiannual, quarterly and current reports filed
thereafter under section 13 or 15(d) of the Act or Regulation A; and
provided further, that the broker or dealer has a reasonable basis
under the circumstances for believing that the issuer is current in
filing annual, semiannual, quarterly, and current reports filed
pursuant to section 13 or 15(d) of the Act or Regulation A, or, in the
case of an insurance company exempted from section 12(g) of the Act by
reason of section 12(g)(2)(G) thereof, the annual statement referred to
in section 12(g)(2)(G)(i) of the Act; or
* * * * *
(d) * * *
(2) * * *
(i) A broker-dealer shall be in compliance with the requirement to
obtain current reports filed by the issuer if the broker-dealer obtains
all current reports filed with the Commission by the issuer as of a
date up to five business days in advance of the earlier of the date of
submission of the quotation to the quotation medium and the date of
submission of the paragraph (a) information pursuant to the applicable
rule of the Financial Industry Regulatory Authority, Inc. or its
successor organization; and
* * * * *
PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF
1939
0
16. The authority citation for Part 260 is revised to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77eee, 77ggg, 77nnn, 77sss, 78 ll
(d), 80b-3, 80b-4, 80b-11 and Pub. L. 112-106, Sec. 401, 126 Stat.
313 (2012), unless otherwise noted.
* * * * *
0
17. Sec. 260.4a-1 is revised to read as follows:
Sec. 260.4a-1 Exempted securities under section 304(a)(8).
The provisions of the Trust Indenture Act of 1939 shall not apply
to any security that has been or will be issued otherwise than under an
indenture. The same issuer may not claim this exemption within a period
of twelve consecutive months for more than $50,000,000 aggregate
principal amount of any securities.
Dated: December 18, 2013.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-30508 Filed 1-22-14; 8:45 am]
BILLING CODE 8011-01-C