[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Rules and Regulations]
[Pages 21806-21925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-07305]
[[Page 21805]]
Vol. 80
Monday,
No. 75
April 20, 2015
Part II
Securities and Exchange Commission
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17 CFR Parts 200, 230, 232, et al.
Amendments for Small and Additional Issues Exemptions Under the
Securities Act (Regulation A); Final Rule
Federal Register / Vol. 80 , No. 75 / Monday, April 20, 2015 / Rules
and Regulations
[[Page 21806]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 230, 232, 239, 240, 249, and 260
[Release Nos. 33-9741; 34-74578; 39-2501; File No. S7-11-13]
RIN 3235-AL39
Amendments for Small and Additional Issues Exemptions Under the
Securities Act (Regulation A)
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: We are adopting amendments to Regulation A and other rules and
forms to implement Section 401 of the Jumpstart Our Business Startups
(JOBS) Act. Section 401 of the JOBS Act added Section 3(b)(2) to the
Securities Act of 1933, which directs the Commission to adopt rules
exempting from the registration requirements of the Securities Act
offerings of up to $50 million of securities annually. The final rules
include issuer eligibility requirements, content and filing
requirements for offering statements, and ongoing reporting
requirements for issuers in Regulation A offerings.
DATES: The final rules and form amendments are effective on June 19,
2015.
FOR FURTHER INFORMATION CONTACT: Zachary O. Fallon, Special Counsel;
Office of Small Business Policy, Division of Corporation Finance, at
(202) 551-3460; or Shehzad K. Niazi, Special Counsel; Office of
Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S.
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-3628.
SUPPLEMENTARY INFORMATION: We are amending Rules 251 through 263 \1\ of
Regulation A under the Securities Act of 1933 (the ``Securities
Act'').\2\
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\1\ 17 CFR 230.251 through 230.263.
\2\ 15 U.S.C. 77a et seq.
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We are revising Form 1-A,\3\ rescinding Form 2-A,\4\ and adopting
four new forms, Form 1-K (annual report), Form 1-SA (semiannual
report), Form 1-U (current report), and Form 1-Z (exit report).
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\3\ 17 CFR 239.90.
\4\ 17 CFR 239.91.
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Further, we are revising Rule 4a-1 \5\ under the Trust Indenture
Act of 1939 (the ``Trust Indenture Act'') \6\ to increase the dollar
ceiling of the exemption from the requirement to issue securities
pursuant to an indenture. We are also amending Rule 12g5-1 \7\ of the
Securities Exchange Act of 1934 (the ``Exchange Act'') \8\ to permit
issuers to rely on a conditional exemption from mandatory registration
of a class of securities under Section 12(g) of the Exchange Act, Rule
15c2-11 \9\ of the Exchange Act to permit an issuer's ongoing reports
filed under Regulation A to satisfy a broker-dealer's obligations to
review and maintain certain information about an issuer's quoted
securities, and Rule 30-1 \10\ of the Commission's organizational rules
and provisions for delegated authority to permit the Division of
Corporation Finance to issue notices of qualification and deny Form 1-Z
filings. In addition, we are adopting a technical amendment to Exchange
Act Rule 15c2-11 to update the outdated reference to ``Schedule H of
the By-Laws of the National Association of Securities Dealers, Inc.,''
which is now known as the ``Financial Industry Regulatory Authority,
Inc.'' and to reflect the correct rule reference.
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\5\ 17 CFR 260.4a-1.
\6\ 15 U.S.C. 77aaa et seq.
\7\ 17 CFR 240.12g5-1.
\8\ 15 U.S.C. 78a et seq.
\9\ 17 CFR 240.15c2-11.
\10\ 17 CFR 200.30-1.
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As a result of the revisions to Regulation A, we are adopting
conforming and technical amendments to Securities Act Rules 157(a),\11\
505(b)(2)(iii),\12\ and Form 8-A. Additionally, we are revising Item
101(a) \13\ of Regulation S-T \14\ to reflect the mandatory electronic
filing of all issuer initial filing and ongoing reporting requirements
under Regulation A. We are also revising Item 101(c)(6) \15\ of
Regulation S-T to remove the reference to paper filings in a Regulation
A offering, and removing and reserving Item 101(b)(8) \16\ of
Regulation S-T dealing with the optional electronic filing of Form F-X
by Canadian issuers.
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\11\ 17 CFR 230.157(a).
\12\ 17 CFR 230.505(b)(2)(iii).
\13\ 17 CFR 232.101(a).
\14\ 17 CFR 232.10 et seq.
\15\ 17 CFR 232.101(c)(6).
\16\ 17 CFR 232.101(b)(8).
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Table of Contents
I. Introduction
II. Final Rules and Amendments to Regulation A
A. Overview
B. Scope of Exemption
1. Eligible Issuers
2. Eligible Securities
3. Offering Limitations and Secondary Sales
4. Investment Limitation
5. Integration
6. Treatment Under Section 12(g)
C. Offering Statement
1. Electronic Filing; Delivery Requirements
2. Non-Public Submission of Draft Offering Statements
3. Form and Content
4. Continuous or Delayed Offerings and Offering Circular
Supplements
5. Qualification
D. Solicitation of Interest (Testing the Waters)
1. Proposed Rules
2. Comments on Proposed Rules
3. Final Rules
E. Ongoing Reporting
1. Continuing Disclosure Obligations
2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing
Reporting Under Regulation A
3. Exchange Act Registration of Regulation A Securities
4. Exit Report on Form 1-Z
F. Insignificant Deviations From a Term, Condition or
Requirement
G. Bad Actor Disqualification
1. Proposed Rules
2. Comments on Proposed Rules
3. Final Rules
H. Relationship With State Securities Law
1. Proposed Rules
2. Comments on Proposed Rules
3. Final Rules
I. Additional Considerations Related to Smaller Offerings
J. Transitional Guidance for Issuers Currently Conducting
Regulation A Offerings
K. Technical and Conforming Amendments
III. Economic Analysis
A. Broad Economic Considerations
B. Baseline
1. Current Methods of Raising Up to $50 Million of Capital
2. Investors
3. Financial Intermediaries
C. Scope of Exemption
1. Eligible Issuers
2. Eligible Securities
3. Offering Limitations and Secondary Sales
4. Investment Limitation
5. Integration
6. Treatment Under Section 12(g)
D. Offering Statement
1. Electronic Filing and Delivery
2. Disclosure Format and Content
3. Audited Financial Statements
4. Other Accounting Requirements
5. Continuous and Delayed Offerings
6. Nonpublic Review of Draft Offering Statements
E. Solicitation of Interest (``Testing the Waters'')
F. Ongoing Reporting
1. Periodic and Current Event Reporting Requirements
2. Termination and Suspension of Reporting and Exit Reports
3. Exchange Act Registration
G. Insignificant Deviations
H. Bad Actor Disqualification
I. Relationship With State Securities Law
IV. Paperwork Reduction Act
A. Background
B. Estimated Number of Regulation A Offerings
C. PRA Reporting and Cost Burden Estimates
[[Page 21807]]
1. Regulation A (Form 1-A and Form 2-A)
2. Form 1-K: Annual Report
3. Form 1-SA: Semiannual Report
4. Form 1-U: Current Reporting
5. Form 1-Z: Exit Report
6. Form 8-A: Short Form Registration Under the Exchange Act
7. Form ID Filings
8. Form F-X
D. Collections of Information Are Mandatory
V. Final Regulatory Flexibility Act Analysis
A. Need for the Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Basis and Text of Amendments
I. Introduction
On December 18, 2013, we proposed rule and form amendments \17\ to
implement Section 401 of the Jumpstart Our Business Startups Act (the
``JOBS Act'').\18\ Section 401 of the JOBS Act amended Section 3(b) of
the Securities Act by designating existing Section 3(b) as Section
3(b)(1), and creating new Sections 3(b)(2)-(5). Section 3(b)(2) directs
the Commission to adopt rules adding a class of securities exempt from
the registration requirements of the Securities Act for offerings of up
to $50 million of securities within a 12-month period. Sections
3(b)(2)-(5) specify mandatory terms and conditions for such exempt
offerings and also authorize the Commission to adopt other terms,
conditions, or requirements as necessary in the public interest and for
the protection of investors.\19\ In addition, Section 3(b)(5) directs
the Commission to review the $50 million offering limit specified in
Section 3(b)(2) not later than two years after the enactment of the
JOBS Act and every two years thereafter, and authorizes the Commission
to increase the annual offering limit if it determines that it would be
appropriate to do so. Accordingly, we are revising Regulation A under
the Securities Act to require issuers conducting offerings in reliance
on Section 3(b)(2) to comply with terms and conditions established by
the Commission's rules, and, where applicable, to make ongoing
disclosure.
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\17\ See Rel. No. 33-9497 [79 FR 3925] (Dec. 18, 2013) (the
``Proposing Release''), available at: http://www.sec.gov/rules/proposed/2013/33-9497.pdf.
\18\ Public Law 112-106, 126 Stat. 306.
\19\ We are adopting a number of terms and conditions for
Regulation A offerings pursuant to our discretionary authority under
Sections 3(b)(2)-(5). Where we have done so, as discussed in detail
in Section II. below, it is because we find such terms and
conditions to be necessary in the public interest and for the
protection of investors.
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II. Final Rules and Amendments to Regulation A
A. Overview
We are adopting final rules to implement the JOBS Act mandate by
expanding Regulation A into two tiers: Tier 1, for securities offerings
of up to $20 million; and Tier 2, for offerings of up to $50
million.\20\ The final rules for offerings under Tier 1 and Tier 2
build on current Regulation A and preserve, with some modifications,
existing provisions regarding issuer eligibility, offering circular
contents, testing the waters, and ``bad actor'' disqualification. As
proposed, and with the modifications described below, the final rules
modernize the Regulation A filing process for all offerings, align
practice in certain areas with prevailing practice for registered
offerings, create additional flexibility for issuers in the offering
process, and establish an ongoing reporting regime for Regulation A
issuers. Under the final rules, Tier 2 issuers are required to include
audited financial statements in their offering documents and to file
annual, semiannual, and current reports with the Commission. With the
exception of securities that will be listed on a national securities
exchange upon qualification, purchasers in Tier 2 offerings must either
be accredited investors, as that term is defined in Rule 501(a) of
Regulation D, or be subject to certain limitations on their investment.
The differences between Tier 1 and Tier 2 offerings are described more
fully below.
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\20\ An issuer of $20 million or less of securities could elect
to proceed under either Tier 1 or Tier 2.
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In developing the final rules, we considered the statutory language
of JOBS Act Section 401, the JOBS Act legislative history, recent
recommendations of the Commission's Government-Business Forum on Small
Business Capital Formation,\21\ the Advisory Committee on Small and
Emerging Companies,\22\ the Equity Capital Formation Task Force,\23\
comment letters received on Title IV of the JOBS Act before the
Commission's proposed rules were issued in December of 2013,\24\ and
comment letters received to date on the Commission's proposed rules to
implement Section 401 of the JOBS Act.\25\
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\21\ Recommendations of the Commission's Government-Business
Forum on Small Business Capital Formation are available at: http://www.sec.gov/info/smallbus/sbforum.shtml.
\22\ Recommendations of the Advisory Committee on Small and
Emerging Companies are available at: http://www.sec.gov/info/smallbus/acsec.shtml.
\23\ Equity Capital Task Force, From the On-Ramp to the Freeway:
Refueling Job Creation and Growth by Reconnecting Investors with
Small-Cap Companies, presentation to the U.S. Dep't. of Treasury
(November 11, 2013), available at: http://www.equitycapitalformationtaskforce.com/.
\24\ To facilitate public input on JOBS Act rulemaking before
the issuance of rule proposals, the Commission invited members of
the public to make their views known on various JOBS Act initiatives
in advance of any rulemaking by submitting comment letters to the
Commission's Web site at 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.
\25\ The comment letters received to date in response to the
Proposing Release are available at: http://www.sec.gov/comments/s7-11-13/s71113.shtml.
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The key provisions of the final rules and amendments to Regulation
A follow: Scope of the exemption--the final rules:
Establish two tiers of offerings:
Tier 1: Annual offering limit of $20 million, including no
more than $6 million on behalf of selling securityholders that are
affiliates of the issuer.
Tier 2: Annual offering limit of $50 million, including no
more than $15 million on behalf of selling securityholders that are
affiliates of the issuer.
Limit sales by selling securityholders in an issuer's initial
Regulation A offering and any subsequently qualified Regulation A
offering within the first 12-month period following the date of
qualification of the initial Regulation A offering to no more than 30%
of the aggregate offering price.
Preserve the existing issuer eligibility requirements of
Regulation A, and also exclude issuers that are, or have been, subject
to any order of the Commission pursuant to Section 12(j) of the
Exchange Act entered within five years before the filing of the
offering statement and issuers that are required to, but that have not,
filed with the Commission the ongoing reports required by the final
rules during the two years immediately preceding the filing of an
offering statement.
Limit the amount of securities that an investor who is not an
accredited investor under Rule 501(a) of Regulation D can purchase in a
Tier 2 offering to no more than: (a) 10% of the greater of annual
income or net worth (for natural persons); or (b) 10% of the greater of
annual revenue or net assets at fiscal year end (for non-natural
persons). This limit will not apply to purchases of securities that
will be listed on a national
[[Page 21808]]
securities exchange upon qualification.
Exclude asset-backed securities, as defined in Regulation AB,
from the list of eligible securities.
Update the safe harbor from integration and provide guidance
on the potential integration of offerings conducted concurrently with,
or close in time after, a Regulation A offering.
Solicitation materials:
Permit issuers to ``test the waters'' with, or solicit
interest in a potential offering from, the general public either before
or after the filing of the offering statement, so long as any
solicitation materials used after publicly filing the offering
statement are preceded or accompanied by a preliminary offering
circular or contain a notice informing potential investors where and
how the most current preliminary offering circular can be obtained.
Qualification, communications, and offering process:
Require issuers and intermediaries in the prequalification
period to deliver a preliminary offering circular to prospective
purchasers at least 48 hours in advance of sale unless the issuer is
subject to, and current in, Tier 2 ongoing reporting obligations. Where
the issuer is subject to, and current in, a Tier 2 ongoing reporting
obligation, issuers and intermediaries will only be required to comply
with the general delivery requirements for offers.
Modernize the qualification, communications, and offering
processes in Regulation A to reflect analogous provisions of the
Securities Act registration process: \26\
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\26\ See, e.g., Securities Offering Reform, 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 sales are made on the basis of
offers conducted during the prequalification period and the final
offering circular is filed and available on the Commission's Electronic
Data Gathering, Analysis and Retrieval system (EDGAR);
Require issuers and intermediaries, not later than two
business days after completion of a sale, to provide purchasers with a
copy of the final offering circular or a notice with the uniform
resource locator (URL) where the final offering circular may be
obtained on EDGAR and contact information sufficient to notify a
purchaser where a request for a final offering circular can be sent and
received in response; and
Permit issuers to file offering circular updates and
supplements after qualification of the offering statement in lieu of
post-qualification amendments in certain circumstances, including to
provide the types of information that may be excluded from a prospectus
under Rule 430A.
Permit continuous or delayed offerings, but require issuers in
continuous or delayed Tier 2 offerings to be current in their annual
and semiannual reporting obligations in order to do so.
Permit issuers to qualify additional securities in reliance on
Regulation A by filing a post-qualification amendment to a qualified
offering statement.
Offering statement:
Require issuers to file offering statements with the
Commission electronically on EDGAR.
Permit the non-public submission of offering statements and
amendments for review by Commission staff before filing such documents
with the Commission, so long as all such documents are publicly filed
not later than 21 calendar days before qualification.
Eliminate the Model A (Question-and-Answer) disclosure format
under Part II of Form 1-A.
Update and clarify Model B (Narrative) disclosure format under
Part II of Form 1-A (renamed, ``Offering Circular''), while continuing
to permit Part I of Form S-1 narrative disclosure as an alternative.
Permit real estate investment trusts (REITs) and similarly
eligible companies to provide the narrative disclosure required by Part
I of Form S-11 in Part II of Form 1-A.
Require that offering statements be qualified by the
Commission before sales may be made pursuant to Regulation A.
Require Tier 1 and Tier 2 issuers to file balance sheets and
related financial statements for the two previous fiscal year ends (or
for such shorter time that they have been in existence).
Require Tier 2 issuers to include financial statements in
their offering circulars that are audited in accordance with either the
auditing standards of the American Institute of Certified Public
Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing
Standards or GAAS) or the standards of the Public Company Accounting
Oversight Board (PCAOB).
Require Tier 1 and Tier 2 issuers to include financial
statements in Form 1-A that are dated not more than nine months before
the date of non-public submission, filing, or qualification, with the
most recent annual or interim balance sheet not older than nine months.
If interim financial statements are required, they must cover a period
of at least six months.
Ongoing reporting:
Require Tier 1 issuers to provide information about sales in
such offerings and to update certain issuer information by
electronically filing a Form 1-Z exit report with the Commission not
later than 30 calendar days after termination or completion of an
offering.
Require Tier 2 issuers to file electronically with the
Commission on EDGAR annual and semiannual reports, as well as current
event reports.
Require Tier 2 issuers to file electronically a special
financial report to cover financial periods between the most recent
period included in a qualified offering statement and the issuer's
first required periodic report.
Permit the ongoing reports filed by an issuer conducting a
Tier 2 offering to satisfy a broker-dealer's obligations under Exchange
Act Rule 15c2-11.
Provide that Tier 2 issuers' reporting obligations under
Regulation A would suspend when they are subject to the ongoing
reporting requirements of Section 13 of the Exchange Act, and may also
be suspended under Regulation A at any time by filing a Form 1-Z exit
report after completing reporting for the fiscal year in which an
offering statement was qualified, so long as the securities of each
class to which the offering statement relates are held of record by
fewer than 300 persons, or fewer than 1,200 persons for banks or bank
holding companies, and offers or sales made in reliance on a qualified
Tier 2 Regulation A offering statement are not ongoing. In certain
circumstances, Tier 2 Regulation A reporting obligations may terminate
when issuers are no longer subject to the ongoing reporting
requirements of Section 13 of the Exchange Act.
Require Tier 2 issuers to include in their first annual report
after termination or completion of a qualified Regulation A offering,
or in their Form 1-Z exit report, information about sales in the
terminated or completed offering and to update certain issuer
information.
Eliminate the requirement that issuers file a Form 2-A with
the Commission
[[Page 21809]]
to report sales and the termination of sales made under Regulation A
every six months after qualification and within 30 calendar days after
the termination, completion, or final sale of securities in the
offering.
Exchange Act registration:
Conditionally exempt securities issued in a Tier 2 offering
from the mandatory registration requirements of Section 12(g) of the
Exchange Act, for so long as the issuer engages the services of a
transfer agent that is registered with the Commission under Section 17A
of the Exchange Act, remains subject to a Tier 2 reporting obligation,
is current in its annual and semiannual reporting at fiscal year end,
and had a public float of less than $75 million as of the last business
day of its most recently completed semiannual period, or, in the
absence of a public float, had annual revenues of less than $50 million
as of its most recently completed fiscal year.
Permit Tier 2 issuers to use a Form 8-A short form
registration statement concurrently with the qualification of a
Regulation A offering statement that includes Part I of Form S-1 or
Form S-11 narrative disclosure in Form 1-A in order to register a class
of securities under Sections 12(g) or 12(b) of the Exchange Act.
``Bad actor'' disqualification provisions:
Substantially conform the ``bad actor'' disqualification
provisions of Rule 262 to Rule 506(d) and add a disclosure requirement
similar to Rule 506(e).
Application of state securities laws:
Provide for the preemption of state securities law
registration and qualification requirements for securities offered or
sold to ``qualified purchasers,'' in light of the total package of
investor protections included in the final rules. A qualified purchaser
will be defined to be any person to whom securities are offered or sold
in a Tier 2 offering.
The Commission is required by Section 3(b)(5) of the Securities Act
to review the Tier 2 offering limitation every two years. In addition
to revisiting the Tier 2 offering limitation, the staff will also
undertake to review the Tier 1 offering limitation at the same time.
The staff also will undertake to study and submit a report to the
Commission no later than 5 years following the adoption of the
amendments to Regulation A, on the impact of both the Tier 1 and Tier 2
offerings on capital formation and investor protection. The report will
include, but not be limited to, a review of: (1) The amount of capital
raised under the amendments; (2) the number of issuances and amount
raised by both Tier 1 and Tier 2 offerings; (3) the number of placement
agents and brokers facilitating the Regulation A offerings; (4) the
number of Federal, State, or any other actions taken against issuers,
placement agents, or brokers with respect to both Tier 1 and Tier 2
offerings; and (5) whether any additional investor protections are
necessary for either Tier 1 or Tier 2. Based on the information
contained in the report, the Commission may propose to either decrease
or increase the offering limit for Tier 1, as appropriate.
B. Scope of Exemption
1. Eligible Issuers
a. Proposed Rules
Section 401 of the JOBS Act does not include any express issuer
eligibility requirements. The proposed rules would have maintained
Regulation A's existing issuer eligibility requirements and added two
new categories of ineligible issuers.\27\ The two new categories would
exclude issuers that are or have been subject to any order of the
Commission pursuant to Section 12(j) of the Exchange Act entered within
five years before the filing of the offering statement and issuers that
are required to, but that have not, filed with the Commission the
ongoing reports required by the final rules during the two years
immediately preceding the filing of an offering statement.
Additionally, we requested comment on other potential changes to the
existing issuer eligibility requirements, including whether the
exemption should be limited to ``operating companies,'' United States
domestic issuers, or issuers that use a certain amount of the proceeds
raised in a Regulation A offering in the United States. We also
solicited comment on whether we should extend issuer eligibility to
non-Canadian foreign issuers, business development companies as defined
in Section 2(a)(48) of the Investment Company Act of 1940 (BDCs),\28\
blank check companies,\29\ or Exchange Act reporting companies, or,
alternatively, eliminate shell companies or REITs from the exemptive
regime.
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\27\ Existing Regulation A limits issuer eligibility to issuers
organized, and with a principal place of business, in the United
States or Canada, while excluding Exchange Act reporting companies,
investment companies, including business development companies,
development stage companies that have no specific business plan or
purpose or have indicated that their business plan is to engage in a
merger or acquisition with an unidentified company or companies,
issuers of fractional undivided interests in oil or gas rights or a
similar interest in other mineral rights, and issuers disqualified
because of Rule 262, 17 CFR 230.262 (2014). See 17 CFR 230.251(a)
(2014).
\28\ 15 U.S.C. 80a-2(a)(48).
\29\ ``Blank check companies'' are development stage companies
that have no specific business plan or purpose or have indicated
that their business plan is to engage in a merger or acquisition
with an unidentified company or companies. See Securities Act Rule
419(a)(2)(i), 17 CFR 230.419(a)(2)(i); see also SEC Rel. No. 33-6949
[57 FR 36442] (July 30, 1992), at fn. 50 (clarifying that blank
check companies regardless of whether they are issuing penny stock
are precluded from relying on Regulation A).
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b. Comments on the Proposed Rules
Commenters expressed a wide range of views on the proposed issuer
eligibility requirements. A number of commenters expressed general
support for the proposed issuer eligibility requirements.\30\ Many
commenters expressly supported the new proposed issuer eligibility
criterion relating to the requirement to be current in Tier 2 ongoing
reporting obligations.\31\ One commenter also expressly supported the
proposed exclusion of issuers subject to an order of the Commission
entered pursuant to Section 12(j) of the Exchange Act from the list of
eligible issuers.\32\ Other commenters suggested additional limitations
on issuer eligibility, including: a requirement that issuers be
``operating companies,'' \33\
[[Page 21810]]
excluding shell companies and issuers of penny stock,\34\ and excluding
other types of investment vehicles, such as commodity pools and
investment funds that invest in gold or virtual currencies.\35\
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\30\ Letter from Catherine T. Dixon, Chair, Federal Regulation
of Securities Committee, Business Law Section, American Bar
Association, April 3, 2014 (``ABA BLS Letter''); Letter from
Gabrielle Buckley, Chair, Section of International Law, American Bar
Association, May 14, 2014 (``ABA SIL Letter''); Letter from Andrew
F. Viles, Canaccord Letter Genuity Inc., March 27, 2014 (``Canaccord
Letter''); Letter from Pw Carey, March 24, 2014 (``Carey Letter'');
Letter from Kurt N. Schacht, CFA, Managing Director, Standards and
Financial Market Integrity, and Linda L. Rittenhouse, Director,
Capital Markets, CFA Institute, March 24, 2014 (``CFA Institute
Letter''); Letter from Kim Wales, Executive Board Member, Crowdfund
Intermediary Regulatory Advocates (CFIRA), May 14, 2014 (``CFIRA
Letter 1''); Letter from Christopher Tyrrell, Chair, Crowdfunding
Intermediary Regulatory Advocates, February 23, 2015 (``CFIRA Letter
2''); Robert R. Kaplan, Jr. and T. Rhys James, Kaplan Voekler
Cunningham & Frank PLC, March 23, 2014 (``KVCF Letter''); Letter
from William F. Galvin, Secretary, Commonwealth of Massachusetts,
March 24, 2014 (``Massachusetts Letter 2''); Letter from Morrison &
Foerster LLP, March 26, 2014 (``MoFo Letter''); Letter from Andrea
Seidt, President, North American Securities Administrators
Association (NASAA) and Ohio Securities Commissioner, March 24, 2014
(``NASAA Letter 2''); Letter from William M. Beatty, Securities
Administrator, Washington Department of Financial Institutions,
March 24, 2014 (``WDFI Letter''); Letter from William R. Hambrecht,
Chairman, WR Hambrecht+ Co, March 4, 2014 (``WR Hambrecht + Co
Letter'').
\31\ ABA BLS Letter; CFA Institute Letter; Massachusetts Letter
2; NASAA Letter 2; WDFI Letter.
\32\ CFA Institute Letter.
\33\ CFIRA Letter 1; WR Hambrecht + Co Letter (suggesting that
limiting the availability of the exemption to, among other things,
operating companies would provide investors with more confidence in
the offerings conducted pursuant to Regulation A). But see KVCF
Letter (suggesting that limiting availability of the exemption to
operating companies would unnecessarily limit the utility of the
exemption).
\34\ ABA BLS Letter; MoFo Letter.
\35\ Massachusetts Letter 2.
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A few commenters recommended allowing blank check companies and
special purpose acquisition companies (SPACs) to rely on Regulation
A.\36\ One of these commenters recommended allowing blank check
companies seeking to raise at least $10 million to use Regulation A in
the same manner as any other eligible issuer, but suggested that, if a
company is raising less than $10 million in a Tier 2 offering, the
Commission should implement certain additional requirements.\37\
Another commenter recommended allowing issuers of fractional interests
in oil and gas or other mineral rights to rely on Regulation A based on
a ``reasonable'' eligibility test to be developed by the
Commission.\38\ Several commenters opposed any change to the proposed
issuer eligibility requirements that would exclude REITs from
participating in Regulation A offerings.\39\ Other commenters advocated
expanding the current categories of eligible issuers, and specifically
supported the continued inclusion of Canadian companies and shell
companies as eligible issuers, as proposed.\40\
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\36\ Gilman Law Letter; Letter from Mark Goldberg, Chairman,
Investment Program Association, March 24, 2014 (``IPA Letter'');
Letter from David N. Feldman, Partner, Richardson Patel LLP, January
15, 2014 (``Richardson Patel Letter''). A SPAC is a type of blank
check company created specifically to pool funds in order to finance
a merger or acquisition opportunity within a set timeframe.
\37\ Richardson Patel Letter (recommending that for offerings of
less than $10 million under Tier 2, the rules should require that:
(a) Monies raised be placed into escrow, minus underwriters
compensation and 10% for offering expenses, until a reverse merger
is completed; (b) a combination with an operating business be
completed within three years; (c) full Form 10 information be
disclosed regarding a pending reverse merger to investors who will
have 15-20 days to reconfirm their investment or receive their money
back; (d) there be no requirement that a certain percentage of
investors reconfirm; and (e) accredited investors have no limit on
the investment they make in the offering).
\38\ Letter from Mark Kosanke, President, Real Estate Investment
Securities Association, March 24, 2014 (``REISA Letter'')
(suggesting that the Commission base the eligibility test on the
issuer having an ``established track record'' or some minimum amount
of assets).
\39\ ABA BLS Letter; Letter from Gilman Law LLC, March 24, 2014
(``Gilman Law Letter''); MoFo Letter; Letter from Serenity Storage,
January 5, 2014 (``Serenity Storage Letter'').
\40\ Letter from Jonathan C. Guest, McCarter & English, LLP,
February 19, 2014 (``McCarter & English Letter'') (also opposing any
limitation on issuer eligibility on the basis of whether most of the
offering proceeds were being used in connection with the issuer's
operations in the United States, noting that many Canadian issuers
would be excluded as a result); OTC Markets Letter.
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(1) Non-Canadian Foreign Issuers
Many commenters recommended making non-Canadian foreign companies
eligible issuers under Regulation A.\41\ Several commenters suggested
that the proposed approach to non-Canadian foreign companies is
inconsistent with the treatment of foreign private issuers in
registered offerings.\42\ Additionally, commenters noted a variety of
benefits arising from allowing foreign companies to access the U.S.
capital markets through Regulation A offerings, including job
creation,\43\ increasing the amount of disclosure available for
investors in foreign companies,\44\ encouraging domestic exchange
listings,\45\ expanding investment opportunities for U.S.
investors,\46\ and general economic benefits.\47\ One commenter
recommended making all foreign private issuers eligible if they
maintained a principal place of business in the United States.\48\ Two
commenters also recommended permitting companies relying on Exchange
Act Rule 12g3-2(b) to make offerings under Regulation A.\49\
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\41\ ABA SIL Letter; Letter from Scott Kupor, Managing Partner,
Andreessen Horowitz, and Jeffrey M. Solomon, Chief Executive
Officer, Cowen and Company, February 26, 2014 (``Andreessen/Cowen
Letter''); Letter from BDO USA, LLP, March 20, 2104 (``BDO
Letter''); Canaccord Letter (suggesting expanding issuer eligibility
to companies organized in jurisdictions with ``robust securities
regulation systems'' such as the United Kingdom and other countries
in the European Union, Australia, and Asian markets such as
Singapore and Hong Kong); McCarter & English Letter; OTC Markets
Letter; Richardson Patel Letter; Letter from Michael T. Lempres,
Assistant General Counsel, SVB Financial Group, March 21, 2014
(``SVB Financial Letter''); Letter from Bill Soby, Managing
Director, Silicon Valley Global Shares, March 24, 2014 (``SVGS
Letter'').
\42\ Andreessen/Cowen Letter; BDO Letter; Richardson Patel
Letter. In the context of registered offerings, foreign private
issuers may provide scaled disclosure if it qualifies as a ``smaller
reporting company,'' which is defined in Item 10(f)(1) of Regulation
S-K, 17 CFR 229.10(f)(1), Securities Act Rule 405, 17 CFR 230.405,
and Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and rely on other
disclosure accommodations.
\43\ ABA SIL Letter; SVGS Letter (noting that high-paying jobs
would be created by expanding global tech companies).
\44\ SVB Financial Letter.
\45\ Andreessen/Cowen Letter; SVB Financial Letter.
\46\ Andreessen/Cowen Letter; OTC Markets Letter.
\47\ ABA SIL Letter; Andreessen/Cowen Letter; McCarter & English
Letter; SVB Financial Letter.
\48\ ABA SIL Letter.
\49\ McCarter & English Letter; OTC Markets Letter. Rule 12g3-
2(b) generally provides foreign private issuers with an automatic
exemption from registration under Section 12(g) if the issuer (i) is
not required to file reports under Exchange Act Sections 13(a) or
15(d); (ii) maintains a listing of the subject class of securities
on one or two exchanges in non-U.S. jurisdictions that comprise more
than 55% of its worldwide trading volume; and (iii) publishes in
English on its Web site certain material items of information. See
17 CFR 240.12g3-2(b).
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(2) BDCs
A number of commenters supported making BDCs eligible issuers under
Regulation A.\50\ Most of these commenters noted that BDCs serve an
important function in facilitating small or emerging business capital
formation or in providing a bridge from the private to public
markets.\51\ Several of these commenters recommended at least allowing
small business investment company (SBIC) licensed BDCs to use the
exemption given the review process such entities are required to
undergo with the U.S. Small Business Administration.\52\ One of these
commenters noted that if BDCs become eligible to use Regulation A, the
Commission should consider requiring them to provide quarterly
financial disclosure so as to enhance transparency and provide the
market with critical investment information.\53\
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\50\ ABA BLS Letter; CFIRA Letter 1; Letter from Michael
Sauvante, Executive Director, Commonwealth Fund LLC, March 21, 2014
(``Commonwealth Fund Letter 1''); Letter from Michael Sauvante,
Executive Director, Commonwealth Fund LLC, March 22, 2014
(``Commonwealth Fund Letter 2''); KVCF Letter; Letter from Daniel
Gorfine, Director, Financial Markets Policy, and Staci Warden,
Executive Director, Center for Financial Markets, Milken Institute,
March 19, 2014 (``Milken Institute Letter''); MoFo Letter; REISA
Letter; SBIA Letter; WR Hambrecht + Co Letter.
\51\ ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letter 1;
Commonwealth Fund Letter 2; KVCF Letter; Milken Institute Letter;
MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter.
\52\ Milken Institute Letter; SBIA Letter. A SBIC-licensed BDC
is a company that is licensed by the Small Business Administration
(SBA) to operate as such under the Small Business Investment Act of
1958.
\53\ Milken Institute Letter.
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(3) Potential Limits on Issuer Size
Several commenters opposed using the issuer's size to limit
eligibility.\54\ Two of these commenters thought that the $50 million
offering limit for Tier 2 would already limit the utility of the
[[Page 21811]]
exemption for issuers on the basis of issuer size--with smaller issuers
likely benefitting most from the exemption--and recommended against
size-based eligibility criteria that may be difficult to define.\55\
One commenter suggested that most issuers with a large public float
would likely be subject to Exchange Act reporting requirements and
therefore would be ineligible to use Regulation A.\56\ Another
commenter noted that a size restriction based on public float would be
particularly harmful to biotechnology companies, because they often
have a public float that is disproportionately high in relation to
their corporate structure, number of employees, or revenues.\57\
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\54\ Letter from E. Cartier Esham, Executive Vice President,
Emerging Companies, Biotechnology Industry Organization (BIO), March
11, 2014 (``BIO Letter''); IPA Letter; Letter from Tom Quaadman,
Vice President, Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce, March 24, 2014 (``U.S. Chamber of Commerce
Letter'').
\55\ BIO Letter; U.S. Chamber of Commerce Letter.
\56\ IPA Letter.
\57\ BIO Letter.
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(4) Exchange Act Reporting Companies
A number of commenters supported allowing Exchange Act reporting
companies to conduct offerings under Regulation A.\58\ Several of these
commenters recommended allowing Exchange Act reporting companies that
are current in their reporting obligations to conduct Tier 2
offerings,\59\ with one commenter limiting its recommendation to
companies with a non-affiliate float of less than $250 million.\60\
Three commenters further suggested that, if Exchange Act reporting
companies are permitted to conduct offerings pursuant to Regulation A,
Exchange Act reporting should satisfy any Regulation A reporting
obligation.\61\ One such commenter further suggested that Exchange Act
reporting companies should be required to be current in their Exchange
Act reporting obligations in order to be eligible to rely on the
exemption, in a manner that is consistent with Regulation A as it
existed before 1992.\62\
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\58\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter;
Letter from U.S. Senator Pat Roberts, May 27, 2014 (``Sen. Roberts
Letter''); Letter from Jack H. Brier, President and Founder, US
Alliance Corporation, March 19, 2014 (``US Alliance Corp. Letter'').
\59\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter.
\60\ BIO Letter.
\61\ Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets
Letter.
\62\ CFIRA Letter 1. Before amendments to Regulation A were
adopted in 1992, Exchange Act reporting companies were permitted to
conduct offerings in reliance on Regulation A, provided they were
current in their public reporting. See 17 CFR 230.252(f) (1992).
---------------------------------------------------------------------------
c. Final Rules
We are adopting the issuer eligibility criteria as proposed. Under
the final rules, Regulation A will be limited to companies organized in
and with their principal place of business in the United States or
Canada. It will be unavailable to:
Companies subject to the ongoing reporting requirements of
Section 13 or 15(d) of the Exchange Act;
companies registered or required to be registered under
the Investment Company Act of 1940 and BDCs;
blank check companies;
issuers of fractional undivided interests in oil or gas
rights, or similar interests in other mineral rights;
issuers that are required to, but that have not, filed
with the Commission the ongoing reports required by the rules under
Regulation A during the two years immediately preceding the filing of a
new offering statement (or for such shorter period that the issuer was
required to file such reports);
issuers that are or have been subject to an order by the
Commission denying, suspending, or revoking the registration of a class
of securities pursuant to Section 12(j) of the Exchange Act that was
entered within five years before the filing of the offering statement;
\63\ and
---------------------------------------------------------------------------
\63\ See Rule 251(b).
---------------------------------------------------------------------------
issuers subject to ``bad actor'' disqualification under
Rule 262.\64\
---------------------------------------------------------------------------
\64\ See Rule 262.
---------------------------------------------------------------------------
We expect that the amendments we are adopting will significantly
expand the utility of the Regulation A offering exemption.
Our approach in the final rules is generally to maintain the issuer
eligibility requirements of existing Regulation A with the limited
addition of two new categories of ineligible issuers. We believe this
approach will provide important continuity in the Regulation A regime
as it expands in the way Congress mandated. For this reason, we do not
believe it is necessary to adopt final rules to exclude issuers that
are currently eligible to conduct Regulation A offerings. Additionally,
we recognize that expanding the categories of eligible issuers, as
suggested by a number of commenters, could provide certain benefits,
including increased investment opportunities for investors and avenues
for capital formation for certain issuers. We are concerned, however,
about the implications of extending issuer eligibility before the
Commission has the ability to assess the impact of the changes to
Regulation A being adopted today. In light of these changes, we believe
it prudent to defer expanding the categories of eligible issuers (for
example, by including non-Canadian foreign issuers, BDCs, or Exchange
Act reporting companies) until the Commission has had the opportunity
to observe the use of the amended Regulation A exemption and assess any
new market practices as they develop.
Additionally, we are not adopting further restrictions on
eligibility at this time. In light of the disclosure requirements
contained in the final rules, we do not believe that it is necessary to
exclude additional types of issuers, such as shell companies, issuers
of penny stock, or other types of investment vehicles, from relying on
the exemption in Regulation A. At the same time, we are concerned about
potentially increased risks to investors that could result from
extending issuer eligibility to other types of entities, such as blank
check companies, before the Commission has the opportunity to observe
developing market practices. We therefore believe the prudent approach
with respect to any potential expansion of issuer eligibility is to
give the Regulation A market time to develop under rules that we are
adopting today. We also do not believe it is necessary to limit
availability of the exemption to issuers of a certain size, as we agree
with commenters that suggested that the annual offering limit will
serve to limit the utility of the exemption for larger issuers in need
of greater amounts of capital. We further do not believe that it is
appropriate to limit the availability of the exemption to ``operating
companies,'' as that term would restrict availability of the exemption
to fewer issuers than are currently eligible under Regulation A, such
as by excluding shell companies.
As proposed, the final rules include two new issuer eligibility
requirements that add important investor protections to Regulation A.
First, potential issuers must have filed all required ongoing reports
under Regulation A during the two years immediately preceding the
filing of a new offering statement (or for such shorter period that the
issuer was required to file such reports) to remain eligible to conduct
offerings pursuant to the rules. This requirement will benefit
investors by providing them with more information, with respect to
issuers that have previously made a Regulation A offering, to consider
when making an investment decision, facilitate the development of an
efficient secondary market in such securities, and enhance our ability
to analyze and observe the Regulation A market. Second, issuers subject
to orders by the Commission entered pursuant to Section 12(j) of the
Exchange Act within a five-year period immediately preceding the filing
of the offering statement will not be eligible to conduct an offering
pursuant to Regulation A. This requirement will increase investor
protection and
[[Page 21812]]
compliment the exclusion of delinquent Regulation A filers discussed
immediately above by excluding issuers with a demonstrated history of
delinquent filings under the Exchange Act from the pool of eligible
issuers under Regulation A.
2. Eligible Securities
a. Proposed Rules
Section 3(b)(3) of the Securities Act limits the availability of
any exemption enacted under Section 3(b)(2) to ``equity securities,
debt securities, and debt securities convertible or exchangeable into
equity interests, including any guarantees of such securities.'' \65\
The proposed rules would have limited the types of securities eligible
for sale under both Tier 1 and Tier 2 of Regulation A to the
specifically enumerated list of securities in Section 3(b)(3) and also
would have excluded asset-backed securities, as defined in Regulation
AB, from the list of eligible securities.
---------------------------------------------------------------------------
\65\ 15 U.S.C. 77c(b)(3).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Several commenters supported the exclusion of asset-backed
securities from the list of eligible securities.\66\ One commenter
recommended clarifying that warrants exercisable for equity or debt
securities are eligible securities.\67\
---------------------------------------------------------------------------
\66\ ABA BLS Letter; Carey Letter; Massachusetts Letter 2; NASAA
Letter 2; WDFI Letter.
\67\ ABA BLS Letter.
---------------------------------------------------------------------------
c. Final Rules
We are adopting final rules that limit the types of securities
eligible for sale under Regulation A to the specifically enumerated
list in Section 3(b)(3), which includes warrants and convertible equity
securities, among other equity and debt securities.\68\ The final rules
exclude asset-backed securities from the list of eligible securities.
Asset-backed securities are subject to the provisions of Regulation AB
and other rules specifically tailored to the offering process,
disclosure, and reporting requirements for such securities. These rules
were not in effect when Regulation A was last updated in 1992.\69\ We
do not believe that Section 401 of the JOBS Act was enacted to
facilitate the issuance of asset-backed securities.
---------------------------------------------------------------------------
\68\ See Rule 261(c); see also Rule 405 (defining ``equity
security'' to include, among other things, warrants and certain
convertible securities). We have also revised the proposed
definition in Rule 261(c) to clarify that all securities, rather
than just equity securities, that are convertible or exchangeable
into equity interests are eligible, subject to the other terms of
Regulation A.
\69\ Regulation AB, 17 CFR 229.1100 et seq., went into effect in
2005. See Rel. No. 33-8518 (Dec. 22, 2004). Asset-backed securities
are defined in Rule 1101(c)(1) to generally mean a security that is
primarily serviced by the cash flows of a discrete pool of
receivables or other financial asset, either fixed or revolving,
that by its terms converts into cash within a finite time period.
---------------------------------------------------------------------------
3. Offering Limitations and Secondary Sales
a. Proposed Rules
We proposed to amend Regulation A to create two tiers of
requirements: Tier 1, for offerings of up to $5 million of securities
in a 12-month period; and Tier 2, for offerings of up to $50 million of
securities in a 12-month period.\70\ As proposed, issuers could conduct
offerings of up to $5 million under either Tier 1 or Tier 2. Consistent
with the existing provisions of Regulation A, we also proposed to
permit sales by selling securityholders of up to 30% of the maximum
offering amount permitted under the applicable tier ($1.5 million in
any 12-month period for Tier 1 and $15 million in any 12-month period
for Tier 2). Sales by selling securityholders under either tier would
be aggregated with sales by the issuer for purposes of calculating the
maximum permissible amount of securities that may be sold during any
12-month period. In addition, we proposed to eliminate the last
sentence of Rule 251(b), which prohibits affiliate resales unless the
issuer has had net income from continuing operations in at least one of
its last two fiscal years.
---------------------------------------------------------------------------
\70\ As proposed, if the offering included securities that were
convertible, exercisable, or exchangeable for other securities, the
offer and sale of the underlying securities would also be required
to be qualified and the aggregate offering price would include the
aggregate conversion, exercise, or exchange price of such
securities, regardless of when they become convertible, exercisable,
or exchangeable.
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Commenters were generally supportive of the proposed offering
limitations on primary and secondary offerings. Many commenters,
however, suggested changes to the proposed offering limits for both
tiers, as well as to the proposed limits on secondary sales.
(1) Offering Limitation
Several commenters recommended that the Commission increase the $50
million offering limitation for Tier 2.\71\ As an alternative, one
commenter recommended applying the $50 million limit on a per offering
basis rather than on a 12-month basis, and suggested that the
Commission consider eliminating the offering limits for certain types
of issuers, such as those that have yet to generate revenue.\72\
Additionally, two commenters recommended that the Commission do more to
increase the utility of Tier 1 offerings by raising the Tier 1 offering
limitation to $10 million or more in a 12-month period.\73\ Another
commenter suggested that the Commission create a third tier in between
Tier 1 and Tier 2 that would have a $15 million offering
limitation.\74\
---------------------------------------------------------------------------
\71\ Letter from Salomon Kamalodine, Director, Investment
Banking, B. Riley & Co., March 24, 2014 (``B. Riley Letter'');
Letter from William Klehm, Chairman and CEO, Fallbrook Technologies,
March 22, 2014 (``Fallbrook Technologies Letter'') (recommended
raising the limit to $75 million); OTC Markets Letter (recommended
raising the limit to $80 million); Jason Coombs, Co-Founder and CEO,
Public Startup Company, Inc., March 24, 2014 (``Public Startup Co.
Letter 1'') (recommended raising the limit to $75 million);
Richardson Patel Letter (recommended raising the limit to $100
million).
\72\ Richardson Patel Letter.
\73\ Letter from Samuel S Guzik, Guzik and Associates, March 24,
2014 (``Guzik Letter 1'') (recommended raising the limit to ``at
least $10 million''); Letter from Christopher Cole, Senior Vice
President and Senior Regulatory Counsel, Independent Community
Bankers of America, March 25, 2014 (``ICBA Letter'') (encouraged
increasing the limit ``from $5 million to $10 million'').
\74\ Public Startup Co. Letter 1.
---------------------------------------------------------------------------
With respect to offering limit calculations, one commenter
recommended that the aggregate offering price of the underlying
security only be included in the $50 million offering limitation during
the 12-month period in which such security is first convertible,
exercisable, or exchangeable.\75\ This commenter suggested that its
recommended approach would accommodate common small business offering
structures that involve warrants exercisable at a premium over several
years.
---------------------------------------------------------------------------
\75\ Andreessen/Cowen Letter; cf. Proposing Release, fn. 112.
---------------------------------------------------------------------------
(2) Secondary Sales Offering Limitation
Several commenters specifically supported the proposed limitations
on secondary sales.\76\ While some commenters indicated their support
for resale limitations,\77\ they expressed a preference for either
proscribing resales entirely \78\ or requiring the approval of the
resale offering by a majority of the issuer's independent directors
upon a finding that the offering is in the best interests of both the
selling securityholders and the issuer.\79\ One commenter recommended
prohibiting
[[Page 21813]]
resales under Regulation A entirely.\80\ Another commenter recommended
requiring selling securityholders to hold the issuer's securities for
12 months before being eligible to sell pursuant to Regulation A, in
order to distinguish between investors seeking to invest in a business
and investors simply seeking to sell to the public for a gain.\81\
---------------------------------------------------------------------------
\76\ Massachusetts Letter 2; NASAA Letter 2; Richardson Patel
Letter; WDFI Letter.
\77\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
\78\ Massachusetts Letter 2; NASAA Letter 2.
\79\ NASAA Letter 2 (supporting the proposed limits coupled with
a board approval requirement in lieu of prohibiting resales
entirely); WDFI Letter (not expressing a preference for prohibiting
resales entirely).
\80\ Carey Letter.
\81\ Letter from Andrew M. Hartnett, Missouri Commissioner of
Securities, March 24, 2014 (``MCS Letter'').
---------------------------------------------------------------------------
Many other commenters recommended raising the resale limits or
eliminating them entirely.\82\ One such commenter recommended
alternatively removing non-affiliate securityholders from the resale
limitation since concerns over investor information asymmetries would
be reduced when dealing with non-affiliate securityholders.\83\ This
commenter also recommended that the Commission reevaluate the need for
resale limits within a year of implementing the rules. Another
commenter also recommended allowing for unlimited sales by non-
affiliate selling securityholders and further suggested that the rules
not aggregate such sales with issuer sales.\84\ Two commenters
suggested that limitations on resales are contrary to the Congressional
intent behind the enactment of Title IV of the JOBS Act.\85\
---------------------------------------------------------------------------
\82\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA
Letter 1; Milken Institute Letter; MoFo Letter; Richardson Patel
Letter; WR Hambrecht + Co Letter.
\83\ Milken Institute Letter.
\84\ B. Riley Letter.
\85\ CFIRA Letter 1; WR Hambrecht + Co Letter (noting that the
JOBS Act contemplated an increase in the offering threshold to $50
million, but did not limit the percentage that could be sold by
selling securityholders).
---------------------------------------------------------------------------
(3) Rule 251(b)
Many commenters specifically supported the proposed elimination of
the requirement that issuers must have had net income from continuing
operations in at least one of its last two fiscal years in order for
affiliate resales to be permitted, generally noting that many companies
have net losses for many years, including, for example, due to high
research and development costs.\86\
---------------------------------------------------------------------------
\86\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA
Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co
Letter.
---------------------------------------------------------------------------
c. Final Rules
We are adopting the proposed amendments to Regulation A with
modifications to the Tier 1 offering limitation and the secondary sales
offering limitation. We discuss these amendments in detail below. We
are also making a technical change to clarify the description of how
compliance with the offering limitations is calculated in Rule
251(a).\87\
---------------------------------------------------------------------------
\87\ The proposed rules used the phrase ``aggregate offering
price for all securities sold'' when discussing the gross proceeds
resulting from prior or anticipated sales of securities under
Regulation A. We have clarified Rule 257(a)(1) to define as
``aggregate sales'' gross proceeds within the prior 12 month time
frame contemplated by Regulation A. We have also made conforming
changes elsewhere in the final rules and forms.
---------------------------------------------------------------------------
Tier 1
As discussed more fully in the ``Additional Considerations for
Smaller Offerings'' section below, we are making changes to the
proposed rules in response to comments and to increase the utility of
Tier 1 of the Regulation A exemption.\88\ Several commenters \89\ and a
report on the impact of state securities law requirements on offerings
conducted under Regulation A by the U.S Government Accountability
Office (GAO), as required by Section 402 of the JOBS Act,\90\
highlighted the $5 million offering limitation in existing Regulation A
as one of the main factors limiting the utility of the exemption. In
certain circumstances, fixed costs associated with conducting
Regulation A offerings, such as legal and accounting fees, may serve as
a disincentive to use the exemption for lower offering amounts. We are
therefore increasing the offering limitation in the final rules for
Tier 1 offerings in a 12-month period from the proposed $5 million
limitation to $20 million.\91\ We believe that raising the offering
limitation for Tier 1 offerings, in addition to other changes discussed
in Section II.I. below, will increase the utility of the exemption for
smaller issuers by providing them with additional options for capital
formation and potentially increasing the proceeds received by the
issuer. Consistent with the proportionate limitation on secondary sales
in the proposed rules, we are also increasing the limitation on
secondary sales in Tier 1 offerings in a 12-month period from the
proposed $1.5 million limitation to $6 million.
---------------------------------------------------------------------------
\88\ See Section II.I. below.
\89\ See, e.g., Guzik Letter 1; ICBA Letter; Public Startup Co.
Letter 1.
\90\ Factors that May Affect Trends in Regulation A Offerings,
GAO-12-839 (July 2012) (the ``GAO Report'') (available at: 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.
\91\ Rule 251(a)(1). We intend to revisit the Tier 1 offering
limitation at the same time that we are required by Section 3(b)(5)
of the Securities Act to review the Tier 2 offering limitation and
will consider whether additional investor protections would be
necessary if the Tier 1 offering limitation is increased.
---------------------------------------------------------------------------
Tier 2
We are adopting the proposed $50 million Tier 2 offering
limitation.\92\ Some commenters suggested that we raise the offering
limitation to an amount above the statutory limitation set forth in
Section 3(b)(2), but we do not believe an increase is warranted at this
time. While Regulation A has existed as an exemption from registration
for some time, today's changes are significant. We believe that the
final rules for Regulation A will provide for a meaningful addition to
the existing capital formation options of smaller companies while
maintaining important investor protections. We are concerned, however,
about expanding the offering limitation of the exemption beyond the
level directly contemplated in Section 3(b)(2) at the outset of the
adoption of final rules. As noted above in Section II.B.1., the final
rules do not limit issuer eligibility on the basis of issuer size, as
we believe that the $50 million annual offering limitation will serve
to limit the utility of the exemption for larger issuers in need of
greater amounts of capital. Similarly, we believe that the more
extensive disclosure requirements associated with Exchange Act
reporting are more appropriate for larger and generally more complex
issuers that raise money in the public capital markets.\93\ We are
therefore concerned that an increase in the offering limitation at this
time may increase risks to investors by encouraging larger issuers to
conduct offerings pursuant to Regulation A in instances where
disclosure pursuant to a registered offering under the Securities Act
would be more appropriate.
---------------------------------------------------------------------------
\92\ Rule 251(a)(2).
\93\ See discussion in Section III.C.3. below.
---------------------------------------------------------------------------
The Commission is required by Section 401 of the JOBS Act to review
the Section 3(b)(2) offering limitation every two years, and we will
consider the use of the final rules by market participants as part of
that review. We will therefore revisit the offering limitation by April
2016, as required by the statute, with a view to considering whether to
increase the $50 million offering limitation. We also are adopting the
proposed $15 million limitation on secondary sales for Tier 2 as
proposed, with a change in the application of the limitation for
secondary sales under both Tier 1 and Tier 2 discussed in the following
section.
Application of the Limitation on Secondary Sales
As noted in the Proposing Release, secondary sales are an important
part of Regulation A. We believe that allowing
[[Page 21814]]
selling securityholders access to avenues for liquidity will encourage
them to invest in companies, although we acknowledge that providing for
secondary sales in any amount may give rise to certain concerns. As
highlighted by at least one commenter at the pre-proposing stage,
permitting some secondary sales pursuant to Regulation A could place
investors at an informational disadvantage to selling securityholders
who have potentially greater access to inside information about the
issuer and does not necessarily provide capital to the issuer.\94\
Other commenters stated that such concerns are misplaced in the context
of secondary sales by non-affiliates, who generally do not have access
to inside information.\95\
---------------------------------------------------------------------------
\94\ Letter from A. Heath Abshure, President, NASAA, April 10,
2013 (``NASAA (pre-proposal) Letter'').
\95\ See, e.g., Milken Institute Letter.
---------------------------------------------------------------------------
We do not believe that a wholesale prohibition on secondary sales,
as suggested by some commenters, is appropriate or necessary for either
Tier 1 or Tier 2 of Regulation A. However, in order to strike an
appropriate balance between allowing selling securityholders continued
access to avenues for liquidity in Regulation A and the concern that
secondary offerings do not directly provide new capital to companies
and could pose the potential risks to investors discussed above, the
final rules continue to permit secondary sales but provide additional
limitations on secondary sales in the first year. The final rules limit
the amount of securities that selling securityholders can sell at the
time of an issuer's first Regulation A offering and within the
following 12 months to no more than 30% of the aggregate offering price
of a particular offering.\96\ While the final rules continue to provide
selling securityholders with the flexibility to sell securities during
this period, we believe that this approach to the final rules will help
to ensure that secondary sales at the time of such offerings will be
made in conjunction with capital raising events by the issuer.
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\96\ Rule 251(a)(3) (Additional limitation on secondary sales in
first year).
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Further, we are providing different requirements for secondary
sales by affiliates and by non-affiliates. The final rules limit
secondary sales by affiliates that occur following the expiration of
the first year after an issuer's initial qualification of an offering
statement to no more than $6 million, in the case of Tier 1 offerings,
or no more than $15 million, in the case of Tier 2 offerings, over a
12-month period. Secondary sales by non-affiliates that are made
pursuant to a qualified offering statement following the expiration of
the first year after an issuer's initial qualification of an offering
statement will not be limited except by the maximum offering amount
permitted by either Tier 1 or Tier 2.\97\ Although the secondary sales
offering amount limitation will only apply to affiliates during this
period, consistent with the proposal, non-affiliate secondary sales
will be aggregated with sales by the issuer and sales by affiliates for
purposes of calculating compliance with the maximum offering amount
permissible under the respective tiers.\98\
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\97\ Rule 251(a).
\98\ Secondary sales of shares acquired in a Regulation A
offering--which are freely tradable--are not subject to limitations
on secondary sales, but must be resold under an exemption from
Securities Act registration (e.g., Section 4(a)(1), 15 U.S.C.
77d(a)(1)).
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We do not believe that the concerns expressed by one commenter
about informational disadvantages that may exist with affiliate sales
are present with respect to resales by non-affiliates.\99\ On the
contrary, in comparison to requirements for non-affiliate resales of
restricted securities after the expiration of Securities Act Rule 144
holding periods,\100\ we believe that Regulation A provides purchasers
of such securities with the benefit of, among other things, narrative
and financial disclosure that is reviewed and qualified by the
Commission in transactions that are subject to Section 12(a)(2)
liability and the antifraud provisions of Section 17 of the Securities
Act.\101\
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\99\ NASAA (pre-proposal) Letter.
\100\ Under Rule 144, non-affiliates of an issuer are, among
other things, permitted to resell restricted securities after the
expiration of a one-year holding period without limitations or
requirements as to: (i) The availability of current public
information about the issuer or its securities, (ii) the volume of
resales, (iii) the manner of sale, or (iv) disclosure. See 17 CFR
230.144.
\101\ 15 U.S.C. 77l(a)(2), 77q.
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We also disagree with the commenters who suggested limitations on
secondary sales are contrary to the legislative intent behind the
enactment of Title IV of the JOBS Act. We note that Section 3(b)(2)
expressly provides that the Commission may impose additional terms,
conditions, or requirements as it deems necessary in the public
interest and for the protection of investors.\102\ For the reasons
discussed above, we believe that limiting secondary sales by affiliates
is not only consistent with the language and purpose of the statute but
also necessary in the public interest and for the protection of
investors.
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\102\ See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).
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Offering Limit Calculation
Under the proposal, if the offering included securities that are
convertible into, or exercisable or exchangeable for, other securities
(rights to acquire), the offer and sale of the underlying securities
also would generally be required to be qualified,\103\ and the
aggregate offering price would include the aggregate conversion,
exercise, or exchange price of such securities, regardless of when they
become convertible, exercisable, or exchangeable.\104\ Consistent with
the views of at least one commenter,\105\ we are concerned that the
proposed requirement could have a greater impact on smaller issuers
than larger issuers because smaller issuers frequently issue rights to
acquire other securities in capital raising events. The proposed method
of calculating the offering limit would presume the exercise price of
underlying securities that, by their terms, may occur at a date in the
distant future or only upon the occurrence of key events. By including
all securities underlying any rights to acquire other securities in the
offering limit calculation, the proposed rules could effectively limit
the proceeds of an offering available to an issuer by requiring such
issuers to include in the aggregate offering price at the time of
qualification the securities underlying rights to acquire that may or
may not become exercisable or exchangeable in the future. We are
adopting final rules that will require issuers to aggregate the price
of all securities for which qualification is currently being sought,
including the securities underlying any rights to acquire that are
convertible, exercisable, or exchangeable within the first year after
qualification or at the discretion of the issuer. As such, and
consistent with the treatment of rights to acquire in the context of
registered offerings, if an offering includes rights to acquire other
securities at a time more than one year after qualification and the
issuer does not otherwise seek to qualify such underlying securities,
the aggregate offering price would not include the aggregate
conversion, exercise, or exchange price of the underlying
securities.\106\ For purposes
[[Page 21815]]
of calculating the price of underlying securities that use a pricing
formula, as opposed to a known conversion price, the issuer will be
required to use the maximum estimated price for which such securities
may be converted, exercised, or exchanged.\107\
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\103\ Qualification would not be required for securities
transactions exempt from registration pursuant to Securities Act
Section 3(a)(9), 15 U.S.C. 77c(a)(9). Section 3(a)(9) exempts from
registration any security exchanged by the issuer with its existing
security holders exclusively where no commission or other
remuneration is paid or given directly or indirectly for soliciting
such exchange.
\104\ See note to proposed Rule 251(a).
\105\ Andreessen/Cowen Letter.
\106\ See note to Rule 251(a). In these circumstances, the
securities underlying the rights to acquire would need to be
separately qualified under Regulation A or, depending on the
circumstances, registered, exempt from registration, or otherwise
offered in an appropriate manner at the time of issuance.
\107\ Id.
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Rule 251(b)
We are adopting as proposed final rules that eliminate the last
sentence of Rule 251(b),\108\ which prohibited affiliate resales unless
the issuer had net income from continuing operations in at least one of
its last two fiscal years. We agree with the views expressed by
commenters that the absence of net income, by itself, is not a
sufficient indicator of an enhanced risk that existing shareholders
will use informational advantages to transfer their holdings to the
investing public that would necessitate the continued application of
the prohibition in the final rules. Further, as noted in the Proposing
Release, the Commission's current disclosure review and qualification
processes and enforcement programs are significantly more sophisticated
and robust than they were when this provision was added to Regulation A
in its original form.\109\ In addition, the final rules being adopted
today include revised ``bad actor'' disqualification provisions and
additional issuer eligibility requirements aimed at limiting access to
the exemption for market participants with demonstrated track records
of non-compliance or abuse.\110\
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\108\ 17 CFR 230.251(b) (2014).
\109\ See Proposing Release, at Section II.B.3.
\110\ See discussions in Section II.G (Bad Actor
Disqualification) below and Section II.B.1 (Eligible Issuers) above.
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4. Investment Limitation
a. Proposed Rules
Regulation A does not currently limit the amount of securities an
investor can purchase in a qualified Regulation A offering. As we noted
in the Proposing Release, however, we recognize that with the increased
annual offering limitation provided in Section 3(b)(2) comes a risk of
commensurately greater investor losses.\111\ To address that risk we
proposed, among other things, to limit the amount of securities
investors can purchase in a Tier 2 offering to no more than 10% of the
greater of their annual income or their net worth. For this purpose,
annual income and net worth would be calculated as provided in the
accredited investor definition under Rule 501 of Regulation D.\112\
Under the proposal, issuers would be required to make investors aware
of the investment limitations,\113\ but would otherwise be able to rely
on an investor's representation of compliance with the proposed
investment limitation unless the issuer knew, at the time of sale, that
any such representation was untrue.
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\111\ See Proposing Release, at Section II.B.4.
\112\ 17 CFR 230.501.
\113\ See paragraph (a)(5) to Part II of proposed Form 1-A.
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b. Comments on Proposed Rules
A number of commenters generally supported investment limitations
for Tier 2 offerings.\114\ These commenters believed that an investment
limitation would serve as an important investor protection. Several
commenters recommended revisiting the necessity of the limitations
after a one- to three- year trial period,\115\ and another commenter
\116\ recommended extending the investment limitation to Tier 1
offerings to make them more consistent with our proposed rules for
securities-based crowdfunding transactions conducted pursuant to
Section 4(a)(6) of the Securities Act.\117\ Some commenters' support
for the proposed investment limitations was conditioned on suggested
changes to the proposed rules that would require issuers to do more to
ensure compliance with the limitations and that would impose adverse
consequences on issuers for the failure to do so.\118\ One commenter
believed that the 10% limitation is ``significantly higher'' than is
appropriate for ``all but the wealthiest, least risk averse''
investors.\119\ Two commenters suggested that the 10% limitation should
be aggregated across all Regulation A offerings instead of being
applied on a per offering basis,\120\ while one commenter specifically
argued against such an aggregated limit.\121\
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\114\ CFA Institute Letter; IPA Letter; Letter from Robert
Kisel, Small Business Owner, March 18, 2014 (``Kisel Letter'')
(erroneously referring to the 10% limit as a 5% limit); MCS Letter;
REISA Letter; Richardson Patel Letter; WDFI Letter.
\115\ CFIRA Letter 1; Kisel Letter; Milken Institute Letter.
\116\ CFA Institute Letter.
\117\ See Crowdfunding, Rel. No. 33-9470 [78 FR 66427] (Nov. 5,
2013).
\118\ CFA Institute Letter; MCS Letter; WDFI Letter.
\119\ Letter from Barbara Roper, Director of Investor
Protection, Consumer Federation of America, March 24, 2014 (``CFA
Letter'').
\120\ CFA Letter (not recommending this specifically, but noting
this as one reason why the investment limit was not an adequate
substitute for state review of Tier 2 offerings); William A.
Jacobson, Clinical Professor of Law, Cornell Law School, and
Director, Cornell Securities Law Clinic, March 24, 2014 (``Cornell
Clinic Letter'').
\121\ KVCF Letter.
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Numerous commenters recommended eliminating the investment
limitation for Tier 2 offerings.\122\ Several of these commenters
alternatively recommended at least doubling the limit if the provision
is not eliminated entirely.\123\ Other commenters thought that the
investment limitation is unnecessary in light of the other investor
protections for Tier 2 offerings, such as the expanded disclosure
requirements.\124\ Several commenters noted that the limit does not
have a statutory basis and suggested that it may be contrary to
Congressional intent,\125\ or contrary to the principles underlying
federal securities law, which focus on fraud prevention and full
disclosure.\126\ One commenter recommended eliminating the investment
limitations only if the final rules do not preempt state law
registration requirements for Tier 2 offerings, arguing that the
limitations may conflict with state investor suitability
standards,\127\ while another commenter indicated that investment
limitations would be unnecessary with appropriate state oversight, but
supported limits for retail investors in startup companies and high-
risk offerings.\128\ Another commenter recommended creating various
categories of investor sophistication with corresponding requirements
and limitations for each.\129\
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\122\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter;
CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter;
Letter from Groundfloor Finance, Inc., Nov. 18, 2014 (``Groundfloor
Letter''); Heritage Letter; ICBA Letter; IPA Letter; Letter from
Ford C. Ladd, Esq., May 19, 2014 (``Ladd Letter 2''); Letter from
John Rodenrys, Executive Director R&D, Leading Biosciences, Inc.,
March 24, 2014 (``Leading Biosciences Letter''); Milken Institute
Letter; MoFo Letter; NASAA Letter 2; Letter from Michael L. Zuppone,
Paul Hastings LLP, March 24, 2014 (``Paul Hastings Letter''); Letter
from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc.,
April 2, 2014 (``Public Startup Co. Letter 7''); SVB Financial
Letter.
\123\ Fallbrook Technologies Letter; Leading Biosciences Letter;
ICBA Letter.
\124\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter;
MoFo Letter; Paul Hastings Letter; SVB Financial Letter.
\125\ ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1;
Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter.
\126\ ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken
Institute Letter.
\127\ Groundfloor Letter.
\128\ NASAA Letter 2.
\129\ Cornell Clinic Letter (recommending the tiered investment
limits in our proposed rules for securities-based crowdfunding as an
example).
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Many commenters, including those both for and against the
investment limit, recommended providing exceptions to the limit for
certain types of investors, such as accredited investors, or altering
the application of
[[Page 21816]]
the limit to such types of investors.\130\ These commenters believed
that the investor protections afforded by the investment limit would
not be necessary for all types of investors or in all types of
Regulation A offerings. Some commenters recommended eliminating the
investment limit for accredited investors.\131\ One such commenter
recommended eliminating the investment limit generally and, if not, at
least for institutional investors and offerings of securities listed on
securities exchanges.\132\ Several commenters recommended eliminating
the investment limit for non-natural persons or institutional
investors.\133\ Other commenters recommended eliminating the investment
limits for other types of investors or offerings.\134\ Two commenters
noted that it would be difficult to apply the investment limits to non-
natural persons (such as small businesses and IRAs) if the rules use an
income or net worth test.\135\ One of these commenters recommended
that, if the test applies to such investors, it should be based on
assets or revenue.\136\
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\130\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter;
Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage
Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter &
English Letter; MCS Letter; Milken Institute Letter; MoFo Letter;
Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter;
WR Hambrecht + Co Letter.
\131\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter;
Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2;
Leading Biosciences Letter; McCarter & English Letter; MCS Letter;
MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB
Financial Letter; cf. Cornell Clinic Letter (recommending an
unspecified higher limit for accredited investors); Milken Institute
Letter; WR Hambrecht + Co Letter (supporting eliminating the
investment limit generally).
\132\ Milken Institute Letter.
\133\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter;
MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters
believed that, as proposed, the investment limitations would not
apply to non-natural persons and asked the Commission to confirm or
clarify this point.
\134\ Cornell Clinic Letter (creating a separate, higher limit
for institutional investors and other types of non-retail investors
included in the ``accredited investor'' definition); Heritage Letter
(eliminating the investment limit for ``any current or former
investor, employee or officer of the issuer''); Ladd Letter 2
(eliminating the investment limit for any non-accredited affiliates,
founders, employees, agents, independent contractors and owners);
Milken Institute Letter (eliminating the investment limit for
investors that purchase Tier 2 securities on an exchange); Paul
Hastings Letter (eliminating the investment limit for offerings
conducted by registered broker-dealers); Richardson Patel Letter
(eliminating the investment limit for any non-individual investor
with at least $100,000 in assets or $100,000 in revenue in the
previous fiscal year).
\135\ McCarter & English Letter; Richardson Patel Letter.
\136\ Richardson Patel Letter.
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Many commenters explicitly supported allowing issuers to rely on an
investor's representation of compliance with the 10% investment
limit.\137\ Most of these commenters stated that any more rigorous
verification process would cause the compliance costs to be too high.
One commenter recommended eliminating any obligation for the issuer to
monitor the 10% investment limit and allowing the issuer to rely on a
representation by the investor that he or she will notify the issuer
upon exceeding the 10% limit.\138\ Another commenter recommended
permitting an issuer to rely on representations from its underwriters
or broker-dealers as to the 10% investment limit, rather than having to
seek this directly from investors.\139\ This commenter believed that
the issuers in most Tier 2 offerings would have little direct contact
with the investors and that the intermediaries would be better
positioned to assess compliance (possibly already having information
about the investor's finances).
---------------------------------------------------------------------------
\137\ Fallbrook Technologies Letter; Heritage Letter; IPA
Letter; KVCF Letter; Leading Biosciences Letter; REISA Letter.
\138\ REISA Letter.
\139\ KVCF Letter.
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Several commenters disagreed with allowing investors to represent
compliance with the investment limitation and recommended a standard
that would require an issuer to do more to ensure compliance.\140\ Two
commenters recommended adopting a standard requiring issuers to take
reasonable steps to verify that the purchasers are in compliance with
the 10% investment limit.\141\ Two commenters recommended requiring an
issuer to have a ``reasonable belief'' or ``reasonable basis'' that it
can rely on an investor's representation of compliance with the 10%
investment limit.\142\ One such commenter also suggested allowing
accredited investors to exceed the 10% investment limit, but requiring
that the issuer take reasonable steps to verify accredited investor
status.\143\ One commenter recommended requiring a ``duty of inquiry''
so that the issuer would have to follow-up on any ``red flags.'' \144\
Additionally, this commenter recommended that the Commission create an
independent and secure means of verifying investor income or to require
a mandatory questionnaire for individual investors to complete before
buying a security issued under Regulation A.
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\140\ Letter from Paul Sigelman, President & CEO, Accredited
Assurance, March 24, 2014 (``Accredited Assurance Letter''); CFA
Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter;
WDFI Letter.
\141\ Accredited Assurance Letter; WDFI Letter.
\142\ CFA Institute Letter; MCS Letter.
\143\ MCS Letter.
\144\ Cornell Clinic Letter.
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c. Final Rules
We are adopting an investment limitation for Tier 2 offerings in
the final rules, with minor modifications from the proposed rules. We
believe that the investment limitation serves as an important investor
protection and may help to mitigate the risk that with the increased
annual offering limitation provided in Section 3(b)(2) comes a risk of
commensurately greater investor losses. We do not believe that the
limitation is needed for accredited investors because investors that
qualify as accredited under our rules satisfy certain criteria that
suggest they are capable of protecting themselves in transactions that
are exempt from registration under the Securities Act.\145\ We also do
not believe that the limitation is necessary for investments in
securities that will be listed on a national securities exchange upon
qualification because of the issuer listing requirements and the
potential liquidity that exchanges provide to investors that seek to
reduce their holdings. These both are important investor protections
that help to mitigate concerns about the magnitude of loss that could
potentially result from an investor purchasing a large amount of
securities in a single offering.
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\145\ See Rule 501(a) of Regulation D, 17 CFR 230.501(a); see
also SEC v. Ralston Purina Co., 346 U.S. 119 (1953).
---------------------------------------------------------------------------
Under the final rules, the investment limitations for purchasers in
Tier 2 offerings will not apply to purchasers who qualify as accredited
investors under Rule 501 of Regulation D.\146\ Further, investment
limitations in a Tier 2 offering will not apply to the sale of
securities that will be listed on a national securities exchange upon
qualification since such issuers will be required to meet the listing
standards of
[[Page 21817]]
a national securities exchange \147\ and become subject to ongoing
Exchange Act reporting, resulting in additional investor protections.
---------------------------------------------------------------------------
\146\ See Rule 252(c)(2). Under Rule 501, natural persons are
accredited investors if: (i) Their income exceeds $200,000 in each
of the two most recent years (or $300,000 in joint income with a
person's spouse), and they reasonably expect to reach the same
income level in the current year; (ii) they serve as executives or
directors of the issuer; or (iii) their net worth exceeds $1,000,000
(individual or jointly with a spouse), excluding the value of their
primary residence. Certain enumerated entities that satisfy an
asset-based test also qualify as accredited investors, while others,
including regulated entities such as banks and registered investment
companies, are not subject to the asset test. See 17 CFR 230.501.
The accredited investor definition is intended to encompass those
individuals and entities ``whose financial sophistication and
ability to sustain the risk of loss of investment or ability to fend
for themselves render the protections of the Securities Act's
registration process unnecessary.'' See, e.g., Rel. No. 33-6683
(Jan. 16, 1987) [52 FR 3015] (Regulation D Revisions; Exemption for
Certain Employee Benefit Plans).
\147\ National securities exchanges impose certain requirements
on issuers, in addition to those generally required by the
Commission, in order for an issuer's securities to be approved for
listing. See discussion of listing requirements for, and additional
investor protections associated with, national securities exchanges
in Section II.E.3.c. below; see also fns. 721, 722 below.
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In response to questions raised by commenters, we are clarifying
that non-accredited, non-natural persons are subject to the investment
limitation and should calculate the limitation based on no more than
10% of the greater of the purchaser's revenue or net assets (as of the
purchaser's most recent fiscal year end).\148\ Non-accredited, natural
persons must calculate the investment limitations on the basis of 10%
of the greater of the purchaser's annual income or net worth
(determined as provided in Rule 501 of Regulation D).\149\
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\148\ Rule 251(d)(2)(i)(C)(1).
\149\ Rule 251(d)(2)(i)(C)(2). See Securities Act Rule 501(a)(5)
[17 CFR 230.501(a)(5)] (net worth). Consistent with this rule, the
calculation of a natural person's net worth for purposes of the
investment limit excludes the value of the primary residence of such
person.
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If the investor is purchasing securities that are convertible into,
or exercisable or exchangeable for, other securities, if such
securities are exercisable within a year or otherwise are being
qualified, the investment limitation will include the aggregate
conversion, exercise, or exchange price of such securities, in addition
to the purchase price.\150\ We believe this is an appropriate
calculation because it is consistent with the offering limit
calculation for the respective tiers \151\ and because it applies
investment limitations to reasonably foreseeable investment decisions
(i.e., those involving securities exercisable within a year or
otherwise qualified by the issuer) while reducing the risk that issuers
may seek to sell large amounts of securities that are convertible,
exercisable or exchangeable into other securities in the near term at a
low cost in an effort to avoid the 10% limitation.
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\150\ See note to Rule 251(d)(2)(i).
\151\ See discussion in Section II.B.3.c. above.
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As proposed, we are adopting final rules that require issuers to
notify investors of the investment limitations.\152\ Issuers may rely
on a representation of compliance with the investment limitation from
the investor, unless the issuer knew at the time of sale that any such
representation was untrue.\153\ As we noted in the Proposing Release,
we are cognizant of the privacy issues and practical difficulties
associated with verifying individual income and net worth and,
therefore, are not requiring investors to disclose personal information
to issuers in order to verify compliance.\154\
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\152\ See paragraph (a)(5) to Part II of Form 1-A.
\153\ Rule 251(d)(2)(i)(D). Similarly, issuers may also rely on
representations of investor compliance with the investment
limitations from participating broker-dealers, unless the issuer
knew at the time of sale that any such representation was untrue.
\154\ See Proposing Release, at Section II.B.4.
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Some commenters suggested requiring an issuer to have a reasonable
belief that it can rely on an investor's representation of compliance
with the investment limitations or to take reasonable steps to verify
compliance, while other commenters suggested we establish consequences
for issuers (and intermediaries, when applicable) if an investor failed
to comply with the limitations.\155\ At the same time, many commenters
supported the proposed approach, noting the low compliance costs and
the certainty it would provide issuers and their intermediaries.\156\
We believe that the rules, as adopted, will limit potential losses for
non-accredited investors with respect to individual offerings, while
providing certainty to, and lower compliance costs for, issuers and
intermediaries.
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\155\ See fn. 140-144 above.
\156\ See fn. 137 above.
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We do not believe that additional requirements for issuers and
their intermediaries, such as requiring issuers to take reasonable
steps to verify an investors' compliance with the investment
limitations, are necessary to protect investors in light of the total
package of investor protections included in the final rules for Tier 2
offerings.\157\ We believe that additional requirements, like the ones
suggested by some commenters, may have an unintended consequence of
dissuading issuers from selling to non-accredited investors in Tier 2
offerings by increasing compliance uncertainties and obligations. We
are therefore not adopting any additional compliance requirements with
respect to investment limitations in the final rules.
---------------------------------------------------------------------------
\157\ For example, the final rules include limitations on issuer
eligibility, bad actor disqualification provisions, a requirement
that offering statements must be qualified by the Commission,
narrative and financial disclosure requirements, which for Tier 2
offerings must include audited financial statements on an initial
and annual basis, as well as annual, semiannual, and current event
reporting.
---------------------------------------------------------------------------
While many commenters urged the Commission to eliminate or provide
less restrictive investment limitations in the final rules,\158\ we
believe that these requirements, as proposed and adopted, usefully
augment other requirements for, and investor protections applicable to,
Tier 2 offerings. As we noted in the Proposing Release, Title IV of the
JOBS Act mandates certain investor protections \159\ and suggests that
the Commission consider others as part of its Section 3(b)(2)
rulemaking.\160\ Congress recognized in Section 3(b)(2) that investor
protections beyond those expressly provided in Title IV of the JOBS Act
may be necessary in the revised regulation. To that end, Section
3(b)(2)(G) indicates that the Commission may include in the expanded
exemption ``such other terms, conditions, or requirements. . .
necessary in the public interest and for the protection of investors. .
. .'' Limiting the amount of securities that a non-accredited investor
can purchase in a particular Tier 2 offering (other than a Tier 2
offering of securities listed on a national securities exchange) should
help to mitigate concerns that such investors may not be able to absorb
the potential loss of the investment and is consistent with the
authority granted to the Commission in Section 3(b)(2).\161\ We further
believe that setting the investment limitation at 10% of the greater of
such investor's net worth/net assets and annual income/revenue, as
opposed to some other percentage (e.g., 5% or 20%), is generally
consistent with similar maximum investment limitations placed on
investors in Title III of the JOBS Act and will help to set a loss
limitation standard in such offerings.\162\
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\158\ See fn. 122 above.
\159\ See Section 3(b)(2)(D) (expressly providing for Section
12(a)(2) liability for any person offering or selling Section
3(b)(2) securities); Section 3(b)(2)(F) (requiring issuers to file
audited financial statements with the Commission annually).
\160\ See Section 3(b)(2)(G) (inviting the Commission to
consider, among other things, requiring audited financial statements
in the offering statement and implementing bad actor
disqualification provisions); Section 3(b)(4) (inviting the
Commission to consider implementing ongoing reporting requirements).
\161\ As proposed and adopted, an underwriter in a firm
commitment underwritten Regulation A offering, or participating
broker-dealer that is involved in stabilization activities with
respect to an offering of Regulation A securities will not be
considered an investor that is subject to the investment
limitations.
\162\ Section 301 of the JOBS Act; see also Securities Act
Section 4(a)(6), 15 U.S.C. 77d(a)(6).
---------------------------------------------------------------------------
Despite the suggestions of some commenters,\163\ we do not believe
that further distinctions as to the applicability of investment
limitations are appropriate among investors that do not qualify as
accredited investors. On the contrary, we believe that the regulatory
distinctions among accredited and non-accredited investors and the
familiarity many market participants have with such terms will help to
ease compliance with, and
[[Page 21818]]
determinations about the applicability of, the investment limitations
and will avoid unnecessary complexity associated with other, additional
distinctions.
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\163\ See fn. 134 above.
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5. Integration
a. Proposed Rules
We proposed amending Rule 251(c) of Regulation A, which governs the
integration of Regulation A offerings with other offerings, to provide
that offerings under Regulation A would not to be integrated with any
of the following: \164\
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\164\ The integration doctrine seeks to prevent an issuer from
improperly avoiding registration by artificially dividing a single
offering into multiple offerings such that Securities Act exemptions
would apply to multiple offerings that would not be available for
the combined offering.
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Prior offers or sales of securities; or
certain specified subsequent offers and sales of
securities.\165\
\165\ See proposed Rule 251(c), which included in the safe
harbor subsequent offers or sales that are registered under the
Securities Act, or made pursuant to Securities Act Rule 701, an
employee benefit plan, Regulation S, proposed Regulation
Crowdfunding (see Rel. No. 33-9470), or more than six months after
completion of the Regulation A offering.
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The proposed safe harbor was substantially the same as the existing
integration safe harbor in Rule 251(c), with the addition of a separate
provision for securities-based crowdfunding transactions conducted
pursuant to Section 4(a)(6) of the Securities Act.\166\
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\166\ Section 4(a)(6) was added to the Securities Act by Section
302 of the JOBS Act.
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We further proposed to amend Rule 254(d) to provide that, where an
issuer decides to register an offering after soliciting interest in a
contemplated, but abandoned, Regulation A offering, any offers made
pursuant to Regulation A would not be subject to integration with the
registered offering, unless the issuer engaged in solicitations of
interest in reliance on Regulation A to persons other than qualified
institutional buyers (QIBs) \167\ and institutional accredited
investors permitted by Section 5(d) \168\ of the Securities Act.\169\
As proposed, an issuer (and any underwriter, broker, dealer, or agent
that is acting on behalf of the issuer in connection with the proposed
offering) soliciting interest in a Regulation A offering to persons
other than QIBs and institutional accredited investors would need to
wait at least 30 calendar days between the last such solicitation of
interest in the Regulation A offering and the filing of the
registration statement with the Commission.\170\ The Proposing Release
also provided guidance on the applicability of the integration doctrine
for offerings conducted outside the scope of the safe harbor.\171\
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\167\ QIBs are large institutions meeting specific requirements
outlined in Rule 144A, or entities the seller (or a person acting on
its behalf) reasonably believes to be QIBs. See Rule 144A, 17 CFR
230.144A.
\168\ 15 U.S.C. 77e(d); see also fn. 537 below.
\169\ Proposed Rule 255(e).
\170\ Id.
\171\ See Proposing Release, Section II.B.5.
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b. Comments on the Proposed Rules
One commenter specifically supported the proposed changes to the
integration provisions of Regulation A.\172\ Another commenter objected
to the proposed changes to the integration provisions and related
guidance.\173\ This commenter cautioned that it would be very difficult
to police compliance with these provisions and suggested that they
would be used to evade regulatory requirements.
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\172\ ABA BLS Letter.
\173\ CFA Letter.
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c. Final Rules
We are adopting, as proposed, an integration safe harbor, with one
clarifying change. Under the final rules, offerings pursuant to
Regulation A will not be integrated with:
Prior offers or sales of securities; or
subsequent offers and sales of securities that are:
Registered under the Securities Act, except as provided in
Rule 255(c);
made pursuant to Rule 701 under the Securities Act;
made pursuant to an employee benefit plan;
made pursuant to Regulation S;
made pursuant to Section 4(a)(6) of the Securities Act; or
made more than six months after completion of the
Regulation A offering.\174\
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\174\ Rule 251(c).
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We believe that the integration safe harbor has historically
provided and, as amended, will continue to provide, issuers,
particularly smaller issuers whose capital needs often change, with
valuable certainty as to the contours of a given offering and their
eligibility for an exemption from Securities Act registration. The
addition of subsequent offers or sales made pursuant to Section
4(a)(6), which is the only substantive change to the existing safe
harbor being adopted today, should not significantly alter the
application of the doctrine in practice. Given the unique capital
formation method available to issuers and investors through Section
4(a)(6) of the Securities Act and the small dollar amounts involved, we
believe that the addition to the safe harbor list of subsequent
crowdfunding offers and sales conducted pursuant to such section is
appropriate and will not unduly increase risks to investors.\175\ As
with any exemption from registration, the burden of proof of compliance
with a claimed exemption rests with the party claiming it.\176\ In our
view, the benefits of providing issuers with certainty as to the scope
of the integration doctrine, particularly for Regulation A, outweighs
the concern expressed by one commenter that compliance with the
doctrine may be difficult to enforce.\177\ In light of the broad
permissible target audience of Regulation A solicitations, the
potential for expanded use of solicitation materials in Regulation A
discussed more fully in Section II.D. below, and the addition of
similar provisions for registered offerings under Section 5(d), we
believe the integration provisions in the final rule are necessary to
ensure that amended Regulation A functions as a viable capital raising
option for issuers.
---------------------------------------------------------------------------
\175\ See 15 U.S.C.77d(a)(6); see also Rel. No. 33-9470.
\176\ See Ralston Purina Co., 346 U.S. 119.
\177\ CFA Letter.
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We are also clarifying in the final rules the scope of the proposed
safe harbor from integration in instances where an issuer abandons a
contemplated Regulation A offering before qualification, but after
soliciting interest in such offering to persons other than QIBs and
institutional accredited investors. The proposed language could be read
to imply that issuers must wait at least 30 calendar days to avoid
integration with a subsequent registered offering or else be subject to
integration. The final rules clarify that waiting less than 30 calendar
days before a subsequent registered offering would not necessarily
result in integration and would instead depend on the particular facts
and circumstances.\178\
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\178\ See Note to Rule 251(c) and Rule 255(e); see also Section
II.D. below for a discussion on solicitation materials.
---------------------------------------------------------------------------
We are also reaffirming the integration guidance provided in the
Proposing Release, which is consistent with guidance provided by the
Commission in a 2007 rule proposal on Regulation D.\179\ As noted in
the Proposing Release,
[[Page 21819]]
we believe that an offering made in reliance on Regulation A should not
be integrated with another exempt offering made by the issuer, provided
that each offering complies with the requirements of the exemption that
is being relied upon for the particular offering. For example, an
issuer conducting a concurrent exempt offering for which general
solicitation is not permitted will need to be satisfied that purchasers
in that offering were not solicited by means of the offering made in
reliance on Regulation A, including without limitation any ``testing
the waters'' communications.\180\ Alternatively, an issuer conducting a
concurrent exempt offering for which general solicitation is permitted,
for example, under Rule 506(c), could not include in any such general
solicitation an advertisement of the terms of a Regulation A offering,
unless that advertisement also included the necessary legends for, and
otherwise complied with, Regulation A.\181\
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\179\ See Revision of Limited Offering Exemptions in Regulation
D, Release No. 33-8828 (Aug. 3, 2007) (expressing the view that the
determination as to whether the filing of the registration statement
should be considered to be a general solicitation or general
advertising that would affect the availability of an exemption under
Securities Act Section 4(a)(2) for such a concurrent unregistered
offering should be based on a consideration of whether the investors
in the private placement were solicited by the registration
statement or through some other means that would otherwise not
foreclose the availability of the Section 4(a)(2) exemption).
\180\ For a concurrent offering under Rule 506(b), an issuer
will have to conclude that purchasers in the Rule 506(b) offering
were not solicited by means of a Regulation A general solicitation.
For example, the issuer may have had a preexisting substantive
relationship with such purchasers. Otherwise, the solicitation
conducted in connection with the Regulation A offering may preclude
reliance on Rule 506(b). See also Rel. No. 33-8828 (Aug. 3, 2007)
[72 FR 45116].
\181\ See discussion in Section II.D. below.
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6. Treatment Under Section 12(g)
a. Proposed Rules
Exchange Act Section 12(g) requires, among other things, that an
issuer with total assets exceeding $10,000,000 and a class of equity
securities held of record by either 2,000 persons, or 500 persons who
are not accredited investors, register such class of securities with
the Commission.\182\ We did not propose to exempt Regulation A
securities from mandatory registration under Section 12(g), but we
solicited comment on whether Regulation A securities should be granted
such an exemption, either conditionally or otherwise.
---------------------------------------------------------------------------
\182\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------
b. Comments on Proposed Rules
Commenters generally expressed support for some form of exemption
from the registration requirements under Section 12(g). Numerous
commenters recommended exempting Regulation A securities from Section
12(g).\183\ Several of these commenters expressed concern that the
Section 12(g) record holder count would decrease the utility of the
Regulation A exemption by incentivizing issuers to sell to accredited
investors over non-accredited investors, likely resulting in issuers
electing to rely on a potentially less costly exemption, such as Rule
506 of Regulation D.\184\ These commenters also expressed concern that
Section 12(g) would decrease the utility of the exemption because
secondary trading in otherwise unrestricted Regulation A securities
might result in issuers inadvertently crossing the Section 12(g)
registration threshold.\185\ Other commenters questioned the extent to
which Regulation A securities would be held in street name through
brokers, which the proposal mentions as a factor that could potentially
limit the impact of not proposing an exemption from Section 12(g).\186\
Some commenters suggested that the reporting regime under Tier 2 would
be a sufficient means by which issuers could provide investors with
current information and that therefore Exchange Act reporting would be
unnecessary.\187\ Two commenters believed that the legislative history
of the JOBS Act supported an exemption from Section 12(g).\188\
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\183\ B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook
Technologies Letter; Letter from Jonathan Frutkin, Principal, The
Frutkin Law Firm, PLC, March 24, 2014 (``Frutkin Law Letter'');
Guzik Letter 1; Letter from Samuel S Guzik, October 25, 2014
(``Guzik Letter 2''); Heritage Letter; IPA Letter; Ladd Letter 2;
Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that
the trigger be ``raised or remedied,'' but not explicitly calling
for elimination); US Alliance Corp. Letter; U.S. Chamber of Commerce
Letter; WR Hambrecht + Co Letter.
\184\ CFIRA Letter 1; Fallbrook Technologies Letter; Frutkin Law
Letter; Heritage Letter; IPA Letter; Milken Institute Letter; MoFo
Letter; SBIA Letter; U.S. Chamber of Commerce Letter.
\185\ Id.
\186\ Guzik Letter 1 (noting the statements of other
commenters); Heritage Letter; Ladd Letter 2 (citing discussions with
various brokers); MoFo Letter; SBIA Letter; WR Hambrecht + Co
Letter; see also OTC Markets Letter (highlighting difficulties
associated with issuer securities becoming eligible for Depository
Trust Company (DTC) services, which services typically limit the
number of an issuer's record holders thereby minimizing the impact
of the Section 12(g) mandatory registration provisions; further
suggesting that companies issuing Regulation A securities be
required to use registered transfer agents).
\187\ B. Riley Letter; Fallbrook Technologies Letter; Milken
Institute Letter; MoFo Letter.
\188\ Ladd Letter 2; WR Hambrecht + Co Letter.
---------------------------------------------------------------------------
Several commenters recommended changing, delaying, or conditioning
the application of Section 12(g)'s registration requirements,
especially the corresponding Section 13 reporting obligations that come
with registration.\189\ One of these commenters recommended delaying
the application of Exchange Act reporting requirements for Tier 2
issuers until the issuer's non-affiliate market capitalization reached
$250 million, so long as the issuer filed reports under Regulation
A.\190\ This commenter believed that non-affiliate market
capitalization was a superior proxy for market interest than the
thresholds under Section 12(g) and noted that the Commission uses the
measure in establishing primary S-3 eligibility. Another commenter
recommended exempting initial Tier 2 issuers from all or part of
Exchange Act reporting obligations until the earliest of the occurrence
of several events.\191\ Yet another commenter suggested exempting Tier
2 issuers from Exchange Act reporting until they reach a certain
unspecified level of revenue or market capitalization.\192\ Two
commenters recommended deeming Tier 2 issuers' ongoing reports under
Regulation A to satisfy the issuer's Exchange Act reporting obligations
for a phase-in period.\193\ One commenter recommended at least allowing
for 2,000 holders of record (whether accredited or not) without being
subject to Exchange Act registration requirements,\194\ while two other
commenters suggested eliminating the cap of 500 non-accredited
investors.\195\ One commenter conditioned its support for a conditional
exemption from Section 12(g) on the Commission requiring Tier 2 issuers
to remain current in their ongoing Regulation A reporting
requirements.\196\
---------------------------------------------------------------------------
\189\ Heritage Letter; KVCF Letter; McCarter & English Letter;
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA
Letter.
\190\ Paul Hastings Letter.
\191\ McCarter & English Letter (suggesting the earliest of: (1)
The last day of any fiscal year of the issuer during which it had
annual gross revenues of $250 million; (2) the last day of any
fiscal year following the fifth anniversary of the date of the first
sale of equity securities under Regulation A; and (3) the date on
which the issuer has an aggregate worldwide market value of voting
and non-voting equity held by its non-affiliates of at least $75
million computed as of the last business day of the issuer's most
recently completed second quarter).
\192\ Milken Institute Letter.
\193\ ABA BLS Letter (a 24 month phase-in period that could
expire earlier if the company triggered Exchange Act reporting in
some other manner); MoFo Letter.
\194\ Heritage Letter.
\195\ KVCF Letter; SBIA Letter.
\196\ MoFo Letter.
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c. Final Rules
We are adopting today final rules that exempt securities issued in
a Tier 2 offering from the provisions of Section 12(g) for so long as
the issuer remains subject to, and is current in (as of its fiscal year
end),\197\ its Regulation A
[[Page 21820]]
periodic reporting obligations.\198\ Additionally, in order for the
conditional exemption to apply, issuers are required to engage the
services of a transfer agent registered with the Commission pursuant to
Section 17A of the Exchange Act. The final rules also provide that the
exemption from Section 12(g) is only available to companies that meet
requirements similar to those in the ``smaller reporting company''
definition under Securities Act and Exchange Act rules.\199\ As such,
the conditional exemption in the final rules is limited to issuers that
have a public float of less than $75 million, determined as of the last
business day of its most recently completed semiannual period,\200\ or,
in the absence of a public float, annual revenues of less than $50
million, as of the most recently completed fiscal year.\201\ An issuer
that exceeds either of the thresholds, in addition to exceeding the
threshold in Section 12(g) of the Exchange Act, would be granted a two-
year transition period before it would be required to register its
class of securities pursuant to Section 12(g), provided it timely files
all ongoing reports due pursuant to Rule 257 during such period.\202\
Section 12(g) registration will only be required if, on the last day of
the fiscal year in which the company exceeded the public float or
annual revenue threshold, the company has total assets of more than $10
million and the class of equity securities is held by more than 2,000
persons or 500 persons who are not accredited investors.\203\ In such
circumstances, an issuer that exceeds the thresholds in Section 12(g)
and Rule 12g5-1(a)(7) would be required to begin reporting under the
Exchange Act the fiscal year immediately following the end of the two-
year transition period.\204\ An issuer entering Exchange Act reporting
will be considered an ``emerging growth company'' to the extent the
issuer otherwise qualifies for such status.\205\
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\197\ The determination as to ``current'' reporting status is
determined at the time of fiscal year end in reference to the filing
of all periodic reports, including special financial reports,
required to be filed during such fiscal year. For these purposes, a
newly qualified issuer that at fiscal year end has not yet been
obligated to file a periodic report, including, if applicable, a
special financial report, would be considered ``current'' for these
purposes.
\198\ Rule 12g5-1(a)(7).
\199\ ``Smaller reporting company'' is defined in Securities Act
Rule 405, 17 CFR 230.405, Exchange Act Rule 12b-2, 17 CFR 240.12b-2,
and Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1). The
provision of the smaller reporting company definition relating to
initial registration statements under the Securities Act is not
applicable to exempt offering pursuant to Regulation A. See Item
10(f)(1)(a)(ii) of Regulation S-K, 17 CFR 229.10(f)(a)(ii). The
final rules do not therefore incorporate this concept for purposes
of Rule 12g5-1(a)(7). See Rule 12g5-1(a)(7).
\200\ Consistent with the smaller reporting company definition,
an issuer will calculate ``public float'' by multiplying the
aggregate worldwide number of shares of its common equity securities
held by non-affiliates by the price at which such securities were
last sold (or the average bid and asked prices of such securities)
in the principal market for such securities. Rule 12g5-1(a)(7). See
also, e.g., Item 10(f)(1)(i) of Regulation S-K.
\201\ Rule 12g5-1(a)(7). The Commission adopted the smaller
reporting company regime in 2007. See SEC Rel. No. 33-8876 (Dec. 19,
2007) [73 FR 934]. Some commentators, such as the Commission's
Advisory Committee on Small and Emerging Companies, have suggested
that the Commission revisit the smaller reporting company regime,
including the definitional thresholds. Recommendations Regarding
Disclosure and Other Requirements for Smaller Public Companies,
Securities and Exchange Commission, Advisory Committee on Small and
Emerging Companies (February 1, 2013), at 2-3, available at: http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf. Although the Commission has not yet responded to
this recommendation, in considering any potential changes to the
smaller reporting company regime, we would expect to consider
whether corresponding changes to the thresholds included in Rule
12g5-1(a)(7) should also be made, taking into account how the
Regulation A regime is working.
\202\ Id.
\203\ 15 U.S.C. 78l(g).
\204\ Id. See Section II.E.4.b(2). below for a discussion on
suspension or termination of the duty to file ongoing reports
pursuant to Rule 257.
\205\ See fn. 726 below and accompanying text.
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In determining to provide a conditional exemption from the
provisions of Section 12(g), we have considered a number of factors.
First, we believe the conditional exemption we are adopting today is
consistent with the intent behind the original enactment of Section
12(g) to the extent it ensures that relevant information about issuers
will be made routinely available to investors and the marketplace.\206\
Second, we believe the additional requirement that Regulation A issuers
use a registered transfer agent will provide an important investor
protection in this context. The use of a transfer agent registered
under the Exchange Act, which, in the absence of a conditional
exemption from the provisions of Section 12(g), would be required of
issuers when they register under the Exchange Act, will provide added
comfort that securityholder records and secondary trades will be
handled accurately. Third, we believe that phasing out the exemption
once companies grow and expand their shareholder base is consistent
with the intent behind Title IV of the JOBS Act, which was enacted to
facilitate smaller company capital formation.\207\ Finally, we are
concerned that, as commenters suggested, the lack of an exemption from
mandatory registration under the Exchange Act may undermine the utility
of amended Regulation A either by discouraging use of the exemption
altogether or by dissuading issuers from making sales to non-accredited
investors in Regulation A offerings in an effort to avoid the
application of Section 12(g).
---------------------------------------------------------------------------
\206\ Section 12(g) was originally enacted by Congress as a way
to ensure that investors in over-the-counter securities about which
there was little or no information, but which had a significant
shareholder base, were provided with ongoing information about their
investment. See, generally, Report of the Special Study of
Securities Markets of the Securities and Exchange Commission, House
Document No. 95, House Committee on Interstate and Foreign Commerce,
88th Cong., 1st Sess. (1963), at 60-62.
\207\ See, e.g., H.R. Rep. No. 112-206 (2011), at 4 (``Small
companies are critical to economic growth in the United States.
Amending Regulation A to make it viable for small companies to
access capital will permit greater investment in these companies,
resulting in economic growth and jobs.'').
---------------------------------------------------------------------------
While we believe, as we noted in the Proposing Release, that the
Section 12(g) record holder threshold continues to provide an important
baseline above which issuers should generally be subject to the
disclosure obligations of the Exchange Act, we are persuaded that this
need not be the case where an issuer is a smaller company that is
subject to, and current in, its periodic reporting obligations under
Tier 2 of Regulation A and engages the services of a transfer agent
that is registered with the Commission under the Exchange Act.
Regulation A, as amended in the final rules, requires issuers that
conduct Tier 2 offerings to provide periodic disclosure to their
investors and updates for certain important corporate events.\208\
While such reports provide less information than is required of an
Exchange Act reporting company, we believe a conditional exemption from
registration under Section 12(g) is warranted for smaller Tier 2
issuers since such companies are required to provide investors with
ongoing information about themselves and the securities offered, and
the ongoing reporting regime we are adopting today is more
appropriately tailored for such companies. Additionally, in order to
address situations where an issuer that conducts a Tier 2 offering
could remain subject to its ongoing reporting requirements indefinitely
and thereby avoid having to comply with Exchange Act reporting
requirements regardless of the size of its shareholder base, we note
that the exemption from Section 12(g) is conditional and that an issuer
that does not meet its conditions, including the limitation on public
float and annual revenues, will be required to register under the
Exchange Act.
---------------------------------------------------------------------------
\208\ See Rule 257.
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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.\209\ The provision permits electronic filing of
[[Page 21821]]
offering statements, and provides a non-exhaustive list of potential
content that may be required in the offering statement, including
audited financial statements, a description of the issuer's business
operations, financial condition, corporate governance principles, use
of investor funds, and other appropriate matters.
---------------------------------------------------------------------------
\209\ 15 U.S.C. 77c(b)(2)(G)(i).
---------------------------------------------------------------------------
1. Electronic Filing; Delivery Requirements
a. Proposed Rules
Consistent with the language of Section 3(b)(2)(G)(i), we proposed
to require Regulation A offering statements to be filed with the
Commission electronically on EDGAR.\210\ We further proposed to amend
Form 1-A, but to continue to have the form consist of three parts:
---------------------------------------------------------------------------
\210\ See proposed Rule 252(e).
---------------------------------------------------------------------------
Part I: An eXtensible Markup Language (XML) based fillable
form;
Part II: A text file attachment containing the body of the
disclosure document and financial statements; and
Part III: Text file attachments, containing the
signatures, exhibits index, and the exhibits to the offering
statement.\211\
---------------------------------------------------------------------------
\211\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------
We further proposed to require all other documents required to be
submitted or filed with the Commission in conjunction with a Regulation
A offering, such as ongoing reports, to be submitted or filed
electronically on EDGAR.\212\
---------------------------------------------------------------------------
\212\ Id.
---------------------------------------------------------------------------
Additionally, we proposed an access equals delivery model for
Regulation A final offering circulars.\213\ Under the proposed rules,
issuers would be required to include a notice in any preliminary
offering circular used that would inform potential investors that the
issuer may satisfy its delivery obligations for the final offering
circular electronically.\214\ As with registered offerings, we also
proposed aftermarket delivery obligations for dealers that would be
satisfied if the final offering circular is filed and available on
EDGAR and the appropriate notice was given by the dealer.\215\
---------------------------------------------------------------------------
\213\ Id.
\214\ See proposed Rule 254(a).
\215\ As proposed, a dealer would generally be required to
deliver a copy of the current offering circular to purchasers for
all sales that occur within 90 calendar days after qualification,
although this requirement would be satisfied when the final offering
circular is filed and available on EDGAR and the dealer has
otherwise complied with the obligation to deliver a notice of sales
to the purchaser not later than two business days after completion
of such sale. See proposed Rules 251(d)(2)(ii)-(iii).
---------------------------------------------------------------------------
Consistent with prior Commission releases on the use of electronic
media for delivery purposes, we proposed that ``electronic-only''
offerings of Regulation A securities would not be prohibited, but an
issuer and its participating intermediaries would have to obtain the
consent of investors to the electronic delivery of:
The preliminary offering circular and other information,
but not the final offering circular, in instances where, upon
qualification, the issuer plans to sell Regulation A securities based
on offers made using a preliminary offering circular; and
all documents and information, including the final
offering circular, when the issuer sells Regulation A securities based
on offers conducted during the post-qualification period using a final
offering circular.\216\
---------------------------------------------------------------------------
\216\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------
We further proposed to maintain the existing requirements in
Regulation A, which require dealers to deliver a copy of the current
offering circular to purchasers for sales that take place within 90
calendar days after qualification.\217\ We proposed to update and amend
Rule 251(d)(2)(i) \218\ to require issuers and participating broker-
dealers to deliver only a preliminary offering circular to prospective
purchasers \219\ at least 48 hours in advance of sale when a
preliminary offering circular is used during the prequalification
period to offer such securities to potential investors. We also
proposed to continue to require a final offering circular to accompany
or precede any written communication that constitutes an offer in the
post-qualification period.\220\
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\217\ See proposed Rule 251(d)(2)(iii).
\218\ 17 CFR 230.251(d)(2)(i) (2014).
\219\ See proposed Rule 251(d)(2)(i).
\220\ See proposed Rule 251(d)(1)(iii).
---------------------------------------------------------------------------
In addition to the revised delivery requirements discussed above,
we proposed to add a provision analogous to Rule 173,\221\ which would
require issuers, underwriters, and dealers, not later than two business
days after completion of a sale, to provide purchasers with a copy of
the final offering circular or a notice stating that the sale occurred
pursuant to a qualified offering statement.\222\ As proposed, the
notice must include the Web site address \223\ where the final offering
circular, or the offering statement of which such final offering
circular is part, may be obtained on EDGAR and contact information
sufficient to notify a purchaser how it may request and receive a final
offering circular from the issuer.\224\
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\221\ 17 CFR 230.173.
\222\ See proposed Rule 251(d)(2)(ii).
\223\ In the case of an electronic-only offering, the notice
must include an active hyperlink to the final offering circular or
to the offering statement of which such final offering circular is
part.
\224\ See proposed Rule 251(d)(2)(ii).
---------------------------------------------------------------------------
We further proposed to allow an issuer to withdraw an offering
statement, with the Commission's consent, if none of the securities
that are the subject of such offering statement has been sold and such
offering statement is not the subject of a Commission order temporarily
suspending a Regulation A exemption. Under the proposed rules, the
Commission also would be able to declare an offering statement
abandoned if the offering statement has been on file with the
Commission for nine months without amendment and has not become
qualified. These withdrawal and abandonment procedures are similar to
the ones that apply to registration statements under the Securities
Act.\225\
---------------------------------------------------------------------------
\225\ See Securities Act Rule 477, 17 CFR 230.477, and Rule 479,
17 CFR 230.479.
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
No commenters opposed the proposed requirement that issuers be
required to file offering statements and related material
electronically with the Commission on EDGAR, while two commenters
expressly supported such a requirement.\226\ One commenter recommended
only requiring preliminary or final offering circular delivery 48 hours
in advance of sale for initial public offerings and not for offerings
by issuers that are already subject to Tier 2 ongoing reporting
requirements.\227\ This commenter also recommended eliminating dealer
offering circular delivery requirements for Tier 2 issuers that are
subject to ongoing reporting.
---------------------------------------------------------------------------
\226\ See MCS Letter; OTC Markets Letter.
\227\ Paul Hastings Letter.
---------------------------------------------------------------------------
A few commenters opposed an access equals delivery model of final
offering circular delivery.\228\ These commenters raised concerns about
the perceived challenge of finding these materials on EDGAR and not
requiring delivery 48 hours in advance of sale in all circumstances.
---------------------------------------------------------------------------
\228\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------
One commenter recommended, in addition to requiring electronic
filing on EDGAR, requiring issuers to maintain a corporate Web site
where the public may access copies of all non-confidential filings in a
timely manner so that investors not familiar with EDGAR may access the
most complete information provided to the
[[Page 21822]]
Commission.\229\ In addition to suggested changes to the filing process
itself, several commenters encouraged the Commission to find ways to
reduce the staff's review time for offering statements.\230\
---------------------------------------------------------------------------
\229\ Ladd Letter 2.
\230\ Frutkin Law Letter; Heritage Letter (suggesting that the
review time needs to be reduced by two-thirds); Letter from Gregory
S. Fryer, Esq., Partner, Verrill Dana LLP, February 28, 2014
(``Verrill Dana Letter 1'') (recommending providing guidance to
issuers, staff training, and more discretion to the staff to make
materiality determinations and to work informally with issuers);
Letter from Ted J. Coombs, Chief Technology Officer, Workers On
Call, March 24, 2014 (``WOC Letter'').
---------------------------------------------------------------------------
c. Final Rules
(1) Filing Requirements
We are adopting provisions for electronic filing and delivery
requirements in the final rules for Regulation A substantially as
proposed.\231\ We agree with commenters that support requiring
electronic filing of offering and related materials and believe that
this requirement will ultimately benefit issuers and investors by
streamlining the offering process. As adopted, issuers must file their
Regulation A offering statements with the Commission electronically on
EDGAR.\232\ Further, as proposed, we are amending Form 1-A to consist
of the following three parts:
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\231\ In conjunction with the adoption of final rules for
electronic filing and delivery, we are making clarifying revisions
to the proposed rules that renumber some of the proposed provisions
in the final rules. See, e.g., Rule 251(e), (f) (originally proposed
Rules 252(c), (e), respectively).
\232\ See Rule 101(a)(vii), (xvii) of Regulation S-T, 17 CFR
232.101(a)(xvii); see also Rule 251(f). As proposed, and in
conjunction with this change, Item 101(c)(6) of Regulation S-T (17
CFR 232.101(c)(6)) is revised so that it no longer prohibits
electronic submission of filings related to Regulation A offerings.
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Part I: An eXtensible Markup Language (XML) based fillable
form, which captures key information about the issuer and its offering
using an easy to complete online form, similar to Form D, with drop-
down menus, indicator boxes or buttons, and text boxes, and assists
issuers in determining their ability to rely on the exemption. The XML-
based fillable form will provide a convenient means of assembling and
transmitting information to EDGAR, without requiring the issuer to
purchase or maintain additional software or technology; \233\
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\233\ Part I (Notification) of Form 1-A. As discussed more fully
in Section II.C.3.a. below, the cover page and Part I of current
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
---------------------------------------------------------------------------
Part II: A text file attachment containing the body of the
disclosure document and financial statements, formatted in HyperText
Markup Language (HTML) or American Standard Code for Information
Interchange (ASCII) to be compatible with the EDGAR filing system;
\234\ and
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\234\ Part II (Offering Circular) of Form 1-A. See discussion in
Section II.C.3.b. below.
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Part III: Text file attachments, containing the
signatures, exhibits index, and the exhibits to the offering statement,
formatted in HTML or ASCII to be compatible with the EDGAR filing
system.\235\
\235\ Part III (Exhibits) of Form 1-A. See discussion in Section
II.C.3.c. below.
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As proposed and adopted, all other documents required to be submitted
or filed with the Commission in conjunction with a Regulation A
offering, such as ongoing reports, must generally be submitted or filed
electronically on EDGAR.\236\ As materials will be available on EDGAR,
we do not see a need to separately require issuers to maintain a
corporate Web site where the public may access all non-confidential
filings. Issuers may, however, elect to provide the filings on their
Web site or to their EDGAR filing page. Consistent with current
Regulation A, there are no filing fees associated with the Regulation A
filing and qualification process.
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\236\ For a discussion on the ongoing reporting requirements,
see Section II.E. below.
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We believe the approach to electronic filing adopted today will be
both practical and useful for issuers of Regulation A securities,
investors in such securities, and other market participants. Issuers
will be able to maintain better control over their filing process,
reduce the printing costs associated with filings, obtain immediate
confirmation of acceptance of an offering statement, and ultimately
save time in the qualification process. Investors will gain real-time
access to the information contained in Regulation A filings.\237\ We
anticipate that the efficiency of the Regulation A market should
improve with the increased accessibility of information about
Regulation A issuers and offerings. Additionally, as with registered
offerings, electronic filing on EDGAR will allow for more efficient
storing, processing, and disseminating of Regulation A filings than
paper filings, which should improve the efficiency of the staff review
and qualification processes.
---------------------------------------------------------------------------
\237\ Investors would not, however, have immediate access to
non-public submissions of draft offering statements. See discussion
in Section II.C.2. below.
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Electronic filing also will facilitate the capture of important
financial and other information about Regulation A issuers and
offerings that will enable the Commission and market participants to
analyze any market that develops in Regulation A securities, including,
for example, information about issuer size, issuer location, key
financial metrics, summary information about securities offered and
offering amounts, the jurisdictions in which offerings take place, and
expenses associated with Regulation A offerings.\238\
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\238\ 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 that requiring EDGAR filing will impose some new
costs on issuers, as addressed more fully in the Economic Analysis
section of the release.\239\ We do not, however, believe that the
incremental cost associated with the EDGAR filing requirements
justifies maintaining a paper-only filing requirement. On the contrary,
we believe that the potential additional cost to issuers associated
with the EDGAR filing requirement should be minimal and electronic
filing on EDGAR would eliminate any processing delays and costs
otherwise associated with the current paper filing system, such as
printing or mailing costs.
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\239\ See Section III. below.
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(2) Delivery Requirements
We are adopting, as proposed, an access equals delivery model for
Regulation A final offering circulars when sales are made on the basis
of offers conducted during the prequalification period and the final
offering circular is filed and available on EDGAR. The expanded use of
the Internet and continuing technological developments suggest that we
should update the final offering circular delivery method for
Regulation A in a manner that is consistent with similar updates to
delivery requirements for registered offerings.\240\ Contrary to the
views of some commenters,\241\ we do not believe that access to EDGAR
generally has proven to be a challenge for investors in registered
offerings since the adoption of the Securities Offering Reform Release
in 2005. We also do not believe that it will be a challenge for
investors under Regulation A or raise investor protection concerns,
particularly in light of our final delivery requirements (including,
where applicable, the inclusion of hyperlinks to offering materials on
EDGAR that must be provided to investors by issuers and
intermediaries).\242\ Therefore, where sales of Regulation A securities
occur
[[Page 21823]]
after qualification on the basis of offers made using a preliminary
offering circular, issuers and intermediaries can presume that
investors have access to the Internet and may satisfy their delivery
requirements for the final offering circular by filing it on
EDGAR.\243\ Issuers are, however, required to include a notice in any
preliminary offering circular that will inform potential investors that
the issuer may satisfy its delivery obligations for the final offering
circular electronically.\244\
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\240\ See Securities Offering Reform, Rel. No. 33-8591.
\241\ See fn. 228 above.
\242\ See Rule 251(d)(2), Rule 254(a), and Rule 255(b) and (d).
\243\ Cf. Rel. No. 33-8591, at 244.
\244\ See Rule 254(a).
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Further, as proposed, ``electronic-only'' offerings of Regulation A
securities will be permitted under the final rules, provided that
issuers and intermediaries comply with relevant Commission
guidance.\245\ Specifically, in such offerings, an issuer and its
participating intermediaries must obtain the consent of investors to,
or otherwise be able to evidence the receipt of, the electronic
delivery of:
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\245\ An electronic-only offering is an offering in which
investors are permitted to participate only if they agree to accept
the electronic delivery of all documents and other information in
connection with the offering. See Rel. No. 34-37182 (May 9, 1996)
[61 FR 24644] (Use of Electronic Media by Broker-Dealers, Transfer
Agents and Investment Advisers for Delivery of Information), Rel.
No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic
Media), and Rel. No. 33-7233 (Oct. 6, 1995) [60 FR 53458] (Use of
Electronic Media for Delivery Purposes).
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The preliminary offering circular and information other
than the final offering circular, in instances where the issuer sells
Regulation A securities based on offers made using a preliminary
offering circular; and
all documents and information, including the final
offering circular, when the issuer sells Regulation A securities based
on offers made during the post-qualification period using a final
offering circular.
As we noted in the Proposing Release, in light of the proposed
requirements for electronic delivery and in order to be consistent with
requirements for registered offerings, we believe it appropriate to
permit dealers, during the aftermarket delivery period, to be deemed to
satisfy their final offering circular delivery requirements if such
document is filed and available on EDGAR.\246\ We are amending Rule
251(d)(2)(ii) of existing Regulation A to make clear that dealers, like
issuers and intermediaries, can also rely on the provisions for access
equals delivery.\247\ Additionally, the amendment clarifies that a
dealer can rely on access equals delivery for a final offering circular
provided it complies with the requirements of Rule 251(d)(2)(ii). This
clarifying amendment is necessary to avoid any confusion that the final
rules could be read to impose a double delivery requirement on dealers
during the aftermarket delivery period.
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\246\ See Proposing Release, at Section II.C.1.
\247\ See Rule 251(d)(2)(ii). Notwithstanding the final delivery
requirements, broker-dealers remain subject to the anti-fraud
provisions of Section 15 of the Exchange Act.
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Separately, we are modifying the terms of Rule 251(d)(2)(ii) to
make it more consistent with the dealer delivery requirements for
registered offerings under Securities Act Rule 174.\248\ As proposed,
the rules would have required dealers in all circumstances to deliver a
copy of the current offering circular to purchasers for sales that take
place within 90 calendar days after qualification.\249\ Consistent with
the suggestion of one commenter,\250\ we are revising the proposed
rules to more closely align the Regulation A delivery requirements with
those required in Securities Act Rules 174(b) and (d).\251\ We,
therefore, are adopting the proposed 90 calendar day dealer delivery
requirement, but eliminating the dealer delivery requirement when the
issuer is subject immediately prior to filing the offering statement to
Tier 2 ongoing reporting \252\ and reducing the length of the delivery
requirement to 25 calendar days after the later of the qualification
date of the offering statement or the first bona fide offering of
securities if the securities will be listed on a national securities
exchange.\253\ As adopted, the final rules reduce dealer aftermarket
delivery requirements, which should aid dealers in compliance with the
final rules.
---------------------------------------------------------------------------
\248\ While we have made clarifying revisions to proposed Rule
251(d)(2)(iii) and renumbered it as Rule 251(d)(2)(ii), the final
rule is consistent with Rule 174, as there is no need for an analog
to Rule 174(g), which covers the dealer delivery obligations in
registered offerings by blank check companies under Rule 174(g).
Blank check companies are ineligible issuers under Regulation A. See
Rule 251(b).
\249\ See proposed Rule 251(d)(2)(iii).
\250\ Paul Hastings Letter.
\251\ See 17 CFR 230.174(b), (d).
\252\ Rule 251(d)(2)(ii)(D); see also Securities Act Rule
174(b).
\253\ Rule 251(d)(2)(ii)(C); see also Securities Act Rule
174(d).
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The final rules also update and amend Rule 251(d)(2)(i) to align
with changes in the prospectus delivery requirements for registered
offerings that have occurred since these requirements were last updated
in Regulation A.\254\ We believe the delivery of the preliminary
offering circular to potential investors before they make an investment
decision on the basis of information provided during the
prequalification period remains an important investor protection that
the final rules should preserve, particularly in light of the proposed
expanded use of ``testing the waters'' solicitation materials to
include the period of time after non-public submission or filing of the
offering statement, as discussed further in Section II.D. below.\255\
We also recognize that updating and amending Regulation A's offering
circular delivery requirements will likely benefit market participants
by minimizing discrepancies between the requirements of broker-dealers
in Regulation A and registered offerings.
---------------------------------------------------------------------------
\254\ See Proposing Release, at Section II.C.1.
\255\ See Securities Offering Reform, Rel. No. 33-8591, at 245
(noting that access equals delivery is not appropriate for
preliminary prospectus delivery obligations in IPOs because it is
important for potential investors to be sent the preliminary
prospectus).
---------------------------------------------------------------------------
We therefore are amending, as proposed, Rule 251(d)(2)(i) to
require issuers and participating broker-dealers to deliver only a
preliminary offering circular to prospective purchasers \256\ at least
48 hours in advance of sale only when a preliminary offering circular
is used during the prequalification period to offer such securities to
potential investors.\257\ To make the final rules more consistent with
the requirements of Exchange Act Rule 15c2-8(b) for issuers who already
provide continuous, ongoing information to investors and the market,
the final rules do not require an issuer or its intermediaries to
deliver a preliminary offering circular at least 48 hours in advance of
sale where the issuer is already subject to a Tier 2 reporting
obligation. In such instances, however, the issuer and its
intermediaries will otherwise remain subject to the general delivery
requirements of the rules, including compliance with the requirements
for making offers pursuant to Rule 251(d)(1) and for including a
preliminary offering circular in any solicitation materials used after
filing the offering statement with the Commission pursuant to Rule 255.
As proposed and adopted, the delivery requirements under the final
rules apply to both issuers and
[[Page 21824]]
participating broker-dealers.\258\ We believe these delivery
requirements are an important investor protection that should apply to
issuers in advance of sale, in addition to their intermediaries, and is
consistent with current Regulation A.\259\ We are also adopting, as
proposed, the requirement that a final offering circular must accompany
or precede any written communications that constitute offers in the
post-qualification period.\260\
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\256\ Prospective purchasers include any person that has
indicated an interest in purchasing the Regulation A securities
before qualification, including, but not limited to, those investors
that respond to an issuer's solicitation materials. See Rule
251(d)(2)(i).
\257\ In accordance with time of sale provisions discussed in
Securities Offering Reform, see Rel. No. 33-8591, at p. 173 et seq.,
the final rules provide that the 48-hour delivery obligation must be
made in advance of ``sale'' rather than the ``mailing of the
confirmation of sale.'' See also Section II.D. below for a
discussion of the delivery requirements for solicitation materials
used after publicly filing the offering statement.
\258\ Issuers may rely on reasonable assurances of delivery from
participating broker-dealers to satisfy their delivery obligations.
\259\ See also 17 CFR 230.460 (Distribution of Preliminary
Prospectus in Registered Offerings). Additionally, with continued
improvements in information and communication technologies, we
believe direct public offerings (i.e., offerings conducted by an
issuer without the involvement of an underwriter) may become a more
attractive option for certain issuers. For that reason, it is
important that the advance preliminary offering circular delivery
requirements for participating broker-dealers apply equally to
issuers.
\260\ See Rule 251(d)(1)(iii). For written confirmations and
notices of allocation in the post-qualification period, issuers and
intermediaries may rely on the EDGAR filing of the final offering
circular to satisfy any delivery requirements that may apply under
Rule 251(d)(1)(iii). This approach is consistent with Rule 172(a) in
the context of registered offerings. For a discussion of Rule
172(a), see Securities Offering Reform, Rel. No. 33-8591, at 251.
---------------------------------------------------------------------------
In addition to the revised delivery requirements discussed above,
we are adopting, as proposed, final rules analogous to Securities Act
Rule 173.\261\ Rule 251(d)(2)(ii) requires issuers and participating
broker-dealers, not later than two business days after completion of
the sale, to provide the purchaser with a copy of the final offering
circular or a notice stating that the sale occurred pursuant to a
qualified offering statement.\262\ The notice must include the URL
\263\ where the final offering circular, or the offering statement of
which such final offering circular is part, may be obtained on EDGAR
and contact information sufficient to notify a purchaser where a
request for a final offering circular can be sent and received in
response.
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\261\ 17 CFR 230.173.
\262\ See Rule 251(d)(2)(ii).
\263\ As proposed, the final rules make clear that, in the case
of an electronic-only offering, the notice must include an active
hyperlink to the final offering circular or to the offering
statement of which such final offering circular is part. See Rule
251(d)(2)(ii)(E).
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(3) Withdrawal of an Offering Statement
The final rules will, as proposed, permit an issuer to withdraw an
offering statement, with the Commission's consent, if none of the
securities that are the subject of such offering statement have been
sold and such offering statement is not the subject of a Commission
order temporarily suspending a Regulation A exemption.\264\ The final
rules also permit, as proposed, the Commission to declare an offering
statement abandoned if the offering statement has been on file with the
Commission for nine months without amendment and has not become
qualified.\265\ These withdrawal and abandonment procedures are similar
to the ones that apply to issuers in registered offerings.
---------------------------------------------------------------------------
\264\ See Rule 259(a). As discussed in Section II.C.5. below in
the context of qualification, we are amending the delegated
authority of the director of the Division of Corporation Finance to
permit the Division to consent to the withdrawal of an offering
statement or to declare an offering statement abandoned, as opposed
to requiring the Commission to issue an order. Rule 30-1(b)(3), 17
CFR 200.30-1(b)(3).
\265\ See Rule 259(b).
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2. Non-Public Submission of Draft Offering Statements
a. Proposed Rules
We proposed to allow the non-public submission of draft offering
statements by issuers of Regulation A securities. As we noted in the
Proposing Release, such submissions would not be subject to the
statutorily-mandated confidentiality of draft initial public offering
(IPO) registration statements confidentially submitted by ``emerging
growth companies'' \266\ under Title I of the JOBS Act.\267\ Instead,
where an issuer seeks to non-publicly submit a draft offering
statement, the proposal indicated it could do so in compliance with the
Commission's Rule 83.\268\ We also sought comment on whether we should
instead adopt a new rule relating to confidential treatment of draft
offering statements in Regulation A.
---------------------------------------------------------------------------
\266\ Under Section 2(a)(19) of the Securities Act, an
``emerging growth company'' is defined as, among other things, an
issuer that had total annual gross revenues of less than $1 billion
during its most recently completed fiscal year. 15 U.S.C.
77b(a)(19).
\267\ Under Section 6(e)(2) of the Securities Act, confidential
submissions of draft registration statements by emerging growth
companies are protected from compelled disclosure under the Freedom
of Information Act (FOIA) (5 U.S.C. 552). There is no similar
provision under Section 3(b) of the Securities Act.
\268\ See proposed Rule 252(f); see also Proposing Release, at
fn. 212.
---------------------------------------------------------------------------
Under the proposed rules, issuers whose securities have not been
previously sold pursuant to a qualified offering statement under
Regulation A or an effective registration statement under the
Securities Act would be permitted to submit to the Commission a draft
offering statement for non-public review. As with the confidential
submission of draft registration statements by emerging growth
companies, all non-public submissions of draft offering statements
would be submitted via EDGAR. The initial non-public submission, all
non-public amendments thereto, and correspondence with Commission staff
regarding such submissions would be required to be publicly filed and
available on EDGAR as exhibits to the offering statement not less than
21 calendar days before qualification of the offering statement.\269\
Unlike emerging growth companies in registered offerings, which must
publicly file any confidential submissions not later than 21 calendar
days before a road show, the timing requirements for filing by issuers
seeking qualification under Regulation A would not depend on whether or
not the issuer conducts a road show.
---------------------------------------------------------------------------
\269\ See proposed Rule 252(f).
---------------------------------------------------------------------------
b. Comments on Proposed Rules
Commenters were generally supportive of the proposed non-public
submission process for Regulation A offerings.\270\ One commenter
recommended keeping all filings confidential other than the final
qualified version and possibly any interim version actually used in
conjunction with solicitation materials.\271\ Another commenter
recommended requiring the inclusion of a legend on non-public offering
statements so that the confidentiality of such submissions would be
automatic, without the need for a separate confidentiality
request,\272\ while another commenter recommended treating the proposed
non-public submissions the same way that draft registration statements
are treated under Title I of the JOBS Act.\273\
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\270\ BIO Letter; McCarter & English Letter; Paul Hastings
Letter; Richardson Patel Letter.
\271\ Verrill Dana Letter 1.
\272\ McCarter & English Letter. The Proposing Release indicated
that issuers seeking to non-publicly submit offering statements
should submit such statements under cover of the Commission's Rule
83, 17 CFR 200.83, which deals with confidential treatment requests.
\273\ Milken Institute Letter (recommending that the Commission
seek Congressional authority, if necessary, to protect these
submissions from requests under the FOIA.
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c. Final Rules
We are adopting rules that will, as proposed, provide for the
submission of non-public draft offering statements under Regulation
A.\274\ In a change from the proposal, however, the final rules do not
require an issuer seeking non-public staff review of its draft offering
statement to submit such draft pursuant to the Commission's Rule 83.
Instead, all such draft offering statements under Rule 252(a) shall
receive non-public review. The final rules only permit
[[Page 21825]]
issuers whose securities have not been previously sold pursuant to a
qualified offering statement under Regulation A or an effective
registration statement under the Securities Act to submit to the
Commission a draft offering statement for non-public review. Consistent
with the treatment of draft registration statements in registered
offerings by emerging growth companies, a non-publicly submitted
offering statement must be substantially complete upon submission in
order for staff of the Division of Corporation Finance to begin its
review. All non-public submissions of draft offering statements must be
submitted via EDGAR, and the initial non-public submission, all non-
public amendments thereto, and correspondence submitted by or on behalf
of the issuer to the Commission staff regarding such submissions must
be publicly filed and available on EDGAR as exhibits to the offering
statement not less than 21 calendar days before qualification of the
offering statement.
---------------------------------------------------------------------------
\274\ See Rule 252(d).
---------------------------------------------------------------------------
We do not believe, as was suggested by at least one commenter,\275\
that requiring issuers to file only the qualified version of the
offering statement and any earlier versions used in conjunction with
solicitation materials would provide investors with sufficient
disclosure to make informed investment decisions. Further, in light of
the preemption of state securities laws registration requirements for
Tier 2 offerings in the final rules,\276\ the 21 calendar day filing
requirement will insure that state securities regulators are able to
require first-time issuers that non-publicly submit draft offering
statements to file such material with them for a minimum of 21 calendar
days before any potential sales to investors in their respective
states.\277\ Unlike emerging growth companies, the timing requirement
for filing by issuers seeking qualification under Regulation A does not
depend on whether or not the issuer conducts a road show or tests the
waters in a contemplated offering before qualification.\278\
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\275\ Verrill Dana Letter 1.
\276\ See discussion in Section II.H. below.
\277\ Notwithstanding the final rules that provide for the
preemption of state securities laws' registration and qualification
requirements of Tier 2 offerings, state securities regulators
retain, among other things, their authority to require the filing
with them of any documents filed with the Commission. See, e.g.,
Section 18(c)(2) of the Securities Act. The timing of filing
requirements at the state level, however, may reduce the time period
in which an offering statement and related materials are on file
with the state before Commission qualification.
\278\ See Section II.D. below for a discussion on the timing and
requirements for the use of solicitation materials under Rule 255.
Regulation A's testing the waters provisions encompass a variety of
activities, including, but not limited to, activities that could
constitute a traditional road show.
---------------------------------------------------------------------------
Unlike Title I of the JOBS Act, Title IV does not provide for
confidential submissions of offering statements under Regulation
A.\279\ Consequently, the requirements of the FOIA are controlling on
the scope of the Commission's ability to adopt confidentiality rules
for non-publicly submitted offering statements. We are therefore not
adopting any specific additional rule or requirement for non-public
submissions that would deem such submissions ``confidential.'' However,
where an issuer seeks confidential treatment for non-publicly submitted
offering materials, or any portion thereof, for which it believes an
exemption from the FOIA exists, it should continue to do so in
compliance with the Commission's Rule 83.\280\
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\279\ See fn. 267 above.
\280\ See 17 CFR 200.83. Where an issuer seeks confidential
treatment of any information included in a publicly filed offering
statement or related materials, it should do so in compliance with
Securities Act Rule 406. See 17 CFR 230.406. See Rule 251(e)
(confidential treatment).
---------------------------------------------------------------------------
While non-publicly submitted offering statements must be submitted
electronically on EDGAR, the Commission and its staff will not make
such offering statements publicly available on EDGAR as a matter of
course.\281\ The treatment of non-public submissions in this regard is
consistent with the Commission staff's approach to the public
availability of draft registration statements submitted by foreign
private issuers for registered offerings.\282\ As there is no statutory
basis for withholding non-public submissions from production, absent an
exemption from the FOIA,\283\ issuers that rely on our provisions for
non-public submission should be aware that the Commission may, under
certain circumstances, be compelled to provide such materials to a
requesting party (or to otherwise make them publicly available) before
the date on which an issuer would otherwise have been required to
publicly file on EDGAR.
---------------------------------------------------------------------------
\281\ This is in contrast to publicly filed draft and final
offering statements that will be made automatically available on
EDGAR at the time of filing.
\282\ See Non-Public Submissions from Foreign Private Issuers,
available at: http://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm.
\283\ See 5 U.S.C. 552.
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3. Form and Content
Section 3(b)(2)(G)(i) of the Securities Act identifies certain
disclosure requirements that the Commission may require for offerings
relying on the Regulation A exemption. The requirements largely
coincide with the existing offering statement disclosure requirements
of Form 1-A, such as financial statements,\284\ a description of the
issuer's business operations,\285\ financial condition,\286\ and use of
investor funds.\287\ The proposed rules, comments received on the
proposed rules, and the final rules being adopted today for each of
Part I, II, and III of Form 1-A are discussed in detail below.
---------------------------------------------------------------------------
\284\ See Form 1-A, Part II, Part F/S (2014). Section
3(b)(2)(G)(i) also contemplates that the Commission may require
issuers to submit audited financial statements. Currently, the
financial statements required under Regulation A need to be audited
only if the issuer has them otherwise available.
\285\ Id., Part II, e.g., Model B, Item 6 (Description of
Business).
\286\ Id., e.g., Part F/S.
\287\ Id., e.g., Item 5 (Use of Proceeds to Issuer).
---------------------------------------------------------------------------
a. Part I (Notification)
(1) Proposed Rules
Part I of Form 1-A serves as a notice of certain basic information
about the issuer and its proposed offering, which also helps to confirm
the availability of the exemption.\288\ As proposed, Part I of Form 1-A
would be converted into an online XML-based fillable form with
indicator boxes or buttons and text boxes and would be filed online
with the Commission.\289\ The information would be publicly available
on EDGAR, as an online data cover sheet, but not otherwise required to
be distributed to investors.\290\
---------------------------------------------------------------------------
\288\ Rel. No. 33-6275 [46 FR 2637], at 2638.
\289\ As proposed, the cover page to current Form 1-A would be
eliminated as a standalone requirement, while portions of the
information required on the cover page would be combined with Item 1
of Part I of Form 1-A in the XML fillable form.
\290\ The Commission would make the information available on
EDGAR in a format that provides normal text for reading and XML-
tagged data for analysis. With the exception of the items that focus
issuers on eligibility to use Regulation A, much of the information
called for in the XML-based fillable form is also required to be
disclosed to investors in Part II of Form 1-A.
---------------------------------------------------------------------------
(2) Comments on Proposed Rules
We received several comments with recommendations specific to
certain items on Part I of Form 1-A. With respect to Item 1 of Part I,
one commenter recommended defining the term ``publicly traded,''
eliminating the ``Financial Statements'' section of Item 1 of Part I or
conforming it to the existing disclosures required by Item 301 of
Regulation S-K, or conforming the line item descriptions in Item 1 to
those in Regulation S-X.\291\ Other commenters recommended clarifying
that an auditor and related fees need not
[[Page 21826]]
be listed in Part I if audited financial statements are not
included.\292\ With respect to Item 5 of Part I, another commenter
supported the proposal's inclusion of checkboxes specifying the
jurisdictions in which the securities are intended to be offered,\293\
while a different commenter recommended expanding the list of
jurisdictions so that issuers could indicate the Canadian provinces in
which they intended to conduct their offerings.\294\ With respect to
Item 6 of Part I, one commenter recommended defining the term
``affiliated issuer.'' \295\ This commenter recommended defining the
term to refer to entities controlled by the issuer, noting that
otherwise it may require disclosure by parent and sister entities,
which is information unrelated to the capitalization of the issuer.
---------------------------------------------------------------------------
\291\ Letter from Ernst & Young LLP, March 24, 2014 (``E&Y
Letter'').
\292\ Letter from Cynthia M. Fornelli, Executive Director,
Center for Audit Quality, March 24, 2014 (``CAQ Letter''); Letter
from Deloitte & Touche LLP, March 24, 2014 (``Deloitte Letter'');
E&Y Letter; Letter from PricewaterhouseCoopers LLP, March 24, 2014
(``PwC Letter'').
\293\ NASAA Letter 2.
\294\ Letter from Mike Liles, Jr., Attorney, Karr Tuttle
Campbell, January 17, 2014 (``Karr Tuttle Letter'').
\295\ Paul Hastings Letter.
---------------------------------------------------------------------------
Other commenters recommended including additional disclosure in
Part I. Two of these commenters recommended requiring issuers to
include their Web site address and the jurisdiction of their principal
place of business.\296\ These commenters also objected to removing the
disclosure and contact information for persons that are covered by the
bad actor rules.\297\
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\296\ NASAA Letter 2; WDFI Letter. These commenters requested
that this information be included in XBRL format, rather than XML.
We note that XBRL is a form of XML, and generally requires labeling
information with data ``tags'' rather than providing the information
through fillable forms.
\297\ NASAA Letter 2; WDFI Letter.
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(3) Final Rules
With the exception of technical clarifications, we are adopting
provisions for Part I as proposed. The notification in Part I of Form
1-A will require disclosure in response to the following items:
Item 1. (Issuer Information) will require information
about the issuer's identity, industry, number of employees, financial
statements and capital structure, as well as contact information.\298\
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\298\ Some of the information in Item 1, such as the name of the
issuer, jurisdiction of incorporation, contact information, primary
Standard Industrial Classification Code Number, and I.R.S. Employer
Identification Number is already required to be included on the
cover page of Form 1-A.
---------------------------------------------------------------------------
Item 2. (Issuer Eligibility) will require the issuer to
certify that it meets various issuer eligibility criteria.
Item 3. (Application of Rule 262 (``bad actor''
disqualification and disclosure)) will require the issuer to certify
that no disqualifying events have occurred and to indicate whether
related disclosure will be included in the offering circular (i.e.,
events that would have been disqualifying, but occurred before the
effective date of the amendments to Regulation A).\299\
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\299\ See discussion of 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) will include indicator boxes or
buttons and text boxes eliciting information about the offering
(including whether the issuer is conducting a Tier 1 or Tier 2
offering, amount and type of securities offered, proposed sales by
selling securityholders and affiliates, type of offering, estimated
aggregate sales of any concurrent offerings pursuant to Regulation A,
anticipated fees in connection with the offering, and the names of
audit and legal service providers, underwriters, and certain others
providing services in connection with the offering).
Item 5. (Jurisdictions in Which Securities are to be
Offered) will include information about the jurisdiction(s) in which
the securities will be offered.
Item 6. (Unregistered Securities Issued or Sold Within One
Year) will require disclosure about unregistered issuances or sales of
securities within the last year, but will not include a requirement to
provide the names and identities of the persons to whom unregistered
securities were issued.
We are adopting, as proposed, further changes to Part I of Form 1-
A. We are eliminating Item 1 (Significant Parties) of current Part I,
which requires disclosure of the names, business address, and
residential address of all the persons covered by current Rule 262.
Instead, we are requiring only narrative disclosure in Part II of Form
1-A when the issuer has determined that a relevant party has a
disclosable, but not disqualifying, ``bad actor'' event.\300\ We also
are eliminating Item 3 of current Part I relating to affiliate sales,
because we are eliminating the current restrictions on affiliate
resales under Rule 251(b).\301\ Information about the amount of
expected secondary sales and the existence of affiliate sales in the
offering, however, will continue to be disclosed in Item 4. Item 6
(Other Present or Proposed Offerings) and Item 9 (Use of a Solicitation
of Interest Document) of current Part I will be incorporated into Item
4 (Summary Information Regarding the Offering and Other Current or
Proposed Offerings). We also are eliminating Item 7 (Marketing
Arrangements) and Item 8 (Relationship with Issuer of Experts Named in
Offering Statement) of current Part I, as disclosure of this
information is required in Part II (Offering Circular).
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\300\ See discussion in Section II.G. below.
\301\ The primary purpose of Item 3 (Affiliate Sales) in Part I
of Form 1-A (2014) is to ensure compliance with certain restrictions
on affiliate resales under Rule 251(b). See discussion in Section
II.B.3. above.
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Some of the technical changes from the proposed rules are non-
substantive procedural revisions to the form that are needed to conform
the form with the technical requirements of EDGAR, while the others
will, as suggested by commenters, provide clarifications to the terms
and requirements of Part I.
We do not, however, believe that the additional disclosure items
suggested by some commenters,\302\ such as the issuer's Web site
address and the jurisdiction of the issuer's principal place of
business, are necessary additional disclosures in Part I of Form 1-A.
As proposed and adopted, Item 1 (Issuer Information) of Part I requires
issuers to disclose the location of their principal executive offices,
while Item 1 (Cover Page of Offering Circular) of Part II requires
issuers to provide investors with their Web site address, if the issuer
has a Web site. In light of these required disclosures, we do not
believe that the additional suggested disclosure items for Part I are
necessary or would provide investors with any additional relevant
information about the issuer. Additionally, notwithstanding the view of
some commenters,\303\ we do not believe that the disclosure
requirements for the application of Rule 262 (Disqualification
Provisions) in Item 3 to Part I of Form 1-A need to include
descriptions and addresses of persons that trigger disqualification for
several reasons. An issuer that has a disqualified person involved in
its offering will not be eligible to conduct a Regulation A offering,
issuers will have to certify their compliance with Rule 262, and, with
the exception of the addresses of covered persons, much of the
requested disclosure, as it applies to persons that would have been
disqualified but whose conduct occurred before effectiveness of the
final rules or have received a waiver from disqualification,\304\ will
be required in Part II of the offering statement.\305\
[[Page 21827]]
Therefore, as proposed and adopted, the final rules for Part I of Form
1-A no longer require the disclosure of such information.
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\302\ NASAA Letter 2; WDFI Letter.
\303\ Id.
\304\ Rule 262(b)(1)-(2).
\305\ See paragraph (a)(2) to Part II of Form 1-A. Additionally,
underwriters, those receiving sales commissions and finders' fees,
promoters, counsel, executive officers, directors, and significant
securityholders, among others, must be identified in the offering
statement in most instances. See, e.g., Item 4 of Part I and Items
1, 10, and 11 of the Offering Circular, Part II of Form 1-A.
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Consistent with a comment received,\306\ we are making technical
amendments to the financial statement requirements of Item 1 (Issuer
Information) of Part I to clarify and require the use of certain
industry-specific terminology and, wherever possible, to use
terminology that is consistent with Regulation S-X and GAAP. These
changes are designed to minimize potential confusion on the part of
issuers in the banking and insurance industries that could result from
the use of more general financial accounting terminology. We disagree,
however, with the suggestion that we eliminate the financial statement
section.\307\ As we noted in the Proposing Release, the disclosure of
this type of information will provide the Commission (and market
participants) with more information about the Regulation A market as it
develops to use as it considers potential changes to the regulation in
the future. We also believe that the disclosure of this information
will provide relevant and useful information about issuers and their
offerings to investors and market participants that will help to
facilitate informed investment decisions. We do not anticipate that the
disclosure of financial information in response to Item 1 to Part I of
Form 1-A will materially alter the compliance obligations of issuers
given that the requirements draw from disclosure already required in
the financial statements included in the offering circular.
Additionally, we are revising Item 1 to require issuers to provide up
to two email addresses to which the Commission's staff may send comment
letters relating to an offering statement, rather than making this
optional as proposed. The email addresses, however, will no longer be
disseminated with the filings. We believe this change will result in
faster reviews of offering statements by the Commission's staff.\308\
Finally, consistent with the concerns underlying a comment we received,
we recognize that the use of the term ``publicly traded'' in the
outstanding securities table of Item 1 may be confusing in the context
of a Regulation A offering.\309\ Accordingly, we have revised Item 1 to
only request the name of the trading center or quotation medium, if
any, for outstanding securities.
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\306\ E&Y Letter.
\307\ Id.
\308\ In the review of registered offerings the Commission's
staff will call filers to obtain email addresses so as to issue
comment letters electronically. Depending on the responsiveness of
the filer, this can be a time consuming process.
\309\ See E&Y Letter.
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Consistent with the views of several commenters,\310\ we are
clarifying that in the fee table included in Item 4 of Part I (Summary
Information Regarding the Offering and Other Current or Proposed
Offerings), auditor fees only need to be disclosed when the issuer is
providing audited financial statements because, for example, an auditor
might not be used for a Tier 1 offering.\311\ This and similar items in
the fee table could be left blank if not applicable and responses could
be clarified in the text box following the table.
---------------------------------------------------------------------------
\310\ See fn. 292 above.
\311\ Disclosure is only required in the fee table to the extent
applicable fees were incurred by the issuer in connection with the
offering.
---------------------------------------------------------------------------
As suggested by one commenter,\312\ we are expanding the list of
jurisdictions in Item 5 (Jurisdiction in Which Securities are to be
Offered) so that issuers can indicate the Canadian provinces in which
they intend to conduct their offerings.\313\
---------------------------------------------------------------------------
\312\ Karr Tuttle Letter.
\313\ Item 5 of Part I of proposed Form 1-A did not include
Canadian provinces, despite Canadian issuers being eligible issuers.
Item 5, as adopted, corrects the form for Canadian issuers or for
offerings that contemplate offers or sales in Canada.
---------------------------------------------------------------------------
Finally, in response to one comment,\314\ we are clarifying, in
this release, that the scope of the term ``affiliated issuer'' in
proposed Item 6 of Part I is only meant to include affiliates of the
issuer that are issuing securities in the same offering for which
qualification is currently being sought under Regulation A. We believe
this clarification is necessary in the final rules in order to avoid
potential confusion among issuers as to the scope of the definition, in
light of the broader definition of ``affiliate'' as it appears in
Securities Act Rule 405.\315\
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\314\ Paul Hastings Letter.
\315\ Rule 405 defines ``affiliate'' to include, among other
things, persons controlling the issuer or under common control with
the issuer. 17 CFR 230.405.
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b. Part II (Offering Circular)
(1) Narrative Disclosure
(a) Proposed Rules for Narrative Disclosure
Part II (Offering Circular) in existing Form 1-A provides issuers
with three options for their narrative disclosure: Model A, Model B,
and Part I of Form S-1.\316\ We proposed to eliminate the Model A
question-and-answer format as a disclosure option, to update and retain
Model B as a disclosure option (renaming it ``Offering Circular''), and
to continue to permit issuers to rely on Part I of Form S-1 to satisfy
the disclosure obligations of Part II of Form 1-A.\317\
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\316\ Non-corporate issuers are not permitted to use Model A.
\317\ See Proposing Release, at Section II.C.3.
---------------------------------------------------------------------------
We further proposed to create new requirements for audited
financial statements and for a section containing management's
discussion and analysis (MD&A) of the issuer's liquidity, capital
resources, and results of operations.\318\ As proposed, issuers that
have not generated revenue from operations during each of the three
fiscal years immediately before the filing of the offering statement
would be required to describe their plan of operations for the 12
months following qualification of the offering statement, including a
statement about whether, in the issuer's opinion, it will be necessary
to raise additional funds within the next six months to implement the
plan of operations.\319\
---------------------------------------------------------------------------
\318\ See Proposing Release, at Section II.C.3(b)(1).
\319\ See Item 9(c) of Offering Circular, Part II of proposed
Form 1-A.
---------------------------------------------------------------------------
Consistent with the treatment of issuers in registered offerings,
we further proposed to permit issuers to incorporate by reference into
Part II of Form 1-A certain items previously submitted or filed on
EDGAR, regardless of whether they were provided pursuant to Regulation
A disclosure requirements. As proposed, incorporation by reference
would be limited to documents publicly submitted or filed under
Regulation A and issuers would have to be subject to the ongoing
reporting obligations for Tier 2 offerings.\320\ Issuers would be
required to describe the information incorporated by reference, and
include a separate hyperlink to the relevant document on EDGAR, which
need not remain active after the filing of the related offering
statement.
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\320\ Issuers following the Offering Circular disclosure model
would be permitted to incorporate by reference Items 2 through 14,
whereas issuers following the narrative disclosure in Part I of Form
S-1 would be permitted to incorporate by reference Items 3 through
11 (other than Item 11(e)) of Part I of Form S-1. See General
Instruction III to proposed Form 1-A. As with Model B, the item
numbers in the Offering Circular format of proposed Part II of Form
1-A and Part I of Form S-1 do not align.
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(b) Comments on Proposed Rules
Several commenters recommended against the proposed elimination of
the Model A disclosure format, and instead recommended that the
Commission retain an updated version of the
[[Page 21828]]
format.\321\ Two of these commenters recommended including a Model A
disclosure format that reflects the most recent version of NASAA's Form
U-7.\322\ One commenter recommended retaining existing Form 1-A with
minor changes until such time as the Commission and NASAA could develop
an improved form.\323\ Six commenters, however, suggested that the
Commission eliminate Model A and the proposed Offering Circular
disclosure formats and instead recommended requiring disclosure by
reference to Regulation S-K (with reduced disclosure requirements in
some instances).\324\ These commenters believed that such a change
would increase efficiency and comparability. One of these commenters
was concerned that differences between Items 303 and 402 of Regulation
S-K and the comparable disclosure requirements of the Offering Circular
format might cause confusion.\325\ Two commenters recommended requiring
REITs to incorporate certain of the items contained in Industry Guide 5
and Form S-11.\326\
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\321\ BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill
Dana Letter 1; WDFI Letter.
\322\ Karr Tuttle Letter; Verrill Dana Letter 1.
\323\ NASAA Letter 2.
\324\ Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter
2 (recommending the change only to the extent that the Commission
believed it would increase the speed of staff reviews); McCarter &
English Letter; WR Hambrecht + Co Letter.
\325\ E&Y Letter.
\326\ ABA BLS Letter; MoFo Letter.
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Several commenters had specific recommendations on disclosure
requirements. Four commenters recommended that the Commission find a
way to require more concise risk factor disclosure.\327\ One of these
commenters recommended possibly imposing a limit on the number of risk
factors or guidance to avoid repetition and emphasizing that disclosure
should not be repeated throughout the offering circular.\328\ Two
commenters recommended expanding the dilution disclosure requirement in
the Offering Circular format's Item 4.\329\ As proposed, Item 4 only
requires disclosure of any material disparity between the public
offering price and the effective cash cost to insiders over the past
year. These commenters recommended removing the one year restriction.
One commenter recommended focusing the disclosure requirements in the
offering statement on valuation assessments and a discussion of
management's expectations about the company's future performance,
including projections.\330\ Another commenter recommended requiring
disclosure of the names of ``those holding more than 20% of shares''
and a description of the ownership and capital structure, including
descriptions of how the exercise of rights by principal shareowners
could negatively affect the purchasers of shares being offered.\331\
Two commenters recommended reducing and clarifying the disclosure
obligations for executive compensation and management's discussion and
analysis for smaller offerings.\332\ One commenter recommended
requiring disclosure regarding the existence of a code of ethics and
corporate governance principles in a manner that would encourage
issuers to adopt internal controls.\333\
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\327\ CFIRA Letter 1; MoFo Letter; SVB Financial Letter; WR
Hambrecht + Co Letter.
\328\ WR Hambrecht + Co Letter.
\329\ NASAA Letter 2; WDFI Letter.
\330\ WR Hambrecht + Co Letter (indicating that, absent this
requirement, such information would be shared orally by management
or research analysts with only the biggest investors).
\331\ CFA Institute Letter.
\332\ Letter from Rutheford B. Campbell, Jr., Spears-Gilbert
Professor of Law, University of Kentucky, March 5, 2014 (``Campbell
Letter''); MoFo Letter (recommending that the Commission reduce and
clarify the disclosure obligations for executive compensation and
management's discussion and analysis by eliminating the need to
repeat information already required to be included in the financial
statements, reducing the number of years of business experience
disclosure required to be included and clarifying the instructions
of the executive compensation section).
\333\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
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(c) Final Rules for Narrative Disclosure
With the exception of clarifying changes, certain additional scaled
disclosure items applicable to Tier 1 offerings, and additional
guidance to issuers designed to streamline disclosure, we are adopting
final rules for narrative disclosure in Form 1-A substantially as
proposed. As adopted, Offering Circular disclosure in Part II of Form
1-A will cover: \334\
---------------------------------------------------------------------------
\334\ Financial statements disclosure requirements for Part F/S
of Form 1-A are discussed in Section II.C.3.b(2)(c). below.
---------------------------------------------------------------------------
Basic information about the issuer and the offering,
including identification of any underwriters and disclosure of any
underwriting discounts and commissions (Item 1: Cover Page of Offering
Circular);
Table of Contents (Item 2);
The most significant factors that make the offering
speculative or substantially risky (Item 3: Summary and Risk Factors);
Material disparities between the public offering price and
the effective cash costs for shares acquired by insiders during the
past year (Item 4: Dilution);
Plan of distribution for the offering and disclosure
regarding selling securityholders (Item 5: Plan of Distribution and
Selling Securityholders);
Use of proceeds (Item 6: Use of Proceeds to Issuer);
Business operations of the issuer for the prior three
fiscal years (or, if in existence for less than three years, since
inception) (Item 7: Description of Business);
Material physical properties (Item 8: Description of
Property);
Discussion and analysis of the issuer's liquidity and
capital resources and results of operations through the eyes of
management covering the two most recently completed fiscal years and
interim periods, if required; and, for issuers that have not received
revenue from operations during each of the three fiscal years
immediately before the filing of the offering statement (or since
inception, whichever is shorter), the plan of operations for the 12
months following qualification of the offering statement, including a
statement about whether the issuer anticipates that it will be
necessary to raise additional funds within the next six months (Item 9:
Management's Discussion and Analysis of Financial Condition and Results
of Operations);
Identification of directors, executive officers and
significant employees with a discussion of any family relationships
within that group, business experience during the past five years, and
involvement in certain legal proceedings during the past five years
(Item 10: Directors, Executive Officers and Significant Employees);
Group-level executive compensation disclosure for the most
recent fiscal year for the three highest paid executive officers or
directors with Tier 2 requiring individual disclosure of the three
highest paid executive officers or directors (Item 11: Compensation of
Directors and Executive Officers);
Beneficial ownership of voting securities by executive
officers, directors, and 10% owners (Item 12: Security Ownership of
Management and Certain Securityholders);
Transactions with related persons, promoters and certain
control persons (Item 13: Interest of Management and Others in Certain
Transactions);
The material terms of the securities being offered (Item
14: Securities Being Offered); and
Any events that would have triggered disqualification of
the offering under Rule 262 if the issuer could not
[[Page 21829]]
rely on the provisions in Rule 262(b)(1).\335\
---------------------------------------------------------------------------
\335\ See discussion of the final disqualification provisions in
Section II.G. below. The final rules require issuers to provide this
``bad actor'' disclosure even if it elects to follow the Part I of
Form S-1 disclosure format.
---------------------------------------------------------------------------
The final rules eliminate Model A as a disclosure format for
Regulation A offerings, as proposed. While some commenters suggested
that the Commission should preserve Model A as an additional disclosure
format for Part II of Form 1-A or update existing Model A with NASAA's
more recent Form U-7, we are not persuaded that a question-and-answer
format should be retained in the final rules. As we noted in the
Proposing Release, the Model A disclosure format has historically been
used less frequently, and resulted in less-uniform disclosure and a
longer time to qualification than the Model B disclosure format.\336\
We do not believe that the use of Form U-7, which is largely similar to
Model A and is also in a question-and-answer format, will alter this
result. While the question-and-answer disclosure format does provide
issuers with additional flexibility, we believe that the Offering
Circular disclosure format (formerly called Model B) and Part I of
Forms S-1 or S-11 provide issuers with sufficient flexibility in
choosing their disclosure format without any of the potential delays or
uniform disclosure issues associated with Model A, either currently or
even if it is updated with Form U-7. We are further concerned that a
question-and-answer format may not best serve the interests of
investors in Regulation A offerings by providing them with less-uniform
disclosure in a potentially unfamiliar format. Additionally, we are
concerned that a question-and-answer format may incorrectly lead
issuers to believe that, despite the guidance contained in the form
itself, less complete disclosure is required under this format, thereby
causing unnecessary delays in the qualification process. Lastly, and
particularly with respect to Tier 2 offerings, we do not believe that a
question-and-answer format is appropriate for issuers and investors in
larger-sized offerings that generally benefit from disclosure that is
comparable between offerings in format and information disclosed. For
similar reasons, we do not believe that this format is appropriate in
offerings of any size by issuers that seek to foster potential trading
in the secondary markets.\337\
---------------------------------------------------------------------------
\336\ See Proposing Release, at Section II.C.3.
\337\ See Section II.E. below for a discussion of the final
rules for ongoing reporting.
---------------------------------------------------------------------------
As proposed, the final rules will require issuers to provide
disclosure in Part II of Form 1-A that follows the Offering Circular or
Part I of Form S-1 disclosure format. Additionally, we agree with
commenters that certain additional disclosure requirements may be
appropriate for offerings by REITs and similar issuers. The final
rules, therefore, also permit issuers to follow, in addition to the
Offering Circular and Part I of Form S-1 formats, the form disclosure
requirements of Part I of Form S-11.\338\ An issuer may, however, only
use Part I of Form S-11 if the securities are eligible to be registered
on that form. As proposed and adopted with respect to disclosure under
Part I of Form S-1, issuers following Part I of Form S-11 may follow
smaller reporting company narrative disclosure requirements if they
meet the definition of that term in Securities Act Rule 405.\339\
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\338\ As proposed, issuers must choose one format to follow for
the offering circular and may not combine items from different
formats. See General Instruction II to proposed and final Form 1-A.
In order to avoid confusion and to facilitate the review of offering
circulars by investors and the Commission's staff, the final rules
will also require issuers to indicate on the offering circular cover
page which format they are following. See Part II(a)(1) of Form 1-A.
\339\ 17 CFR 230.405.
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Contrary to the suggestions of some commenters, we are not adopting
rules that would limit the number of risk factors disclosed. While we
appreciate the concern that certain issuers and their advisors may take
an overly cautious approach to the application of our disclosure
requirements resulting in numerous risk disclosures, the decision as to
the appropriate mix of information that should be disclosed to
investors must be based on the particular facts and circumstances of
each company. We do not believe that a limit on risk factor disclosure
is an appropriate substitute for the judgments of issuers and their
advisors. A form-based limitation on the number of risk factors, beyond
the guidance in Item 3 of Part II, could lead to incomplete disclosure
that may place investors at a higher risk of potential loss and issuers
at a higher risk for potential litigation if it results in appropriate
risk factors being excluded.
Further, we believe that certain other commenter concerns and
suggestions as to specific narrative disclosures are already
appropriately addressed by the final rules. For example, one commenter
suggested that we require disclosure of the names of those holding more
than 20% beneficial ownership of the issuer and a description of the
issuer's ownership and capital structure, including descriptions of the
exercise of rights of principal shareholders.\340\ The final rules
substantially address these topics. Item 12 of the Offering Circular,
as proposed and adopted, requires disclosure relating to more than 10%
beneficial ownership and Item 14, which is adopted as proposed,
requires disclosure of the terms of all classes of outstanding capital
stock.
---------------------------------------------------------------------------
\340\ CFA Institute Letter.
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As adopted, the Offering Circular includes disclosure based on
disclosure guidelines set forth in the Securities Act Industry Guides
as well as guidance applicable to limited partnerships and limited
liability companies.\341\ As suggested by commenters,\342\ in order to
create more flexibility in disclosure matters for smaller issuers, we
are adding a materiality threshold for disclosure as it relates to time
and dollar expenditures on research and development.\343\ Additionally,
the final rules require issuers to provide financial statements, which
in the case of Tier 2 offerings must be audited,\344\ as well as a
section on management's discussion and analysis (MD&A) of the issuer's
liquidity, capital resources, and results of operations.\345\ We are
amending the MD&A disclosure requirements in Item 9 to align more
closely with the language in Regulation S-K that applies to domestic
registrants \346\ and smaller reporting companies.\347\ Consistency
with Regulation S-K in this regard may assist companies with compliance
with the rules for registered offerings to the extent Tier 2 issuers
eventually become Exchange Act reporting companies, while also making
sure that Regulation A issuers do not have a greater disclosure
obligation than registered
[[Page 21830]]
domestic issuers.\348\ Further, consistent with the proposed rules,
issuers that have not generated revenue from operations during each of
the three fiscal years immediately before the filing of the offering
statement (or since inception, whichever is shorter) will be required
to describe their plan of operations for the 12 months following
qualification of the offering statement.\349\ For companies that have
been in existence for less than three years, the final rules clarify
that this disclosure requirement applies to them since inception.\350\
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\341\ See Item 7(c)-(d) of Offering Circular, Part II of Form 1-
A ; see also Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting
forth the Commission's view on the disclosure requirements for
limited partnerships).
\342\ CFIRA Letter 1; MoFo Letter; WR Hambrecht + Co Letter.
\343\ Item 7(a)(1)(iii) of Offering Circular, Part II of Form 1-
A.
\344\ See discussion in Section II.C.3.b(2)(c). below.
\345\ See Item 9 of Offering Circular, Part II of Form 1-A.
\346\ Item 9(b)(1) of Offering Circular, Part II of proposed
Form 1-A is amended to track more closely the language and
requirements of domestic issuers, as opposed to foreign private
issuers. As proposed, the language more closely followed the
requirements contained in Form 20-F for foreign private issuers.
\347\ We are eliminating proposed Item 9(b)(2)-(3) of Offering
Circular, Part II of Form 1-A. As proposed, these disclosures would
have increased the disclosure obligations of Regulation A issuers in
comparison to those required of smaller reporting companies under
Item 305 of Regulation S-K. 17 CFR 229.305.
\348\ See also discussion of the final rules for simplifying
Exchange Act registration of Tier 2 issuers in Section II.E.3.c.
below.
\349\ Item 9(c) of Offering Circular, Part II of Form 1-A.
\350\ Id.
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The changes to the Offering Circular format adopted today will
result in Offering Circular disclosure, particularly for Tier 2
offerings, more akin to what is required of smaller reporting companies
in a prospectus for a registered offering. For example, the final rules
require issuers in both Tier 1 and Tier 2 offerings to disclose
beneficial ownership of their voting securities, as opposed to record
ownership of voting and non-voting securities.\351\ With respect to
transactions with related persons, promoters, and certain control
persons in Tier 2 offerings, issuers will no longer be required to
disclose transactions in excess of $50,000 in the prior two years (or
similar transactions currently contemplated), but rather must follow
the requirements for smaller reporting company disclosure of
transactions during the prior two fiscal years that exceed the lesser
of $120,000 or 1% of the average total assets at year end for the last
two completed fiscal years.\352\ We originally proposed to apply this
threshold to Tier 1 offerings also, but believe that the 1% of average
total assets threshold could result in a lower disclosure threshold for
smaller issuers than was otherwise required of such issuers under the
existing rules. The final rules therefore preserve the related party
transaction disclosure requirements of Regulation A, as they existed
before the adoption of final rules today, for Tier 1 offerings so that
issuers in such offerings are only required to disclose such
transactions in excess of $50,000 in the prior two years (or similar
transactions currently contemplated).\353\
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\351\ Item 12 of Offering Circular, Part II of Form 1-A.
\352\ Item 13 of Offering Circular, Part II of Form 1-A. As
adopted, Tier 2 issuers that have more than $5 million in average
total assets at year end for the last two completed fiscal years
would be required to disclose related party transactions at a higher
threshold (i.e., 1% or more) than was previously required under
Regulation A, which required the disclosure of transactions in
excess of $50,000 in the prior two years.
\353\ Id.
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In addition to preserving the related party transaction disclosure
threshold for Tier 1 offerings, we are adopting a change applicable to
Tier 1 that will provide an additional scaled disclosure option for
issuers in the Offering Circular. This change is consistent with the
general views of a number of commenters that urged the Commission to
consider additional potential scaling for smaller issuers generally and
Tier 1 offerings in particular.\354\ The final rules alter the format
of, but not the ultimate aggregate amount of information required to be
disclosed in, the proposed executive compensation disclosure
requirements for Tier 1 offerings. Instead of providing executive
compensation data on an individual basis for the three highest paid
officers or directors and on a group basis for all directors, as was
proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will
instead be required to disclose only group-level compensation data as
it applies to the three highest paid executives or directors and all
directors as a collective group, including the number of persons
comprising such group, covering the period of the issuer's last
completed fiscal year.\355\ In this regard, the final rules for Tier 1
offerings will continue to require the disclosure of important
compensation data to investors, but on an aggregate, rather than
individual, basis. The group-level disclosure format for the highest
paid executives and all directors should help smaller issuers avoid
some of the harm that could follow compensation disclosure of
individual executives or directors to the market and competitors,
especially when disclosure of such information would not necessarily be
required in the context of a private placement or other exempt
offering.\356\ Further, the additional requirement to disclose the
total number of persons comprising any group for which group-level data
is required to be disclosed will preserve the ability of investors in
Tier 1 offerings to determine the average compensation paid to all
persons within the group.\357\ Consistent with the suggestions of some
commenters,\358\ we believe that this change to the final rules will
assist smaller issuers with more appropriately tailored executive
compensation disclosure requirements and will provide investors with
useful information.
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\354\ See, e.g., Campbell Letter; MoFo Letter.
\355\ See Item 11 of Offering Circular, Part II of Form 1-A. The
number of persons comprising the director-level group data is also
required of issuers providing compensation data under Tier 2.
\356\ For example, there are no rule-based disclosure
requirements for private placements pursuant to Rule 506 of
Regulation D, 17 CFR 230.500 et seq., when the issuer only sells to
accredited investors. Contrary to the requirements of Regulation D,
we believe mandated compensation (and other) disclosure is
appropriate in the context of a public offering under Regulation A.
Additionally, however, we believe that the final disclosure rules
for such information are appropriately tailored to provide
information to investors.
\357\ This requirement is a change to the disclosure
requirements of group-level data in both Tiers. Although this
information would have been ascertainable under Tier 2 by comparing
the group-level disclosure of director compensation to the number of
directors disclosed pursuant to Item 10 of the Offering Circular, we
believe the change will facilitate investors' calculations of
average director compensation without significantly increasing the
burden on Tier 2 issuers.
\358\ Campbell Letter; MoFo Letter.
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We do not, however, believe that further scaling of smaller
issuers' MD&A is necessary under the final rules. As we noted in the
Proposing Release, while the final rules provide issuers with more
detailed instructions on MD&A disclosure, similar disclosure is already
called for under existing requirements.\359\ The final MD&A
requirements clarify existing requirements and will likely save issuers
time by providing more express guidance regarding the type of
information and analysis that should be included. We believe the
clearer requirements will lead to improved MD&A disclosure, which will
provide investors with better visibility into management's perspective
on the issuer's financial condition and operations. The final
provisions for MD&A disclosure in the Offering Circular, however, are
not as extensive as those required under Item 303 of Regulation S-
K.\360\ As proposed, the final Offering Circular format includes
detailed guidance and requirements similar to Item 303 with respect to
liquidity, capital resources, and results of operations, including the
most significant trend information,\361\ but does not separately call
for disclosure of off-balance sheet arrangements or a table of
contractual obligations.\362\ Similar to
[[Page 21831]]
smaller reporting companies in registered offerings, Regulation A
issuers are required to disclose information about the issuer's results
of operations for the two most recently completed fiscal years and
interim periods, when applicable.\363\
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\359\ MD&A disclosure is specifically required by Model A. Model
B calls for similar information in Item 6, which requires disclosure
of the characteristics of the issuer's operations or industry that
may have a material impact upon the issuer's future financial
performance. Item 6 also requires disclosure of the issuer's plan of
operations and short-term liquidity if the issuer has not received
revenue from operations during each of the three fiscal years
immediately prior to filing the offering statement.
\360\ 17 CFR 229.303.
\361\ 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
\362\ An issuer may, however, be required to disclose such
information during the course of the qualification process, if
material to an understanding of the issuer's financial condition.
\363\ When management's discussion and analysis of the financial
condition and results of operations is provided for interim period
financial statements, any material change in financial condition
from the end of the preceding fiscal year to the date of the most
recent interim balance sheet should be discussed. Also, any material
changes in results of operations with respect to the most recent
fiscal year-to-date period for which an income statement is provided
and the corresponding year-to-date period of the preceding fiscal
year shall be discussed. See Instruction 3 to Item 9(a) of the
Offering Circular, Part II of Form 1-A.
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Except as noted above, the updates to the Offering Circular
disclosure requirements will not result in an overall increase in an
issuer's disclosure obligations. For example, as mentioned above,
certain issuers will have a higher threshold for reporting related
party transactions than would have previously been required under
Regulation A. Additionally, Tier 1 issuers (which will likely be
smaller companies) will, in comparison to the proposed rules, benefit
from further scaling of related party transactions and compensation-
related disclosures. Further, as proposed, all issuers will be
permitted to provide more streamlined disclosure of dilutive
transactions with insiders by no longer being required to present a
dilution table based on the net tangible book value per share of the
issuer's securities.\364\ While we disagree with commenters that
suggested we should expand disclosure provisions related to
dilution,\365\ the final rules, which reduce the disclosure time period
from three years to one year, are consistent with their view that the
disclosure of this information should not depend on when such shares
were acquired. We do not believe that information regarding dilution
covering more than the prior year is necessary for the smaller issuers
likely to conduct Regulation A offerings, nor do we believe that a
reduction in the required disclosure from three years to one year, as
proposed and adopted, will negatively affect investor protection.
Additionally, the final provisions for MD&A disclosure clarify existing
requirements and should benefit issuers by providing more express
guidance regarding the type of information and analysis that should be
included, including instructions about disclosure of operating results.
We believe that these clarifications should also lead to improved MD&A
disclosure, which will provide investors with better visibility into
management's perspective on the issuer's financial condition and
results of operations. Investors, particularly in Tier 2 offerings,
will also benefit from disclosure that is more consistent across
issuers in both registered offerings and Regulation A offerings.
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\364\ See Item 4 (Dilution) of the Offering Circular, Part II of
Form 1-A.
\365\ See NASAA Letter 2, at fn. 50; WDFI Letter, at 9.
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We are making one change to the disclosure requirements of Item 6
(Use of Proceeds) in the final rules. As proposed, issuers were
required to disclose if any material amount of other funds are to be
used in conjunction with the proceeds raised in the offering. If so, an
issuer would be required to state the amounts and sources of such other
funds. The final rules include these proposed provisions, but add a
requirement that the issuer further provide disclosure about whether
such other funds are firm or contingent. While we did not receive any
comment specifically addressing this issue, where applicable, this type
of information would generally be required to be disclosed as part of
the staff review and comment process before qualification. We believe
an express requirement in the final rules will ultimately save issuers
time in the qualification process and therefore are including language
addressing this issue in the final rules.\366\
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\366\ See Instruction 5 to Item 6 (Use of Proceeds) of Part II
of Form 1-A.
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For clarity, we are moving the requirements to furnish certain
supplemental information found in Item 7 (Business Description) of Part
II to Form 1-A to General Instruction IV (Supplemental Information) to
Form 1-A, where similar requirements are found. We believe that
providing these instructions in one place will help issuers understand
and comply with the process for furnishing supplemental information to
the Commission. The process for furnishing supplemental information to
the Commission pursuant to Form 1-A is similar to the treatment of such
information in registered offerings.\367\ Additionally, since we
believe it is important for the Commission to be aware of the
existence--rather than the non-existence--of such reports, the final
rules no longer require an issuer to inform the Commission if no such
report has been prepared. Item 7 is further revised to clarify that
issuers must only disclose distinctive or special characteristics of
the issuer's operation or industry that are reasonably likely to have a
material impact on its future financial performance.\368\
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\367\ In this regard, we have also clarified in General
Instruction IV that supplemental information provided to the
Commission may be returned in certain circumstances and will be
handled by the Commission in a similar manner to supplemental
information provided in connection with registered offerings.
\368\ The language in proposed Item 7 to Part II of Form 1-A
indicated that issuers had to disclose characteristics that ``may''
have a material impact on its future financial performance. We
believe this clarifying change in the final rules will help
facilitate compliance by smaller issuers.
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The final rules also clarify in Item 5 (Plan of Distribution and
Selling Securityholders) the calculation of selling securityholder
ownership prior to an offering, which we believe will facilitate
compliance with, and calculations pursuant to, this requirement.
Additionally, in order to avoid potential confusion as to the scope of
Items 11 and 13 to Part II of Form 1-A, the final rules make clear that
issuers are required to provide disclosure for ``executive officers''
rather than ``officers.'' \369\ Contrary to the suggestion of one
commenter,\370\ we do not believe that requiring disclosure regarding
the existence of a code of ethics and corporate governance principles
should be a required disclosure item for the types of issuers likely to
conduct Regulation A offerings. While nothing in Part II of Form 1-A
would prevent an issuer from providing more disclosure than is
otherwise required in the form itself, we do not believe it would be
appropriate to mandate this type of disclosure for all issuers because
we anticipate that issuers of Regulation A securities will generally be
smaller companies with less complex organizational structures.\371\ We
further believe that the disclosure requirements of Part II of Form 1-A
will provide investors with the information they need to adequately
evaluate an issuer's business and securities.
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\369\ The language in proposed Items 11 and 13 to Part II of
Form 1-A indicated that issuers had to disclose information
regarding directors and officers. We believe the clarifying language
will help smaller issuers comply with the final rules.
\370\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
\371\ See fn. 93 above and Section III.C.3. below.
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As proposed, the final rules permit issuers to incorporate by
reference into Part II of Form 1-A certain items previously submitted
or filed on EDGAR. In a change from the proposed rules, issuers will be
permitted to incorporate by reference any documents publicly submitted
or filed on EDGAR, as opposed to being limited to documents submitted
or filed pursuant to Regulation A. We believe that this
[[Page 21832]]
change will continue to facilitate the provision of required
information to investors, while taking a consistent approach to
information previously provided to the Commission and publicly
available on EDGAR. Issuers following the Offering Circular disclosure
model will be permitted to incorporate by reference into Items 2
through 14; issuers following the narrative disclosure in Part I of
Form S-1 will be permitted to incorporate by reference into Items 3
through 11 (other than Item 11(e)) of Part I of Form S-1; issuers
following the narrative disclosure in Part I of Form S-11 will be
permitted to incorporate by reference into Items 3 through 26, Item 28,
and Item 30 of Part I of Form S-11.\372\ The final rules require
issuers to describe the information incorporated by reference, and
include a separate hyperlink to the relevant document on EDGAR, which
need not remain active after the filing of the related offering
statement. Additionally, Form 1-A encourages issuers to cross-reference
items within the form, where applicable.\373\ Further, in order to
avoid incorporation by reference to stale information without requiring
the latest version of the document to be filed, Form 1-A indicates
that, if any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.\374\
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\372\ See General Instruction III to Form 1-A. Since, as
proposed, the financial statements required by Part F/S would apply
to those following the Form S-1 format, rather than Item 11(e), we
have removed the reference to that item in General Instruction III
for clarity. Although, as proposed, Items 11(f) and (g) are also not
required for those following the Form S-1 format, we continue to
specifically allow for cross-referencing and incorporation by
reference in those items for those voluntarily choosing to provide
such disclosure. As with Model B, the item numbers in the Offering
Circular format of Part II of Form 1-A and Part I of Form S-1 do not
align.
\373\ Id. Issuers may, for example, add a cross-reference to
disclosure found in the financial statements. However, they may not
incorporate by reference or add a cross-reference within the
financial statements to disclosures found elsewhere. See General
Instruction III to Form 1-A, which does not allow for incorporation
by reference in Part F/S.
\374\ Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-
32 (providing a similar requirement when incorporating exhibits by
reference in filings under the Securities Act and Exchange Act).
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(2) Financial Statements
(a) Proposed Rules for Financial Statements
Part F/S of Form 1-A currently requires issuers \375\ in Regulation
A offerings to provide the following financial statements prepared in
accordance with U.S. GAAP: \376\
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\375\ The requirements also apply to the issuer's predecessors
or any business to which the issuer is a successor.
\376\ See Form 1-A, Part F/S (2014).
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A balance sheet as of a date within 90 days before filing
the offering statement (or as of an earlier date, not more than six
months before filing, if the Commission approves upon a showing of good
cause) but, for filings made more than 90 days after the end of the
issuer's most recent fiscal year, the balance sheet must be dated as of
the end of the fiscal year;
statements of income, cash flows, and stockholders' equity
for each of the two fiscal years preceding the date of the most recent
balance sheet, and for any interim period between the end of the most
recent fiscal year and the date of the most recent balance sheet;
financial statements of significant acquired or to be
acquired businesses; and
pro forma information relating to significant business
combinations.
The required financial statements may be unaudited unless the issuer
has already obtained an audit for another purpose.\377\
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\377\ The issuer would be considered to have audited financial
statements if the qualifications and reports of the auditor meet the
requirements of Article 2 of Regulation S-X (17 CFR 210.1 et seq.)
and the audit was conducted in accordance with U.S. GAAS or the
standards of the PCAOB. The auditor is not required to be registered
with the PCAOB.
We proposed to generally maintain the existing financial statement
requirements of current Part F/S of Form 1-A for Tier 1 offerings,
while requiring Tier 2 issuers to file audited financial
statements.\378\ We proposed to require all issuers to file balance
sheets as of the two most recently completed fiscal year ends (or for
such shorter time that they have been in existence), instead of the
current requirement to file a balance sheet as of only the most
recently completed fiscal year end. As proposed, financial statements
for U.S.-domiciled issuers would be required to be prepared in
accordance with U.S. GAAP. Additionally, however, we proposed to permit
Canadian issuers to prepare financial statements in accordance with
either U.S. GAAP or International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB).\379\
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\378\ See paragraph (c) of Part F/S of proposed Form 1-A.
\379\ If the proposed financial statements comply with IFRS as
issued by the IASB, such compliance must be unreservedly and
explicitly stated in the notes to the financial statements and the
auditor's report must include an opinion on whether the financial
statements comply with IFRS as issued by the IASB. See General Rule
(a)(2) to Part F/S of proposed Form 1-A. Cf. Item 17(c) of Form 20-
F.
---------------------------------------------------------------------------
As proposed, issuers conducting Tier 1 offerings would be required
to follow the requirements for the form and content of their financial
statements set out in Part F/S, rather than the requirements in
Regulation S-X. In certain less common circumstances, however, such as
for an acquired business or subsidiary guarantors, Part F/S would
direct issuers conducting Tier 1 offerings to comply with certain
portions of Regulation S-X, which provides guidance on the financial
statements required for entities other than the issuer.\380\
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\380\ We proposed to update the requirements for financial
statements of businesses acquired or to be acquired in Part F/S to
refer to the requirements of Rule 8-04 of Regulation S-X. We also
proposed to provide specific references to the relevant provisions
of Regulation S-X regarding the requirements for financial
statements of guarantors and the issuers of guaranteed securities
(Rule 3-10 of Regulation S-X), financial statements of affiliates
whose securities collateralize an issuance of securities (Rule 3-16
of Regulation S-X), and financial statements provided in connection
with oil and gas producing activities (Rule 4-10 of Regulation S-X).
As proposed, the financial statements provided in these
circumstances would only be required to be audited to the extent the
issuer had already obtained an audit of its financial statements for
other purposes.
---------------------------------------------------------------------------
For all Tier 2 offerings, the proposed rules would require issuers
to follow the financial statement requirements of Article 8 of
Regulation S-X, as if the issuer conducting a Tier 2 offering were a
smaller reporting company, unless otherwise noted in Part F/S. This
requirement would include any financial information with respect to
acquired businesses required by Rule 8-04 and 8-05 of Regulation S-
X.\381\
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\381\ Tier 2 issuers would, however, follow paragraph (a)(3) of
Part F/S of proposed Form 1-A with respect to the age of the
financial statements and the periods to be presented. In Tier 2
offerings, the form and contents of financial statements for other
entities follow the requirements of Article 8 of Regulation S-X.
---------------------------------------------------------------------------
As proposed, issuers conducting Tier 2 offerings would be required
to have their financial statements audited. As with Tier 1 offerings,
the auditor of financial statements would need to be independent under
Rule 2-01 of Regulation S-X and must comply with the other requirements
of Article 2 of Regulation S-X, but need not be PCAOB-registered.\382\
Unlike Tier 1
[[Page 21833]]
issuers, issuers conducting Tier 2 offerings would be required to
provide financial statements that are audited in accordance with the
standards issued by the PCAOB.
---------------------------------------------------------------------------
\382\ See Part F/S of proposed Form 1-A (referencing Article 2
of Regulation S-X, 17 CFR 210.2-01 et seq.).
---------------------------------------------------------------------------
Additionally, we proposed to update the Form 1-A financial
statement requirements to be consistent with the proposed timetable for
ongoing reporting.\383\ Under existing Regulation A, issuers are
required to prepare a balance sheet as of a date not more than 90 days
before filing the offering statement, or not more than six months
before filing if approved by the Commission upon a showing of good
cause.\384\ In practice, issuers often receive a six-month
accommodation. If the financial statements are filed more than 90 days
after the end of the issuer's most recently completed fiscal year, the
financial statements must include that fiscal year.\385\
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\383\ The rules for ongoing reporting are discussed in Section
II.E. below.
\384\ See Form 1-A, Part F/S (2014).
\385\ Id.
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We proposed to extend the permissible age of financial statements
in Form 1-A to nine months, in order to permit the provision of
financial statements that are updated on a timetable consistent with
our proposed requirement for semiannual interim reporting.\386\ We also
proposed to add a new limitation on the age of financial statements at
qualification, under which an offering statement could not be qualified
if the date of the balance sheet included under Part F/S were more than
nine months before the date of qualification.\387\ For filings made
more than three months after the end of the issuer's most recent fiscal
year, the balance sheet would be required to be dated as of the end of
the most recent fiscal year.\388\ For filings made more than nine
months after the end of the issuer's most recent fiscal year, the
balance sheet would be required to be dated no earlier than as of six
months after the end of the most recent fiscal year.\389\ If interim
financial statements are required, they would be required to cover a
period of at least six months.\390\ In the Proposing Release, we noted
that requiring issuers to file interim financial statements no older
than nine months and covering a minimum of six months would have the
beneficial effect of eliminating what could otherwise be a requirement
for certain issuers to provide quarterly interim financial statements
during the qualification process and would be consistent with the
timing of our proposed ongoing reporting requirements.\391\ We proposed
to generally maintain the timing requirement of existing Form 1-A
concerning the date after which an issuer must provide financial
statements dated as of the most recently completed fiscal year, but to
change the interval from 90 calendar days to three months.\392\ While
not proposed, we additionally solicited comment on whether Tier 2
issuers should be required to submit financial statements in
interactive data format using the eXtensible Business Reporting
Language (XBRL).
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\386\ This age of financial statements requirement is also
consistent with the treatment of foreign private issuers in the
context of registered offerings. See Division of Corporation
Finance's Financial Reporting Manual, at 6620, available at: http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf#topic6.
\387\ Form 1-A currently does not expressly limit the age of
financial statements at qualification. In practice, however,
Commission staff requires issuers to update financial statements
before qualification to the extent such financial statements no
longer satisfy Form 1-A's requirements for the age of financial
statements at the time of filing.
\388\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
\389\ Id.
\390\ See paragraph (a)(3)(iv) to Part F/S of proposed Form 1-A.
\391\ See discussion in Section II.E.1. below.
\392\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
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(b) Comments on Proposed Rules
We received numerous detailed suggestions from commenters on our
proposed financial statement requirements for Part F/S of Form 1-A.
Commenters were generally supportive of the proposed rules, but also
raised concerns as to the effect some of the proposed requirements for
audits in Tier 2 offerings could have on issuers and recommended
clarifying revisions that would help to make the financial statements
more consistent in some respects with those required in registered
offerings, while also eliminating potentially confusing or inconsistent
terminology.
Commenters generally supported the proposed increase to two years
of balance sheets.\393\ One commenter noted that the Commission's
proposal to require two years of balance sheets was appropriate,
particularly in light of the existing requirement to provide statements
of income, cash flows and stockholders' equity for two years.\394\
Another commenter, however, argued against two years of balance sheets
for Tier 1 issuers instead of the one year required under existing
Regulation A.\395\
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\393\ See, e.g., CFA Institute Letter; ABA BLS Letter.
\394\ ABA BLS Letter (noting that in light of the existing
requirements, the proposed change did not seem unduly burdensome).
\395\ Campbell Letter.
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While commenters generally approved of the proposed rules not
requiring audits for Tier 1 issuers,\396\ many recommended making
changes to the proposed auditing requirements for the financial
statements included in an offering.\397\ One commenter recommended not
requiring audited financial statements until after the first year of
operations as a ``public startup company'' or not at all for companies
that are pre-revenue or that have paid-in capital, assets and revenues
below a specified threshold.\398\ Many commenters recommended allowing
Tier 1 issuers to designate financial statements as ``audited'' if the
auditor was only independent in accordance with the rules of the AICPA
and not in accordance with the Commission's auditor independence
rules.\399\ These commenters noted that the proposed requirements for
financial statements only to qualify as ``audited'' if the auditor
complies with the independence standards of Article 2 of Regulation S-
X, as opposed to the independence standards of the AICPA, may increase
costs to smaller issuers due to the increased likelihood that an issuer
would need to have their financial statements audited a second time by
an auditor who was independent under Rule 2-01 of Regulation S-X. One
commenter requested clarification of whether a Tier 1 issuer could
voluntarily provide an audit opinion on its financial statements that
was obtained for other purposes if the auditor complied with U.S. GAAS,
including AICPA independence standards, but not with the Commission's
independence rules.\400\ Several commenters recommended requiring Tier
1 issuers that provide unaudited financial statements to label them as
unaudited.\401\
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\396\ See, e.g., CFA Institute Letter; ABA BLS Letter; Campbell
Letter.
\397\ ABA BLS Letter; BDO Letter; Canaccord Letter; CAQ Letter;
CFA Letter; CFIRA Letter 2; Deloitte Letter; E&Y Letter; Letter from
KPMG LLP, March 24, 2014 (``KPMG Letter''); Letter from McGladrey
LLP (``McGladrey Letter''); MoFo Letter; WOC Letter; WR Hambrecht +
Co Letter.
\398\ Letter from Jason Coombs, Co-Founder and CEO, Public
Startup Company, Inc., March 25, 2014 (``Public Startup Co. Letter
3'') (suggesting three tiers, where at least the first two would not
require audited financial statements); Public Startup Co. Letter 6.
\399\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
\400\ CAQ Letter.
\401\ CAQ Letter (recommending that such issuers disclose that
the financial statements have not been subject to an audit or review
by an independent accountant); E&Y Letter; KPMG Letter.
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Many commenters recommended allowing financial statements in Tier 2
offerings to be audited in accordance
[[Page 21834]]
with either PCAOB standards or U.S. GAAS.\402\ One commenter limited
its recommendation to smaller Tier 2 issuers and conditioned this
recommendation on the Commission not altering the requirement that
auditors be independent under Rule 2-01 of Regulation S-X.\403\ This
commenter also recommended conditioning the ability to follow U.S. GAAS
under Tier 2 on the issuer's showing of undue cost and impracticability
in the offering statement and also limiting this relief to the issuer's
initial Tier 2 offering. One commenter noted that because Regulation A
issuers are not ``issuers'' (as defined in Section 2(a)(7) of the
Sarbanes-Oxley Act of 2002),\404\ when the audit is performed in
accordance with PCAOB standards, AICPA rules would require the audit to
be compliant with both AICPA and PCAOB standards and the auditor's
report would have to reference both AICPA and PCAOB standards. This
commenter also noted, however, that given recent changes to the
auditor's report under AICPA standards, it may not be possible for the
auditor to be in compliance with both AICPA and PCAOB standards from a
reporting perspective.\405\
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\402\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
\403\ ABA BLS Letter.
\404\ 15 U.S.C. 7201(a) et seq.
\405\ KPMG Letter.
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Additionally, two commenters expressed concern about potential
confusion that could result from requiring PCAOB standards in Tier 2
offerings, but not requiring PCAOB registration.\406\ One of these
commenters recommended avoiding any potential confusion by allowing for
audits under U.S. GAAS in Tier 2 offerings.\407\ Another commenter
stated that the issue could be resolved by requiring either the use of
PCAOB-registered auditors for Tier 2 offerings or appropriate
disclosure of the auditor's PCAOB registration status, noting that the
disclosure option would result in lower costs to the issuer and fewer
instances in which an issuer would need to have its financial
statements audited a second time under PCAOB standards.\408\
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\406\ BDO Letter; Deloitte Letter.
\407\ Deloitte Letter.
\408\ BDO Letter.
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One commenter asked the Commission to clarify issues relating to
transition reporting for Tier 1 issuers that have previously conducted
an offering pursuant to the exemption under Section 4(a)(6) and were
required to file reviewed annual financial statements.\409\ Another
commenter asked the Commission to clarify the application of the audit
requirements applicable to Tier 1 issuers that have audited financial
statements prepared for other purposes, in light of potentially
contradictory references in proposed Form 1-A to the ``standards of the
PCAOB'' and the PCAOB auditing standards.\410\ One commenter
recommended not requiring audited financials under either Tier 1 or
Tier 2 for ``small companies with limited revenues and assets.'' \411\
Another commenter raised concerns about allowing Tier 1 issuers to
include financial statements audited using U.S. GAAS and not requiring
that all audits be conducted by PCAOB-registered auditors.\412\
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\409\ E&Y Letter.
\410\ CAQ Letter.
\411\ WOC Letter.
\412\ CFA Letter.
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Many commenters recommend making other changes to the financial
statement requirements not directly related to audit requirements.\413\
A number of commenters suggested allowing companies to use alternatives
under U.S. GAAP for non-public business entities when preparing their
financial statements, since Regulation A issuers would otherwise be
considered ``public business entities'' under FASB standards.\414\
These commenters were concerned about the need for issuers to have
their financial statements prepared and audited a second time under
U.S. GAAP applicable to public business entities, as discussed in
greater detail below. One commenter did not address this issue with
respect to Tier 1, but recommended allowing the smallest Tier 2 issuers
to follow alternatives under U.S. GAAP applicable to non-public
business entities.\415\ One commenter recommended allowing companies to
include financial statements prepared in accordance with alternatives
under U.S. GAAP for non-public business entities in offerings up to a
specified minimum, suggesting $10 million or $20 million.\416\ Another
commenter recommended explicitly stating that Regulation A issuers are
subject to ``public business entity'' requirements if the final rules
do not provide for the use of, or a non-costly transition from,
financial statements based on alternatives under U.S. GAAP for non-
public business entities.\417\ One commenter limited its recommendation
with respect to the applicability of alternatives under U.S. GAAP for
non-public business entities to Tier 1 issuers and to entities whose
financial statements are required to be included in offering statements
relying on Tier 1.\418\ Another commenter noted that significant
acquired businesses will qualify as ``public business entities''
because their financial statements are filed with the Commission.\419\
As a result, financial statements of those businesses would also need
to be revised, and an issuer would potentially need to have their
financial statements prepared and audited a second time under U.S. GAAP
applicable to public business entities.
---------------------------------------------------------------------------
\413\ ABA BLS Letter; BDO Letter; Letter from Frederick D.
Lipman, Blank Rome LLP, March 17, 2014 (``Blank Rome Letter'');
Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y
Letter; KPMG Letter; Karr Tuttle Letter; McGladrey Letter; MoFo
Letter; PwC Letter; WR Hambrecht + Co Letter.
\414\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo
Letter; WR Hambrecht + Co Letter.
\415\ ABA BLS Letter.
\416\ McGladrey Letter.
\417\ KPMG Letter.
\418\ E&Y Letter.
\419\ Deloitte Letter.
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Several commenters recommended allowing issuers under Regulation A
to defer adopting new or revised accounting standards effective for
public companies if non-public business entities have a delayed
effective date (similar to accommodations for emerging growth companies
under Section 102(b) of the JOBS Act).\420\ Two commenters recommended
either clarifying how the disclosure requirements for pro forma
financial information in Part F/S for Tier 1 issuers differ from Rule
8-05 of Regulation S-X or requiring such Tier 1 issuers to follow Rule
8-05.\421\ One commenter recommended allowing companies formed within
nine months of the filing date of the offering statement to provide
only a discussion of their financial condition and operations since
inception, rather than financial statements as of a date within nine
months of the date of filing.\422\ This commenter further recommended
aligning the financial statement updating requirements with the timing
of periodic reports (e.g., allowing for 120 days before year end
financial statements are required in the offering statement, rather
than 90 days).\423\ This commenter also recommended that the Commission
consider additional scaling for Regulation A offerings in the
requirements concerning the financial statements of: Acquired or to-be-
[[Page 21835]]
acquired businesses; guarantors of issuers of guaranteed securities;
and, affiliates that collateralize an issuance.\424\
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\420\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter.
\421\ CAQ Letter; PwC Letter.
\422\ E&Y Letter.
\423\ Id.
\424\ Id.
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Another commenter recommended that Tier 2 issuers not be subject to
Rule 8-04(b)(3) of Regulation S-X when the to-be-acquired business has
significant loss operations.\425\ This commenter recommended at least
not applying Rule 8-04(b)(3) in situations where companies intend to
eliminate the losses by dropping certain products or service lines of
business that produced the loss. Another commenter recommended
clarifying whether financial statements should also be dated within
nine months of the qualification date of the offering statement.\426\
---------------------------------------------------------------------------
\425\ Blank Rome Letter.
\426\ E&Y Letter (referring to paragraphs (a)(3)(i) and (b)(2)
of Part F/S of proposed Form 1-A).
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One commenter made a number of specific recommendations that we
clarify language in particular paragraphs of the proposed requirements
for financial statements in Part F/S of Form 1-A.\427\ A different
commenter indicated that proposed Form 1-A seemed to require issuers to
disclose ``selected financial information'' and objected to any such
requirement as being more onerous than the requirements otherwise
applicable to smaller reporting companies.\428\
---------------------------------------------------------------------------
\427\ E&Y Letter, Appendix B.
\428\ CAQ Letter. See Section II.C.3.a. above.
---------------------------------------------------------------------------
Several commenters specifically supported allowing Canadian issuers
to prepare their financial statements in accordance with IFRS as issued
by the IASB, as proposed.\429\ More generally, many commenters
recommended allowing foreign issuers to use IFRS as issued by the IASB
to prepare their financial statements.\430\ One commenter recommended
allowing U.S. companies to use IFRS when conducting offerings in
Canada.\431\ This comment was made within the context of providing U.S.
companies the ability to list on a Canadian exchange without being
subject to resale restrictions imposed by Regulation S. Three
commenters specifically opposed adding an XBRL requirement.\432\
---------------------------------------------------------------------------
\429\ ABA BLS Letter; Canaccord Letter; MoFo Letter; NASAA
Letter 2; PwC Letter.
\430\ ABA BLS Letter (although supporting excluding non-Canadian
foreign companies); Andreessen/Cowen Letter; Canaccord Letter
(stating generally that the Commission should clarify that companies
may use IFRS); CAQ Letter; Deloitte Letter; PwC Letter.
\431\ Karr Tuttle Letter.
\432\ BIO Letter; MoFo Letter; U.S. Chamber of Commerce Letter.
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(c) Final Rules for Financial Statements
As discussed more fully below, we are adopting requirements for
financial statements in Part F/S of Form 1-A with changes from the
proposed rules that are designed to simplify and lower the cost of
compliance for issuers, while maintaining important investor
protections. As proposed, the final rules require Tier 1 and Tier 2
issuers to file balance sheets and other required financial statements
as of the two most recently completed fiscal year ends (or for such
shorter time that they have been in existence). With the exception of
the requirement to file two years of balance sheets, the final rules
largely maintain the existing financial statement requirements of
current Part F/S for Tier 1 offerings, while requiring Tier 2 issuers
to file audited financial statements in Part F/S.
Financial statements for U.S.-domiciled issuers will be required to
be prepared in accordance with U.S. GAAP, as is currently the case.
Canadian issuers, however, may prepare financial statements in
accordance with either U.S. GAAP or International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards
Board (IASB).\433\
---------------------------------------------------------------------------
\433\ If the financial statements comply with IFRS as issued by
the IASB, such compliance must be unreservedly and explicitly stated
in the notes to the financial statements and the auditor's report
must include an opinion on whether the financial statements comply
with IFRS as issued by the IASB. See General Rule (a)(2) to Part F/S
of Form 1-A.
---------------------------------------------------------------------------
Additionally, consistent with the suggestions of commenters and in
order to be consistent with the treatment of emerging growth companies
under Section 102(b)(1) of the JOBS Act, the final rules permit
issuers, where applicable, to delay the implementation of new
accounting standards to the extent such standards provide for delayed
implementation by non-public business entities.\434\ In this regard,
with respect to the delayed implementation of new or revised financial
accounting standards, if the issuer chooses to take advantage of the
extended transition period to the same extent that a ``non-issuer''
company is permitted to, the issuer:
---------------------------------------------------------------------------
\434\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. See
also Section 7(a)(2)(B) of the Securities Act, 15 U.S.C.
77g(a)(2)(B), and Section 13(a) of the Exchange Act, 15 U.S.C.
78m(a).
---------------------------------------------------------------------------
Must disclose such choice at the time the issuer files the
offering statement; and
May not take advantage of the extended transition period
with respect to some standards and not others, but must apply the same
choice to all standards.\435\
---------------------------------------------------------------------------
\435\ See paragraph (a)(3) of Part F/S of Form 1-A.
---------------------------------------------------------------------------
However, issuers electing not to use this accommodation must forgo
this accommodation for all financial accounting standards and may not
elect to rely on this accommodation in any future filings.\436\
---------------------------------------------------------------------------
\436\ Id.
---------------------------------------------------------------------------
As proposed, the final rules require issuers conducting Tier 1
offerings to follow the requirements for the form and content of their
financial statements set out in Part F/S, rather than following the
requirements in Regulation S-X.\437\ However, consistent with a comment
received,\438\ in certain less common circumstances, such as for an
acquired business or subsidiary guarantors, Part F/S directs issuers
conducting Tier 1 offerings to certain portions of Regulation S-X that
provide guidance on when financial statements for entities other than
the issuer are required.\439\ In Tier 1 offerings the form and content
of the financial statements for those other entities also follow the
requirements set out in Part F/S. We believe this guidance will assist
issuers with compliance with the general requirements for financial
statement disclosure in these less common circumstances and is an
appropriate change in the final rules. In an effort to reduce
confusion, as suggested by commenters,\440\ the final rules also direct
issuers to Rule 8-05 of Regulation S-X for pro forma information
disclosure requirements. Additionally, the final rules require
compliance with Rule 8-06 of Regulation S-X for real estate operations
acquired because real estate companies and REITs are eligible issuers.
---------------------------------------------------------------------------
\437\ See paragraph (b) of Part F/S of Form 1-A.
\438\ E&Y Letter.
\439\ We are updating the requirements for financial statements
of businesses acquired or to be acquired in Part F/S to refer to the
requirements of Rule 8-04 of Regulation S-X. We are also providing
specific references to the relevant provisions of Regulation S-X
regarding the requirements for financial statements of guarantors
and the issuers of guaranteed securities (Rule 3-10 of Regulation S-
X), financial statements of affiliates whose securities
collateralize an issuance of securities (Rule 3-16 of Regulation S-
X), financial statements provided in connection with oil and gas
producing activities (Rule 4-10 of Regulation S-X), pro forma
financial information (Rule 8-05 of Regulation S-X) and income
statements for real estate operations acquired or to be acquired
(Rule 8-06 of Regulation S-X). The financial statements provided in
these circumstances would only be required to be audited to the
extent the issuer had already obtained an audit of those financial
statements for other purposes.
\440\ CAQ Letter; PwC Letter.
---------------------------------------------------------------------------
The final rules require Tier 2 issuers to follow the financial
statement requirements of Article 8 of Regulation S-X, as if the issuer
were a smaller reporting company, unless otherwise
[[Page 21836]]
noted in Part F/S.\441\ This requirement also includes any financial
information required for Tier 1 offerings, as discussed above, such as
acquired businesses required by Rule 8-04 and 8-05 of Regulation S-
X.\442\
---------------------------------------------------------------------------
\441\ See paragraph (c) of Part F/S of Form 1-A.
\442\ Tier 2 issuers would, however, follow paragraphs (c)(1) of
Part F/S of Form 1-A with respect to the age of the financial
statements and the periods to be presented. In Tier 2 offerings, the
form and content of financial statements for other entities follow
the requirement of Article 8 of Regulation S-X.
---------------------------------------------------------------------------
As adopted, financial statements in a Tier 1 offering are not
required to be audited. Consistent with the suggestions of
commenters,\443\ and in order to avoid potential confusion as to the
presentation of financial statements, issuers in Tier 1 offerings that
do not provide audited financial statements must label their financial
statements as unaudited. However, the final rules clarify that, if an
issuer conducting a Tier 1 offering has already obtained an audit of
its financial statements for other purposes, and that audit was
performed in accordance with U.S. GAAS or the standards of the PCAOB,
and the auditor followed the independence standards of either Rule 2-01
of Regulation S-X or the independence standards of the AICPA, then
those audited financial statements must be filed.\444\ We believe the
requirement to file already available audited financial statements will
benefit investors. The auditor need not be registered with the PCAOB.
While audited financial statements are not generally required to be
filed for Tier 1 offerings, allowing auditors to follow the
independence standards of the AICPA or Rule 2-01 of Regulation S-X is
consistent with the suggestions of most commenters and will provide
smaller issuers that seek to submit ``audited'' financial statements in
Tier 1 offerings with greater flexibility in satisfying the financial
statement requirements.\445\ We agree that, when available, financial
statements that satisfy the financial statement requirements and that
have been audited by an auditor that meets the independence standards
of the AICPA should be deemed ``audited'' for purposes of Tier 1
offerings.
---------------------------------------------------------------------------
\443\ CAQ Letter; E&Y Letter; KPMG Letter.
\444\ See CAQ Letter (requesting clarification on this issue).
\445\ While not a requirement, issuers in Tier 1 offerings may
have independent business reasons why they seek to provide, or
investors that may otherwise demand, audited financial statements.
---------------------------------------------------------------------------
Issuers conducting Tier 2 offerings are, by contrast, required to
have their financial statements audited. The auditor of financial
statements being filed as part of a Tier 2 offering must be independent
under Rule 2-01 of Regulation S-X and must comply with the other
requirements of Article 2 of Regulation S-X, but need not be PCAOB-
registered.\446\ In a change from the proposed rules, and consistent
with the suggestions of commenters,\447\ the final rules require
issuers conducting Tier 2 offerings to provide financial statements
that are audited in accordance with either U.S. GAAS or the standards
issued by the PCAOB.
---------------------------------------------------------------------------
\446\ See paragraph (c)(1)(iii) of Part F/S of Form 1-A.
\447\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
---------------------------------------------------------------------------
As noted above, one commenter indicated that, because Regulation A
issuers are not ``issuers,'' as defined by Section 2(a)(7) of the
Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be
compliant with U.S. GAAS even if the auditor has conducted the audit in
accordance with PCAOB standards. Staff of the Commission consulted with
the AICPA on this issue and has been advised that an audit performed by
its members of an issuer conducting an offering pursuant to Regulation
A would be required to comply with U.S. GAAS in accordance with the
AICPA's Code of Professional Conduct.\448\ As a result, an auditor for
a Regulation A issuer who is conducting its audit in accordance with
PCAOB standards would also be required to comply with U.S. GAAS, and
the auditor would need to comply with the reporting requirements of
both the AICPA standards and the PCAOB standards. As further noted by
this commenter,\449\ there may be some question as to whether an
auditor can currently comply with both sets of standards when issuing
its auditor's report. Commission staff also consulted with the AICPA on
this issue and has been informed that the AICPA will consider taking
action to address this potential conflict so that an auditor's report
would be able to comply with both sets of auditing standards.
---------------------------------------------------------------------------
\448\ The AICPA Code of Professional Conduct is available at:
http://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
\449\ See KPMG Letter.
---------------------------------------------------------------------------
Thus, requiring issuers in Tier 2 offerings to have their financial
statements audited in accordance with PCAOB standards would have the
effect of requiring issuers to comply with two sets of auditing
standards and potentially result in audits for Tier 2 issuers being
subject to additional incremental costs than would be required for
registered offerings (which are only subject to PCAOB auditing
standards). To avoid such a result, the final rules permit Tier 2
issuers the option of following U.S. GAAS or the standards of the
PCAOB.\450\
---------------------------------------------------------------------------
\450\ As discussed above, however, compliance with PCAOB
standards could also require compliance with U.S. GAAS.
---------------------------------------------------------------------------
We believe that providing issuers with this option could help
reduce the cost of required audits in Tier 2 offerings while
maintaining appropriate safeguards for investors. We believe audits
conducted in accordance with U.S. GAAS provide sufficient protection
for investors in Regulation A offerings, especially in light of the
requirement that auditors for Tier 2 offerings must be independent
under Rule 2-01 of Regulation S-X. Moreover, we believe that the
flexibility adopted in the final rules is more appropriately tailored
for the different types of issuers likely to conduct Tier 2 offerings
because it will not only eliminate the potential that existed under the
proposed rules that some issuers would need to have their financial
statements audited a second time under PCAOB standards, but also
continue to permit issuers, such as those that may seek concurrent
registration of a class of securities under the Exchange Act, to comply
with the PCAOB standards if they so choose.\451\
---------------------------------------------------------------------------
\451\ See, e.g., Section II.E.3.c (Exchange Act Registration of
Regulation A Securities) below.
---------------------------------------------------------------------------
An issuer that includes financial statements audited in accordance
with U.S. GAAS and PCAOB standards will likely incur additional
incremental costs compared with an issuer that includes financial
statements audited only in accordance with U.S. GAAS. However, we
assume that an issuer would only elect to comply with both sets of
auditing standards because it has concluded that the benefit of doing
so (for example, to facilitate Exchange Act registration) justify these
additional incremental costs. Commission staff understands that many
firms that conduct audits using PCAOB standards have developed their
methodology in a manner that would comply with both sets of standards,
which could help contain the costs related to complying with both U.S.
GAAS and PCAOB auditing standards.
An issuer conducting a Regulation A offering that seeks to
concurrently register its securities under the Exchange Act would be
required to file audited financial statements that are prepared in
accordance with the standards of the PCAOB by an auditor that is PCAOB-
registered.\452\ The final rules therefore provide Regulation A
[[Page 21837]]
issuers with the option to provide financial statements in Part F/S of
Form 1-A that comply with correlating requirements under the Exchange
Act.\453\
---------------------------------------------------------------------------
\452\ See Section 12 of the Exchange Act, Section 102 of the
Sarbanes Oxley Act of 2002 and Article 2 of Regulation S-X.
\453\ If the final rules did not permit issuers to prepare
audited financial statements in accordance with the standards of the
PCAOB, Regulation A issuers that rely on the amendments to Form 8-A
adopted today in order to register a class of securities pursuant to
Section 12 of the Exchange Act would have to have their financial
statements audited a second time under PCAOB standards by a PCAOB
registered auditor.
---------------------------------------------------------------------------
The Form 1-A financial statement requirements are being further
updated to be consistent with the timetable for ongoing reporting.\454\
The final rules extend the permissible age of financial statements in
Form 1-A to nine months, in order to permit the provision of financial
statements that are updated on a timetable consistent with our
requirement for semiannual interim reporting.\455\ As proposed, the
final rules add a new limitation on the age of financial statements at
qualification, under which an offering statement cannot be qualified if
the date of the most recent balance sheet included under Part F/S is
more than nine months before the date of qualification.\456\ For
filings made more than three months but no more than nine months after
the end of the issuer's most recently completed fiscal year end,
issuers are required to include a balance sheet as of the two most
recently completed fiscal year ends.\457\ For filings made more than
nine months after the end of the issuer's most recently completed
fiscal year end, the balance sheet is required to be dated as of the
two most recently completed fiscal year ends and an interim balance
sheet must be included as of a date no earlier than six months after
the end of the most recently completed fiscal year.\458\ If interim
financial statements are required, they are required to cover a period
of at least six months.\459\ Requiring issuers to file interim
financial statements no older than nine months and covering a minimum
of six months has the beneficial effect of eliminating what would
otherwise be a requirement for certain issuers to provide quarterly
interim financial statements during the qualification process and is
consistent with the timing of the ongoing reporting requirements
adopted today.\460\ We are generally maintaining the requirement of
existing Form 1-A concerning the date after which an issuer must
provide financial statements dated as of the most recently completed
fiscal year, but are changing the interval from 90 calendar days to
three months, which we believe will simplify compliance by allowing
issuers to follow full months. In order to further simplify compliance
with the final rules, we also revised Part F/S of Form 1-A to
streamline the application of, and simplify the language in, the rules
without substantively changing the required content.
---------------------------------------------------------------------------
\454\ Our final rules for ongoing reporting are discussed in
Section II.E.1. below.
\455\ See paragraph(s) (b)(3)-(4) of Part F/S of Form 1-A for
Tier 1 issuers, which also apply to Tier 2 issuers by virtue of
paragraph (c)(1) of Part F/S of Form 1-A.
\456\ Id.
\457\ See paragraph (b)(3)(A) of Part F/S of Form 1-A.
\458\ See paragraph (b)(3)(B) of Part F/S of Form 1-A.
\459\ See paragraph (b)(4) of Part F/S of Form 1-A.
\460\ See, e.g., discussion in Section II.E.1. below.
---------------------------------------------------------------------------
Although we solicited comment on whether issuers conducting Tier 2
offerings should be required to provide their financial statements to
the Commission and on their corporate Web sites in interactive data
format using XBRL, we are not adopting any such requirement in the
final rules.\461\ Commenters that addressed this issue opposed
requiring the use of XBRL in Regulation A filings.\462\ We agree and do
not believe that requiring the use of XBRL in Regulation A filings
would be an appropriately tailored requirement for smaller issuers at
this time.\463\
---------------------------------------------------------------------------
\461\ Data becomes interactive when it is labeled or ``tagged''
using a computer markup language such as XBRL that software can
process for analysis. For a discussion of current financial
statement interactive data requirements, see Rel. No. 33-9002 (Jan.
30, 2009) [74 FR 6776].
\462\ BIO Letter; MoFo Letter; US Chamber of Commerce Letter.
\463\ We recognize, however, that future technological
developments may lessen the burden to smaller issuers associated
currently with XBRL, at which time we may revisit this initial
determination.
---------------------------------------------------------------------------
On December 23, 2013, after we proposed rules for Regulation A, the
Financial Accounting Standards Board (FASB) and Private Company Council
(PCC) issued a guide for evaluating financial accounting and reporting
for non-public business entities.\464\ The PCC was created in 2012 by
the FASB and the Financial Accounting Foundation (FAF) to improve the
standard-setting process, and provide for accounting and reporting
alternatives, for non-public business entities under U.S. GAAP.\465\ As
the standards for non-public business entities are new, there are
currently very few distinctions between U.S. GAAP for public and non-
public business entities. Over time, however, more distinctions between
non-public business entity and public company accounting standards
could develop.
---------------------------------------------------------------------------
\464\ The Private Company Decision-Making Framework: A Guide for
Evaluating Financial Accounting and Reporting for Private Companies
(the ``PCC Guide''), available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163703583.
\465\ For a brief history behind the creation of the PCC, see:
http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1351027243391.
---------------------------------------------------------------------------
Issuers that offer securities pursuant to Regulation A will be
considered ``public business entities'' as defined by the FASB and,
therefore, ineligible to rely on any alternative accounting or
reporting standards for non-public business entities.\466\ Even though
issuers of securities in a Regulation A offering fit within the
definition of ``public business entity,'' the Commission retains the
authority to determine whether or not such issuers would be permitted
to rely on the developing non-public business entity standards.\467\
---------------------------------------------------------------------------
\466\ See numbered paragraph 12 of the PCC Guide, p. 3.
\467\ Id.
---------------------------------------------------------------------------
The distinction between public and non-public business entity
standards was not directly contemplated in the Proposing Release, as
the FASB/PCC Guide was issued after the Regulation A proposal was
approved by the Commission.\468\ Commenters, however, generally
expressed concern about the costs associated with requiring non-public
business entities (e.g., non-Exchange Act reporting companies) to
follow public company U.S. GAAP accounting standards, particularly on a
going forward basis.\469\ Commenters also expressed concern about the
potential that an issuer would need to have its financial statements
prepared and audited a second time, which would likely increase the
costs associated with any previously obtained financial statements by a
non-public business entity that would not comply with the financial
statement requirements of an exemption that requires such issuer to
follow the standards applicable to public business entities.\470\
---------------------------------------------------------------------------
\468\ The Commission approved the proposed rules on December 18,
2013, while the PCC Guide was issued on December 23, 2013.
\469\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo
Letter; WR Hambrecht + Co Letter.
\470\ Id.
---------------------------------------------------------------------------
The final rules do not allow Regulation A issuers to use the
alternatives available to non-public business entities under U.S. GAAP
in the preparation of their financial statements. One of the
significant factors considered by the FASB in developing its definition
of ``public business entity'' was the number of primary users of the
financial statements and their access to
[[Page 21838]]
management.\471\ As the FASB noted, ``users of private company
financial statements have continuous access to management and the
ability to obtain financial information throughout the year.'' \472\ As
the number of investors increases and the ability to influence
management decreases, it is important that all investors receive or
have timely access to comprehensive financial information. As a result,
the Commission believes that investor protection is enhanced by
Regulation A issuers providing financial statements prepared in the
same manner as other entities meeting the FASB's definition of ``public
business entity.''
---------------------------------------------------------------------------
\471\ PCC Guide, p. 6.
\472\ Id.
---------------------------------------------------------------------------
c. Part III (Exhibits)
We proposed to maintain the existing exhibit requirements in Part
III of Form 1-A. Additionally, we proposed to continue to permit
issuers to incorporate by reference certain information in documents
filed under Regulation A that is already available on EDGAR, but also
require issuers to describe the information incorporated by reference
and include a hyperlink to such exhibit on EDGAR.\473\ As proposed,
issuers also would have to be subject to the ongoing reporting
obligations for Tier 2 offerings in order to avail themselves of this
accommodation.
---------------------------------------------------------------------------
\473\ See General Instruction III to proposed Form 1-A and
discussion in Section II.C.3.b(1). above regarding incorporation by
reference in Part II of Form 1-A. The hyperlink must be active at
the time of filing, but need not remain active after filing.
---------------------------------------------------------------------------
We did not receive any comments on the proposed exhibit
requirements for Part III of Form 1-A, and are adopting the proposed
exhibit requirements substantially as proposed. As adopted, issuers
will be required to file the following exhibits with the offering
statement: Underwriting agreement; charter and by-laws; instrument
defining the rights of securityholders; subscription agreement; voting
trust agreement; material contracts; plan of acquisition,
reorganization, arrangement, liquidation, or succession; escrow
agreements; consents; opinion regarding legality; ``testing the
waters'' materials; appointment of agent for service of process; and
any additional exhibits the issuer may wish to file.\474\ In a change
from the proposed requirements, however, the final rules no longer
require issuers to file schedules (or similar attachments) to material
contracts in all instances. As adopted, issuers are permitted to
exclude schedules (or similar attachments) to material contracts if not
material to an investment decision or if the material information
contained in such schedules is otherwise disclosed in the agreement or
the offering statement. Any material contract filed in response to Item
17, however, must contain a list briefly identifying the contents of
all omitted schedules, together with an agreement to furnish
supplementally a copy of any omitted schedule to the Commission upon
request.
---------------------------------------------------------------------------
\474\ See Part III (Exhibits) of Form 1-A.
---------------------------------------------------------------------------
We are adopting final rules that permit issuers to incorporate by
reference certain information that is already available on EDGAR. In a
change from the proposed rules, incorporation by reference will not be
limited to documents previously filed pursuant to Regulation A and will
not be limited to issuers subject to Tier 2 ongoing reporting
obligations. We believe that this change will continue to facilitate
the provision of required information to investors, while taking a
consistent approach to information previously provided to the
Commission and publicly available on EDGAR. Issuers that seek to
incorporate by reference are further required to describe the
information incorporated by reference and include a hyperlink to such
exhibit on EDGAR.\475\ As proposed, such issuers must be subject to the
ongoing reporting obligations for Tier 2 offerings. Additionally, as
proposed, to the extent post-qualification amendments to offering
statements must include audited financial statements, the final rules
require the consent of the certifying accountant to the use of such
accountant's report in connection with amended financial statements to
be included as an exhibit.\476\ The final rule, however, clarifies that
the requirement to file the consent of the certifying accountant only
applies where the financial statements required to be filed are
amended.\477\
---------------------------------------------------------------------------
\475\ See General Instruction III to Form 1-A. The hyperlink
must be active at the time of filing, but need not remain active
after filing.
\476\ This is consistent with current practice under Regulation
A, but will be made an express requirement under the final rules.
See Rule 252(f)(1)(ii).
\477\ See id.
---------------------------------------------------------------------------
d. Signature Requirements
Similar to the requirement for issuers in registered offerings, we
proposed to require issuers to manually sign a copy of the offering
statement before or at the time of filing and retain it for a period of
five years.\478\ Issuers would be required to produce the manually
signed copy to the Commission, upon request.\479\ Additionally, we
proposed to eliminate the requirement that, where an issuer filing a
Form 1-A is a Canadian issuer, its authorized representative in the
United States is required to sign the offering statement.\480\ Also, we
proposed to maintain the requirement that Canadian issuers file a Form
F-X \481\ to provide an express consent to service of process in
connection with offerings qualified under Form 1-A. This treatment is
similar to requirements for Canadian companies making filings under the
multijurisdictional disclosure system.\482\
---------------------------------------------------------------------------
\478\ See Instructions 2 and 3 to Signatures in proposed Form 1-
A; cf. Rule 402(e), 17 CFR 230.402(e).
\479\ Id.
\480\ See 17 CFR 230.252(f) (2014) and Instruction 1 to
Signatures of Form 1-A (2014).
\481\ 17 CFR 239.42.
\482\ See Rel. No. 33-6902 (June 21, 1991) [56 FR 30036]
(adopting the multijurisdictional disclosure system).
---------------------------------------------------------------------------
We did not receive any comments on this aspect of the proposal, and
are adopting these provisions, as proposed, in the final rules.\483\
---------------------------------------------------------------------------
\483\ See Instructions to Signatures, Form 1-A.
---------------------------------------------------------------------------
4. Continuous or Delayed Offerings and Offering Circular Supplements
a. Proposed Rules
Rule 251(d)(3) currently allows for continuous or delayed offerings
under Regulation A if permitted by Rule 415.\484\ By reference to the
undertakings of Item 512(a) of Regulation S-K,\485\ Rule 415 does not
necessarily require every change in the information contained in a
prospectus to a registration statement in a continuous offering to be
reflected in a post-effective amendment.\486\ On the other hand,
currently Regulation A requires every revised or updated offering
circular in a continuous offering to be filed as an amendment to the
offering statement to which it relates and to be qualified in a process
similar to the Commission staff review, comment and qualification
process for initial offering statements.\487\ The requalification
[[Page 21839]]
process can be costly and time consuming for smaller issuers conducting
continuous offerings of securities pursuant to Regulation A. We
proposed to clarify in the rules for Regulation A the scope of
permissible continuous or delayed offerings and the related concept of
offering circular supplements.
---------------------------------------------------------------------------
\484\ 17 CFR 230.415. Certain shelf offerings, however, are only
permissible in offerings on Form S-3, which Regulation A issuers are
ineligible to use. See, e.g., Rule 415(a)(1)(x).
\485\ 17 CFR 230.415(a)(3).
\486\ See 17 CFR 229.512(a)(1) (requiring issuers to file a
post-effective amendment for purposes of an update under Section
10(a)(3) of the Securities Act, to reflect any facts or events
arising after effectiveness that, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, or to include, subject to certain
exceptions, any material information with respect to the plan of
distribution not previously disclosed (or material changes to
information previously disclosed) in the registration statement).
\487\ See 17 CFR 230.253(e) (2014); 17 CFR 230.252(h)(1) (2014).
---------------------------------------------------------------------------
Rule 415 attempts to promote efficiency and cost savings in the
securities markets by allowing for the registration of certain
traditional and other shelf offerings.\488\ Prior to the adoption of
final rules today, Rule 251(d)(3) of Regulation A allowed for
continuous or delayed offerings under Regulation A if permitted by Rule
415.\489\ When Rule 415 was adopted, the Commission recognized that
certain traditional shelf offerings have been allowed by administrative
practice for many years despite the absence of such a rule.\490\ Since
Rule 415 only addresses registered offerings, however, the precise
scope of continuous or delayed offerings under Regulation A has been
unclear.
---------------------------------------------------------------------------
\488\ See Rel. No. 33-6499 [48 FR 52889] (Nov. 23, 1983) (noting
the efficiency and cost savings issuers experienced during the
eighteen month trial period for a previous temporary version of the
rule).
\489\ 17 CFR 230.415.
\490\ Certain ``traditional shelf offerings'' have been allowed
since at least 1968 by the Commission's guides for the preparation
and filing of registration statements, such as Guide 4, and related
administrative practice. See id.; see also Rel. No. 33-4936 [33 FR
18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission
guides).
---------------------------------------------------------------------------
The proposed rules would clarify the scope of permissible
continuous or delayed offerings under Regulation A and the related
concept of offering circular supplements, and otherwise continue to
allow for certain traditional shelf offerings to promote flexibility,
efficiency, and to reduce unnecessary offerings costs.\491\ Further, as
proposed, an issuer's ability to sell securities in a continuous or
delayed offering would be conditioned on being current with the Tier 2
ongoing reporting requirements at the time of sale.\492\
---------------------------------------------------------------------------
\491\ See Proposing Release, at Section II.C.4.
\492\ Proposed Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------
To provide clarity regarding the application of Rule 415 concepts
to Regulation A offerings, we proposed to add a provision to Regulation
A similar to Rule 415, but with limitations that we believed would be
appropriate for Regulation A. The provision would establish time limits
similar to those in Rule 415 and make conforming changes as
necessary.\493\
---------------------------------------------------------------------------
\493\ Proposed Rule 251(d)(3).
---------------------------------------------------------------------------
In the Proposing Release we proposed excluding types of shelf
offerings that cannot be conducted under existing Regulation A, such as
offerings requiring registration on Form F-6, offerings requiring
primary eligibility to use Forms S-3 or F-3,\494\ offerings conducted
by issuers ineligible to use Regulation A,\495\ as well as certain
offerings that we do not currently believe would be appropriate to
include in the Regulation A framework. Further, we proposed prohibiting
all ``at the market'' offerings under Regulation A.\496\
---------------------------------------------------------------------------
\494\ See also fn. 484 above.
\495\ Rule 415(a)(1)(xi) discusses investment companies and
BDCs.
\496\ See proposed Rule 251(d)(3)(ii).
---------------------------------------------------------------------------
Additionally, as proposed, changes in the information contained in
the offering statement would no longer necessarily trigger an
obligation to amend.\497\ Offering circulars for continuous Regulation
A offerings would, however, continue to be required to be updated
annually through the filing of a post-qualification amendment. These
annual post-qualification amendments would include updated financial
statements and post-qualification amendments would also be required
when updating the offering circular to reflect facts or events arising
after qualification which, in the aggregate, represent a fundamental
change in the information set forth in the offering statement.\498\
---------------------------------------------------------------------------
\497\ See proposed Rule 252(h)(2).
\498\ Id.
---------------------------------------------------------------------------
In addition to these post-qualification amendments to the offering
statement that must be qualified, we also proposed to allow issuers to
use offering circular supplements in certain situations.\499\ Further,
we proposed to permit issuers in continuous offerings to qualify
additional securities in reliance on Regulation A by a post-
qualification amendment.\500\
---------------------------------------------------------------------------
\499\ See proposed Rule 253(g).
\500\ See proposed Rule 251(d)(3)(i)(F) and note to proposed
Rule 253(b).
---------------------------------------------------------------------------
We also proposed provisions similar to Rule 424 that would require
issuers omitting certain information from an offering statement at the
time of qualification, in reliance on proposed Rule 253(b), to file
such information as an offering circular supplement no later than two
business days following the earlier of the date of determination of
such pricing information or the date of first use of the offering
circular after qualification.\501\ Further, these proposed provisions
would require offering circulars that contain substantive changes in
information previously provided in the last offering circular (other
than information omitted in reliance on proposed Rule 253(b)) to be
filed within five business days after the date such offering circular
is first used after qualification.\502\ Offering circular supplements
that are not filed within the required time frames provided by the
proposed rules would be required to be filed as soon as practicable
after the discovery of the failure to file.\503\
---------------------------------------------------------------------------
\501\ See proposed Rule 253(g).
\502\ See proposed Rule 253(g)(2).
\503\ See proposed Rule 253(g)(4).
---------------------------------------------------------------------------
b. Comments on Proposed Rules
Commenters were generally supportive of the proposed modernization
of Regulation A's offering process, in general, and the provisions for
continuous or delayed offerings, in particular.\504\ Two commenters,
however, recommended allowing for at the market offerings under
Regulation A.\505\ Additionally, one commenter recommended allowing for
at the market offerings in non-penny stocks on established trading
markets.\506\ Another commenter recommended allowing for at the market
offerings in securities that qualify for the actively-traded securities
exceptions in Rules 101 and 102 of Regulation M.\507\ This commenter
suggested that the offering amount could be determined by using the
calculation set forth in Securities Act Rule 457(c) \508\ as of a
specified date within five business days of qualification of the
offering statement.
---------------------------------------------------------------------------
\504\ See, e.g., ABA BLS Letter; KVCF Letter; OTC Markets
Letter; Paul Hastings Letter.
\505\ OTC Markets Letter; Paul Hastings Letter.
\506\ OTC Markets Letter. This commenter also recommended that
securities offered under Regulation A that are not penny stocks and
that trade on an established public market should be treated as
having a ``ready market'' and thus be considered eligible for margin
purposes, which the commenter believed would increase the value of
securities and their liquidity.
\507\ Paul Hastings Letter. Regulation M was adopted by the
Commission in 1996 and is intended to prevent potentially
manipulative practices by underwriters, issuers, selling
securityholders, and other participants in a securities offering.
See Rel. No. 38067 (December 20, 1996) [62 FR 520].
\508\ Rule 457(c) specifies that Securities Act registration
fees for securities offered on the basis of fluctuating market
prices shall be calculated as follows: Either the average of the
high and low prices reported in the consolidated reporting system
(for last sale reported over-the-counter securities) or the average
of the bid and asked price (for other over-the-counter securities)
as of a specified date within 5 business days prior to the date of
filing the offering statement.
---------------------------------------------------------------------------
c. Final Rules
We believe the proposed rules sufficiently update existing rules,
while providing issuers with adequate flexibility with respect to, and
additional guidance on, the permissible scope of continuous or delayed
Regulation A offerings and offering
[[Page 21840]]
circular supplements. We are adopting these rules as proposed.
The final rules add Rule 251(d)(3) to Regulation A, without changes
from the proposed rule. This provision is similar to Rule 415, but its
scope is limited to permissible Regulation A offerings.\509\ In this
regard, the final rules for Regulation A will continue to allow for
certain traditional shelf offerings to promote flexibility, efficiency,
and to reduce unnecessary offerings costs.\510\ The final rules will
condition the ability of an issuer to sell securities in a continuous
offering on being current in its annual and semiannual report filing,
if required under Rule 257(b), at the time of sale.\511\ As we
indicated in the Proposing Release, we believe this additional
condition will not impose incremental costs on issuers, which are in
any case required to update their offering statement and to file such
ongoing reports, and will promote parity of information in the
secondary markets.
---------------------------------------------------------------------------
\509\ Rule 251(d)(3).
\510\ See Rel. No. 33-6499, at IV.A. (``[T]he procedural
flexibility afforded by the Rule enables a registrant to time its
offering to avail itself of the most advantageous market conditions
. . . registrants are able to obtain lower interest rates on debt
and lower dividend rates on preferred stock, thereby benefiting
their existing shareholders.'').
\511\ This condition only applies to continuous offerings under
Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------
As proposed, the final rules provide for the following types of
continuous or delayed offerings:
Securities offered or sold by or on behalf of a person
other than the issuer or its subsidiary or a person of which the issuer
is a subsidiary;
securities offered and sold pursuant to a dividend or
interest reinvestment plan or an employee benefit plan of the issuer;
securities issued upon the exercise of outstanding
options, warrants, or rights;
securities issued upon conversion of other outstanding
securities;
securities pledged as collateral; or
securities that are part of an offering which commences
within two calendar days after the qualification date, will be offered
on a continuous basis, may continue to be offered for a period in
excess of 30 days from the date of initial qualification, and will be
offered in an amount that, at the time the offering statement is
qualified, is reasonably expected to be offered and sold within two
years from the initial qualification date.\512\
---------------------------------------------------------------------------
\512\ Id.
---------------------------------------------------------------------------
Notwithstanding the suggestions of commenters regarding at the
market offerings, we continue to believe that such offerings are not
appropriate for Regulation A offerings, particularly at the outset of
the adoption of today's amendments to the existing rules. While it is
possible that a market in Regulation A securities may develop that is
capable of supporting primary and secondary at the market offerings,
rather than permit such offerings at the outset, we believe that any
determination as to whether the exemption would be an appropriate
method for such offerings should occur in the future. Further, an
offering sold at fluctuating market prices may not be appropriate
within the context of an exemption that is contingent upon not
exceeding a maximum offering size.
Under the final rules, as proposed, changes in the information
contained in the offering statement will no longer necessarily trigger
an obligation to amend.\513\ Offering circulars for continuous or
delayed Regulation A offerings will continue to be required to be
updated, and the offering statements to which they relate requalified
annually to include updated financial statements, and otherwise as
necessary to reflect facts or events arising after qualification which,
in the aggregate, represent a fundamental change in the information set
forth in the offering statement.\514\ In addition to post-qualification
amendments to the offering statement that must be qualified, the final
rules also will allow issuers to use offering circular supplements in
certain situations.\515\ Further, issuers in continuous offerings will
be permitted to qualify additional securities in reliance on Regulation
A by a post-qualification amendment.\516\
---------------------------------------------------------------------------
\513\ Rule 252(f)(2).
\514\ Id.
\515\ Rule 253(g).
\516\ Rule 251(d)(3)(i)(F) and note to Rule 253(b).
---------------------------------------------------------------------------
The final rules will, as proposed, permit offering circular
supplements to be used for final pricing information, where the
offering statement is qualified on the basis of a bona fide price range
estimate.\517\ Additionally, the final rules permit offering circulars
to omit information with respect to the underwriting syndicate
analogous to the provisions for registered offerings under Rule
430A.\518\ However, the final rules do not allow an issuer to omit the
volume of securities (the number of equity securities or aggregate
principal amount of debt securities) to be offered.\519\ The final
rules also permit, as proposed, offering circular supplements to
reflect a decrease in the volume of, or to change the price range of,
the securities offered in reliance on a qualified offering statement
under Regulation A, so long as the decrease in the volume of securities
offered or change in the price range would not materially change the
disclosure contained in the offering statement at qualification.\520\
Notwithstanding this provision, any decrease in the volume of
securities offered and any deviation from the low or high end of the
price range may be reflected in the offering circular supplement filed
with the Commission if, in the aggregate, the decrease in volume and/or
change in price represent no more than a 20% change from the maximum
aggregate offering price calculable using the information in the
qualified offering statement.\521\ Under no circumstances, however,
would an issuer be able to amend its offering statement or rely on the
provisions for offering circular supplements where the maximum
aggregate offering price resulting from any changes in the price of the
securities would exceed the offering amount limitation set forth in
Rule 251(a) or if the increase in aggregate offering price would result
in a Tier 1 offering becoming a Tier 2 offering.\522\
---------------------------------------------------------------------------
\517\ Rule 253(b)(2). The bona fide price range estimate may not
exceed $2 for offerings where the upper end of the range is $10 or
less and 20% if the upper end of the price range is over $10.
\518\ Rule 253(b) (also permitting the omission of underwriting
discounts or commissions, discounts or commissions to dealers,
amount of proceeds, conversion rates, call prices and other items
dependent upon the offering price, delivery dates, and terms of the
securities dependent upon the offering date, so long as certain
conditions are met).
\519\ Rule 253(b)(4).
\520\ See note to Rule 253(b).
\521\ Id.
\522\ Id.
---------------------------------------------------------------------------
We are also adopting as proposed provisions similar to Rule 424
that require issuers omitting certain pricing and price-related
information from an offering statement at the time of qualification, in
reliance on Rule 253(b), to file such information as an offering
circular supplement no later than two business days following the
earlier of the date of determination of such pricing information or the
date of first use of the offering circular after qualification.\523\
These provisions require offering circulars that contain substantive
changes (other than information omitted in reliance on Rule 253(b)) in
information previously provided in the last offering circular to be
filed within five business days after the date such offering circular
is first used after qualification.\524\ Offering circular supplements
that are not filed within the required time frames provided by the
rules are required to be
[[Page 21841]]
filed as soon as practicable after the discovery of the failure to
file.\525\
---------------------------------------------------------------------------
\523\ Rule 253(g)(1).
\524\ Rule 253(g)(2).
\525\ Rule 253(g)(4).
---------------------------------------------------------------------------
5. Qualification
Under existing Regulation A, an offering statement is generally
only qualified by order of the Commission in a manner similar to a
registration statement being declared effective.\526\ In such
instances, the issuer includes a delaying notation on the cover of the
Form 1-A stating that the offering statement shall only be qualified by
order of the Commission.\527\ In order to remove a delaying notation,
an issuer must file an amendment to the offering statement indicating
that the offering statement will become qualified on the 20th calendar
day after filing.\528\ An offering statement that does not include a
delaying notation will be qualified without Commission action on the
20th calendar day after filing.\529\
---------------------------------------------------------------------------
\526\ 17 CFR 230.252(g)(2) (2014).
\527\ Id.
\528\ 17 CFR 230.252(g)(3) (2014).
\529\ 17 CFR 230.252(g)(1) (2014).
---------------------------------------------------------------------------
We proposed to alter the qualification process of existing
Regulation A. As proposed, an offering statement could only be
qualified by order of the Commission, and the process associated with
the delaying notation would be eliminated. A few commenters generally
supported the proposed elimination of qualification without Commission
action.\530\ No commenters opposed this aspect of the proposal.
---------------------------------------------------------------------------
\530\ CFA Letter; CFA Institute Letter; MCS Letter.
---------------------------------------------------------------------------
We are adopting, substantially as proposed, final rules that
require Commission action before a Regulation A offering statement may
be qualified. The final rules modify the proposed rules by permitting
the offering statements to be declared qualified by a ``notice of
qualification'' issued by the Division of Corporation Finance, pursuant
to delegated authority, rather than requiring the Commission itself to
issue an order.\531\ The notice of qualification is analogous to a
notice of effectiveness in registered offerings.\532\ We are therefore
amending the Commission's organization rules, as they relate to the
delegated authority of the Director of the Division of Corporation
Finance, to permit the Division to issue qualification orders pursuant
to Regulation A.\533\ The final rules also eliminate the risk that an
issuer may exclude a delaying notation either in error or in an effort
to become qualified automatically without review and comment by the
Commission staff. Given the electronic filing processes we are
adopting,\534\ the scaled disclosure requirements for Tier 1 and Tier 2
offerings,\535\ and the preemption of state securities law registration
and qualification requirements for Tier 2 offerings,\536\ we believe it
is appropriate to ensure that the Commission staff has the opportunity
to review and comment on an offering statement before it becomes
qualified.
---------------------------------------------------------------------------
\531\ See Rule 252(e).
\532\ See 17 CFR 200.30-1(a)(5) (The Director of the Division of
Corporation Finance has the delegated authority to declare
registration statements to be effective within shorter periods of
time than 20 days after filing, consistent with Section 8(a) of the
Securities Act (15 U.S.C. 77h).
\533\ Rule 30-1(b)(2)-(4).
\534\ See discussion in Section II.C.1. above.
\535\ See discussion in Section II.C.3.b. above.
\536\ See discussion in Section II.H.3. below.
---------------------------------------------------------------------------
D. Solicitation of Interest (Testing the Waters)
1. Proposed Rules
Under Securities Act Section 3(b)(2)(E), issuers may test the
waters for interest in an offering--without restriction as to the types
of investors solicited--before filing an offering statement on such
terms and conditions as the Commission prescribes. We proposed to
permit issuers to use testing the waters solicitation materials both
before and after the offering statement is filed, subject to issuer
compliance with the rules on filing of solicitation materials and
disclaimers.\537\ As we noted in the Proposing Release, the investor
protections with respect to solicitation materials in existing
Regulation A would remain in place as these materials remain subject to
the antifraud and other civil liability provisions of the federal
securities laws.\538\ As proposed, testing the waters materials used by
an issuer or its intermediaries after publicly filing an offering
statement would be required to include a current preliminary offering
circular or contain a notice informing potential investors where and
how the most current preliminary offering circular can be obtained. We
further proposed to require issuers to publicly file their offering
statements not later than 21 calendar days before qualification so that
any solicitation made in the 21 calendar days before the earliest date
of potential sales of securities would be conducted using the most
recent version of the preliminary offering circular. The proposed rules
would amend the requirements for submission or filing of solicitation
materials, so that such material would be submitted or filed as an
exhibit when the offering statement is either submitted for non-public
review or filed (and updated for substantive changes in such material
after the initial non-public submission or filing) but would no longer
be required to be submitted at or before the time of first use.
---------------------------------------------------------------------------
\537\ This timing is similar to the ``testing the waters''
permitted for emerging growth companies under new Section 5(d) of
the Securities Act, added by the JOBS Act, which can also be
conducted both before and after filing of a registration statement.
Under Section 5(d), no legending or disclaimers are required, but
testing the waters is limited to potential investors that are
``qualified institutional buyers'' or institutional ``accredited
investors.''
\538\ The Commission's antifraud liability provisions in Section
17 of the Securities Act, 15 U.S.C. 77q, apply to any person who
commits fraud in connection with the offer or sale of securities.
Section 3(b)(2)(D) of the Securities Act, 15 U.S.C. 77c(b)(2)(D),
states that the civil liability provisions of Section 12(a)(2) apply
to any person offering or selling securities under Regulation A. See
also Rel. No. 33-6924, at fn. 48.
---------------------------------------------------------------------------
As proposed, Rule 255(b) would require all soliciting materials to
bear certain legends or disclaimers.\539\ Further, we did not propose
to limit testing the waters to QIBs and institutional accredited
investors (as is currently the case with testing the waters by emerging
growth companies under Securities Act Section 5(d)).
---------------------------------------------------------------------------
\539\ Proposed Rule 255(b). As proposed, Rule 255(b) would
largely follow similar provisions in the context of registered
offerings. See Rule 134(d), 17 CFR 230.134(d) (requiring a
disclaimer for solicitations of interest in registered offerings).
---------------------------------------------------------------------------
2. Comments on Proposed Rules
Most commenters generally supported the proposed amendments to the
testing the waters provisions.\540\ Several commenters, however,
recommended requiring the filing of testing the waters materials prior
to first use.\541\ These commenters suggested that the antifraud and
other civil liability provisions of the federal securities laws are not
an adequate substitute for the investor protections afforded by an
advance filing requirement for solicitation materials. They further
suggested that their concerns about the proposed testing the waters
provisions are compounded by an access equals delivery model of final
offering circular delivery. One commenter recommended allowing states
to have immediate access to all testing the waters materials filed with
the Commission.\542\ Another commenter recommended making the filing of
testing the waters materials a condition to the exemption,\543\ while a
third commenter specifically opposed that recommendation.\544\
---------------------------------------------------------------------------
\540\ BIO Letter; Letter from Daniel McElroy, DuMoulin Black
LLP, April 1, 2014 (``DuMoulin Letter''); Ladd Letter 2; Paul
Hastings Letter; Richardson Patel Letter.
\541\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
\542\ Ladd Letter 2.
\543\ MCS Letter.
\544\ BIO Letter.
---------------------------------------------------------------------------
[[Page 21842]]
Two commenters recommended ensuring that any testing the waters
materials that are filed with the Commission be kept confidential, at
least until the offering statement is qualified.\545\ One commenter
recommended removing any requirement to file testing the waters
materials publicly,\546\ while another commenter recommended not
requiring testing the waters materials to be filed for Tier 2
offerings.\547\ One commenter supported the use of legends on testing
the waters materials or, in lieu of legends, restricting testing the
waters to certain types of investors, such as QIBs and accredited
investors.\548\
---------------------------------------------------------------------------
\545\ Heritage Letter; Ladd Letter 2.
\546\ BIO Letter.
\547\ MoFo Letter.
\548\ CFA Institute Letter.
---------------------------------------------------------------------------
Several commenters suggested that the Commission provide market
participants with communication safe harbors from Section 12(a)(2)
liability for regular business communications by a Regulation A
issuer.\549\
---------------------------------------------------------------------------
\549\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA
Letter 2; MoFo Letter; Public Startup Co. Letter 6; WR Hambrecht +
Co Letter. See also discussion of Section 12(a)(2) liability in
Proposing Release, Section II.B.7.
---------------------------------------------------------------------------
3. Final Rules
We are adopting testing the waters provisions in the final rules as
proposed. Under the final rules, issuers will be permitted to test the
waters with all potential investors and use solicitation materials both
before and after the offering statement is filed, subject to issuer
compliance with the rules on filing and disclaimers.\550\
---------------------------------------------------------------------------
\550\ Rule 255. For a discussion of the use of solicitation
materials as it relates to (i) the doctrine of integration, see
Section II.B.5.c. above and Rule 255(e), and (ii) the application of
state securities laws, see Section II.H.3. below.
---------------------------------------------------------------------------
The final rules require, as proposed, that testing the waters
materials used by an issuer or its intermediaries after the issuer
publicly files an offering statement be accompanied by a current
preliminary offering circular or contain a notice informing potential
investors where and how the most current preliminary offering circular
can be obtained.\551\ This requirement may be satisfied by providing
the URL where the preliminary offering circular or the offering
statement may be obtained. Solicitation materials will remain subject
to the antifraud and other civil liability provisions of the federal
securities laws.\552\ Further, the final rules require issuers and
intermediaries that use testing the waters materials after publicly
filing the offering statement to update and redistribute such material
in a substantially similar manner as such materials were originally
distributed to the extent that either the material itself or the
preliminary offering circular attached thereafter becomes inadequate or
inaccurate in any material respect.\553\
---------------------------------------------------------------------------
\551\ Rule 255(b)(4).
\552\ See fn. 538 above.
\553\ Issuers would not, however, be required to update and
redistribute solicitation materials to the extent that: (i) Any such
changes occur only with respect to the preliminary offering
circular, (ii) no similar changes are required in the solicitation
materials previously relied upon, and (iii) such materials included
(when originally distributed) a URL where the preliminary offering
circular or the offering statement may be obtained and that URL
continues to link to the most recent version of the preliminary
offering circular. See Rule 255(d).
---------------------------------------------------------------------------
As discussed in Section II.C.2. above, first-time issuers that are
eligible for, and elect to, non-publicly submit draft offering
statements are required to publicly file their offering statements not
later than 21 calendar days before qualification so that any
solicitation of interest made in the 21 calendar days before the
earliest date of potential sales of securities by such issuers will be
conducted while potential investors have access to the most recent
version of the preliminary offering circular. Additionally, in light of
the preemption of state securities laws registration requirements in
the final rules for Tier 2 offerings, the 21 calendar day requirement
will enable state securities regulators to require such issuers to file
such materials with them for a minimum of 21 calendar days before any
potential sales to investors in their respective states.\554\
---------------------------------------------------------------------------
\554\ See fn. 277 above.
---------------------------------------------------------------------------
As proposed, the final rules require that issuers submit or file
solicitation materials as an exhibit when the offering statement is
either submitted for non-public review or filed (and update for
substantive changes in such material after the initial non-public
submission or filing). However, issuers are no longer required to
submit solicitation materials at or before the time of first use.\555\
The treatment of solicitation materials in Regulation A offerings is
generally consistent with the Commission staff's treatment of
solicitation materials used by emerging growth companies under
Securities Act Section 5(d), with two exceptions that we believe will
provide investors in Regulation A offerings with additional
protections:
---------------------------------------------------------------------------
\555\ Rule 255.
---------------------------------------------------------------------------
Solicitation materials used in Regulation A offerings are
required to be included with the offering statement; \556\ and
---------------------------------------------------------------------------
\556\ See Item 17 (Exhibits), Part III of Form 1-A.
---------------------------------------------------------------------------
solicitation materials used by Regulation A issuers that
file an offering statement with the Commission will be publicly
available as a matter of course.
Contrary to the views of commenters that suggested we keep
solicitation materials confidential, or not require such materials to
be filed (either publicly or at all), we believe the submission and
filing requirements for solicitation materials are important elements
of the final rules for the use of solicitation materials.\557\ We
believe that issuers should be accountable for the content of
solicitation materials and that such information must be consistent
with the information contained in the offering circular. We believe
that making these materials publicly available as an exhibit to the
offering statement, and thereby subjecting them to staff review and
comment and scrutiny by the public, will help ensure that issuers use
solicitation materials with appropriate caution. However, for the
reasons discussed in Section II.F. below, we do not believe that the
filing of such materials should be a condition to relying on the
Regulation A exemption.
---------------------------------------------------------------------------
\557\ BIO Letter; Heritage Letter; Ladd Letter 2; MoFo Letter.
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We are adopting as proposed the required legends for solicitation
materials. The legends provide that sales made pursuant to Regulation A
are contingent upon the qualification of the offering statement.\558\
Additionally, to provide greater flexibility when using solicitation
materials, the final rules eliminate, as proposed, the requirement in
existing Regulation A for testing the waters materials to identify the
issuer's chief executive officer, business, and products. Solicitation
materials used before qualification will, therefore, be required to
bear a legend or disclaimer indicating that: (1) No money or other
consideration is being solicited, and if sent, will not be accepted;
(2) no sales will be made or commitments to purchase accepted until the
offering statement is qualified; and (3) a prospective purchaser's
indication of interest is non-binding.\559\ While the expansion of use
of solicitation materials after filing may result in investors
receiving more sales literature in marketed offerings, in such
circumstances, potential investors will also be afforded more time with
the preliminary offering circular before making an investment decision
because, as noted above, testing the waters materials used by an issuer
or its intermediaries after the issuer publicly
[[Page 21843]]
files an offering statement must be accompanied by a current
preliminary offering circular or contain a notice informing potential
investors where and how the most current preliminary offering circular
can be obtained.\560\
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\558\ See Rule 255(a).
\559\ See Rule 255(b).
\560\ Cf. The Regulation of Securities Offerings, Rel. No. 33-
7606A, at 78 (Nov. 17, 1998) [63 FR 67174] (discussing the
importance of providing a preliminary prospectus in conjunction with
the distribution of sales materials).
---------------------------------------------------------------------------
We believe the approach to solicitation materials that we are
adopting today is consistent with existing Regulation A that allows
issuers to test the waters and will make the use of solicitation
materials more beneficial for issuers and investors. For issuers, the
final rules will generally reduce compliance burdens and entirely
eliminate the filing requirement for issuers that, after testing the
waters, decide not to proceed with an offering. With respect to
investors, we note that the final rules contain significant safeguards
that should help mitigate the concerns expressed by some commenters
that not requiring testing the waters materials to be submitted or
filed with the Commission before first use will result in a reduction
in investor protections.\561\ These include the requirements to make
the most recent preliminary offering circular available with
solicitation materials after filing, to redistribute solicitation
materials after filing to the extent that either the material itself or
the preliminary offering circular attached thereafter becomes
inadequate or inaccurate in any material respect, to deliver the
preliminary offering circular at least 48 hours in advance of sale if
the issuer is not subject to a Tier 2 reporting obligation, to deliver
the final offering circular (or a notice of the final offering
circular) no later than two business days after sale in all instances,
and the minimum 21 calendar day filing requirement for issuers that
non-publicly submit draft offering statements as well as the continued
application of the antifraud provisions of the federal securities laws.
Additionally, state securities regulators have the ability under the
final rules to require issuers to file with them any materials required
to be filed with the Commission.\562\ From an investor protection
standpoint, we also note that sales under Regulation A may occur only
in connection with a qualified offering statement that is filed with
the Commission and that is subject to review by the staff.
---------------------------------------------------------------------------
\561\ See fn. 541 above.
\562\ See also fn. 277 above and discussion in Section II.H.
below. Where states elect to require issuers to file such
information with them, their respective securities regulators will,
for example, have access to solicitation materials relied upon by
first-time issuers that non-publicly submit draft offering
statements for a minimum of 21 calendar days before the first date
of any potential sales.
---------------------------------------------------------------------------
Lastly, to address the concerns of commenters regarding an issuers'
ability to conduct routine communications with customers and suppliers
at or near the time of a contemplated Regulation A offering,\563\ we
are confirming, consistent with Rule 169's existing exemption from
Sections 2(a)(10) and 5(c) of the Securities Act for regularly released
factual business communications,\564\ that we do not believe such
communications constitute solicitation of interest materials under
Regulation A. Ultimately, whether or not a communication is limited to
factual business information depends on the facts and circumstances,
but issuers may generally look to the provisions of Rule 169 for
guidance in making this determination in the Regulation A context. More
generally, we note that factual business information means information
about the issuer, its business, financial condition, products,
services, or advertisement of such products or services.\565\ Factual
business information generally does not include such things as
predictions, projections, forecasts, or opinions with respect to
valuation of a security.\566\ The approach we are taking today with
respect to factual business information is consistent with the
Commission's stated position on such communications for registered
offerings and clarifies its application to Regulation A solicitation of
interest materials.
---------------------------------------------------------------------------
\563\ See fn. 549 above
\564\ 17 CFR 230.169.
\565\ See Rel. No. 33-5180 (Aug. 20, 1971) (Guidelines for
Release of Information by Issuers Whose Securities are in
Registration).
\566\ Id.
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E. Ongoing Reporting
Section 3(b)(2) of the Securities Act requires issuers to provide
annual audited financial information on an ongoing basis and expressly
provides that the Commission may consider whether additional ongoing
reporting should be required. Specifically, Section 3(b)(4) grants the
Commission authority to require issuers ``to make available to
investors and file with the Commission periodic disclosures regarding
the issuer, its business operations, its financial condition, its
corporate governance principles, its use of investor funds, and other
appropriate matters, and also may provide for the suspension and
termination of such a requirement with respect to that issuer.''
As we noted in the Proposing Release, we are mindful that a one-
size-fits-all ongoing reporting regime may not be suitable for all
types of entities and investors.\567\ In the final rules for Regulation
A, we have endeavored to achieve an appropriate balance between the
costs and benefits associated with the provision of ongoing information
about issuers of Regulation A securities to investors in such
securities and any market that develops.
---------------------------------------------------------------------------
\567\ See Proposing Release, at Section II.E.
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1. Continuing Disclosure Obligations
a. Proposed Rules for Continuing Disclosure Obligations
Regulation A currently requires issuers to file a Form 2-A with the
Commission to report sales and the termination of sales made under
Regulation A every six months after qualification and within 30
calendar days after the termination, completion, or final sale of
securities in the offering.\568\ We proposed to rescind Form 2-A, but
to continue to require Regulation A issuers to file with the Commission
electronically on EDGAR after the termination or completion of the
offering the information generally disclosed in Form 2-A.\569\ As
proposed, issuers conducting Tier 1 offerings would be required to
provide this information on Part I of proposed Form 1-Z not later than
30 calendar days after termination or completion of the offering,\570\
while issuers conducting Tier 2 offerings have the flexibility to
provide this information on either Part I of Form 1-Z at the time of
filing an exit report or proposed Form 1-K as part of their annual
report, whichever is filed first.\571\
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\568\ See 17 CFR 230.257 (2014); see also 17 CFR 239.91 (Form 2-
A).
\569\ We did not propose to continue to require issuers to
disclose the use of proceeds currently disclosed in Form 2-A, as
issuers would already have to disclose this information in Part II
of proposed Form 1-A and changes in the use of proceeds after
qualification not previously disclosed may require issuers to file a
post-qualification amendment or offering circular supplement to
update such disclosure. See discussion of continuous or delayed
offerings and offering circular supplements in Section II.C.4.
above.
\570\ Proposed Form 1-Z (exit report) is discussed in Section
II.E.4. below.
\571\ Proposed Rule 257(a), (b)(1).
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As proposed, Tier 2 issuers would be subject to a Regulation A
ongoing reporting regime that would require, in addition to annual
reports and summary information about a recently completed offering,
semiannual reports on proposed Form 1-SA, current event reports on
proposed Form 1-U, and, when eligible and electing to do so, notice to
the Commission of the suspension of ongoing reporting
[[Page 21844]]
obligations on Part II of proposed Form 1-Z. All of these reports would
be filed electronically on EDGAR.
b. Comments on the Proposed Rules
We received both general comments and specific comments on the
proposed forms. These comments are discussed in turn below.
General Comments
Commenters generally approved of the continuing disclosure
obligations for Tier 2 offerings.\572\ One commenter noted favorably
that professional fees, other costs, and the time burden associated
with the proposed rules would likely be substantially lower for
Regulation A issuers than for issuers subject to Exchange Act
reporting.\573\ Another commenter remarked that the proposed ongoing
reporting regime strikes an appropriate balance between the benefits of
disclosure and costs to issuers.\574\
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\572\ ABA BLS Letter; Campbell Letter; Canaccord Letter; CFA
Letter; McCarter & English Letter; NASAA Letter 2; Letter from Jason
Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 26,
2014 (``Public Startup Co. Letter 5''); US Alliance Corp. Letter;
WDFI Letter.
\573\ US Alliance Corp. Letter.
\574\ McCarter & English Letter.
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Other commenters expressed general support, but also recommended
changes to the semiannual reporting requirement or the content of Form
1-U.\575\ One commenter supported the general policy that it should not
be easier or harder to exit the Regulation A reporting system than it
would be to exit the Exchange Act reporting system.\576\ Several
commenters recommended including an ongoing disclosure requirement for
Tier 1 issuers, including disclosure at a level lower than what was
proposed for Tier 2,\577\ ongoing disclosure with yearly audited
financials,\578\ or some unspecified continuous disclosure
obligation.\579\ Another commenter recommended extending continuing
disclosure obligations into Tier 1, but further suggested that the
Commission replace any requirement to provide audited financial
statements with an affidavit from management attesting to the accuracy
of the financial statements.\580\ A few commenters generally
recommended reducing the disclosure burden on Tier 2 issuers.\581\ One
of these commenters recommended making continuing disclosure
requirements contingent upon factors other than offering size, such as
whether the issuer has taken steps to foster a market in its
securities.\582\ This commenter also recommended allowing issuers to
either avoid ongoing reporting or to file only financial statements and
a management letter regarding operations and results if, shortly after
commencing the offering upon qualification, issuers have less than 300
record holders. Another commenter recommended allowing Canadian
companies to rely on Rule 12g3-2(b) to avoid having to file ongoing
reports under Regulation A.\583\ As an alternative, this commenter
recommended allowing Canadian companies to furnish reports under cover
of Form 6-K rather than using the Regulation A reports. One commenter
recommended that, to the extent that the final rules allow foreign
private issuers to use Regulation A, such issuers should be permitted
to follow the ongoing reporting rules applicable to them in the
Exchange Act context in lieu of Regulation A ongoing reporting
requirements,\584\ while another commenter specifically opposed this
suggestion.\585\ Another commenter recommended requiring officers,
directors, and controlling shareholders of companies that offer
securities under Regulation A to make ongoing disclosure of
transactions in company securities, similar to reporting on Forms 3, 4,
and 5 and Schedules 13D, 13G, and 13F in the registered context.\586\
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\575\ ABA BLS Letter; Canaccord Letter; NASAA Letter 2; WDFI
Letter.
\576\ ABA BLS Letter (raising the issue particularly with
respect to ``very small issuers'' under Tier 2).
\577\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure
requirements could parallel Tier 2's requirements but without the
requirement for semiannual reports).
\578\ Ladd Letter 2.
\579\ SVB Financial Letter.
\580\ Public Startup Co. Letter 5.
\581\ Heritage Letter; IPA Letter (providing estimated costs of
compliance for offering statement and periodic reports).
\582\ Heritage Letter.
\583\ DuMoulin Letter.
\584\ McCarter & English Letter (noting Exchange Act Form 20-F,
40-F, Form 6-K, and ongoing home country reports).
\585\ Andreessen/Cowen Letter.
\586\ OTC Markets Letter.
---------------------------------------------------------------------------
Comments on Form 1-K
One commenter recommended revising proposed Form 1-K to expressly
not require the disclosure of an issuer's plan of operations, as
described in Item 9(c) of Part II of Form 1-A.\587\ This commenter
further recommended clarifying whether a Tier 2 issuer is required to
comply with Rules 3-10, 3-16, and 8-04 of Regulation S-X in Form 1-K,
in light of the reference to segmented data in Item 7(b) to Part F/S of
proposed Form 1-A.\588\ This same commenter recommended that the
Commission clarify whether a Tier 2 issuer is required to comply with
Rule 8-04 of Regulation S-X in proposed Form 1-K, particularly with
respect to probable acquisitions.\589\
---------------------------------------------------------------------------
\587\ E&Y Letter (noting the Commission's intent to follow this
approach, as mentioned in the Proposing Release at fn. 397).
\588\ Id.
\589\ Id.
---------------------------------------------------------------------------
Comments on Form 1-SA
Several commenters recommended requiring or permitting quarterly
reporting rather than semiannual reporting on proposed Form 1-SA.\590\
One of these commenters stated that quarterly reporting is standard in
the United States and is not overly burdensome.\591\ Two other
commenters stated that quarterly reporting was necessary for investor
protection and to reduce the risk of insider trading.\592\ Other
commenters noted that quarterly reporting might be preferred by market
participants but supported a semiannual requirement.\593\
---------------------------------------------------------------------------
\590\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; OTC
Markets Letter; WDFI Letter.
\591\ OTC Markets Letter.
\592\ Massachusetts Letter 2; WDFI Letter.
\593\ B. Riley Letter; Milken Institute Letter.
---------------------------------------------------------------------------
One commenter agreed with our proposal not to require Tier 2
issuers to have their Form 1-SA financial statements reviewed by an
independent accountant, particularly with respect to smaller
issuers.\594\ Another commenter recommended either requiring the
financial statements in Form 1-SA to be reviewed by an independent
accountant or requiring issuers to disclose on Form 1-SA that the
financial statements were not subject to review.\595\ Yet another
commenter recommended that there be no requirement to provide Rule 3-16
of Regulation S-X financial statements or summarized financial
information in semiannual reports (to align with requirements for
existing registrants that are not required to include this in Form 10-
Q).\596\ This commenter also recommended clarifying if the financial
statements in Form 1-SA can be presented using a condensed format
consistent with Rule 8-03(a) of Regulation S-X and if additional
disclosure requirements of Rule 8-03(b) are applicable.\597\ This same
commenter recommended removing Item 3(d) of Form 1-SA, because neither
this statement nor a statement of changes in stockholders' equity is an
existing requirement on Form 10-Q.\598\
---------------------------------------------------------------------------
\594\ ABA BLS Letter. As proposed, such reviews would not be
required for any Form 1-SA filing.
\595\ KPMG Letter.
\596\ E&Y Letter.
\597\ Id.
\598\ Id.
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[[Page 21845]]
Comments on Form 1-U
Commenters made a number of suggestions regarding the current
report requirements. Some commenters recommended eliminating the
requirement to file Form 1-U for the smallest issuers, based on a
measure such as asset size or market capitalization.\599\ Other
commenters recommended extending the proposed filing requirement from
four business days after the triggering event to fifteen business days
after such event.\600\ Several commenters recommended changing or
clarifying the ``fundamental change'' standard in Item 1 of proposed
Form 1-U.\601\ One of these commenters expressed concerns about whether
this item will be consistently interpreted and whether the use of the
term ``fundamental change,'' in light of the use of the same term in
Item 512 of Regulation S-K, would cause additional confusion.\602\ This
commenter further recommended that, for contracts involving business
acquisitions, the measurement of significance in this item should be
limited to the investment test and the numerical threshold should be
increased to at least 50% to be more consistent with the stated
disclosure objective. Three commenters recommended moving to a
materiality standard so as to be consistent with the standards in the
anti-fraud provisions of federal securities laws, suggesting that this
would help avoid confusion.\603\ One commenter recommended allowing
(but not requiring) Tier 1 issuers to report material information on
Form 1-U, including the financial statements of significant acquired
businesses.\604\
---------------------------------------------------------------------------
\599\ ABA BLS Letter; Milken Institute Letter.
\600\ ABA BLS Letter; E&Y Letter; Milken Institute Letter.
\601\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI
Letter.
\602\ E&Y Letter. For description of Item 512, see fn. 486
above.
\603\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
\604\ E&Y Letter. Two commenters made a similar recommendation
without specifying which form should be used for that purpose. See
ABA BLS Letter; Canaccord Letter.
---------------------------------------------------------------------------
Other commenters suggested changes to the substance of what would
need to be reported on Form 1-U. One commenter generally recommended
cross-referencing existing disclosure requirements when a proposed
disclosure standard is meant to be the same.\605\ For example, this
commenter suggested that Form 1-U include a cross-reference to Form 8-K
when disclosure requirements are meant to be the same. One commenter
recommended permitting companies to disclose: (1) A change in
accountants in the next periodic filing instead of reporting it on Form
1-U if the change does not involve a disagreement or reportable event
(as defined in Item 304 of Regulation S-K); and (2) sales of equity
securities in the next periodic filing if the price was not below that
of previous primary offerings.\606\ Two of these commenters recommended
eliminating the requirement to report unregistered sales of securities
on Form 1-U, or to raise the reporting threshold to only cover
offerings that represent at least 10% of the issuer's pre-transaction
outstanding shares.\607\
---------------------------------------------------------------------------
\605\ PwC Letter.
\606\ E&Y Letter.
\607\ ABA BLS Letter; MoFo Letter.
---------------------------------------------------------------------------
c. Final Rules for Continuing Disclosure Obligations
We are adopting rules for continuing disclosure obligations under
Regulation A generally as proposed, with certain technical
modifications and clarifications. The final rules eliminate Form 2-A
and in its place require the disclosure of similar information pursuant
to Part I of Form 1-Z for Tier 1 issuers and, depending on when the
issuer's offering is terminated or completed, in either Form 1-K or
Part I of Form 1-Z for Tier 2 issuers. As proposed, the respective
disclosure requirements in Part I of Forms 1-K and 1-Z will include the
date the offering was qualified and commenced, the amount of securities
qualified, the amount of securities sold in the offering, the price of
the securities, the portions of the offering that were sold on behalf
of the issuer and any selling securityholders, any fees associated with
the offering, and the net proceeds to the issuer.\608\ We believe that
summary information and data about an issuer and its Regulation A
offering is most valuable when obtained after the offering is completed
or terminated.\609\ Therefore, as proposed, issuers will only be
required to disclose such information after the termination or
completion of the offering.
---------------------------------------------------------------------------
\608\ See Part I of Form 1-K and Part I of Form 1-Z. For
clarification purposes, we have changed the references in Part I in
these forms from ``number of securities'' to ``amount of
securities.'' These changes should avoid confusion when reporting
debt offerings where a quantifiable number of securities is not
being offered. In such cases, issuers will be able to report the
aggregate sales of securities in the offering.
\609\ Additionally, in continuous offerings, issuers are
required to file post-qualification amendments with the Commission
every twelve months to the extent that sales are ongoing at that
time. See Rule 252(f)(2)(i).
---------------------------------------------------------------------------
As noted in the Proposing Release, we are concerned that uniform
ongoing reporting requirements for all issuers of Regulation A
securities could disproportionately affect issuers in smaller
offerings. For that reason, the final rules do not require any ongoing
reporting for issuers conducting Tier 1 offerings, other than the
disclosure of the summary information discussed above.\610\ Issuers in
smaller offerings will, however, have the option to conduct a Tier 2
offering and subject themselves to ongoing reporting and other Tier 2
requirements.\611\
---------------------------------------------------------------------------
\610\ See Rule 257(a).
\611\ An issuer offering up to $20 million in a Tier 2 offering
would, in addition to providing ongoing reports to the Commission on
an annual and semiannual basis, with interim current event updates,
be required to file audited financial statements in the offering
statement, just as issuers in larger Tier 2 offerings are required
to do. See Section II.C.3.b(2)(c). above.
---------------------------------------------------------------------------
The final rules for ongoing reporting for Tier 2 issuers are being
adopted as proposed, except where noted below, and will require issuers
to file annual reports on Form 1-K,\612\ file semiannual reports on
Form 1-SA,\613\ file current event reports on Form 1-U,\614\ and
provide notice to the Commission of the suspension of their ongoing
reporting obligations on Part II of Form 1-Z.\615\ All reports for Tier
1 and Tier 2 offerings are required to be filed electronically on
EDGAR.\616\
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\612\ Rule 257(b)(1).
\613\ Rule 257(b)(3).
\614\ Rule 257(b)(4).
\615\ Rule 257(d)(2).
\616\ Subject, in certain cases, to the hardship exemptions set
forth in Rules 201 and 202 of Regulation S-T. 17 CFR 232.201-202.
---------------------------------------------------------------------------
As discussed above, commenters suggested that the Commission
consider various potential changes to the proposed ongoing reporting
requirements for Tier 2 issuers, including: Extending ongoing reporting
to Tier 1 offerings with some modifications; increasing the ongoing
reporting requirements for Tier 2 issuers to include analogs to
Exchange Act Forms 3, 4, and 5 and beneficial ownership reporting on
Schedules 13D, 13G and 13F; basing the ongoing reporting requirements
on characteristics of the issuer, such as whether the issuer has taken
steps to foster a secondary market; or providing different requirements
for Canadian companies or foreign private issuers. Another commenter
suggested that we allow issuers to either avoid ongoing reporting or to
file only financial statements and a management letter regarding
operations and results if, shortly after commencing the offering upon
qualification, issuers have less than 300 record holders.\617\
---------------------------------------------------------------------------
\617\ Heritage Letter.
---------------------------------------------------------------------------
We do not, however, believe that the changes suggested by
commenters
[[Page 21846]]
described above are advisable at this time. Instead, we believe the
approach to ongoing reporting adopted in the final rules is preferable
and will support a regular flow of information about issuers conducting
Tier 2 offerings, which will benefit investors in these larger
offerings and also help foster the development of a secondary market in
such securities, while balancing the compliance burden that would be
imposed on smaller issuers. We do not believe that requiring ongoing
reporting for Tier 1 issuers, other than the requirement to file a Form
1-Z upon completion or termination of the offering, is necessary for
Tier 1 offerings. We believe issuers in Tier 1 offerings will be small
companies whose businesses revolve around products, services, and a
customer base that will likely be more local in nature than issuers in
Tier 2 offerings.\618\ Further, we believe Tier 1 offerings will be
conducted by issuers that are unlikely to seek the creation of a
secondary trading market in their securities.\619\ In light of this, we
do not believe that it is necessary to require ongoing reporting for
Tier 1 issuers. Consistent with our experience under existing
Regulation A, we do not believe that a lack of ongoing reporting for
issuers in Tier 1 offerings will adversely affect investors that base
purchasing decisions on the narrative and financial statement
disclosure requirements included in the offering statement and, with
respect to continuous offerings lasting for more than one year, updated
annually by post-qualification amendment thereafter. Further,
notwithstanding the suggestions of some commenters,\620\ we believe
that adopting different ongoing reporting requirements for Canadian
issuers \621\ would not be consistent with our goal to adopt a uniform
reporting standard for Tier 2 issuers that provides investors with
certainty as to the amount of information they can expect to receive
from an issuer in a Tier 2 offering on an ongoing basis. We believe
that the final rules will provide investors and potential investors
with the information they need to make investment decisions and
facilitate capital formation for smaller companies.
---------------------------------------------------------------------------
\618\ See fn. 830 in Section II.H.3. below.
\619\ See discussion of the nature of offerings in Section
II.H.3. below.
\620\ DuMoulin Letter; see also McCarter & English Letter.
\621\ Commenters also suggested that their proposed ongoing
reporting for Canadian issuers apply to foreign private issuers. As
noted above in Section II.B.1.c., however, non-Canadian foreign
issuers are not eligible under Regulation A.
---------------------------------------------------------------------------
We are therefore adopting the following ongoing reporting
requirements for Tier 2 offerings:
(1) Annual Reports on Form 1-K
As proposed and adopted, Form 1-K will consist of two parts: Part I
(Notification) and Part II (Information to be included in the report).
The contents of and requirements for Part I and Part II are, with the
exception of technical amendments to the forms, amendments that are
necessary to reflect corresponding changes to the required audit
standards of financial statements filed under Part F/S of Form 1-A, and
additional guidance designed to streamline disclosure, adopted without
changes from the proposed rules.
(a) Part I (Notification)
As adopted, Part I of Form 1-K will be an online XML-based fillable
form that will include certain basic information about the issuer,
prepopulated on the basis of information previously disclosed in Part I
of Form 1-A, which can be updated by the issuer at the time of filing.
Additionally, if at the time of filing the Form 1-K an issuer has
terminated or completed a qualified Regulation A offering, the issuer
will be required to provide certain updated summary information about
itself and such offering in Part I, including the date the offering was
qualified and commenced, the amount of securities qualified, the amount
of securities sold in the offering, the price of the securities, the
portions of the offering that were sold on behalf of the issuer and any
selling securityholders, any fees associated with the offering, and the
net proceeds to the issuer.
As proposed and adopted, issuers will only be required to fill out
the XML-based portion of Part I of Form 1-K that relates to the summary
information about a terminated or completed offering once per offering.
An issuer that elects to terminate its ongoing reporting obligation
under Tier 2 of Regulation A after terminating or completing an
offering, in a fiscal year other than the fiscal year in which the
offering statement was qualified, but before reporting the required
summary information on Form 1-K, will be required to file the summary
offering information in Part I of Form 1-K by filing a Form 1-Z (exit
report) that includes such information.\622\
---------------------------------------------------------------------------
\622\ General Instruction (3) to Form 1-Z.
---------------------------------------------------------------------------
The summary information disclosed will facilitate analysis of
Regulation A offerings by the Commission, other regulators, third-party
data providers, and market participants and thereby enable the
Commission and others to evaluate the use and effectiveness of
Regulation A as a capital formation tool.\623\ The fillable form will
enable issuers to provide the required information in a convenient
medium and capture relevant data about the recently terminated or
completed Regulation A offering. The required disclosure will be
publicly available on EDGAR. Consistent with Part I of Form 1-A, the
issuer will not be required to obtain specialty software to file Part I
of Form 1-K on EDGAR.
---------------------------------------------------------------------------
\623\ See also discussion in Section II.E.4. below.
---------------------------------------------------------------------------
(b) Part II (Information To Be Included in the Report)
As with Part II of Form 1-A, the final rules require that the
issuer submit Part II of Form 1-K electronically as a text file
attachment containing the body of the disclosure document and financial
statements, formatted to be compatible with the EDGAR filing system.
Part II will require issuers to disclose information about themselves
and their business based on the financial statement and narrative
disclosure requirements of Form 1-A.\624\
---------------------------------------------------------------------------
\624\ Part II of Form 1-K.
---------------------------------------------------------------------------
As adopted, Item 2 to Part II of Form 1-K (Management's Discussion
and Analysis of Financial Condition and Results of Operation) requires
issuers, by cross-reference to the requirements of Form 1-A, to provide
information for the two most recently completed fiscal years. As
suggested by one commenter,\625\ we are clarifying that the Form 1-K
cross-reference to the requirements of Item 9 to Part II of Form 1-A
does not require issuers to include the additional MD&A disclosure
required in Item 9(c) for issuers that have not received revenue from
operations during each of the three fiscal years immediately before the
filing of the offering statement (or since inception, whichever is
shorter).\626\
---------------------------------------------------------------------------
\625\ E&Y Letter.
\626\ See Item 2 to Part II of Form 1-K.
---------------------------------------------------------------------------
Additionally, we are revising the financial statement requirements
in Item 7 to Part II of Form 1-K. As proposed, Form 1-K directed
issuers to the financial statement requirements of Part F/S of Form 1-
A. We are revising this portion of the form so as to include the
financial statement requirements directly in Item 7 to Part II of Form
1-K. We believe this change to Item 7 will make it easier for issuers
to comply by clarifying, as one commenter recommended,\627\ the
specific portions of Regulation S-X relating to financial
[[Page 21847]]
statements for entities other than the issuer that are required in Form
1-K. Additionally, since Tier 2 issuers are now permitted to file
financial statements that are audited in accordance with either U.S.
GAAS or the standards of the PCAOB, a corresponding change has been
made to the financial statement requirements of Item 7 of Form 1-
K.\628\ As proposed, the auditor of financial statements would need to
be independent under Rule 2-01 of Regulation S-X and must comply with
the other requirements of Article 2 of Regulation S-X, but need not be
PCAOB-registered. Further, in comparison to the proposed rules, Item
7(a) no longer requires issuers to provide a list of the financial
statements included in Form 1-K at the beginning of the financial
statement section. We eliminated this requirement in the final rules
because we do not believe that there is a need for a separate list of
the financial statements at the beginning of this section, when the
financial statements themselves will be labeled.
---------------------------------------------------------------------------
\627\ E&Y Letter.
\628\ See discussion in Section II.C.3.b(2)(c). above.
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Form 1-K will permit issuers to incorporate by reference certain
information previously filed on EDGAR, but will require issuers to
include a hyperlink to such material on EDGAR.\629\ In a change from
the proposed rules, the final rules do not limit the availability of
incorporation by reference to information previously filed pursuant to
Regulation A. We believe that this change will facilitate the provision
of required information to investors, while taking a consistent
approach to information previously provided to the Commission and
publicly available on EDGAR. Additionally, to avoid unnecessary
repetition of disclosure items, Form 1-K encourages issuers to cross-
reference items within the form, where applicable.\630\ Further, in
order to avoid incorporation by reference to stale information without
requiring the latest version of the document to be filed, Form 1-K
indicates that, if any substantive modification has occurred in the
text of any document incorporated by reference since such document was
filed, the issuer must file with the reference a statement containing
the text and date of such modification.\631\ Form 1-K will cover:
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\629\ General Instruction D. to Form 1-K. The hyperlink to EDGAR
need only be active at the time of filing of the Form 1-K. Cf.
Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
\630\ Id. Issuers may, for example, add a cross-reference to
disclosure in the financial statements. We have clarified, however,
that like with Form 1-A, they may not add a cross-reference within
the financial statements themselves to disclosures elsewhere.
\631\ Id.
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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 executive officers or directors;
MD&A of the issuer's liquidity, capital resources, and
results of operations covering the two most recently completed fiscal
years; and
Two years of audited financial statements.\632\
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\632\ Part II of Form 1-K.
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We anticipate that issuers will generally be able to use the
offering materials as a basis to prepare their ongoing disclosure.
As adopted in the final rules, Form 1-K includes requirements for
financial statements prepared on the same basis, and subject to the
same requirements as to audit standards and auditor independence, as
the financial statements required in the Regulation A offering circular
for Tier 2 offerings.\633\ Form 1-K must be filed within 120 calendar
days after the issuer's fiscal year end.\634\ A manually signed copy of
the Form 1-K must be executed by the issuer and related signatories
before or at the time of filing and retained by the issuer for a period
of five years.\635\ Issuers will be required to produce the manually
signed copy to the Commission, upon request.\636\ Any amendments to the
form must comply with the requirements of the applicable items and be
filed under cover of Form 1-K/A.\637\
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\633\ See Item 7 (Financial Statements), Part II of Form 1-K.
\634\ See General Instruction A.(2), Form 1-K.
\635\ See General Instruction C., Form 1-K.
\636\ Id.
\637\ See Rule 257(c) (also requiring the signature on behalf of
an authorized representative of the issuer and the inclusion of any
specified certifications).
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(2) Semiannual Reports on Form 1-SA
We are adopting final rules for semiannual interim reporting for
Regulation A issuers generally as proposed, with technical amendments
and additional guidance designed to streamline the disclosure
requirements for Tier 2 issuers and harmonize them with the
requirements of issuers subject to an ongoing reporting obligation
under the Exchange Act.\638\ As proposed, we continue to believe that a
semiannual, rather than a quarterly, reporting requirement strikes an
appropriate balance between the need to provide information to the
market and the cost of compliance for smaller issuers, especially given
the further flexibility provided to issuers in Form 1-U to provide
quarterly information if they elect to do so.\639\ Issuers will be
required to provide semiannual reports on Form 1-SA that, much like
reports on Form 10-Q, consist primarily of financial statements and
MD&A.\640\ Unlike Form 10-Q, however, Form 1-SA does not require
disclosure about quantitative and qualitative market risk, controls and
procedures, updates to risk factors, or defaults on senior
securities.\641\ We do not believe such disclosure is necessary for
ongoing reports under Regulation A, as we believe such disclosure is
not applicable to, or appropriately tailored for, the types of issuers
likely to conduct Regulation A offerings.
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\638\ Rule 257(b)(3); Form 1-SA.
\639\ Consistent with the suggestions of commenters, we are
clarifying that issuers seeking to voluntarily report information to
the market on a more frequent basis may do so under the final rules
for current reporting on Form 1-U. See discussion in Section
II.E.1.c(3). below; see also discussion in Section II.E.2.c. below
regarding the provision of ongoing reports as it applies to
Securities Act Rule 144.
\640\ See Part I (Financial Information) of Form 10-Q, 17 CFR
249.308a.
\641\ See Item 3 and Item 4 of Part I of Form 10-Q.
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Consistent with the technical, specialized suggestions of several
commenters,\642\ we are including provisions in Form 1-SA that will
help issuers comply with the form requirements, eliminate potential
confusion over such requirements, and streamline and harmonize
disclosure to make the requirements for Tier 2 issuers no more onerous
than, and consistent with, the ongoing disclosures required of smaller
reporting companies under the Exchange Act. Specifically, the final
rules:
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\642\ See, e.g., E&Y Letter; KPMG letter.
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Add clarifying language to Item 1 (Management Discussion
and Analysis of Financial Condition and Results of Operations) of Form
1-SA to indicate that compliance with this disclosure requirement only
applies to the interim financial statements required by Item 3 to Form
1-SA and that, similar to our clarification of Form 1-K's requirements,
issuers are not required to
[[Page 21848]]
include the additional MD&A disclosure required by Item 9(c) of Form 1-
A; \643\
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\643\ See Section II.F.1.c.(1)(b) above for a discussion of this
clarification in Form 1-K.
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Update the financial statement disclosure requirements of
Form 1-SA to more clearly delineate the requirements for compliance
with Item 3 of Form 1-SA;
Provide that the financial statements that must be
included pursuant to Item 3 may be condensed, in addition to being
unaudited, and that the financial statements are not required to be
reviewed;
Amend the final form to note that additional guidance on
the presentation of financial statements and footnotes and other
disclosures can be found in Rule 8-03 of Regulation S-X; \644\
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\644\ Tier 2 issuers are required under Part F/S of Form 1-A to
provide financial statements that comply with Article 8 of
Regulation S-X.
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Revise the requirements of Item 3(e) of Form 1-SA to match
the disclosure language contained in Rule 3-10 of Regulation S-X for
smaller reporting companies;
Delete the requirement in Item 3(d) of proposed Form 1-SA
to present interim statements of changes in financial position for the
period between the end of the preceding fiscal year and the end of the
interim period covered by this report, and for the corresponding period
of the preceding fiscal year, as this is not required of issuers under
Rule 8-03 of Regulation S-X; and
Make the ongoing reporting requirements under Item 3 of
Form 1-SA more consistent with what is required of issuers subject to
an ongoing reporting obligation under the Exchange Act, consistent with
the suggestion of one commenter,\645\ by eliminating the line item
requirements of Item 3(f) and (g), as Rule 3-16 and Rule 4-10 of
Regulation S-X generally do not require the disclosure of such
information other than in registration statements and annual reports.
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\645\ E&Y Letter.
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As adopted, Form 1-SA will require disclosure of updates otherwise
reportable on Form 1-U. The final rules permit issuers to incorporate
by reference in Form 1-SA certain information previously filed on
EDGAR, but must include a hyperlink to such material on EDGAR.\646\ In
a change from the proposed rules, the final rules do not limit the
availability of incorporation by reference to information previously
filed pursuant to Regulation A. We believe that this change will
continue to facilitate the provision of required information to
investors, while taking a consistent approach to information previously
provided to the Commission and publicly available on EDGAR.
Additionally, in a change from the proposed form that seeks to avoid
unnecessary repetition of disclosure items, Form 1-SA encourages
issuers to cross-reference items within the form, where
applicable.\647\ Further, in order to avoid incorporation by reference
to stale information without requiring the latest version of the
document to be filed, Form 1-SA indicates that, if any substantive
modification has occurred in the text of any document incorporated by
reference since such document was filed, the issuer must file with the
reference a statement containing the text and date of such
modification.\648\
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\646\ General Instruction D. to Form 1-SA. The hyperlink to
EDGAR need only be active at the time of filing of the Form 1-SA.
Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
\647\ Id. Issuers may, for example, add a cross-reference to
disclosure in the financial statements. We have clarified, however,
that like with Form 1-A, they may not add a cross-reference within
the financial statements themselves to disclosures elsewhere.
\648\ Id.
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Form 1-SA must be filed within 90 calendar days after the end of
the first six months of the issuer's fiscal year.\649\ The first such
obligation to file will commence immediately following the most recent
fiscal year for which full financial statements were included in the
offering statement, or, if the offering statement included financial
statements for the first six months of the fiscal year following the
most recent full fiscal year, for the first six months of the following
fiscal year.\650\ As proposed, a manually signed copy of the Form 1-SA
must be executed by the issuer and related signatories before or at the
time of filing, retained by the issuer for a period of five years, and
produced by the issuer to the Commission, upon request.\651\ The final
rules require, as proposed, any amendments to the form to comply with
the requirements of the applicable items and be filed under cover of
Form 1-SA/A.\652\
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\649\ See General Instruction A.(2), Form 1-SA.
\650\ For example, where an offering statement is filed in
October 2015 and includes full financial statements for the fiscal
years ended December 31, 2014 and December 31, 2013 and interim
financial statements for the six months ended June 30, 2015 and June
30, 2014 and is qualified in December 2015, the Form 1-SA will not
be required until within 90 days following the first six months of
the following fiscal year (i.e., within 90 days following June 30,
2016).
If, however, the offering statement is filed in March 2015 and
qualified in June of 2015 than the first Form 1-SA would cover the
six months ended June 30, 2015 and June 30, 2014 and would not be
required to be filed until within 90 days following June 30, 2015.
\651\ See General Instruction C. to Form 1-SA.
\652\ See Rule 257(c).
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(3) Current Reports on Form 1-U
In addition to the annual report on Form 1-K and semiannual report
on Form 1-SA, the final rules require issuers to submit current reports
on Form 1-U. The final rules are being adopted largely as proposed with
one change and some technical amendments and additional guidance
designed to ease compliance with the final rules and eliminate
potential confusion as to the scope and applicability of the disclosure
requirements. The final rules require issuers to submit a report on
Form 1-U when it experiences one (or more) of the following events:
Fundamental changes; \653\
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\653\ As discussed below, disclosure pursuant to this
requirement is limited to the entry into or termination of material
definitive agreements resulting in fundamental changes in the nature
of an issuer's business. More generally, a fundamental change in the
nature of an issuer's business includes major and substantial
changes in the issuer's business or plan of operations or changes
reasonably expected to result in such changes, such as significant
acquisitions or dispositions, or the entry into, or termination of,
a material definitive agreement that has or will result in major and
substantial changes to the nature of an issuer's business or plan of
operations.
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Bankruptcy or receivership;
Material modification to the rights of securityholders;
Changes in the issuer's certifying accountant;
Non-reliance on previous financial statements or a related
audit report or completed interim review;
Changes in control of the issuer;
Departure of the principal executive officer, principal
financial officer, or principal accounting officer; and
Unregistered sales of 10% or more of outstanding equity
securities.
Additionally, as proposed, Item 9 of final Form 1-U contains
provisions for disclosing other events not directly required of issuers
in the form. As noted above in the context of suggestions by commenters
to require or permit quarterly reporting by issuers,\654\ issuers that
elect to provide relevant information to the market on, for example, a
quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1-
U.\655\
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\654\ See fn. 639 and 604 above.
\655\ An issuer seeking to, for example, report information that
satisfies, and on a frequency that accords with, the requirements of
Exchange Act Rule 15c2-11(a)(5) and (g) or Securities Act Rule
144A(d)(4) may do so pursuant to Item 9 of Form 1-U.
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Notwithstanding the view of some commenters,\656\ we believe that
Form 1-U should be required of all Tier 2
[[Page 21849]]
issuers, including smaller issuers. We believe that, on balance, the
benefit of requiring a uniform base level of disclosure to investors of
current event reporting for all issuers in Tier 2 offerings outweighs
any potential additional compliance cost to smaller issuers.
Additionally, given the inclusion of only the most significant events
in the list of disclosable current events on Form 1-U, we do not
anticipate that issuers, particularly smaller issuers, will on average
be required to file many reports in this regard.
---------------------------------------------------------------------------
\656\ ABA BLS Letter; Milken Institute Letter.
---------------------------------------------------------------------------
In a change from the proposed rules, and consistent with the
suggestions of commenters,\657\ the final rules increase the threshold
below which an issuer need not report unregistered sales of equity
securities pursuant to Item 8 of Form 1-U from 5% to 10% of the number
of shares outstanding of the class of equity securities sold. We
believe that this increase in the threshold below which an issuer would
not be required to report such sales remains consistent with our
general approach to the final rules for Form 1-U--namely, that Form 1-U
should reflect the most significant or substantial events that an
issuer may experience in the interim period between the filing of the
required periodic reports.
---------------------------------------------------------------------------
\657\ ABA Letter; MoFo Letter.
---------------------------------------------------------------------------
We are not amending Item 1 of Form 1-U to alter the use of the term
``fundamental change,'' as suggested by some commenters.\658\ We are,
however, revising Instruction 2 to Item 1 to make clear that the
transactions described therein are deemed to be ``fundamental changes''
solely for purposes of Item 1 of Form 1-U and should not be read to
influence the definition of that term in other contexts.\659\ Item 1 of
Form 1-U is meant to require issuers to disclose material definitive
agreements, including agreements to acquire other entities, which
result or would reasonably be expected to result in fundamental changes
to the nature of the issuer's business or plan of operations. As
Instruction 2 to Item 1 indicates, certain transactions are deemed to
involve fundamental changes, and disclosure of these transactions, as
prescribed by Item 1 is required. Consistent with the suggestion of one
commenter,\660\ we are narrowing from the proposed rules the
applicability of Instruction 2(a) so that an acquisition transaction
will only result in a fundamental change for these purposes if the
purchase price, as defined by U.S. GAAP and IFRS, exceeds 50% of the
total consolidated assets of the issuer as of the end of the most
recently completed fiscal year.\661\ We believe that this is consistent
with our general goal of only requiring disclosure of significant and
substantial matters that may affect an issuer's business or plan of
operations. We believe that this requirement is appropriately tailored
for the types of issuers likely to conduct Tier 2 offerings by
providing them with important flexibility as to the determination of a
``fundamental change,'' while providing clear guidance that certain
transactions will always trigger disclosure under Item 1.
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\658\ See E&Y Letter; see also ABA BLS Letter; Canaccord Letter.
\659\ Item 1(d) to Form 1-U.
\660\ E&Y Letter.
\661\ Instruction(s) 2(b)-(c) to Item 1 of Form 1-U are adopted,
as proposed.
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On a related point, we continue to believe, despite the suggestions
of some commenters,\662\ that a fundamental change standard for some of
the disclosure requirements in Form 1-U is a more appropriately
tailored standard for Tier 2 issuers than a broader materiality
standard. A fundamental (as opposed to a material) change to the nature
of an issuer's business includes major and substantial changes to the
issuer's business or plan of operations or changes reasonably expected
to result in such changes.\663\ The final rules reflect our belief
that, on balance, Tier 2 issuers should only be required make
disclosures in Form 1-U that reflect major and substantial changes to
business plans or operations, as opposed to material events that are
otherwise reportable in their periodic reports. Moreover, we do not
believe that a fundamental change standard will cause confusion or
raise concerns as to the applicability of other standards applicable in
the anti-fraud provisions of the federal securities laws.
---------------------------------------------------------------------------
\662\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI
Letter.
\663\ See Instruction 2(a) to Item 1 for the circumstances when
an acquisition transaction would be deemed to trigger a fundamental
change for purposes of Form 1-U.
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Additionally, we note that Item 6 of Form 1-K and Item 2 of Form 1-
SA permit issuers to disclose any information required to be disclosed
under Form 1-U, but not so reported. For example, if an event occurs
that would, under normal circumstances, require an issuer to file a
Form 1-U within four business days, but such issuer is due to file
either its annual or semiannual report within that period, then the
issuer may instead report such information in its periodic report.
Finally, contrary to the suggestions of some commenters,\664\ we
continue to believe that the requirement to report unregistered sales
of securities in Item 8 of Form 1-U will provide investors with
valuable current information as to significant capital raising events
by the issuer and should be disclosed in a timely manner to the market.
We therefore retain this disclosure requirement in the final
rules.\665\
---------------------------------------------------------------------------
\664\ ABA BLS Letter; MoFo Letter.
\665\ Item 8 to Form 1-U. We have also clarified in Item 8(b)
that only periodic reports that contain disclosure regarding
unregistered sales of equity securities will reset the five percent
reporting threshold for unregistered sales of securities, rather
than any periodic report.
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As adopted, Form 1-U must be filed within four business days after
the occurrence of any of the triggering events, and, where applicable,
will permit issuers to incorporate by reference certain information
previously filed on EDGAR.\666\ Notwithstanding the suggestions of some
commenters,\667\ we believe that requiring issuers to file the form
within four business days, as opposed to fifteen business days, is
appropriate in an ongoing reporting regime that otherwise only requires
issuers to provide annual and semiannual reports. Further, we are
concerned that extending the filing deadline for Form 1-U reports would
make the reporting of disclosable events no longer ``current.'' We are
therefore adopting the timing requirements, as proposed. Additionally,
in a change from the proposed rules, the final rules do not limit the
availability of incorporation by reference to information previously
filed pursuant to Regulation A. We believe that this change will
continue to facilitate the provision of required information to
investors, while taking a consistent approach to information previously
provided to the Commission and publicly available on EDGAR.
---------------------------------------------------------------------------
\666\ General Instruction D. to Form 1-U. The hyperlink to EDGAR
need only be active at the time of filing of the Form 1-U. Cf.
Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
\667\ ABA BLS Letter; E&Y Letter; Milken Institute Letter.
---------------------------------------------------------------------------
Additionally, consistent with the changes made to Form 1-K and Form
1-SA and suggestions of at least one commenter,\668\ Form 1-U
encourages issuers to cross-reference items within the form, where
applicable.\669\ Further, in order to avoid incorporation by reference
to stale information without requiring the latest version of the
[[Page 21850]]
document to be filed, Form 1-U indicates that, if any substantive
modification has occurred in the text of any document incorporated by
reference since such document was filed, the issuer must file with the
reference a statement containing the text and date of such
modification.\670\ A manually signed copy of the Form 1-U must be
executed by the issuer and related signatories before or at the time of
filing and retained by the issuer for a period of five years.\671\
Issuers are required to produce the manually signed copy to the
Commission, upon request.\672\ Any amendments to the Form 1-U must
comply with the requirements of the applicable items, and be filed
under cover of Form 1-U/A.\673\
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\668\ PwC Letter.
\669\ General Instruction D. to Form 1-U. We have clarified,
however, that like with Form 1-A, they may not add a cross-reference
within any financial statements that may be included to disclosures
elsewhere.
\670\ Id.
\671\ See General Instruction C to proposed Form 1-U.
\672\ Id.
\673\ Rule 257(c).
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(4) Special Financial Reports on Form 1-K and Form 1-SA
We did not receive any comment on the proposed provisions for
special financial reports and are adopting them as proposed with one
minor clarifying change. This report serves to close lengthy gaps in
financial reporting between the financial statements included in Form
1-A and the issuer's first periodic report due after qualification of
the offering statement. Where applicable, issuers conducting Tier 2
offerings must provide special financial reports analogous to those
required under Exchange Act Rule 15d-2.\674\ The special financial
report requires audited financial statements for the issuer's most
recent fiscal year (or for the life of the issuer if less than a full
fiscal year) to be filed not later than 120 calendar days after
qualification of the offering statement if the offering statement does
not include such financial statements.\675\ The special financial
report requires semiannual financial statements for the first six
months of the issuer's fiscal year, which may be unaudited, to be filed
90 calendar days after qualification of the offering statement if the
offering statement does not include such financial statements and the
offering statement was qualified in the second half of the issuer's
current fiscal year.\676\ The special financial report must be filed
under cover of Form 1-K if it includes audited year end financial
statements and under cover of Form 1-SA if it includes semiannual
financial statements for the first six months of the issuer's fiscal
year.\677\ The financial statement and auditing requirements must
follow the requirements of those forms, and the issuer must indicate on
the front page of the applicable form that only financial statements
are included.\678\
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\674\ 17 CFR 240.15d-2.
\675\ Rule 257(b)(2)(ii). As adopted, we are revising Rule
257(b)(2)(ii) to reference the fiscal year or other period specified
in Rule 257(b)(2)(i)(A), in order to avoid potential confusion about
which most recent fiscal year is covered.
\676\ Id.
\677\ Id.
\678\ See General Instruction A.(3) to Form 1-K and General
Instruction A.(3) to Form 1-SA.
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(5) Reporting by Successor Issuers
We did not receive any comment on reporting by successor issuers,
and we are adopting the proposed rules without change. Where in
connection with a succession by merger, consolidation, exchange of
securities, acquisition of assets, or otherwise, securities of an
issuer that is not subject to the reporting requirements of Regulation
A are issued to the holders of any class of securities of an issuer
that is subject to ongoing reporting under Tier 2, the issuer
succeeding to that class of securities must continue to file the
reports required for Tier 2 offerings on the same basis as would have
been required of the original Tier 2 issuer.\679\ The successor issuer
may suspend or terminate its reporting obligations on the same basis as
the original issuer under Rule 257(d).\680\
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\679\ See Rule 257(b)(5).
\680\ See Section II.E.4. below for a discussion of the
suspension or termination of disclosure obligations.
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2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing
Reporting Under Regulation A
Exchange Act Rule 15c2-11 governs broker-dealers' publication of
quotations for securities in a quotation medium other than a national
securities exchange.\681\ The Commission adopted Rule 15c2-11 in 1971
to prevent fraudulent and manipulative trading schemes that had arisen
in connection with the distribution and trading of certain unregistered
securities.\682\ The rule prohibits broker-dealers from publishing
quotations (or submitting quotations for publication) in a ``quotation
medium'' for covered over-the-counter securities without first
reviewing basic information about the issuer, subject to certain
exceptions.\683\ A broker-dealer also must have a reasonable basis for
believing that the issuer information is accurate in all material
respects and that it was obtained from a reliable source.\684\
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\681\ 17 CFR 240.15c2-11.
\682\ See Rel. No. 34-39670 (Feb. 17, 1998) (Publication or
Submission of Quotations Without Specified Information) (describing
Rel. No. 34-9310 (Sept. 13, 1971) [36 FR 18641]). See 17 CFR
240.15c2-11(e)(1) (defining quotation medium as any ``interdealer
quotation system'' or any publication or electronic communications
network or other device which is used by brokers or dealers to make
known to others their interest in transactions in any security,
including offers to buy or sell at a stated price or otherwise, or
invitations of offers to buy or sell).
\683\ 17 CFR 240.15c2-11(a); See also Rel. No. 34-29094 (April
17, 1991) [56 FR 19148].
\684\ See 17 CFR 240.15c2-11 (Preliminary Note).
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A broker-dealer can satisfy its obligations under Rule 15c2-11 if
it has reviewed and maintained in its records certain specified
information. The particular information that is required by the rule
varies depending on the nature of the issuer and includes, among other
things:
For an issuer that has filed a registration statement
under the Securities Act, a copy of the prospectus;
for an issuer that has filed an offering statement under
the Securities Act pursuant to Regulation A, a copy of the offering
circular; or
for an issuer subject to ongoing reporting under Sections
13 or 15(d) of the Exchange Act, the issuer's most recent annual report
and any quarterly or current reports filed thereafter.\685\
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\685\ A broker-dealer can also satisfy its review requirements
under Rule 15c2-11 by reviewing certain information published
pursuant to a Rule 12g3-2(b) exemption for foreign private issuers
that claim the registration exemption or information specified in
Rule 15c2-11(a)(5) for non-reporting issuers.
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a. Proposed Rules
As proposed, the ongoing reports for Tier 2 offerings under
Regulation A, which would update the narrative and financial statement
disclosures previously provided in Form 1-A on an annual and semiannual
basis, with additional provisions for current reporting, would satisfy
a broker-dealer's obligations under Rule 15c2-11 to review and maintain
records of basic information about an issuer and its securities. In
this regard, we proposed to amend Rule 15c2-11 to permit an issuer's
ongoing reports filed in a Tier 2 offering under Regulation A to
satisfy a broker-dealer's obligations to review specified information
about an issuer and its security before publishing a quotation for a
security (or submitting a quotation for publication) in a quotation
medium.\686\
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\686\ In addition, we proposed a technical amendment to Rule
15c2-11 to amend subsection (d)(2)(i) of the rule to update the
outdated reference to ``Schedule H of the By-Laws of the National
Association of Securities Dealers, Inc.'' which is now known as the
``Financial Industry Regulatory Authority, Inc.'' and to reflect the
correct rule reference.
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[[Page 21851]]
We also solicited comment on other potential effects that Tier 2
ongoing reporting under Regulation A could have under other provisions
of the federal securities laws, such as whether timely ongoing
Regulation A reporting under Tier 2 should constitute ``adequate
current public information'' for purposes of paragraph (c) of Rule
144.\687\ Under this provision, issuers are required to make available
adequate current public information about themselves, which, for
issuers not subject to Exchange Act reporting, must include certain
information described in Exchange Act Rule 15c2-11(a)(5).\688\ We also
solicited comment on whether ongoing Regulation A reporting for Tier 2
offerings should satisfy the information requirements of paragraph
(d)(4) of Rule 144A.\689\ Under that provision, holders of Rule 144A
securities must have the right to obtain from the issuer, upon request,
a very brief statement of the nature of the issuer's business and the
products and services it offers, the issuer's most recent balance sheet
and profit and loss and retained earnings statements, and similar
financial statements for each of the two preceding fiscal years, which
information must be ``reasonably current.'' \690\
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\687\ 17 CFR 230.144(c).
\688\ 17 CFR 230.144(c)(2); see also 17 CFR 230.15c2-11(a), (g).
\689\ 17 CFR 230.144A(d)(4).
\690\ Id.
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b. Comments on Proposed Rules
All commenters that addressed Rule 15c2-11 supported amending the
rule in the manner proposed.\691\ Some commenters recommended further
amending Rule 15c2-11(g) to provide that an issuer that is current in
its Tier 2 obligations would be deemed to have ``reasonably current''
financial information, even if its most current balance sheet is as of
a date up to nine months old and it has not provided other updated
information.\692\ Most commenters also recommended amending Rule 144(c)
to allow for ongoing reporting under Tier 2 to constitute ``adequate
current public information.'' \693\ Other commenters recommended
amending Rule 144A(d)(4) to allow for ongoing reporting under Tier 2 to
satisfy the ``reasonably current information'' requirements of that
rule.\694\ Although the proposal did not solicit comment on Rule
144(i), one commenter recommended amending this rule to allow former
shell companies to rely on Rule 144 if they have been current in their
ongoing reporting under Regulation A for a certain period of time and
without having to file a Form 10.\695\ One commenter also supported
allowing use of the Rule 144 safe harbor for former shell companies
that were not previously registered under the Exchange Act and that are
now selling securities under Regulation A.\696\ Another commenter
requested that the Commission limit the prohibitions on reliance on
Rule 144 only to Exchange Act registered issuers.\697\
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\691\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; KVCF
Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter;
Public Startup Co. Letter 1; REISA Letter; WR Hambrecht + Co Letter.
\692\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter;
MoFo Letter.
\693\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; McCarter
& English Letter; Paul Hastings Letter; KVCF Letter; Milken
Institute Letter; Richardson Patel Letter; REISA Letter; WR
Hambrecht + Co Letter.
\694\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter;
MoFo Letter.
\695\ McCarter & English Letter.
\696\ Public Startup Co. Letter 1.
\697\ Letter from Jason Coombs, Co-Founder and CEO, Public
Startup Company, Inc., March 24, 2014 (``Public Startup Co. Letter
2'').
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c. Final Rules
We are adopting final rules for Regulation A that, as proposed,
amend Exchange Act Rule 15c2-11(a) so that an issuer's ongoing reports
filed under Tier 2 will satisfy the specified information about an
issuer and its security that a broker-dealer must review before
publishing a quotation for a security (or submitting a quotation for
publication) in a quotation medium. In addition, we are adopting, as
proposed, a technical amendment to Rule 15c2-11 to amend subsection
(d)(2)(i) of the rule to update the outdated reference to ``Schedule H
of the By-Laws of the National Association of Securities Dealers,
Inc.'' which is now known as the ``Financial Industry Regulatory
Authority, Inc.'' and to reflect the correct rule reference.
We are not following the suggestions of some commenters that we
adopt provisions in the final rules so that Tier 2 ongoing reports will
satisfy the current information requirements of Rule 144 and Rule 144A
for the entirety of an issuer's fiscal year. While commenters were
generally supportive, we do not believe that the frequency of the
required Tier 2 ongoing reporting merits a broad determination that
such reports will constitute ``adequate public information'' or
``reasonably current information'' on a year-round basis. On the
contrary, quarterly reporting is an integral part of the resale safe
harbors provided for in Rule 144 and Rule 144A that contemplate the
provision of ongoing and continuous information.\698\ While the
semiannual reporting required under the final rules for Tier 2
offerings will result in issuers only having ``reasonably current
information'' and ``adequate current public information'' for the
portions of the year during which the financial statements of such
issuers continue to satisfy the respective rules,\699\ we note that
issuers may voluntarily submit on Form 1-U quarterly financial
statements or other information necessary to satisfy the respective
rule requirements.\700\ In such instances, and provided that the
financial statements otherwise meet the financial statement
requirements of Form 1-SA, such voluntarily provided quarterly
information could satisfy the ``reasonably current information'' and
``adequate current public information'' requirements of Rule 144 and
Rule 144A. An issuer that is therefore current in its semiannual
reporting required under the rules and voluntarily provides quarterly
financial statements on Form 1-U will have provided reasonably current
and adequate current public information for the entirety of such year
under Rule 144 and Rule 144A.
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\698\ See, e.g., Rel. No. 33-6099 (Aug. 2, 1979) (Question 20).
See also Section 13(a) of the Exchange Act, which contemplates, but
does not prescribe, reasonably current information in the context of
annual and quarterly reporting. 15 U.S.C. 78m(a).
\699\ See Securities Act Rule 144(c)(2); Securities Act Rule
144A(d)(4)(ii); Exchange Act Rule 15c2-11(a) and Rule 15c2-11(g).
\700\ See Item 9 of Form 1-U; see also Section II.E.1.c(3). and
fn. 655 above.
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3. Exchange Act Registration of Regulation A Securities
Under Section 15(d) of the Exchange Act, an issuer that has had a
Securities Act registration statement declared effective must comply
with the periodic reporting requirements of the Exchange Act.\701\
Qualification of a Regulation A offering statement does not have the
same effect. An issuer of Regulation A securities would not take on
Exchange Act reporting obligations unless it separately registered a
class of securities under Section 12 of the Exchange Act, or conducted
a registered public offering.\702\
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\701\ While issuers with a Section 15(d) reporting obligation
are required to file the same periodic reports as issuers that have
registered a class of securities under Section 12, Section 15(d)
reporting issuers are not subject to additional Exchange Act
obligations (e.g., proxy rules, short-swing profit rules, and
beneficial ownership reporting) that apply to Exchange Act
registrants.
\702\ See also Section II.B.6. above for a discussion of the
conditional exemption from Section 12(g) adopted in the final rules
today.
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An issuer registering a class of securities under Section 12 of the
Exchange Act must file either a Form
[[Page 21852]]
10 \703\ or Form 8-A \704\ with the Commission. Form 10 is the general
form for Exchange Act registration, while Form 8-A is a short-form
registration statement. An issuer must use a Form 10 if, at the time it
files its registration statement, it is not already subject to a
Section 13 or Section 15(d) reporting obligation. An issuer may use
Form 8-A if it is already subject to the provisions of either Section
13 or Section 15(d). Additionally, when an issuer that is not already
subject to the provisions of either Section 13 or 15(d) plans to list
its securities on a national securities exchange contemporaneously with
the effectiveness of a Securities Act registration statement, the
Commission staff will not object if that issuer files a Form 8-A in
lieu of a Form 10 in order to avoid having the issuer restate the
contents of its Securities Act registration statement in its Exchange
Act registration statement.\705\
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\703\ 17 CFR 249.210. Foreign private issuers must file a Form
20-F, 17 CFR 249.220f, or, where available, a Form 8-A.
\704\ 17 CFR 249.208a.
\705\ See Rel. No. 34-38850 (Sept. 2, 1997) [62 FR 39755], at
39757 (``[A]n issuer registering an initial public offering will be
permitted to use Form 8-A even though it will not be subject to
reporting until after the effectiveness of that Securities Act
registration statement.'').
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a. Proposed Rules
As proposed, issuers conducting offerings under Regulation A that
seek to list their securities on a national securities exchange or
otherwise register a class of securities under the Exchange Act would
be required to file a registration statement on Form 10. We solicited
comment, however, on whether we should provide a simplified means for
Regulation A issuers to register a class of securities under the
Exchange Act, for example, by permitting such issuers to file a Form 8-
A rather than a Form 10 in conjunction with, or following, the
qualification of a Regulation A offering statement on Form 1-A.
We also invited comment on ways to facilitate secondary market
trading in the securities of Regulation A issuers, such as by
encouraging the development of ``venture exchanges'' or other trading
venues that are focused on attracting such issuers.
b. Comments on Proposed Rules
Many commenters recommended that Regulation A issuers be allowed to
use Form 8-A to register a class of securities under the Exchange Act
in Tier 2 offerings.\706\ Some of these commenters limited their
recommendation to when the issuer follows the requirements of Part I of
Form S-1 in its offering circular.\707\ Separately, three commenters
recommended allowing issuers to use a ``super'' Form 8-A that would
require issuers to include any disclosure that is required in a Form
10, but is not included in the chosen offering circular format under
Form 1-A.\708\ Several commenters suggested allowing issuers to use a
Form 10 that would go effective immediately as an alternative to filing
a Form 8-A.\709\ This process could be used to register securities
under the Exchange Act when a simultaneous exchange listing was not
contemplated. Other commenters recommended limiting the use of Form 8-A
to situations contemporaneous with qualification of an offering
statement,\710\ within 12 months of qualification,\711\ or after a
brief time period after an offering statement is qualified.\712\
Separately, two commenters recommended that Regulation A issuers that
become Exchange Act reporting companies be considered ``emerging growth
companies.'' \713\ One commenter recommended allowing issuers to use
Form 8-A but to continue using Regulation A reports until its non-
affiliate market capitalization reached $250 million.\714\
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\706\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA
Letter 2; Fallbrook Technologies Letter; Frutkin Law Letter;
McCarter & English Letter; Milken Institute Letter; MoFo Letter; OTC
Markets Letter; Paul Hastings Letter; Richardson Patel Letter; WR
Hambrecht + Co Letter.
\707\ ABA BLS Letter; CFIRA Letter 1; WR Hambrecht + Co Letter.
\708\ Canaccord Letter; Milken Institute Letter; MoFo Letter.
\709\ ABA BLS Letter; Canaccord Letter; MoFo Letter.
\710\ Milken Institute Letter.
\711\ Frutkin Law Letter; Richardson Patel Letter.
\712\ McCarter & English Letter.
\713\ ABA BLS Letter; MoFo Letter.
\714\ Paul Hastings Letter.
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Two commenters encouraged the Commission to foster the development
of venture exchanges on which Regulation A securities could be
traded,\715\ while another commenter largely opposed the creation of
venture exchanges.\716\
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\715\ Heritage Letter; SBIA Letter.
\716\ OTC Markets Letter.
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c. Final Rules
In the final rules, and consistent with the views of many
commenters,\717\ we are simplifying Exchange Act registration in
connection with Regulation A offerings conducted pursuant to Tier 2 so
that issuers wishing to register a class of Regulation A securities
under the Exchange Act may do so by filing a Form 8-A in conjunction
with the qualification of a Form 1-A. Only issuers that follow Part I
of Form S-1 or the Form S-11 disclosure model in the offering circular
will be permitted to use Form 8-A.\718\ An issuer registering a class
of securities under the Exchange Act concurrently with the
qualification of a Regulation A offering statement will become an
Exchange Act reporting company upon effectiveness of the Form 8-A and,
if applicable, its obligation to file ongoing reports under Regulation
A will be suspended for the duration of the resulting reporting
obligation under Section 13 of the Exchange Act.\719\ While some
commenters suggested that we permit issuers to rely on the Form 8-A to
register a class of securities for up to 12 months following the
qualification of an offering statement, we believe limiting short form
registration to situations in which an offering statement is being
concurrently qualified will help ensure that the disclosures
incorporated by reference into the Form 8-A, including financial
statements contained in the offering statement are current.\720\ The
final rules would not, however, prevent an issuer from registering a
class of securities under the Exchange Act on Form 8-A concurrent with
the re-qualification of a previously qualified offering statement.
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\717\ See fn. 706 above.
\718\ See Form 8-A, General Instructions A(c).
\719\ As discussed more fully in in Section II.E.4. below, a
Tier 2 issuer may terminate its Regulation A ongoing disclosure
obligation when it is no longer subject to the ongoing reporting
requirements of Section 13 of the Exchange Act. See also Rule
257(e).
\720\ In order to ensure that registration on Form 8-A is
limited to a concurrently qualified Regulation A offering statement,
the amendments to Form 8-A expressly limit the use of the form to
instances where the filing of the Form 8-A and, where applicable,
the receipt by the Commission of certification from the national
securities exchange listed on the form occur within five calendar
days after the qualification of the Regulation A offering statement.
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We recognize that Exchange Act reporting requires more
comprehensive ongoing reporting than the Regulation A disclosure
regime, which is why facilitating issuers' entrance into the Exchange
Act reporting system on Form 8-A concurrent with the qualification of a
Regulation A offering statement will benefit investors. At a minimum,
issuers pursuing this route to exchange listing must meet listing
standards of, and be certified by, the exchange before the Form 8-A
will be declared effective. In order to be approved for listing on an
exchange, issuers generally must meet certain size, financial, minimum
securities distribution (or liquidity), and corporate governance
criteria.\721\
[[Page 21853]]
Additionally, in order to maintain listing on an exchange, issuers must
maintain certain qualitative and quantitative continued listing
standards.\722\ Therefore, in addition to the provision of ongoing
Exchange Act reports, investors will benefit from the issuer's
satisfaction of the exchange's initial and ongoing listing standards,
and may benefit from greater liquidity for their shares as a result.
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\721\ See, e.g., Initial Listing Guide for the NASDQAQ Stock
Market, available at: https://listingcenter.nasdaq.com/assets/initialguide.pdf; U.S. Listing Standards for the New York Stock
Exchange (NYSE), available at: https://www.nyse.com/publicdocs/nyse/listing/NYSE%20_Initial_Listing_Standards_Summary.pdf.
\722\ See, e.g., Continued Listing Guide for the NASDQAQ Stock
Market, available at: https://listingcenter.nasdaq.com/assets/continuedguide.pdf; Continued Listing Standards for the New York
Stock Exchange (NYSE), available at: https://www.nyse.com/get-started/reference.
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As suggested by commenters, we believe that our accommodation
should be limited to instances where an issuer provides disclosure in
Part II of Form 1-A that follows Part I of Form S-1 or Form S-11,
instead of the Offering Circular format. While all formats require
extensive disclosure that, with the exception of item numbering, is
similar in many respects, we believe that an issuer entering Exchange
Act reporting should provide disclosure in a manner that is generally
consistent with the requirements of issuers entering the Exchange Act
reporting regime through registered offerings.\723\ In this regard, we
note that issuers qualifying an offering statement that follows Part I
of Form S-1 or Form S-11 will, however, be required to follow the
financial statement requirements of Part F/S of Form 1-A. For purposes
of concurrent Exchange Act registration, the financial statements
included in Form 1-A must be audited in accordance with the standards
of the PCAOB by a PCAOB-registered auditor that is independent pursuant
to Article 2 of Regulation S-X.\724\ After effectiveness of the Form 8-
A, they will be subject to Exchange Act reporting and compliance with
the financial statement requirements of Exchange Act reporting
companies.
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\723\ See Section II.C.3.b(2)(c). above for a description of the
financial statement requirements.
\724\ See General Instruction A.(a) to Form 8-A.
---------------------------------------------------------------------------
Consistent with the suggestion of commenters,\725\ we agree that
issuers entering Exchange Act reporting under a qualified Regulation A
offering statement and Form 8-A will be considered ``emerging growth
companies'' to the extent the issuers otherwise qualify for such
status. Issuers should base status determinations on the definition of
an emerging growth company as it appears in the Securities Act and the
Exchange Act.\726\
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\725\ ABA BLS Letter; MoFo Letter.
\726\ Under Section 2(a)(19) of the Securities Act, an
``emerging growth company'' is defined as, among other things, an
issuer that had total annual gross revenues of less than $1 billion
during its most recently completed fiscal year. 15 U.S.C.
77b(a)(19). See also Section 3(a)(80) of the Exchange Act (which
repeats the same definition). 15 U.S.C. 78c(a)(80).
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As noted above, the Proposing Release sought comment on whether we
should consider encouraging the development of venture exchanges or
other trading venues to facilitate the secondary market trading of
Regulation A securities. We are considering venture exchanges as a way
to provide liquidity for smaller issuers, and are contemplating their
use for Regulation A securities as part of that consideration.
4. Exit Report on Form 1-Z
a. Proposed Rules
(1) Summary Information on Terminated or Completed Offerings
As discussed in Section II.E.1. above, we proposed to rescind Form
2-A but to continue to require Regulation A issuers to file the
information generally disclosed in Form 2-A with the Commission
electronically on EDGAR. Consistent with the related portion of
proposed Form 1-K,\727\ we proposed to convert the Form 2-A information
into an online XML-based fillable form with indicator boxes or buttons
and text boxes to be filed electronically with the Commission as Part I
of proposed Form 1-Z (exit report). Issuers conducting Tier 1 offerings
would be required to provide this information on Form 1-Z not later 30
calendar days after termination or completion of the offering, while
issuers conducting Tier 2 offerings would be required to provide this
information on Form 1-Z at the time of filing the exit report, if not
previously provided on Form 1-K as part of their annual report.\728\ As
proposed, the summary offering information disclosed on Form 1-Z would
be publicly available on EDGAR (but not otherwise required to be
distributed to investors) and would include the date the offering was
qualified and commenced, the number of securities qualified, the number
of securities sold in the offering, the price of the securities, any
fees associated with the offering, and the net proceeds to the issuer.
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\727\ See also discussion in Section II.C.1. (Electronic Filing;
Delivery Requirements) and Section II.C.3.a. (Part I (Notification))
above.
\728\ See Section II.E.1. above for a discussion of the
requirements for proposed Form 1-K.
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(2) Termination or Suspension of Tier 2 Disclosure Obligations
We further proposed to permit a Tier 2 issuer that has filed all
ongoing reports required by Regulation A for the shorter of (1) the
period since the issuer became subject to such reporting obligation or
(2) its most recent three fiscal years and the portion of the current
year preceding the date of filing Form 1-Z to immediately suspend its
ongoing reporting obligation under Regulation A at any time after
completing reporting for the fiscal year in which the offering
statement was qualified, if the securities of each class to which the
offering statement relates are held of record by fewer than 300 persons
and offers or sales made in reliance on a qualified offering statement
are not ongoing.\729\ In such circumstances, an issuer's obligation to
continue to file ongoing reports in a Tier 2 offering under Regulation
A would be suspended immediately upon the filing of a notice with the
Commission on Part II of proposed Form 1-Z. A manually signed copy of
the Form 1-Z would have to be executed by the issuer and related
signatories before or at the time of filing and retained by the issuer
for a period of five years.\730\ Issuers would be required to produce
the manually signed copy to the Commission, upon request.\731\
---------------------------------------------------------------------------
\729\ See proposed Rule 257(d)(2).
\730\ See Instruction to proposed Form 1-Z.
\731\ Id.
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We further proposed that issuers' obligations to file ongoing
reports in a Tier 2 offering under Regulation A would be automatically
suspended upon registration of a class of securities under Section 12
of the Exchange Act or effectiveness of a registration statement under
the Securities Act, such that Exchange Act reporting obligations would
always supersede ongoing reporting obligations under Regulation A. If
an issuer terminates or suspends its reporting obligations under the
Exchange Act and the issuer is eligible to suspend its Regulation A
reporting obligation by filing a Form 1-Z at that time, the ongoing
reporting obligations would terminate automatically and no Form 1-Z
filing would be required to terminate the issuer's Regulation A
reporting obligation. If the issuer is not eligible to file a Form 1-Z
at that time, it would need to recommence its Regulation A reporting
with a report covering any financial period not completely covered by
an effective registration statement or filed Exchange Act report.\732\
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\732\ See proposed Rule 257(d)(1) and (e).
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[[Page 21854]]
b. Final Rules
(1) Summary Information on Terminated or Completed Offerings
The single commenter on this issue approved of the proposed
requirement to file summary information after the termination or
completion of a Regulation A offering under both tiers.\733\ We are
adopting this requirement without changes.
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\733\ CFA Institute Letter.
---------------------------------------------------------------------------
(2) Termination or Suspension of Tier 2 Disclosure Obligations
We are adopting, with a change from the proposal, final rules that
will permit issuers that conduct a Tier 2 offering to terminate or
suspend their ongoing reporting obligations on a basis similar to the
provisions that allow issuers to suspend their ongoing reporting
obligations under Section 13 and Section 15(d) of the Exchange
Act.\734\ As proposed, the final rules permit a Tier 2 issuer that has
filed all reports required by Regulation A for the shorter of: (1) The
period since the issuer became subject to such reporting obligation, or
(2) its most recent three fiscal years and the portion of the current
year preceding the date of filing Form 1-Z to immediately suspend its
ongoing reporting obligation under Regulation A at any time after
completing reporting for the fiscal year in which the offering
statement was qualified, if the securities of each class to which the
offering statement relates are held of record by fewer than 300 persons
and offers or sales made in reliance on a qualified Tier 2 offering
statement are not ongoing.\735\ In a change from the proposal, in order
to be consistent with Title VI of the JOBS Act, the final rules permit
banks or bank holding companies \736\ to immediately suspend their
ongoing reporting obligation under Regulation A at any time after
completing reporting for the fiscal year in which the offering
statement was qualified, if the securities of each class to which the
offering statement relates are held of record by fewer than 1,200
persons, instead of 300 persons, and offers or sales made in reliance
on a qualified Tier 2 offering statement are not ongoing.\737\ As
proposed, an issuer's obligation to continue to file ongoing reports in
a Tier 2 offering under Regulation A will be suspended immediately upon
the filing of a notice to the Commission on Part II of proposed Form 1-
Z.\738\ As proposed, a manually signed copy of the Form 1-Z must be
executed by the issuer and related signatories before or at the time of
filing and retained by the issuer for a period of five years.\739\
Issuers must produce the manually signed copy to the Commission, upon
request.\740\
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\734\ See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange
Act Rule 12h-3, 17 CFR 240.12h-3.
\735\ Rule 257(d)(2).
\736\ The Commission recently proposed changes to its rules
regarding Exchange Act registration to implement Title V and Title
VI of the JOBS Act. See Rel. No. 33-9693 (Dec. 18, 2014) [79 FR
78343]. These proposed changes would, among other things, apply the
registration thresholds applicable to banks and bank holding
companies, as set forth in Section 12(g) of the Exchange Act, to
savings and loan holding companies. Should we adopt this provision
in the final rules for Section 12(g), we would anticipate making a
corresponding change to the termination provisions of Rule 257(d).
\737\ Rule 257(d)(2). The final rules, as they apply to the
number of record holders of other types of issuers, are adopted
without changes from the proposal. Although Rule 257(d)(2) relies on
the definition of ``held of record'' in Rule 12g5-1, issuers seeking
to terminate or suspend their Tier 2 ongoing disclosure obligations
are specifically excluded from relying on the amendment to such
definition, which exclude securities issued in Tier 2 offerings. See
Rule 12g5-1(a)(7) and Section II.B.6 above.
\738\ Id. In this regard, we have clarified that the Commission
may only deny a Form 1-Z filing if the issuer is ineligible to use
the form. See Rule 257(d).
\739\ See Instruction to Form 1-Z.
\740\ Id.
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We otherwise adopt the proposed rules for the termination or
suspension of a Tier 2 ongoing reporting obligation as proposed and
without changes.
F. Insignificant Deviations From a Term, Condition or Requirement
We did not propose any changes to the existing insignificant
deviation provisions of Rule 260. Rule 260 provides that certain
insignificant deviations from a term, condition or requirement of
Regulation A will not result in the issuer's loss of the exemption from
registration under Section 5 of the Securities Act.\741\ The provisions
of Regulation A regarding issuer eligibility, offering limits, offers,
and continuous or delayed offerings of Regulation A are deemed to be
significant to the offering as a whole, and any deviations from these
provisions result in the issuer's loss of the exemption.
---------------------------------------------------------------------------
\741\ 17 CFR 230.260.
---------------------------------------------------------------------------
One commenter generally supported the concept of allowing for
insignificant deviations from the rules without the loss of the
exemption.\742\ This commenter recommended that the Commission give
notice of violations and allow companies to have an opportunity to cure
any such violation. The commenter also recommended imposing lesser
sanctions, such as fines, if less significant violations could not be
cured. Another commenter recommended including deviations from the
prohibitions on the timing of sales and the amounts sold to investors
on the list of matters deemed significant in proposed Rule 260, noting
that, in its view, it would be difficult for issuers to show a good
faith and reasonable attempt was made to comply with the requirements
of Rule 251(d)(2).\743\ This commenter noted that issuers, investors
and state regulators need clear boundaries to know what actions will
disqualify an offering from exemption and thus, with respect to the
proposed provisions for Tier 2 offerings, would result in a loss of
state preemption.
---------------------------------------------------------------------------
\742\ Heritage Letter.
\743\ MCS Letter.
---------------------------------------------------------------------------
The final rules maintain the existing provisions for insignificant
deviations, as proposed. Under the final rules, a failure to comply
with a term, condition or requirement of Regulation A will not result
in the loss of the exemption for any offer or sale to a particular
individual or entity, if the person relying on the exemption
establishes that:
(1) The failure to comply did not pertain to a term, condition or
requirement directly intended to protect that particular individual or
entity;
(2) The failure to comply was insignificant with respect to the
offering as a whole, provided that any failure to comply with the
offering limitations, issuer eligibility criteria, or requirements for
offers or continuous or delayed offerings will be deemed to be
significant to the offering as a whole; and
(3) A good faith and reasonable attempt was made to comply with all
applicable terms, conditions and requirements of Regulation A.\744\
---------------------------------------------------------------------------
\744\ Rule 260.
---------------------------------------------------------------------------
We believe that provisions for insignificant deviations serve an
important function by allowing for certain errors that can occur in the
offering process, while clearly delineating those provisions from which
an issuer may not deviate. We believe the current provisions provide
assurances to investors that issuers will not be able to deviate from
certain fundamental requirements in the rules and avoid undue hardship
that could befall issuers for inadvertent errors, such as loss of the
exemption and, with respect to Tier 2 offerings, the loss of preemption
of state securities law registration and qualification requirements. We
are not expanding the list of provisions from which an issuer may not
deviate. We note that whether a deviation from the requirements would
be significant to the offering as a whole would depend on the facts and
[[Page 21855]]
circumstances related to the offering and the deviation. We also note
that in certain situations, such as in the event of pre-qualification
sales, it may be difficult for issuers to establish a good faith
attempt at compliance. In such circumstances, an issuer would not be
able to rely on the provision.
G. Bad Actor Disqualification
1. Proposed Rules
Under Securities Act Section 3(b)(2)(G)(ii), the Commission has
discretion to issue rules disqualifying certain felons and other `bad
actors' from using amended Regulation A. Such rules, if adopted, must
be ``substantially similar'' to those adopted to implement Section 926
of the Dodd-Frank Act, which requires the Commission to adopt
disqualification rules for securities offerings under Rule 506 of
Regulation D. The Commission adopted the disqualification provisions
required by Section 926 in Rule 506(d) together with a related
disclosure requirement in Rule 506(e) on July 10, 2013.\745\
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\745\ Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]. The
Commission proposed rules substantially similar to those adopted
pursuant to Section 926 of the Dodd-Frank Act in the Proposing
Release for securities-based crowdfunding transactions under Title
III of the JOBS Act. See Rel. No. 33-9470, at 284.
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We proposed amendments to Regulation A's bad actor disqualification
provisions that would make those provisions substantially similar to
those adopted under Rule 506 of Regulation D. We also sought comment on
the proposed disqualification rules and the categories of persons and
types of events covered by the proposed rules. Additionally, we sought
comment more broadly on the interpretation of the phrase ``voting
equity securities,'' as it appears in ``any beneficial owner of 20% or
more of the issuer's outstanding voting equity securities, calculated
on the basis of voting power,'' a category of covered persons in Rule
506(d) and the proposed disqualification provisions for Regulation A as
well as our proposed rules for securities-based crowdfunding
transactions.
2. Comments on Proposed Rules
In general, commenters did not oppose the proposed amendments to
Regulation A's bad actor disqualification rules. Some commenters
expressly supported the proposed rules.\746\ Some commenters, however,
recommended changes to particular provisions of the proposal. One
commenter recommended revising the look-back periods for disqualifying
events to run from the time of sale, not from the time of filing of the
offering statement as proposed.\747\ Another commenter recommended
adding final orders of Canadian provincial regulators to the list of
disqualifying events.\748\ This commenter noted that some Canadian
provinces have information publicly posted on their Web sites that
would facilitate the bad actor diligence process. One commenter
recommended that the Commission develop an online bad actor
database.\749\ Another commenter supported bad actor provisions as
extensive as those under Rule 506(d).\750\ Finally, one commenter
recommended defining voting equity securities for purposes of the bad
actor disqualifications provisions using the definition in Rule 12b-2
of the Exchange Act.\751\
---------------------------------------------------------------------------
\746\ See, e.g., KVCF Letter; MCS Letter;
\747\ KVCF Letter.
\748\ Karr Tuttle Letter.
\749\ Ladd Letter 2.
\750\ MCS Letter.
\751\ ABA BLS Letter (suggesting ``voting securities'' be deemed
securities the holders of which are presently entitled to vote for
the election of directors (or the equivalent)).
---------------------------------------------------------------------------
3. Final Rules
We are adopting bad actor disqualification provisions for
Regulation A, substantially as proposed with the exception of one
change to further align the final rules for Regulation A with similar
provisions in Rule 506(d). The covered persons and triggering events in
the final rules for Regulation A are substantially the same as the
covered persons and triggering events included in Rule 506(d).\752\ The
covered persons include managing members of limited liability
companies; compensated solicitors of investors; underwriters; executive
officers and other officers participating in the offering; and
beneficial owners of 20% or more of the issuer's outstanding voting
equity securities, calculated on the basis of voting power.\753\
Consistent with the bad actor disqualification rules under Rule 506(d),
the final rules also include two new disqualification triggers not
previously present in Regulation A: (1) Final orders and bars of
certain state and other federal regulators,\754\ and (2) Commission
cease-and-desist orders relating to violations of scienter-based anti-
fraud provisions of the federal securities laws or Section 5 of the
Securities Act.\755\ In order to clarify the scope of the term ``final
order'' as it appears in Rule 262, we are including a definition of
that term in Regulation A that is consistent with the term as it
appears in Rule 501(g) of Regulation D. As adopted, a ``final order''
shall mean a written directive or declaratory statement issued by a
federal or state agency described in Rule 262(a)(3) under applicable
statutory authority that provides for notice and an opportunity for
hearing, which constitutes a final disposition or action by that
federal or state agency.\756\ We believe that creating a uniform set of
bad actor triggering events should simplify due diligence, particularly
for issuers that may engage in different types of exempt offerings. For
this reason, consistent with the disqualification provisions of Rule
506(d), the final rules do not include final orders of Canadian
provincial regulators in the list of disqualifying events.
---------------------------------------------------------------------------
\752\ 17 CFR 230.506(d).
\753\ Rule 262(a).
\754\ Rule 262(a)(3).
\755\ Rule 262(a)(5).
\756\ Rule 261(d).
---------------------------------------------------------------------------
The final disqualification rules in Regulation A also specify that
an order must bar the covered person at the time of filing of the
offering statement, as opposed to the requirement in Rule 506(d) that
the order must bar the covered person at the time of the relevant
sale.\757\ This clarification accords with the current provisions of
Rule 262 and is appropriate for Regulation A because there is no filing
requirement before the time of first sale in Rule 506.\758\ We are
further adopting a reasonable care exception to the disqualification
provisions on a basis consistent with Rule 506(d).\759\ Under the final
rules, an issuer will not lose the benefit of the Regulation A
exemption if it is able to show that it did not know, and in the
exercise of reasonable care could not have known, of the existence of a
disqualification.\760\ As proposed, and consistent with the provisions
of existing Regulation A, the final rules permit issuers that are
disqualified from relying on the exemption to request a waiver of
disqualification from the Commission.\761\
---------------------------------------------------------------------------
\757\ Rule 506(d), 17 CFR 230.506(d).
\758\ Under Rule 503 of Regulation D, issuers must file a notice
of sales on Form D no later than 15 calendar days after the first
sale of securities. 17 CFR 230.503(a).
\759\ See Rule 262(b)(4).
\760\ Id.
\761\ Rule 262(b)(2).
---------------------------------------------------------------------------
In the Proposing Release, we solicited comment on the
interpretation of the phrase ``voting equity securities,'' as it
appears in ``any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power,'' a category of covered persons in Rule 506(d) and proposed Rule
262 as well as our
[[Page 21856]]
proposed rules for securities-based crowdfunding transactions.
Consistent with the views of at least one commenter,\762\ we have
reconsidered our initial views on the interpretation of ``voting equity
securities.'' We believe that it is appropriate to refine our initial
interpretation,\763\ as it applies to our bad actor disqualification
rules,\764\ and create a ``bright-line'' standard that is consistent
with the definition of the term ``voting securities'' in Rule 405 of
the Securities Act.\765\ In this regard, we believe that such a term
should include only those voting equity securities which, by their
terms, currently entitle the holder to vote for the election of
directors. In other words, we believe the term should be read to denote
securities having a right to vote that are presently exercisable.
Additionally, while the ability to control or significantly influence
the management or policies of the issuer may be derived in part from
the power to vote for the election of directors, in order to dispel any
uncertainty as to the scope of our interpretation, we believe the term
``voting equity securities'' should be interpreted based on the present
right to vote for the election of directors, irrespective of the
existence of control or significant influence.
---------------------------------------------------------------------------
\762\ ABA BLS Letter.
\763\ When we adopted Rule 506(d), we did not define ``voting
equity securities,'' but rather indicated that our initial intention
would be to consider securities as voting equity securities if
``securityholders have or share the ability, either currently or on
a contingent basis, to control or significantly influence the
management and policies of the issuer through the exercise of a
voting right.'' See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR
44729], text accompanying fn. 62. In light of concerns that our
initial interpretation may be overbroad and that a ``bright line''
test may be more workable and would facilitate compliance, as we
indicated in the Proposing Release, we are reconsidering our initial
views. See Proposing Release, at Section II.G.
\764\ In addition to Regulation A, this interpretive position
would apply to Rule 505 and Rule 506 of Regulation D.
\765\ In Securities Act Rule 405, the term voting securities
means securities the holders of which are presently entitled to vote
for the election of directors. 17 CFR 230.405.
---------------------------------------------------------------------------
Under the final rules, offerings that would have been disqualified
from reliance on Regulation A under Rule 262 as in effect before
today's amendments will continue to be disqualified. Triggering events
that were not previously included in the bad actor rules for Regulation
A and that pre-date effectiveness of the final rules will not cause
disqualification, but instead must be disclosed on a basis consistent
with Rule 506(e). Specifically, issuers will be required to indicate in
Part I of Form 1-A that none of the persons described in Rule 262 are
disqualified and, where applicable, that disclosure of triggering
events that would have triggered disqualification, but occurred before
the effective date of the Regulation A amendments, will be provided in
Part II of Form 1-A.\766\
---------------------------------------------------------------------------
\766\ As discussed in Section II.C.3.a. above, Part I of Form 1-
A focuses, in part, on issuer eligibility, and requires issuers to
make an eligibility determination at the outset of filling out Form
1-A.
---------------------------------------------------------------------------
We believe that the final rules are appropriate in light of the
Section 3(b)(2)(G)(ii) mandate, the benefits of creating a more uniform
set of standards for all exemptions that include bad actor
disqualification, and the required disclosure in the offering circular
of persons subject to events that would have triggered
disqualification, but occurred before the effective date of the final
rules.
H. Relationship With State Securities Law
1. Proposed Rules
Although Section 401(b) of the JOBS Act does not exempt offerings
made under Section 3(b)(2) and the related rules from state law
registration and qualification requirements, it added Section
18(b)(4)(D) to the Securities Act.\767\ That provision states that
Section 3(b)(2) securities are covered securities for purposes of
Section 18 if they are ``offered or sold on a national securities
exchange'' or ``offered or sold to a qualified purchaser, as defined by
the Commission pursuant to [Section 18(b)(3)] with respect to that
purchase or sale.'' Section 18(b)(3) provides that ``the Commission may
define the term `qualified purchaser' differently with respect to
different categories of securities, consistent with the public interest
and the protection of investors.''
---------------------------------------------------------------------------
\767\ Section 18 of the Securities Act generally provides for
exemption from state law registration and qualification requirements
for certain categories of securities, defined as ``covered
securities.'' See Section 18(c), 15 U.S.C. 77r(c). State securities
regulators retain authority to impose certain filing and fee
requirements and general antifraud enforcement authority with
respect to covered securities. See Section 18(c), 15 U.S.C. 77r(c).
---------------------------------------------------------------------------
Commenters in the pre-proposal stage suggested that the cost of
state securities law compliance, which they identified as an obstacle
to the use of Regulation A, would discourage market participants from
using the new exemption. In addition, the GAO, as required by Section
402 of the JOBS Act, conducted a study on the impact of state
securities laws registration and qualification requirements on
offerings conducted under Regulation A and found that state securities
laws were among several central factors that may have contributed to
the lack of use of Regulation A.\768\
---------------------------------------------------------------------------
\768\ See fn. 90 above.
---------------------------------------------------------------------------
In light of the issues raised by commenters and in the GAO Report,
as well the substantial investor protections included in the proposed
rules to amend Regulation A and implement Title IV of the JOBS Act, we
proposed to define the term ``qualified purchaser'' in a Regulation A
offering to consist of: (1) All offerees in a Regulation A offering and
(2) all purchasers in a Tier 2 offering.\769\ We indicated in the
Proposing Release that we believed this approach would protect offerees
and purchasers in Regulation A securities, while streamlining
compliance and reducing transaction costs.
---------------------------------------------------------------------------
\769\ Proposed Rule 256.
---------------------------------------------------------------------------
We proposed to preempt state securities laws registration and
qualification requirements with respect to all offerees in a Regulation
A offering, in order to allow issuers relying on Regulation A to
communicate with potential investors about their offerings using the
internet, social media, and other means of widespread communication,
without concern that such communications might trigger registration
requirements under state law.\770\ We further proposed to preempt state
securities laws registration and qualification requirements with
respect to all purchasers in a Tier 2 offering to help make Regulation
A a more workable means of capital formation. We also noted our belief
that the substantial investor protections embedded in the proposed
rules, including issuer eligibility conditions, limitations on
investment, disclosure requirements, qualification process, and ongoing
reporting requirements of Tier 2, in combination, could address
potential concerns that may arise as a result of preemption.
---------------------------------------------------------------------------
\770\ We understand that some state securities regulators do not
require the registration of broadly advertised offerings such as
internet offerings, if the advertisement indicates, directly or
indirectly, that the offering is not available to residents of that
state. See, e.g., Washington State Dep't of Financial Institutions,
Securities Act Policy Statement--16, available at: 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).
---------------------------------------------------------------------------
Under the proposed rules, state securities regulators would retain
their authority to:
Require the filing of any document filed with the
Commission and the payment of filing fees;
investigate and bring enforcement actions against
fraudulent securities transactions and unlawful conduct by broker-
dealers in such offerings; and
[[Page 21857]]
enforce the filing and fee requirements by suspending the
offer or sale of securities within a given state for the failure to
file or pay the appropriate fee.\771\
---------------------------------------------------------------------------
\771\ Section 18(c) (Preservation of Authority) of the
Securities Act, 15 U.S.C. 77r(c).
---------------------------------------------------------------------------
As noted in the Proposing Release, it was our preliminary view that
the additional requirements for Tier 2 offerings would meaningfully
bolster the protections otherwise embedded in Regulation A and
therefore a different treatment than Tier 1 offerings is appropriate.
2. Comments on Proposed Rules
The preemption of state securities law registration and
qualification requirements contemplated in the proposed ``qualified
purchaser'' definition received an extensive amount of public
commentary. Commenters were sharply divided on the need for state
securities law preemption in Regulation A.
Many commenters objected to the preemption of state securities law
registration and qualification requirements.\772\ The views of these
commenters were based on the following arguments:
---------------------------------------------------------------------------
\772\ Letter from A. Heath Abshure, Arkansas Securities
Commissioner, February 20, 2014 (``ASD Letter''); CFA Letter; CFA
Institute Letter; Letter from Rep. Stephen F. Lynch, et al, U.S.
House of Representatives, June 3, 2014 (``Congressional Letter 2'');
Letter from Sen. Barbara Boxer, et al, U.S. Senate, Aug. 1, 2014
(``Congressional Letter 4''); Cornell Clinic Letter; Groundfloor
Letter (suggesting that the Commission should at least evaluate
NASAA's coordinated review program for 12 months); Karr Tuttle
Letter (acknowledging that state preemption may still be necessary
for states not participating in NASAA's new coordinated review
program); Letter from William F. Galvin, Secretary, Commonwealth of
Massachusetts, December 18, 2013 (``Massachusetts Letter 1'');
Massachusetts Letter 2; MCS Letter; Letter from Andrea Seidt,
President, et al., North American Securities Administrators
Association (NASAA), February 19, 2014 (``NASAA Letter 1''); NASAA
Letter 2; Letter from William Beatty, President, North American
Securities Administrators Association (NASAA), February 11, 2015
(``NASAA Letter 3''); Letter from Jack E. Herstein, Assistant
Director, Nebraska Department of Banking and Finance, February 10,
2014 (``NDBF Letter''); Letter from Chad Johnson, Bureau Chief,
Investor Protection Bureau, New York State Attorney General's
Office, New York, May 7, 2014 (``NYIPB Letter''); Letter from Irving
L. Faught, Administrator, Oklahoma Department of Securities, March
24, 2014 (``ODS Letter''); Letter from Damaris Mendoza-Rom[aacute]n,
Assistant Commissioner, Office of the Commissioner of Financial
Institutions, Puerto Rico, March 5, 2014 (``PRCFI Letter''); Letter
from Hon. Jesse White, Illinois Secretary of State, et al., March 4,
2014 (``Secretaries of State Letter''); Letter from Lindsay M.
Scherber, May 8, 2014 (``Scherber Letter''); Letter from Janet M.
Tavakoli, President, Tavakoli Structured Finance, Inc., February 24,
2014 (``Tavakoli Letter''); Letter from John Morgan, Securities
Commissioner, Texas State Securities Board, March 21, 2014 (``TSSB
Letter''); WDFI Letter.
---------------------------------------------------------------------------
A ``qualified purchaser'' means a purchaser with
specialized skill, experience or knowledge.\773\
---------------------------------------------------------------------------
\773\ See, e.g., ASD Letter; CFA Letter; Congressional Letter 4;
Cornell Clinic Letter; Massachusetts Letter 1; NASAA Letter 2; ODS
Letter; PRCFI Letter; WDFI Letter.
---------------------------------------------------------------------------
The qualifications of the purchaser are key, not the
nature of the issuer or the offering. Thus, the proposed definition of
``qualified purchaser'' is contrary to the plain meaning of this
term.\774\
---------------------------------------------------------------------------
\774\ See, e.g., CFA Letter; Massachusetts Letter 1; NASAA
Letter 2; PRCFI Letter; Tavakoli Letter; WDFI Letter.
---------------------------------------------------------------------------
The legislative history of the National Securities Markets
Improvement Act of 1996 (NSMIA) \775\ suggests that definitions of
``qualified purchaser'' must include an investor sophistication
test.\776\ The Commission made similar statements on the ``qualified
purchaser'' definition in a 2001 Proposing Release.\777\
---------------------------------------------------------------------------
\775\ Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996).
\776\ See, e.g., ASD Letter; Karr Tuttle Letter; Congressional
Letter 4; Massachusetts Letter 1; Massachusetts Letter 2; NASAA
Letter 1; NASAA Letter 2; NDBF Letter; NYIPB Letter; ODS Letter;
PRCFI Letter; Secretaries of State Letter; Tavakoli Letter; WDFI
Letter.
\777\ Rel. No. 33-8041 (Dec. 27, 2001) (the ``2001 Proposing
Release'').
---------------------------------------------------------------------------
Congress considered preemption in the context of a
provision to preempt offerings conducted through a broker-dealer in an
early draft of Title IV of the JOBS Act, but then purposefully excluded
such broad preemption from the final statute.\778\
---------------------------------------------------------------------------
\778\ See, e.g., ASD Letter; CFA Letter; Congressional Letter 2;
Congressional Letter 4; Groundfloor Letter; Massachusetts Letter 1;
Massachusetts Letter 2; NASAA Letter 2; NDBF Letter; NYIPB Letter;
Secretaries of State Letter; Tavakoli Letter; WDFI Letter.
---------------------------------------------------------------------------
The Commission's cost-benefit analysis of preemption was
inadequate because it largely ignored investor protections, the
benefits of state regulation, perceived resource constraints at the
Commission, and preemption's impact on investor confidence in the
markets.\779\
---------------------------------------------------------------------------
\779\ See, e.g., CFA Letter; Groundfloor Letter; Massachusetts
Letter 2; NASAA Letter 2; Scherber Letter; WDFI Letter.
---------------------------------------------------------------------------
Although the GAO Report conducted under Section 402 of the
JOBS Act cited compliance with state securities law review and
qualification requirements as a factor in the lack of use of Regulation
A, it also noted lengthy Commission reviews of Form 1-A filings.\780\
---------------------------------------------------------------------------
\780\ See, e.g., CFA Letter; Massachusetts Letter 2; NASAA
Letter 2; WDFI Letter.
---------------------------------------------------------------------------
States play a unique role in regulating securities
offerings due to their localized knowledge and resources, which aid in
detecting fraud and facilitating issuer compliance.\781\
---------------------------------------------------------------------------
\781\ See, e.g., NASAA Letter 1; ODS Letter; PRCFI Letter; WDFI
Letter.
---------------------------------------------------------------------------
The investor protections included in the proposal do not
act as an adequate substitute for state review and comment on offering
statements.\782\
---------------------------------------------------------------------------
\782\ See, e.g., CFA Letter; CFA Institute Letter; MCS Letter;
NASAA Letter 2; Scherber Letter; TSSB Letter; WDFI Letter.
---------------------------------------------------------------------------
The states have adopted and implemented a new coordinated
review program, designed to address many of the perceived
inefficiencies associated with state registration.\783\
---------------------------------------------------------------------------
\783\ See, e.g., ASD Letter; CFA Institute Letter; Cornell
Clinic Letter; Groundfloor Letter; Karr Tuttle Letter; Massachusetts
Letter 1; Massachusetts Letter 2; NASAA Letter 1; NASAA Letter 2;
NASAA Letter 3; NYIPB Letter; PRCFI Letter; Secretaries of State
Letter; Tavakoli Letter; TSSB Letter; WDFI Letter.
---------------------------------------------------------------------------
Many other commenters expressed their support for preemption, as
proposed.\784\ These commenters made the following arguments:
---------------------------------------------------------------------------
\784\ ABA BLS Letter; Letter from Kendall Almerico, Crowdfunding
Expert, Attorney and CEO, Fund Hub and ClickStartMe, February 11,
2014 (``Almerico Letter''); Andreessen/Cowen Letter; B. Riley
Letter; BIO Letter; Campbell Letter; Canaccord Letter; CFIRA Letter
1; CFIRA Letter 2; Letter from Rep. David Schweikert, et al, U.S.
House of Representatives, Sept. 25, 2014 (``Congressional Letter
3''); DuMoulin Letter (noting that Canadian issuers conducting
simultaneous offerings in Canada would otherwise be subject to three
levels of review); Letter from Stanley Keller, Edwards Wildman
Palmer LLP, April 3, 2014 (``Edwards Wildman Letter'') (recommending
defining ``qualified purchasers'' as ``accredited investors'' if the
proposed preemption is not adopted); Letter from Daniel Eng, CEO,
March 20, 2014 (``Eng Letter''); Fallbrook Technologies Letter;
Gilman Law Letter; McCarter & English Letter; Guzik Letter 1 (see
also Guzik Letter 2 (suggesting that if the proposed preemption is
not adopted to consider adopting an accredited investor style
definition for ``qualified purchaser,'' but with a lower income or
net worth test)); Letter from Todd Hart, Aug. 20, 2014 (``Hart
Letter''); Heritage Letter; Letter from Charles Huynh, February 24,
2014 (``Huynh Letter''); IPA Letter; Kisel Letter; Letter from
Akbert P. Kretz, Ph.D., Founder/Manager, Mentor, March 11, 2014
(``Kretz Letter''); KVCF Letter; Ladd Letters; Leading Biosciences
Letter; Letter from Bruce E. Methven, Securities Law Attorney, March
23, 2014 (``Methven Letter''); Milken Institute Letter; MoFo Letter;
Letter from Donald R. Hancock, CEO, Moloney Securities Co., Inc.,
February 20, 2014 (``Moloney Letter''); Letter from Jason Akel,
President, New Food Ventures LLC, March 12, 2014 (``New Food
Letter''); OTC Markets Letter; Letter from Jesse J. Palomino,
February 25, 2014 (``Palomino Letter''); Paul Hastings Letter;
Public Startup Co. Letters; REISA Letter; Richardson Patel Letter;
SBIA Letter; Letter from Bradley L. Staples, MBA, University of
Utah, February 21, 2014 (``Staples Letter''); Letter from Chris
Sugai, February 21, 2014 (``Sugai Letter''); SVB Financial Letter;
SVGS Letter; Letter from Ryan Hawxhurst, Founder and CEO of
Unorthodocs Printing LLC, February 21, 2014 (``Unorthodocs
Letter''); U.S. Chamber of Commerce Letter; Letter from Gregory S.
Fryer, Esq., Partner, Verrill Dana LLP, July 15, 2014 (``Verrill
Dana Letter 2''); Letter from John Warren, Esq., February 24, 2014
(``Warren Letter''); WR Hambrecht + Co Letter.
---------------------------------------------------------------------------
[[Page 21858]]
The proposed rules provide substantial investor
protections to investors.\785\
---------------------------------------------------------------------------
\785\ See, e.g., ABA BLS Letter; Almerico Letter; B. Riley
Letter; Campbell Letter; Canaccord Letter; CFIRA Letter 1;
Congressional Letter 3; Edwards Wildman Letter; Fallbrook
Technologies Letter; Gilman Law Letter; Guzik Letter 1; Guzik Letter
2; KVCF Letter; Leading Biosciences Letter; Milken Institute Letter;
MoFo Letter; OTC Markets Letter; Paul Hastings Letter; Richardson
Patel Letter; Verrill Dana Letter 2; WR Hambrecht + Co Letter.
---------------------------------------------------------------------------
State securities law review of offering statements is a
significant impediment to the use of Regulation A.\786\
---------------------------------------------------------------------------
\786\ See, e.g., ABA BLS Letter; Almerico Letter; BIO Letter;
Campbell Letter; Canaccord Letter; Congressional Letter 3; DuMoulin
Letter; Edwards Wildman Letter; Fallbrook Technologies Letter;
Gilman Law Letter; Guzik Letter 1; Guzik Letter 2; Kisel Letter;
Kretz Letter; KVCF Letter; Ladd Letters; Leading Biosciences Letter;
McCarter & English Letter; Milken Institute Letter; Moloney Letter;
OTC Markets Letter; Paul Hastings Letter; REISA Letter; Richardson
Patel Letter; SBIA Letter; Staples Letter; SVB Financial Letter;
U.S. Chamber of Commerce Letter; Verrill Dana Letter 2.
---------------------------------------------------------------------------
The Commission has the authority to preempt state
qualification and review requirements.\787\
---------------------------------------------------------------------------
\787\ See, e.g., ABA BLS Letter; BIO Letter; Campbell Letter;
Edwards Wildman Letter; Guzik Letter 1; Heritage Letter; IPA Letter;
KVCF Letter; Public Startup Co. Letters; Richardson Patel Letter;
U.S. Chamber of Commerce Letter; Verrill Dana Letter 2.
---------------------------------------------------------------------------
States continue to have the authority to, among other
things, bring anti-fraud enforcement actions and to review the publicly
filed disclosure documents before sales occur.\788\
---------------------------------------------------------------------------
\788\ See, e.g., Congressional Letter 3; Heritage Letter; KVCF
Letter; Methven Letter; REISA Letter.
---------------------------------------------------------------------------
NASAA's coordinated review program as implemented will
remain inefficient due to internal conflict, the application of merit
review standards and the program's inability to bind participants in
the event of disagreements among the states.\789\
---------------------------------------------------------------------------
\789\ See, e.g., ABA BLS Letter; BIO Letter; Canaccord Letter;
Congressional Letter 3; Edwards Wildman Letter; Guzik Letter 2; KVCF
Letter; Ladd Letters; Milken Institute Letter; Paul Hastings Letter;
REISA Letter; Richardson Patel Letter; SVB Financial Letter; Verrill
Dana Letter 2.
---------------------------------------------------------------------------
Many commenters that expressed general support for preemption, as
proposed, also recommended applying it on an expanded basis.\790\ Some
commenters recommended preempting state regulation of secondary trading
in Regulation A securities,\791\ and some recommended preempting state
regulation of Tier 1 offerings.\792\
---------------------------------------------------------------------------
\790\ ABA BLS Letter; Campbell Letter; Congressional Letter 3;
Guzik Letter 1; Hart Letter; Heritage Letter; IPA Letter; KVCF
Letter; Ladd Letter 2; Milken Institute Letter; OTC Markets Letter;
Paul Hastings Letter; Public Startup Co. Letter 1; SVB Financial
Letter.
\791\ ABA BLS Letter; IPA Letter (recommending preempting for
resales of all securities of a Tier 2 issuer that is current in
Regulation A reporting); KVCF Letter; OTC Markets Letter
(recommending preemption for at least Regulation A securities that
are not penny stocks); Paul Hastings Letter; SVB Financial Letter.
\792\ Andreessen/Cowen Letter; Campbell Letter; Congressional
Letter 3; Guzik Letter 1 (recommending preemption with audited
financial statements and a substantially lighter disclosure regime
compared to Tier 2); Heritage Letter; Ladd Letter 2 (recommending
preemption if company adopts internal controls and meets continuing
disclosure requirements, including yearly audited financials);
Milken Institute Letter (recommending preemption if audited
financial statements are included in the ``initial filing''); Public
Startup Co. Letter 1; SVB Financial Letter (recommending preemption
with additional, unspecified disclosure obligations). See Section
II.I. below for additional recommended changes to Tier 1.
---------------------------------------------------------------------------
Alternatively, several commenters recommended possibly eliminating
the Commission's review of Regulation A offerings to varying
extents.\793\ Two commenters recommended eliminating the Commission's
review of Tier 1 offerings.\794\ One of these commenters recommended
only doing this for offerings that are ``local'' in nature.\795\ One
commenter recommended having a single state review, in lieu of a review
and qualification by the Commission, if the Commission's staff is
unwilling to review Regulation A offerings ``promptly with content-
appropriate standards.'' \796\ One commenter recommended completely
eliminating the Commission's review if NASAA's coordinated review
program promotes a ``robust'' Regulation A market.\797\
---------------------------------------------------------------------------
\793\ Groundfloor Letter; Ladd Letter 2; Public Startup Co.
Letter 5; Verrill Dana Letter 2.
\794\ Ladd Letter 2; Public Startup Co. Letter 5.
\795\ Public Startup Co. Letter 5.
\796\ Verrill Dana Letter 2.
\797\ Groundfloor Letter.
---------------------------------------------------------------------------
3. Final Rules
For the reasons discussed below, we are adopting the ``qualified
purchaser'' definition in Regulation A, substantially as proposed. In
the final rules, a ``qualified purchaser'' for purposes of Section
18(b)(4)(D)(ii) of the Securities Act includes any person to whom
securities are offered or sold in a Tier 2 offering. Because of the
requirements for all Tier 2 offerings, all purchasers in Tier 2
offerings persons must be either accredited investors or persons who
limit their investment amount to no more than 10% of the greater of
annual income or net worth (for natural persons), or 10% of the greater
of annual revenue or net assets at fiscal year end (for non-natural
persons).
To address commenter concerns and avoid potential confusion as to
the application of the preemption provisions in Tier 1 offerings, the
final definition of ``qualified purchaser'' does not include offerees
in Tier 1 offerings. While the final rules permit Regulation A issuers
to test the waters and make offers in the pre-qualification period at
the federal level, in light of the concerns raised by state regulators
about the proposed rule's expanded use of solicitation materials \798\
and what we anticipate to be the generally more local nature of Tier 1
offerings,\799\ we believe it is appropriate, in this context, for the
states to retain oversight over how these offerings are conducted.
Although we acknowledge that this could potentially inhibit the use of
solicitation materials in certain Tier 1 offerings, for these smaller,
more localized offerings, we think the states should be permitted to
regulate the use of solicitation materials.
---------------------------------------------------------------------------
\798\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter. These
commenters suggested that the Commission require the filing of
solicitation materials before the time of first use, as, in their
view, the antifraud and other civil liability provisions of the
federal securities laws are not an adequate substitute for the
investor protections afforded by an advance filing requirement for
solicitation materials, while also noting that problems with the use
of solicitation materials are compounded by the provisions for
access equals delivery of final offering circulars.
\799\ See Section II.H.3.d. below; see also fn. 830 below.
---------------------------------------------------------------------------
Given the sharply divided views of commenters on the ``qualified
purchaser'' definition included in the Proposing Release, we want to
clarify the scope of the Commission's authority under the Securities
Act to define such a term and the effect the final qualified purchaser
definition will have on the continued ability of the states to regulate
offers and sales within their jurisdiction. We continue to believe that
the substantial investor protections embedded in the final rules for
Tier 2 offerings, including the requisite qualifications of the issuer,
offering, and eventual purchasers, as well as the particular
characteristics associated with this category of securities, support
the limited preemption of state securities laws registration and
qualification requirements adopted in the final rules.
a. NSMIA and the JOBS Act
As noted above, some commenters questioned the ability of the
Commission to adopt a ``qualified purchaser'' definition that includes
any person to whom securities are offered or sold in a Tier 2
offering.\800\ These commenters suggested that a qualified purchaser
definition under Section 18(b)(3) of the Securities Act must be based
on attributes of the purchaser, not the nature of the issuer or
offering. These commenters stated that broad preemption was
contemplated in the legislative history of Title IV of the JOBS Act and
expressly rejected by Congress.
---------------------------------------------------------------------------
\800\ See fn. 772 above.
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[[Page 21859]]
Title I of the NSMIA, referred to as the ``Capital Markets
Efficiency Act of 1996'' (the ``Efficiency Act''),\801\ was, as its
name suggests, enacted to promote efficiency and capital formation in
the financial markets.\802\ The Efficiency Act realigned the respective
responsibilities of federal and state securities regulators in the
context of the dual system of securities offering registration that
existed before enactment of the statute.\803\ The Efficiency Act
achieved this regulatory realignment by amending Section 18 of the
Securities Act to provide for exemption from state law registration and
qualification requirements for certain categories of securities,
defined as ``covered securities.''
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\801\ NSMIA, section 101 (Short Title).
\802\ H.R. Rep. No. 622, 104th Cong. 2d Sess. at 1 (1996) (House
Report).
\803\ As enacted, NSMIA included five separate titles, each of
which served a different purpose in the overarching statutory goal
of improving national securities markets. See preamble and Section 1
to NSMIA.
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Section 18(b)(3) provides that ``[a] security is a covered security
with respect to the offer or sale of the security to qualified
purchasers, as defined by the Commission by rule.'' Congress stated in
Section 18(b)(3) that the Commission may ``define the term `qualified
purchaser' differently with respect to different categories of
securities, consistent with the public interest and the protection of
investors.'' The JOBS Act \804\ amended Section 18 by adding to its
list of ``covered securities'' transactions involving securities that
are exempt from registration pursuant to a rule or regulation adopted
pursuant to Section 3(b)(2) and that are ``offered or sold to a
qualified purchaser, as defined by the Commission pursuant to [Section
18(b)(3)] with respect to that purchase or sale.'' \805\
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\804\ The stated purpose of the JOBS Act is to ``increase
American job creation and economic growth by improving access to the
public capital markets. . . .'' See JOBS Act (Preamble).
\805\ JOBS Act section 401(b) (adding Section 18(b)(4)(D)(ii) to
the Securities Act). Section 401(b) also included in the list of
``covered securities'' transactions involving Section 3(b)(2)
securities that are offered or sold on a national securities
exchange, see Section 18(b)(4)(D)(i). See also Title III of the JOBS
Act, which added to the list of ``covered securities'' in Section
18(b)(4)(C) transactions involving securities issued pursuant to
Section 4(a)(6).
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By its terms, Section 18(b)(3) provides the Commission with the
express authority to adopt rules that define a ``qualified purchaser.''
The provision does not prescribe specific criteria that the Commission
must consider in determining, or the manner in which it must determine,
a purchaser to be ``qualified.'' Furthermore, Section 18(b)(3) states
that the definition of qualified purchaser may be different for
different categories of securities. This means that, rather than
considering the characteristics of the purchaser in isolation, the
Commission may adopt a qualified purchaser definition that is also
tailored to reflect the characteristics of the particular type of
issuer or transaction. Further, Section 18(b)(3) does not proscribe any
particular terms or characteristics that the Commission must include in
any rules defining qualified purchaser with respect to a given category
of securities. What it does instead is require that any rules so
adopted be consistent with the public interest and the protection of
investors.
Unlike Section 18(b)(3), which provides for preemption with respect
to offers or sales to qualified purchasers in any context, Section
18(b)(4)(D)(ii) provides for preemption specifically with respect to
transactions exempt from registration pursuant to Section 3(b)(2). As
such, the preemption afforded under Section 18(b)(4)(D)(ii) necessarily
encompasses the mandatory requirements for conducting an exempt
offering pursuant to Section 3(b)(2). These include, among other
things, that the civil liability provisions of Section 12(a)(2) must
apply and that an issuer must file audited financial statements with
the Commission annually.\806\ Other potential requirements left to the
discretion of the Commission include provisions for ongoing reporting,
bad actor disqualification, and requirements for electronic filing of
offering materials.\807\
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\806\ 15 U.S.C. 77c(b)(2)(D), (F).
\807\ See 15 U.S.C. 77c(b)(2)(G); 15 U.S.C. 77c(b)(4).
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We believe that the terms of Section 18(b)(3) and Section
18(b)(4)(D)(ii)--read in conjunction--provide the Commission with
discretionary authority to adopt a ``qualified purchaser'' definition
that reflects the particular characteristics of transactions exempt
from registration pursuant to Section 3(b)(2). Thus, in determining who
should be considered a qualified purchaser for purposes of the
amendments to Regulation A, we have considered not only the mandatory
features of Section 3(b)(2), but also many of the discretionary
features contained in our final rules, such as the requirement that
purchasers in Tier 2 offerings be limited to accredited investors or
persons otherwise subject to specified investment limitations.
We recognize that a number of commenters disagreed with this
approach.\808\ Some stated that a ``qualified purchaser'' definition
adopted by the Commission must at a minimum be based on attributes of
the purchaser, such as a person's wealth, income, or
sophistication,\809\ and noted that the Commission had highlighted such
factors in a 2001 Proposing Release to define a ``qualified purchaser''
pursuant to Section 18(b)(3).\810\ The 2001 Proposing Release, however,
contemplated that state securities review and qualification
requirements would be preempted in all categories of transactions to
the extent that sales were made to ``accredited investors.'' By
contrast, our rules to implement Title IV of the JOBS Act provide for
preemption in the more limited circumstances in which the requirements
of Section 3(b)(2) and the rules adopted thereunder are satisfied.
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\808\ See fn. 772 above.
\809\ See, e.g., NASAA Letter 2.
\810\ 2001 Proposing Release. In this release, the Commission
proposed to define a ``qualified purchaser'' to be an ``accredited
investor,'' as that term is defined under Rule 501(a) of Regulation
D.
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In the 2001 Proposing Release, we noted that certain aspects of
NSMIA's legislative history suggest that a qualified purchaser
definition should include investors that are sophisticated and capable
of protecting themselves. In addition, we asked questions about the
proposed approach to the definition and whether other potential factors
mentioned in the legislative history, such as the national character of
an offering, could or should bear on potential qualified purchaser
definitions adopted pursuant to Section 18(b)(3).\811\
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\811\ See 2001 Proposing Release, Section II.B. (for example,
asking questions about the national character of offerings and the
potential for eliminating redundancies and inefficiencies in the
application of disparate state standards); see also House Report, at
31.
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We do not believe that the 2001 Proposing Release is inconsistent
with the qualified purchaser definition for Regulation A that we are
adopting today. The 2001 Proposing Release was not a Commission
statement on the scope of all permissible definitions for a qualified
purchaser adopted pursuant to Section 18(b)(3). Rather, it expressed a
preliminary interpretive view of certain aspects of the legislative
history of NSMIA in the context of a proposed rulemaking that would
have equated ``qualified purchaser'' with the definition of an
``accredited investor'' for sales by any category of issuer in any type
of transaction.\812\ While it may have been appropriate to focus on
attributes of the purchaser when crafting a ``qualified purchaser''
definition that would have applied in a broad set of possible
transactions, as in the 2001
[[Page 21860]]
Proposing Release, the definition being adopted today serves a
different purpose because it applies only in Regulation A offerings.
Indeed, Section 18(b)(3) contemplates that the term ``qualified
purchaser'' can be defined ``differently with respect to different
categories of securities.''
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\812\ See 2001 Proposing Release, Section I.C., II.B. The
Commission did not adopt final rules based on the 2001 Proposing
Release.
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The enactment of the JOBS Act in 2012, and in particular its
addition of Section 18(b)(4)(D)(ii) to the Securities Act has caused us
to consider the definition of qualified purchaser specifically within
the context of transactions under the new Section 3(b)(2) exemption.
This is a new and different context in which to consider the definition
of qualified purchaser than existed at the time of the 2001 Proposing
Release. In this new context, we believe that the definition of
qualified purchaser that we are adopting is appropriately tailored to
these transactions because, as explained above, the requirements
applicable to Tier 2 offerings include numerous provisions designed to
protect investors, including, among other things, a requirement that
all purchasers in these offerings be either accredited investors or
persons who are subject to investment limitations.
We do not agree with the commenters who assert that broad state
securities law preemption was expressly rejected by Congress in Title
IV of the JOBS Act. The legislative record indicates that the only form
of state securities law preemption directly contemplated, but not
adopted, in the drafting of Title IV of the JOBS Act was for offers and
sales through a broker or dealer.\813\
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\813\ See, e.g., Congressional Record Volume 157, Number 166
(Wednesday, Nov. 2, 2011), p. 7231 (Statement of Rep. Peters:
``Finally, the gentleman [Rep. Schweikert (AZ)] has also worked with
Democrats on the remaining issue of contention, and that was the
preemption of State law. [Rep. Schweikert's] substitute amendment to
H.R. 1070 removes the exemption from State level review that was
previously provided to an issuer using a broker-dealer to distribute
and [sic] issue.'') Cf. H.R. Rep. No. 112-206, at 2 (2011).
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b. Section 18 of the Securities Act and the Effect of Preemption on
State Securities Laws
As discussed above, some commenters expressed concern about the
effect preemption would have on the ability of state securities
regulators to remain actively involved in Regulation A offerings.\814\
We believe it is important to clarify the effect preemption will have
on the ability of state securities regulators to continue to play a
vital role in the supervision of Regulation A securities.
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\814\ See, e.g., NASAA Letter 2, at 10.
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Under Section 18(a) of the Securities Act, no law, rule or
regulation of any state requiring the registration or qualification of
securities applies to a covered security or to a security that will be
a covered security upon completion of the transaction.\815\ Further,
with respect to a covered security, no state law, rule or regulation
shall prohibit, limit, or impose, among other things, any conditions
upon the use of any offering document \816\ that is prepared by or on
behalf of the issuer, or, based on the merits of such offering or
issuer, upon the offer or sale of any covered security.\817\
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\815\ 15 U.S.C. 77r(a)(1).
\816\ Under Section 18(d), the term ``offering document'' has
the same meaning given the term ``prospectus'' in first portion of
section 2(a)(10) and includes a communication that is not deemed to
offer a security pursuant to a rule of the Commission. For these
purposes, the term ``prospectus'' means any prospectus, notice,
circular, advertisement, letter, or communication, written or by
radio or television, which offers any security for sale or confirms
the sale of any security.
\817\ 15 U.S.C. 77r(a)(2)-(3).
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While covered security status under Section 18 prohibits the states
from requiring the registration or qualification of such securities,
Section 18(c) preserves the power of the states in several important
areas.\818\ Under Section 18(c), the states retain:
---------------------------------------------------------------------------
\818\ 15 U.S.C. 77r(c).
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The jurisdiction to investigate and bring enforcement
actions with respect to fraudulent securities transactions and unlawful
conduct by broker-dealers; \819\
---------------------------------------------------------------------------
\819\ 15 U.S.C. 77r(c)(1).
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the ability to require issuers to file with the states any
document filed with the Commission, solely for notice purposes and the
assessment of fees, together with a consent to service of process and
any required fee; \820\ and
---------------------------------------------------------------------------
\820\ 15 U.S.C. 77r(c)(2). For example, even though state
securities law registration requirements are preempted in offerings
pursuant to Rule 506 of Regulation D, 17 CFR 230.506, many states
continue to require the filing of Form D notices and amendments, and
most of them charge a filing fee. See, e.g., https://www.efdnasaa.org; cf. 15 U.S.C. 77r(b)(4)(E).
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the power to enforce the filing and fee requirements by
suspending the offer or sale of securities within a given state for the
failure to file or pay the appropriate fee.\821\
---------------------------------------------------------------------------
\821\ 15 U.S.C. 77r(c)(3).
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As the name of the statute that added Section 18 to the Securities
Act suggests, the preemption of state securities laws is about
improving the ``efficiency'' of our capital markets by eliminating
unnecessary, duplicative regulation of securities offerings at both the
federal and state level.\822\ It is not about eliminating investor
protections or otherwise limiting the continued involvement of the
states in such offerings.\823\
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\822\ House Report, at 1.
\823\ Id., at 16 (Noting the reason behind the legislation that
eventually became NSMIA was a clear need for modernization and that
``there continues to be a substantial degree of duplication between
Federal and State securities regulation, and that this duplication
tends to raise the cost of capital to American issuers of securities
without providing commensurate protection to investors or our
markets.'').
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c. State Coordinated Review Program for Section 3(b)(2) Securities
Since the proposed rules to implement Title IV of the JOBS Act were
issued in December 2013, NASAA has implemented a multi-state
coordinated review program for Regulation A offerings, the goal of
which is to reduce the state law disclosure and compliance obligations
of Regulation A issuers.\824\ Under the coordinated review program,
issuers are required to file Regulation A offering materials with the
states via electronic mail. The administrator of the coordinated review
program must then select a lead disclosure examiner and, where
applicable, a lead merit examiner, which are responsible for drafting
and circulating comment letters to the participating jurisdictions, and
for seeking resolution of those comments with the issuer and its
counsel. As enacted, the program contemplates a twenty-one business day
turnaround from the time of filing of an offering statement until the
issuer receives comments from the states.\825\ The coordinated review
program's review protocol also modifies (or disapplies altogether)
certain of NASAA statements of policy for offerings undergoing
coordinated review. Where, however, an issuer elects to offer or sell
Regulation A securities in at least one merit state, the coordinated
review program may require the issuer to apply NASAA's statements of
policy to the offering as a whole (i.e., not solely for purposes of
offers or sales within such merit review state(s)).
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\824\ A description of NASAA's coordinated review program can be
found at: http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/. The Proposing
Release also discusses this program, as it was contemplated and
proposed at that time. See Proposing Release, at Section II.H.
\825\ An illustrated timeline for NASAA's multi-state
coordinated review program is available at: http://www.nasaa.org/wp-content/uploads/2015/03/Coordinated-Review-Chart.pdf.
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At the proposing stage, we indicated that a number of open
questions remained about the then-proposed multi-state review program.
In the intervening time, many questions have been answered, largely
relating to the final adoption and implementation of
[[Page 21861]]
the program by a vast majority of the states.\826\ Other crucial
questions, however, remain, such as whether the program will be able to
address the concerns related to state securities law compliance
identified by the GAO Report and commenters,\827\ and whether the
program can continue, as contemplated, in the face of numerous filings
by issuers that seek to participate in the streamlined process. As of
the date of this release, we are aware of three issuers that have
elected to seek qualification at the state level pursuant to the
protocols of the multi-state coordinated review program.\828\ While the
program, as contemplated in its enactment, could potentially reduce the
state law disclosure and compliance obligations of issuers,\829\ the
limited experience of issuers with the program prevents us from being
able to fully evaluate it at this time. We note that Tier 1 issuers may
well benefit from the coordinated review program as it continues to
develop. We remain concerned, however, that, even under the coordinated
review program, state securities law registration and qualification
requirements would be unnecessarily duplicative for, and impose
unnecessary costs on, securities issued in Tier 2 offerings. In light
of the recent efforts of state securities regulators to address
concerns about the costs associated with state qualification of
Regulation A offering statements, however, the ongoing implementation
and development of the coordinated review program, particularly as it
may operate within Tier 1 offerings, may provide additional data that
will aid any future evaluation of whether such a program could
effectively operate within the context of larger, more national Tier 2
offerings as an alternative to preemption.
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\826\ At this time, it is our understanding that 49 of NASAA's
53 constituent members have agreed to participate in the coordinated
review program.
\827\ See, e.g., GAO-12-839, at 14 (discussing the varying
standards and degrees of stringency applied during the qualification
and review process in merit review states); see also, e.g., ABA BLS
Letter, at 14.
\828\ See, e.g., Groundfloor Letter (the first issuer to rely on
NASAA's coordinate review program, with the exception of having to
seek qualification outside of the coordinated review program in the
state of Georgia).
\829\ Id. (suggesting that in its experience the benefits of
NASAA's coordinated review program outweighed the approximately
$50,000 cost of the average Regulation A offering); see also NASAA
Letter 3.
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d. Application of State Securities Law in Tier 1 and Tier 2 Offerings
As we noted in the Proposing Release, in light of the issues raised
by commenters and in the GAO report, we remain concerned that costs
associated with state securities law compliance, even under a
coordinated review program, may deter issuers from using amended
Regulation A, which could significantly limit the impact of the
exemption as a tool for capital formation. In considering our approach
to preemption in the final rules, particularly as we evaluate what is
consistent with the public interest and the protection of investors, we
have taken into account the amended Regulation A regime, including the
distinctions between the two tiers and in particular the additional
protections provided in Tier 2 beyond the requirements of Tier 1.
In addition to certain basic requirements that are applicable to
both tiers, Tier 2 issuers will be subject to significant additional
requirements, some arising directly from Section 3(b)(2) and others
that we have imposed through our discretionary authority under that
section. For example, the financial statements that Tier 2 issuers
include in their offering circulars are required to be audited, and
Tier 2 issuers must file audited financial statements with the
Commission annually. Tier 2 issuers also must provide ongoing reports
on an annual and semiannual basis with additional requirements for
interim current event updates, assuring a continuous flow of
information to investors and the market. In addition, purchasers in
Tier 2 offerings must be either accredited investors or subject to
limitations in the amount they may invest in a single offering.
Finally, as with Tier 1 offerings, Tier 2 offering statements will be
filed electronically, reviewed and qualified by Commission staff, and
the offerings are subject to both limitations on eligible issuers and
``bad actor'' disqualification provisions. In consideration of these
requirements, as well as our view, as discussed in greater detail
below, that Tier 2 offerings are more likely to be national rather than
local in nature, we believe that preemption of state securities law
registration and qualification requirements is appropriate for
purchasers in these offerings.
We believe that the final rules for Regulation A create two
different categories of securities for purposes of Section 18(b)(3).
The requirements for Tier 1 issuers create a category of securities
that is more local in character, while Tier 2 offerings involve a
category of securities that is more national in character. In this
regard, to the extent an issuer seeks to raise money through a public
offering pursuant to Regulation A, the distinctions between the
requirements for Tier 1 and Tier 2 will provide issuers with a
meaningful choice at the outset between initial and ongoing offering
costs and requirements.
Tier 1 issuers are not required to include audited financial
statements in their offering statements, nor are they required--as
contemplated by Section 3(b)(2)--to file audited financial statements
with the Commission annually. They are further not subject to any
ongoing reporting, beyond the requirements contained in Part I of Form
1-Z. While the final rules raise the offering limitation in Tier 1 to
$20 million in a 12-month period, which we believe should increase the
general utility of the tier, such offerings by virtue of the lower
dollar amounts that can be raised in comparison to Tier 2 offerings, as
well as the form filing requirements and the lack of ongoing reporting,
will likely be conducted by a different set of issuers than those that
conduct offerings pursuant to Tier 2. Specifically, we think that
issuers conducting Tier 1 offerings are likely to be smaller companies
whose businesses revolve around products, services, and a customer base
that will more likely be located within a single state, region, or a
small number of geographically dispersed states.\830\ We believe that
these issuers will typically not seek or, on the basis of their
business models, be able to: (i) Raise capital on a national scale; or
(ii) create a secondary trading market in their Regulation A
securities.
---------------------------------------------------------------------------
\830\ For example, issuers of securities in the seven offering
statements qualified by the Commission pursuant to Regulation A in
2014 indicated, on average, that they were seeking qualification in
approximately five states per offering. The financial statements
provided by these issuers further indicated, on average, that
issuers had approximately $1.2 million in assets. No issuer
indicated assets greater than $3.6 million, while two issuers
indicated assets of less than $20,000.
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By contrast, we believe that the higher offering limitation for
Tier 2 offerings, the higher costs associated with complying with the
audited financial statement and ongoing reporting requirements, as well
as the requirement to sell to ``accredited investors'' or otherwise
limit the amount of securities sold to non-accredited investors, will
necessitate that such offerings be offered and sold on a larger and
more national scale. Additionally, an issuer electing to conduct a Tier
2 offering would likely do so, or be required by its investors to do
so, in order to provide ongoing reports in a manner that will
facilitate, or otherwise result in, secondary trading on a national
level. While issuers conducting Regulation A offerings for less than
$20 million are free to choose between the requirements of either tier,
we believe that the initial and ongoing costs and limitations
associated with
[[Page 21862]]
complying with Tier 2 will provide for the natural separation of
offerings into the respective tiers with issuers in more local
offerings electing to comply with the less onerous requirements of Tier
1.
As noted above, some of the basic requirements of the offering
statement are applicable to both tiers, and issuers of securities
pursuant to either tier will remain subject to the same review and
comment process by the staff of the Division of Corporation Finance
before qualification. On this basis, some commenters argued that the
same reasons supporting the preemption of state securities law
registration requirements for Tier 2 offerings suggests that the
Commission should also extend preemption to Tier 1 offerings.\831\
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\831\ Andreessen/Cowen Letter; Campbell Letter; Guzik Letter 1;
Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public
Startup Co. Letter 1; SVB Letter.
---------------------------------------------------------------------------
The distinctions between the tiers in the final rules for purposes
of the preemption of state securities law registration requirements are
based only in part on the form distinctions and process requirements
for issuers at the time of qualification at the federal level. The
preemption of state securities law registration requirements in the
final rules for Tier 2 offerings is additionally related to the
inefficiencies of qualification at the state and federal level, the
differing characteristics of Tier 1 and Tier 2 offerings, and the
statutory purposes behind the enactment of the Efficiency Act that are
served by deeming Tier 2 offerings to involve a covered class of
securities.
While, as some commenters suggest, the review and qualification of
Tier 1 offerings at the state level will involve inefficiencies to
which Tier 2 issuers will not be subject, we believe that continued
state involvement in Tier 1 offerings is consistent with the policy
underlying the enactment of NSMIA that suggests that states should
``generally retain their authority to regulate small, regional, or
intrastate securities offerings.'' \832\ As noted above, we believe
that the implementation of NASAA's multi-state coordinated review
program has the potential to ameliorate some of these inefficiencies.
We will observe issuers' experience under the coordinated review
program and amended Regulation A, and whether changes to the rule could
be beneficial. We also believe that the requirements for Tier 2
offerings will advance ``the development of national securities markets
and eliminate the costs and burdens of duplicative and unnecessary
regulation.'' \833\ The absence of preemption in Tier 2 offerings would
unnecessarily subject issuers in such offerings to a substantial degree
of duplication between federal and state securities regulation in the
qualification of offering statements, which would raise the cost of
capital to issuers without providing commensurate additional protection
to investors or our markets.\834\
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\832\ House Report, at 16. See also WDFI Letter, at 3 (``Given
the relatively small size of these offerings and the low probability
of attracting the attention of national broker-dealers to distribute
them, these offerings are likely to be local in nature.''). The
Commission is exploring the possibility of establishing a program
whereby a representative of NASAA, or of a state securities
regulator, would be assigned to work at the Commission in the
Division of Corporation Finance to assist the staff as it implements
the final rules.
\833\ House Report, at 16. While further preemption of state
securities law regulation of the secondary trading of Regulation A
securities issued in a Tier 2 offerings could, as some commenters
suggest, further advance the development of a national securities
market by easing the compliance obligations of investors that trade
in the secondary markets, we believe that the approach to preemption
of state securities laws adopted today is more appropriate at the
outset and will afford the Commission time to subsequently review
the development of, and consider potential changes to, the final
rules for primary and secondary Regulation A markets.
\834\ See id.; see also, e.g., ABA BLS Letter, at 13 (noting the
challenges posed to smaller companies that arise when having to
respond to both federal and state reviews and coordinating
overlapping or potentially inconsistent comments and approvals);
Groundfloor Letter (noting the existence of, and additional costs
associated with, duplicative qualification requirements at the state
and federal level, as well as potential complications between
investment limitations at the federal level and state suitability
standards).
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As noted above, under Section 18(c), the states retain authority to
(1) investigate and bring enforcement actions with respect to
fraudulent transactions, (2) require the filing of any documents filed
with the Commission ``solely for notice purposes and the assessment of
any fee,'' and (3) enforce filing and fee requirements by suspending
offerings within a given state. We see no reason why state securities
regulators could not continue to rely on the multi-state coordinated
review program as a mechanism to allow Tier 2 issuers to make notice
filings of their offering statements with the states consistent with
Section 18(c). In this regard, notice filings of offering statements of
Tier 2 issuers would be available to the states for a period of time
prior to the qualification of the offering.\835\ For example, the final
rules for Regulation A require an issuer that non-publicly submits its
offering statement for review to the Commission to publicly file its
offering statement and related documents with the Commission not less
than 21 calendar days before qualification. At that time, the states
would be permitted to require issuers to also make notice filings of
such materials with them and to assess any filing fees under Section
18(c)(2).
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\835\ See, e.g., comment letters cited in fn. 788 above; see
also Letter from A. Heath Abshure, President, NASAA, September 27,
2013 (comments on SEC. Rel. No. 33-9416 (Proposed Amendments to
Regulation D, Form D and Rule 156 under the Securities Act))
(indicating that although ``states are preempted from requiring
registration of securities that are sold in compliance with Rule 506
. . . state regulators routinely review Form D filings to ensure
that the offerings actually qualify for an exemption . . . and to
look for ``red flags'' that may indicate a fraudulent offering. The
absence of a Form D filing complicates our efforts to protect the
investing public.''). The concerns of the states, as they relate to
Form D filings, would be addressed in the final rules for Regulation
A that require the filing with the Commission of substantive
offering materials, thereby triggering any notice filing
requirements with the states, before sales can be made.
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I. Additional Considerations Related to Smaller Offerings
As we noted in the Proposing Release, a number of factors have
influenced the use of Regulation A in the form it has taken since its
last substantive update in 1992, including the process of filing the
offering statement with the Commission, state securities law
compliance, the types of investors businesses seek to attract, and the
cost-effectiveness of Regulation A relative to other exemptions.\836\
In developing the final rules we are adopting, we have attempted to
create a more efficient and effective method to raise capital under
Regulation A that incorporates important investor protections. We are
also cognizant of how issuers seeking to raise relatively smaller
amounts of capital could consider a range of possible approaches to
capital raising.\837\
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\836\ See, e.g., Proposing Release, at Section I.C.; see also
GAO Report.
\837\ These methods include, for example, Rules 504, 505 and 506
under Regulation D and Section 4(a)(6) of the Securities Act and any
rules adopted thereunder. See also Proposing Release, at Section
II.I.
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Under our proposal, offerings for up to $5 million conducted under
Tier 1 would benefit from the proposed updates to Regulation A's filing
and qualification processes, but the proposed amendments did not
otherwise substantially alter the existing exemption for such
offerings.\838\ We were mindful of the possibility that additional
changes to Tier 1 could expand its use by, and thus potentially
benefit, issuers conducting smaller offerings. We therefore solicited
[[Page 21863]]
comment on additional considerations with respect to Tier 1 and a
potential intermediate tier for offerings incrementally larger than
Tier 1 offerings and how such offerings would affect investor
protection and capital formation.
---------------------------------------------------------------------------
\838\ Some commenters at the pre-proposal stage suggested that
the Commission should largely preserve the requirements of the then-
existing Regulation A in the final rules. See Proposing Release, at
fn. 505.
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Many commenters recommended making changes to proposed Tier 1 to
make it a more viable option for small business capital formation.\839\
Some of these commenters recommended preempting state regulation of
Tier 1 offerings, as mentioned above.\840\ Two commenters recommended
raising the offering limit of Tier 1 to $10 million or more.\841\
Several commenters recommended including an ongoing disclosure
requirement for Tier 1 issuers, including disclosure at a level lower
than what is required for Tier 2,\842\ ongoing disclosure with yearly
audited financials,\843\ or some unspecified continuous disclosure
obligation.\844\ One commenter recommended lowering the Tier 1
disclosure obligations from the current proposed requirements,
particularly for offerings of $2 million or less.\845\ One commenter
recommended expanding the offering limit for Tier 1 to $15 million and
creating a new tier below Tier 1 with fewer disclosure
requirements.\846\ Many commenters recommended changes to proposed Tier
1, but did not address preemption.\847\ Several of these commenters
made recommendations with respect to the financial statement and
auditing requirements in Form 1-A.\848\
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\839\ Andreessen/Cowen Letter; BDO Letter; Letter from Kevin
Bernard, Sept. 3, 2014 (``Bernard Letter''); Campbell Letter; CAQ
Letter; Deloitte Letter; E&Y Letter; Guzik Letter 1; Heritage
Letter; ICBA Letter; KPMG Letter; Ladd Letter 2; McGladrey Letter;
Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial
Letter; Verrill Dana Letter 1; WR Hambrecht + Co Letter.
\840\ Andreessen/Cowen Letter; Bernard Letter; Campbell Letter;
Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute
Letter; Public Startup Co. Letter 1; SVB Financial Letter.
\841\ Guzik Letter 1; ICBA Letter.
\842\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure
requirements could parallel Tier 2's requirements, but without the
requirement for semiannual reports).
\843\ Ladd Letter 2.
\844\ SVB Financial Letter.
\845\ Campbell Letter.
\846\ Public Startup Co. Letter 1. As mentioned in the relevant
sections above, this commenter recommended three tiers based on
offering size. The first tier could potentially only require state
review and would be ``local'' in nature. This tier would include
some form of ongoing reporting with the states, but not audited
financials. Instead directors and officers would have to certify
under penalty of perjury that the financial statements were
accurate. The second tier would only require audited financial
statements if they were otherwise available, would preempt state
review and would require periodic reporting. This tier might allow
for more flexibility with respect to auditor independence. The third
tier would require more reporting than currently proposed for Tier 2
and would appear to require PCAOB-registered auditors.
\847\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; ICBA
Letter; KPMG Letter; McGladrey Letter.
\848\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
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The final rules for Regulation A take into account some of the
suggestions by commenters on ways to improve the requirements for
smaller offerings, particularly in Tier 1. The comments we received did
not reflect any consensus on the particular provisions in Tier 1 that
were most in need of amendment. As noted above, we do not agree that
preemption of state securities laws registration and qualification
requirements is appropriate for Tier 1 offerings.\849\ Further, while
some commenters suggested that preemption of state securities laws may
improve the attractiveness of Tier 1 offerings, they did so on the
condition that other aspects of the tier should change accordingly,
such as by requiring Tier 1 issuers to provide audited financial
statements in the offering statement and possibly on an ongoing basis.
For the reasons discussed in Section II.C.3.b(2)(c) above, however, we
have not adopted such changes in Tier 1. Alternatively, some commenters
suggested that the Commission adopt a third tier either expressly or
through the flexible applicability of the proposed tier requirements.
While a third tier may provide issuers with some additional flexibility
for capital formation under Regulation A, this additional flexibility
would also have potential costs. For example, a third tier may
unnecessarily complicate compliance with Regulation A for smaller
issuers, and could potentially confuse investors as to the type of
Regulation A offering an issuer was undertaking and the type of
information such investor could expect to receive as a result, thereby
lessening the viability of the exemption as a whole. For this reason,
we are not adopting a third or intermediate tier in Regulation A.
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\849\ See Section II.H.3. above.
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We are adopting certain changes in the final rules that are
intended to make Tier 1 more useful for small business capital
formation. As discussed above, in line with the suggestions of
commenters, we have raised the offering limitation in Tier 1 to $20
million in a 12-month period, including no more than $6 million on
behalf of selling securityholders that are affiliates of the
issuer.\850\ With respect to the offering circular narrative disclosure
requirements,\851\ we have adopted certain additional scaled disclosure
requirements for Tier 1 that are intended to lessen the compliance
obligations for issuers. For example, Tier 1 issuers will be required
to disclose related party transactions at the thresholds in current
Regulation A, as opposed to the lower thresholds in the proposed rules,
and simplified executive compensation data. We are further providing
issuers under both Tiers with the accommodation provided to emerging
growth companies in Securities Act Section 7(a) to delay the
implementation of new accounting standards to the extent such standards
provide for delayed implementation by non-public business entities.
Lastly, we have provided Tier 1 issuers with additional flexibility
with respect to auditor independence standards. As originally proposed,
an issuer electing to provide audited financial statements in a Tier 1
offering--even though audited financial statements would not generally
be required--would have had to engage the services of an auditor that
followed the independence standards outlined in Article 2 of Regulation
S-X. Commenters suggested that we should permit auditors of the
financial statements of Tier 1 issuers to alternatively follow the
independence standards of the AICPA or Article 2 of Regulation S-
X.\852\ In the view of these comments, allowing auditors of Tier 1
issuer financial statements the option to follow the independence
standards of the AICPA would permit more issuers to include financial
statements that would be deemed audited under the requirements for Tier
1 in the first instance, thereby avoiding any fees associated with an
issuer having their existing financial statements audited a second time
under PCAOB standards. As noted above,\853\ we agree with commenters
that this accommodation may benefit smaller issuers in Tier 1 offerings
who wish to file audited final statements for purposes of the offering
statement and thus are adopting this suggestion.
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\850\ See Section II.B.3.c. above.
\851\ See Section II.C.3.b(1). above.
\852\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
\853\ See Section II.C.3.b(2)(c). above.
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In the light of the changes discussed above, we believe that the
final rules we are adopting will provide Tier 1 issuers with a
meaningful choice within Regulation A between the costs and benefits
associated with compliance with the requirements for Tier 1 and Tier 2
and therefore do not believe that an intermediate or other tier is
necessary at this time.
[[Page 21864]]
J. Transitional Guidance for Issuers Currently Conducting Regulation A
Offerings
While Regulation A has been used infrequently in recent years,
there are issuers that are currently conducting, or that have filed
offering statements, under the preexisting Regulation A rules. By way
of transitional guidance, we are clarifying that issuers currently
conducting sales of securities pursuant to a qualified Regulation A
offering statement may continue to do so. Such offerings will be
considered Tier 1 offerings after the effectiveness of the final rules.
Qualified offering statements under the preexisting rules for
Regulation A are, however, incompatible with the final requirements for
Tier 2 offerings and, as discussed below, issuers that wish to
transition to a Tier 2 offering will need to file a post-qualification
amendment that satisfies the requirements for Tier 2.
Upon effectiveness of the final rules, issuers currently conducting
Regulation A offerings under the preexisting rules must begin to comply
with the final rules for Tier 1 offerings, including, for example, the
requirement of electronic filing and the rules for post-qualification
amendments, at the time of their next filing under Regulation A.
Additionally, after effectiveness of the final rules, to the extent
that issuers provided offering statements that were qualified using the
Model A disclosure format of Part II of the Form 1-A, any subsequently
required filing or amendment to such offering statement must be filed
using a disclosure format that is permissible under the final rules for
Tier 1 offerings. Model A will no longer be appropriate or permitted
for post-qualification amendments of qualified offerings that pre-date
effectiveness of the final rules. Lastly, an issuer that is offering
securities pursuant to a qualified offering statement under the
preexisting rules will, upon effectiveness of the final rules, no
longer be required to file a Form 2-A, but instead be required to file
a Form 1-Z with the Commission electronically upon completion or
termination of the offering.
Issuers that are currently in the review process for the
qualification of a Regulation A offering statement may continue to
follow the preexisting rules for Regulation A until the effective date
of the final rules. On or after the effective date, such an issuer will
be required to comply with the final rules, including the requirements
for electronic filing and, where applicable, transitioning to a
disclosure format that is approved for Regulation A offerings. The
issuer may also elect to proceed at that time with its offering under
the final requirements for either Tier 1 or Tier 2 offerings, provided
it follows the requirements for the respective tiers.
Issuers in ongoing offerings that were qualified before
effectiveness of the final rules that wish to transition to a Tier 2
offering may do so by filing a post-qualification amendment that
satisfies all of the requirements for Tier 2. Such issuers will
transition to the requirements for Tier 2 upon qualification of the
post-qualification amendment. For purposes of calculating the maximum
offering amount permissible under Rule 251(a), an issuer must reduce
the maximum offering amount sought to be qualified under the final
rules for the respective tiers by the amount which such issuer has sold
during the previous 12-month period pursuant to the preexisting rules
for Regulation A.
K. Technical and Conforming Amendments
The final rules for Regulation A amend existing Rules 251-263.\854\
The amendments take into account changes to Regulation A associated
with the addition of Section 3(b)(2) to the Securities Act, and the
items detailed in this release.
---------------------------------------------------------------------------
\854\ 17 CFR 230.251 through 230.263.
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As a result of the revisions to Regulation A, we are adopting
conforming and technical amendments to Securities Act Rules
157(a),\855\ 505(b)(2)(iii),\856\ and Form 8-A. Additionally, we are
revising Item 101(a) \857\ of Regulation S-T \858\ to reflect the
mandatory electronic filing of all issuer initial filing and ongoing
reporting requirements under Regulation A. We are also revising Item
101(c)(6) \859\ of Regulation S-T to remove the reference to paper
filings in a Regulation A offering, and removing and reserving Item
101(b)(8) \860\ of Regulation S-T dealing with the optional electronic
filing of Form F-X by Canadian issuers.
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\855\ 17 CFR 230.157(a).
\856\ 17 CFR 230.505(b)(2)(iii).
\857\ 17 CFR 232.101(a).
\858\ 17 CFR 232.10 et seq.
\859\ 17 CFR 232.101(c)(6).
\860\ 17 CFR 232.101(b)(8).
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III. Economic Analysis
In this section, we analyze the expected economic effects of the
final rules relative to the current baseline, which is the market
situation in existence today, including current methods of raising up
to $50 million in capital available to potential issuers. Our analysis
considers the anticipated costs and benefits for market participants
affected by the final rules as well as the impact of the final rules on
efficiency, competition, and capital formation relative to the
baseline. This includes the likely economic effects of the specific
provisions of the final rules related to the scope of the exemption,
the format and contents of the offering statement, solicitation of
interest, ongoing reporting, insignificant deviations, bad actor
disqualification, and relationship with state securities law.
The final rules to implement Section 401 of the JOBS Act and amend
Regulation A seek to promote capital formation, efficiency and
competition for small companies, and provide for meaningful investor
protection. We are mindful of the costs imposed by, and the benefits to
be obtained from, our rules. Securities Act Section 2(b) \861\ and
Exchange Act Section 3(f) \862\ require us, when engaging in rulemaking
that requires us to consider or determine whether an action is
necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. Exchange Act
Section 23(a)(2) \863\ requires us, when adopting rules under the
Exchange Act, to consider the impact that any new rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
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\861\ 15 U.S.C. 77b(b).
\862\ 15 U.S.C. 78c(f).
\863\ 15 U.S.C. 78w(a)(2).
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The final rules include provisions mandated by the statute as well
as provisions that rely on our discretionary authority. As a result,
while many of the costs and benefits of the final rules stem from the
statutory mandate of Title IV of the JOBS Act, certain benefits and
costs are affected by the discretion we exercise in connection with
implementing this mandate. For purposes of this economic analysis, we
address the benefits and costs resulting from the mandatory statutory
provisions and our exercise of discretion together because the two
types of benefits and costs are not readily separable. We also analyze
the benefits and costs of significant alternatives to the final rules
that were suggested by commenters and that we considered. Many of the
benefits and costs discussed below are difficult to quantify when
analyzing the likely effects of the final rules on efficiency,
competition, and capital formation. For example, the extent to which
the amendments to Regulation A will
[[Page 21865]]
promote future reliance by issuers on this offering method, and the
extent to which future use of Regulation A will affect the use of other
offering methods, is difficult to precisely estimate. Similarly, there
is some uncertainty as to the effect of some of the provisions in the
final rules on investor protection. Therefore, much of the discussion
is qualitative in nature but, where possible, we attempted to quantify
the potential costs and benefits of the final rules.
A. Broad Economic Considerations
One of the primary objectives of Section 401 was to expand the
capital raising options available to smaller and emerging companies and
thereby to promote capital formation within the larger economy.\864\
With this objective in mind, and as background to our analysis of the
likely costs and benefits of the final rule provisions, we consider the
broader impact of amended Regulation A on capital formation. As
discussed below, this will depend on whether issuers that currently
raise capital elect to rely on amended Regulation A in place of other
offering methods and whether issuers that have been unable to raise
capital, or raise enough capital, avail themselves of amended
Regulation A because it is preferable over other capital rising methods
otherwise available to them. To the extent that amended Regulation A
provides a method of raising capital for issuers that currently have no
method of doing so, it could enhance the overall level of capital
formation in the economy in addition to any redistributive effect that
could arise from issuers changing their capital raising methods.
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\864\ Congress enacted Section 3(b)(2) against a background of
public commentary suggesting that Regulation A, an exemption for
small offerings originally adopted by the Commission in 1936 under
the authority of Section 3(b) of the Securities Act, should be
expanded and updated to make it more useful to small issuers. H.R.
1070 (Small Company Capital Formation Act of 2011) was introduced in
April 2011. In its September 2011 report, the Committee on Financial
Services noted: ``H.R. 1070, the Small Company Capital Formation
Act, raises the offering threshold for companies exempted from
registration with the U.S. Securities and Exchange Commission (SEC)
under Regulation A from $5 million--the threshold set in the early
1990s--to $50 million. Raising the offering threshold helps small
companies gain access to capital markets without the costs and
delays associated with the full-scale securities registration
process . . .'' See H.R. Rep. No. 112-206 (2011).
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The impact of the final rules on an issuer's ability to raise
capital will also depend on whether new investor capital is attracted
to the Regulation A market, and on whether investors reallocate
existing capital among various types of offerings. Investor demand for
securities offered under amended Regulation A will depend on the
expected risk, return and liquidity of the offered securities, and in
particular, how these characteristics compare to what investors can
obtain from securities in other exempt offerings and in registered
offerings. Investor demand also will depend on whether Regulation A
disclosure requirements are sufficient to enable investors to evaluate
the aforementioned characteristics of Regulation A offerings.
To assess the likely impact of the final rules on capital
formation, we consider the features of amended Regulation A that
potentially could increase the use of Regulation A by new issuers and
by issuers that already rely on private and registered offerings.
The amendments to Regulation A we are adopting remove certain
burdens identified by commenters and others in existing Regulation A.
Offerings relying on existing Regulation A must be qualified by the
states and the Commission, which also requires a review and
qualification process for issuers to access capital.\865\ Amended
Regulation A removes the requirement of state qualification for Tier 2
offerings, thereby eliminating the cost and other burdens of the
duplicative review under existing Regulation A. Issuance costs may also
be reduced, as a percentage of proceeds, by increasing the maximum
offering size from $5 million annually under existing Regulation A, to
$20 million for Tier 1 offerings and to $50 million for Tier 2
offerings relying on amended Regulation A.
---------------------------------------------------------------------------
\865\ See GAO Report. According to the GAO Report, the limited
use of Regulation A appears to have been influenced by multiple
factors, including ``the type of investors businesses sought to
attract, the process of filing the offering with SEC, state
securities laws, and the cost-effectiveness of Regulation A relative
to other SEC exemptions. For example, identifying and addressing
individual state's securities registration requirements can be both
costly and time-consuming for small businesses, according to
research, an organization that advocates for small businesses, and
securities attorneys that GAO interviewed. Additionally, another SEC
exemption [Regulation D] is viewed by securities attorneys that GAO
met with as more cost-effective for small businesses . . .''
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We believe that the potential use of amended Regulation A for Tier
2 offerings depends largely on how issuers perceive, the trade-off
between the costs of qualification and ongoing disclosure requirements
and the benefits to issuers from access to a broad investor base,
expansion of the offering size, the preemption of state securities law
registration requirements and the potential for enhanced secondary
market liquidity.
With respect to Tier 1 offerings, the potential use of amended
Regulation A depends largely on how issuers perceive the trade-off
between state review and qualification requirements, limited disclosure
requirements (with potentially greater information asymmetry between
issuers and investors) and the $20 million maximum offering size.
We also recognize that the level of investor protection resulting
from the final rules is an important consideration that could affect
the ultimate use and success of amended Regulation A. For example, if
preempting state review of Tier 2 offerings, or not requiring audited
financials or ongoing disclosures in Tier 1 offerings, leads to
undisclosed risks or misconduct in the offering process, then investors
may be unwilling to participate in those types of Regulation A
offerings. On the other hand, Commission staff review of the offerings
and investment limitations for Tier 2 offerings may mitigate some of
these concerns for certain investors.
Many of the potential issuers of securities under amended
Regulation A may be small companies, particularly early-stage and high-
growth companies, seeking capital through equity-based financing
because they do not have sufficient collateral or the cash flows
necessary to support the fixed repayment schedule of debt
financing.\866\ Currently, these companies often seek capital from
institutional or accredited investors through offerings that are exempt
from registration under the Securities Act or through registered public
offerings. In the future, whether issuers opt to rely instead on
Regulation A will depend on the perceived utility of the amended
Regulation A exemption compared to: (i) Other available exemptions from
registration, and (ii) registered public offerings. Below we discuss
each of these considerations in turn.
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\866\ See Berger, Allen N., and Gregory F. Udell, 1998, The
economics of small business finance: The roles of private equity and
debt markets in the financial growth cycle, Journal of Banking and
Finance 22(6), pp. 613-673.
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Some issuers may prefer to offer securities under amended
Regulation A relative to using other offering methods exempt from
registration because of potentially limiting features associated with
the other exemptions. In particular, securities sold pursuant to the
exemptions from registration under Regulation D,\867\ which account for
a significant amount of exempt offerings,\868\ are generally subject to
[[Page 21866]]
restrictions on resale or limits on participation by non-accredited
investors in ways that can limit the ability to raise capital. In
contrast to Rule 506 of Regulation D, companies relying on amended
Regulation A can sell securities to an unlimited number of non-
accredited investors,\869\ and the securities will not be restricted
securities for purposes of the federal securities laws, which will
allow for a more diffuse investor base and potential liquidity
benefits.
---------------------------------------------------------------------------
\867\ 17 CFR 230.500 through 230.508.
\868\ See V. Ivanov, and S. Bauguess, 2013, Capital Raising in
the U.S.: An Analysis of Unregistered Offerings Using the Regulation
D Exemption, 2009-2012, available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
\869\ Non-accredited investors in Tier 2 offerings will be
subject to an investment limitation.
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The use of amended Regulation A may also depend on whether
companies considering seeking capital through an exempt offering
believe that the benefits from access to a broader investor base under
amended Regulation A offset the costs of qualification and, with
respect to Tier 2 offerings, ongoing disclosure requirements. Other
offering exemptions could remain attractive relative to amended
Regulation A. For example, general solicitation is now permissible
under Rule 506(c) of Regulation D. Issuers relying on Rule 506(c) to
solicit offerings may now more easily reach institutional and
accredited investors, making it less necessary for them to seek capital
from a broader non-accredited investor base, especially if trading
platforms aimed at accredited investors in privately placed securities
continue to develop.\870\
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\870\ For example, ``NASDAQ Private Market's affiliated
marketplace is an electronic network of Member Broker-Dealers who
provide accredited institutions and individual clients with access
to the market. Companies use a private portal to enable approved
parties to access certain information and transact in its
securities.'' See NASDAQ Private Market overview, available at:
https://www.nasdaqprivatemarket.com/market/overview.
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Finally, the conditional exemption from registration of a class of
securities under Section 12(g) available to some Tier 2 issuers may
encourage them to pursue a Regulation A offering as a means to avoid
the associated costs and requirements of Exchange Act registration and
reporting.\871\ This effect may be limited by the imposition of the
conditions on the Section 12(g) exemption, in particular, the condition
limiting the availability of the exemption to smaller companies that do
not exceed certain thresholds for public float or, in the absence of
float, revenues. Larger issuers of Regulation A securities or issuers
using Regulation A to raise capital as part of a growth strategy, or
seeking to increase liquidity through a broader investor base, may
still be subject to a Section 12(g) registration requirement in the
future.
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\871\ See Section II.B.6.c.
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The trade-offs between amended Regulation A and a registered
offering are somewhat different. In a registered offering, issuers can
offer the securities directly to all potential investors, without a
limitation on the aggregate offering amount and with no resale
restrictions. Moreover, securities issued through registered offerings
often trade on national securities exchanges and can offer a degree of
liquidity to investors that is generally not available for securities
issued in private offerings. However, the issuance costs associated
with small registered public offerings are generally a significant
percentage of proceeds and issuers in registered offerings must bear
the costs arising from ongoing disclosure requirements under the
Exchange Act. These costs are perceived to be one of the determinants
of the relatively low incidence of initial public offerings (``IPOs'')
over the past decade and may be a motivating factor for potential
issuers to prefer offering securities under amended Regulation A.\872\
Relative to registered public offerings, offerings under amended
Regulation A will provide smaller issuers with access to sources of
capital without necessarily imposing the full ongoing reporting
requirements of the Exchange Act.
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\872\ See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20,
2011), available at: http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
There are other possible explanations for the decline in IPOs,
for example, macro-economic effects on investment opportunities in
the economy and the cost of capital. See Lowry, M., 2003, Why does
IPO volume fluctuate so much? Journal of Financial Economics 67(1),
pp. 3-40. Another possible explanation is an increase in the
benefits of being acquired by a larger entity relative to the
benefits of operating as an independent firm. See Gao, X., J.
Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of
Financial and Quantitative Analysis 48(6), pp. 1663-1692.
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The use of amended Regulation A may depend on the extent to which
companies considering a traditional IPO believe that amended Regulation
A is a viable alternative. These potential issuers will need to assess
whether the cost savings from reduced reporting requirements under
amended Regulation A offset the potential reduction in secondary market
liquidity compared to registered offerings that meet the listing
requirements of national securities exchanges. In particular,
securities listed on a national securities exchange are likely to
benefit from increased liquidity as a result of greater access to
potential investors and a lower level of information asymmetry due to
more extensive reporting requirements. At present, only some securities
issued under existing Regulation A trade over-the-counter, with the
majority not known to trade in any secondary market.
The liquidity trade-off faced by issuers considering amended
Regulation A relative to other exempt or registered offering methods
may ultimately center on whether the ongoing reporting requirements of
Tier 2 offerings can generate sufficient information for secondary
markets to provide the intended liquidity benefits. Academic studies
have found a close relationship between disclosure requirements and
liquidity.\873\ The disclosure requirements in the final rules seek to
balance the burden of disclosure requirements on issuers and the demand
of investors for information by offering issuers a capital raising
option with lower compliance costs while still mandating relevant
information about the issuer and the securities for the market.
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\873\ For example, one study found improved liquidity at
companies that chose to comply with Exchange Act reporting
requirements in order to remain eligible for quotation on OTCBB. See
Bushee, B., and C. Leuz, 2005, Economic consequences of SEC
disclosure regulation: Evidence from the OTC bulletin board, Journal
of Accounting and Economics 39(2), pp. 233-264.
Another study found significant decreases in liquidity for
issuers that deregistered their securities, with the subsequent loss
of liquidity attributed to decreased disclosure separate from the
effect of delisting from a major exchange. This study also shows
that some companies choose to deregister under Section 12(b) and
trade on less liquid OTC markets instead of trading on national
securities exchanges, indicating that, for such companies, the
expected costs of reporting under the Exchange Act outweigh the
expected liquidity benefits. See Leuz, C., A. Triantis, and T. Wang,
2008, Why do firms go dark? Causes and economic consequences of
voluntary SEC deregistrations, Journal of Accounting and Economics
45(2-3), pp. 181-208.
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Overall, amended Regulation A could increase the aggregate amount
of capital raised in the economy if used by private issuers that have
until now been limited in their ability to raise capital through other
types of exempt offerings or by smaller private issuers that seek a
public market for their securities but that are not sufficiently large
to bear the fixed costs of being an Exchange Act reporting company. The
impact of amended Regulation A on capital formation could also be
redistributive in nature by encouraging issuers to shift from one
method of capital raising to another. This potential outcome may have
significant net positive effects on capital formation and allocative
efficiency by providing issuers with access to capital at a lower cost
than alternative capital raising methods and by providing
[[Page 21867]]
investors with additional investment opportunities.
The net effect of the final rules on capital formation will depend
on whether issuers that rely on amended Regulation A do so in addition
to or instead of other methods of raising capital. The effect will also
depend on whether investors find Regulation A disclosure requirements
and investor protections to be sufficient to evaluate the expected
return and risk of such offerings and to choose between offerings
reliant on Regulation A, other exempt offerings and registered
offerings. Due to a lack of data, we are not able to estimate the
effects of the final rules on the potential rate of substitution
between alternative methods of raising capital and amended Regulation A
and the overall expansion, if any, in capital raising by potential
issuers eligible for amended Regulation A.
B. Baseline
As we described in the Proposing Release, the baseline for our
economic analysis of amended Regulation A is market conditions as they
exist today, in which issuers seeking to raise capital through
securities offerings must register the offer and sale of securities
under the Securities Act unless they can rely on an exemption from
registration under the federal securities laws.\874\ The baseline
discussion below also includes a description of investors in offerings
of similar amounts and a discussion of the role of intermediaries that
may be affected by the final rules.
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\874\ Other rules mandated by the JOBS Act have been proposed
but not adopted by the Commission. The baseline does not account for
potential changes that may result from future adoption of proposed
rules.
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1. Current Methods of Raising up to $50 Million of Capital
Issuers seeking to raise up to $50 million over a twelve-month
period are expected to be affected directly by amended Regulation A. As
we described in the Proposing Release, while there are a number of
factors that companies consider when determining how to raise capital,
one of the primary considerations is whether to issue securities
through a registered public offering or through an offering that is
exempt from Securities Act registration and ongoing Exchange Act
reporting requirements. The choice of offering method may depend on the
size of the issuer, the type of investors the issuer seeks to attract
and the amount of new capital sought. Registered offerings entail
considerable initial and ongoing costs that can weigh more heavily on
smaller issuers, providing incentives to remain private and to raise
capital outside of public markets.\875\ To the extent that these
issuance costs constrain small firms' access to capital, they may
result in underinvestment in some value-generating projects and thus
potentially less efficient allocation of capital to investment
projects. This section describes the various currently available
offering methods and the prevalence of their use.
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\875\ See IPO Task Force.
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a. Exempt Offerings
Currently, small issuers can raise capital by relying on an
exemption from registration under the Securities Act, such as Section
3(a)(11),\876\ Section 4(a)(2),\877\ Regulation D,\878\ and Regulation
A. Each of these exemptions, however, has requirements that may limit
its utility for issuers. For example, the exemption under Securities
Act Section 3(a)(11) is limited to intrastate offerings, and Regulation
D offerings may limit or prohibit participation by non-accredited
investors. Additionally, offerings relying on existing Regulation A
require preparation of offering materials and qualification of an
offering statement by the Commission and may require qualification or
registration in multiple states.\879\ The table below summarizes the
main features of each exemption.
---------------------------------------------------------------------------
\876\ Under Securities Act Section 3(a)(11), except as expressly
provided, the provisions of the Securities Act (including Section 5
registration requirement) do not apply to a security that is ``part
of an issue offered and sold only to persons resident within a
single State or Territory, where the issuer of such security is a
person resident and doing business within, or, if a corporation,
incorporated by and doing business within, such State or
Territory.'' 15 U.S.C 77c(a)(3)(a)(11).
\877\ Securities Act Section 4(a)(2) provides that the
provisions of Section 5 shall not apply to ``transactions by an
issuer not involving a public offering.'' 15 U.S.C. 77d(4)(a)(2).
\878\ Regulation D contains rules providing exemptions and safe
harbors from the Securities Act's registration requirements,
allowing some companies to offer and sell their securities without
having to register the offering with the Commission. 17 CFR 230.504,
505, 506.
\879\ See Campbell, R., 2005, Regulation A: Small business'
search for a moderate capital, Delaware Journal of Corporate Law
31(1), pp. 77-123. See also GAO Report.
\880\ Aggregate offering limit on securities sold within a
twelve-month period.
\881\ Resale restrictions are determined by state securities
laws, which typically restrict in-state resales for a one-year
period.
\882\ Section 4(a)(2) of the Securities Act provides a statutory
exemption for ``transactions by an issuer not involving any public
offering.'' See SEC v. Ralston Purina Co., 346 U.S. 119 (1953)
(holding that an offering to those who are shown to be able to fend
for themselves is a transaction ``not involving any public
offering.'')
\883\ This description is based on Regulation A before the
adoption of the final rules today.
\884\ No general solicitation or advertising is permitted unless
the offering is registered in a state requiring the use of a
substantive disclosure document or sold under a state exemption for
sales to accredited investors with general solicitation.
\885\ Filing is not a condition of the exemption.
\886\ Restricted unless the offering is registered in a state
requiring the use of a substantive disclosure document or sold under
a state exemption for sale to accredited investors.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering limit Issuer and investor Filing Resale Blue sky law
Type of offering \880\ Solicitation requirements requirement restrictions preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)............... None.............. No limitations.... All issuers and None............. Restricted in No.
investors must be some cases.
resident in state. \881\
Section 4(a)(2)................ None.............. No general Transactions by an None............. Restricted No.
solicitation. issuer not involving securities.
any public offering.
\882\
Regulation A \883\............. $5 million with Testing the waters U.S. or Canadian File testing the No............... No.
$1.5 million permitted before issuers, excluding waters
limit on filing. investment companies, materials, Form
secondary sales. blank-check 1-A, Form 2-A.
companies, reporting
companies, and
issuers of fractional
undivided interests
in oil or gas rights,
or similar interests
in other mineral
rights.
Rule 504 Regulation D.......... $1 million........ General Excludes investment File Form D \885\ Restricted in No.
solicitation companies, blank- some cases.
permitted in some check companies, and \886\
cases. \884\ Exchange Act
reporting companies.
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 21868]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering limit Issuer and investor Filing Resale Blue sky law
Type of offering \887\ Solicitation requirements requirement restrictions preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 505 Regulation D.......... $5 million........ No general Unlimited accredited File Form D \888\ Restricted No.
solicitation. investors and up to securities.
35 non-accredited
investors.
Rule 506 Regulation D.......... None.............. General Unlimited accredited File Form D \891\ Restricted Yes.
solicitation investors. securities.
permitted in some Limitations on non-
cases. \889\ accredited investors.
\890\
--------------------------------------------------------------------------------------------------------------------------------------------------------
While we do not have data on offerings relying on an exemption
under Section 3(a)(11) or Section 4(a)(2), available data related to
Regulation D and Regulation A filings allow us to gauge how frequently
issuers currently use these exemptions when raising capital.
---------------------------------------------------------------------------
\887\ Aggregate offering limit on securities sold within a
twelve-month period.
\888\ Filing is not a condition of the exemption.
\889\ No general solicitation or advertising is permitted under
Rule 506(b). General solicitation and general advertising permitted
under Rule 506(c), provided all purchasers are accredited investors
and the issuer takes reasonable steps to verify accredited investor
status.
\890\ Under Rule 506(b), offerings may involve an unlimited
number of accredited investors and up to 35 non-accredited
investors. Under Rule 506(c), all purchasers must be accredited
investors.
\891\ Filing is not a condition of the exemption.
---------------------------------------------------------------------------
i. Regulation A Offerings
As we described in the Proposing Release, issuers rarely rely on
existing Regulation A to raise capital. The chart below, from the GAO
Report shows the number of filed and qualified Regulation A offerings
in fiscal years 1992 to 2011.\892\
---------------------------------------------------------------------------
\892\ For the purposes of this chart, a Regulation A offering is
considered ``filed'' when the Commission receives a potential
issuer's offering materials through Form 1-A. A Regulation A
offering is considered qualified after the Commission staff has
reviewed the offering materials and determined that all conditions
have been met. Therefore, offerings that are filed and not qualified
are either pending, withdrawn, or abandoned.
[GRAPHIC] [TIFF OMITTED] TR20AP15.000
In calendar years 2012 to 2014, 26 Regulation A offerings,
excluding amendments, were qualified by the Commission.\893\
---------------------------------------------------------------------------
\893\ In cases in which an issuer made multiple Form 1-A filings
over this time period, only the first qualified offering by that
issuer was included in the number of qualified Regulation A
offerings. The estimate also excludes amendments filed on Form 1-A/
A, including post-qualification amendments to earlier Form 1-A
filings, as well as abandoned and withdrawn filings.
---------------------------------------------------------------------------
Section 402 of the JOBS Act required the GAO to study the impact of
state securities laws on Regulation A offerings. The GAO examined: (1)
Trends in Regulation A filings, (2) differences in state registration
of Regulation A filings, and (3) factors that may have affected the
number of Regulation A filings. In its July 2012 report on Regulation
A, the GAO cited four factors affecting the use of Regulation A
offerings: (1) Costs associated with compliance with state securities
regulations, or blue sky laws; (2) the availability of alternative
offering methods exempt from registration, such as Regulation D
offerings; (3) costs associated with the Commission's filing and
qualification process; and (4) the type of investors businesses sought
to attract.
As identified by the GAO, compliance with state securities laws is
one of the factors that impacts the use of existing Regulation A. The
GAO did not provide an estimate of the compliance costs. For issuers
seeking to offer securities in multiple states, differences in
securities laws and applicable procedures across states may result in
significant legal costs \894\ and a time consuming process for issuers,
which could adversely affect their efforts to raise capital in a timely
and cost-effective manner. NASAA has recently initiated a Coordinated
Review Program for Regulation A offerings.\895\ Only a limited number
of issuers have undergone state review through this process to date, so
we are unable to conclude whether it may result in lower costs or a
shorter amount of review time than was the case prior to its inception.
---------------------------------------------------------------------------
\894\ See discussion in Section III.I below.
\895\ A description of NASAA's coordinated review program can be
found at: http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/. See discussion
in Section III.I below.
---------------------------------------------------------------------------
The GAO also identified costs associated with the Commission's
filing and qualification process for Regulation A offerings as another
factor contributing to its limited current use.
[[Page 21869]]
While existing Regulation A permits offerings to an unlimited number of
non-accredited investors, the total offering amount must not exceed $5
million in a twelve-month period, limiting the opportunity to scale the
fixed component of these costs as a percentage of proceeds.
As described above, a business that relies on Regulation A must
file an offering statement with the Commission that must be qualified
by Commission staff before the offering can proceed. From 2002 through
2011, Regulation A filings took an average of 228 days to qualify.\896\
Average time to qualification exceeded 300 days in 2012-2014.\897\
Factors that affect the time to qualification include the paper filing
method, quality of the initial filing, time taken by the Commission
staff, and time taken by the issuer to provide required information or
address questions from previous correspondence with the Commission
staff.
---------------------------------------------------------------------------
\896\ See GAO Report.
\897\ This estimate is generated by staff from the Commission's
Division of Economic and Risk Analysis using Form 1-A filings and is
determined as the difference between the filing date for the initial
Form 1-A filing and the final disposition date for the final Form 1-
A or 1-A/A filing through which the offering was qualified.
---------------------------------------------------------------------------
Our analysis of the Regulation A filings qualified between 2002 and
2014 shows that approximately half of the issuers operated in the
financial industry and the majority of offerings involved equity
securities. Offerings with affiliate sales were rare, likely due not
only to the requirement of the existing Regulation A that the issuer
have net income from continuing operations in the prior two years but
also due to the perceptions that adverse selection concerns may limit
investor demand in securities offerings with affiliate sales.\898\
---------------------------------------------------------------------------
\898\ See Bettis, J., J. Coles, and M. Lemmon, 2000, Corporate
policies restricting trading by insiders, Journal of Financial
Economics 57, pp. 191-220 (discussing adverse selection issues and
corporate policies restricting trading by insiders. See also
Michaely, R., and W. Shaw, 1994, The pricing of initial public
offerings: Tests of adverse-selection and signaling theories, Review
of Financial Studies 7(2), pp. 279-319 (analyzing the role of
adverse selection and the possibility of informed trading in IPOs).
---------------------------------------------------------------------------
ii. Regulation D Offerings
Based on the information available to us, it appears that the most
common way to issue up to $50 million of securities is pursuant to an
offering under a Regulation D exemption. Eligible issuers can rely on
Rule 504 to raise up to $1 million within a twelve-month period, on
Rule 505 to raise up to $5 million within a twelve-month period, and on
Rule 506 to raise an unlimited amount of capital. In total, based on
the analysis of offering amounts reported on Form D in calendar year
2014, Regulation D offerings accounted for over one trillion dollars.
Most issuers choose to raise capital by relying on Rule 506, even when
their offering size would have potentially permitted reliance on Rule
504 or Rule 505.\899\ For example, in 2014, we identified 11,228
Regulation D offerings that would have been potentially eligible to be
conducted under amended Regulation A. Of those, 10,671 offerings relied
on Rule 506, 376 on Rule 504, and 181 on Rule 505. We summarize their
characteristics in the table below.
---------------------------------------------------------------------------
\899\ This tendency could, in part, be attributed to two
features of Rule 506: State securities law preemption and unlimited
offering amount. See also GAO Report.
\900\ Based on an analysis performed by staff in the Division of
Economic and Risk Analysis of Form D filings submitted for calendar
year 2014. The numbers exclude offerings by reporting companies,
non-Canadian foreign issuers and pooled investment funds, as well as
offerings of interests in claims on natural resources, which are not
eligible for amended Regulation A. We do not have a scalable way of
excluding blank check companies, which are also not eligible for
amended Regulation A, from this sample, which leads to a higher
estimate of the number of issuers that would be eligible to rely on
amended Regulation A.
Regulation D Offerings in 2014 by Issuers That Would Be Eligible To Rely on Amended Regulation A \900\
----------------------------------------------------------------------------------------------------------------
Rule 504 Rule 505 Rule 506
Offering size ---------------------------------------------------------------
<=$1M <=$5M <=$20M $20-50M
----------------------------------------------------------------------------------------------------------------
Current Reg A Eligible.......................... Yes Yes Up to $5M No
Amended Reg A Eligible.......................... Yes Yes Yes Yes
Number of filings............................... 376 181 10,071 600
Average offering amount ($ million)............. 0.4 1.4 3.2 31.6
Offerings with non-accredited investors......... 58% 31% 6% 2%
Median number of investors...................... 3 7 6 9
----------------------------------------------------------------------------------------------------------------
As shown in the table above, approximately 95% of Regulation D
offerings that would be eligible for amended Regulation A relied on
Rule 506. A comparison of Rule 506 offerings over $20 million to those
below $20 million shows that larger offerings generally had a higher
number of investors and were less likely to have non-accredited
investors.
Additional data on Regulation D offerings that would have been
eligible for amended Regulation A exemption is provided in the graph
below, which displays the offering size distribution of Rule 506
offerings and other Regulation D offerings that would have been
potentially eligible for the amended Regulation A exemption in calendar
year 2014. Approximately 95% of Regulation D offerings that would have
been potentially eligible for amended Regulation A had offering amounts
below $20 million.
---------------------------------------------------------------------------
\901\ Based on an analysis performed by staff in the Division of
Economic and Risk Analysis of Form D filings submitted for calendar
year 2014.
---------------------------------------------------------------------------
[[Page 21870]]
[GRAPHIC] [TIFF OMITTED] TR20AP15.001
[[Page 21871]]
Approximately seventy percent of Regulation D issuers that would be
eligible for amended Regulation A declined to disclose their revenue
range in their Form D filings for 2014. Of the remaining 30%, 13%
reported ``no revenues.'' The portion of issuers with no revenues is
noteworthy because it may be more difficult for issuers without regular
cash flows to obtain debt financing (without collateral or a
guarantee).
b. Registered Offerings
Issuers may seek to raise capital by registering the offer and sale
of securities under the Securities Act. In calendar year 2014, using
data from Thomson Reuters, we identified 75 IPOs and 246 seasoned
equity offerings (SEOs) of up to $50 million by issuers that would have
been potentially eligible for amended Regulation A.\902\
---------------------------------------------------------------------------
\902\ The sample excludes offerings from non-Canadian foreign
issuers, blank check companies, and investment companies, which
would not be eligible to rely on amended Regulation A. Offerings
with gross proceeds below $1,000 are excluded to minimize
measurement error. Issuers of interests in claims on natural
resources, which also would not be eligible for amended Regulation
A, were not separately eliminated due to data constraints.
---------------------------------------------------------------------------
There has been a general decline in the number of IPOs,
particularly those undertaken by small firms, since the late
1990s.\903\ One possible reason behind the relatively low number of
IPOs under $50 million is that public offerings may be too costly to be
a viable capital raising option for smaller issuers.\904\ Fees paid to
underwriters average 7% for IPOs, 5% for SEOs, and 1% for bond
issuances.\905\ Issuers conducting registered public offerings also
incur Commission registration fees and FINRA filing fees, legal and
accounting fees and expenses, transfer agent and registrar fees, costs
associated with periodic reporting requirements and other regulatory
requirements and various other fees.\906\ Two surveys cited in the IPO
Task Force report concluded that regulatory compliance costs of IPOs
average $2.5 million initially, followed by an average ongoing cost of
$1.5 million per year.\907\
---------------------------------------------------------------------------
\903\ See IPO Task Force. However, a recent study notes that the
decline in IPOs has been partly reversed in 2012-2014. See Dambra,
M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume:
Evidence that disclosure costs affect the IPO decision, Journal of
Financial Economics (forthcoming), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
\904\ Other potential reasons, such as macro-economic
conditions, are discussed below.
\905\ See Chen, H., and J. Ritter, 2000, The seven percent
solution, Journal of Finance 55(3), pp. 1105-1131; Abrahamson, M.,
T. Jenkinson, and H. Jones, 2011, Why don't U.S. issuers demand
European fees for IPOs? Journal of Finance 66(6), pp. 2055-2082;
Corwin, S., 2000, The determinants of underpricing for seasoned
equity offers, Journal of Finance 58(5), pp. 2249-2279; Huang, R.,
and D. Zhang, 2011, Managing underwriters and the marketing of
Seasoned Equity Offerings, Journal of Financial and Quantitative
Analysis 46(1), pp. 141-170; Fang, L., 2005, Investment bank
reputation and the price and quality of underwriting services,
Journal of Finance 60(6), pp. 2729-2761.
\906\ According to the survey cited in the IPO Task Force
report, 92% of the surveyed CEOs listed the ``Administrative Burden
of Public Reporting'' as being one of the most significant
challenges of an IPO. See IPO Task Force.
\907\ See IPO Task Force. However, some studies conclude that
the decline in U.S. small-firm IPOs predated the adoption of the
Sarbanes-Oxley Act. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where
have all the IPOs gone? Journal of Financial and Quantitative
Analysis 48(6), pp. 1663-1692. See also Doidge, C., A. Karolyi, and
R. Stulz, 2013, The U.S. left behind? Financial globalization and
the rise of IPOs outside the U.S., Journal of Financial Economics
110(3), pp. 546-573.
---------------------------------------------------------------------------
Because of the fixed-cost nature of some of the compliance-related
fees associated with public offerings, compliance-related fees as a
percentage of offering proceeds tend to decline as offering size
increases, as illustrated in the table below. Offerings below $50
million, and especially offerings below $20 million, incur
significantly higher registration, legal and accounting-related fees,
as a percentage of proceeds.
Certain Non-Underwriter IPO-Related Fees as a Percentage of Offering Proceeds From 1992-2014 \908\
----------------------------------------------------------------------------------------------------------------
Offering Offering $20- Offering
<=$20M % $50M % >$50M %
----------------------------------------------------------------------------------------------------------------
SEC Registration Fees........................................... 0.11 0.04 0.03
Blue Sky Fees................................................... 0.35 0.05 0.02
Accounting Fees................................................. 1.38 0.84 0.56
Legal Fees...................................................... 2.32 1.18 0.81
----------------------------------------------------------------------------------------------------------------
In addition to compliance costs, there are other possible
explanations for the trends in IPOs. A decline in public offerings also
could result from macro-economic effects on investment opportunities
and the cost of capital \909\ or an increase in the economies of scope
from being acquired by a larger entity relative to the benefits of
operating as an independent firm.\910\
---------------------------------------------------------------------------
\908\ Fee information is compiled from Thomson Reuters SDC data
on IPOs for 1992-2014. The sample excludes offerings from non-
Canadian foreign issuers, blank-check companies, and investment
companies. Averages are computed based on observations with non-
missing data (where a particular type of fees is separately
reported). Offerings with gross proceeds below $1,000 are excluded
to minimize measurement error.
The analysis includes legal, accounting, blue sky, and
registration fees, to which we collectively refer as ``compliance
fees''. Blue Sky Fees denotes fees and expenses related to
compliance with state securities regulations. We note that Blue Sky
fees associated with small registered offerings may over- or under-
estimate similar expenses for Regulation A offerings of the same
size.
\909\ See Lowry, M., 2003, Why does IPO volume fluctuate so
much? Journal of Financial Economics 67(1), pp. 3-40.
\910\ See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all
the IPOs gone? Journal of Financial and Quantitative Analysis 48(6),
pp. 1663-1692.
---------------------------------------------------------------------------
Several other trade-offs may affect an issuer's willingness to
pursue an IPO. According to the IPO Task Force survey, 88% of CEOs that
had completed an IPO listed ``Managing Public Communications
Restrictions'' as one of the most significant challenges brought on by
becoming a reporting company.\911\ Additionally, issuers in certain
industries, such as high-technology sectors, may be sensitive to the
costs of disclosure of proprietary information and may find private
capital sources more attractive.\912\ Access to capital may be
especially time-sensitive for the types of issuers most likely to
conduct small offerings, such as startups and small businesses,
rendering these issuers unwilling to go through a potentially lengthy
registration process. Directors and officers of small issuers also may
not want to subject themselves to the increased liability and takeover
threats that come with dispersed ownership.\913\
---------------------------------------------------------------------------
\911\ See IPO Task Force.
\912\ See Verrecchia, R., 2001, Essays on disclosure, Journal of
Accounting and Economics 32, pp. 97-180.
\913\ See Burkart, M., D. Gromb, and F. Panunzi, 2000, Agency
conflicts in public and negotiated transfers of corporate control,
Journal of Finance 55(2), pp. 647-677.
---------------------------------------------------------------------------
The cost and disclosure requirements of IPOs have been affected by
the recent adoption of scaled reporting requirements for emerging
growth companies (EGCs) under Title I of the
[[Page 21872]]
JOBS Act, which can ease the compliance obligations of certain issuers
in registered offerings. There is some evidence that Title I has
contributed to an increase in IPO volume in 2012-2014, particularly in
industries with high proprietary disclosure costs, such as
biotechnology and pharmaceuticals.\914\ Some recent studies, however,
suggest that the overall cost of going public for EGCs has not
decreased whereas the indirect cost (e.g., IPO underpricing) has
increased.\915\
---------------------------------------------------------------------------
\914\ See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS
Act and IPO volume: Evidence that disclosure costs affect the IPO
decision, Journal of Financial Economics (forthcoming), available
at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
\915\ See Chaplinsky, S., K. Hanley, and S. K. Moon, 2014, The
JOBS Act and the costs of going public, Working paper, available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2492241; Barth,
M., W. Landsman, and D. Taylor, 2014, The JOBS Act and information
uncertainty in IPO firms, Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2465927; Westfall, T.J.,
and T.C. Omer, 2014, The impact of emerging growth company status on
initial public offering valuation and the associated auditor risk
and effort, Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2512605.
---------------------------------------------------------------------------
c. Private Debt Financing
Equity, including principal owner equity, accounts for a
significant proportion of the total capital of a typical small
business. Other sources of capital for small businesses include loans
from commercial banks, finance companies and other financial
institutions, and trade credit.\916\
---------------------------------------------------------------------------
\916\ See Berger, A., and G. Udell, 2006, Small business credit
availability and relationship lending: The importance of bank
organisational structure, Economic Journal 112(477), pp. 32-53. In
this study, equity accounted for approximately half of the total
capital, including approximately 31% (45% for the smallest firms--
that is, those, with less than $1 million in revenues or less than
twenty employees) attributed to the principal owner. The remainder
came from debt financing, with about one quarter accounted for by
loans from commercial banks, finance companies and other financial
institutions, and another 16% comprised of trade credit. The study
was conducted based on the 1993 edition of the Federal Reserve
Board's Survey of Small Business Finances, which collects
information on small businesses in the United States.
---------------------------------------------------------------------------
Borrowing is relatively costly for many early-stage issuers as they
may have low revenues, irregular cash-flow projections, insufficient
assets to offer as collateral and high external monitoring costs.\917\
For example, a small growth company, such as a technology or life
sciences startup, without steady revenues or substantial tangible
assets is likely to have trouble obtaining a loan or a line of credit
from a bank because it would have difficulty proving its ability to
repay. Financial institutions generally require such small business
borrowers to provide collateral or a guarantee by owners,\918\ which
some issuers may be unable or reluctant to provide.
---------------------------------------------------------------------------
\917\ See Robb, A., and D. Robinson, 2014, The capital structure
decisions of new firms, Review of Financial Studies 27(1), pp. 153-
179.
\918\ Approximately 92% of all small business debt to financial
institutions is secured, and owners of the firm guarantee about 52%
of that debt. See Berger, A., and G. Udell, 1995, Relationship
lending and lines of credit in small firm finance, Journal of
Business 68(3), pp. 351-381. Some studies of small business lending
also document the creation of local captive markets with higher
borrowing costs for small, opaque firms as a result of strategic use
of soft information by local lenders. See Agarwal, Sumit, and Robert
Hauswald, 2010, Distance and private information in lending, Review
of Financial Studies 13(7), pp. 2757-2788.
---------------------------------------------------------------------------
2. Investors
There are currently no limitations on who can invest in existing
Regulation A offerings. In considering the baseline for the amendments
to Regulation A, we also examine the investors in other existing
methods of raising up to $50 million in capital because the final rules
we are adopting may impact an issuer's choice of offering method and
the potential investor base of the offering. For example, as discussed
above, while there are no limitations on the number of non-accredited
investors that can invest in offerings made pursuant to Rule 504 of
Regulation D and in registered public offerings, offerings made
pursuant to Rule 505 and Rule 506(b) of Regulation D are limited to a
maximum of 35 non-accredited investors. Issuers making offerings
pursuant to Rule 506(c) of Regulation D must take reasonable steps to
verify that investors are accredited investors.
While non-accredited investors can participate in Regulation D
offerings, subject to limitations described above, data from Form D
filings suggests that non-accredited investors are not significantly
involved in Regulation D offerings of up to $50 million. Offerings
involving non-accredited investors are typically smaller than those
that do not involve non-accredited investors. In 2014, we estimate that
approximately 152,641 investors participated in Regulation D offerings
of less than $50 million by issuers that would be eligible for amended
Regulation A.\919\ Such offerings had an average of 13.6 investors per
offering. Approximately 8% of such offerings involved one or more non-
accredited investors.
---------------------------------------------------------------------------
\919\ Based on an analysis by staff from the Commission's
Division of Economic and Risk Analysis of initial Form D filings
submitted during calendar year 2014. The estimated number of
investors likely exceeds the actual number of Regulation D investors
because investors could have participated in more than one offering.
---------------------------------------------------------------------------
The total number of households estimated to qualify as accredited
investors is substantially larger than the total number of investors
reported to have participated in an unregistered offering. As of 2013,
we estimated that over 9 million U.S. households qualified as
accredited investors based on the net worth standard alone,
approximately 8 million U.S. households qualified as accredited
investors based on the income standard alone, and approximately 12.4
million U.S. households qualified based on either the income standard
or the net worth standard.\920\
---------------------------------------------------------------------------
\920\ These estimates are based on an analysis by staff from the
Commission's Division of Economic and Risk Analysis, using the
Federal Reserve Board's 2013 Survey of Consumer Finances.
---------------------------------------------------------------------------
3. Financial Intermediaries
Regulation A amendments may also affect financial intermediaries
that may become involved in the placement and quotation of Regulation A
securities. Currently, there is limited involvement of intermediaries
in a Regulation A offering. However, financial intermediaries are used
in certain of the other types of offerings, including registered
offerings and certain exempt offerings. To the extent that the
amendments to Regulation A that we are adopting today impact the number
and the overall amount of capital raised in other types of offerings,
financial intermediaries may be affected. For example, in registered
offerings, underwriters are frequently used to identify potential
investors and are primarily responsible for facilitating a successful
distribution of the offered securities. While intermediaries are used
less frequently in Regulation D offerings, they play a role in some
offerings. We estimate that fewer than 10% of Regulation D offerings
that would have been potentially eligible under amended Regulation A
involved an intermediary (the estimate is based on information about
sales compensation or sales compensation recipients reported in
connection with the offering).\921\
---------------------------------------------------------------------------
\921\ Based on an analysis performed by staff in the Division of
Economic and Risk Analysis of Form D filings for calendar year 2014.
---------------------------------------------------------------------------
C. Scope of Exemption
1. Eligible Issuers
Consistent with the restrictions in existing Regulation A, the
final rules exclude non-Canadian foreign issuers, investment companies
(including BDCs), Exchange Act reporting companies, blank check
companies, and issuers of fractional undivided interests in oil or gas
rights, or similar interests
[[Page 21873]]
in other mineral rights, from relying on the exemption.
The final rules also exclude two additional categories of issuers:
(i) issuers that are or have been subject to a denial, suspension, or
revocation order by the Commission pursuant to Section 12(j) of the
Exchange Act within the five years immediately preceding the filing of
the offering statement, and (ii) issuers that are required to, but that
have not, filed with the Commission the ongoing reports required by the
final rules during the two years immediately preceding the filing of an
offering statement.
Excluding issuers that have not complied with Regulation A's
ongoing reporting requirements in the two-year period immediately
preceding the filing of a new offering statement will incentivize
issuers that intend to rely on amended Regulation A exemption in the
future to comply with its ongoing reporting requirements. Similarly,
excluding issuers that were subject to a denial, suspension, or
revocation order by the Commission pursuant to Section 12(j) of the
Exchange Act within the five years immediately preceding the filing of
the offering statement will incentivize registrants to comply with
their obligations under the Exchange Act, including their ongoing
reporting obligations, and will prevent issuers with a history of non-
compliance from relying on Regulation A after they terminate or suspend
their Exchange Act reporting obligations. At the same time, neither of
these exclusions should result in additional compliance costs for
issuers because they do not impose any reporting or other requirements
on issuers beyond those already mandated by existing regulations.
We recognize that excluding these additional categories of issuers
would have an effect on capital formation as it could prevent
Regulation A offerings by issuers who otherwise might have utilized the
Regulation A exemption rather than other methods of capital raising.
However, to the extent that the information contained in required past
reports provides investors in follow-on offerings of Regulation A
securities with a more complete picture of the issuer's business and
financial condition and is relevant for current investment decisions,
the exclusion of issuers that are not compliant with Regulation A's
reporting requirements and issuers subject to an order by the
Commission pursuant to Section 12(j) should therefore enhance investor
protection and the informational efficiency of prices of Regulation A
securities by allowing investors to make better informed investment
decisions. Moreover, we believe that these additional issuer
eligibility requirements will complement each other in facilitating
compliance with our rules.
To the extent that more issuers use the amended Regulation A
exemption, the final rules may promote competition among eligible
issuers in the market for investor capital and in the market for goods
and services. The final rules may also promote competition in the
product market between small issuers and larger issuers.
As suggested by some commenters, we could have expanded the
categories of eligible Regulation A issuers to include non-Canadian
foreign issuers,\922\ blank check companies,\923\ BDCs,\924\ and
issuers of fractional undivided interests in oil or gas rights, or
similar interests in other mineral rights.\925\ These alternatives
could potentially enhance capital formation and competition.\926\
---------------------------------------------------------------------------
\922\ See ABA SIL Letter; Andreessen/Cowen Letter; BDO Letter;
McCarter & English Letter; OTC Markets Letter; Richardson Patel
Letter; SVB Letter; SVGS Letter.
\923\ See Gilman Law Letter; IPA Letter; Richardson Patel
Letter.
\924\ See ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund
Letters 1 and 2; KVCF Letter; Milken Institute Letter; MoFo Letter;
REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. Most of these
commenters noted that BDCs serve an important function in
facilitating small or emerging business capital formation or in
providing a bridge from private to public markets.
\925\ See REISA Letter.
\926\ If eligibility under amended Regulation A had been
extended to investment companies and BDCs, and such companies
obtained a lower cost of capital and passed savings through to the
companies in which they invest, the latter could also realize
indirect capital formation benefits.
---------------------------------------------------------------------------
However, it may be potentially difficult and costly for investors,
especially less sophisticated investors, to determine the valuation and
risk of securities of non-Canadian foreign issuers, blank check
companies and issuers of fractional undivided interests in oil or gas
rights, or similar interests in other mineral rights, so extending
eligibility to such issuers may also decrease investor protection. To
the extent that such information asymmetries are not fully mitigated by
initial and ongoing Regulation A disclosure requirements, which are
generally less extensive than the disclosure requirements for
registered offerings, the prices of Regulation A securities of these
issuers could be less informationally efficient. Along the same lines,
we believe the specialized nature of capital formation and investment
strategies at BDCs warrants disclosures that are more specialized than
what is required by existing or amended Regulation A for a proper
understanding of an investment in the securities of these types of
issuers.
We also could have expanded the categories of eligible Regulation A
issuers to include issuers that are subject to the ongoing reporting
requirements of Section 13 or 15(d) of the Exchange Act (``reporting
companies''), as suggested by some commenters.\927\ Although reporting
companies sometimes conduct offerings exempt from registration, we are
unable to estimate the number of reporting companies that would use the
amended Regulation A exemption if it were made available to them. We
recognize that some reporting companies may have benefited from this
alternative due to, for example, the lower costs of preparation of a
Regulation A offering statement than a registration statement.\928\
Additionally, some reporting companies whose securities are not listed
on a national securities exchange could potentially benefit from
savings of time and dollar expenditures that may result from the state
securities law preemption in Tier 2 offerings. However, because
Exchange Act disclosure requirements for reporting companies are more
extensive than those under amended Regulation A, reporting companies
would not be able to derive the benefit of reduced ongoing reporting
costs under amended Regulation A. Other commenters suggested imposing
more restrictive issuer eligibility criteria, by excluding issuers that
are not ``operating companies'' \929\ or excluding shell companies and
issuers of penny stock.\930\ While these additional exclusions may
create some investor protection benefits, such additional exclusions
would be likely to limit capital formation and competition among small
issuers, which are more likely to fall into the penny stock
[[Page 21874]]
category, or some early-stage companies, which may not meet the
definition of an ``operating company.'' Overall, due to the
implications of extending issuer eligibility before the Commission has
the ability to assess the impact of the changes to Regulation A being
adopted today, we believe that it is prudent to defer consideration of
potential changes to the categories of eligible issuers until we have
the opportunity to observe the use of the amended Regulation A
exemption and assess any new market practices as they develop.
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\927\ Three commenters recommended allowing Exchange Act
reporting companies that are current in their reporting obligations
to conduct Tier 2 offerings. See Andreessen/Cowen Letter; BIO
Letter; OTC Markets Letter. One of these three commenters limited
its recommendation to companies with a non-affiliate float of less
than $250 million. See BIO Letter. The other two commenters further
commented that Exchange Act reporting should satisfy Regulation A
reporting obligations if the Commission adopted their
recommendation. See Andreessen/Cowen Letter and OTC Markets Letter.
\928\ According to one commenter, Form S-1 registration may be
too costly for micro-cap companies, and the eligibility requirements
of Form S-3 limit primary capital raising for issuers with a small
public float. See Andreessen/Cowen Letter. But see earlier
discussion of indirect costs of issuance for issuers using scaled
disclosures in Section III.B.1.b.
\929\ See CFIRA Letter 1 and WR Hambrecht + Co Letter.
\930\ See ABA BLS Letter and MoFo Letter.
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2. Eligible Securities
Consistent with the statute, the final rules apply to offerings of
equity securities, debt securities, and securities convertible or
exchangeable to equity interests, for example, warrants, including any
guarantees of such securities.\931\
---------------------------------------------------------------------------
\931\ See discussion in Section II.B.2 above.
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Similar to the proposal, the final rules exclude offerings of
asset-backed securities (``ABS'') from eligibility for Regulation A. As
discussed above, we believe that ABS issuers are not the intended
beneficiaries of the mandated expansion of Regulation A. ABS are
subject to the provisions of Regulation AB and other rules specifically
tailored to the offering process, disclosure and reporting requirements
for such securities, and we do not believe that Regulation A's
requirements are suitable for offerings of such securities. ABS are
designed to pool the risk of already-issued loans and other financial
assets and, in this respect, do not constitute new capital formation.
We recognize that, in certain cases, permitting ABS offerings to be
conducted under Regulation A could lower the cost of capital for
underlying borrowers whose loans are eventually securitized by ABS
issuers and therefore indirectly facilitate capital formation.\932\ In
practice, however, the vast majority of ABS offerings are much larger
than the maximum allowable offering size under amended Regulation
A.\933\ As a result, we believe that excluding ABS offerings from
eligibility for Regulation A likely will not have a significant adverse
effect on capital formation.
---------------------------------------------------------------------------
\932\ This indirect effect may result because, due to bank
accounting standards and capital requirements, securitization allows
originators to move assets off the balance sheet, freeing up capital
for additional loans. The resulting increase in capital available
for lending could lead to lower borrowing costs for all borrowers
down the capital supply chain. See Pennacchi, G., 1995, Loan sales
and the cost of bank capital, Journal of Finance 43(2), pp. 375-396;
Carlstrom, C., and K. Samolyk, 1995, Loan sales as a response to
market-based capital constraints, Journal of Banking and Finance
19(3), pp. 627-646.
\933\ Our analysis indicates that from 2011-2013, approximately
2.9% of ABS issuances were below $50 million. This estimate uses the
AB Alert and CM Alert databases and includes only private label ABS
deals.
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3. Offering Limitations and Secondary Sales
a. Offering Limitations
As explained above, the final rules introduce two tiers of
offerings compared with the baseline of one tier in existing Regulation
A. The tiered approach in the final rules allows us to scale regulatory
requirements based on offering size, to give issuers more flexibility
in raising capital under Regulation A, and to provide appropriately
tailored protections for investors in each tier. Issuers seeking to
raise a larger amount of capital are, among other things, required to
provide more extensive initial and ongoing disclosures, but are also
able to take advantage of the larger maximum offering size in Tier 2
(up to $50 million in a twelve-month period). In light of this larger
maximum offering size, the final rules impose additional disclosure
requirements and other provisions to provide protection to investors in
Tier 2 offerings. Issuers seeking a smaller amount of capital retain
the advantage of more scaled disclosures required in Tier 1 offerings
but must comply with a lower offering size limit.
We recognize that the cost associated with greater disclosure
requirements for offerings made under Tier 2 in amounts up to $20
million may place Tier 2 issuers at a relative competitive disadvantage
as compared to issuers seeking to raise an amount below $20 million in
a Tier 1 offering. Such potential competitive effects are likely to be
mitigated by the ability of issuers to evaluate the trade-off between
the costs associated with more extensive disclosure requirements for
Tier 2 offerings and the benefit of a potentially higher securities
valuation stemming from a reduction in information asymmetry between
issuers and investors due to the more extensive disclosure requirements
for Tier 2 offerings.
In a change from the proposal, and in line with the suggestions of
some commenters, the final rules raise the Tier 1 maximum offering size
from $5 million to $20 million in a twelve-month period in order to
provide smaller issuers with additional flexibility to meet their
financing needs.\934\ We expect the higher Tier 1 maximum offering size
will facilitate capital formation under Regulation A for those issuers
seeking to raise between $5 and $20 million in a twelve-month period.
We expect the resulting capital formation benefits to be greater for
smaller issuers for which the incremental costs of the Tier 2
disclosure regime--relative to the costs of complying with state
registration--exceed the benefits of more extensive disclosure.
---------------------------------------------------------------------------
\934\ Some commenters recommended raising the Tier 1 offering
limitation to $10 million or more. See Guzik Letter 1 and ICBA
Letter.
---------------------------------------------------------------------------
Compared to the baseline, the increase in the maximum offering size
to $20 million for Tier 1 offerings and the creation of Tier 2 with the
maximum offering size of $50 million will provide issuers with
increased flexibility with regard to their offering size and should
lower the burden of fixed costs associated with conducting Regulation A
offerings as a percentage of proceeds.\935\ This could make amended
Regulation A more cost effective and attractive to issuers than
existing Regulation A, resulting in potential favorable effects on
capital formation and competition. The increase in the maximum offering
size could also make Regulation A attractive to a broader range of
issuers, including larger issuers. This could provide investors with a
broader range of investment opportunities in the Regulation A market
and potentially result in a more efficient allocation of investor
capital.
---------------------------------------------------------------------------
\935\ To the extent that issuers in Tier 2 offerings face
additional costs due to revised disclosure requirements under
amended Regulation A, issuance costs as a percentage of proceeds may
remain unchanged or may increase.
---------------------------------------------------------------------------
The increased maximum offering size could also contribute to
improved liquidity for Regulation A securities, to the extent that
larger issues may encourage greater breadth of equity ownership,
assuming sufficient secondary market demand develops.\936\ Improved
liquidity would enable investors in Regulation A offerings to unwind
their investments more easily and at a lower cost, thus making such
investments more attractive to potential investors. On the other hand,
if investor demand for securities offered under amended Regulation A is
low, this could negatively affect security prices and liquidity.
---------------------------------------------------------------------------
\936\ We recognize the possibility that, despite the absence of
resale restrictions, even large Regulation A offerings with heavy
investor participation may fail to attain sufficient liquidity due
to a lack of secondary trading and a lack of breadth of
institutional ownership, and thus may be associated with a higher
cost of capital due to the illiquidity premium. In such a scenario,
some issuers and investors may still benefit from having access to a
type of offering that provides greater liquidity than Regulation D
securities offerings although less liquidity than registered
offerings of securities listed on major national exchanges.
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[[Page 21875]]
If investor demand for Regulation A securities and information
about issuers is sufficient, the increase in maximum offering size
could also contribute to the development of intermediation services,
such as market making, and to the coverage of Regulation A securities
by analysts.\937\ It is possible that an underwriting market may
develop to provide Regulation A offering services, especially in larger
Tier 2 offerings. The presence of these services could have a positive
impact on investor participation and aftermarket liquidity of
Regulation A securities, further increasing demand for such services.
It is also possible, however, that investor demand for Regulation A
securities will not expand sufficiently to make such services
economically feasible.
---------------------------------------------------------------------------
\937\ Academic studies show that firm size is an important
predictor of analyst coverage, so if larger issuers are attracted to
the Regulation A market, they may be more likely to be covered by
analysts than smaller issuers, all else equal. See Barth, M., R.
Kasznik, and M. McNichols, 2001, Analyst coverage and intangible
assets, Journal of Accounting Research 39(1), pp. 1-34.
---------------------------------------------------------------------------
Finally, the increase in the maximum offering size could result in
increased competition among Regulation A issuers for investor capital.
If the number of issuers seeking to raise larger amounts of capital
pursuant to Regulation A increases more than the size of the accredited
and non-accredited investor base, investors considering Regulation A
securities will have more choice of investment opportunities in the
Regulation A market, resulting in greater competition among issuers for
prospective investors. Increased competition, in turn, could result in
more efficient allocation of capital by investors. The intensity of
competition among issuers for investor capital may not change, however,
if issuers are able to attract additional numbers of accredited and
non-accredited investors as the Regulation A market develops.
Alternatively, as suggested by some commenters, we could have
increased the Tier 2 maximum offering size above $50 million, for
example, to $75 or $100 million.\938\ This alternative could result in
benefits that are similar to the benefits of the increase in the
maximum offering size contained in the final rules but of a potentially
larger magnitude. However, there is reason to believe that the
magnitude of the increase in such benefits may be limited. In
particular, although Rule 506 does not limit maximum offering size, few
Regulation D offerings by issuers that would be eligible for amended
Regulation A exceeded $50 million.\939\ To the extent that the current
use of other types of exempt offerings is indicative of future
Regulation A offerings, the alternative of raising the Tier 2 offering
size above $50 million may not lead to a significant increase in the
number of issuers.
---------------------------------------------------------------------------
\938\ See B. Riley Letter; Fallbrook Technologies Letter; OTC
Markets Letter; Public Startup Co. Letter 1; Richardson Patel
Letter.
\939\ Based on an analysis of Form D filings for 2014 by staff
from Commission's Division of Economic and Risk Analysis, less than
3% of Regulation D offerings by issuers that would be eligible for
amended Regulation A had offering size greater than $50 million.
We also considered the overall distribution of registered
offerings (initial public offerings and seasoned equity offerings).
The overall number of Regulation D offerings significantly exceeded
the number of registered equity offerings, thus the combined
distribution of registered and Regulation D offerings closely
resembles the distribution of Regulation D offerings. In 2014, most
(92.2%) of the offerings conducted in the form of registered equity
offerings or Regulation D offerings had offer sizes up to $50
million. In 2014, offerings in the $50-$75 million range accounted
for 1.0% of Regulation D offerings and approximately 10% of
registered equity offerings. Data on registered offerings was
obtained from Thomson Reuters, as described in Section III.B.1.b.
---------------------------------------------------------------------------
However, we recognize that historical use of Regulation D may not
fully represent future potential use of Regulation A, particularly to
the extent that the amended rules facilitate offerings by issuers that
do not currently rely on other private offering exemptions and that are
seeking a broader investor base and enhanced liquidity for their issued
securities. In particular, amended Regulation A may attract issuers
seeking a public ownership status, and for whom a likely alternative is
a registered offering. An increase in the Tier 2 offering size above
$50 million could result in some issuers shifting from conducting a
registered offering to conducting a Tier 2 offering. As discussed
earlier, amended Regulation A may facilitate offerings that would not
otherwise be conducted given the cost of registered offerings. However,
it is also possible that an increase in the Tier 2 offering size above
$50 million will not result in a significant number of issuers shifting
from conducting a registered offering to conducting a Tier 2 offering
given that the relative cost savings from a Tier 2 offering compared to
a registered offering may be lower for offerings in the $50 million to
$75 million range than for those below $50 million.\940\
---------------------------------------------------------------------------
\940\ The fixed costs of registered offerings represent a
significantly higher portion of offering proceeds as offering sizes
decrease. For instance, compliance related costs (registration,
legal and accounting expenses and fees) increase from an average of
an average of 1.7% for IPOs and 0.5% for SEOs in the $50-$75 million
range to an average of 2.9% for IPOs and 1.6% for SEOs in the below
$50 million range. Fee information is compiled from Thomson Reuters
SDC data for 1992-2014, excluding offerings from non-Canadian
foreign issuers, blank-check companies, and investment companies.
Average compliance fees and expenses for this calculation are based
on observations with non-missing data (where all four types of
fees--legal, accounting, blue sky, and registration fees, to which
we collectively refer as compliance fees--are separately reported).
Offerings with gross proceeds below $1,000 are excluded to minimize
measurement error.
---------------------------------------------------------------------------
An increased maximum offering size for Tier 1 offerings could
increase the overall amount of securities being offered to the general
public that are subject to less extensive initial disclosure
requirements and not subject to ongoing disclosure requirements, which
may reduce the ability of investors to make informed investment
decisions. However, some issuers that conduct offerings that are
eligible for Tier 1 may instead choose a Tier 2 offering, for example,
to take advantage of the benefits of more extensive disclosure, such as
potentially greater secondary market liquidity, and the benefits of a
single level of regulatory review.
An increased maximum offering size for Tier 2 Regulation A
offerings could increase the overall amount of securities being offered
to the general public that are subject to initial and ongoing
disclosure requirements that are less extensive than the requirements
for registered offerings being offered to the general public, which may
result in less informed decisions by investors, thus potentially
impacting investor protection. This may be partly mitigated by the
investment limitations imposed on non-accredited investors in Tier 2
offerings. Further, larger issuers are more likely to conduct
registered offerings, associated with the more extensive disclosure
requirements of the Exchange Act.\941\ We believe that the
[[Page 21876]]
annual offering limitation for Tier 2 will serve to limit the utility
of the Regulation A exemption for larger issuers and thus will make it
more likely that they will continue to raise money through registered
offerings and provide the corresponding disclosure.
---------------------------------------------------------------------------
\941\ Early in the firm's life cycle, it may be optimal for a
firm to remain private, but as it grows larger, it may become
optimal to conduct a registered IPO. See Chemmanur, Thomas J., and
Paolo Fulghieri, 1999, A theory of the going-public decision, Review
of Financial Studies 12(2), pp. 249-279. Privately held firms tend
to be significantly smaller than firms with publicly traded
securities. See Asker, John, Joan Farre-Mensa, and Alexander
Ljungqvist, 2014, Corporate investment and stock market listing: A
puzzle? Review of Financial Studies 28(2), pp. 342-390. Asker, John,
Joan Farre-Mensa, and Alexander Ljungqvist, 2011, What do private
firms look like? Data appendix, available at: http://ssrn.com/abstract_id=1659926. Other studies support the notion that larger
firms are more likely to conduct a registered IPO. See Pagano,
Marco, Fabio Panetta, and Luigi Zingales, 1998, Why do computers go
public? An empirical analysis, Journal of Finance 53, 27-64 (showing
that size predicts going public using Italian data). See also
Chemmanur, Thomas J., Shan He, and Debarshi K. Nandy, 2010, The
going-public decision and the product market, Review of Financial
Studies 23(5), pp. 1855-1908 (showing that size predicts a higher
likelihood of conducting a registered IPO using US data). In turn,
smaller firms that have undertaken an IPO in the past are more
likely to go private later on. See Mehran, Hamid, and Stavros
Peristiani, 2010, Financial visibility and the decision to go
private, Review of Financial Studies, 23(2), pp. 519-547.
---------------------------------------------------------------------------
b. Secondary Sales
The final rules continue to permit secondary sales as part of a
Regulation A offering, subject to the following conditions. The amount
of securities that selling securityholders can sell at the time of an
issuer's initial offering and within the following 12-month period may
not exceed 30% of the aggregate offering price (offering size) of a
particular offering. Following the expiration of the first 12-month
period after an issuer's initial qualification of an offering
statement, the amount of securities that affiliate securityholders can
sell in a Regulation A offering in any 12-month period will be limited
to $6 million in Tier 1 offerings and $15 million in Tier 2
offerings.\942\ After the initial 12-month period, sales by non-
affiliate securityholders made pursuant to the offering statement will
not be subject to a limit on secondary sales but will be aggregated
with sales by the issuer and affiliates for the purposes of compliance
with the maximum offering limitation for the respective tier. The final
rules also eliminate the provision in the current Rule 251(b), which
prohibits resales by affiliates unless the issuer has had net income
from continuing operations in at least one of the last two years.\943\
---------------------------------------------------------------------------
\942\ The dollar limits are broadly consistent with existing
Regulation A, which limits sales by existing securityholders to $1.5
million, or 30% of the $5 million maximum offering size, in a 12-
month period.
\943\ Tier 1 offerings may still be subject to state law
limitations on secondary sales and sales by affiliates.
---------------------------------------------------------------------------
Several commenters recommended eliminating limits on sales by
existing securityholders,\944\ including one commenter that recommended
eliminating restrictions on sales by non-affiliate securityholders
since concerns over information asymmetries between potential investors
and non-affiliate securityholders would be reduced.\945\ Other
commenters recommended either proscribing resales entirely \946\ or
requiring the approval of the resale offering by a majority of the
issuer's independent directors upon a finding that the offering is in
the best interests of both the selling securityholders and the
issuer.\947\ Another commenter recommended requiring a twelve-month
holding period for selling shareholders in order to distinguish between
investors seeking to invest in a business and investors simply seeking
to sell to the public for a gain or limiting securityholders not
qualifying for the twelve-month holding period to selling a fraction of
their shares, such as 50%.\948\
---------------------------------------------------------------------------
\944\ See ABA BLS Letter; B. Riley Letter; Canaccord Letter;
CFIRA Letter 1; CFIRA Letter 2; Milken Institute Letter; MoFo
Letter; WR Hambrecht + Co Letter.
\945\ See Milken Institute Letter.
\946\ See Massachusetts Letter 2; NASAA Letter 2; Carey Letter.
\947\ See NASAA Letter 2 (supporting the proposed limits coupled
with a board approval requirement in lieu of prohibiting resales
entirely) and WDFI Letter (not expressing a preference for
prohibiting resales entirely).
\948\ See MCS Letter.
---------------------------------------------------------------------------
Whether and to what extent securityholders should be permitted to
sell in a Regulation A offering involves a trade-off between enhancing
liquidity for selling securityholders and limiting the potential harm
to investors that could arise from such sales. The final rules attempt
to balance these considerations. The trade-off between these
countervailing considerations will depend in large part on whether the
selling securityholder is an affiliate of the issuer. There are two
concerns about sales by affiliates. One is that there is an information
asymmetry between an affiliate and outside investors. In particular, an
affiliate selling securityholder is likely to have an informational
advantage that it may potentially utilize to the detriment of outside
investors.\949\ The other concern is the alignment of incentives. With
respect to affiliates, it is often argued that the incentives of
company management are better aligned with other shareholders when
managers hold a significant equity interest in the company.\950\ Thus,
it can be important that insiders retain an ownership stake in the
company to ensure that their incentives are aligned.\951\ A divestiture
of the ownership stake of an affiliate owner may therefore exacerbate
agency conflicts, thus suggesting that large affiliate sales can be
detrimental to current and future investors.
---------------------------------------------------------------------------
\949\ See Easley, D., and M. O'Hara, 2004, Information and the
cost of capital, Journal of Finance 59(4), pp. 1553-1583. We note
that these potential effects may be limited to the extent that
purchasers are aware that they may be transacting with better
informed affiliates in the course of offerings with affiliate
securityholder sale disclosures, in which case these informational
asymmetries could be partially or fully reflected in lower security
prices and lower proceeds at the time of the offering.
\950\ See Jensen, M., and W. Meckling, 1976, Theory of the firm:
Managerial behavior, agency costs and ownership structure, Journal
of Financial Economics 3(4), pp. 305-360.
\951\ See Core, J., R. Holthausen, and D. Larcker, 1999,
Corporate governance, chief executive officer compensation, and firm
performance, Journal of Financial Economics 51(3), pp. 371-406;
Mehran, H., 1995, Executive compensation structure, ownership, and
firm performance, Journal of Financial Economics 38(2), pp. 163-184.
---------------------------------------------------------------------------
We recognize, however, that there are benefits to be realized from
permitting affiliate securityholders, such as company founders and
employees, to sell in a Regulation A offering. Because entrepreneurs
and other affiliates consider available exit options before
participating in a new venture, permitting secondary sales increases
their incentives to make the original investment, which may promote
innovation and business formation.\952\ Allowing exit could also
facilitate efficient reallocation of capital and talents of
entrepreneurs to new ventures.\953\ Additionally, exit of a large
affiliate shareholder could potentially result in a broader base of
investors.
---------------------------------------------------------------------------
\952\ See Cumming, D., and J. MacIntosh, 2003, Venture-capital
exits in Canada and the United States, University of Toronto Law
Journal 53(2), pp. 101-199.
\953\ See Zhang, J., 2011, The advantage of experienced start-up
founders in venture capital acquisition: Evidence from serial
entrepreneurs, Small Business Economics 36(2), pp. 187-208. See also
Gompers, P., A. Kovner, J. Lerner, and D. Scharfstein, 2006, Skill
vs. luck in entrepreneurship and venture capital: Evidence from
serial entrepreneurs, Working paper No. w12592, National Bureau of
Economic Research.
---------------------------------------------------------------------------
As noted above, the final rules relax the existing limitations on
secondary sales by affiliates by eliminating the net income test for
affiliate resales in existing Rule 251(b). We are concerned that this
criterion may not be the best measure of financial health and
investment opportunities for some issuers eligible for amended
Regulation A and thus may inappropriately disadvantage those issuers,
and their affiliates, with respect to secondary sales.\954\ In
particular, this change should benefit growth and R&D-intensive issuers
that may experience longer periods of negative revenues. Several
commenters supported the elimination of the net income test for
affiliate resales, generally noting that some issuers may have net
losses for several years, including due to high R&D costs.\955\ We
recognize that eliminating this criterion could lead to reduced
investor protection due to
[[Page 21877]]
insiders in Regulation A offerings being able to sell securities in
issuers that have not reported net income. However, we note that the
disclosures required for Regulation A offerings, as well as the overall
limits on secondary sales during the initial 12-month period and
subsequent limits on secondary sales by affiliates, should partly
mitigate this cost.
---------------------------------------------------------------------------
\954\ See Davila, A., and G. Foster, 2005, Management accounting
systems adoption decisions: Evidence and performance implications
from early-stage/startup companies, Accounting Review 80(4), pp.
1039-1068 (suggesting that standard accounting measures are often
poor indicators of financial health in small companies).
\955\ See ABA BLS Letter; B. Riley Letter; Canaccord Letter;
CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht +
Co Letter.
---------------------------------------------------------------------------
The trade-off between enhanced liquidity and investor protection is
different with respect to sales by non-affiliates, because these
securityholders are less likely to have access to inside information,
and their sales do not raise the incentive alignment concerns discussed
above in the context of affiliate securityholders. The option to exit
through a Regulation A offering provides additional liquidity to
existing non-affiliate securityholders. During the initial 12-month
period, the final rules enable selling securityholders to access
liquidity through a Regulation A offering while ensuring that secondary
sales at the time of such offerings are made in conjunction with new
capital raising by the issuer. After the expiration of the initial 12-
month period, the ability of non-affiliate securityholders to sell
securities pursuant to a qualified Regulation A offering statement
without limitation (except the maximum Regulation A offering size)
should make Regulation A securities more attractive to prospective
investors, which may encourage initial investment and increase capital
formation. Non-affiliate securityholders who hold restricted securities
purchased in reliance on another exemption will be able to sell them
freely after a one-year holding period. Purchasers of the securities
from such non-affiliate securityholders would not have the benefit of
the more robust disclosure provisions of a Regulation A offering, where
the seller will be subject to Section 12(a)(2) liability. Thus,
allowing secondary sales in a Regulation A offering will provide an
additional measure of protection for purchasers as compared to
transactions in the secondary market.\956\ Consequently, we believe
that removing restrictions on non-affiliate securityholder sales in
Regulation A offerings will not have an adverse effect on investor
protection.
---------------------------------------------------------------------------
\956\ See Securities Act Section 3(b)(2)(D) (expressly providing
for Section 12(a)(2) liability for any person offering or selling
Section 3(b)(2) securities).
---------------------------------------------------------------------------
Although secondary sales increase the liquidity for existing
securityholders, since secondary sales will be aggregated with issuer
sales for purposes of compliance with the maximum offering amount
permissible under the respective tiers, secondary sales may reduce the
maximum amount of issuer sales in a Regulation A offering. The 30%
limit on secondary sales imposed during the initial 12-month period
partly mitigates this potential effect.
4. Investment Limitation
Regulation A currently does not place limits on the amount of
securities that may be purchased by an investor. The proposed rules
included a 10% investment limit for all investors in Tier 2 offerings.
Several commenters recommended providing exceptions to the limit, or
altering the limit, for certain types of investors, such as accredited
investors,\957\ and for securities that will be listed on an exchange
upon qualification.\958\
---------------------------------------------------------------------------
\957\ See ABA BLS Letter; Andreessen/Cowen Letter; Canaccord
Letter; Cornell Clinic Letter; Fallbrook Technologies Letter;
Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter
& English Letter; MCS Letter; Milken Institute Letter; MoFo Letter;
Paul Hastings Letter; Richardson Patel Letter; SVB Letter; WR
Hambrecht + Co Letter.
\958\ See Milken Institute Letter.
---------------------------------------------------------------------------
We recognize that there are potential investor protection benefits
as well as costs from imposing investment limits in Regulation A
offerings. To help balance those benefits and costs, the final rules
seek to focus these limits on those investors who may be less likely to
be able to fend for themselves and sustain losses. Accordingly, non-
accredited investors in Tier 2 offerings will be limited to purchases
of no more than 10% of the greater of annual income or net worth (for
natural persons) or the greater of annual revenue or net assets (for
non-natural persons), as proposed.\959\ In a change from the proposal,
the final rules do not apply the investment limit to investors in Tier
2 offerings that are accredited investors as defined in Rule 501 of
Regulation D. We believe that accredited investors, due to their level
of income or net worth, are more likely to be able to withstand losses
from an undiversified exposure to an individual offering.
---------------------------------------------------------------------------
\959\ Annual income and net worth would be calculated for
individual purchasers as provided in the accredited investor
definition in Rule 501 of Regulation D. See 17 CFR 230.501.
---------------------------------------------------------------------------
We also recognize that there are costs associated with investment
limits. In particular, the investment limitation could limit potential
gains for non-accredited investors in Tier 2 offerings. The investment
limitation could require some issuers to solicit a greater number of
investors or to solicit additional accredited investors, which could
impose additional costs on those issuers or limit capital formation if
they are unable to attract additional investors.\960\ Despite these
costs, we believe that this limitation, as tailored in the final rules,
is an appropriate means of protecting investors while promoting
efficiency, competition and capital formation.
---------------------------------------------------------------------------
\960\ An issuer would, however, be able to conduct a Tier 1
offering, which does not impose investment limitations.
---------------------------------------------------------------------------
The investment limitation could also lead to a more dispersed non-
accredited investor base or a higher proportion of accredited investors
in the investor base to the extent that the 10% threshold impacts
investor participation. This could facilitate increased liquidity as
there would be more investors with which to trade. More diffuse
ownership could also exacerbate the shareholder collective action
problem and weaken external monitoring by non-affiliated shareholders
to the extent that coordination costs with other shareholders increase.
We do not believe, however, that either of these outcomes is a likely
consequence of the 10% investment limit.
In a change from the proposal, the final rules exclude sales of
securities that will be listed on a national securities exchange upon
qualification from Tier 2 investment limitations. This provision may
provide additional investment opportunities for some investors and may
enhance capital formation for some issuers. We do not anticipate that
this provision will reduce investor protection since such issuers will
be required to meet the listing standards of a national securities
exchange and become subject to ongoing Exchange Act reporting,
resulting in a high level of investor protection.
As an alternative to the final rules, we considered imposing more
restrictive investment limitations, as suggested by various comments,
including extending investment limitations to Tier 1 offerings,\961\
imposing a limit lower than 10% on ``all but the wealthiest, least risk
averse'' investors,\962\ or imposing a 10% investment limitation across
investments in all Regulation A offerings rather than applying the
limitation on a per offering basis.\963\ Applying the investment
limitation in Tier 1 offerings could marginally enhance investor
protection, especially since these offerings will be subject to less
extensive disclosure and transactional requirements. However, given
that Tier 1 offerings will remain
[[Page 21878]]
subject to state registration requirements, it is unclear whether
investment limits would significantly enhance investor protection in
these offerings.\964\ Moreover, adding the investment limitation in
Tier 1 offerings could have an adverse effect on capital formation for
the smallest Regulation A issuers, which may face greater hurdles than
larger issuers in attracting a broad investor base.
---------------------------------------------------------------------------
\961\ See CFA Institute Letter.
\962\ See CFA Letter.
\963\ See CFA Letter (not recommending this specifically, but
noting this as one reason why the investment limit was not an
adequate substitute for state review of Tier 2 offerings) and
Cornell Clinic Letter.
\964\ One commenter noted that the investment limitation is
unnecessary with appropriate state oversight. See NASAA Letter 2.
---------------------------------------------------------------------------
The alternative of imposing a cap that is lower than 10% on ``all
but the wealthiest, least risk averse'' investors may confer additional
investor protection benefits on investors that are unable to withstand
significant investment losses. However, this alternative could also
limit some investors from pursuing attractive investment opportunities
and limit capital formation for some issuers. Further, since risk
preferences vary considerably among investors, objectively identifying
``risk averse'' investors in a way that is broadly applicable is a
challenge. In contrast, the 10% investment limitation in the final
rules that applies to all investors in a Tier 2 offering, except
accredited investors, defined pursuant to Rule 501 of Regulation D,
provides a standard that market participants can easily implement.
The alternative of imposing the 10% investment limitation that is
aggregated across investments in all Regulation A offerings rather than
applying the limitation on a per offering basis may strengthen investor
protection. Because the risk profiles of different securities offerings
by the same issuer are likely to be correlated, and some issuers may
participate in multiple Regulation A offerings over time, such an
alternative definition of the limitation may prevent a non-accredited
investor from using a significant share (potentially, significantly in
excess of 10%) of their net worth or income to establish a highly
undiversified exposure to a single issuer. However, this alternative
could also limit some investors from pursuing attractive investment
opportunities and limit capital formation for issuers. Moreover,
different offerings by the same issuer under Regulation A may have
different risk profiles, depending on security type and class, thus for
some investors, depending on their preferences, investing a larger
aggregate amount in multiple offerings by the same issuer may be
optimal.
Overall, while such additional restrictions may strengthen investor
protection, their incremental contribution to investor protection may
be small in light of other provisions of amended Regulation A. At the
same time, such additional restrictions may prevent some investors from
taking advantage of potentially beneficial investment opportunities and
may limit the attractiveness of Regulation A to prospective issuers,
reducing capital formation and competition benefits.
The final rules permit issuers to rely on an investor's
representation that the investment represents no more than 10% of the
greater of the investor's net worth and annual income, unless the
issuer has knowledge that such representation is untrue. The ability to
rely on investor representations should help mitigate potential costs
that issuers could incur to comply with the investment limitation
provisions. At the same time, we realize that investors might make
inaccurate representations, whether intentionally or not, which could
expose these investors to increased losses.
As an alternative to investor representations, we could have
imposed additional requirements on the issuer to verify that investors
in Tier 2 offerings are compliant with the 10% investment limit, as
suggested by some commenters.\965\ Such additional provisions could
strengthen investor protections. At the same time, they would likely
result in a disproportionate increase in the cost of compliance,
especially for smaller issuers in Tier 2 offerings, and might deter
some investors from participating in such offerings due to the
potential burdens of the verification process and privacy concerns.
5. Integration
---------------------------------------------------------------------------
\965\ See Accredited Assurance Letter; CFA Letter; CFA Institute
Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter.
---------------------------------------------------------------------------
The final rules provide issuers with a safe harbor from integration
that, with the exception of the addition of security-based crowdfunding
transactions conducted pursuant to Section 4(a)(6) of the Securities
Act, preserves the provisions of existing Regulation A.
We believe that the final rules provide issuers with valuable
certainty as to the contours of offerings conducted before, or close in
time with, Regulation A offerings. This certainty may be particularly
beneficial for smaller issuers whose capital needs, and thus preferred
capital raising methods, may change frequently.
As an alternative, we could have eliminated the integration safe
harbor. We believe that the elimination of the safe harbor, however,
would inject uncertainty into offerings conducted before, or close in
time with, Regulation A offerings and would, in turn, decrease the
utility of the exemption. Uncertainty as to the contours of offerings,
as they relate to Regulation A, could possibly cause issuers to prefer
other offering methods to Regulation A, which may have an effect on
investor protection. For example, if issuers rely more on Regulation D,
this alternative could result in investors receiving less information
about an issuer before making an investment, thereby reducing investor
protection. Instead, if issuers rely more on registered offerings, this
alternative could potentially provide investors with the more extensive
disclosure required of, and liability protections associated with, such
offerings, although it would cause smaller issuers to incur the higher
initial and ongoing costs associated with such offerings.
6. Treatment Under Section 12(g)
Existing rules currently do not exempt Regulation A securities from
the requirements of Section 12(g), but the Proposing Release requested
comment on whether we should adopt such an exemption. A number of
commenters recommended exempting Regulation A securities from Section
12(g) of the Exchange Act,\966\ and several commenters recommended
changing or delaying the application of Section 12(g).\967\ In a change
from the proposed rules, the final rules exempt securities issued in a
Tier 2 offering from the provisions of Section 12(g) for so long as the
issuer remains subject to, and is current in, its periodic Regulation A
reporting obligations as of its fiscal year end,\968\ engages the
services of a transfer agent registered with the Commission pursuant to
Section 17A of the Exchange Act, and had a public float of less than
$75 million as of the last business day of its most recently completed
semiannual period, or, in the absence of a public float, had annual
revenues of less than $50 million as of
[[Page 21879]]
its most recently completed fiscal year.\969\
---------------------------------------------------------------------------
\966\ See B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2;
Fallbrook Technologies Letter; Frutkin Law Letter; Guzik Letter 1
and Letter 3; Heritage Letter; IPA Letter; Ladd Letter 2; Milken
Institute Letter; MoFo Letter; SBIA Letter (recommending that the
trigger be ``raised or remedied,'' but not explicitly calling for
elimination); U.S. Chamber of Commerce Letter; WR Hambrecht + Co
Letter.
\967\ See Heritage Letter; KVCF; McCarter & English Letter;
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA
Letter.
\968\ See Rule 12g5-1(a)(7).
\969\ Id.
---------------------------------------------------------------------------
The final rules are intended to provide sufficient disclosure to
help investors make informed decisions while limiting the costs imposed
on issuers. We believe that the initial and ongoing disclosures
required for Tier 2 offerings in the final rules accomplish this
objective and that the final rules also provide an appropriate balance
between providing investor protection and promoting capital formation.
The size of Tier 2 offerings, combined with the investment limitation
and the ability to offer Tier 2 securities to the general public, may
result in the number of an issuer's shareholders of record exceeding
Section 12(g) thresholds. A conditional Section 12(g) exemption for
small issuers of Tier 2 securities in such instances is expected to
reduce the compliance cost for small issuers and facilitate capital
formation and the creation of a broad investor base in offerings made
pursuant to Regulation A by small Tier 2 issuers. This will benefit
those small Regulation A issuers that are not seeking to list on a
national securities exchange \970\ and that may find the costs of
Exchange Act reporting to be too high given their size.
---------------------------------------------------------------------------
\970\ Issuers seeking to list on a national securities exchange
will be required to register with the Commission under Section
12(b).
---------------------------------------------------------------------------
Regulation A offerings may be particularly attractive to small
private companies whose shareholder bases are approaching the Section
12(g) registration threshold. The conditional Section 12(g) exemption
may enable small private issuers of Tier 2 securities under amended
Regulation A to expand their shareholder base over time, as a result of
secondary market trading, to the extent that such a market develops, or
through subsequent security issuances, without incurring the costs
associated with reporting company status.\971\
---------------------------------------------------------------------------
\971\ See IPO Task Force. Based on two surveys, regulatory
compliance costs of IPOs average $2.5 million initially, followed by
an ongoing cost of $1.5 million per year.
---------------------------------------------------------------------------
While the additional requirement to use a registered transfer agent
will impose costs on issuers,\972\ it should provide investor
protection benefits by helping to ensure that securityholder records
and secondary trades will be handled accurately. As it is a conditional
exemption from Section 12(g), however, issuers that are not concerned
with registration under the Exchange Act, perhaps because they do not
believe that Exchange Act registration will be required as a result of
a Regulation A offering, would not be required to retain the services
of a registered transfer agent in order to conduct a Tier 2 offering.
---------------------------------------------------------------------------
\972\ We lack the information to provide a precise quantitative
estimate of transfer agent costs for Tier 2 issuers. However, we
have some sources of information about transfer agent costs in
analogous contexts.
According to the Securities Transfer Association (STA), the
registered transfer agent industry is highly competitive and many of
its members can develop business models that will suit the needs of
small issuers and at the same time provide adequate protection to
investors. The STA further noted that it did not anticipate most
small issuers to require some of the services, such as the
processing of dividends, that raise the cost of recordkeeping
services. See STA letter on JOBS Act regulatory initiatives,
available at: http://www.sec.gov/comments/jobs-title-i/general/general-207.pdf. STA estimated that monthly transfer agent fees
would be $75[hyphen]$300 for security-based crowdfunding issuers,
which translates into annual fees of $900-$3600. See STA letter on
proposed crowdfunding rules, available at: http://www.sec.gov/comments/s7-09-13/s70913-96.pdf. In 2014, average transfer agent and
registrar fees amounted to approximately $9,000 in registered IPOs
with offering sizes below $50 million, based on Thomson Reuters SDC
data, excluding offerings from non-Canadian foreign issuers, blank-
check companies, and investment companies. Offerings with proceeds
below $1,000 are excluded to minimize measurement error. While
estimates for security-based crowdfunding issuers are likely to
underestimate the cost for a typical Tier 2 issuer, estimates for
IPOs are likely to overestimate the cost of transfer agent services
for a typical Tier 2 issuer. Costs of transfer agent services for a
typical Tier 2 issuer may be in the range between the two sets of
estimates.
---------------------------------------------------------------------------
The final rules also include an issuer size limit in the
eligibility requirements for the Section 12(g) exemption for Tier 2
offerings, consistent with providing a conditional exemption tailored
to facilitate small company capital formation. The issuer size limit
may make Regulation A less attractive for larger issuers and issuers
anticipating growth or capital appreciation that expect to reach
Section 12(g) thresholds after conducting a Tier 2 offering or
subsequent secondary market trading. The two-year transition period
before reporting must begin may partly mitigate some of these costs to
issuers. Due to the uncertainty about the future composition of the
issuer and investor base in Tier 2 offerings, we cannot determine the
proportion of Tier 2 issuers whose number of shareholders of record
will exceed Section 12(g) thresholds or the proportion of those issuers
that will not qualify for an exemption due to their size.\973\
---------------------------------------------------------------------------
\973\ Based on the analysis by the staff of Division of Economic
and Risk Analysis of 2013 data on registrants under Section 12(g),
excluding issuers with a class of securities registered under
Section 12(b), approximately three-quarters of Section 12(g)
registrants would have been below the issuer size limit (defined
similarly to smaller reporting company (SRC) criteria). These
figures may not be representative of the proportion of issuers that
would be below the issuer size limit among future Regulation A
issuers that would potentially exceed Section 12(g) thresholds for
the number of shareholders of record.
---------------------------------------------------------------------------
Some issuers may be able to limit the number of shareholders of
record by adopting a minimum investment size requirement. This may
potentially limit the breadth of investor base and the availability of
investment opportunities to some investors. We are not able to
determine the extent to which the issuer size limit may affect overall
capital formation and whether large or growth issuers will proceed with
a Tier 2 offering or pursue a registered offering, a Regulation D
offering or another method of financing. In addition, the issuer size
limit may place at a competitive disadvantage those potential issuers
that exceed the size limit but for which the costs of registration
remain high, relative to potential issuers that are close to the size
limit but that qualify for the Section 12(g) conditional exemption.
We recognize that there are costs associated with the conditional
exemption adopted today. Under this exemption, some issuers in Tier 2
offerings with a large number of shareholders could avoid--potentially
indefinitely--the comprehensive disclosure requirements of the Exchange
Act, which may decrease the informational efficiency of prices and
potentially result in less informed investment decisions by a larger
number of investors than in the absence of a conditional Section 12(g)
exemption. The issuer size limit partly mitigates this concern. For the
same reasons, however, the inclusion of a conditional exemption from
Section 12(g) may entice small issuers that would have otherwise
generally preferred to raise capital in private offerings to enter the
public markets through a Tier 2 offering pursuant to Regulation A.\974\
In this regard, the conditional exemption could increase the
availability of information about companies that would otherwise remain
relatively obscure in the private markets. On balance, we believe that
provisions such as the initial and periodic disclosure requirements and
the investment limit in Tier 2 offerings appropriately balance investor
protections and issuer compliance costs while facilitating the creation
of a broad investor base in Tier 2 offerings for small issuers.
---------------------------------------------------------------------------
\974\ For example, issuers may be more willing to raise capital
publicly and become subject to some ongoing reporting requirements
if such requirements are less costly to the issuer than the costs
generally associated with the ongoing reporting requirements of the
Exchange Act.
---------------------------------------------------------------------------
We have considered the alternative of providing a conditional
exemption from Section 12(g) registration that does not
[[Page 21880]]
incorporate an issuer size limitation. Such an alternative would enable
a broader class of potential Tier 2 issuers to remain exempt from
Exchange Act registration. Larger Regulation A issuers could generate a
more vibrant OTC trading market, providing enhanced liquidity to those
issuers that may not otherwise be of sufficient size to make listing on
a national market exchange cost-effective. Providing an exemption from
Section 12(g) could provide incentive for these larger issuers to
broaden their investor base while still providing the ongoing
disclosure of the Tier 2 reporting regime. This could result in
potentially beneficial effects on capital formation, competition, and
informational efficiency of prices. However, such an alternative would
potentially create a class of securities permanently exempt from
Exchange Act registration regardless of issuer size and thus subject to
less extensive disclosure requirements than public reporting companies,
which may affect investor protection.
D. Offering Statement
1. Electronic Filing and Delivery
The final rules preserve the current three-part structure of Form
1-A but make various revisions and updates to the form to streamline
the information included in the form. Since most of this information is
already contained in other offering materials, the additional reporting
burden in Part I of the Form 1-A should not entail significantly higher
costs in terms of time or out-of-pocket expenses.\975\
---------------------------------------------------------------------------
\975\ For the purposes of the Paperwork Reduction Act (``PRA''),
we estimate that compliance with the requirements of amended Form 1-
A will result in a burden of approximately 750 hours per response
(compared to the current burden associated with Form 1-A of 608
hours per response). We estimate that compliance with the
requirements of amended Form 1-A will result in an aggregate annual
burden of 140,625 hours of in-house personnel time and an aggregate
annual cost of $18,750,000 for the services of outside
professionals. See Section IV below.
---------------------------------------------------------------------------
Under existing Regulation A, offering materials are submitted to
the Commission in paper form. The final rules require electronic
submission of offering materials. Electronic submission is expected to
offer benefits to issuers and investors. Paper documents are difficult
to process both for the Commission and for investors. Electronic filing
is therefore expected to reduce processing delays and costs associated
with the current paper filing system, improve the overall efficiency of
the filing process for issuers, benefit investors by providing them
with faster access to the offering statement, and allow offering
materials to be more easily accessed and analyzed by regulators and
analysts.
We anticipate that electronic access to offering materials may
promote the informational efficiency of prices of Regulation A
securities.\976\ Evidence, obtained from the adoption of EDGAR for 10-K
filings by reporting companies, suggests that the use of EDGAR has
favorably affected small investors.\977\ Moreover, the adoption of XML
format for Part I of Form 1-A, which captures key information about the
issuer and the offering, should allow more efficient access to
information and more systematic tracking of offering details by
investors, analysts, other market participants and regulators. The XML
format for Part I will provide a convenient and efficient means of
gathering information from issuers and transmitting it to EDGAR.\978\
---------------------------------------------------------------------------
\976\ In the case of reporting companies, one study found that
EDGAR e-filing was associated with an increase in the speed with
which information was incorporated into share prices (thus,
increased informational efficiency of prices) and presented evidence
of a larger market reaction to 10-K and 10-Q filings in the EDGAR
period relative to the pre-EDGAR period. See Griffin, P., 2003, Got
information? Investor response to Form 10-K and Form 10-Q EDGAR
filings, Review of Accounting Studies 8(4), pp. 433-460.
\977\ One study has examined the effect of the switch to EDGAR
filing for annual reports on Form 10-K on small versus large
investors. See Asthana, S., S. Balsam, and S. Sankaraguruswam, 2004,
Differential response of small versus large investors to 10-K
filings on EDGAR, Accounting Review 79(3), pp. 571-589.
\978\ See Part I (Notification) of Form 1-A. As discussed more
fully in Section II.C.3.a., the cover page and Part I of current
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
---------------------------------------------------------------------------
At the same time, we recognize that an electronic filing
requirement may impose compliance costs on issuers, particularly,
issuers that have not previously used the EDGAR system, which include
filing Form ID (the application form for access codes to permit EDGAR
filing) \979\ and converting filings into EDGAR format. Some of these
compliance burdens will be mitigated by the savings of printing and
mailing costs.
---------------------------------------------------------------------------
\979\ For purposes of the PRA, Form ID is estimated to result in
0.15 burden hours per form, for an additional aggregate annual
burden due to the rule amendments of 28.20 hours of in-house
personnel time. See Section IV.
---------------------------------------------------------------------------
Some commenters have expressed investor protection concerns in
relation to the access equals delivery model (discussed in Section
II.C.1) arising from the perceived challenge of finding these materials
on EDGAR and not requiring delivery 48 hours in advance of sale in all
circumstances.\980\ As discussed above, we do not believe that access
to EDGAR generally has proven to be a challenge for investors in
registered offerings since the adoption of Securities Offering Reform
in 2005, nor do we believe that it will be a challenge for investors
under Regulation A or raise investor protection concerns, particularly
in light of our final delivery requirements (including, where
applicable, the inclusion of hyperlinks to offering materials on EDGAR
that must be provided to investors by issuers and intermediaries).
Additionally, given that the final offering circular delivery
obligations generally affect investors only after they have made their
investment decisions and that, taking into account advancements in
technology and expanded use of the Internet, investors will have access
to the final offering circular upon its filing, we believe that using a
means other than physical delivery to satisfy the final offering
circular delivery obligation will not have an adverse effect on
investor protection. Overall, we believe that there will be benefits to
issuers of streamlining delivery requirements for the final offering
circular, consistent with similar updates to delivery requirements for
registered offerings.\981\
---------------------------------------------------------------------------
\980\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
\981\ See Securities Offering Reform, Rel. No. 33-8591.
---------------------------------------------------------------------------
2. Disclosure Format and Content
Under the existing Regulation A, issuers can choose among three
models for providing narrative disclosure in Part II of the offering
statement: Model A, Model B, and Part I of Form S-1. Similar to the
proposal, the final rules eliminate Model A but preserve Model B, with
certain changes to the contents, and Part I of Form S-1.\982\
---------------------------------------------------------------------------
\982\ See Section II.C.3.b for a more detailed description.
---------------------------------------------------------------------------
We believe that eliminating Model A, which uses a question-and-
answer format, may benefit investors by avoiding possible confusion
that could result from the lack of uniformity of information presented
in the question-and-answer format. Several commenters disagreed with
the elimination of the Model A format, recommending that an updated
version of the Model A disclosure format be retained.\983\ The Model A
format may be easier to understand for non-accredited investors, who
may lack the sophistication to analyze information presented in
alternative disclosure formats. Compared to other formats, the Model A
format might also result in lower costs of initial preparation of the
offering statement, including, in some instances,
[[Page 21881]]
lessen the need to retain outside securities counsel.\984\ While a
question-and-answer format may lower the cost of initial preparation,
it often requires more substantive revisions after filing and before
qualification, in order for the disclosure to sufficiently address the
form requirements. We believe that most of the benefits associated with
the lower cost of initial preparation are negated subsequently during
the qualification process. Consequently, we are not persuaded that
there are sufficient benefits to retaining the Model A format.
---------------------------------------------------------------------------
\983\ See BIO Letter; Karr Tuttle Letter; NASAA Letter 2;
Verrill Dana Letter 1; WDFI Letter.
\984\ See Karr Tuttle Letter and WDFI Letter. The Karr Tuttle
Letter also refers to the experience of issuers in Rule 504
offerings, indicating that NASAA's Form U-7, upon which Model A is
based, has proved convenient for issuers in Rule 504 offerings
qualified by states without the use of securities counsel.
---------------------------------------------------------------------------
The changes to Model B include updated disclosure requirements,
including a new section containing management discussion and analysis
of the issuer's liquidity, capital resources and business operations.
While these updates may impose costs on the issuer, they are expected
to increase investor protection and informational efficiency of prices
by providing important information to investors. The updated disclosure
requirements are, however, generally designed to assist issuers with
more guidance as to the required disclosures that, while they may
increase the cost to issuers associated with the initial preparation of
the offering circular, should lower the overall cost of, and time to,
qualification, when the process is considered in its entirety. Overall,
we believe that the availability of two alternative disclosure
formats--a revised Model B format and Part I of Form S-1--provides
sufficient flexibility to issuers in choosing their disclosure format
while preserving the benefits of disclosure of relevant information to
prospective investors.
Some commenters suggested eliminating all three disclosure formats
and instead creating a new disclosure format similar to Part I of Form
S-1 that would reference Regulation S-K requirements (with reduced
disclosure requirements in some instances).\985\ Another commenter
recommended reducing the disclosure requirements for offerings of $2
million or less,\986\ while another suggested increasing disclosure
requirements as an issuer grows in size and complexity.\987\ We
recognize that scaling the disclosure requirements for Form 1-A, as
suggested by commenters, could ease compliance costs for Regulation A
issuers. However, additional scaling of disclosure requirements within
tiers may reduce the comparability of disclosures within the same tier
and result in pricing inefficiencies.
---------------------------------------------------------------------------
\985\ See Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd
Letter 2; McCarter & English Letter; WR Hambrecht + Co Letter.
\986\ See Campbell Letter.
\987\ See SVB Letter.
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3. Audited Financial Statements
The final rules require issuers conducting Tier 2 offerings to
include audited financial statements in their offering materials.
Audited financial statements should provide investors in Tier 2
offerings with greater confidence in the accuracy and quality of the
financial statements of issuers seeking to raise larger amounts of
capital. This, in turn, could benefit issuers by lowering the cost of
capital or increasing the amount of capital supplied by investors.
We recognize that audited financial statements could also entail
significant costs to issuers, and that the costs of an audit could
discourage the use of Tier 2 offerings. Based on data from registered
IPOs below $50 million in 2014 by issuers that would have been
potentially eligible for amended Regulation A, average total accounting
fees amounted to 1.65% of gross offering proceeds, where reported
separately.\988\
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\988\ This estimate is based on Thomson Reuters SDC data on IPOs
with issue dates in 2014, excluding offerings from non-Canadian
foreign issuers, blank check companies, and investment companies.
Offerings with proceeds below $1,000 are excluded to minimize
measurement error. Issuers of interests in claims on natural
resources, which also would not be eligible for amended Regulation
A, were not separately eliminated due to data constraints.
Accounting fees include the cost of preparing accounting statements,
in addition to the cost of an audit. We also note that costs
incurred by issuers in registered IPOs may not be representative of
costs incurred by issuers in Tier 2 offerings. We lack the
information to provide a quantitative estimate of audit costs that
would be incurred by Regulation A issuers in Tier 2 offerings.
---------------------------------------------------------------------------
The final rules require issuers in Tier 2 offerings to include
audited financial statements in their offering circulars that are
audited in accordance with either the auditing standards of the
American Institute of Certified Public Accountants (AICPA) (referred to
as U.S. Generally Accepted Auditing Standards or GAAS) or the standards
of the Public Company Accounting Oversight Board (PCAOB), as suggested
by some commenters.\989\ We expect this provision in the final rules to
provide issuers with flexibility that may help contain issuer
compliance costs, compared to requiring financial statements that are
audited in accordance with the standards of the PCAOB. As noted
above,\990\ because AICPA rules would require an audit of a Regulation
A issuer conducted in accordance with PCAOB standards to also comply
with U.S. GAAS, an issuer who includes financial statements audited in
accordance with PCAOB standards will likely incur additional
incremental costs compared with an issuer who includes financial
statements audited only in accordance with U.S. GAAS. However, we
assume that an issuer would only elect to comply with both sets of
auditing standards because it has concluded that the benefits of doing
so (for example, to facilitate Exchange Act registration) justify these
additional incremental costs.
---------------------------------------------------------------------------
\989\ See ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
\990\ See Section II.C.3.
---------------------------------------------------------------------------
As an alternative, we could have not required the audited financial
statements until after the first year of operation as a ``public
startup company'' or indefinitely for issuers that are pre-revenue or
that have paid-in capital, assets and revenues below a modest
threshold, as suggested by commenters.\991\ While this alternative may
decrease issuer compliance costs, it may also lower the accuracy of
information provided to investors in Tier 2 offerings, resulting in
reduced investor protection. The large offering limit in Tier 2
offerings may make some of the fixed costs of an audit relatively less
burdensome. In addition, we note that smaller issuers may opt to forgo
the cost of an audit and elect a Tier 1 offering or a Regulation D
offering, which does not require audited financial statements.
---------------------------------------------------------------------------
\991\ See Public Startup Co. Letter 3 (also suggesting three
tiers, where at least the first two would not require this) and
Public Startup Co. Letter 11.
---------------------------------------------------------------------------
On the other hand, other commenters advised the Commission to
require audited financial statements for Tier 1 offerings.\992\ While
we acknowledge that requiring audited statements is likely to result in
stronger investor protections due to reduced likelihood of fraudulent
financial statements being presented, this alternative would likely
place a relatively greater burden on smaller issuers due to the fixed-
cost nature of some of the audit costs. Also, given the relatively low
maximum offering size for Tier 1, this could result in Tier 1 offerings
becoming not cost-effective.
---------------------------------------------------------------------------
\992\ See Guzik Letter 1 and Milken Institute Letter.
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4. Other Accounting Requirements
The final rules permit Canadian issuers to prepare financial
statements in accordance with either U.S. GAAP or International
Financial Reporting
[[Page 21882]]
Standards (IFRS) as issued by the International Accounting Standards
Board (IASB). This is expected to benefit Canadian issuers that
currently use IFRS as issued by the IASB by helping such issuers
contain compliance costs associated with Regulation A offerings,
compared to requiring Canadian issuers to prepare financial statements
in accordance with U.S. GAAP. Several commenters specifically supported
allowing Canadian issuers to prepare their financial statements in
accordance with IFRS as issued by the IASB.\993\
---------------------------------------------------------------------------
\993\ See ABA BLS Letter; Canaccord Letter; NASAA Letter 2; MoFo
Letter; PwC Letter.
---------------------------------------------------------------------------
5. Continuous and Delayed Offerings
The final rules explicitly allow for continuous or delayed
offerings.\994\ As a result, it is now clear that eligible issuers have
greater flexibility to select the timing of their offerings. Such
flexibility is expected to benefit issuers by allowing them to adjust
their capital raising based on macro-economic factors or company
conditions.\995\ These factors should facilitate financing decisions
and capital market efficiency. For example, existing research on Rule
415 offerings in the registered offering market shows that costs of
intermediation in shelf offerings, and consequently the cost of raising
equity through shelf registration, are lower than through traditional
registration.\996\ The final rules condition the ability to sell
securities in a continuous or delayed Tier 2 offering on being current
with ongoing reporting requirements at the time of sale. This should
not impose incremental costs on eligible issuers as they already file
periodic updates and amendments.
---------------------------------------------------------------------------
\994\ Existing Regulation A allows for continuous or delayed
offerings to the extent permitted by Rule 415. Since Rule 415 only
discusses ``registered offerings,'' the reference to it may have
caused confusion as to the scope of its application in Regulation A
offerings.
\995\ See Bayless, M., and S. Chaplinsky, 1996, Is there a
window of opportunity for seasoned equity issuance? Journal of
Finance 51(1), pp. 253-278.
\996\ See Bethel, J., and L. Krigman, 2008, Managing the cost of
issuing common equity: The role of registration choice, Quarterly
Journal of Finance and Accounting 47(4), pp. 57-85. We recognize
that the evidence based on registered offerings may not be
indicative of the effects on Regulation A offerings.
---------------------------------------------------------------------------
The final rules restrict all ``at the market'' secondary offerings.
Existing Regulation A prohibited primary ``at the market'' offerings,
but did not necessarily restrict such offerings by selling
securityholders. Some commenters suggested allowing such offerings,
including primary offerings by the issuer.\997\ We recognize that not
allowing secondary ``at the market'' offerings may limit flexibility
for those issuers that are uncertain about the offering price that will
attract sufficient investor demand. However, the benefit of the new
restriction as it applies to secondary sales is that it helps ensure
that issuers do not lose their Regulation A exemption due to
unanticipated market factors by inadvertently offering securities in an
amount that exceeds the offering limitation. Future offerings made in
reliance on the final rules may provide more information to determine
whether a robust market capable of supporting ``at the market''
offerings develops and whether the Regulation A exemption could be an
appropriate method for such offerings in the future.
---------------------------------------------------------------------------
\997\ See OTC Markets Letter and Paul Hastings Letter.
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6. Nonpublic Review of Draft Offering Statements
Under the final rules, issuers whose securities have not been
previously sold pursuant to a qualified offering statement under
Regulation A or an effective registration statement under the
Securities Act will be permitted to submit to the Commission a draft
offering statement for non-public review, so long as all such documents
are publicly filed not later than 21 calendar days before
qualification. The option of non-public submission of a draft offering
statement is expected to reduce the barriers to entry for issuers using
Regulation A. In this regard, a potential issuer could reduce the
amount of time between disclosing possibly sensitive information to its
competitors in its offering statement and the related sale of its
securities. Furthermore, companies that are tentative about conducting
an offering could start the qualification process and then abandon the
offering any time before the initial public filing without receiving
the related stigma in the market. To the extent that this accommodation
lowers the barriers to entry, it may encourage capital formation and
competition. Moreover, we do not believe that the option of draft
offering statement submission will significantly affect investor
protection. Disclosure requirements are unchanged for issuers that
elect the option of non-public submission of draft offering statement.
The initial non-public statement, all non-public statement amendments,
and all correspondence with Commission staff regarding such submissions
must be publicly filed and available on EDGAR as exhibits to the
offering statement not less than 21 calendar days before qualification
of the offering statement.
E. Solicitation of Interest (``Testing the Waters'')
Under existing Regulation A, testing the waters is permitted only
until the offering statement is filed with the Commission, and
solicitation material is required to be filed prior to or concurrent
with first use. The final rules permit issuers to test the waters and
use solicitation materials both before and after the offering statement
is filed, subject to issuer compliance with the rules on filing
information and disclaimers.\998\ Under the final rules, testing the
waters materials will be required to be included as an exhibit to the
offering statement at the time of initial submission or filing with the
Commission, and updated thereafter.
---------------------------------------------------------------------------
\998\ As noted in Section II.H.3. above, some state securities
laws may impose limitations on the use of testing the waters by Tier
1 issuers.
---------------------------------------------------------------------------
In general, allowing issuers to gauge interest through expanded
testing the waters will reduce uncertainty about whether an offering
could be completed successfully. Allowing solicitation prior to filing
enables issuers to determine market interest in their securities before
incurring the costs of preparing and filing an offering statement. If
after testing the waters, the issuer is not confident that it will
attract sufficient investor interest, the issuer can consider alternate
methods of raising capital and thereby avoid the costs of an
unsubscribed or under-subscribed offering. Allowing testing the waters
at any time prior to qualification of the offering statement, rather
than only prior to filing of the offering statement with the
Commission, may increase the likelihood that the issuer will raise the
desired amount of capital. This option may be useful for smaller
issuers, especially early-stage issuers, first-time issuers, issuers in
lines of business characterized by a considerable degree of
uncertainty, and other issuers with a high degree of information
asymmetry. This provision may attract certain issuers--those that may
be uncertain about the prospects of raising investor capital--to
consider using amended Regulation A when they might not otherwise, thus
potentially promoting competition for investor capital as well as
capital formation in the Regulation A market.
Expanding the permissible use of testing the waters communications
could also increase the type and extent of information available to
investors, which could lead to more efficient prices for the offered
securities. The final rules permit testing the waters for an expanded
period of time compared to the baseline. As a result, it may be easier
[[Page 21883]]
for investors to become aware of a larger and more diverse set of
investment opportunities in private offerings, which may allow these
investors to more efficiently allocate their capital. The net effect
could be to enhance both capital formation and allocative efficiency.
Further, requiring issuers using testing the waters solicitations after
the offering statement is publicly filed to provide the offering
statement with the testing the waters materials (or provide information
about where it can be accessed), and to update it and redistribute
updates in the event of material changes, will allow investors to make
informed investment decisions.
We recognize that there may also be potential costs associated with
expanding the use of testing the waters communications. If the contents
of the offering circular differ substantively from the material
distributed through testing the waters communications, and if investors
rely on testing the waters materials, this may lead investors to make
less informed investment decisions. Some commenters were concerned that
the expanded use of permissible testing the waters may facilitate
misleading statements to investors and may lead to a heightened risk of
fraud.\999\ We believe, however, that this potential investor
protection concern is mitigated by the application of Section 12(a)(2)
liability to Regulation A offerings and the general anti-fraud
provisions of the federal securities laws.
---------------------------------------------------------------------------
\999\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------
We considered the alternative, suggested by some commenters,\1000\
of requiring submission and review of testing the waters materials
before or concurrent with first use, rather than at the time the
offering statement is submitted for non-public review or filed, which
could aid regulators in detecting fraudulent solicitation of interest
communications, potentially resulting in investor protection benefits.
However, requiring initial submission and review of testing the waters
materials prior to their use could dissuade issuers, particularly
smaller or less experienced issuers, from engaging in testing the
waters communications, thereby undermining many of the benefits of
permitting such communications discussed above.
---------------------------------------------------------------------------
\1000\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------
We also considered the views of other commenters who suggested we
relax some of the proposed requirements for the use of testing the
waters. For example, we could have treated the solicitation materials
as non-public when filed with the Commission, at least until the
offering statement is qualified,\1001\ or removed the requirement for
public filing of solicitation materials for all Regulation A offerings
or for Tier 2 offerings.\1002\ Issuers that have elected to use testing
the waters communications have already incurred the cost of preparing
the materials, so the incremental direct cost of the requirement to
file the materials with the Commission will be low. We recognize that
permitting issuers to file the solicitation materials non-publicly with
the Commission could reduce the indirect costs of some issuers by
limiting the ability of the issuer's competitors to discover
information about the issuer.
---------------------------------------------------------------------------
\1001\ See Heritage Letter and Ladd Letter 2.
\1002\ See BIO Letter and MoFo Letter.
---------------------------------------------------------------------------
However, we note that this information may become available to
competitors in any event through the solicitation process and removing
the requirement to publicly file the materials may result in adverse
effects on the protection of investors to the extent that it may
facilitate fraudulent statements by issuers to all or a selected group
of investors that may fail to compare the statements in the
solicitation materials against the offering circular. On balance, we
believe that the final rule's requirements governing the use of testing
the waters communications appropriately balance the goals of providing
flexibility to issuers and protection to investors.
F. Ongoing Reporting
Currently, Regulation A issuers do not have ongoing reporting
obligations. The final rules prescribe an ongoing reporting regime for
issuers that conduct Tier 2 offerings that requires, in addition to
annual reports on Form 1-K, semiannual reports on Form 1-SA, current
event reporting on Form 1-U, and notice to the Commission of the
suspension of ongoing reporting obligations on Form 1-Z.
These reporting requirements will have benefits and costs. These
reporting requirements should strengthen investor protection and
decrease the extent of information asymmetries between issuers and
investors in the Regulation A market, relative to existing Regulation
A. Requiring ongoing disclosures for Tier 2 offerings will provide
investors with periodically updated information, allowing them to
identify investment opportunities best suited for their level of risk
tolerance and re-evaluate the issuer's prospects through time,
resulting in better informed investment decisions and improved
allocative efficiency of capital. By standardizing the content, timing,
and format of these disclosures, the amendments to Regulation A will
make it easier for investors to compare information across issuers,
both within and outside of the new Regulation A market.
The additional reporting requirements for Tier 2 offerings increase
the availability of public information that can be used for valuing
securities. A reduction in information risk due to improvements in
disclosure can lower the issuer's cost of capital.\1003\ Because there
are no resale restrictions, some securities issued in amended
Regulation A offerings are likely to be quoted on the OTC market, and
required ongoing disclosure requirements will provide investors with
updated information about their underlying value, and as a result,
lower the inherent asymmetric information risks associated with trading
in this market.\1004\ The enhanced information environment should
facilitate more informationally efficient pricing and better liquidity
for amended Regulation A securities.\1005\ Tier 2 ongoing disclosure
requirements should also provide timely and relevant issuer information
at a lower cost to broker-dealers that initiate quotations and make
markets in these securities. Increased secondary market liquidity can
make securities more attractive to prospective investors, which can
promote capital formation. Hence, there may be significant benefits for
capital formation from the ongoing reporting requirements in the final
rules.
---------------------------------------------------------------------------
\1003\ See Diamond, D., and R. Verrecchia, 1991, Disclosure,
liquidity, and the cost of capital, Journal of Finance 46(4), pp.
1325-1359; Easley, D., and M. O'Hara, 2004, Information and the cost
of capital, Journal of Finance 59(4), 1553-1583; Easley, D., S.
Hvidkjaer, and M. O'Hara, 2002, Is information risk a determinant of
asset returns? Journal of Finance 57(5), pp. 2185-2221.
\1004\ See Ang, A., A. Shtauber, and P. Tetlock, 2013, Asset
pricing in the dark: The cross section of OTC stocks, Review of
Financial Studies 26(12), pp. 2985-3028.
\1005\ See Graham, J., C. Harvey, and S. Rajgopal, 2005, The
economic implications of corporate financial reporting, Journal of
Accounting and Economics 40(1-3), pp. 3-73; Durnev, A., R. Morck,
and B. Yeung, 2003, Value enhancing capital budgeting and firm-
specific stock return variation, Journal of Finance 59(1), pp. 65-
106.
---------------------------------------------------------------------------
Although reporting obligations for Tier 2 issuers are less
extensive than for reporting companies, we recognize that they will
still result in a significant direct cost of compliance. One commenter
estimated the qualification and reporting costs of a Tier 2 issuer to
be approximately $400,000 in the first year and $200,000 annually
thereafter (per issuer).\1006\ For the purposes of the PRA, we estimate
that compliance with
[[Page 21884]]
the requirements of Forms 1-K, 1-SA, and 1-U for issuers with an
ongoing reporting obligation under Regulation A will result in an
aggregate annual burden of 115,351 hours of in-house personnel time and
an aggregate annual cost of $13,450,272 for the services of outside
professionals.\1007\
---------------------------------------------------------------------------
\1006\ See IPA Letter.
\1007\ See Section IV below.
---------------------------------------------------------------------------
In addition to the direct costs of preparing the mandatory
disclosures, issuers of securities in Tier 2 offerings will be subject
to indirect disclosure costs of revealing to their competitors and
other market participants information about their business not
previously required to be disclosed.\1008\ These disclosures can inform
the issuer's competitors about the issuer's strategic decisions
regarding investment, financing, management and other aspects of
business. For issuers seeking to reduce such costs of disclosure, Rule
506(c) of Regulation D could be more appealing. Based on the scope of
disclosures required, an issuer's combination of direct and indirect
costs of disclosure is likely to be lowest for a Regulation D Rule 506
offering, followed by a Tier 1 offering, a Tier 2 offering and,
finally, a registered public offering.
---------------------------------------------------------------------------
\1008\ See Verrecchia, R., 2001, Essays on disclosure, Journal
of Accounting and Economics 32, pp. 97-180.
---------------------------------------------------------------------------
We evaluate below the different provisions of the ongoing reporting
requirements and the alternatives we have considered.
1. Periodic and Current Event Reporting Requirements
Currently, Regulation A issuers do not have ongoing reporting
obligations. Tier 2 issuers in a Regulation A offering will have
periodic and current event reporting obligations under the final rules.
As noted above, these ongoing reporting requirements will result in
both direct and indirect costs to Tier 2 issuers.
Commenters made various suggestions for expanding the ongoing
disclosure requirements for Tier 2 issuers. For example, several
commenters suggested we require quarterly reporting instead of semi-
annual reporting.\1009\ Another commenter suggested we require
officers, directors and controlling shareholders of issuers that offer
securities under Regulation A to make ongoing disclosure of
transactions in company securities, similar to reporting on Forms 3, 4
and 5 and Schedules 13D, 13G and 13F in the registered securities
context.\1010\ While additional requirements that would bring the Tier
2 disclosure obligations closer to the reporting company disclosure
obligations are likely to have informational efficiency and investor
protection benefits, they are also likely to make Regulation A more
costly and less attractive to prospective issuers and may not promote
capital formation as much as the final rules.
---------------------------------------------------------------------------
\1009\ See Massachusetts Letter 2; NASAA Letter 2; OTC Markets
Letter; WDFI Letter.
\1010\ See OTC Markets Letter.
---------------------------------------------------------------------------
Other commenters recommended reducing the continuing disclosure
burden on Tier 2 issuers \1011\ or making continuing disclosure
requirements contingent upon factors other than offering tier, such as
whether the issuer has taken steps to foster a market in its
securities.\1012\ These alternatives would likely reduce compliance
costs for Tier 2 issuers; however, they also may cause investors to
have less information upon which to make investment decisions,
resulting in weaker investor protections and less informationally
efficient prices.
---------------------------------------------------------------------------
\1011\ See Heritage Letter and IPA Letter.
\1012\ See Heritage Letter.
---------------------------------------------------------------------------
Other commenters recommended requiring ongoing disclosures for
issuers in Tier 1 offerings, including disclosures at a level lower
than is required for Tier 2,\1013\ ongoing disclosure with yearly
audited financials,\1014\ or some unspecified continuous disclosure
obligation.\1015\ Such alternatives, particularly if accompanied by the
requirement of audited financial statements, would increase the
availability and quality of financial information provided to investors
in Tier 1 offerings and strengthen investor protection by enabling
investors to make better informed decisions. However, due to the fixed
component of disclosure costs, and the likely smaller size of Tier 1
offerings relative to Tier 2 offerings, such requirements may limit
capital formation and place Tier 1 issuers at a competitive
disadvantage relative to Tier 2 issuers. We note that small issuers
that value informational efficiency gains from ongoing disclosures
above the cost of such disclosures have the option of conducting a Tier
2 offering.
---------------------------------------------------------------------------
\1013\ See Guzik Letter 1 (suggesting that Tier 1 ongoing
disclosure requirements could parallel Tier 2's requirements, but
without the requirement for semiannual reports).
\1014\ See Ladd Letter 2.
\1015\ See SVB Letter.
---------------------------------------------------------------------------
2. Termination and Suspension of Reporting and Exit Reports
The final rules permit issuers in Tier 2 offerings that have filed
all periodic and current reports required by Regulation A for a
specified period to suspend their ongoing reporting obligation under
Regulation A at any time after completing reporting for the fiscal year
in which the offering statement was qualified, if the securities of
each class to which the offering statement relates are held of record
by fewer than 300 persons and offers or sales made in reliance on a
qualified Tier 2 offering statement are not ongoing. For banks or bank
holding companies, the termination threshold is fewer than 1,200
persons, consistent with Title VI of the JOBS Act. The option to cease
reporting could be beneficial, especially for issuers that do not seek
secondary market liquidity and for smaller issuers that find the costs
of compliance with the ongoing disclosure requirements to be a
relatively greater burden. At the same time, the option might be costly
for investors because it will decrease the amount of information
available about the issuer, making it more difficult to monitor the
issuer and accurately price its securities or to find a trading venue
that will allow liquidation of the investment. The public availability
of information in bank regulatory filings is expected to mitigate some
of these effects for bank issuers undertaking Regulation A offerings.
Termination of reporting also might make it easier for inside
shareholders to use an informational advantage to the detriment of
minority outside investors.
The final rules require Tier 1 issuers to notify the Commission
upon completion of their offerings by filing Form 1-Z (exit report).
Issuers in Tier 2 offerings will be required to provide this
information on Form 1-Z at the time of filing the exit report, if they
have not previously provided this information on Form 1-K as part of
their annual report. Form 1-Z contains limited summary information
about the issuer and the completed offering and, therefore, should not
impose substantial additional compliance costs on the issuer.\1016\ The
enhanced availability of Form 1-Z information is likely to benefit
investors and facilitate evaluation of Regulation A market activity.
For example, this information should allow the Commission and others to
assess whether issuers have been able to raise the projected amount of
capital in Regulation A offerings. We recognize, however, that, since
information about the completed offering has value to an issuer's
[[Page 21885]]
competitors, its disclosure may also impose an indirect cost on
issuers.
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\1016\ For the purposes of the PRA, we estimate that filing the
Form 1-Z exit report will result in an aggregate annual burden of
235.5 hours of in-house personnel time. See Section IV below.
---------------------------------------------------------------------------
3. Exchange Act Registration
Generally, an issuer of Regulation A securities would not be
subject to Exchange Act reporting obligations unless it separately
registers a class of securities under Section 12 of the Exchange Act or
conducts a registered public offering. This results in significantly
lower costs of periodic reporting for Regulation A issuers relative to
reporting companies.\1017\
---------------------------------------------------------------------------
\1017\ Ongoing compliance costs were estimated to be $1.5
million per year, following an IPO, according to two surveys cited
in the IPO Task Force report.
---------------------------------------------------------------------------
The final rules permit issuers seeking to register a class of
Regulation A securities under the Exchange Act to do so by filing a
Form 8-A in conjunction with the qualification of a Form 1-A that
follows Part I of Form S-1 or the Form S-11 disclosure model in the
offering circular. In some circumstances this option may provide more
flexibility, for instance, with respect to testing the waters, to
issuers seeking to register a class of securities. The obligation to
file ongoing reports in a Tier 2 offering is automatically suspended
upon registration of a class of securities under Section 12 of the
Exchange Act or registration of an offering of securities under the
Securities Act. Given that Exchange Act reporting obligations are more
extensive than those of Regulation A, the entry of such issuers into
the Exchange Act reporting system upon qualification of a Regulation A
offering statement is expected to have a beneficial effect on investor
protection and informational efficiency of prices. While registration
pursuant to the Exchange Act is likely to impose additional costs on
issuers, only issuers that opt into such registration are affected. As
a result, we anticipate that only those issuers for whom the perceived
benefits of registration justify the accompanying costs will elect to
use this provision.
G. Insignificant Deviations
Under the final rules, offerings with ``certain insignificant
deviations from a term, condition or requirement'' of Regulation A
remain exempt from registration. This is the same as the rules in
existing Regulation A. As a result, the only change from the baseline
is that these rules will likely apply to a greater number of offerings
due to the expanded availability of amended Regulation A. Further, as
in existing Regulation A, the final rules explicitly classify as
significant those deviations that are related to issuer eligibility,
aggregate offering price, offers and continuous or delayed offerings.
This provision benefits investors by providing certainty about the
provisions from which the issuer may not deviate without losing the
exemption. At the same time, it enables issuers to continue to rely on
the exemption and obtain its capital formation benefits even if they
have an ``insignificant deviation'' from the final rules. This
provision may be especially beneficial for issuers with limited
experience with Regulation A offerings as their limited experience may
make them more susceptible to an inadvertent error. In this way, the
provision may encourage more issuers to engage in Regulation A
transactions and thereby facilitate capital formation.
H. Bad Actor Disqualification
The final rules amend Rule 262 to include bad actor
disqualification provisions in substantially the same form as adopted
under Rule 506(d).\1018\ The final rules specify that the covered
person's status is tested at the time of filing of the offering
statement. Consistent with the disqualification provisions of Rule
506(d), the final rules add two new disqualification triggers to those
in existing Regulation A: Commission cease-and-desist orders relating
to violations of scienter-based anti-fraud provisions of the federal
securities laws or Section 5 of the Securities Act and the final orders
and bars of certain state and other federal regulators. While these
provisions may impose an incremental cost on issuers and other covered
persons relative to the cost imposed by the disqualification provisions
of existing Regulation A, they should strengthen investor protection
from potential fraud.
---------------------------------------------------------------------------
\1018\ See 17 CFR 230.506(d).
---------------------------------------------------------------------------
If one of these new triggering events occurred prior to the
effective date of the final rules, the event will not cause
disqualification, but instead must be disclosed on a basis consistent
with Rule 506(e). This approach will not preclude the participation of
bad actors whose disqualifying events occurred prior to the effective
date of the final rules, which could expose investors to the risks that
arise when bad actors are associated with an offering. These risks to
investors may be partly mitigated since investors will have access to
relevant information that could inform their investment decisions.
Disclosure of triggering events may also make it more difficult for
issuers to attract investors, and issuers may experience some or all of
the impact of disqualification as a result. Some issuers may,
accordingly, choose to exclude involvement by prior bad actors to avoid
such disclosures.
We expect that the bad actor disqualification provisions in the
final rules will lead most issuers to restrict bad actor participation
in Regulation A offerings, which could help reduce the potential for
fraud in these types of offerings and thus strengthen investor
protection compared with an alternative of not including bad actor
disqualification provisions. If disqualification standards lower the
risk premium associated with the risk of fraud due to the presence of
bad actors in securities offerings, they could also reduce the cost of
capital for issuers that rely on amended Regulation A. In addition, the
requirement that issuers determine whether any covered persons are
subject to disqualification might reduce the need for investors to do
their own investigations and could therefore increase efficiency.
The disqualification provisions also impose costs on issuers and
covered persons. Issuers that are disqualified from using amended
Regulation A may experience an increased cost of capital or a reduced
availability of capital, which could have negative effects on capital
formation. In addition, issuers may incur costs related to seeking
disqualification waivers from the Commission and replacing personnel or
avoiding the participation of covered persons who are subject to
disqualifying events. Issuers also might incur costs to restructure
their share ownership to avoid beneficial ownership of 20% or more of
the issuer's outstanding voting equity securities, calculated on the
basis of voting power, by individuals subject to disqualifying events.
As discussed above, the final rules also provide a reasonable care
exception on a basis consistent with Rule 506(d).\1019\ We anticipate
that the reasonable care exception would result in benefits and costs,
compared with an alternative of not providing a reasonable care
exception. For example, a reasonable care exception could facilitate
capital formation by encouraging issuers to proceed with Regulation A
offerings in situations in which issuers otherwise might have been
deterred from relying on Regulation A if they risked potential
liability under Section 5 of the Securities Act for unknown
disqualifying events. This exception also could increase the potential
for fraud, compared with an alternative of not providing a reasonable
care exception, by limiting issuers' incentives to determine whether
bad
[[Page 21886]]
actors are involved with their offerings. We also recognize that some
issuers might incur costs associated with conducting and documenting
their factual inquiry into possible disqualifications. The rule's
flexibility with respect to the nature and extent of the factual
inquiry required could allow an issuer to tailor its factual inquiry as
appropriate to its particular circumstances, thereby potentially
limiting costs.
---------------------------------------------------------------------------
\1019\ See Proposed Rule 262(b)(4).
---------------------------------------------------------------------------
One commenter recommended revising the look-back periods for
disqualifying events to run from the time of sale rather than the time
of filing of the offering statement.\1020\ These changes would relax
the bad actor disqualification standard, by allowing bad actors to
participate in Regulation A offerings during the qualification process.
We believe that timing application of the bad actor disqualification
rules to the time of filing of the offering statement, as opposed to
the time of qualification, is therefore more appropriate under the
final rules.
---------------------------------------------------------------------------
\1020\ See KVCF Letter.
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I. Relationship With State Securities Law
The final rules preempt state registration and qualification
requirements for Tier 2 offerings but preserve these requirements for
Tier 1 offerings, consistent with state registration of Regulation A
offerings of up to $5 million under existing Regulation A.
The GAO Report found that compliance with state securities review
and qualification requirements was one of the factors that appeared to
have influenced the infrequent use of Regulation A by small
businesses.\1021\ Various commenters supporting preemption of state
securities laws in the final rules noted that state review of offering
statements is a significant impediment to the use of Regulation A and
that the process of qualification in multiple states will remain
inefficient despite NASAA's implementation of a coordinated review
program.\1022\ More broadly, commenters as well as the GAO Report
indicated that the existing regime of federal and state qualification
has been a significant disincentive to the use of Regulation A for
capital raising. With respect to time and compliance costs associated
with state qualification, we believe preemption will likely reduce
issuers' costs, although we lack comprehensive, independent data to
estimate the precise amount. Only a few commenters provided specific
monetary estimates of cost components. One commenter indicated that a
revenue-generating business seeking to conduct a debt or equity
offering under existing Regulation A can produce a conforming offering
statement for state and federal review for approximately $50,000.\1023\
According to another commenter, an issuer seeking state registration in
50 states would incur $80,000 to $100,000 in legal fees.\1024\
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\1021\ See GAO Report. The GAO Report also cites other factors
that may have discouraged issuer use of the Regulation A exemption,
including a comparatively low $5 million offering limitation, a slow
and costly filing process associated with Commission qualification,
and the availability of other exemptions under the federal
securities laws.
A recent study performs a comparison of Rule 506 offerings with
Rule 505 and Rule 504 offerings that ``suggests that the Blue Sky
law preemption feature unique to Rule 506 offerings has greater
value to issuers than the unique features of Rule 504 or Rule 505
offerings.'' See Ivanov, V., and S. Bauguess, 2013, Capital raising
in the U.S.: An analysis of unregistered offerings using the
Regulation D exemption, 2009-2012, available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
See also Leading Biosciences Letter referencing recommendations
supporting preemption from the SEC Government-Business Forum on
Small Business Capital Formation in 2011 and 2012. Similar
recommendations were made in the final report of the SEC Forum on
Small Business Capital Formation in 2013, available at: http://www.sec.gov/info/smallbus/gbfor32.pdf.
\1022\ See ABA BLS Letter; Andreessen/Cowen Letter; Almerico
Letter; B. Riley Letter; BIO Letter; Campbell Letter; Canaccord
Letter; CFIRA Letter 1; CFIRA Letter 2; Congressional Letter 3;
DuMoulin Letter; Eng Letter; Fallbrook Technologies Letter; Gilman
Law Letter; Guzik Letter 1; Hart Letter; Heritage Letter; Huynh
Letter; IPA Letter; Edwards Wildman Letter; Kisel Letter; Kretz
Letter; KVCF Letter; Ladd Letter 2; Leading Biosciences Letter;
McCarter & English Letter; Methven Letter; Milken Institute Letter;
MoFo Letter; Moloney Letter; New Food Letter; OTC Markets Letter;
Paul Hastings Letter; Palomino Letter; Public Startup Co. (several
letters); REISA Letter; Richardson Patel Letter; SBIA Letter;
Staples Letter; Sugai Letter; SVB Letter; SVGS Letter; Unorthodocs
Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2;
Warren Letter; WR Hambrecht + Co Letter.
\1023\ See Groundfloor Letter. This commenter does not
separately estimate the component of the cost due to state
registration.
\1024\ See Letter from Paul Hastings, LLP, November 26, 2013.
Another commenter referenced one issuer's offering in the State
of Washington in the amount of $750,000, with legal and accounting
expenses estimated at $10,000 and the offering statement prepared
without outside securities counsel and reviewed by the state within
less than three months. See WDFI Letter. We do not believe that this
cost estimate would be representative of costs for issuers
registering in multiple states rather than a single state or for
issuers involving outside securities counsel.
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As one commenter noted, ``[t]he challenges posed by the necessity
of responding to both federal and state reviews and coordinating
overlapping but potentially inconsistent comments and approvals have
helped to make the existing Regulation A scheme unworkable for most
smaller companies.'' \1025\ Preemption of state securities review and
qualification requirements for Tier 2 offerings will eliminate the
burdens of responding to multiple reviews and thus provide for a more
streamlined review process than exists under existing Regulation A. We
expect that this, in turn, will make Tier 2 a more attractive capital
raising option for issuers than existing Regulation A. Accordingly, we
believe that by eliminating the requirement for state qualification,
the final rules' preemption for Tier 2 offerings will result in greater
use of amended Regulation A and thereby facilitate capital formation.
---------------------------------------------------------------------------
\1025\ See ABA BLS Letter.
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We recognize that commenters were divided on the issue of
preemption, and those who objected to preemption of state securities
review and qualification requirements cited benefits of state
review.\1026\ These include additional investor protection benefits
arising from the localized knowledge and resources of state regulators
that may aid in detecting fraud and facilitating issuer
compliance.\1027\ Some of these commenters also noted that the launch
of NASAA's coordinated review program could streamline state review of
offerings among participating states.
---------------------------------------------------------------------------
\1026\ See ASD Letter; Cornell Clinic Letter; CFA Letter; CFA
Institute Letter; Groundfloor Letter (arguing that the Commission
should at least evaluate NASAA's coordinated review program for 12
months); Karr Tuttle Letter (acknowledging that state preemption may
still be necessary for states not participating in NASAA's new
coordinated review program); MCS Letter; Congressional Letter 2;
Congressional Letter 4; NASAA Letter 1; NASAA Letter 2; NASAA Letter
3; NDBF Letter; NYIPB Letter; ODS Letter; PRCFI Letter; Scherber
Letter; Secretaries of State Letter; Massachusetts Letter 1;
Massachusetts Letter 2; Tavakoli Letter; TSSB Letter; WDFI Letter.
One commenter stated its view that the Commission's proposal to
preempt state regulatory review contained little consideration of
the adverse costs that come with preemption, particularly the
potential harm to investors, including harm investors might incur in
the absence of state review in the area of small and thinly traded
company offerings. See NASAA Letter 2.
\1027\ According to the 2014 NASAA enforcement report for 2013,
securities violations related to unregistered securities sold by
unlicensed individuals, including fraudulent offerings marketed
through the Internet, remain an important enforcement concern. The
report does not detail the number and category of violations by type
of exemption from registration. See NASAA Enforcement Report,
available at: http://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
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We acknowledge that the preemption of state qualification for Tier
2 offerings may have an impact on investor protection by eliminating
one level of government review. In addition, merit-based review of
offerings undertaken by some states may, in some cases, provide a level
of investor protections different from the disclosure-based review
[[Page 21887]]
undertaken by the Commission. State regulators may also have a better
knowledge of local issuers, which could help in detecting fraud,
especially in offerings by small, localized issuers. If investors
require higher returns because of a perceived increase in the risk of
fraud as a result of preemption, issuers may face a higher cost of
capital. We are unable to predict how the amendments to Regulation A
will affect the incidence of fraud that may arise in Regulation A
offerings.
Several factors could mitigate these potential impacts. First,
under Section 18(c), the states retain the ability to require the
filing with them of any documents filed with the Commission and to
investigate and bring enforcement actions with respect to fraudulent
transactions. Second, we believe that amended Regulation A provides
substantial protections to purchasers in Tier 2 offerings. Under the
final rules, a Regulation A offering statement will continue to provide
substantive narrative and financial disclosures about the issuer.
Further, the final rules require offering statements to be qualified by
the Commission before an issuer can conduct sales. Additional investor
protections would be afforded by Regulation A's limitations on eligible
issuers and bad actor disqualification provisions. The final rules for
Tier 2 offerings provide further protection by requiring audited
financial statements in the offering circular, ongoing reporting, and
an investment limitation for purchasers who do not qualify as
accredited investors.
The anticipated costs and benefits of state preemption will depend
on key offering characteristics and issuer disclosure requirements. In
particular, smaller offerings with a narrow investor base, such as
those expected to be conducted under Tier 1, are more likely to be
concentrated in fewer states and to benefit from geographic-specific
information of state regulators as part of the review process.\1028\ In
contrast, larger offerings that seek a broader investor base, such as
those expected to be conducted under Tier 2, are more likely to span
multiple states. For Tier 2 offerings, the additional disclosure,
audited financial statements, and transactional requirements relative
to Tier 1 offerings are expected to provide an additional layer of
investor protection, thus reducing the need for, and the expected
benefits of, state review. State preemption for Tier 2 offerings should
lower the compliance burdens imposed on issuers, and partly offset the
costs of the increased disclosure and transactional requirements.
---------------------------------------------------------------------------
\1028\ We believe that issuers conducting Tier 1 offerings are
more likely to be smaller companies whose businesses revolve around
products, services, and a customer base that will more likely be
located within a single state or region or a small number of
geographically dispersed states. For example, based on our analysis,
issuers of securities in the seven offering statements qualified by
the Commission pursuant to Regulation A in 2014 indicated, on
average, that they were seeking qualification in approximately five
states per offering. The financial statements provided by these
issuers further indicated, on average, that issuers had
approximately $1.2 million in assets. No issuer indicated assets
greater than $3.6 million, while two issuers indicated assets of
less than $20,000. We recognize, however, that the characteristics
of Tier 1 issuers in Tier 1 offerings relying on amended Regulation
A in the future may differ from the characteristics of issuers that
rely on existing Regulation A (for example, due to the higher
maximum offering size for Tier 1 offerings in the final rules,
compared with the maximum offering size in existing Regulation A).
---------------------------------------------------------------------------
In general, we expect that issuers in Tier 1 offerings will face
significantly lower offering costs as a result of not being subjected
to the requirements of audited financial statements and ongoing
reporting in the final rules. For these offerings, the local knowledge
of state regulators is anticipated to add value to the review process
to the extent that the issuer and the investor base are more likely to
be localized. Thus, state qualification is more likely to have
incremental investor protection benefits in Tier 1 offerings relative
to Tier 2 offerings. Moreover, to the extent that Tier 1 offerings are
more likely to be concentrated in fewer states, the cost of complying
with state review procedures is likely to be diminished for these types
of offerings.
Some commenters also pointed to the increased burden on Commission
resources as a cost of state preemption.\1029\ Compared with the
baseline of the existing Regulation A, we anticipate a possible
increase in the burden on Commission resources as a result of the
increase in the Regulation A maximum offering size and other provisions
intended to make Regulation A more attractive to prospective issuers.
However, we believe this increase would also occur under the
alternative of no state preemption for Tier 2 offerings. While state
review of Tier 2 offerings could potentially confer incremental
investor protection benefits to the extent a thorough Commission staff
review is constrained by the increased burden on agency resources,
overall we do not believe this effect will be substantial.
---------------------------------------------------------------------------
\1029\ See WDFI Letter and NASAA Letter 2.
---------------------------------------------------------------------------
As an alternative to preemption for Tier 2 offerings, we considered
the option of state qualification by one state or a subset of states or
the option of state review under NASAA's coordinated review
program.\1030\ According to one commenter, the coordinated review
program creates value by defining concrete service standards regarding
the timeliness of various steps of the qualification process and by
introducing more legal certainty.\1031\ According to another commenter,
the coordinated review program will eliminate costs of identifying and
addressing individual state requirements and will provide an expedient
registration process.\1032\ We recognize that the coordinated review
process ultimately may reduce processing time and streamline certain
state requirements for issuers registering in multiple states when
compared to independent review conducted by individual states. To date,
however, we are aware of only a few issuers that have utilized the
coordinated review process, so currently there is limited evidence
available to us to evaluate the effectiveness and timeliness of
coordinated review, especially in the event that more potential
Regulation A issuers seek state qualification under this process. While
it is possible that the coordinated review process may reduce costs for
issuers as compared to individual state review and qualification, it
would add cost and complexity for issuers seeking an exemption under
amended Regulation A when compared to Commission review and
qualification alone. To the extent that disclosure or merit review (if
applicable to one of the participating jurisdictions in which the
issuer is seeking to offer securities) standards of participating
jurisdictions impose more extensive requirements on the issuer than
Commission rules, some issuers may incur additional compliance expense
or require additional time to address comments. In light of the recent
efforts of state securities regulators to address concerns about the
cost of state review and qualification of Regulation A offerings,
however, the ongoing implementation and development of the coordinated
review program, particularly as it may operate within Tier 1 offerings,
may, in the future, provide additional data that will aid our future
evaluation of whether such a program could effectively operate within
the context of larger, more national Tier 2 offerings.
---------------------------------------------------------------------------
\1030\ A description of NASAA's coordinated review program can
be found at: http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/.
\1031\ See Groundfloor Letter.
\1032\ See WDFI Letter.
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[[Page 21888]]
We believe the final rules strike appropriate balance between
mitigating cost and time demands on issuers and providing investor
protections.
IV. Paperwork Reduction Act
A. Background
Certain provisions of the final rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (PRA).\1033\ We published a notice requesting
comment on the collection of information requirements in the Proposing
Release, and we submitted these requirements to the Office of
Management and Budget (OMB) for review in accordance with the PRA and
its implementing regulations.\1034\ While several commenters provided
qualitative comments on the possible costs of the proposed rules and
amendments, we did not receive comments on our PRA analysis and thus
are adopting our estimates substantially as proposed, except as
otherwise noted herein. The titles for the collections of information
are:
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\1033\ 44 U.S.C. 3501 et seq.
\1034\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
(1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number
3235-0286);
(2) ``Form 1-K'' (OMB Control Number 3235-0720);
(3) ``Form 1-SA'' (OMB Control Number 3235-0721);
(4) ``Form 1-U'' (OMB Control Number 3235-0722);
(5) ``Form 1-Z'' (OMB Control Number 3235-0723);
(6) ``Form 8-A'' (OMB Control Number 3235-0056);
(7) ``Form ID'' (OMB Control Number 3235-0328); and
(8) ``Form F-X'' (OMB Control Number 3235-0379).\1035\
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\1035\ Although the final rules do not amend Form F-X, the total
burden hours associated with that form may increase minimally as a
result of the increased number of issuers relying on Regulation A.
The Commission submitted the revised burden estimate for Form F-X to
OMB for review in accordance with the PRA, although the potential
minimal increase in burden hours was not noted in the Proposing
Release.
---------------------------------------------------------------------------
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. We applied for OMB control numbers
for the new collections of information in accordance with 44 U.S.C.
3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each
new collection, as specified above. Responses to these new collections
of information would be mandatory for issuers raising capital under
Regulation A.
The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collections of information. In deriving estimates of
these hours and costs, we recognize that the burdens likely will vary
among individual issuers based on a number of factors, including the
stage of development of the business, the amount of capital an issuer
seeks to raise, and the number of years since inception of the
business. We believe that some issuers will experience costs in excess
of the average and some issuers may experience less than the average
costs.
B. Estimated Number of Regulation A Offerings
Data regarding current market practices may help identify the
potential number of offerings that will be conducted in reliance on the
final rules.\1036\ We estimate that there are currently approximately
26 Regulation A offering statements filed by issuers per year.\1037\
While it is not possible to predict with certainty the number of
offering statements that will be filed by issuers relating to offerings
made in reliance on amended Regulation A, for purposes of this PRA
analysis, we estimate that the number will be 250 offerings statements
per year. We base this estimate on (i) the current approximate number
of annual Form 1-A filings under the existing rules, plus (ii) 65
percent of the estimated number of registered offering of securities
that would have been eligible to be conducted under Regulation A,\1038\
plus (iii) an additional 16 offerings that either would not otherwise
occur or would have been conducted in reliance on another exemption
from Securities Act registration, such as Regulation D.\1039\ For
purposes of this PRA analysis, we assume that each offering statement
for a unique Regulation A offering that is filed represents a unique
issuer, such that approximately 250 issuers are estimated to conduct
Regulation A offerings each year under the final rules.
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\1036\ See Section III. above for a discussion of the data
regarding current market practices.
\1037\ From 2009 through 2014, there were 158 Form 1-As filed
with the Commission.
\1038\ See figures and graphs for registered offerings cited in
Section III.B.b. above (citing approximately 320 registered initial
public offerings or follow-on offerings in calendar year 2014 that
would have been potentially eligible to be conducted under amended
Regulation A).
\1039\ See figures and graphs for registered and exempt
offerings under Regulation D cited in Section III.B.1.a.ii. above
(citing 11,228 issuances under Regulation D in calendar year 2014
that would have been potentially eligible to be conducted under
amended Regulation A).
---------------------------------------------------------------------------
C. PRA Reporting and Cost Burden Estimates
1. Regulation A (Form 1-A and Form 2-A)
Currently, Regulation A requires issuers to file a Form 1-A:
Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds
with the Commission. Regulation A has one administrative burden hour
associated with it, while current Form 1-A is estimated to take
approximately 608 hours to prepare and Form 2-A is estimated to take
approximately 12 hours to prepare.\1040\ We do not anticipate that the
one administrative burden hour associated with Regulation A will change
as a result of the final rules. As discussed more fully below, we
believe the burden hours associated with Form 1-A will change, while
Form 2-A and the associated burden hours are eliminated as a result of
today's proposal.\1041\
---------------------------------------------------------------------------
\1040\ See Form 1-A at 1; Form 2-A at 1.
\1041\ See discussion in Section II.E. above.
---------------------------------------------------------------------------
Under the final rules, an issuer conducting a transaction in
reliance on Regulation A will be able to conduct either a Tier 1
offering or a Tier 2 offering.\1042\ In either case, a Regulation A
issuer will continue to be required to file with the Commission
specified disclosures on a Form 1-A: Offering Statement.\1043\ An
issuer will also be required to file amendments to Form 1-A to address
comments from Commission staff and to disclose material changes in the
disclosure previously provided to the Commission or investors.\1044\ In
light of the electronic filing requirements for Regulation A offering
materials discussed above,\1045\ issuers are no longer required to file
a manually signed copy of Form 1-A with the Commission.\1046\ Issuers
are, however, required to manually sign a copy of the offering
statement before or at the time of non-public submission or filing that
must be retained by the issuer for a period of five years and produced
to the Commission, upon request.\1047\ As issuers are currently
required to manually sign the Form 1-A and file it with the Commission,
we do not anticipate that the Form 1-A retention requirement adopted in
the final rules will alter an issuer's compliance
[[Page 21889]]
burden. As adopted, Form 1-A is similar to existing Form 1-A. In some
instances, Form 1-A, contains fewer disclosure items than existing Form
1-A (e.g., Part I (Notification) of Form 1-A does not require
disclosure of ``Affiliate Sales''; Part II (Offering Circular) of Form
1-A requires a description of the issuer's business for a period of
three years, rather than five years). Part II of Form 1-A no longer
permits disclosure in reliance on the Model A disclosure format, but
directs issuers to follow the provisions of Model B (renamed ``Offering
Circular''), Part I of Form S-1, or, where applicable, Part I of Form
S-11.\1048\ In other instances, Form 1-A contains more disclosure items
than existing Form 1-A (e.g., Part I of Form 1-A requires additional
disclosure of certain summary information regarding the issuer and the
offering; Part II of Form 1-A requires more detailed management
discussion and analysis of the issuer's liquidity and capital resources
and results of operations). Form 1-A requires disclosure similar to
that required in a Form S-1 registration statement for registered
offerings under the Securities Act, but with fewer disclosure items
(e.g., it requires less disclosure about the compensation of officers
and directors, and less detailed management discussion and analysis of
the issuer's liquidity and capital resources and results of operations)
and, under certain circumstances, Form 1-A does not require issuers to
file audited financial statements.\1049\
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\1042\ See discussion in Section II.B.3. above.
\1043\ See Rule 252.
\1044\ See Rule 252(f).
\1045\ See discussion in Section II.C.1. above.
\1046\ See discussion in Section II.C.3.d. above.
\1047\ See Instruction 2 to Signatures in Form 1-A.
\1048\ See discussion at Section II.C.3.b. above.
\1049\ See discussion in Section II.C.3.b(2). above.
---------------------------------------------------------------------------
We expect that issuers relying on Regulation A for Tier 1 offerings
of up to $20 million in a 12-month period will largely be at a similar
stage of development to issuers relying on existing Regulation A and
will therefore not experience an increased compliance burden with Form
1-A. Given the increased annual offering amount limit of $50 million
for Tier 2 offerings, however, we expect that issuers conducting such
offerings pursuant to Regulation A may be at a more advanced stage of
development than issuers offering securities under Tier 1. In such
cases, the complexity of the required disclosure and, in turn, the
burden of compliance with the requirements of Form 1-A may be greater
for some issuers than for issuers relying on existing Form 1-A. We
believe that the burden hours associated with amended Form 1-A will be
greater than the current estimated 608 burden hours per response but
will not be as great as the current estimated 972.32 burden hours per
response for Form S-1. We therefore estimate that the total burden to
prepare and file Form 1-A, as adopted today, including any amendments
to the form, will increase on average across all issuers in comparison
to existing Form 1-A to approximately 750 hours.\1050\ We estimate that
the issuer will internally carry 75 percent of the burden of
preparation and that outside professionals retained by the issuer at an
average cost of $400 per hour will carry 25 percent.\1051\
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\1050\ By comparison, we estimate the burden per response for
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
\1051\ The costs of retaining outside professionals may vary
depending on the nature of the professional services. For purposes
of this PRA analysis, however, we estimate that such costs will be
an average of $400/hour, which is consistent with the rate we
typically estimate for outside legal services used in connection
with public company reporting.
---------------------------------------------------------------------------
We estimate that compliance with the requirements of a Form 1-A
will require 187,500 burden hours (250 offering statements x 750 hours/
offering statement) in aggregate each year, which corresponds to
140,625 aggregated hours carried by the issuer internally (250 offering
statements x 750 hours/offering statement x 0.75) and aggregated costs
of $18,750,000 (250 offering statements x 750 hours/offering statement
x 0.25 x $400) for the services of outside professionals. As stated
above, we estimate that the proposed amendments to Regulation A will
not change the one administrative burden hour associated with the
review of Regulation A and will require 250 burden hours (250 offering
statements x one hour/offering statement) in aggregate each year, which
corresponds to 187 aggregated hours carried by the issuer internally
(250 offering statements x 0.75) and aggregated costs of $25,000 (250
offering statements x one hour/offering statement x 0.25 x $400) for
services of outside professionals. When combined with the estimates for
Form 1-A, the administrative burden hour results in an estimated total
compliance burden of 751 hours per offering statement and an estimated
annual compliance burden of 187,750 hours (250 offering statements x
751 hours/offering statement) and aggregated costs of $18,775,000 (250
offering statements x 751 hours/offering statement x 0.25 x $400).
2. Form 1-K: Annual Report
Under the final rules, any issuer that conducts a Tier 2 offering
pursuant to Regulation A is required to file an annual report with the
Commission on Form 1-K: Annual Report.\1052\ A manually signed copy of
Form 1-K must be executed by the issuer and related signatories before
or at the time of electronic filing, retained by the issuer for a
period of five years and, if requested, produced to the
Commission.\1053\ We do not anticipate that the requirement to retain a
manually signed copy of Form 1-K will affect an issuer's compliance
burden. We believe the compliance burden associated with disclosure
provided in Form 1-K will be less than the compliance burden associated
with reporting required under Exchange Act Sections 13 or 15(d). We
also believe the burden is more analogous to the compliance burden
attendant to Form 1-A. Unlike the disclosure required in Form 1-A,
however, offering-specific disclosure in Form 1-K is not required.
Additionally, under certain circumstances, an issuer will be required
to disclose information similar to the information previously required
of issuers on Form 2-A.\1054\ Unlike the disclosure previously required
on Form 2-A, however, an issuer is not required to provide disclosure
about the use of proceeds. We estimate that the burden to prepare and
file a Form 1-K will be less than that required to prepare and file a
Form 1-A. We estimate that compliance with Form 1-K will result in a
burden of 600 hours per response.\1055\ We further estimate that 75
percent of the burden of preparation will be carried by the issuer
internally and that 25 percent will be carried by outside professionals
retained by the issuer at an average cost of $400 per hour. While we do
not know the exact number of issuers that will conduct Tier 2 offerings
in reliance on amended Regulation A, we estimate 75 percent of all
issuers filing a Form 1-A (or 188 issuers, 250 issuers x .75) will
conduct Tier 2 offerings, enter the Regulation A ongoing reporting
regime and therefore be required to file Form 1-K.\1056\
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\1052\ See Rule 257(b)(1).
\1053\ See General Instruction C to Form 1-K and related
discussion in Section II.E.1.c. above.
\1054\ Id.
\1055\ We estimate that the burden of preparing the information
required by Form 1-K will be approximately \3/4 \of the burden for
filing Form 1-A due to the lack of offering-specific disclosure and
an issuer's ability to update previously provided disclosure.
\1056\ This estimate includes any special financial reports
required to be filed on Form 1-K.
---------------------------------------------------------------------------
We estimate that compliance with the requirements of Form 1-K for
issuers with an ongoing reporting obligation under Regulation A will
require 112,800 burden hours (188 issuers x 600 hours/issuer) in the
aggregate each year, which corresponds to 84,600 hours carried by the
issuer internally (188 issuers x 600
[[Page 21890]]
hours/issuer x 0.75) and costs of $11,280,000 (188 issuers x 600 hours/
issuer x 0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
Under the final rules, any issuer that conducts a Tier 2 offering
in reliance on Regulation A will be required to file a semiannual
report with the Commission on Form 1-SA: Semiannual Report.\1057\ A
manually signed copy of the Form 1-SA must be executed by the issuer
and related signatories before or at the time of electronic filing,
retained by the issuer for a period of five years and, if requested,
produced to the Commission.\1058\ We do not anticipate that the
requirement to retain a manually signed copy of the Form 1-SA will
affect an issuer's compliance burden. Issuers must provide semiannual
updates on Form 1-SA, which, like a Form 10-Q,\1059\ consists primarily
of financial statements and MD&A. Unlike Form 10-Q, Form 1-SA does not
require disclosure regarding quantitative and qualitative market risk
or controls and procedures.\1060\ We estimate, however, that on balance
the reduction in burden attributable to eliminating these two items in
Form 1-SA will be offset by the increased burden associated with
requiring financial statement disclosure covering six months, rather
than three months. We therefore believe the per response compliance
burden of Form 1-SA will be similar to the compliance burden for
issuers filing a Form 10-Q under the Exchange Act.\1061\ Therefore, for
purposes of this PRA analysis, we estimate that the burden to prepare
and file a Form 1-SA will equal the burden to prepare and file Form 10-
Q, which we have previously estimated as 187.43 hours per
response.\1062\ Unlike Form 1-K, Form 1-SA does not require the
provision of audited financial statements. We therefore believe, in
comparison to Form 1-K, issuers filing a Form 1-SA will be able to
prepare more of the required disclosures internally. Accordingly, we
estimate that 85 percent of the burden of preparation will be carried
by the issuer internally and that 15 percent will be carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.
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\1057\ See Rule 257(b)(3).
\1058\ See General Instruction C to Form 1-SA and related
discussion in Section II.E.1.c(2). above.
\1059\ 17 CFR 249.308a.
\1060\ See discussion in Section II.E.1.c(2). above.
\1061\ Issuers will, however, have to file Form 1-SA, a
semiannual report, less frequently than Form 10-Q, a quarterly
report.
\1062\ See Form 10-Q, at 1.
---------------------------------------------------------------------------
We estimate that compliance with the requirements of Form 1-SA for
issuers with an ongoing reporting obligation under Regulation A will
require 35,237 burden hours (188 issuers x 187 hours/issuer/filing x 1
filing/year) in the aggregate each year, which corresponds to 29,952
hours carried by the issuer internally (188 issuers x 187 hours/issuer/
filing x 1 filing/year x 0.85) and costs of $2,113,872 (188 issuers x
187 hours/issuer/filing x 1 filing/year x 0.15 x $400) for the services
of outside professionals.\1063\
---------------------------------------------------------------------------
\1063\ This estimate includes any special financial reports
required to be filed on Form 1-SA.
---------------------------------------------------------------------------
4. Form 1-U: Current Reporting
Under the final rules, any issuer that conducts a Tier 2 offering
in reliance on Regulation A is required to promptly file current
reports on Form 1-U with the Commission.\1064\ A manually signed copy
of the Form 1-U must be executed by the issuer and related signatories
before or at the time of electronic filing, retained by the issuer for
a period of five years and, if requested, produced to Commission.\1065\
We do not anticipate that the requirement to retain a manually signed
copy of the Form 1-U will affect an issuer's compliance burden. Issuers
are required to file such reports in the event they experience certain
corporate events, much the same way as issuers subject to an ongoing
reporting obligation under the Exchange Act file current reports on
Form 8-K.\1066\ The requirement to file a Form 1-U, however, will be
triggered by significantly fewer corporate events than those that
trigger a reporting requirement on a Form 8-K, and the form itself will
be slightly less burdensome for issuers to fill out.\1067\ Thus, the
frequency of filing the required disclosure and the burden to prepare
and file a Form 1-U will be considerably less than for Form 8-K. We
estimate that the burden to prepare and file each current report will
be 5 hours. While we do not know for certain how often an issuer would
experience a corporate event that would trigger a current report filing
on Form 1-U, we estimate that many issuers may not experience a
corporate event that triggers reporting, while others may experience
multiple events that trigger reporting. On average, we estimate that an
issuer will be required to file one current report annually.\1068\
Therefore, we estimate that an issuer's compliance with Form 1-U will
result in an annual aggregate burden of 5 hours (1 current report
annually x 5 hours per current report) per issuer.
---------------------------------------------------------------------------
\1064\ See Rule 257(b)(4).
\1065\ See General Instruction C to Form 1-U and related
discussion in Section II.E.1.c(3). above.
\1066\ We estimate the burden per response for preparing a Form
8-K to be 5.71 hours. See Form 8-K, at 1.
\1067\ See discussion at Section II.E.1.c(3). above.
\1068\ We have previously estimated that on average issuers file
one current report on Form 8-K annually. Although we believe that
the frequency of filing a Form 1-U will be considerably less than a
Form 8-K, we are estimating that each issuer will be required to
file one Form 1-U per year.
---------------------------------------------------------------------------
As with Form 1-SA, we estimate that 85 percent of the burden of
preparation will be carried by the issuer internally and that 15
percent will be carried by outside professionals retained by the issuer
at an average cost of $400 per hour. We estimate that compliance with
the requirements of Form 1-U will require 940 burden hours (188 issuers
x 1 current report annually x 5 hours per current report) in aggregate
each year, which corresponds to 799 hours carried by the issuer
internally (188 issuers x 5 hours/issuer/year x 0.85) and costs of
$56,400 (188 issuers x 5 hours/issuer/year x 0.15 x $400) for the
services of outside professionals.
5. Form 1-Z: Exit Report
Under the final rules, all Regulation A issuers are required to
file a notice under cover of Form 1-Z: Exit Report. Issuers conducting
Tier 1 offerings will be required to file Part I of Form 1-Z that
discloses information similar to the information previously required of
issuers on Form 2-A.\1069\ Issuers conducting Tier 2 offerings will
also be required to disclose the same information as issuers conducting
Tier 1 offerings in Part I of Form 1-Z, unless previously reported by
the issuer on Form 1-K. Issuers conducting Tier 2 offerings will also
be required to complete Part II of Form 1-Z in order to notify
investors and the Commission that it will no longer file and provide
annual reports pursuant to the requirements of Regulation A.\1070\ In
Tier 2 offerings, an issuer's obligations to file ongoing reports could
be terminated at any time after completion of reporting for the fiscal
year in which the offering statement was qualified, if the securities
of each class to which the offering statement relates are held of
record by fewer than 300 persons and offers and sales made in reliance
on a qualified offering statement are not ongoing.\1071\ A manually
signed copy of the Form 1-Z must be executed by the issuer and related
signatories before or at the time of electronic filing, retained
[[Page 21891]]
by the issuer for a period of five years and, if requested, produced to
Commission.\1072\ We do not anticipate that the requirement to retain a
manually signed copy of the Form 1-Z will affect an issuer's compliance
burden. We estimate that all of the issuers conducting Tier 1 offerings
(63 issuers, 250 total estimated issuers x 0.25) and 50 percent of
issuers conducting Tier 2 offerings (94 issuers, 188 issuers with an
ongoing reporting obligation x 0.50) will file a Form 1-Z in the second
fiscal year after qualification of the offering statement (157 total
issuers, 63 + 94). Although we believe that the vast majority of
issuers subject to ongoing reporting under Regulation A will qualify
for termination in the second fiscal year after qualification, we
believe that only half or 50 percent of such issuers will actually
choose to terminate their reporting obligations. An issuer may have
many reasons for continuing its reporting obligations, such as a desire
to facilitate continued quotations in the over-the-counter (OTC)
markets pursuant to revisions to Exchange Act Rule 15c2-11.\1073\
---------------------------------------------------------------------------
\1069\ See discussion in Section II.E.4.b. above.
\1070\ See Rule 257(d).
\1071\ See Rule 252(f)(2).
\1072\ See Instruction to Form 1-Z and related discussion in
Section II.E.4.b. above.
\1073\ See discussion in Section II.E.2. above.
---------------------------------------------------------------------------
The Form 1-Z is similar to the Form 15 that issuers file to provide
notice of termination of the registration of a class of securities
under Exchange Act Section 12(g) or to provide notice of the suspension
of the duty to file reports required by Exchange Act Sections 13(a) or
15(d).\1074\ Therefore, we estimate that compliance with the Form 1-Z
will result in a similar burden as compliance with Form 15 that is, a
burden of 1.50 hours per response. We estimate that 100% of the burden
will be carried by the issuer internally. We estimate that compliance
with Form 1-Z will result in a burden of 235.5 hours (157 issuers
filing Form 1-Z x 1.50 hours/issuer) in the aggregate.
---------------------------------------------------------------------------
\1074\ We currently estimate the burden per response for
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------
6. Form 8-A: Short Form Registration Under the Exchange Act
Under the final rules, Regulation A issuers in Tier 2 offerings
that elect to list securities offered pursuant to a qualified offering
statement on a national securities exchange or that seek to register
the class of securities offered pursuant to a qualified offering
statement under the Exchange Act may do so by filing a Form 8-A (short
form) registration statement with the Commission.\1075\ In such
circumstances, an issuer will be required to comply with the form
requirements of Form 8-A, which will generally allow issuers to
incorporate by reference in the form information provided in the
related Form 1-A. While we do not know the exact number of issuers
conducting Tier 2 offerings that will seek to register a class of
securities under the Exchange Act at or near the time of qualification
of an offering statement, for purpose of this PRA analysis, we estimate
2 percent of all issuers filing a Form 1-A (or 5 issuers, 250 issuers x
.02) will elect to register a class of securities under the Exchange
Act and file a Form 8-A.
---------------------------------------------------------------------------
\1075\ See discussion in Section II.E.3. above.
---------------------------------------------------------------------------
The final rules do not alter the burden hour per response of Form
8-A, but rather amend the existing Form 8-A to permit issuers in Tier 2
offerings to rely on the form. Therefore, we estimate that compliance
with the Form 8-A will not change as a result of the final rules, a
burden of 3 hours per response.\1076\ We estimate that compliance with
Form 8-A by issuers conducting a Tier 2 offering will result in a
burden of 15 hours (5 issuers filing Form 8-A x 3 hours/issuer) in
aggregate each year. We estimate that 100% of the burden will be
carried by the issuer internally.
---------------------------------------------------------------------------
\1076\ 17 CFR 249.208a.
---------------------------------------------------------------------------
7. Form ID Filings
Under the final rules, an issuer will be required to file specified
disclosures with the Commission on EDGAR.\1077\ We anticipate that many
issuers relying on Regulation A for the first time will not have
previously filed an electronic submission with the Commission and so
will need to file a Form ID. Form ID is the application form for access
codes to permit filing on EDGAR. The final rules will not change the
form itself, but we anticipate that the number of Form ID filings will
increase due to an increase in issuers relying on Regulation A. For
purposes of this PRA analysis, we estimate that 75 percent of the
issuers who seek to offer and sell securities in reliance on amended
Regulation A will not have previously filed an electronic submission
with the Commission and will, therefore, be required to file a Form ID.
As noted above, we estimate that approximately 250 issuers per year
will seek to offer and sell securities in reliance on Regulation A,
which corresponds to approximately 188 additional Form ID filings. We
estimate that 100% of the burden will be carried by the issuer
internally. As a result, we estimate the additional annual burden will
be approximately 28.20 hours (188 filings x 0.15 hours/filing).\1078\
---------------------------------------------------------------------------
\1077\ See Rules 252 and 257.
\1078\ We currently estimate the burden associated with Form ID
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------
8. Form F-X
Under the final rules, Canadian issuers are required to file a Form
F-X, which furnishes to the Commission a written irrevocable consent
and power of attorney at the time of filing the offering statement
required by Rule 252. It is used to appoint an agent for service of
process by Canadian issuers eligible to use Regulation A, issuers
registering securities on Forms F-8 or F-10 under the Securities Act or
filing periodic reports on Form 40-F under the Exchange Act, as well as
in certain other circumstances.
The final rules will not change Form F-X itself, but will amend the
rules to allow for the form to be filed electronically for offerings
under Regulation A. Canadian companies are the only type of issuer that
will be required to use this form under the final rules and we estimate
that 100% of the burden will be carried by the issuer internally. We
estimate that approximately 2 percent of issuers utilizing amended
Regulation A will be Canadian companies (or 5 responses, 250 issuers x
0.02) resulting in an annual burden of approximately 10 hours (2 hours
per response x 5 responses).\1079\
---------------------------------------------------------------------------
\1079\ In this regard, we note that no Canadian issuers filed a
Form 1-A in 2013.
---------------------------------------------------------------------------
D. Collections of Information Are Mandatory
The collections of information required under Rules 251 through 263
will be mandatory for all issuers seeking to rely on the Regulation A
exemption. Responses on Form 1-A, Form 1-K, Form 1-SA, Form 1-U and
Form 1-Z will not be kept confidential, although an issuer may request
confidential treatment for non-publicly submitted offering materials,
or any portion thereof, for which it believes an exemption from the
FOIA exists.\1080\ It is anticipated that most material not subject to
a confidential treatment request will be made public when the offering
is qualified. A Form 1-A that is non-publicly submitted by an issuer
and later abandoned before being publicly filed with the Commission and
responses on Form ID will, however, remain non-public, absent a request
for
[[Page 21892]]
such information under the Freedom of Information Act.\1081\
---------------------------------------------------------------------------
\1080\ See Commission Rule 83, 17 CFR 200.83, and Securities Act
Rule 406, 17 CFR 230.406.
\1081\ 5 U.S.C. 552. The Commission's regulations that implement
the Freedom of Information Act are at 17 CFR 200.80 et seq.
---------------------------------------------------------------------------
V. Final Regulatory Flexibility Act Analysis
This Final Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act, 5 U.S.C. 603. It
relates to the following:
Amendments to Rule 157(a), Rules 251 through 263 of
Regulation A, Rule 505 of Regulation D, Form 1-A, Form 8-A, Rule 30-1
of the Commission's organizational rules, Rule 4a-1 under the Trust
Indenture Act, Rule 12g5-1 and Rule 15c2-11 under the Exchange Act, and
Item 101 of Regulation S-T;
new Forms 1-K, 1-SA, 1-U, and 1-Z; and
the rescission of Form 2-A.
An Initial Regulatory Flexibility Analysis (IRFA) was prepared in
accordance with the Regulatory Flexibility Act and included in the
Proposing Release.
A. Need for the Rules
The rule amendments, new forms, and rescission of Form 2-A are
designed to implement the requirements of Section 3(b)(2) of the
Securities Act and to make certain conforming changes based on our
amendments to Regulation A. Section 3(b)(2) directs the Commission to
adopt rules adding a class of securities exempt from the registration
requirements of the Securities Act for offerings of up to $50 million
of securities within a 12-month period, subject to various additional
terms and conditions set forth in Section 3(b)(2) or as provided for by
the Commission as part of the rulemaking process.
Our primary objective is to implement Section 401 of the JOBS Act
by expanding and updating Regulation A in a manner that makes public
offerings of up to $50 million less costly and more flexible while
providing a framework for regulatory oversight to protect investors. In
so doing, we have crafted a revision of Regulation A that both promotes
small company capital formation and provides for meaningful investor
protection. We believe that issuers, particularly small businesses,
benefit from having a wide range of capital-raising strategies
available to them, and that an expanded and updated Regulation A could
serve as a valuable option that augments the exemptions from
registration more frequently relied upon, thereby facilitating capital
formation for small businesses.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on every aspect of
the IRFA, including the number of small entities that would be affected
by the proposed amendments, the existence or nature of the potential
impact of the proposals on small entities discussed in the analysis,
and how to quantify the impact of the proposed rules. We did not
receive any comments specifically addressing the IRFA. We did, however,
receive comments from members of the public on matters that could
potentially impact small entities. These comments are discussed at
length by topic in the corresponding subsections of Section II. above.
While the proposed rules contemplated that small entities would be
able to elect to proceed under the requirements of either Tier 1 or
Tier 2, as discussed more fully below, an entity considered a small
business under our rules would only be required to file ongoing reports
under Regulation A if it elected to conduct a Tier 2 offering.\1082\
The following discussion therefore focuses on the suggestions of
commenters, as they relate to the proposed and final requirements for
Tier 1 offerings, which is the tier most likely to be relied upon by
small entities.\1083\
---------------------------------------------------------------------------
\1082\ The distinction between a Tier 1 offering and Tier 2
offering is discussed in Section II. above.
\1083\ For a more comprehensive discussion of commenter
suggestions as to the proposed rules for both Tier 1 and Tier 2 that
could potentially impact small entities, see Section II. above.
---------------------------------------------------------------------------
Many commenters recommended making changes to proposed rules that,
in their view, would make Regulation A a more viable capital raising
option for smaller issuers.\1084\ Some commenters recommended improving
the utility of Regulation A for smaller issuers by preempting state
regulation of Tier 1 offerings.\1085\ Others, however, opposed
preemption for all Regulation A offerings.\1086\ Some commenters
recommended that we adopt a third tier, either expressly or through
fleixble applicability of the proposed tier requirements.\1087\ Some
commenters suggested that raising the offering limit of Tier 1 from $5
million to $10 million or more would make Tier 1 more useful,\1088\
while others recommended including various forms of ongoing disclosure
at a level lower than what was proposed to be required for Tier
2.\1089\ One commenter suggested reducing the Tier 1 narrative
disclosure obligations, particularly for offerings of $2 million or
less, so that such requirements would be more appropriately tailored
for smaller issuers.\1090\ Several commenters made recommendations with
respect to the financial statement and auditing requirements in Form 1-
A, as they relate to the requirements for Tier 1.\1091\
---------------------------------------------------------------------------
\1084\ Andreessen/Cowen Letter; BDO Letter; Bernard Letter;
Campbell Letter; CAQ Letter; Public Startup Co. Letter 1; Deloitte
Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter;
KPMG Letter; McGladrey Letter; Milken Institute Letter; Ladd Letter
2; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co
Letter.
\1085\ Andreessen/Cowen Letter; Bernard Letter; Campbell Letter;
Public Startup Co. Letter 1; Guzik Letter 1; Heritage Letter; Milken
Institute Letter; Ladd Letter 2; SVB Financial Letter.
\1086\ See fn. 772 above.
\1087\ See, e.g., Public Startup Co. Letter 1.
\1088\ Guzik Letter 1; ICBA Letter.
\1089\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure
requirements could parallel Tier 2's requirements, but without the
requirement for semiannual reports); Ladd Letter 2; Public Startup
Co. Letters 1 and 5; SVB Financial Letter.
\1090\ Campbell Letter.
\1091\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
---------------------------------------------------------------------------
The final rules for Regulation A take into account some of the
suggestions by commenters on ways to make Tier 1 more useful for small
entities. For example, the final rules raise the offering limit of Tier
1 to $20 million. Also, with respect to the offering circular narrative
disclosure requirements,\1092\ we have adopted certain additional
scaled disclosure requirements for Tier 1 that are intended to lessen
the compliance obligations for smaller issuers. We are further
providing issuers under both tiers with the accommodation provided to
emerging growth companies in Securities Act Section 7(a) to use the
extended transition periods applicable to private companies for
complying with new or revised accounting standards under U.S. GAAP.
Additionally, we have provided Tier 1 issuers with additional
flexibility with respect to auditor independence standards.
---------------------------------------------------------------------------
\1092\ See Section II.C.3.b(1). above.
---------------------------------------------------------------------------
As noted in Section II.H.3. above, however, we do not agree with
the position of some commenters that preemption of state securities
laws registration and qualification requirements is necessary or
appropriate for Tier 1 offerings.\1093\ We note that some commenters
who suggested that preemption of state securities laws may improve the
attractiveness of Tier 1 offerings did so on the condition that other
aspects of the tier should change accordingly, namely requiring Tier 1
[[Page 21893]]
issuers to provide audited financial statements in the offering
statement and possibly on an ongoing basis. For the reasons discussed
in Section II.D.3.b(2)(c). above, we have not adopted such changes in
Tier 1.
---------------------------------------------------------------------------
\1093\ See Section II.H.3. above.
---------------------------------------------------------------------------
Additionally, as noted in Section II.I. above, we do not believe
that the creation of a third tier, as suggested by some commenters,
would meaningfully alter a smaller entity's options for capital
formation under Regulation A. While a third tier may provide issuers
with some additional flexibility for capital formation under Regulation
A, this additional flexibility would have potential costs. For example,
a third tier may unnecessarily complicate compliance with Regulation A
for smaller entities, and could potentially confuse investors as to the
type of Regulation A offering an issuer was undertaking and the type of
information such investor could expect to receive as a result, thereby
lessening the viability of the exemption as a whole. For this reason,
we are not adopting a third or intermediate tier in Regulation A.
In the light of the changes discussed above, we believe that the
final rules we are adopting today provide smaller issuers with an
appropriately tailored regulatory regime that takes into account the
needs of small entities to have a viable capital formation option in
Regulation A, while maintaining appropriate investor protections.
C. Small Entities Subject to the Rules
For purposes of the Regulatory Flexibility Act, under our rules, an
issuer (other than an investment company) is a ``small business'' or
``small organization'' if it has total assets of $5 million or less as
of the end of its most recent fiscal year and is engaged or proposing
to engage in an offering of securities which does not exceed $5
million.\1094\
---------------------------------------------------------------------------
\1094\ Securities Act Rule 157 [17 CFR 230.157]. We note that
currently this rule refers to ``the dollar limitation prescribed by
Section 3(b) of the Securities Act.'' The JOBS Act amended Section
3(b) of the Securities Act. The former Section 3(b) is now Section
3(b)(1), and a new Section 3(b)(2) was added. To retain the meaning
of Rule 157, we are adopting a technical correction to replace the
reference to ``Section 3(b)'' with a reference to ``Section
3(b)(1).''
---------------------------------------------------------------------------
While Regulation A is available for offerings of up to $50 million
in securities in a 12-month period, only offerings up to $5 million in
securities in a 12-month period will constitute offerings by small
entities under the definition set forth above. It is difficult to
predict the number of small entities that will use Regulation A due to
the many variables included in the amendments. Nevertheless, we believe
that the final rules for Regulation A will increase the overall number
of Regulation A offerings of $5 million or less due to the ability to
non-publicly submit draft offering statements for review by the
Commission's staff, the expanded use of solicitation of interest
materials, the ability to electronically file and transmit offering
statements and offering circulars, the potential for preemption of
state regulatory review if the issuer elects to conduct a Tier 2
offering, and other significant changes summarized in Section II.
above.
Regulation A is currently limited to offerings with an aggregate
offering price and aggregate sales of $5 million or less.\1095\ From
2009 through 2014, 158 issuers filed offering statements and 36
offering statements were qualified by the Commission, or an average of
approximately six qualified offering statements per year. Of the 36
offering statements that were qualified, 28 included financial
statements indicating that the issuer had total assets of $5 million or
less (as of the most recent balance sheet included in such issuer's
offering statement at the time of qualification), or an average of
approximately five qualified offering statements per year in which the
issuer indicated it had total assets of $5 million or less. Based on
these data, and for the reasons discussed above, we believe that at
least five small businesses will conduct offerings under Regulation A
per year.
---------------------------------------------------------------------------
\1095\ As explained in Section II.B.3. above, aggregate sales
under Regulation A include prior sales generated from Regulation A
offerings that occurred in the 12 months preceding the current
offering.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
As discussed above in Section II., the final rules include
reporting, recordkeeping and other compliance requirements. In
particular, the final rules impose certain reporting requirements on
issuers offering and selling securities in a transaction relying on the
exemption provided by Section 3(b) and Regulation A. The final rules
require that issuers relying on the exemption file with the Commission
certain information specified in Form 1-A about the issuer and the
offering, including the issuer's contact information; use of proceeds
from the offering; price or method for calculating the price of the
securities being offered; business and business plan; property;
financial condition and results of operations; directors, officers,
significant employees and certain beneficial owners; material
agreements and contracts; and past securities sales.\1096\ Such issuers
are also required to provide information on the material factors that
make an investment in the issuer speculative or risky; dilution; the
plan of distribution for the offering; executive and director
compensation; conflicts of interest and related party transactions; and
financial statements. Similar to existing Regulation A, for Tier 1
offerings, Form 1-A does not require the financial statements to be
audited unless the issuer has already had them audited for another
purpose.
---------------------------------------------------------------------------
\1096\ See discussion in Section II.C.3.b. above.
---------------------------------------------------------------------------
As discussed above in Section II.E.1.c., issuers conducting Tier 2
offerings are also required to file annual reports on new Form 1-K,
semiannual updates on new Form 1-SA, current event reporting on new
Form 1-U, and to provide notice to the Commission of the termination of
their ongoing reporting obligations on new Form 1-Z.
An issuer subject to the Tier 2 periodic and current event
reporting described above is required to provide information annually
on Form 1-K, including the issuer's business and business plan;
conflicts of interest and related party transactions; executive and
director compensation; financial condition and results of operations;
and audited financial statements. The semiannual update on Form 1-SA
consists primarily of unaudited, interim financial statements for the
issuer's first two fiscal quarters and information regarding the
issuer's financial condition and results of operations. The current
event reporting on Form 1-U requires issuers to disclose certain major
developments, including changes of control; changes in the principal
executive officer and principal financial officer; fundamental changes
in the nature of business; material transactions or corporate events;
unregistered sales of five percent or more of outstanding equity
securities; changes in the issuer's certifying accountant; and non-
reliance on previous financial statements.
Form 1-Z is required for issuers in both Tier 1 and Tier 2
offerings to report summary information about a completed or terminated
Regulation A offering. Issuers conducting Tier 2 offerings also will be
subject to the additional provision in Form 1-Z that relates to the
voluntary termination of an issuer's continuous reporting obligations
under Tier 2; however, we expect its use by small entities will be
limited.
Although we estimated in the Proposing Release that approximately
188 issuers would enter the proposed Tier 2 ongoing reporting regime
every year, we believe that very few small
[[Page 21894]]
businesses will do so. A small business under our rules will only be
required to file ongoing reports under Regulation A if it elects to
conduct a Tier 2 offering.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the final amendments and rules, we
considered the following alternatives: (1) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (2) the
clarification, consolidation or simplification of compliance and
reporting requirements under the rule for small entities; (3) the use
of performance rather than design standards; and (4) an exemption from
coverage of the rules, or any parts of the rules, for small entities.
We considered whether it is necessary or appropriate to establish
different compliance or reporting requirements, timetables, or to
clarify, consolidate, or simplify compliance and reporting requirements
under the final rules for small entities. We have made several changes
from the proposal that may reduce compliance burdens on small entities.
For example, in response to public comment, the final rules provide for
the further scaling of disclosure items pertaining to executive
compensation and related party transactions for entities offering
securities pursuant to Tier 1, which are likely to be smaller entities.
With respect to using performance rather than design standards, we
used performance standards to the extent appropriate under the statute.
For example, issuers have the flexibility to customize the presentation
of certain disclosures in their offering statements.\1097\
---------------------------------------------------------------------------
\1097\ See Section II.C.3.b. above.
---------------------------------------------------------------------------
We also considered whether there should be an exemption from
coverage of the rules, or any parts of the rules, for small entities.
As discussed above, we are adopting different compliance reporting
requirements for issuers that qualify $20 million or less in securities
annually under Tier 1. Those issuers, which are more likely to be small
entities, are not subject to ongoing reporting requirements and the
requirement to provide audited financial statements, although such
entities retain the flexibility to comply with more rigorous initial
and ongoing compliance obligations if they so choose. While audited
financial statements are not a Tier 1 requirement, in comparison to the
proposed rules, the final rules provide certain additional flexibility
as to the independence standards required to be followed by auditors of
financial statements for issuers of less than $20 million that conduct
Tier 1 offerings--to the extent an issuer elects to provide audited
financial statements--by allowing such auditors to comply with the
independence standards of either the AICPA or Article 2 of Regulation
S-X. We believe that further distinctions in compliance requirements
for Form 1-A users beyond the different sets of requirements for Tier 1
and Tier 2 issuers may lead to investor confusion or reduced investor
confidence in Regulation A offerings, especially considering that the
disclosure requirements are already less than what is required by Form
S-1 for registered offerings. Further, we anticipate that the burden
for preparing a Form 1-A should be less for companies at an earlier
stage of development and with less extensive operations that are likely
to be small entities.\1098\ For these reasons, we believe that small
entities should be covered by the final rules to the extent specified
above.
---------------------------------------------------------------------------
\1098\ See discussion in Section IV.A.1. above.
---------------------------------------------------------------------------
VI. Statutory Basis and Text of Amendments
The amendments and forms contained in this document are being
adopted under the authority set forth in Sections 3(b), 19 and 28 of
the Securities Act of 1933, as amended, Sections 12, 15, 23(a) and 36
of the Securities Exchange Act of 1934, as amended, and Section 304 of
the Trust Indenture Act of 1939, as amended.
List of Subjects
17 CFR Part 200
Administrative practice and procedure, Authority delegations
(Government agencies), Organization and functions (Government
agencies).
17 CFR Parts 230, 232, 239, 240, 249, and 260
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
0
1. The authority citation for part 200 is revised to read in part as
follows:
Authority: 15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1,
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et
seq., unless otherwise noted.
* * * * *
0
2. Section 200.30-1 is amended by:
0
a. Revise paragraphs (b)(2) and (3); and
0
b. Add paragraph (b)(4).
The revisions and addition read as follows:
Sec. 200.30-1 Delegation of authority to Director of Division of
Corporation Finance.
* * * * *
(b) * * *
(2) To determine the date and time of qualification for offering
statements and amendments to offering statements pursuant to Rule
252(e) (Sec. 230.252(e) of this chapter);
(3) To consent to the withdrawal of an offering statement or to
declare an offering statement abandoned pursuant to Rule 259 (Sec.
230.259 of this chapter); and
(4) To deny a Form 1-Z filing pursuant to Rule 257 (Sec. 230.257
of this chapter).
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
3. The authority citation for part 230 is revised to read in part as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
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4. In Sec. 230.157, paragraph (a) is revised to read as follows:
Sec. 230.157 Small entities under the Securities Act for purposes of
the Regulatory Flexibility Act.
* * * * *
(a) When used with reference to an issuer, other than an investment
company, for purposes of the Securities Act of 1933, mean an issuer
whose total assets on the last day of its most recent fiscal year were
$5 million or less and that is engaged or proposing to engage in small
business financing. An issuer is considered to be engaged or proposing
to engage in small business financing under this section if it is
conducting or
[[Page 21895]]
proposes to conduct an offering of securities which does not exceed the
dollar limitation prescribed by section 3(b)(1) of the Securities Act.
* * * * *
0
5. Sections 230.251 through 230.263 are revised to read as follows:
Sec.
230.251 Scope of exemption.
230.252 Offering statement.
230.253 Offering circular.
230.254 Preliminary offering circular.
230.255 Solicitations of interest and other communications.
230.256 Definition of ``qualified purchaser''.
230.257 Periodic and current reporting; exit report.
230.258 Suspension of the exemption.
230.259 Withdrawal or abandonment of offering statements.
230.260 Insignificant deviations from a term, condition or
requirement of Regulation A.
230.261 Definitions.
230.262 Disqualification provisions.
230.263 Consent to service of process.
Sec. 230.251 Scope of exemption.
(a) Tier 1 and Tier 2. A public offer or sale of eligible
securities, as defined in Rule 261 (Sec. 230.261), pursuant to
Regulation A shall be exempt under section 3(b) from the registration
requirements of the Securities Act of 1933 (the ``Securities Act'') (15
U.S.C. 77a et seq.).
(1) Tier 1. Offerings pursuant to Regulation A in which the sum of
all cash and other consideration to be received for the securities
being offered (``aggregate offering price'') plus the gross proceeds
for all securities sold pursuant to other offering statements within
the 12 months before the start of and during the current offering of
securities (``aggregate sales'') does not exceed $20,000,000, including
not more than $6,000,000 offered by all selling securityholders that
are affiliates of the issuer (``Tier 1 offerings'').
(2) Tier 2. Offerings pursuant to Regulation A in which the sum of
the aggregate offering price and aggregate sales does not exceed
$50,000,000, including not more than $15,000,000 offered by all selling
securityholders that are affiliates of the issuer (``Tier 2
offerings'').
(3) Additional limitation on secondary sales in first year. The
portion of the aggregate offering price attributable to the securities
of selling securityholders shall not exceed 30% of the aggregate
offering price of a particular offering in:
(i) The issuer's first offering pursuant to Regulation A; or
(ii) Any subsequent Regulation A offering that is qualified within
one year of the qualification date of the issuer's first offering.
Note to paragraph (a). Where a mixture of cash and non-cash
consideration is to be received, the aggregate offering price must
be based on the price at which the securities are offered for cash.
Any portion of the aggregate offering price or aggregate sales
attributable to cash received in a foreign currency must be
translated into United States currency at a currency exchange rate
in effect on, or at a reasonable time before, the date of the sale
of the securities. If securities are not offered for cash, the
aggregate offering price or aggregate sales must be based on the
value of the consideration as established by bona fide sales of that
consideration made within a reasonable time, or, in the absence of
sales, on the fair value as determined by an accepted standard.
Valuations of non-cash consideration must be reasonable at the time
made. If convertible securities or warrants are being offered and
such securities are convertible, exercisable, or exchangeable within
one year of the offering statement's qualification or at the
discretion of the issuer, the underlying securities must also be
qualified and the aggregate offering price must include the actual
or maximum estimated conversion, exercise, or exchange price of such
securities.
(b) Issuer. The issuer of the securities:
(1) Is an entity organized under the laws of the United States or
Canada, or any State, Province, Territory or possession thereof, or the
District of Columbia, with its principal place of business in the
United States or Canada;
(2) Is not subject to section 13 or 15(d) of the Securities
Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78a et seq.)
immediately before the offering;
(3) Is not a development stage company that either has no specific
business plan or purpose, or has indicated that its business plan is to
merge with or acquire an unidentified company or companies;
(4) Is not an investment company registered or required to be
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.) or a business development company as defined in section 2(a)(48)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));
(5) Is not issuing fractional undivided interests in oil or gas
rights, or a similar interest in other mineral rights;
(6) Is not, and has not been, subject to any order of the
Commission entered pursuant to Section 12(j) of the Exchange Act (15
U.S.C. 78l(j)) within five years before the filing of the offering
statement;
(7) Has filed with the Commission all reports required to be filed,
if any, pursuant to Rule 257 (Sec. 230.257) during the two years
before the filing of the offering statement (or for such shorter period
that the issuer was required to file such reports); and
(8) Is not disqualified under Rule 262 (Sec. 230.262).
(c) Integration with other offerings. Offers or sales made in
reliance on this Regulation A will not be integrated with:
(1) Prior offers or sales of securities; or
(2) Subsequent offers or sales of securities that are:
(i) Registered under the Securities Act, except as provided in Rule
255(e) (Sec. 230.255(e));
(ii) Exempt from registration under Rule 701 (Sec. 230.701);
(iii) Made pursuant to an employee benefit plan;
(iv) Exempt from registration under Regulation S (Sec. Sec.
230.901 through 203.905);
(v) Made more than six months after the completion of the
Regulation A offering; or
(vi) Exempt from registration under Section 4(a)(6) of the
Securities Act (15 U.S.C. 77d(a)(6)).
Note to paragraph (c). If these safe harbors do not apply,
whether subsequent offers and sales of securities will be integrated
with the Regulation A offering will depend on the particular facts
and circumstances.
(d) Offering conditions--(1) Offers. (i) Except as allowed by Rule
255 (Sec. 230.255), no offer of securities may be made unless an
offering statement has been filed with the Commission.
(ii) After the offering statement has been filed, but before it is
qualified:
(A) Oral offers may be made;
(B) Written offers pursuant to Rule 254 (Sec. 230.254) may be
made; and
(C) Solicitations of interest and other communications pursuant to
Rule 255 (Sec. 230.255) may be made.
(iii) Offers may be made after the offering statement has been
qualified, but any written offers must be accompanied with or preceded
by the most recent offering circular filed with the Commission for such
offering.
(2) Sales. (i) No sale of securities may be made:
(A) Until the offering statement has been qualified;
(B) By issuers that are not currently required to file reports
pursuant to Rule 257(b) (Sec. 230.257(b)), until a Preliminary
Offering Circular is delivered at least 48 hours before the sale to any
person that before qualification of the offering statement had
indicated an interest in purchasing securities in the offering,
including those persons that responded to an issuer's solicitation of
interest materials; and
(C) In a Tier 2 offering of securities that are not listed on a
registered
[[Page 21896]]
national securities exchange upon qualification, unless the purchaser
is either an accredited investor (as defined in Rule 501 (Sec.
230.501)) or the aggregate purchase price to be paid by the purchaser
for the securities (including the actual or maximum estimated
conversion, exercise, or exchange price for any underlying securities
that have been qualified) is no more than ten percent (10%) of the
greater of such purchaser's:
(1) Annual income or net worth if a natural person (with annual
income and net worth for such natural person purchasers determined as
provided in Rule 501 (Sec. 230.501)); or
(2) Revenue or net assets for such purchaser's most recently
completed fiscal year end if a non-natural person.
Note to paragraph (d)(2)(i)(C). When securities underlying
warrants or convertible securities are being qualified pursuant to
Tier 2 of Regulation A one year or more after the qualification of
an offering for which investment limitations previously applied,
purchasers of the underlying securities for which investment
limitations would apply at that later date may determine compliance
with the ten percent (10%) investment limitation using the
conversion, exercise, or exchange price to acquire the underlying
securities at that later time without aggregating such price with
the price of the overlying warrants or convertible securities.
(D) The issuer may rely on a representation of the purchaser when
determining compliance with the ten percent (10%) investment limitation
in this paragraph (d)(2)(i)(C), provided that the issuer does not know
at the time of sale that any such representation is untrue.
(ii) In a transaction that represents a sale by the issuer or an
underwriter, or a sale by a dealer within 90 calendar days after
qualification of the offering statement, each underwriter or dealer
selling in such transaction must deliver to each purchaser from it, not
later than two business days following the completion of such sale, a
copy of the Final Offering Circular, subject to the following
provisions:
(A) If the sale was by the issuer and was not effected by or
through an underwriter or dealer, the issuer is responsible for
delivering the Final Offering Circular as if the issuer were an
underwriter;
(B) For continuous or delayed offerings pursuant to paragraph
(d)(3) of this section, the 90 calendar day period for dealers shall
commence on the day of the first bona fide offering of securities under
such offering statement;
(C) If the security is listed on a registered national securities
exchange, no offering circular need be delivered by a dealer more than
25 calendar days after the later of the qualification date of the
offering statement or the first date on which the security was bona
fide offered to the public;
(D) No offering circular need be delivered by a dealer if the
issuer is subject, immediately prior to the time of the filing of the
offering statement, to the reporting requirements of Rule 257(b) (Sec.
230.257(b)); and
(E) The Final Offering Circular delivery requirements set forth in
paragraph (d)(2)(ii) of this section may be satisfied by delivering a
notice to the effect that the sale was made pursuant to a qualified
offering statement that includes the uniform resource locator
(``URL''), which, in the case of an electronic-only offering, must be
an active hyperlink, where the Final Offering Circular, or the offering
statement of which such Final Offering Circular is part, may be
obtained on the Commission's Electronic Data Gathering, Analysis and
Retrieval System (``EDGAR'') and contact information sufficient to
notify a purchaser where a request for a Final Offering Circular can be
sent and received in response.
(3) Continuous or delayed offerings. (i) Continuous or delayed
offerings may be made under this Regulation A, so long as the offering
statement pertains only to:
(A) Securities that are to be offered or sold solely by or on
behalf of a person or persons other than the issuer, a subsidiary of
the issuer, or a person of which the issuer is a subsidiary;
(B) Securities that are to be offered and sold pursuant to a
dividend or interest reinvestment plan or an employee benefit plan of
the issuer;
(C) Securities that are to be issued upon the exercise of
outstanding options, warrants, or rights;
(D) Securities that are to be issued upon conversion of other
outstanding securities;
(E) Securities that are pledged as collateral; or
(F) Securities the offering of which will be commenced within two
calendar days after the qualification date, will be made on a
continuous basis, may continue for a period in excess of 30 calendar
days from the date of initial qualification, and will be offered in an
amount that, at the time the offering statement is qualified, is
reasonably expected to be offered and sold within two years from the
initial qualification date. These securities may be offered and sold
only if not more than three years have elapsed since the initial
qualification date of the offering statement under which they are being
offered and sold; provided, however, that if a new offering statement
has been filed pursuant to this paragraph (d)(3)(i)(F), securities
covered by the prior offering statement may continue to be offered and
sold until the earlier of the qualification date of the new offering
statement or 180 calendar days after the third anniversary of the
initial qualification date of the prior offering statement. Before the
end of such three-year period, an issuer may file a new offering
statement covering the securities. The new offering statement must
include all the information that would be required at that time in an
offering statement relating to all offerings that it covers. Before the
qualification date of the new offering statement, the issuer may
include as part of such new offering statement any unsold securities
covered by the earlier offering statement by identifying on the cover
page of the new offering circular, or the latest amendment, the amount
of such unsold securities being included. The offering of securities on
the earlier offering statement will be deemed terminated as of the date
of qualification of the new offering statement. Securities may be sold
pursuant to this paragraph (d)(3)(i)(F) only if the issuer is current
in its annual and semiannual filings pursuant to Rule 257(b) (Sec.
230.257(b)), at the time of such sale.
(ii) At the market offerings, by or on behalf of the issuer or
otherwise, are not permitted under this Regulation A. As used in this
paragraph (d)(3)(ii), the term at the market offering means an offering
of equity securities into an existing trading market for outstanding
shares of the same class at other than a fixed price.
(e) Confidential treatment. A request for confidential treatment
may be made under Rule 406 (Sec. 230.406) for information required to
be filed, and Rule 83 (Sec. 200.83) for information not required to be
filed.
(f) Electronic filing. Documents filed or otherwise provided to the
Commission pursuant to this Regulation A must be submitted in
electronic format by means of EDGAR in accordance with the EDGAR rules
set forth in Regulation S-T (17 CFR part 232).
Sec. 230.252 Offering statement.
(a) Documents to be included. The offering statement consists of
the contents required by Form 1-A (Sec. 239.90 of this chapter) and
any other material information necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
[[Page 21897]]
(b) Paper, printing, language and pagination. Except as otherwise
specified in this rule, the requirements for offering statements are
the same as those specified in Rule 403 (Sec. 230.403) for
registration statements under the Act. No fee is payable to the
Commission upon either the submission or filing of an offering
statement on Form 1-A, or any amendment to an offering statement.
(c) Signatures. The issuer, its principal executive officer,
principal financial officer, principal accounting officer, and a
majority of the members of its board of directors or other governing
body, must sign the offering statement in the manner prescribed by Form
1-A. If a signature is by a person on behalf of any other person,
evidence of authority to sign must be filed, except where an executive
officer signs for the issuer.
(d) Non-public submission. An issuer whose securities have not been
previously sold pursuant to a qualified offering statement under this
Regulation A or an effective registration statement under the
Securities Act may submit a draft offering statement to the Commission
for non-public review by the staff of the Commission before public
filing, provided that the offering statement shall not be qualified
less than 21 calendar days after the public filing with the Commission
of:
(1) The initial non-public submission;
(2) All non-public amendments; and
(3) All non-public correspondence submitted by or on behalf of the
issuer to the Commission staff regarding such submissions (subject to
any separately approved confidential treatment request under Rule
251(e) (Sec. 230.251(e)).
(e) Qualification. An offering statement and any amendment thereto
can be qualified only at such date and time as the Commission may
determine.
(f) Amendments. (1)(i) Amendments to an offering statement must be
signed and filed with the Commission in the same manner as the initial
filing. Amendments to an offering statement must be filed under cover
of Form 1-A and must be numbered consecutively in the order in which
filed.
(ii) Every amendment that includes amended audited financial
statements must include the consent of the certifying accountant to the
use of such accountant's certification in connection with the amended
financial statements in the offering statement or offering circular and
to being named as having audited such financial statements.
(iii) Amendments solely relating to Part III of Form 1-A must
comply with the requirements of paragraph (f)(1)(i) of this section,
except that such amendments may be limited to Part I of Form 1-A, an
explanatory note, and all of the information required by Part III of
Form 1-A.
(2) Post-qualification amendments must be filed in the following
circumstances for ongoing offerings:
(i) At least every 12 months after the qualification date to
include the financial statements that would be required by Form 1-A as
of such date; or
(ii) To reflect any facts or events arising after the qualification
date of the offering statement (or the most recent post-qualification
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the offering
statement.
Sec. 230.253 Offering circular.
(a) Contents. An offering circular must include the information
required by Form 1-A for offering circulars.
(b) Information that may be omitted. Notwithstanding paragraph (a)
of this section, a qualified offering circular may omit information
with respect to the public offering price, underwriting syndicate
(including any material relationships between the issuer or selling
securityholders and the unnamed underwriters, brokers or dealers),
underwriting discounts or commissions, discounts or commissions to
dealers, amount of proceeds, conversion rates, call prices and other
items dependent upon the offering price, delivery dates, and terms of
the securities dependent upon the offering date; provided, that the
following conditions are met:
(1) The securities to be qualified are offered for cash.
(2) The outside front cover page of the offering circular includes
a bona fide estimate of the range of the maximum offering price and the
maximum number of shares or other units of securities to be offered or
a bona fide estimate of the principal amount of debt securities
offered, subject to the following conditions:
(i) The range must not exceed $2 for offerings where the upper end
of the range is $10 or less or 20% if the upper end of the price range
is over $10; and
(ii) The upper end of the range must be used in determining the
aggregate offering price under Rule 251(a) (Sec. 230.251(a)).
(3) The offering statement does not relate to securities to be
offered by competitive bidding.
(4) The volume of securities (the number of equity securities or
aggregate principal amount of debt securities) to be offered may not be
omitted in reliance on this paragraph (b).
Note to paragraph (b). A decrease in the volume of securities
offered or a change in the bona fide estimate of the offering price
range from that indicated in the offering circular filed as part of
a qualified offering statement may be disclosed in the offering
circular filed with the Commission pursuant to Rule 253(g) (Sec.
230.253(g)), so long as the decrease in the volume of securities
offered or change in the price range would not materially change the
disclosure contained in the offering statement at qualification.
Notwithstanding the foregoing, any decrease in the volume of
securities offered and any deviation from the low or high end of the
price range may be reflected in the offering circular supplement
filed with the Commission pursuant to Rule 253(g)(1) or (3) (Sec.
230.253(g)(1) or (3)) if, in the aggregate, the decrease in volume
and/or change in price represent no more than a 20% change from the
maximum aggregate offering price calculable using the information in
the qualified offering statement. In no circumstances may this
paragraph be used to offer securities where the maximum aggregate
offering price would result in the offering exceeding the limit set
forth in Rule 251(a) (Sec. 230.251(a)) or if the change would
result in a Tier 1 offering becoming a Tier 2 offering. An offering
circular supplement may not be used to increase the volume of
securities being offered. Additional securities may only be offered
pursuant to a new offering statement or post-qualification amendment
qualified by the Commission.
(c) Filing of omitted information. The information omitted from the
offering circular in reliance upon paragraph (b) of this section must
be contained in an offering circular filed with the Commission pursuant
to paragraph (g) of this section; except that if such offering circular
is not so filed by the later of 15 business days after the
qualification date of the offering statement or 15 business days after
the qualification of a post-qualification amendment thereto that
contains an offering circular, the information omitted in reliance upon
paragraph (b) of this section must be contained in a qualified post-
qualification amendment to the offering statement.
(d) Presentation of information. (1) Information in the offering
circular must be presented in a clear, concise and understandable
manner and in a type size that is easily readable. Repetition of
information should be avoided; cross-referencing of information within
the document is permitted.
(2) Where an offering circular is distributed through an electronic
medium, issuers may satisfy legibility requirements applicable to
printed documents by presenting all required information in a format
readily communicated to investors.
[[Page 21898]]
(e) Date. An offering circular must be dated approximately as of
the date it was filed with the Commission.
(f) Cover page legend. The cover page of every offering circular
must display the following statement highlighted by prominent type or
in another manner:
The United States Securities and Exchange Commission does not pass
upon the merits of or give its approval to any securities offered or
the terms of the offering, nor does it pass upon the accuracy or
completeness of any offering circular or other solicitation materials.
These securities are offered pursuant to an exemption from registration
with the Commission; however, the Commission has not made an
independent determination that the securities offered are exempt from
registration.
(g) Offering circular supplements. (1) An offering circular that
discloses information previously omitted from the offering circular in
reliance upon Rule 253(b) (Sec. 230.253(b)) must be filed with the
Commission no later than two business days following the earlier of the
date of determination of the offering price or the date such offering
circular is first used after qualification in connection with a public
offering or sale.
(2) An offering circular that reflects information other than that
covered in paragraph (g)(1) of this section that constitutes a
substantive change from or addition to the information set forth in the
last offering circular filed with the Commission must be filed with the
Commission no later than five business days after the date it is first
used after qualification in connection with a public offering or sale.
If an offering circular filed pursuant to this paragraph (g)(2)
consists of an offering circular supplement attached to an offering
circular that previously had been filed or was not required to be filed
pursuant to paragraph (g) of this section because it did not contain
substantive changes from an offering circular that previously was
filed, only the offering circular supplement need be filed under
paragraph (g) of this section, provided that the cover page of the
offering circular supplement identifies the date(s) of the related
offering circular and any offering circular supplements thereto that
together constitute the offering circular with respect to the
securities currently being offered or sold.
(3) An offering circular that discloses information, facts or
events covered in both paragraphs (g)(1) and (2) of this section must
be filed with the Commission no later than two business days following
the earlier of the date of the determination of the offering price or
the date it is first used after qualification in connection with a
public offering or sale.
(4) An offering circular required to be filed pursuant to paragraph
(g) of this section that is not filed within the time frames specified
in paragraphs (g)(1) through (3) of this section, as applicable, must
be filed pursuant to this paragraph (g)(4) as soon as practicable after
the discovery of such failure to file.
(5) Each offering circular filed under this section must contain in
the upper right corner of the cover page the paragraphs of paragraphs
(g)(1) through (4) of this section under which the filing is made, and
the file number of the offering statement to which the offering
circular relates.
Sec. 230.254 Preliminary offering circular.
After the filing of an offering statement, but before its
qualification, written offers of securities may be made if they meet
the following requirements:
(a) Outside front cover page. The outside front cover page of the
material bears the caption Preliminary Offering Circular, the date of
issuance, and the following legend, which must be highlighted by
prominent type or in another manner:
An offering statement pursuant to Regulation A relating to these
securities has been filed with the Securities and Exchange Commission.
Information contained in this Preliminary Offering Circular is subject
to completion or amendment. These securities may not be sold nor may
offers to buy be accepted before the offering statement filed with the
Commission is qualified. This Preliminary Offering Circular shall not
constitute an offer to sell or the solicitation of an offer to buy nor
may there be any sales of these securities in any state in which such
offer, solicitation or sale would be unlawful before registration or
qualification under the laws of any such state. We may elect to satisfy
our obligation to deliver a Final Offering Circular by sending you a
notice within two business days after the completion of our sale to you
that contains the URL where the Final Offering Circular or the offering
statement in which such Final Offering Circular was filed may be
obtained.
(b) Other contents. The Preliminary Offering Circular contains
substantially the information required to be in an offering circular by
Form 1-A (Sec. 239.90 of this chapter), except that certain
information may be omitted under Rule 253(b) (Sec. 230.253(b)) subject
to the conditions set forth in such rule.
(c) Filing. The Preliminary Offering Circular is filed as a part of
the offering statement.
Sec. 230.255 Solicitations of interest and other communications.
(a) Solicitation of interest. At any time before the qualification
of an offering statement, including before the non-public submission or
public filing of such offering statement, an issuer or any person
authorized to act on behalf of an issuer may communicate orally or in
writing to determine whether there is any interest in a contemplated
securities offering. Such communications are deemed to be an offer of a
security for sale for purposes of the antifraud provisions of the
federal securities laws. No solicitation or acceptance of money or
other consideration, nor of any commitment, binding or otherwise, from
any person is permitted until qualification of the offering statement.
(b) Conditions. The communications must:
(1) State that no money or other consideration is being solicited,
and if sent in response, will not be accepted;
(2) State that no offer to buy the securities can be accepted and
no part of the purchase price can be received until the offering
statement is qualified, and any such offer may be withdrawn or revoked,
without obligation or commitment of any kind, at any time before notice
of its acceptance given after the qualification date;
(3) State that a person's indication of interest involves no
obligation or commitment of any kind; and
(4) After the public filing of the offering statement:
(i) State from whom a copy of the most recent version of the
Preliminary Offering Circular may be obtained, including a phone number
and address of such person;
(ii) Provide the URL where such Preliminary Offering Circular, or
the offering statement in which such Preliminary Offering Circular was
filed, may be obtained; or
(iii) Include a complete copy of the Preliminary Offering Circular.
(c) Indications of interest. Any written communication under this
rule may include a means by which a person may indicate to the issuer
that such person is interested in a potential offering. This issuer may
require the name, address, telephone number, and/or email address in
any response form included pursuant to this paragraph (c).
(d) Revised solicitations of interest. If solicitation of interest
materials are used after the public filing of the offering statement
and such solicitation of interest materials contain information
[[Page 21899]]
that is inaccurate or inadequate in any material respect, revised
solicitation of interest materials must be redistributed in a
substantially similar manner as such materials were originally
distributed. Notwithstanding the foregoing in this paragraph (d), if
the only information that is inaccurate or inadequate is contained in a
Preliminary Offering Circular provided with the solicitation of
interest materials pursuant to paragraphs (b)(4)(i) or (ii) of this
section, no such redistribution is required in the following
circumstances:
(1) in the case of paragraph (b)(4)(i) of this section, the revised
Preliminary Offering Circular will be provided to any persons making
new inquiries and will be recirculated to any persons making any
previous inquiries; or
(2) in the case of paragraph (b)(4)(ii) of this section, the URL
continues to link directly to the most recent Preliminary Offering
Circular or to the offering statement in which such revised Preliminary
Offering Circular was filed.
(e) Abandoned offerings. Where an issuer decides to register an
offering under the Securities Act after soliciting interest in a
contemplated, but subsequently abandoned, Regulation A offering, the
abandoned Regulation A offering would not be subject to integration
with the registered offering if the issuer engaged in solicitations of
interest pursuant to this rule only to qualified institutional buyers
and institutional accredited investors permitted by Section 5(d) of the
Securities Act. If the issuer engaged in solicitations of interest to
persons other than qualified institutional buyers and institutional
accredited investors, an abandoned Regulation A offering would not be
subject to integration if the issuer (and any underwriter, broker,
dealer, or agent used by the issuer in connection with the proposed
offering) waits at least 30 calendar days between the last such
solicitation of interest in the Regulation A offering and the filing of
the registration statement with the Commission.
Sec. 230.256 Definition of ``qualified purchaser''.
For purposes of Section 18(b)(3) of the Securities Act [15 U.S.C.
77r(b)(3)], a ``qualified purchaser'' means any person to whom
securities are offered or sold pursuant to a Tier 2 offering of this
Regulation A.
Sec. 230.257 Periodic and current reporting; exit report.
(a) Tier 1: Exit report. Each issuer that has filed an offering
statement for a Tier 1 offering that has been qualified pursuant to
this Regulation A must file an exit report on Form 1-Z (Sec. 239.94 of
this chapter) not later than 30 calendar days after the termination or
completion of the offering.
(b) Tier 2: Periodic and current reporting. Each issuer that has
filed an offering statement for a Tier 2 offering that has been
qualified pursuant to this Regulation A must file with the Commission
the following periodic and current reports:
(1) Annual reports. An annual report on Form 1-K (Sec. 239.91 of
this chapter) for the fiscal year in which the offering statement
became qualified and for any fiscal year thereafter, unless the
issuer's obligation to file such annual report is suspended under
paragraph (d) of this section. Annual reports must be filed within the
period specified in Form 1-K.
(2) Special financial report. (i) A special financial report on
Form 1-K or Form 1-SA if the offering statement did not contain the
following:
(A) Audited financial statements for the issuer's most recent
fiscal year (or for the life of the issuer if less than a full fiscal
year) preceding the fiscal year in which the issuer's offering
statement became qualified; or
(B) unaudited financial statements covering the first six months of
the issuer's current fiscal year if the offering statement was
qualified during the last six months of that fiscal year.
(ii) The special financial report described in paragraph
(b)(2)(i)(A) of this section must be filed under cover of Form 1-K
within 120 calendar days after the qualification date of the offering
statement and must include audited financial statements for such fiscal
year or other period specified in that paragraph, as the case may be.
The special financial report described in paragraph (b)(2)(i)(B) of
this section must be filed under cover of Form 1-SA within 90 calendar
days after the qualification date of the offering statement and must
include the semiannual financial statements for the first six months of
the issuer's fiscal year, which may be unaudited.
(iii) A special financial report must be signed in accordance with
the requirements of the form on which it is filed.
(3) Semiannual report. A semiannual report on Form 1-SA (Sec.
239.92 of this chapter) within the period specified in Form 1-SA.
Semiannual reports must cover the first six months of each fiscal year
of the issuer, commencing with the first six months of the fiscal year
immediately following the most recent fiscal year for which full
financial statements were included in the offering statement, or, if
the offering statement included financial statements for the first six
months of the fiscal year following the most recent full fiscal year,
for the first six months of the following fiscal year.
(4) Current reports. Current reports on Form 1-U (Sec. 239.93 of
this chapter) with respect to the matters and within the period
specified in that form, unless substantially the same information has
been previously reported to the Commission by the issuer under cover of
Form 1-K or Form 1-SA.
(5) Reporting by successor issuers. Where in connection with a
succession by merger, consolidation, exchange of securities,
acquisition of assets or otherwise, securities of any issuer that is
not required to file reports pursuant to paragraph (b) of this section
are issued to the holders of any class of securities of another issuer
that is required to file such reports, the duty to file reports
pursuant to paragraph (b) of this section shall be deemed to have been
assumed by the issuer of the class of securities so issued. The
successor issuer must, after the consummation of the succession, file
reports in accordance with paragraph (b) of this section, unless that
issuer is exempt from filing such reports or the duty to file such
reports is terminated or suspended under paragraph (d) of this section.
(c) Amendments. All amendments to the reports described in
paragraphs (a) and (b) of this section must be filed under cover of the
form amended, marked with the letter A to designate the document as an
amendment, e.g., ``1-K/A,'' and in compliance with pertinent
requirements applicable to such reports. Amendments filed pursuant to
this paragraph (c) must set forth the complete text of each item as
amended, but need not include any items that were not amended.
Amendments must be numbered sequentially and be filed separately for
each report amended. Amendments must be signed on behalf of the issuer
by a duly authorized representative of the issuer. An amendment to any
report required to include certifications as specified in the
applicable form must include new certifications by the appropriate
persons.
(d) Suspension of duty to file reports. (1) The duty to file
reports under this rule shall be automatically suspended if and so long
as the issuer is subject to the duty to file reports required by
section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 15 U.S.C.
78o).
(2) The duty to file reports under paragraph (b) of this section
with respect to a class of securities held of
[[Page 21900]]
record (as defined in Rule 12g5-1 (Sec. 240.12g5-1 of this chapter))
by less than 300 persons, or less than 1,200 persons for a bank (as
defined in Section 3(a)(6) of the Exchange Act (15 U.S.C. 78c(a)(6)),
or a bank holding company (as defined in section 2 of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841)), shall be suspended for such
class of securities immediately upon filing with the Commission an exit
report on Form 1-Z (Sec. 239.94 of this chapter) if the issuer of such
class has filed all reports due pursuant to this rule before the date
of such Form 1-Z filing for the shorter of:
(i) The period since the issuer became subject to such reporting
obligation; or
(ii) Its most recent three fiscal years and the portion of the
current year preceding the date of filing Form 1-Z.
(3) For the purposes of paragraph (d)(2) of this section, the term
class shall be construed to include all securities of an issuer that
are of substantially similar character and the holders of which enjoy
substantially similar rights and privileges. If the Form 1-Z is
subsequently withdrawn or if it is denied because the issuer was
ineligible to use the form, the issuer must, within 60 calendar days,
file with the Commission all reports which would have been required if
such exit report had not been filed. If the suspension resulted from
the issuer's merger into, or consolidation with, another issuer or
issuers, the notice must be filed by the successor issuer.
(4) The ability to suspend reporting, as described in paragraph
(d)(2) of this section, is not available for any class of securities
if:
(i) During that fiscal year a Tier 2 offering statement was
qualified;
(ii) The issuer has not filed an annual report under this rule or
the Exchange Act for the fiscal year in which a Tier 2 offering
statement was qualified; or
(iii) Offers or sales of securities of that class are being made
pursuant to a Tier 2 Regulation A offering.
(e) Termination of duty to file reports. If the duty to file
reports is suspended pursuant to paragraph (d)(1) of this section and
such suspension ends because the issuer terminates or suspends its duty
to file reports under the Exchange Act, the issuer's obligation to file
reports under paragraph (b) of this section shall:
(1) Automatically terminate if the issuer is eligible to suspend
its duty to file reports under paragraphs (d)(2) and (3) of this
section; or
(2) Recommence with the report covering the most recent financial
period after that included in any effective registration statement or
filed Exchange Act report.
Sec. 230.258 Suspension of the exemption.
(a) Suspension. The Commission may at any time enter an order
temporarily suspending a Regulation A exemption if it has reason to
believe that:
(1) No exemption is available or any of the terms, conditions or
requirements of Regulation A have not been complied with;
(2) The offering statement, any sales or solicitation of interest
material, or any report filed pursuant to Rule 257 (Sec. 230.257)
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements made, in light
of the circumstances under which they are made, not misleading;
(3) The offering is being made or would be made in violation of
section 17 of the Securities Act;
(4) An event has occurred after the filing of the offering
statement that would have rendered the exemption hereunder unavailable
if it had occurred before such filing;
(5) Any person specified in Rule 262(a) (Sec. 230.262(a)) has been
indicted for any crime or offense of the character specified in Rule
262(a)(1) (Sec. 230.262(a)(1)), or any proceeding has been initiated
for the purpose of enjoining any such person from engaging in or
continuing any conduct or practice of the character specified in Rule
262(a)(2) (Sec. 230.262(a)(2)), or any proceeding has been initiated
for the purposes of Rule 262(a)(3)-(8) (Sec. 230.262(a)(3) through
(8)); or
(6) The issuer or any promoter, officer, director, or underwriter
has failed to cooperate, or has obstructed or refused to permit the
making of an investigation by the Commission in connection with any
offering made or proposed to be made in reliance on Regulation A.
(b) Notice and hearing. Upon the entry of an order under paragraph
(a) of this section, the Commission will promptly give notice to the
issuer, any underwriter, and any selling securityholder:
(1) That such order has been entered, together with a brief
statement of the reasons for the entry of the order; and
(2) That the Commission, upon receipt of a written request within
30 calendar days after the entry of the order, will, within 20 calendar
days after receiving the request, order a hearing at a place to be
designated by the Commission.
(c) Suspension order. If no hearing is requested and none is
ordered by the Commission, an order entered under paragraph (a) of this
section shall become permanent on the 30th calendar day after its entry
and shall remain in effect unless or until it is modified or vacated by
the Commission. Where a hearing is requested or is ordered by the
Commission, the Commission will, after notice of and opportunity for
such hearing, either vacate the order or enter an order permanently
suspending the exemption.
(d) Permanent suspension. The Commission may, at any time after
notice of and opportunity for hearing, enter an order permanently
suspending the exemption for any reason upon which it could have
entered a temporary suspension order under paragraph (a) of this
section. Any such order shall remain in effect until vacated by the
Commission.
(e) Notice procedures. All notices required by this rule must be
given by personal service, registered or certified mail to the
addresses given by the issuer, any underwriter and any selling
securityholder in the offering statement.
Sec. 230.259 Withdrawal or abandonment of offering statements.
(a) Withdrawal. If none of the securities that are the subject of
an offering statement has been sold and such offering statement is not
the subject of a proceeding under Rule 258 (Sec. 230.258), the
offering statement may be withdrawn with the Commission's consent. The
application for withdrawal must state the reason the offering statement
is to be withdrawn and must be signed by an authorized representative
of the issuer. Any withdrawn document will remain in the Commission's
files, as well as the related request for withdrawal.
(b) Abandonment. When an offering statement has been on file with
the Commission for nine months without amendment and has not become
qualified, the Commission may, in its discretion, declare the offering
statement abandoned. If the offering statement has been amended, the
nine-month period shall be computed from the date of the latest
amendment.
Sec. 230.260 Insignificant deviations from a term, condition or
requirement of Regulation A.
(a) Failure to comply. A failure to comply with a term, condition
or requirement of Regulation A will not result in the loss of the
exemption from the requirements of section 5 of the Securities Act for
any offer or sale to a particular individual or entity, if the person
relying on the exemption establishes that:
(1) The failure to comply did not pertain to a term, condition or
[[Page 21901]]
requirement directly intended to protect that particular individual or
entity;
(2) The failure to comply was insignificant with respect to the
offering as a whole, provided that any failure to comply with Rule
251(a), (b), and (d)(1) and (3) (Sec. 230.251(a), (b), and (d)(1) and
(3)) shall be deemed to be significant to the offering as a whole; and
(3) A good faith and reasonable attempt was made to comply with all
applicable terms, conditions and requirements of Regulation A.
(b) Action by Commission. A transaction made in reliance upon
Regulation A must comply with all applicable terms, conditions and
requirements of the regulation. Where an exemption is established only
through reliance upon paragraph (a) of this section, the failure to
comply shall nonetheless be actionable by the Commission under section
20 of the Securities Act.
(c) Suspension. This provision provides no relief or protection
from a proceeding under Rule 258 (Sec. 230.258).
Sec. 230.261 Definitions.
As used in this Regulation A, all terms have the same meanings as
in Rule 405 (Sec. 230.405), except that all references to registrant
in those definitions shall refer to the issuer of the securities to be
offered and sold under Regulation A. In addition, these terms have the
following meanings:
(a) Affiliated issuer. An affiliate (as defined in Rule 501 (Sec.
230.501)) of the issuer that is issuing securities in the same
offering.
(b) Business day. Any day except Saturdays, Sundays or United
States federal holidays.
(c) Eligible securities. Equity securities, debt securities, and
securities convertible or exchangeable to equity interests, including
any guarantees of such securities, but not including asset-backed
securities as such term is defined in Item 1101(c) of Regulation AB.
(d) Final order. A written directive or declaratory statement
issued by a federal or state agency described in Rule 262(a)(3) (Sec.
230.262(a)(3)) under applicable statutory authority that provides for
notice and an opportunity for hearing, which constitutes a final
disposition or action by that federal or state agency.
(e) Final offering circular. The more recent of: the current
offering circular contained in a qualified offering statement; and any
offering circular filed pursuant to Rule 253(g) (Sec. 230.253(g)). If,
however, the issuer is relying on Rule 253(b) ((Sec. 230.253(b)), the
Final Offering Circular is the most recent of the offering circular
filed pursuant to Rule 253(g)(1) or (3) (Sec. 230.253(g)(1) or (3))
and any subsequent offering circular filed pursuant to Rule 253(g)
(Sec. 230.253(g)).
(f) Offering statement. An offering statement prepared pursuant to
Regulation A.
(g) Preliminary offering circular. The offering circular described
in Rule 254 (Sec. 230.254).
Sec. 230.262 Disqualification provisions.
(a) Disqualification events. No exemption under this Regulation A
shall be available for a sale of securities if the issuer; any
predecessor of the issuer; any affiliated issuer; any director,
executive officer, other officer participating in the offering, general
partner or managing member of the issuer; any beneficial owner of 20%
or more of the issuer's outstanding voting equity securities,
calculated on the basis of voting power; any promoter connected with
the issuer in any capacity at the time of filing, any offer after
qualification, or such sale; any person that has been or will be paid
(directly or indirectly) remuneration for solicitation of purchasers in
connection with such sale of securities; any general partner or
managing member of any such solicitor; or any director, executive
officer or other officer participating in the offering of any such
solicitor or general partner or managing member of such solicitor:
(1) Has been convicted, within ten years before the filing of the
offering statement (or five years, in the case of issuers, their
predecessors and affiliated issuers), of any felony or misdemeanor:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the offering statement, that, at the time of such filing, restrains or
enjoins such person from engaging or continuing to engage in any
conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(3) Is subject to a final order (as defined in Rule 261 (Sec.
230.261)) of a state securities commission (or an agency or officer of
a state performing like functions); a state authority that supervises
or examines banks, savings associations, or credit unions; a state
insurance commission (or an agency or officer of a state performing
like functions); an appropriate federal banking agency; the U.S.
Commodity Futures Trading Commission; or the National Credit Union
Administration that:
(i) At the time of the filing of the offering statement, bars the
person from:
(A) Association with an entity regulated by such commission,
authority, agency, or officer;
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative, or deceptive
conduct entered within ten years before such filing of the offering
statement;
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15
U.S.C. 78o(b) or 78o-4(c)) or section 203(e) or (f) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at the time of
the filing of the offering statement:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer or investment adviser;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the offering statement that, at the time of
such filing, orders the person to cease and desist from committing or
causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the federal
securities laws, including without limitation section 17(a)(1) of the
Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-
5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(c)(1)) and section 206(1) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
[[Page 21902]]
(ii) Section 5 of the Securities Act of 1933 (15 U.S.C. 77e).
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or offering statement
filed with the Commission that, within five years before the filing of
the offering statement, was the subject of a refusal order, stop order,
or order suspending the Regulation A exemption, or is, at the time of
such filing, the subject of an investigation or proceeding to determine
whether a stop order or suspension order should be issued; or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
offering statement, or is, at the time of such filing, subject to a
temporary restraining order or preliminary injunction with respect to
conduct alleged by the United States Postal Service to constitute a
scheme or device for obtaining money or property through the mail by
means of false representations.
(b) Transition, waivers, reasonable care exception. Paragraph (a)
of this section shall not apply:
(1) With respect to any order under Sec. 230.262(a)(3) or (5) that
occurred or was issued before June 19, 2015;
(2) Upon a showing of good cause and without prejudice to any other
action by the Commission, if the Commission determines that it is not
necessary under the circumstances that an exemption be denied;
(3) If, before the filing of the offering statement, the court or
regulatory authority that entered the relevant order, judgment or
decree advises in writing (whether contained in the relevant judgment,
order or decree or separately to the Commission or its staff) that
disqualification under paragraph (a) of this section should not arise
as a consequence of such order, judgment or decree; or
(4) If the issuer establishes that it did not know and, in the
exercise of reasonable care, could not have known that a
disqualification existed under paragraph (a) of this section.
Note to paragraph (b)(4). An issuer will not be able to
establish that it has exercised reasonable care unless it has made,
in light of the circumstances, factual inquiry into whether any
disqualifications exist. The nature and scope of the factual inquiry
will vary based on the facts and circumstances concerning, among
other things, the issuer and the other offering participants.
(c) Affiliated issuers. For purposes of paragraph (a) of this
section, events relating to any affiliated issuer that occurred before
the affiliation arose will be not considered disqualifying if the
affiliated entity is not:
(1) In control of the issuer; or
(2) Under common control with the issuer by a third party that was
in control of the affiliated entity at the time of such events.
(d) Disclosure of prior ``bad actor'' events. The issuer must
include in the offering circular a description of any matters that
would have triggered disqualification under paragraphs (a)(3) and (5)
of this section but occurred before June 19, 2015. The failure to
provide such information shall not prevent an issuer from relying on
Regulation A if the issuer establishes that it did not know and, in the
exercise of reasonable care, could not have known of the existence of
the undisclosed matter or matters.
Sec. 230.263 Consent to service of process.
(a) If the issuer is not organized under the laws of any of the
states or territories of the United States of America, it shall furnish
to the Commission a written irrevocable consent and power of attorney
on Form F-X (Sec. 239.42 of this chapter) at the time of filing the
offering statement required by Rule 252 (Sec. 230.252).
(b) Any change to the name or address of the agent for service of
the issuer shall be communicated promptly to the Commission through
amendment of the requisite form and referencing the file number of the
relevant offering statement.
0
6. Section 230.505(b)(2)(iii)(A) and (B) are revised to read as
follows:
Sec. 230.505 Exemption for limited offers and sales of securities not
exceeding $5,000,000.
* * * * *
(b) * * *
(2) * * *
(iii) * * *
(A) The term filing of the offering statement as used in Sec.
230.262 shall mean the first sale of securities under this section;
(B) The term underwriter as used in Sec. 230.262(a) shall mean a
person that has been or will be paid directly or indirectly
remuneration for solicitation of purchasers in connection with sales of
securities under this section; and
* * * * *
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
7. The authority citation for part 232 is revised to read in part as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
0
8. Section 232.101 is amended by:
0
a. Revising paragraph (a)(1)(vii), (xv), and (xvi), and (c)(6);
0
b. Adding paragraph (a)(1)(xvii); and
0
c. Removing and reserving paragraph (b)(8).
The revisions and addition read as follows:
Sec. 232.101 Mandated electronic submissions and exceptions.
(a) * * *
(1) * * *
(vii) Form F-X (Sec. 239.42 of this chapter) when filed in
connection with a Form CB (Sec. Sec. 239.800 and 249.480 of this
chapter) or a Form 1-A (Sec. 239.90 of this chapter);
* * * * *
(xv) Form ABS-EE (Sec. 249.1401 of this chapter);
(xvi) Form ABS-15G (as defined in Sec. 249.1400 of this chapter);
and
(xvii) Filings made pursuant to Regulation A (Sec. Sec. 230.251-
230.263 of this chapter).
* * * * *
(c) * * *
(6) Filings on Form 144 (Sec. 239.144 of this chapter) where the
issuer of the securities is not subject to the reporting requirements
of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d),
respectively).
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
9. The authority citation for part 239 is revised to read in part as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
0
10. Amend Form 1-A (referenced in Sec. 239.90) by revising it to read
as follows:
[[Page 21903]]
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-A
REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933
GENERAL INSTRUCTIONS
I. Eligibility Requirements for Use of Form 1-A.
This Form is to be used for securities offerings made pursuant to
Regulation A (17 CFR 230.251 et seq.). Careful attention should be
directed to the terms, conditions and requirements of Regulation A,
especially Rule 251, because the exemption is not available to all
issuers or for every type of securities transaction. Further, the
aggregate offering price and aggregate sales of securities in any 12-
month period is strictly limited to $20 million for Tier 1 offerings
and $50 million for Tier 2 offerings, including no more than $6 million
offered by all selling securityholders that are affiliates of the
issuer for Tier 1 offerings and $15 million by all selling
securityholders that are affiliates of the issuer for Tier 2 offerings.
Please refer to Rule 251 of Regulation A for more details.
II. Preparation, Submission and Filing of the Offering Statement.
An offering statement must be prepared by all persons seeking
exemption under the provisions of Regulation A. Parts I, II and III
must be addressed by all issuers. Part II, which relates to the content
of the required offering circular, provides alternative formats, of
which the issuer must choose one. General information regarding the
preparation, format, content, and submission or filing of the offering
statement is contained in Rule 252. Information regarding non-public
submission of the offering statement is contained in Rule 252(d).
Requirements relating to the offering circular are contained in Rules
253 and 254. The offering statement must be submitted or filed with the
Securities and Exchange Commission in electronic format by means of the
Commission's Electronic Data Gathering, Analysis and Retrieval System
(EDGAR) in accordance with the EDGAR rules set forth in Regulation S-T
(17 CFR part 232) for such submission or filing.
III. Incorporation by Reference and Cross-Referencing.
An issuer may incorporate by reference to other documents
previously submitted or filed on EDGAR. Cross-referencing within the
offering statement is also encouraged to avoid repetition of
information. For example, you may respond to an item of this Form by
providing a cross-reference to the location of the information in the
financial statements, instead of repeating such information.
Incorporation by reference and cross-referencing are subject to the
following additional conditions:
(a) The use of incorporation by reference and cross-referencing in
Part II of this Form is limited to the following items:
(1) Items 2-14 of Part II if following the Offering Circular
format;
(2) Items 3-11 (other than Item 11(e)) of Form S-1 if following the
Part I of Form S-1 format; or
(3) Items 3-26, 28, and 30 of Form S-11 if following the Part I of
Form S-11 format.
(b) Descriptions of where the information incorporated by reference
or cross-referenced can be found must be specific and must clearly
identify the relevant document and portion thereof where such
information can be found. For exhibits incorporated by reference, this
description must be noted in the exhibits index for each relevant
exhibit. All descriptions of where information incorporated by
reference can be found must be accompanied by a hyperlink to the
incorporated document on EDGAR, which hyperlink need not remain active
after the filing of the offering statement. Inactive hyperlinks must be
updated in any amendment to the offering statement otherwise required.
(c) Reference may not be made to any document if the portion of
such document containing the pertinent information includes an
incorporation by reference to another document. Incorporation by
reference to documents not available on EDGAR is not permitted.
Incorporating information into the financial statements from elsewhere
is not permitted. Information shall not be incorporated by reference or
cross-referenced in any case where such incorporation would render the
statement or report incomplete, unclear, or confusing.
(d) If any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.
IV. Supplemental Information.
The information specified below must be furnished to the Commission
as supplemental information, if applicable. Supplemental information
shall not be required to be filed with or deemed part of the offering
statement, unless otherwise required. The information shall be returned
to the issuer upon request made in writing at the time of submission,
provided that the return of such information is consistent with the
protection of investors and the provisions of the Freedom of
Information Act [5 U.S.C. 552] and the information was not filed in
electronic format.
(a) A statement as to whether or not the amount of compensation to
be allowed or paid to the underwriter has been cleared with the
Financial Industry Regulatory Authority (FINRA).
(b) Any engineering, management, market, or similar report
referenced in the offering circular or provided for external use by the
issuer or by a principal underwriter in connection with the proposed
offering. There must also be furnished at the same time a statement as
to the actual or proposed use and distribution of such report or
memorandum. Such statement must identify each class of persons who have
received or will receive the report or memorandum, and state the number
of copies distributed to each such class along with a statement as to
the actual or proposed use and distribution of such report or
memorandum.
(c) Such other information as requested by the staff in support of
statements, representations and other assertions contained in the
offering statement or any correspondence to the staff.
Correspondence appropriately responding to any staff comments made
on the offering statement must also be furnished electronically. When
applicable, such correspondence must clearly indicate where changes
responsive to the staff's comments may be found in the offering
statement.
PART I--NOTIFICATION
The following information must be provided in the XML-based portion
of Form 1-A available through the EDGAR portal and must be completed or
updated before uploading each offering statement or amendment thereto.
The format of Part I shown below may differ from the electronic version
available on EDGAR. The electronic version of Part I will allow issuers
to attach Part II and Part III for filing by means of EDGAR. All items
must be addressed, unless otherwise indicated.
* * * * *
[ballot] No changes to the information required by Part I have occurred
since the last filing of this offering statement.
[[Page 21904]]
ITEM 1. Issuer Information
Exact name of issuer as specified in the issuer's charter:-------------
Jurisdiction of incorporation/organization:
-----------------------------------------------------------------------
Year of incorporation:-------------------------------------------------
CIK:-------------------------------------------------------------------
Primary Standard Industrial Classification Code:-----------------------
I.R.S. Employer Identification Number:
-----------------------------------------------------------------------
Total number of full-time employees:
-----------------------------------------------------------------------
____Total number of part-time employees:-------------------------------
Contact Information
Address of Principal Executive Offices:
-----------------------------------------------------------------------
Telephone:(__)---------------------------------------------------------
Provide the following information for the person the Securities and
Exchange Commission's staff should call in connection with any pre-
qualification review of the offering statement:------------------------
-----------------------------------------------------------------------
Name:------------------------------------------------------------------
Address:---------------------------------------------------------------
Telephone: (__)--------------------------------------------------------
Provide up to two email addresses to which the Securities and Exchange
Commission's staff may send any comment letters relating to the
offering statement. After qualification of the offering statement, such
email addresses are not required to remain active:---------------------
-----------------------------------------------------------------------
Financial Statements
Industry Group (select one): [ballot] Banking [ballot] Insurance
[ballot] Other
Use the financial statements for the most recent fiscal period
contained in this offering statement to provide the following
information about the issuer. The following table does not include all
of the line items from the financial statements. Long Term Debt would
include notes payable, bonds, mortgages, and similar obligations. To
determine ``Total Revenues'' for all companies selecting ``Other'' for
their industry group, refer to Article 5-03(b)(1) of Regulation S-X.
For companies selecting ``Insurance,'' refer to Article 7-04 of
Regulation S-X for calculation of ``Total Revenues'' and paragraphs 5
and 7(a) for ``Costs and Expenses Applicable to Revenues''.
[If ``Other'' is selected, display the following options in the
Financial Statements table:]
Balance Sheet Information
Cash and Cash Equivalents:---------------------------------------------
Investment Securities:-------------------------------------------------
Accounts and Notes Receivable:-----------------------------------------
Property, Plant and Equipment (PP&E):----------------------------------
Total Assets:----------------------------------------------------------
Accounts Payable and Accrued Liabilities:------------------------------
Long Term Debt:--------------------------------------------------------
Total Liabilities:-----------------------------------------------------
Total Stockholders' Equity:--------------------------------------------
Total Liabilities and Equity:------------------------------------------
Income Statement Information
Total Revenues:--------------------------------------------------------
Costs and Expenses Applicable to Revenues:
-----------------------------------------------------------------------
Depreciation and Amortization:-----------------------------------------
Net Income:------------------------------------------------------------
Earnings Per Share--Basic:---------------------------------------------
Earnings Per Share--Diluted:-------------------------------------------
[If ``Banking'' is selected, display the following options in the
Financial Statements table:]
Balance Sheet Information
Cash and Cash Equivalents:---------------------------------------------
Investment Securities:-------------------------------------------------
Loans:-----------------------------------------------------------------
Property and Equipment:------------------------------------------------
Total Assets:----------------------------------------------------------
Accounts Payable and Accrued Liabilities:------------------------------
Deposits:--------------------------------------------------------------
Long Term Debt:--------------------------------------------------------
Total Liabilities:-----------------------------------------------------
Total Stockholders' Equity:--------------------------------------------
Total Liabilities and Equity:------------------------------------------
Income Statement Information
Total Interest Income:-------------------------------------------------
Total Interest Expense:------------------------------------------------
Depreciation and Amortization:-----------------------------------------
Net Income:------------------------------------------------------------
Earnings Per Share--Basic:---------------------------------------------
Earnings Per Share--Diluted:-------------------------------------------
[If ``Insurance'' is selected, display the following options in the
Financial Statements table:]
Balance Sheet Information
Cash and Cash Equivalents:---------------------------------------------
Total Investments:-----------------------------------------------------
Accounts and Notes Receivable:-----------------------------------------
Property and Equipment:------------------------------------------------
Total Assets:----------------------------------------------------------
Accounts Payable and Accrued Liabilities:------------------------------
Policy Liabilities and Accruals:---------------------------------------
Long Term Debt:--------------------------------------------------------
Total Liabilities:-----------------------------------------------------
Total Stockholders' Equity:--------------------------------------------
Total Liabilities and Equity:------------------------------------------
Income Statement Information
Total Revenues:--------------------------------------------------------
Costs and Expenses Applicable to Revenues:-----------------------------
Depreciation and Amortization:-----------------------------------------
Net Income:------------------------------------------------------------
Earnings Per Share--Basic:---------------------------------------------
Earnings Per Share--Diluted:-------------------------------------------
[End of section that varies based on the selection of Industry Group]
Name of Auditor (if any):----------------------------------------------
Outstanding Securities
----------------------------------------------------------------------------------------------------------------
Name of trading
Name of class (if any) Units outstanding CUSIP (if any) center or quotation
medium (if any)
----------------------------------------------------------------------------------------------------------------
Common Equity ...................... ...................... ..................... .....................
Preferred Equity ...................... ...................... ..................... .....................
Debt Securities ...................... ...................... ..................... .....................
----------------------------------------------------------------------------------------------------------------
ITEM 2. Issuer Eligibility
[ballot] Check this box to certify that all of the following statements
are true for the issuer(s):
Organized under the laws of the United States or Canada,
or any State, Province, Territory or possession thereof, or the
District of Columbia.
Principal place of business is in the United States or
Canada.
Not subject to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Not a development stage company that either (a) has no
specific business plan or purpose, or (b) has indicated that its
business plan is to merge with an unidentified company or companies.
Not an investment company registered or required to be
registered under the Investment Company Act of 1940.
Not issuing fractional undivided interests in oil or gas
rights, or a similar interest in other mineral rights.
Not issuing asset-backed securities as defined in Item
1101(c) of Regulation AB.
Not, and has not been, subject to any order of the
Commission entered pursuant to Section 12(j) of the Exchange Act (15
U.S.C. 78l(j)) within five years before the filing of this offering
statement.
Has filed with the Commission all the reports it was
required to file, if any, pursuant to Rule 257 during the two years
immediately before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports).
[[Page 21905]]
ITEM 3. Application of Rule 262
[ballot] Check this box to certify that, as of the time of this filing,
each person described in Rule 262 of Regulation A is either not
disqualified under that rule or is disqualified but has received a
waiver of such disqualification.
[ballot] Check this box if ``bad actor'' disclosure under Rule 262(d)
is provided in Part II of the offering statement.
ITEM 4. Summary Information Regarding the Offering and Other Current or
Proposed Offerings
Check the appropriate box to indicate whether you are conducting a
Tier 1 or Tier 2 offering:
[ballot] Tier 1 [ballot] Tier 2
Check the appropriate box to indicate whether the annual financial
statements have been audited:
[ballot] Unaudited [ballot] Audited
Types of Securities Offered in this Offering Statement (select all
that apply):
[ballot] Equity (common or preferred stock)
[ballot] Debt
[ballot] Option, warrant or other right to acquire another security
[ballot] Security to be acquired upon exercise of option, warrant
or other right to acquire security
[ballot] Tenant-in-common securities
[ballot] Other (describe)______
Does the issuer intend to offer the securities on a delayed or
continuous basis pursuant to Rule 251(d)(3)?
Yes [ballot] No [ballot]
Does the issuer intend this offering to last more than one year?
Yes [ballot] No [ballot]
Does the issuer intend to price this offering after qualification
pursuant to Rule 253(b)?
Yes [ballot] No [ballot]
Will the issuer be conducting a best efforts offering?
Yes [ballot] No [ballot]
Has the issuer used solicitation of interest communications in
connection with the proposed offering?
Yes [ballot] No [ballot]
Does the proposed offering involve the resale of securities by
affiliates of the issuer?
Yes [ballot] No [ballot]
Number of securities offered:______
Number of securities of that class already outstanding:______
The information called for by this item below may be omitted if
undetermined at the time of filing or submission, except that if a
price range has been included in the offering statement, the midpoint
of that range must be used to respond. Please refer to Rule 251(a) for
the definition of ``aggregate offering price'' or ``aggregate sales''
as used in this item. Please leave the field blank if undetermined at
this time and include a zero if a particular item is not applicable to
the offering.
Price per security: $______
The portion of the aggregate offering price attributable to
securities being offered on behalf of the issuer:
$______
The portion of the aggregate offering price attributable to
securities being offered on behalf of selling securityholders:
$______
The portion of aggregate offering attributable to all the
securities of the issuer sold pursuant to a qualified offering
statement within the 12 months before the qualification of this
offering statement:
$______
The estimated portion of aggregate sales attributable to securities
that may be sold pursuant to any other qualified offering statement
concurrently with securities being sold under this offering statement:
$______
Total: $______ (the sum of the aggregate offering price and
aggregate sales in the four preceding paragraphs).
Anticipated fees in connection with this offering and names of
service providers:
------------------------------------------------------------------------
Name of Service
Provider Fees
------------------------------------------------------------------------
Underwriters:.................. ________ $_____
Sales Commissions:............. ________ $_____
Finders' Fees:................. ________ $_____
Audit:......................... ________ $_____
Legal:......................... ________ $_____
Promoters:..................... ________ $_____
Blue Sky Compliance:........... ________ $_____
------------------------------------------------------------------------
CRD Number of any broker or dealer listed:______
Estimated net proceeds to the issuer: $______
Clarification of responses (if necessary):______
ITEM 5. Jurisdictions in Which Securities are to be Offered
Using the list below, select the jurisdictions in which the issuer
intends to offer the securities:
[List will include all U.S. and Canadian jurisdictions, with an option
to add and remove them individually, add all and remove all.]
Using the list below, select the jurisdictions in which the
securities are to be offered by underwriters, dealers or sales persons
or check the appropriate box:
[ballot] None
[ballot] Same as the jurisdictions in which the issuer intends to offer
the securities.
[List will include all U.S. and Canadian jurisdictions, with an option
to add and remove them individually, add all and remove all.]
ITEM 6. Unregistered Securities Issued or Sold Within One Year
[ballot] None
As to any unregistered securities issued by the issuer or any of
its predecessors or affiliated issuers within one year before the
filing of this Form 1-A, state:
(a) Name of such issuer.
(b) (1) Title of securities issued
(2) Total amount of such securities issued
(3) Amount of such securities sold by or for the account of any
person who at the time was a director, officer, promoter or principal
securityholder of the issuer of such securities, or was an underwriter
of any securities of such issuer
(c)(1) Aggregate consideration for which the securities were issued
and basis for computing the amount thereof.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(2) Aggregate consideration for which the securities listed in
(b)(3) of this item (if any) were issued and the basis for computing
the amount thereof (if
[[Page 21906]]
different from the basis described in (c)(1)).
(e) Indicate the section of the Securities Act or Commission rule or
regulation relied upon for exemption from the registration requirements
of such Act and state briefly the facts relied upon for such
exemption:_________
-----------------------------------------------------------------------
PART II -- INFORMATION REQUIRED IN OFFERING CIRCULAR
(a) Financial statement requirements regardless of the applicable
disclosure format are specified in Part F/S of this Form 1-A. The
narrative disclosure contents of offering circulars are specified as
follows:
(1) The information required by:
(i) the Offering Circular format described below; or
(ii) The information required by Part I of Form S-1 (17 CFR 239.11)
or Part I of Form S-11 (17 CFR 239.18), except for the financial
statements, selected financial data, and supplementary financial
information called for by those forms. An issuer choosing to follow the
Form S-1 or Form S-11 format may follow the requirements for smaller
reporting companies if it meets the definition of that term in Rule 405
(17 CFR 230.405). An issuer may only use the Form S-11 format if the
offering is eligible to be registered on that form;
The cover page of the offering circular must identify which
disclosure format is being followed.
(2) The offering circular must describe any matters that would have
triggered disqualification under Rule 262(a)(3) or (a)(5) but for the
provisions set forth in Rule 262(b)(1);
(3) The legend required by Rule 253(f) of Regulation A must be
included on the offering circular cover page (for issuers following the
S-1 or S-11 disclosure models this legend must be included instead of
the legend required by Item 501(b)(7) of Regulation S-K);
(4) For preliminary offering circulars, the legend required by Rule
254(a) must be included on the offering circular cover page (for
issuers following the S-1 or S-11 disclosure models, this legend must
be included instead of the legend required by Item 501(b)(10) of
Regulation S-K); and
(5) For Tier 2 offerings where the securities will not be listed on
a registered national securities exchange upon qualification, the
offering circular cover page must include the following legend
highlighted by prominent type or in another manner:
Generally, no sale may be made to you in this offering if the
aggregate purchase price you pay is more than 10% of the greater of
your annual income or net worth. Different rules apply to accredited
investors and non-natural persons. Before making any representation
that your investment does not exceed applicable thresholds, we
encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For
general information on investing, we encourage you to refer to
www.investor.gov.
(b) The Commission encourages the use of management's projections
of future economic performance that have a reasonable basis and are
presented in an appropriate format. See Rule 175, 17 CFR 230.175.
(c) Offering circulars need not follow the order of the items or
the order of other requirements of the disclosure form except to the
extent otherwise specifically provided. Such information may not,
however, be set forth in such a fashion as to obscure any of the
required information or any information necessary to keep the required
information from being incomplete or misleading. Information requested
to be presented in a specified tabular format must be given in
substantially the tabular format specified. For incorporation by
reference, please refer to General Instruction III of this Form.
OFFERING CIRCULAR
Item 1. Cover Page of Offering Circular
The cover page of the offering circular must be limited to one page
and must include the information specified in this item.
(a) Name of the issuer.
Instruction to Item 1(a):
If your name is the same as, or confusingly similar to, that of a
company that is well known, include information to eliminate any
possible confusion with the other company. If your name indicates a
line of business in which you are not engaged or you are engaged only
to a limited extent, include information to eliminate any misleading
inference as to your business. In some circumstances, disclosure may
not be sufficient and you may be required to change your name. You will
not be required to change your name if you are an established company,
the character of your business has changed, and the investing public is
generally aware of the change and the character of your current
business.
(b) Full mailing address of the issuer's principal executive
offices and the issuer's telephone number (including the area code)
and, if applicable, Web site address.
(c) Date of the offering circular.
(d) Title and amount of securities offered. Separately state the
amount of securities offered by selling securityholders, if any.
Include a cross-reference to the section where the disclosure required
by Item 14 of Part II of this Form 1-A has been provided;
(e) The information called for by the applicable table below as to
all the securities being offered, in substantially the tabular format
indicated. If necessary, you may estimate any underwriting discounts
and commissions and the proceeds to the issuer or other persons.
----------------------------------------------------------------------------------------------------------------
Underwriting
Price to public discount and Proceeds to issuer Proceeds to other
commissions persons
----------------------------------------------------------------------------------------------------------------
Per share/unit:................ ____________ ____________ ____________ ______
Total:......................... ____________ ____________ ____________ ______
----------------------------------------------------------------------------------------------------------------
If the securities are to be offered on a best efforts basis, the
cover page must set forth the termination date, if any, of the
offering, any minimum required sale and any arrangements to place the
funds received in an escrow, trust, or similar arrangement. The
following table must be used instead of the preceding table.
----------------------------------------------------------------------------------------------------------------
Underwriting
Price to public discount and Proceeds to issuer Proceeds to other
commissions persons
----------------------------------------------------------------------------------------------------------------
Per share/unit:................ ____________ ____________ ____________ ______
Total Minimum:................. ____________ ____________ ____________ ______
Total Maximum:................. ____________ ____________ ____________ ______
----------------------------------------------------------------------------------------------------------------
[[Page 21907]]
Instructions to Item 1(e):
1. The term ``commissions'' includes all cash, securities,
contracts, or anything else of value, paid, to be set aside, disposed
of, or understandings with or for the benefit of any other persons in
which any underwriter is interested, made in connection with the sale
of such security.
2. Only commissions paid by the issuer in cash are to be indicated
in the table. Commissions paid by other persons or any form of non-cash
compensation must be briefly identified in a footnote to the table with
a cross-reference to a more complete description elsewhere in the
offering circular.
3. Before the commencement of sales pursuant to Regulation A, the
issuer must inform the Commission whether or not the amount of
compensation to be allowed or paid to the underwriters, as described in
the offering statement, has been cleared with FINRA.
4. If the securities are not to be offered for cash, state the
basis upon which the offering is to be made.
5. Any finder's fees or similar payments must be disclosed on the
cover page with a reference to a more complete discussion in the
offering circular. Such disclosure must identify the finder, the nature
of the services rendered and the nature of any relationship between the
finder and the issuer, its officers, directors, promoters, principal
stockholders and underwriters (including any affiliates of such
persons).
6. The amount of the expenses of the offering borne by the issuer,
including underwriting expenses to be borne by the issuer, must be
disclosed in a footnote to the table.
(f) The name of the underwriter or underwriters.
(g) Any legend or information required by the law of any state in
which the securities are to be offered.
(h) A cross-reference to the risk factors section, including the
page number where it appears in the offering circular. Highlight this
cross-reference by prominent type or in another manner.
(i) Approximate date of commencement of proposed sale to the
public.
(j) If the issuer intends to rely on Rule 253(b) and a preliminary
offering circular is circulated, provide (1) a bona fide estimate of
the range of the maximum offering price and the maximum number of
securities offered or (2) a bona fide estimate of the principal amount
of the debt securities offered. The range must not exceed $2 for
offerings where the upper end of the range is $10 or less and 20% if
the upper end of the price range is over $10.
Instruction to Item 1(j):
The upper limit of the price range must be used in determining the
aggregate offering price for purposes of Rule 251(a).
Item 2. Table of Contents
On the page immediately following the cover page of the offering
circular, provide a reasonably detailed table of contents. It must show
the page numbers of the various sections or subdivisions of the
offering circular. Include a specific listing of the risk factors
section required by Item 3 of Part II of this Form 1-A.
Item 3. Summary and Risk Factors
(a) An issuer may provide a summary of the information in the
offering circular where the length or complexity of the offering
circular makes a summary useful. The summary should be brief and must
not contain all of the detailed information in the offering circular.
(b) Immediately following the Table of Contents required by Item 2
or the Summary, there must be set forth under an appropriate caption, a
carefully organized series of short, concise paragraphs, summarizing
the most significant factors that make the offering speculative or
substantially risky. Issuers should avoid generalized statements and
include only factors that are specific to the issuer.
Item 4. Dilution
Where there is a material disparity between the public offering
price and the effective cash cost to officers, directors, promoters and
affiliated persons for shares acquired by them in a transaction during
the past year, or that they have a right to acquire, there must be
included a comparison of the public contribution under the proposed
public offering and the average effective cash contribution of such
persons.
Item 5. Plan of Distribution and Selling Securityholders
(a) If the securities are to be offered through underwriters, give
the names of the principal underwriters, and state the respective
amounts underwritten. Identify each such underwriter having a material
relationship to the issuer and state the nature of the relationship.
State briefly the nature of the underwriters' obligation to take the
securities.
Instructions to Item 5(a):
1. All that is required as to the nature of the underwriters'
obligation is whether the underwriters are or will be committed to take
and to pay for all of the securities if any are taken, or whether it is
merely an agency or the type of best efforts arrangement under which
the underwriters are required to take and to pay for only such
securities as they may sell to the public. Conditions precedent to the
underwriters' taking the securities, including market outs, need not be
described except in the case of an agency or best efforts arrangement.
2. It is not necessary to disclose each member of a selling group.
Disclosure may be limited to those underwriters who are in privity of
contract with the issuer with respect to the offering.
(b) State briefly the discounts and commissions to be allowed or
paid to dealers, including all cash, securities, contracts or other
consideration to be received by any dealer in connection with the sale
of the securities.
(c) Outline briefly the plan of distribution of any securities
being issued that are to be offered through the selling efforts of
brokers or dealers or otherwise than through underwriters.
(d) If any of the securities are to be offered for the account of
securityholders, identify each selling securityholder, state the amount
owned by the securityholder prior to the offering, the amount offered
for his or her account and the amount to be owned after the offering.
Provide such disclosure in a tabular format. At the bottom of the
table, provide the total number of securities being offered for the
account of all securityholders and describe what percent of the pre-
offering outstanding securities of such class the offering represents.
Instruction to Item 5(d):
The term ``securityholder'' in this paragraph refers to beneficial
holders, not nominee holders or other such holders of record. If the
selling securityholder is an entity, disclosure of the persons who have
sole or shared voting or investment power must be included.
(e) Describe any arrangements for the return of funds to
subscribers if all of the securities to be offered are not sold. If
there are no such arrangements, so state.
(f) If there will be a material delay in the payment of the
proceeds of the offering by the underwriter to the issuer, the salient
provisions in this regard and the effects on the issuer must be stated.
(g) Describe any arrangement to (1) limit or restrict the sale of
other securities of the same class as those to be offered for the
period of distribution, (2) stabilize the market for any of the
securities to be offered, or (3) withhold commissions, or otherwise to
hold each
[[Page 21908]]
underwriter or dealer responsible for the distribution of its
participation.
(h) Identify any underwriter that intends to confirm sales to any
accounts over which it exercises discretionary authority and include an
estimate of the amount of securities so intended to be confirmed.
Instruction to Item 5:
Attention is directed to the provisions of Rules 10b 9 [17 CFR
240.10b-9] and 15c2-4 [17 CFR 240.15c2-4] under the Securities Exchange
Act of 1934. These rules outline, among other things, antifraud
provisions concerning the return of funds to subscribers and the
transmission of proceeds of an offering to a seller.
Item 6. Use of Proceeds to Issuer
State the principal purposes for which the net proceeds to the
issuer from the securities to be offered are intended to be used and
the approximate amount intended to be used for each such purpose. If
the issuer will not receive any of proceeds from the offering, so
state.
Instructions to Item 6:
1. If any substantial portion of the proceeds has not been
allocated for particular purposes, a statement to that effect must be
made together with a statement of the amount of proceeds not so
allocated.
2. State whether or not the proceeds will be used to compensate or
otherwise make payments to officers or directors of the issuer or any
of its subsidiaries.
3. For best efforts offerings, describe any anticipated material
changes in the use of proceeds if all of the securities being qualified
on the offering statement are not sold.
4. If an issuer must provide the disclosure described in Item 9(c)
the use of proceeds and plan of operations should be consistent.
5. If any material amounts of other funds are to be used in
conjunction with the proceeds, state the amounts and sources of such
other funds and whether such funds are firm or contingent.
6. If any material part of the proceeds is to be used to discharge
indebtedness, describe the material terms of such indebtedness. If the
indebtedness to be discharged was incurred within one year, describe
the use of the proceeds arising from such indebtedness.
7. If any material amount of the proceeds is to be used to acquire
assets, otherwise than in the ordinary course of business, briefly
describe and state the cost of the assets. If the assets are to be
acquired from affiliates of the issuer or their associates, give the
names of the persons from whom they are to be acquired and set forth
the basis used in determining the purchase price to the issuer.
8. The issuer may reserve the right to change the use of proceeds,
so long as the reservation is prominently disclosed in the section
where the use of proceeds is discussed. It is not necessary to describe
the possible alternative uses of proceeds unless the issuer believes
that a change in circumstances leading to an alternative use of
proceeds is likely to occur.
Item 7. Description of Business
(a) Narrative description of business.
(1) Describe the business done and intended to be done by the
issuer and its subsidiaries and the general development of the business
during the past three years or such shorter period as the issuer may
have been in business. Such description must include, but not be
limited to, a discussion of the following factors if such factors are
material to an understanding of the issuer's business:
(i) The principal products and services of the issuer and the
principal market for and method of distribution of such products and
services.
(ii) The status of a product or service if the issuer has made
public information about a new product or service that would require
the investment of a material amount of the assets of the issuer or is
otherwise material.
(iii) If material, the estimated amount spent during each of the
last two fiscal years on company-sponsored research and development
activities determined in accordance with generally accepted accounting
principles. In addition, state, if material, the estimated dollar
amount spent during each of such years on material customer-sponsored
research activities relating to the development of new products,
services or techniques or the improvement of existing products,
services or techniques.
(iv) The total number of persons employed by the issuer, indicating
the number employed full time.
(v) Any bankruptcy, receivership or similar proceeding.
(vi) Any legal proceedings material to the business or financial
condition of the issuer.
(vii) Any material reclassification, merger, consolidation, or
purchase or sale of a significant amount of assets not in the ordinary
course of business.
(2) The issuer must also describe those distinctive or special
characteristics of the issuer's operation or industry that are
reasonably likely to have a material impact upon the issuer's future
financial performance. Examples of factors that might be discussed
include dependence on one or a few major customers or suppliers
(including suppliers of raw materials or financing), effect of existing
or probable governmental regulation (including environmental
regulation), material terms of and/or expiration of material labor
contracts or patents, trademarks, licenses, franchises, concessions or
royalty agreements, unusual competitive conditions in the industry,
cyclicality of the industry and anticipated raw material or energy
shortages to the extent management may not be able to secure a
continuing source of supply.
(b) Segment Data. If the issuer is required by generally accepted
accounting principles to include segment information in its financial
statements, an appropriate cross-reference must be included in the
description of business.
(c) Industry Guides. The disclosure guidelines in all Securities
Act Industry Guides must be followed. To the extent that the industry
guides are codified into Regulation S-K, the Regulation S-K industry
disclosure items must be followed.
(d) For offerings of limited partnership or limited liability
company interests, an issuer must comply with the Commission's
interpretive views on substantive disclosure requirements set forth in
Securities Act Release No. 6900 (June 17, 1991).
Item 8. Description of Property
State briefly the location and general character of any principal
plants or other material physical properties of the issuer and its
subsidiaries. If any such property is not held in fee or is held
subject to any major encumbrance, so state and briefly describe how
held. Include information regarding the suitability, adequacy,
productive capacity and extent of utilization of the properties and
facilities used in the issuer's business.
Instruction to Item 8:
Detailed descriptions of the physical characteristics of individual
properties or legal descriptions by metes and bounds are not required
and should not be given.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Discuss the issuer's financial condition, changes in financial
condition and results of operations for each year and interim period
for which financial statements are required, including the causes of
material changes from year to year or period to period in financial
statement line items, to the extent necessary for an understanding of
[[Page 21909]]
the issuer's business as a whole. Information provided also must relate
to the segment information of the issuer. Provide the information
specified below as well as such other information that is necessary for
an investor's understanding of the issuer's financial condition,
changes in financial condition and results of operations.
(a) Operating results. Provide information regarding significant
factors, including unusual or infrequent events or transactions or new
developments, materially affecting the issuer's income from operations,
and, in each case, indicating the extent to which income was so
affected. Describe any other significant component of revenue or
expenses necessary to understand the issuer's results of operations. To
the extent that the financial statements disclose material changes in
net sales or revenues, provide a narrative discussion of the extent to
which such changes are attributable to changes in prices or to changes
in the volume or amount of products or services being sold or to the
introduction of new products or services.
Instruction to Item 9(a):
1. The discussion and analysis shall focus specifically on material
events and uncertainties known to management that would cause reported
financial information not to be necessarily indicative of future
operating results or of future financial condition. This would include
descriptions and amounts of (A) matters that would have an impact on
future operations that have not had an impact in the past, and (B)
matters that have had an impact on reported operations that are not
expected to have an impact upon future operations.
2. Where the consolidated financial statements reveal material
changes from year to year in one or more line items, the causes for the
changes shall be described to the extent necessary to an understanding
of the issuer's businesses as a whole. If the causes for a change in
one line item also relate to other line items, no repetition is
required and a line-by-line analysis of the financial statements as a
whole is not required or generally appropriate. Issuers need not recite
the amounts of changes from year to year which are readily computable
from the financial statements. The discussion must not merely repeat
numerical data contained in the consolidated financial statements.
3. When interim period financial statements are included, discuss
any material changes in financial condition from the end of the
preceding fiscal year to the date of the most recent interim balance
sheet provided. Discuss any material changes in the issuer's results of
operations with respect to the most recent fiscal year-to-date period
for which an income statement is provided and the corresponding year-
to-date period of the preceding fiscal year.
(b) Liquidity and capital resources. Provide information regarding
the following:
(1) the issuer's liquidity (both short and long term), including a
description and evaluation of the internal and external sources of
liquidity and a brief discussion of any material unused sources of
liquidity. If a material deficiency in liquidity is identified,
indicate the course of action that the issuer has taken or proposes to
take to remedy the deficiency.
(2) the issuer's material commitments for capital expenditures as
of the end of the latest fiscal year and any subsequent interim period
and an indication of the general purpose of such commitments and the
anticipated sources of funds needed to fulfill such commitments.
(c) Plan of Operations. Issuers (including predecessors) that have
not received revenue from operations during each of the three fiscal
years immediately before the filing of the offering statement (or since
inception, whichever is shorter) must describe, if formulated, their
plan of operation for the 12 months following the commencement of the
proposed offering. If such information is not available, the reasons
for its unavailability must be stated. Disclosure relating to any plan
must include, among other things, a statement indicating whether, in
the issuer's opinion, the proceeds from the offering will satisfy its
cash requirements or whether it anticipates it will be necessary to
raise additional funds in the next six months to implement the plan of
operations.
(d) Trend information. The issuer must identify the most
significant recent trends in production, sales and inventory, the state
of the order book and costs and selling prices since the latest
financial year. The issuer also must discuss, for at least the current
financial year, any known trends, uncertainties, demands, commitments
or events that are reasonably likely to have a material effect on the
issuer's net sales or revenues, income from continuing operations,
profitability, liquidity or capital resources, or that would cause
reported financial information not necessarily to be indicative of
future operating results or financial condition.
Item 10. Directors, Executive Officers and Significant Employees
(a) For each of the directors, persons nominated or chosen to
become directors, executive officers, persons chosen to become
executive officers, and significant employees, provide the information
specified below in substantially the following tabular format:
----------------------------------------------------------------------------------------------------------------
Approximate hours per
Name Position Age Term of Office \(1)\ week for part-time
employees \(2)\
----------------------------------------------------------------------------------------------------------------
Executive Officers:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Directors:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Significant Employees:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
[[Page 21910]]
(1) Provide the month and year of the start date and, if
applicable, the end date. To the extent you are unable to provide
specific dates, provide such other description in the table or in an
appropriate footnote clarifying the term of office. If the person is a
nominee or chosen to become a director or executive officer, it must be
indicated in this column or by footnote.
(2) For executive officers and significant employees that are
working part-time, indicate approximately the average number of hours
per week or month such person works or is anticipated to work. This
column may be left blank for directors. The entire column may be
omitted if all those listed in the table work full time for the issuer.
In a footnote to the table, briefly describe any arrangement or
understanding between the persons described above and any other persons
(naming such persons) pursuant to which the person was or is to be
selected to his or her office or position.
Instructions to Item 10(a):
1. No nominee or person chosen to become a director or person
chosen to be an executive officer who has not consented to act as such
may be named in response to this item.
2. The term ``executive officer'' means the president, secretary,
treasurer, any vice president in charge of a principal business
function (such as sales, administration, or finance) and any other
person who performs similar policy making functions for the issuer.
3. The term ``significant employee'' means persons such as
production managers, sales managers, or research scientists, who are
not executive officers, but who make or are expected to make
significant contributions to the business of the issuer.
(b) Family relationships. State the nature of any family
relationship between any director, executive officer, person nominated
or chosen by the issuer to become a director or executive officer or
any significant employee.
Instruction to Item 10(b):
The term ``family relationship'' means any relationship by blood,
marriage, or adoption, not more remote than first cousin.
(c) Business experience. Give a brief account of the business
experience during the past five years of each director, executive
officer, person nominated or chosen to become a director or executive
officer, and each significant employee, including his or her principal
occupations and employment during that period and the name and
principal business of any corporation or other organization in which
such occupations and employment were carried on. When an executive
officer or significant employee has been employed by the issuer for
less than five years, a brief explanation must be included as to the
nature of the responsibilities undertaken by the individual in prior
positions to provide adequate disclosure of this prior business
experience. What is required is information relating to the level of
the employee's professional competence, which may include, depending
upon the circumstances, such specific information as the size of the
operation supervised.
(d) Involvement in certain legal proceedings. Describe any of the
following events which occurred during the past five years and which
are material to an evaluation of the ability or integrity of any
director, person nominated to become a director or executive officer of
the issuer:
(1) A petition under the federal bankruptcy laws or any state
insolvency law was filed by or against, or a receiver, fiscal agent or
similar officer was appointed by a court for the business or property
of such person, or any partnership in which he was general partner at
or within two years before the time of such filing, or any corporation
or business association of which he was an executive officer at or
within two years before the time of such filing; or
(2) Such person was convicted in a criminal proceeding (excluding
traffic violations and other minor offenses).
Item 11. Compensation of Directors and Executive Officers
(a) Provide, in substantially the tabular format indicated, the
annual compensation of each of the three highest paid persons who were
executive officers or directors during the issuer's last completed
fiscal year.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Capacities in which compensation was received (e.g., Cash compensation Other compensation Total compensation
Name Chief Executive Officer, director, etc.) ($) ($) ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
........................................................ .................... .................... ....................
........................................................ .................... .................... ....................
........................................................ .................... .................... ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------
(b) Provide the aggregate annual compensation of the issuer's
directors as a group for the issuer's last completed fiscal year.
Specify the total number of directors in the group.
(c) For Tier 1 offerings, the annual compensation of the three
highest paid persons who were executive officers or directors and the
aggregate annual compensation of the issuer's directors may be provided
as a group, rather than as specified in paragraphs (a) and (b) of this
item. In such case, issuers must specify the total number of persons in
the group.
(d) Briefly describe all proposed compensation to be made in the
future pursuant to any ongoing plan or arrangement to the individuals
specified in paragraphs (a) and (b) of this item. The description must
include a summary of how each plan operates, any performance formula or
measure in effect (or the criteria used to determine payment amounts),
the time periods over which the measurements of benefits will be
determined, payment schedules, and any recent material amendments to
the plan. Information need not be included with respect to any group
life, health, hospitalization, or medical reimbursement plans that do
not discriminate in scope, terms or operation in favor of executive
officers or directors of the issuer and that are available generally to
all salaried employees.
Instructions to Item 11:
1. In case of compensation paid or to be paid otherwise than in
cash, if it is impracticable to determine the cash value thereof, state
in a note to the table the nature and amount thereof.
2. This item is to be answered on an accrual basis if practicable;
if not so answered, state the basis used.
Item 12. Security Ownership of Management and Certain Securityholders
(a) Include the information specified in paragraph (b) of this item
as of the most recent practicable date (stating the date used), in
substantially the tabular format indicated, with respect to voting
securities beneficially owned by:
(1) all executive officers and directors as a group, individually
naming each
[[Page 21911]]
director or executive officer who beneficially owns more than 10% of
any class of the issuer's voting securities;
(2) any other securityholder who beneficially owns more than 10% of
any class of the issuer's voting securities as such beneficial
ownership would be calculated if the issuer were subject to Rule 13d-
3(d)(1) of the Securities Exchange Act of 1934.
(b) Beneficial Ownership Table:
----------------------------------------------------------------------------------------------------------------
Name and address of Amount and nature of
Title of class beneficial owner Amount and nature of beneficial ownership Percent of class
\(1)\ beneficial ownership acquirable \(2)\ \(3)\
----------------------------------------------------------------------------------------------------------------
..................... ..................... ..................... ....................
----------------------------------------------------------------------------------------------------------------
(1) The address given in this column may be a business, mailing, or
residential address. The address may be included in an appropriate
footnote to the table rather than in this column.
(2) This column must include the amount of equity securities each
beneficial owner has the right to acquire using the manner specified in
Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. An appropriate
footnote must be included if the column heading does not sufficiently
describe the circumstances upon which such securities could be
acquired.
(3) This column must use the amounts contained in the two preceding
columns to calculate the percent of class owned by such beneficial
owner.
Item 13. Interest of Management and Others in Certain Transactions
(a) Describe briefly any transactions or any currently proposed
transactions during the issuer's last two completed fiscal years and
the current fiscal year, to which the issuer or any of its subsidiaries
was or is to be a participant and the amount involved exceeds $50,000
for Tier 1 or the lesser of $120,000 and one percent of the average of
the issuer's total assets at year end for the last two completed fiscal
years for Tier 2, and in which any of the following persons had or is
to have a direct or indirect material interest, naming the person and
stating his or her relationship to the issuer, the nature of the
person's interest in the transaction and, where practicable, the amount
of such interest:
(1) Any director or executive officer of the issuer;
(2) Any nominee for election as a director;
(3) Any securityholder named in answer to Item 12(a)(2);
(4) If the issuer was incorporated or organized within the past
three years, any promoter of the issuer; or
(5) Any immediate family member of the above persons. An
``immediate family member'' of a person means such person's child,
stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-
in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or
any person (other than a tenant or employee) sharing such person's
household.
Instructions to Item 13(a):
1. For purposes of calculating the amount of the transaction
described above, all periodic installments in the case of any lease or
other agreement providing for periodic payments must be aggregated to
the extent they occurred within the time period described in this item.
2. No information need be given in answer to this item as to any
transaction where:
(a) The rates of charges involved in the transaction are determined
by competitive bids, or the transaction involves the rendering of
services as a common or contract carrier at rates or charges fixed in
conformity with law or governmental authority;
(b) The transaction involves services as a bank depositary of
funds, transfer agent, registrar, trustee under a trust indenture, or
similar services;
(c) The interest of the specified person arises solely from the
ownership of securities of the issuer and the specified person receives
no extra or special benefit not shared on a pro-rata basis by all of
the holders of securities of the class.
3. This item calls for disclosure of indirect as well as direct
material interests in transactions. A person who has a position or
relationship with a firm, corporation, or other entity which engages in
a transaction with the issuer or its subsidiaries may have an indirect
interest in such transaction by reason of the position or relationship.
However, a person is deemed not to have a material indirect interest in
a transaction within the meaning of this item where:
(a) the interest arises only (i) from the person's position as a
director of another corporation or organization (other than a
partnership) that is a party to the transaction, or (ii) from the
direct or indirect ownership by the person and all other persons
specified in paragraphs (1) through (5) of this item, in the aggregate,
of less than a 10 percent equity interest in another person (other than
a partnership) that is a party to the transaction, or (iii) from both
such position and ownership;
(b) the interest arises only from the person's position as a
limited partner in a partnership in which the person and all other
persons specified in paragraphs (1) through (5) of this item had an
interest of less than 10 percent; or
(c) the interest of the person arises solely from the holding of an
equity interest (unless the equity interest confers management rights
similar to a general partner interest) or a creditor interest in
another person that is a party to the transaction with the issuer or
any of its subsidiaries and the transaction is not material to the
other person.
4. Include the name of each person whose interest in any
transaction is described and the nature of the relationships by reason
of which such interest is required to be described. The amount of the
interest of any specified person must be computed without regard to the
amount of the profit or loss involved in the transaction. Where it is
not practicable to state the approximate amount of the interest, the
approximate amount involved in the transaction must be disclosed.
5. Information must be included as to any material underwriting
discounts and commissions upon the sale of securities by the issuer
where any of the specified persons was or is to be a principal
underwriter or is a controlling person, or member, of a firm which was
or is to be a principal underwriter. Information need not be given
concerning ordinary management fees paid by underwriters to a managing
underwriter pursuant to an agreement among underwriters, the parties to
which do not include the issuer or its subsidiaries.
6. As to any transaction involving the purchase or sale of assets
by or to any issuer or any subsidiary, otherwise than in the ordinary
course of business, state the cost of the assets to the purchaser and,
if acquired by the seller within two years before the transaction, the
cost to the seller.
7. Information must be included in answer to this item with respect
to transactions not excluded above which
[[Page 21912]]
involve compensation from the issuer or its subsidiaries, directly or
indirectly, to any of the specified persons for services in any
capacity unless the interest of such persons arises solely from the
ownership individually and in the aggregate of less than 10 percent of
any class of equity securities of another corporation furnishing the
services to the issuer or its subsidiaries.
(b) If any expert named in the offering statement as having
prepared or certified any part of the offering statement was employed
for such purpose on a contingent basis or, at the time of such
preparation or certification or at any time thereafter, had a material
interest in the issuer or any of its parents or subsidiaries or was
connected with the issuer or any of its subsidiaries as a promoter,
underwriter, voting trustee, director, officer or employee, describe
the nature of such contingent basis, interest or connection.
Item 14. Securities Being Offered
(a) If capital stock is being offered, state the title of the class
and furnish the following information regarding all classes of capital
stock outstanding:
(1) Outline briefly: (i) dividend rights; (ii) voting rights; (iii)
liquidation rights; (iv) preemptive rights; (v) conversion rights; (vi)
redemption provisions; (vii) sinking fund provisions; (viii) liability
to further calls or to assessment by the issuer; (ix) any
classification of the Board of Directors, and the impact of
classification where cumulative voting is permitted or required; (x)
restrictions on alienability of the securities being offered; (xi) any
provision discriminating against any existing or prospective holder of
such securities as a result of such securityholder owning a substantial
amount of securities; and (xii) any rights of holders that may be
modified otherwise than by a vote of a majority or more of the shares
outstanding, voting as a class.
(2) Briefly describe potential liabilities imposed on
securityholders under state statutes or foreign law, for example, to
employees of the issuer, unless such disclosure would be immaterial
because the financial resources of the issuer or other factors are such
as to make it unlikely that the liability will ever be imposed.
(3) If preferred stock is to be offered or is outstanding, describe
briefly any restriction on the repurchase or redemption of shares by
the issuer while there is any arrearage in the payment of dividends or
sinking fund installments. If there is no such restriction, so state.
(b) If debt securities are being offered, outline briefly the
following:
(1) Provisions with respect to interest, conversion, maturity,
redemption, amortization, sinking fund or retirement.
(2) Provisions with respect to the kind and priority of any lien
securing the issue, together with a brief identification of the
principal properties subject to such lien.
(3) Material affirmative and negative covenants.
Instruction to Item 14(b):
In the case of secured debt there must be stated: (i) the
approximate amount of unbonded property available for use against the
issuance of bonds, as of the most recent practicable date, and (ii)
whether the securities being issued are to be issued against such
property, against the deposit of cash, or otherwise.
(c) If securities described are to be offered pursuant to warrants,
rights, or convertible securities, state briefly:
(1) the amount of securities issuable upon the exercise or
conversion of such warrants, convertible securities or rights;
(2) the period during which and the price at which the warrants,
convertible securities or rights are exercisable;
(3) the amounts of warrants, convertible securities or rights
outstanding; and
(4) any other material terms of such securities.
(d) In the case of any other kind of securities, include a brief
description with comparable information to that required in (a), (b)
and (c) of Item 14.
Part F/S
(a) General Rules
(1) The appropriate financial statements set forth below of the
issuer, or the issuer and its predecessors or any businesses to which
the issuer is a successor must be filed as part of the offering
statement and included in the offering circular that is distributed to
investors.
(2) Unless the issuer is a Canadian company, financial statements
must be prepared in accordance with generally accepted accounting
principles in the United States (US GAAP). If the issuer is a Canadian
company, such financial statements must be prepared in accordance with
either US GAAP or International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB). If the
financial statements comply with IFRS, such compliance must be
explicitly and unreservedly stated in the notes to the financial
statements and if the financial statements are audited, the auditor's
report must include an opinion on whether the financial statements
comply with IFRS as issued by the IASB.
(3) The issuer may elect to delay complying with any new or revised
financial accounting standard until the date that a company that is not
an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of
2002 (15 U.S.C. 7201(a)) is required to comply with such new or revised
accounting standard, if such standard also applies to companies that
are not issuers. Issuers electing such extension of time accommodation
must disclose it at the time the issuer files its offering statement
and apply the election to all standards. Issuers electing not to use
this accommodation must forgo this accommodation for all financial
accounting standards and may not elect to rely on this accommodation in
any future filings.
(b) Financial Statements for Tier 1 Offerings
(1) The financial statements prepared pursuant to this paragraph
(b), including (b)(7), need not be prepared in accordance with
Regulation S-X.
(2) The financial statements prepared pursuant to paragraph (b),
including (b)(7), need not be audited. If the financial statements are
not audited, they shall be labeled as ``unaudited''. However, if an
audit of these financial statements is obtained for other purposes and
that audit was performed in accordance with either U.S. generally
accepted auditing standards or the Standards of the Public Company
Accounting Oversight Board by an auditor that is independent pursuant
to either the independence standards of the American Institute of
Certified Public Accountants (AICPA) or Rule 2-01 of Regulation S-X,
those audited financial statements must be filed, and an audit opinion
complying with Rule 2-02 of Regulation S-X must be filed along with
such financial statements. The auditor may, but need not, be registered
with the Public Company Accounting Oversight Board.
(3) Consolidated Balance Sheets. Age of balance sheets at filing
and at qualification:
(A) If the filing is made, or the offering statement is qualified,
more than three months but no more than nine months after the most
recently completed fiscal year end, include a balance sheet as of the
two most recently completed fiscal year ends.
(B) If the filing is made, or the offering statement is qualified,
more than nine months after the most recently completed fiscal year
end, include a balance sheet as of the two most
[[Page 21913]]
recently completed fiscal year ends and an interim balance sheet as of
a date no earlier than six months after the most recently completed
fiscal year end.
(C) If the filing is made, or the offering statement is qualified,
within three months after the most recently completed fiscal year end,
include a balance sheet as of the two fiscal year ends preceding the
most recently completed fiscal year end and an interim balance sheet as
of a date no earlier than six months after the date of the most recent
fiscal year end balance sheet that is required.
(D) If the filing is made, or the offering statement is qualified,
during the period from inception until three months after reaching the
annual balance sheet date for the first time, include a balance sheet
as of a date within nine months of filing or qualification.
(4) Statements of comprehensive income, cash flows, and changes in
stockholders' equity. File consolidated statements of income, cash
flows, and changes in stockholders' equity for each of the two fiscal
years preceding the date of the most recent balance sheet being filed
or such shorter period as the issuer has been in existence. If a
consolidated interim balance sheet is required by (b)(3) above,
consolidated interim statements of income and cash flows shall be
provided and must cover at least the first six months of the issuer's
fiscal year and the corresponding period of the preceding fiscal year.
(5) Interim financial statements. Interim financial statements may
be condensed as described in Rule 8-03(a) of Regulation S-X. The
interim income statements must be accompanied by a statement that in
the opinion of management all adjustments necessary in order to make
the interim financial statements not misleading have been included.
(6) Oil and Gas Producing Activities. Issuers engaged in oil and
gas producing activities must follow the financial accounting and
reporting standards specified in Rule 4-10 of Regulation S-X.
(7) Financial Statements of Other Entities. The circumstances
described below may require you to file financial statements of other
entities in the offering statement. The financial statements of other
entities must be presented for the same periods as if the other entity
was the issuer as described above in paragraphs (b)(3) and (b)(4)
unless a shorter period is specified by the rules below. The financial
statement of other entities shall follow the same audit requirement as
paragraph (b)(2) of this Part F/S.
(i) Financial Statements of Guarantors and Issuers of Guaranteed
Securities. Financial statements of a subsidiary that issues securities
guaranteed by the parent or guarantees securities issued by the parent
must be presented as required by Rule 3-10 of Regulation S-X.
(ii) Financial Statements of Affiliates Whose Securities
Collateralize an Issuance. Financial statements for an issuer's
affiliates whose securities constitute a substantial portion of the
collateral for any class of securities being offered must be presented
as required by Rule 3-16 of Regulation S-X.
(iii) Financial Statements of Businesses Acquired or to be
Acquired. File the financial statements required by Rule 8-04 of
Regulation S-X.
(iv) Pro Forma Financial Information. If financial statements are
presented under paragraph (b)(7)(iii) above, file pro forma information
showing the effects of the acquisition as described in Rule 8-05 of
Regulation S-X.
(v) Real Estate Operations Acquired or to be Acquired. File the
financial information required by Rule 8-06 of Regulation S-X.
Instructions to paragraph (b) in Part F/S:
1. Issuers should refer to Rule 257(b)(2) to determine whether a
special financial report will be required after qualification of the
offering statement.
2. If the last day that the financial statements included in the
offering statement can be accepted, according to the age requirements
of this item falls on a Saturday, Sunday, or holiday, such offering
statement may be filed on the first business day following the last day
of the specified period.
3. As an alternative, an issuer may--but need not--elect to comply
with the provisions of paragraph (c).
(c) Financial Statement Requirements for Tier 2 Offerings
(1) In addition to the general rules in paragraph (a), provide the
financial statements required by paragraph (b) of this Part F/S, except
the following rules should be followed in the preparation of the
financial statements:
(i) The issuer and, when applicable, other entities for which
financial statements are required, must comply with Article 8 of
Regulation S-X, as if it was conducting a registered offering on Form
S-1, except the age of interim financial statements may follow
paragraphs (b)(3)-(4) of this Part F/S.
(ii) Audited financial statements are required for Tier 2 offerings
for the issuer and, when applicable, for financial statements of other
entities. However, interim financial statements may be unaudited.
(iii) The audit must be conducted in accordance with either U.S.
Generally Accepted Auditing Standards or the standards of the Public
Company Accounting Oversight Board (United States) and the report and
qualifications of the independent accountant shall comply with the
requirements of Article 2 of Regulation S-X. Accounting firms
conducting audits for the financial statements included in the offering
circular may, but need not, be registered with the Public Company
Accounting Oversight Board.
PART III--EXHIBITS
Item 16. Index to Exhibits
(a) An exhibits index must be presented at the beginning of Part
III.
(b) Each exhibit must be listed in the exhibit index according to
the number assigned to it under Item 17 below.
(c) For incorporation by reference, please refer to General
Instruction III of this Form.
Item 17. Description of Exhibits
As appropriate, the following documents must be filed as exhibits
to the offering statement.
1. Underwriting agreement--Each underwriting contract or agreement
with a principal underwriter or letter pursuant to which the securities
are to be distributed; where the terms have yet to be finalized,
proposed formats may be provided.
2. Charter and bylaws--The charter and bylaws of the issuer or
instruments corresponding thereto as currently in effect and any
amendments thereto.
3. Instruments defining the rights of securityholders--
(a) All instruments defining the rights of any holder of the
issuer's securities, including but not limited to (i) holders of equity
or debt securities being issued; (ii) holders of long-term debt of the
issuer, and of all subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.
(b) The following instruments need not be filed if the issuer
agrees to file them with the Commission upon request: (i) instruments
defining the rights of holders of long-term debt of the issuer and all
of its subsidiaries for which consolidated financial statements are
required to be filed if such debt is not being issued pursuant to this
Regulation A offering and the total amount of such authorized issuance
does not exceed 5% of the total assets of the issuer and its
subsidiaries on a consolidated basis; (ii) any instrument
[[Page 21914]]
with respect to a class of securities that is to be retired or redeemed
before the issuance or upon delivery of the securities being issued
pursuant to this Regulation A offering and appropriate steps have been
taken to assure such retirement or redemption; and (iii) copies of
instruments evidencing scrip certificates or fractions of shares.
4. Subscription agreement--The form of any subscription agreement
to be used in connection with the purchase of securities in this
offering.
5. Voting trust agreement--Any voting trust agreements and
amendments.
6. Material contracts
(a) Every contract not made in the ordinary course of business that
is material to the issuer and is to be performed in whole or in part at
or after the filing of the offering statement or was entered into not
more than two years before such filing. Only contracts need be filed as
to which the issuer or subsidiary of the issuer is a party or has
succeeded to a party by assumption or assignment or in which the issuer
or such subsidiary has a beneficial interest. Schedules (or similar
attachments) to material contracts may be excluded if not material to
an investment decision or if the material information contained in such
schedules is otherwise disclosed in the agreement or the offering
statement. The material contract filed must contain a list briefly
identifying the contents of all omitted schedules, together with an
agreement to furnish supplementally a copy of any omitted schedule to
the Commission upon request.
(b) If the contract is such as ordinarily accompanies the kind of
business conducted by the issuer and its subsidiaries, it is made in
the ordinary course of business and need not be filed unless it falls
within one or more of the following categories, in which case it must
be filed except where immaterial in amount or significance: (i) any
contract to which directors, officers, promoters, voting trustees,
securityholders named in the offering statement, or underwriters are
parties, except where the contract merely involves the purchase or sale
of current assets having a determinable market price, at such market
price; (ii) any contract upon which the issuer's business is
substantially dependent, as in the case of continuing contracts to sell
the major part of the issuer's products or services or to purchase the
major part of the issuer's requirements of goods, services or raw
materials or any franchise or license or other agreement to use a
patent, formula, trade secret, process or trade name upon which the
issuer's business depends to a material extent; (iii) any contract
calling for the acquisition or sale of any property, plant or equipment
for a consideration exceeding 15% of such fixed assets of the issuer on
a consolidated basis; or (iv) any material lease under which a part of
the property described in the offering statement is held by the issuer.
(c) Any management contract or any compensatory plan, contract or
arrangement including, but not limited to, plans relating to options,
warrants or rights, pension, retirement or deferred compensation or
bonus, incentive or profit sharing (or if not set forth in any formal
document, a written description) is deemed material and must be filed
except for the following: (i) ordinary purchase and sales agency
agreements; (ii) agreements with managers of stores in a chain
organization or similar organization; (iii) contracts providing for
labor or salesperson's bonuses or payments to a class of
securityholders, as such; (iv) any compensatory plan, contract or
arrangement that pursuant to its terms is available to employees
generally and that in operation provides for the same method of
allocation of benefits between management and non-management
participants.
7. Plan of acquisition, reorganization, arrangement, liquidation,
or succession--Any material plan of acquisition, disposition,
reorganization, readjustment, succession, liquidation or arrangement
and any amendments thereto described in the offering statement.
Schedules (or similar attachments) to these exhibits must not be filed
unless such schedules contain information that is material to an
investment decision and that is not otherwise disclosed in the
agreement or the offering statement. The plan filed must contain a list
briefly identifying the contents of all omitted schedules, together
with an agreement to furnish supplementally a copy of any omitted
schedule to the Commission upon request.
8. Escrow agreements--Any escrow agreement or similar arrangement
which has been executed in connection with the Regulation A offering.
9. Letter re change in certifying accountant--A letter from the
issuer's former independent accountant regarding its concurrence or
disagreement with the statements made by the issuer in the current
report concerning the resignation or dismissal as the issuer's
principal accountant.
10. Power of attorney--If any name is signed to the offering
statement pursuant to a power of attorney, signed copies of the power
of attorney must be filed. Where the power of attorney is contained
elsewhere in the offering statement or documents filed therewith, a
reference must be made in the index to the part of the offering
statement or document containing such power of attorney. In addition,
if the name of any officer signing on behalf of the issuer is signed
pursuant to a power of attorney, certified copies of a resolution of
the issuer's board of directors authorizing such signature must also be
filed. A power of attorney that is filed with the Commission must
relate to a specific filing or an amendment thereto. A power of
attorney that confers general authority may not be filed with the
Commission.
11. Consents--
(a) Experts: The written consent of (i) any accountant, counsel,
engineer, geologist, appraiser or any persons whose profession gives
authority to a statement made by them and who is named in the offering
statement as having prepared or certified any part of the document or
is named as having prepared or certified a report or evaluation whether
or not for use in connection with the offering statement; (ii) the
expert that authored any portion of a report quoted or summarized as
such in the offering statement, expressly stating their consent to the
use of such quotation or summary; (iii) any persons who are referenced
as having reviewed or passed upon any information in the offering
statement, and that such information is being included on the basis of
their authority or in reliance upon their status as experts.
(b) All written consents must be dated and signed.
12. Opinion re legality--An opinion of counsel as to the legality
of the securities covered by the Offering Statement, indicating whether
they will when sold, be legally issued, fully paid and non-assessable,
and if debt securities, whether they will be binding obligations of the
issuer.
13. ``Testing the waters'' materials--Any written communication or
broadcast script used under the authorization of Rule 255. Such
materials need not be filed if they are substantively the same as
materials previously filed with the offering statement.
14. Appointment of agent for service of process--A Canadian issuer
must file Form F-X.
15. Additional exhibits--
(a) Any non-public, draft offering statement previously submitted
pursuant to Rule 252(d) and any related, non-public correspondence
submitted by or on behalf of the issuer.
[[Page 21915]]
(b) Any additional exhibits which the issuer may wish to file,
which must be so marked as to indicate clearly the subject matters to
which they refer.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies
that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 1-A and has duly caused this offering
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of ____, State of ____, on ____ (date).
(Exact name of issuer as specified in its charter)_______--------------
By (Signature and Title)_______
This offering statement has been signed by the following persons
in the capacities and on the dates indicated.
(Signature)_______-----------------------------------------------------
(Title)_______---------------------------------------------------------
(Date)_______----------------------------------------------------------
Instructions to Signatures:
1. The offering statement must be signed by the issuer, its
principal executive officer, principal financial officer, principal
accounting officer, and a majority of the members of its board of
directors or other governing body. If a signature is by a person on
behalf of any other person, evidence of authority to sign must be filed
with the offering statement, except where an executive officer signs on
behalf of the issuer.
2. The offering statement must be signed using a typed signature.
Each signatory to the filing must also manually sign a signature page
or other document authenticating, acknowledging or otherwise adopting
his or her signature that appears in the filing. Such document must be
executed before or at the time the filing is made and must be retained
by the issuer for a period of five years. Upon request, the issuer must
furnish to the Commission or its staff a copy of any or all documents
retained pursuant to this section.
3. The name and title of each person signing the offering statement
must be typed or printed beneath the signature.
Note: The text of Form 1-A will not appear in the Code of
Federal Regulations.
0
11. Revise Sec. 239.91 to read as follows:
Sec. 239.91 Form 1-K.
This form shall be used for filing annual reports under Regulation
A (Sec. Sec. 230.251-230.263 of this chapter).
0
12. Add Form 1-K (referenced in Sec. 239.91) to read as follows:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-K
GENERAL INSTRUCTIONS
A. Rules as to Use of Form 1-K.
(1) This Form shall be used for annual reports pursuant to Rule
257(b)(1) of Regulation A (Sec. Sec. 230.251-230.263).
(2) Annual reports on this Form shall be filed within 120 calendar
days after the end of the fiscal year covered by the report.
(3) This Form also shall be used for special financial reports
filed pursuant to Rule 257(b)(2)(i)(A) of Regulation A. Such special
financial reports shall be filed and signed in the manner set forth in
this Form, but otherwise need only provide Part I and the financial
statements required by Rule 257(b)(2)(i)(A). Special financial reports
filed using this Form shall be filed within 120 calendar days after the
qualification date of the offering statement.
B. Preparation of Report.
(1) Regulation A contains certain general requirements that are
applicable to reports on any form, including amendments to reports.
These general requirements should be carefully read and observed in the
preparation and filing of reports on this Form.
(2) This Form is not to be used as a blank form to be filled in,
but only as a guide in the preparation of the report.
(3) Except where information is required to be given for the fiscal
year or as of a specified date, it shall be given as of the latest date
reasonably practicable.
(4) References in this Form to the items in Form 1-A are to the
items set forth in Part II and Part III of Form 1-A, not Part I.
(5) In addition to the information expressly required to be
included in this Form, there shall be added such further material
information, if any, as may be necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
C. Signature and Filing of Report.
(1) The report must be filed with the Commission in electronic
format by means of the Commission's Electronic Data Gathering, Analysis
and Retrieval System (``EDGAR'') in accordance with the EDGAR rules set
forth in Regulation S-T (17 CFR part 232).
(2) The report must be signed by the issuer, its principal
executive officer, principal financial officer, principal accounting
officer, and at least a majority of the members of its board of
directors or other governing body. If a signature is by a person on
behalf of any other person, evidence of authority to sign must be filed
with the report, except where an executive officer signs on behalf of
the issuer.
(3) The report must be signed using a typed signature. Each
signatory to the filing must also manually sign a signature page or
other document authenticating, acknowledging or otherwise adopting his
or her signature that appears in the filing. Such document must be
executed before or at the time the filing is made and must be retained
by the issuer for a period of five years. Upon request, the issuer must
furnish to the Commission or its staff a copy of any or all documents
retained pursuant to this paragraph.
D. Incorporation by Reference and Cross-Referencing.
(1) An issuer may incorporate by reference to other documents
previously submitted or filed on EDGAR. Cross-referencing within the
report is also encouraged to avoid repetition of information. For
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in the financial
statements, instead of repeating such information. Descriptions of
where the information incorporated by reference or cross-referenced can
be found must be specific and must clearly identify the relevant
document and portion thereof where such information can be found. For
exhibits incorporated by reference, this description must be noted in
the exhibits index for each relevant exhibit. All descriptions of where
information incorporated by reference can be found must be accompanied
by a separate hyperlink to the incorporated document on EDGAR. A
hyperlink need not remain active after the filing of the report, except
that amendments to the report must update any hyperlinks referred to in
the amendment that are inactive.
(2) Reference may not be made to any document if the portion of
such document containing the pertinent information includes an
incorporation by reference to another document. Incorporation by
reference to documents not available on EDGAR is not permitted.
Information shall not be incorporated by reference or cross-referenced
in any case where such incorporation would render the statement or
report incomplete, unclear, or confusing. Incorporating information
[[Page 21916]]
into the financial statements from elsewhere is not permitted.
(3) If any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.
PART I
NOTIFICATION
The following information must be provided in the XML-based portion
of Form 1-K available through the EDGAR portal and must be completed or
updated before uploading each offering statement or amendment thereto.
The format of Part I shown below may differ from the electronic version
available on EDGAR. The electronic version of Part I will allow issuers
to attach Part II for filing by means of EDGAR. All items must be
addressed, unless otherwise indicated.
* * * * *
This Form 1-K is to provide an [ballot] Annual Report OR [ballot]
Special Financial Report for the fiscal year ended______
Exact name of issuer as specified in the issuer's charter:______
Jurisdiction of incorporation/organization:______
I.R.S. Employer Identification Number:______
Address of Principal Executive Offices:
-----------------------------------------------------------------------
Phone: (_)-------------------------------------------------------------
Title of each class of securities issued pursuant to Regulation A:-----
-----------------------------------------------------------------------
Summary Information Regarding Prior Offerings and Proceeds
The following information must be provided for any Regulation A
offering that has terminated or completed prior to the filing of this
Form 1-K, unless such information has been previously reported in a
manner permissible under Rule 257. If such information has been
previously reported, check this box [ballot]and leave the rest of Part
I blank.
Commission File Number of the offering statement:______
Date of qualification of the offering statement:______
Date of commencement of the offering:______
Amount of securities qualified to be sold in the offering:______
Amount of securities sold in the offering:______
Price per security: $______
The portion of aggregate sales attributable to securities sold on
behalf of the issuer: $_______
The portion of aggregate sales attributable to securities sold on
behalf of selling securityholders: $_______
Fees in connection with this offering and names of service
providers:
Name of Service Provider Fees
Underwriters:....................................... ____________ $____________
Sales Commissions:.................................. ____________ $____________
Finders' Fees:...................................... ____________ $____________
Audit:.............................................. ____________ $____________
Legal:.............................................. ____________ $____________
Promoters:.......................................... ____________ $____________
Blue Sky Compliance:................................ ____________ $____________
CRD Number of any broker or dealer listed:______
Net proceeds to the issuer: $______
Clarification of responses (if necessary):______
PART II
INFORMATION TO BE INCLUDED IN REPORT
Item 1. Business
Set forth the information required by Item 7 of Form 1-A.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Set forth the information required by Item 9(a), (b) and (d) of
Form 1-A for the most recent two completed fiscal years.
Item 3. Directors and Officers
Set forth the information required by Items 10 and 11 of Form 1-A.
Item 4. Security Ownership of Management and Certain Securityholders
Set forth the information required by Item 12 of Form 1-A.
Item 5. Interest of Management and Others in Certain Transactions
Set forth the information required by Item 13 of Form 1-A.
Item 6. Other Information
Set forth any information required to be disclosed in a report on
Form 1-U during the last six months of the fiscal year covered by this
Form 1-K, but not reported, whether or not otherwise required by this
Form 1-K. If disclosure of such information is made under this item, it
need not be repeated in a report on Form 1-U that would otherwise be
required to be filed with respect to such information or in a
subsequent report on Form 1-U.
Item 7. Financial Statements
(a) The appropriate audited financial statements set forth below of
the issuer, or the issuer and its predecessors or any businesses to
which the issuer is a successor must be filed as part of the Form 1-K.
(b) Unless the issuer is a Canadian company, financial statements
must be prepared in accordance with generally accepted accounting
principles in the United States (US GAAP). If the issuer is a Canadian
company, such financial statements must be prepared in accordance with
either US GAAP or International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB). If the
financial statements comply with IFRS, such compliance must be
explicitly and unreservedly stated in the notes to the financial
statements and the auditor's report must include an opinion on whether
the financial statements comply with IFRS as issued by the IASB.
(c) The audit of the financial statements must be conducted in
accordance with either U.S. Generally Accepted Auditing Standards or
the standards of the Public Company Accounting Oversight Board (United
States) and the report and qualifications of the independent accountant
shall comply with the requirements of Article 2 of Regulation S-X.
Accounting firms conducting audits for the financial statements may,
but need not, be registered with the Public Company Accounting
Oversight Board.
(d) Balance Sheet. There shall be filed an audited consolidated
balance sheet as of the end of each of the most recent two fiscal
years.
[[Page 21917]]
(e) Statements of income, cash flows, and changes in stockholders'
equity. File audited consolidated statements of income, cash flows, and
changes in stockholders' equity for each of the two fiscal years
preceding the date of the most recent balance sheet being filed or such
shorter period as the issuer has been in existence.
(f) Oil and Gas Producing Activities. Issuers engaged in oil and
gas producing activities must follow the financial accounting and
reporting standards specified in Rule 4-10 of Regulation S-X.
(g) Financial Statements of Other Entities. The circumstances
described below may require you to file financial statements of other
entities. The financial statements of other entities must be presented
for the same periods as the issuer's financial statements described
above in paragraphs (d) and (e) unless a shorter period is specified by
the rules below.
(1) Financial Statements of Guarantors and Issuers of Guaranteed
Securities. Financial statements of a subsidiary that issues securities
guaranteed by the parent or guarantees securities issued by the parent
must be presented as required by Rule 3-10 of Regulation S-X.
(2) Financial Statements of Affiliates Whose Securities
Collateralize an Issuance. Financial statements for an issuer's
affiliates whose securities constitute a substantial portion of the
collateral for any class of securities being offered must be presented
as required by Rule 3-16 of Regulation S-X.
Item 8. Exhibits
(a) An exhibits index must be presented immediately preceding the
first signature page of the report.
(b) File, as exhibits to this Form, the exhibits required by Form
1-A, except for the exhibits required by paragraphs 1, 12, and 13 of
Item 17.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Exact name of issuer as specified in its charter)---------------------
-----------------------------------------------------------------------
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
Pursuant to the requirements of Regulation A, this report has
been signed below by the following persons on behalf of the issuer
and in the capacities and on the dates indicated.
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
Note: The text of Form 1-K will not appear in the Code of
Federal Regulations.
0
13. Add Sec. 239.92 to read as follows:
Sec. 239.92 Form 1-SA.
This form shall be used for filing semiannual reports under
Regulation A (Sec. Sec. 230.251-230.263 of this chapter).
0
14. Add Form 1-SA (referenced in Sec. 239.92) to read as follows:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-SA
[ ] SEMIANNUAL REPORT PURSUANT TO REGULATION A or
[ ] SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A
For the fiscal semiannual period ended---------------------------------
-----------------------------------------------------------------------
(Exact name of issuer as specified in its charter)
State or other jurisdiction of incorporation or organization-----------
(I.R.S. Employer Identification No.)-----------------------------------
(Full mailing address of principal executive offices)------------------
(Issuer's telephone number, including area code)-----------------------
GENERAL INSTRUCTIONS
A. Rules as to Use of Form 1-SA.
(1) This Form shall be used for semiannual reports pursuant to Rule
257(b)(3) of Regulation A (Sec. Sec. 230.251-230.263).
(2) Semiannual reports on this Form shall be filed within 90
calendar days after the end of the semiannual period covered by the
report.
(3) This Form also shall be used for special financial reports
filed pursuant to Rule 257(b)(2)(i)(B) of Regulation A. Such special
financial reports shall be filed and signed in the manner set forth in
this Form, but otherwise need only provide the cover page and financial
statements required by Rule 257(b)(2)(i)(B). Special financial reports
filed using this Form shall be filed within 90 calendar days after the
qualification date of the offering statement.
B. Preparation of Report.
(1) Regulation A contains certain general requirements that are
applicable to reports on any form, including amendments to reports.
These general requirements should be carefully read and observed in the
preparation and filing of reports on this Form.
(2) This Form is not to be used as a blank form to be filled in,
but only as a guide in the preparation of the report.
(3) In addition to the information expressly required to be
included in this Form, there shall be added such further material
information, if any, as may be necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
C. Signature and Filing of Report.
(1) The report must be filed with the Commission in electronic
format by means of the Commission's Electronic Data Gathering, Analysis
and Retrieval System (``EDGAR'') in accordance with the EDGAR rules set
forth in Regulation S-T (17 CFR part 232).
(2) The report must be signed by the issuer, its principal
executive officer, principal financial officer and principal accounting
officer. If a signature is by a person on behalf of any other person,
evidence of authority to sign must be filed with the report, except
where an executive officer signs on behalf of the issuer.
(3) The report must be signed using a typed signature. Each
signatory to the filing must also manually sign a signature page or
other document authenticating, acknowledging or otherwise adopting his
or her signature that appears in the filing. Such document must be
executed before or at the time the filing is made and must be retained
by the issuer for a period of five years. Upon request, the issuer must
furnish to the Commission or its staff a copy of any or all documents
retained pursuant to this paragraph.
D. Incorporation by Reference and Cross-Referencing.
(1) An issuer may incorporate by reference to other documents
previously submitted or filed on EDGAR. Cross-referencing within the
report is also encouraged to avoid repetition of information. For
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in the financial
statements, instead of repeating such information. Descriptions of
where the information incorporated by reference or cross-referenced can
be found must be specific and must clearly identify the relevant
document and portion thereof where such information can be found. For
exhibits incorporated by reference, this description must be noted in
the exhibits index for each relevant exhibit. All such descriptions of
where information incorporated by reference can be found must be
accompanied by
[[Page 21918]]
a separate hyperlink to the incorporated document on EDGAR. A hyperlink
need not remain active after the filing of the report, except that
amendments to the report must update any hyperlinks referred to in the
amendment that are inactive.
(2) Reference may not be made to any document if the portion of
such document containing the pertinent information includes an
incorporation by reference to another document. Incorporation by
reference to documents not available on EDGAR is not permitted.
Information shall not be incorporated by reference or cross-referenced
in any case where such incorporation would render the statement or
report incomplete, unclear, or confusing. Incorporating information
into the financial statements from elsewhere is not permitted.
(3) If any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.
INFORMATION TO BE INCLUDED IN REPORT
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Set forth the information required by Item 9(a), (b), and (d) of
Form 1-A for the interim period for which financial statements are
required by Item 3 below.
Item 2. Other Information
Set forth any information required to be disclosed in a report on
Form 1-U during the semiannual period covered by this Form 1-SA, but
not reported, whether or not otherwise required by this Form 1-SA. If
disclosure of such information is made under this item, it need not be
repeated in a report on Form 1-U that would otherwise be required to be
filed with respect to such information or in a subsequent report on
Form 1-U.
Item 3. Financial Statements
The appropriate financial statements set forth below of the issuer,
or the issuer and its predecessors or any businesses to which the
issuer is a successor must be filed as part of the Form 1-SA.
Unless the issuer is a Canadian company, financial statements must
be prepared on a consolidated basis in accordance with generally
accepted accounting principles in the United States (US GAAP). If the
issuer is a Canadian company, such financial statements must be
prepared in accordance with either US GAAP or International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB). If the financial statements comply with IFRS as
issued by the IASB, such compliance must be explicitly and unreservedly
stated in the notes to the financial statements.
The financial statements included pursuant to this item may be
condensed, unaudited, and are not required to be reviewed. For
additional guidance on presentation of the financial statements refer
to Rule 8-03(a) of Regulation S-X. The financial statements must
include the following:
(a) An interim consolidated balance sheet as of the end of the six
month period covered by this report and a balance sheet as of the end
of the preceding fiscal year. An interim balance sheet as of the end of
the corresponding six month interim period of the preceding fiscal year
need not be provided unless necessary for an understanding of the
impact of seasonal fluctuations on the issuer's financial condition.
(b) Interim consolidated statements of income must be provided for
the six month interim period covered by this report and for the
corresponding period of the preceding fiscal year. Income statements
must be accompanied by a statement that in the opinion of management
all adjustments necessary in order to make the interim financial
statements not misleading have been included.
(c) Interim statements of cash flows must be provided for the six
month interim period covered by this report and for the corresponding
period of the preceding fiscal year.
(d) Footnote and other disclosures should be provided as needed for
fair presentation and to ensure that the financial statements are not
misleading. Refer to Rule 8-03(b) of Regulation S-X for examples of
disclosures that may be needed.
(e) Financial Statements of Guarantors and Issuers of Guaranteed
Securities. Financial statements of a subsidiary that issues securities
guaranteed by the parent or guarantees securities issued by the parent
must be presented as required by Rule 3-10 of Regulation S-X, except
that the periods presented are those required by this item and the
financial statements need not be audited.
Item 4. Exhibits
(a) An exhibits index must be presented immediately preceding the
first signature page of the report.
(b) File, as exhibits to this Form, the exhibits required by Form
1-A, except for the exhibits required by paragraphs 1, 12, and 13 of
Item 17.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Exact name of issuer as specified in its charter)---------------------
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
Pursuant to the requirements of Regulation A, this report has
been signed below by the following persons on behalf of the issuer
and in the capacities and on the dates indicated.
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
By (Signature and Title)-----------------------------------------------
Date-------------------------------------------------------------------
Note: The text of Form 1-SA will not appear in the Code of
Federal Regulations.
0
15. Add Sec. 239.93 to read as follows:
Sec. 239.93 Form 1-U.
This form shall be used for filing current reports under Regulation
A (Sec. Sec. 230.251-230.263 of this chapter).
0
16. Add Form 1-U (referenced in Sec. 239.92) to read as follows:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-U
CURRENT REPORT PURSUANT TO REGULATION A
Date of Report (Date of earliest event reported)-----------------------
(Exact name of issuer as specified in its charter)---------------------
State or other jurisdiction of incorporation or organization-----------
(I.R.S. Employer Identification No.)-----------------------------------
(Full mailing address of principal executive offices)------------------
(Issuer's telephone number, including area code)-----------------------
Title of each class of securities issued pursuant to Regulation A:-----
-----------------------------------------------------------------------
GENERAL INSTRUCTIONS
A. Rules as to Use of Form 1-U.
(1) This Form shall be used for current reports pursuant to Rule
257(b)(4) of Regulation A (Sec. Sec. 230.251-230.263).
(2) A report on this Form is required to be filed, as applicable,
upon the occurrence of any one or more of the events specified in Items
1--9 of this Form. Unless otherwise specified, a
[[Page 21919]]
report is to be filed within four business days after occurrence of the
event. If the event occurs on a Saturday, Sunday, or holiday on which
the Commission is not open for business, then the four business day
period shall begin to run on, and include, the first business day
thereafter.
(3) If the issuer previously has provided substantially the same
information as required by this Form in a report required by Rule
257(b) of Regulation A, the issuer need not make an additional report
of the information on this Form. To the extent that an item calls for
disclosure of developments concerning a previously reported event or
transaction, any information required in the new report or amendment
about the previously reported event or transaction may be provided by
incorporation by reference to the previously filed report, if a
hyperlink to such report as filed with the Commission is included.
(4) Copies of agreements, amendments or other documents or
instruments are not required to be filed as exhibits to the Form 1-U
unless specifically required by the applicable item. This instruction
does not affect the requirement to otherwise file such agreements,
amendments or other documents or instruments, including as exhibits to
offering statements and periodic reports pursuant to the requirements
of Regulation A.
B. Preparation of Report.
(1) Regulation A contains certain general requirements which are
applicable to reports on any form, including amendments to reports.
These general requirements should be carefully read and observed in the
preparation and filing of reports on this Form.
(2) This Form is not to be used as a blank form to be filled in,
but only as a guide in the preparation of the report. Nevertheless, the
report shall contain the number and caption of each applicable item,
but the text of such item may be omitted. All items that are not
required to be answered in a particular report may be omitted and no
reference thereto need be made in the report. All instructions should
also be omitted.
(3) In addition to the information expressly required to be
included in this Form, there shall be added such further material
information, if any, as may be necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
C. Signature and Filing of Report.
(1) The report must be filed with the Commission in electronic
format by means of the Commission's Electronic Data Gathering, Analysis
and Retrieval System (``EDGAR'') in accordance with the EDGAR rules set
forth in Regulation S-T (17 CFR part 232).
(2) The report must be signed by an officer duly authorized to sign
on behalf of the issuer. The report must be signed using a typed
signature. The signatory to the filing must also manually sign a
signature page or other document authenticating, acknowledging or
otherwise adopting his or her signature that appears in the filing.
Such document must be executed before or at the time the filing is made
and must be retained by the issuer for a period of five years. Upon
request, the issuer must furnish to the Commission or its staff a copy
of any or all documents retained pursuant to this paragraph.
D. Incorporation by Reference and Cross-Referencing.
(1) An issuer may incorporate by reference to other documents
previously submitted or filed on EDGAR. Cross-referencing within the
report is also encouraged to avoid repetition of information. For
example, you may respond to an item of this Form by providing a cross-
reference to the location of the information in another item, instead
of repeating such information. Descriptions of where the information
incorporated by reference or cross-referenced can be found must be
specific and must clearly identify the relevant document and portion
thereof where such information can be found. For exhibits incorporated
by reference, this description must be noted in the exhibits index for
each relevant exhibit. All such descriptions of where information
incorporated by reference can be found must be accompanied by a
separate hyperlink to the incorporated document on EDGAR. A hyperlink
need not remain active after the filing of the report, except that
amendments to the report must update any hyperlinks referred to in the
amendment that are inactive.
(2) Reference may not be made to any document if the portion of
such document containing the pertinent information includes an
incorporation by reference to another document. Incorporation by
reference to documents not available on EDGAR is not permitted.
Information shall not be incorporated by reference or cross-referenced
in any case where such incorporation would render the statement or
report incomplete, unclear, or confusing. Incorporating information
into any financial statements from elsewhere is not permitted.
(3) If any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.
INFORMATION TO BE INCLUDED IN THE REPORT
Item 1. Fundamental Changes
(a) If the issuer has entered into or terminated a material
definitive agreement that has resulted in or would reasonably be
expected to result in a fundamental change to the nature of its
business or plan of operations, disclose the following information to
the extent applicable:
(1) the date on which the agreement was entered into, amended, or
terminated, the identity of the parties to the agreement or amendment,
and a brief description of any material relationship between the issuer
or its affiliates and any of the parties (other than the relationship
created by the material definitive agreement or amendment);
(2) a brief description of the material terms and conditions of the
agreement;
(3) a brief description of the material circumstances surrounding
the termination; and
(4) any material early termination penalties incurred by the issuer
due to a termination.
(b) For purposes of this item, a material definitive agreement
means an agreement that provides for obligations that are material to
and enforceable against the issuer, or rights that are material to the
issuer and enforceable by the issuer against one or more other parties
to the agreement, in each case whether or not subject to conditions.
(c) File any material definitive agreement disclosed pursuant to
this item as an exhibit to the report on this Form.
Instructions to Item 1:
1. A material definitive agreement that is not made in the ordinary
course of business is not necessarily required to be disclosed under
this item if it does not result in, and would not reasonably be
expected to result in, a fundamental change to the nature of the
issuer's business or plan of operations.
2. Without limiting the generality of the foregoing and solely for
the purposes of this Item 1, a material definitive agreement is deemed
to result in a fundamental change if it involves any of the following:
[[Page 21920]]
a. An acquisition transaction for which the purchase price, as
defined by U.S. GAAP or IFRS, exceeds fifty-percent of the total
consolidated assets of the issuer as of the end of the most recently
completed fiscal year. If the acquirer transferred assets to the
acquiree than the carrying value of those assets should be excluded
from the purchase price;
b. A merger, consolidation, acquisition or similar transaction that
requires approval by the issuer's securityholders; or
c. Any contract upon which the issuer's business is substantially
dependent, as in the case of continuing contracts to sell the major
part of the issuer's products or services or to purchase the major part
of the issuer's requirements of goods, services or raw materials or any
franchise or license or other agreement to use a patent, formula, trade
secret, process or trade name upon which the issuer's business is
substantially dependent.
3. An issuer must provide disclosure under this item if the issuer
succeeds as a party to the agreement or amendment to the agreement by
assumption or assignment (other than in connection with a merger or
acquisition or similar transaction that is otherwise reported pursuant
to this item).
4. No disclosure under this item is required regarding the
termination of a material definitive agreement if:
a. The agreement terminated on its stated termination date, or as a
result of all parties completing their obligations under such
agreement.
b. Only negotiations or discussions regarding termination of a
material definitive agreement are being conducted and the agreement has
not been terminated.
c. The issuer believes in good faith that the material definitive
agreement has not been terminated, unless the issuer has received a
notice of termination pursuant to the terms of agreement.
Item 2. Bankruptcy or Receivership
(a) If a receiver, fiscal agent or similar officer has been
appointed for an issuer or its parent, in a proceeding under the U.S.
Bankruptcy Code or in any other proceeding under state, federal, or
Canadian laws, in which a court or governmental authority has assumed
jurisdiction over substantially all of the assets or business of the
issuer or its parent, or if such jurisdiction has been assumed by
leaving the existing directors and officers in possession but subject
to the supervision and orders of a court or governmental authority,
disclose the following information:
(1) the name or other identification of the proceeding;
(2) the identity of the court or governmental authority;
(3) the date that jurisdiction was assumed; and
(4) the identity of the receiver, fiscal agent or similar officer
and the date of his or her appointment.
(b) If an order confirming a plan of reorganization, arrangement or
liquidation has been entered by a court or governmental authority
having supervision or jurisdiction over substantially all of the assets
or business of the issuer or its parent, disclose the following:
(1) the identity of the court or governmental authority;
(2) the date that the order confirming the plan was entered by the
court or governmental authority;
(3) a summary of the material features of the plan;
(4) the number of shares or other units of the issuer or its parent
issued and outstanding, the number reserved for future issuance in
respect of claims and interests filed and allowed under the plan, and
the aggregate total of such numbers; and
(5) information as to the assets and liabilities of the issuer or
its parent as of the date that the order confirming the plan was
entered, or a date as close thereto as practicable.
Instruction to Item 2:
The information called for in paragraph (b)(5) of this item may be
presented in the form in which it was furnished to the court or
governmental authority.
Item 3. Material Modification to Rights of Securityholders
(a) If the constituent instruments defining the rights of the
holders of any class of securities of the issuer that were issued
pursuant to Regulation A have been materially modified, disclose the
date of the modification, the title of the class of securities involved
and briefly describe the general effect of such modification upon the
rights of holders of such securities.
(b) If the rights or benefits evidenced by any class of securities
issued pursuant to Regulation A have been materially limited or
qualified by the issuance or modification of any other class of
securities by the issuer, briefly disclose the date of the issuance or
modification, the general effect of the issuance or modification of
such other class of securities upon the rights or benefits of the
holders of the securities issued pursuant to Regulation A.
Instruction to Item 3:
Working capital restrictions and other limitations upon the payment
of dividends must be reported pursuant to this item.
Item 4. Changes in Issuer's Certifying Accountant
(a) If an independent accountant who was previously engaged as the
principal accountant to audit the issuer's financial statements, or an
independent accountant upon whom the principal accountant expressed
reliance in its report regarding a significant subsidiary, resigns (or
indicates that it declines to stand for re-appointment after completion
of the current audit) or is dismissed, disclose the information that
would be required under Item 304(a)(1) of Regulation S-K (17 CFR
229.304(a)(1)), including compliance with Item 304(a)(3) of Regulation
S-K (17 CFR 229.304(a)(3)) if the issuer were a ``registrant.''
(b) If a new independent accountant has been engaged as either the
principal accountant to audit the issuer's financial statements or as
an independent accountant on whom the principal accountant is expected
to express reliance in its report regarding a significant subsidiary,
the issuer must disclose the information that would be required by Item
304(a)(2) of Regulation S-K (17 CFR 229.304(a)(2)) if the issuer were a
``registrant.''
Instructions to Item 4:
1. Information under this Item 4 is only required if the issuer's
most recent qualified offering statement on Form 1-A or report on Form
1-K, whichever is most recent, contains audited financial statements.
2. The resignation or dismissal of an independent accountant, or
its refusal to stand for re-appointment, is a reportable event separate
from the engagement of a new independent accountant. On some occasions,
two reports on Form 1-U are required for a single change in
accountants, the first on the resignation (or refusal to stand for re-
appointment) or dismissal of the former accountant and the second when
the new accountant is engaged. Information required in the second Form
1-U filing in such situations need not be provided to the extent that
it has been reported previously in the first Form 1-U filing.
Item 5. Non-reliance on Previously Issued Financial Statements or a
Related Audit Report or Completed Interim Review
(a) If the issuer's board of directors, a committee of the board of
directors or the officer or officers of the issuer authorized to take
such action if board action is not required, concludes that any
previously issued financial
[[Page 21921]]
statements, covering one or more years or interim periods for which the
issuer is required to provide financial statements under Regulation A,
including Form 1-A, should no longer be relied upon because of an error
in such financial statements as addressed in FASB Accounting Standards
Codification Topic 250 or IAS 8, as may be modified, supplemented or
succeeded, disclose the following information:
(1) the date of the conclusion regarding the non-reliance and an
identification of the financial statements and years or periods covered
that should no longer be relied upon;
(2) a brief description of the facts underlying the conclusion to
the extent known to the issuer at the time of filing; and
(3) a statement of whether the audit committee, or the board of
directors in the absence of an audit committee, or authorized officer
or officers, discussed with the issuer's independent accountant the
matters disclosed in the filing pursuant to this paragraph (a).
(b) If the issuer is advised by, or receives notice from, its
independent accountant that disclosure should be made or action should
be taken to prevent future reliance on a previously issued audit report
or completed interim review related to previously issued financial
statements, disclose the following information:
(1) the date on which the issuer was so advised or notified;
(2) identification of the financial statements that should no
longer be relied upon;
(3) a brief description of the information provided by the
accountant; and
(4) a statement of whether the audit committee, or the board of
directors in the absence of an audit committee, or authorized officer
or officers, discussed with the independent accountant the matters
disclosed in the filing pursuant to paragraph (b) of this item.
(c) If the issuer receives advisement or notice from its
independent accountant requiring disclosure under paragraph (b) of this
item, the issuer must:
(1) provide the independent accountant with a copy of the
disclosures the issuer is making in response to this item and the
independent accountant shall receive a copy no later than the day that
the disclosures are filed with the Commission;
(2) request the independent accountant to furnish to the issuer as
promptly as possible a letter addressed to the Commission stating
whether the independent accountant agrees with the statements made by
the issuer in response to this item and, if not, stating the respects
in which it does not agree; and
(3) amend the issuer's previously filed Form 1-U by filing the
independent accountant's letter as an exhibit to the filed Form 1-U no
later than two business days after the issuer's receipt of the letter.
Item 6. Changes in Control of Issuer
(a) If, to the knowledge of the issuer's board of directors, a
committee of the board of directors, governing body similar to a board
of directors, or authorized officer or officers of the issuer, a change
in control of the issuer has occurred, furnish the following
information:
(1) the identity of the persons who acquired such control;
(2) the date and a description of the transactions which resulted
in the change in control;
(3) the basis of the control, including the percentage of voting
securities of the issuer now beneficially owned directly or indirectly
by the persons who acquired control;
(4) the amount of the consideration used by such persons;
(5) the sources of funds used by the persons, unless all or any
part of the consideration used is a loan made in the ordinary course of
business by a bank as defined by Section 3(a)(6) of the Securities
Exchange Act of 1934.
(6) the identity of the persons from whom control was assumed; and
(7) any arrangements or understandings among members of both the
former and new control groups and their associates with respect to
election of directors or other matters.
(b) Describe any arrangements, known to the issuer, including any
pledge by any person of securities of the issuer or any of its parents,
the operation of which may at a subsequent date result in a change in
control of the issuer. It is not necessary to describe ordinary default
provisions contained in the charter, trust indentures, or other
governing instruments relating to securities of the issuer in response
to this paragraph.
Item 7. Departure of Certain Officers
If the issuer's principal executive officer, principal financial
officer, principal accounting officer, or any person performing similar
functions, retires, resigns or is terminated from that position,
disclose the fact that the event has occurred and the date of the
event.
Instruction to Item 7:
The disclosure requirements of this item do not apply to an issuer
that is a wholly-owned subsidiary of an issuer with a class of
securities registered under Section 12 of the Exchange Act (15 U.S.C.
78l), or that is required to file reports under Section 15(d) of the
Exchange Act (15 U.S.C. 78o(d)) or under Regulation A.
Item 8. Certain Unregistered Sales of Equity Securities
(a) If the issuer sells equity securities in a transaction that is
not registered under the Securities Act or qualified under Regulation
A, furnish the information set forth in Item 6 of Part I of Form 1-A.
For purposes of determining the required filing date for the Form 1-U
under this item, the issuer has no obligation to disclose information
under this item until the issuer enters into an agreement enforceable
against the issuer, whether or not subject to conditions, under which
the equity securities are to be sold. If there is no such agreement,
the issuer must provide the disclosure within four business days after
the occurrence of the closing or settlement of the transaction or
arrangement under which the equity securities are to be sold.
(b) No report need be filed if the equity securities sold, in the
aggregate since its last report filed under this item or its last
periodic report containing such disclosure, whichever is more recent,
constitute less than 10% of the number of shares outstanding of the
class of equity securities sold.
Instructions to Item 8:
1. For purposes of this item, ``the number of shares outstanding''
refers to the actual number of shares of equity securities of the class
outstanding and does not include outstanding securities convertible
into or exchangeable for such equity securities.
2. It is not necessary to follow the format of Item 6 of Part I of
Form 1-A when providing the information required by this item.
Item 9. Other Events
The issuer may, at its option, disclose under this item any events
or information, the disclosure of which is not otherwise called for by
this Form, that the issuer deems of importance to securityholders.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Exact name of issuer as specified in its charter)---------------------
By (Signature and Title)-----------------------------------------------
[[Page 21922]]
-----------------------------------------------------------------------
Date______
Note: The text of Form 1-U will not appear in the Code of
Federal Regulations.
0
17. Add Sec. 239.94 to read as follows:
Sec. 239.94 Form 1-Z.
This form shall be used to file an exit report under Regulation A
(Sec. Sec. 230.251-230.263 of this chapter).
0
18. Add Form 1-Z (referenced in Sec. 239.94) to read as follows:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1-Z
EXIT REPORT UNDER REGULATION A
GENERAL INSTRUCTIONS
(1) The following information must be provided in the XML-based
Form 1-Z available through the EDGAR portal. The format shown below may
differ from the electronic version available on EDGAR.
(2) An issuer filing this Form pursuant to Rule 257(a) must only
complete the Preliminary Information and Part I.
(3) An issuer filing this Form to suspend its duty to file reports
under Rule 257(d) must complete the Preliminary Information and Part
II. Such issuer must also provide Part I if it has not previously
provided the Part I information in a Form 1-K filing.
* * * * *
PRELIMINARY INFORMATION
Exact name of issuer as specified in the issuer's charter:______
Address of Principal Executive Offices:______
Phone: (_)
Commission File Number(s):______
PART I
Summary Information Regarding the Offering and Proceeds
Date of qualification of the offering statement:______
Date of commencement of the offering:______
Amount of securities qualified to be sold in the offering:______
Amount of securities sold in the offering:______
Price per security: $______
The portion of aggregate sales attributable to securities sold on
behalf of the issuer:
$ _______
The portion of aggregate sales attributable to securities sold on
behalf of selling securityholders:
$_______
Fees in connection with this offering and names of service
providers:
Name of Service Provider Fees
Underwriters:....................................... ________ ____ $________ ____
Sales Commissions:.................................. ________ ____ $________ ____
Finders' Fees:...................................... ________ ____ $________ ____
Audit:.............................................. ________ ____ $________ ____
Legal:.............................................. ________ ____ $________ ____
Promoters:.......................................... ________ ____ $________ ____
Blue Sky Compliance:................................ ________ ____ ________ ____
CRD Number of any broker or dealer listed:______
Net proceeds to the issuer: $______
Clarification of responses (if necessary):______
PART II
Certification of Suspension of Duty to File Reports
Title of each class of securities covered by this Form-----------------
Commission File Number(s)----------------------------------------------
Approximate number of holders of record as of the certification date:--
Pursuant to the requirements of Regulation A, _____ (Name of issuer
as specified in charter) certifies that it meets all of the
conditions for termination of Regulation A reporting specified in
Rule 257(d) and that there are no classes of securities other than
those that are the subject of this Form 1-Z regarding which the
issuer has Regulation A reporting obligations. _____ (Name of issuer
as specified in charter) has caused this certification to be signed
on its behalf by the undersigned duly authorized person.
By: _____ Date: _____
Title: _____
Instruction: This Part II of Form 1-Z is required by Rule 257(d) of
Regulation A. An officer of the issuer or any other duly authorized
person may sign, and must do so by typed signature. The name and
title of the person signing the form must be typed or printed under
the signature. The signatory to the filing must also manually sign a
signature page or other document authenticating, acknowledging or
otherwise adopting his or her signature that appears in the filing.
Such document must be executed before or at the time the filing is
made and must be retained by the issuer for a period of five years.
Upon request, the issuer must furnish to the Commission or its staff
a copy of any or all documents retained pursuant to this
instruction.
Note: The text of Form 1-Z will not appear in the Code of
Federal Regulations.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
19. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010), unless otherwise
noted.
* * * * *
0
20. Section 240.12g5-1 is amended by adding paragraph (a)(7) to read as
follows:
Sec. 240.12g5-1 Definition of securities ``held of record''.
(a) * * *
(7) Other than when determining compliance with Rule 257(d)(2) of
Regulation A (Sec. 230.257(d)(2) of this chapter), the definition of
``held of record'' shall not include securities issued in a Tier 2
offering pursuant to Regulation A by an issuer that:
(i) Is required to file reports pursuant to Rule 257(b) of
Regulation A (Sec. 230.257(b) of this chapter);
(ii) Is current in filing annual, semiannual and special financial
reports pursuant to such rule as of its most recently completed fiscal
year end;
(iii) Has engaged a transfer agent registered pursuant to Section
17A(c) of the Act to perform the function of a transfer agent with
respect to such securities; and
(iv) Had a public float of less than $75 million as of the last
business day of its most recently completed semiannual period, computed
by multiplying the aggregate worldwide number of shares of its common
equity securities held by non-affiliates by the price at which such
securities were last sold (or the average
[[Page 21923]]
bid and asked prices of such securities) in the principal market for
such securities or, in the event the result of such public float
calculation was zero, had annual revenues of less than $50 million as
of its most recently completed fiscal year. An issuer that would be
required to register a class of securities under Section 12(g) of the
Act as a result of exceeding the applicable threshold in this paragraph
(a)(7)(iv), may continue to exclude the relevant securities from the
definition of ``held of record'' for a transition period ending on the
penultimate day of the fiscal year two years after the date it became
ineligible. The transition period terminates immediately upon the
failure of an issuer to timely file any periodic report due pursuant to
Rule 257 (Sec. 230.257 of this chapter) at which time the issuer must
file a registration statement that registers that class of securities
under the Act within 120 days.
* * * * *
0
21. Section 240.15c2-11 is amended by revising paragraphs (a)(3) and
(d)(2)(i) to read as follows:
Sec. 240.15c2-11 Initiation or resumption of quotations without
specific information.
* * * * *
(a) * * *
(3) A copy of the issuer's most recent annual report filed pursuant
to section 13 or 15(d) of the Act or pursuant to Regulation A
((Sec. Sec. 230.251 through 230.263 of this chapter), or a copy of the
annual statement referred to in section 12(g)(2)(G)(i) of the Act in
the case of an issuer required to file reports pursuant to section 13
or 15(d) of the Act or an issuer of a security covered by section
12(g)(2)(B) or (G) of the Act, together with any semiannual, quarterly
and current reports that have been filed under the provisions of the
Act or Regulation A by the issuer after such annual report or annual
statement; provided, however, that until such issuer has filed its
first annual report pursuant to section 13 or 15(d) of the Act or
pursuant to Regulation A, or annual statement referred to in section
12(g)(2)(G)(i) of the Act, the broker or dealer has in its records a
copy of the prospectus specified by section 10(a) of the Securities Act
of 1933 included in a registration statement filed by the issuer under
the Securities Act of 1933, other than a registration statement on Form
F-6, or a copy of the offering circular specified by Regulation A
included in an offering statement filed by the issuer under Regulation
A, that became effective or was qualified within the prior 16 months,
or a copy of any registration statement filed by the issuer under
section 12 of the Act that became effective within the prior 16 months,
together with any semiannual, quarterly and current reports filed
thereafter under section 13 or 15(d) of the Act or Regulation A; and
provided further, that the broker or dealer has a reasonable basis
under the circumstances for believing that the issuer is current in
filing annual, semiannual, quarterly, and current reports filed
pursuant to section 13 or 15(d) of the Act or Regulation A, or, in the
case of an insurance company exempted from section 12(g) of the Act by
reason of section 12(g)(2)(G) thereof, the annual statement referred to
in section 12(g)(2)(G)(i) of the Act; or
* * * * *
(d) * * *
(2) * * *
(i) A broker-dealer shall be in compliance with the requirement to
obtain current reports filed by the issuer if the broker-dealer obtains
all current reports filed with the Commission by the issuer as of a
date up to five business days in advance of the earlier of the date of
submission of the quotation to the quotation medium and the date of
submission of the information in paragraph (a) of this section pursuant
to the applicable rule of the Financial Industry Regulatory Authority,
Inc. or its successor organization; and
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
22. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
23. Section 249.208 is amended by:
0
a. Revising paragraph (a); and
0
b. Adding paragraph (e).
The revision and addition read as follows:
Sec. 249.208a Form 8-A, for registration of certain classes of
securities pursuant to section 12 (b) or (g) of the Securities Exchange
Act of 1934.
(a) Subject to paragraph (b) of this section, this form may be used
for registration pursuant to section 12(b) or (g) of the Securities
Exchange Act of 1934 of any class of securities of any issuer which:
(1) Is required to file reports pursuant to sections 13 and 15(d)
of that Act;
(2) Is concurrently qualifying a Tier 2 offering statement relating
to that class of securities using the Form S-1 or Form S-11 disclosure
models; or
(3) Pursuant to an order exempting the exchange on which the issuer
has securities listed from registration as a national securities
exchange.
* * * * *
(e) Notwithstanding the foregoing in paragraphs (c) and (d) of this
section, if the form is used for registration of a class of securities
being offered under Regulation A, it shall become effective:
(1) For the registration of a class of securities under Section
12(b), upon the latest of the filing of the form with the Commission,
the qualification of the Regulation A offering statement or the receipt
by the Commission of certification from the national securities
exchange listed on the form; or
(2) For the registration of a class of securities under Section
12(g), upon the later of the filing of the form and qualification of
that Regulation A offering statement.
0
24. Amend Form 8-A (referenced in Sec. 249.208a) by revising it to
read as follows:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 GENERAL
INSTRUCTIONS
A. Rule as to Use of Form 8-A.
(a) Subject to paragraph (b) below, this form may be used for
registration pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934 of any class of securities of any issuer which is
(1) required to file reports pursuant to Section 13 or 15(d) of that
Act, (2) is concurrently qualifying a Tier 2 offering statement
relating to that class of securities using the Form S-1 or Form S-11
disclosure models that includes financial statements that are audited
in accordance with the standards of, and by an accounting firm that is
registered with, the Public Company Accounting Oversight Board (United
States), or (3) pursuant to an order exempting the exchange on which
the issuer has securities listed from registration as a national
securities exchange.
(b) If the registrant would be required to file an annual report
pursuant to Section 15(d) of the Act for its last fiscal year, except
for the fact that the registration statement on this form will become
effective before such report is required to be filed, an annual report
for such fiscal year shall nevertheless be filed within the period
specified in the appropriate annual report form.
[[Page 21924]]
(c) If this form is used for the registration of a class of
securities under Section 12(b), it shall become effective:
(1) If a class of securities is not concurrently being registered
under the Securities Act of 1933 (15 U.S.C. 77a et seq.) (``Securities
Act''), upon the later of receipt by the Commission of certification
from the national securities exchange listed on this form or the filing
of the Form 8-A with the Commission; or
(2) If a class of securities is concurrently being registered under
the Securities Act, upon the latest of the filing of the Form 8-A with
the Commission, receipt by the Commission of certification from the
national securities exchange listed on this form or effectiveness of
the Securities Act registration statement relating to the class of
securities.
(d) If this form is used for the registration of a class of
securities under Section 12(g), it shall become effective:
(1) If a class of securities is not concurrently being registered
under the Securities Act, upon the filing of the Form 8-A with the
Commission; or
(2) If class of securities is concurrently being registered under
the Securities Act, upon the later of the filing of the Form 8-A with
the Commission or the effectiveness of the Securities Act registration
statement relating to the class of securities.
(e) Notwithstanding the foregoing in paragraphs (c) and (d) of this
form, if this form is used for registration of a class of securities
being offered under Regulation A, it shall become effective:
(1) For the registration of a class of securities under Section
12(b), upon the latest of the filing of the Form 8-A with the
Commission, the qualification of the Regulation A offering statement or
the receipt by the Commission of certification from the national
securities exchange listed on this form; or
(2) For the registration of a class of securities under Section
12(g), upon the later of the filing of the Form 8-A and qualification
of the Regulation A offering statement.
(Note: Registration pursuant to paragraph (e) of this form is not
permitted if the filing of the Form 8-A and, where applicable, the
receipt by the Commission of certification from the national securities
exchange listed on this form occurs more than five calendar days after
the qualification of the Regulation A offering statement)
B. Application of General Rules and Regulations.
(a) The General Rules and Regulations under the Act contain certain
general requirements which are applicable to registration on any form.
These general requirements should be carefully read and observed in the
preparation and filing of registration statements on this form.
(b) Particular attention is directed to Regulation 12B which
contains general requirements regarding matters such as the kind and
size of paper to be used, legibility, information to be given whenever
the title of securities is required to be stated, incorporation by
reference and the filing of the registration statement. The definitions
contained in Rule 12b-2 should be especially noted.
C. Preparation of Registration Statement.
This form is not to be used as a blank form to be filled in, but
only as a guide in the preparation of the registration statement on
paper meeting the requirements of Rule 12b-12. The registration
statement shall contain the item numbers and captions, but the text of
the items may be omitted. The answers to the items shall be prepared in
the manner specified in Rule 12b-13.
D. Signature and Filing of Registration Statement.
Eight complete copies of the registration statement, including all
papers and documents filed as a part thereof (other than exhibits)
shall be filed with the Commission and at least one such copy shall be
filed with each exchange on which the securities are to be registered.
Exhibits shall be filed with the Commission and with any exchange in
accordance with the Instructions as to Exhibits. At least one copy of
the registration statement filed with the Commission and one filed with
each exchange shall be manually signed. Unsigned copies shall be
conformed.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
-----------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
-----------------------------------------------------------------------
(Address of principal executive offices)
-----------------------------------------------------------------------
(I.R.S. Employer Identification No.)
-----------------------------------------------------------------------
(Zip Code)
Securities to be registered pursuant to Section 12(b) of the
Act:
Title of each class to be so registered
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name of each exchange on which each class is to be registered
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
If this form relates to the registration of a class of securities
pursuant to Section 12(b) of the Exchange Act and is effective pursuant
to General Instruction A.(c) or (e), check the following box. [ballot]
If this form relates to the registration of a class of securities
pursuant to Section 12(g) of the Exchange Act and is effective pursuant
to General Instruction A.(d) or (e), check the following box. [ballot]
If this form relates to the registration of a class of securities
concurrently with a Regulation A offering, check the following box.
[ballot]
Securities Act registration statement or Regulation A offering
statement file number to which this form relates:____ (if applicable)
Securities to be registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------------------
(Title of class)
-----------------------------------------------------------------------
(Title of class)
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Item 1. Description of Registrant's Securities to be Registered.
Furnish the information required by Item 202 of Regulation S-K
(Sec. 229.202 of this chapter), as applicable.
Instruction. If a description of the securities comparable to that
required here is contained in any prior filing with the Commission,
such description may be incorporated by reference to such other filing
in answer to this item. If such description will be included in a form
of prospectus or an offering circular subsequently filed by the
registrant pursuant to Rule 424(b) under the Securities Act (Sec.
230.424(b) of this chapter) or Rule 253(g) of Regulation A (Sec.
230.253(g) of this chapter), this registration statement shall state
that such prospectus or offering circular shall be deemed to be
incorporated by reference into the registration statement. If the
securities are to be registered on a national securities exchange and
the description has not previously been filed with such exchange,
copies of the description shall be filed with copies of the application
filed with the exchange.
[[Page 21925]]
Item 2. Exhibits.
List below all exhibits filed as a part of the registration
statement:
Instruction. See the instructions as to exhibits, set forth below.
SIGNATURE
Pursuant to the requirements of Section l2 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized.
(Registrant)
-----------------------------------------------------------------------
Date
-----------------------------------------------------------------------
By
-----------------------------------------------------------------------
*Print the name and title of the signing officer under such
officer's signature.
INSTRUCTIONS AS TO EXHIBITS
If the securities to be registered on this form are to be
registered on an exchange on which other securities of the registrant
are registered, or are to be registered pursuant to Section 12(g) of
the Act, copies of all constituent instruments defining the rights of
the holders of each class of such securities, including any contracts
or other documents which limit or qualify the rights of such holders,
shall be filed as exhibits with each copy of the registration statement
filed with the Commission or with an exchange, subject to Rule 12b-32
regarding incorporation of exhibits by reference.
Note: The text of Form 8-A will not appear in the Code of
Federal Regulations.
PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF
1939
0
25. The authority citation for part 260 is revised to read as follows:
Authority: 15 U.S.C. 77c, 77ddd, 77eee, 77ggg, 77nnn, 77sss,
78ll (d), 80b-3, 80b-4, and 80b-11, unless otherwise noted.
0
26. Section 260.4a-1 is revised to read as follows:
Sec. 260.4a-1 Exempted securities under section 304(a)(8).
The provisions of the Trust Indenture Act of 1939 shall not apply
to any security that has been or will be issued otherwise than under an
indenture. The same issuer may not claim this exemption within a period
of twelve consecutive months for more than $50,000,000 aggregate
principal amount of any securities.
By the Commission.
Dated: March 25, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-07305 Filed 4-17-15; 8:45 am]
BILLING CODE 8011-01-P