[Federal Register Volume 81, Number 224 (Monday, November 21, 2016)]
[Rules and Regulations]
[Pages 83494-83554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26348]



[[Page 83493]]

Vol. 81

Monday,

No. 224

November 21, 2016

Part IV





Securities and Exchange Commission





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





17 CFR Parts 200, 230, 239, et al.





Exemptions To Facilitate Intrastate and Regional Securities Offerings; 
Final Rule

Federal Register / Vol. 81 , No. 224 / Monday, November 21, 2016 / 
Rules and Regulations

[[Page 83494]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 239, 240, 249, 270 and 275

[Release Nos. 33-10238; 34-79161; File No. S7-22-15]
RIN 3235-AL80


Exemptions To Facilitate Intrastate and Regional Securities 
Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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

SUMMARY: We are adopting amendments to modernize Rule 147 under the 
Securities Act of 1933, which provides a safe harbor for compliance 
with the Section 3(a)(11) exemption from registration for intrastate 
securities offerings. We are also establishing a new intrastate 
offering exemption under the Securities Act, designated Rule 147A, 
which will be similar to amended Rule 147, but will have no restriction 
on offers and will allow issuers to be incorporated or organized 
outside of the state in which the intrastate offering is conducted 
provided certain conditions are met. The amendments to Rule 147 and new 
Rule 147A are designed to facilitate capital formation, including 
through offerings relying upon intrastate crowdfunding provisions under 
state securities laws, while maintaining appropriate investor 
protections and providing state securities regulators with the 
flexibility to add additional investor protections they deem 
appropriate for offerings within their state.
    We also are adopting amendments to Rule 504 of Regulation D under 
the Securities Act to facilitate issuers' capital raising efforts and 
provide additional investor protections. The amendments to Rule 504 
will increase the aggregate amount of securities that may be offered 
and sold in any twelve-month period from $1 million to $5 million and 
disqualify certain bad actors from participation in Rule 504 offerings. 
In light of these amendments to Rule 504, we are also repealing Rule 
505.

DATES: Effective date: Revised 17 CFR 230.147 (Rule 147) and new 17 CFR 
230.147A (Rule 147A) will be effective on April 20, 2017. The 
amendments to 17 CFR 230.504 (Rule 504) and 17 CFR 200.30-1 (Rule 30-1) 
will be effective on January 20, 2017. The removal of 17 CFR 230.505 
(Rule 505) will be effective on May 22, 2017. All other amendments in 
this rule will be effective on May 22, 2017.
    Comment date: Comments regarding the collection of information 
requirements within the meaning of the Paperwork Reduction Act of 1995 
should be received on or before January 20, 2017.

ADDRESSES: Persons submitting comments on the collection of information 
requirements should direct the comments to the Commission by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/final.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-22-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

FOR FURTHER INFORMATION CONTACT: With regard to the final rules, 
Anthony G. Barone, Special Counsel, Jenny Riegel, Special Counsel, or 
Ivan Griswold, Attorney-Advisor, Division of Corporation Finance, at 
(202) 551-3460, and with regard to guidance on broker-dealer 
registration, Timothy J. White, Senior Special Counsel, Division of 
Trading and Markets, at (202) 551-5550, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting new Rule 147A and are 
adopting amendments to Rule 147 \1\ and Rule 504 \2\ of Regulation D 
\3\ under the Securities Act of 1933 (the ``Securities Act'').\4\ We 
are repealing Rule 505 \5\ of Regulation D.
---------------------------------------------------------------------------

    \1\ 17 CFR 230.147.
    \2\ 17 CFR 230.504.
    \3\ 17 CFR 230.500 through 230.508.
    \4\ 15 U.S.C. 77a et seq.
    \5\ 17 CFR 230.505.
---------------------------------------------------------------------------

Table of Contents

I. Introduction and Background
II. Amendments to Rule 147 and New Rule 147A
    A. Explanation of Amendments to Rule 147 and New Rule 147A
    1. Manner of Offering
    2. Elimination of Residence Requirement for Issuers
    B. Common Requirements of the Amendments to Rule 147 and New 
Rule 147A
    1. Requirements for Issuers ``Doing Business'' In-State
    2. Reasonable Belief as to Purchaser Residency Status
    3. Residence of Entity Purchasers
    4. Limitation on Resales
    5. Integration
    6. Disclosures to Investors
    7. State Law Requirements
    C. Additional Considerations
    1. Notice Filings
    2. Intrastate Broker Dealer Exemption
    3. Section 12(g) Registration
    4. Exclusion of Investment Companies
    5. Trust Indenture Act
    6. Other Requirements
III. Amendments to Rules 504 and 505 of Regulation D
    A. Overview of Rules 504 and 505
    B. Amendments to Rule 504
    C. Repeal of Rule 505
IV. Other Matters
V. Economic Analysis
    A. Baseline
    1. Current Market Participants
    2. Alternative Methods of Raising up to $5 Million of Capital
    B. Analysis of Final Rules
    1. Broad Economic Considerations
    2. Analysis of Amendments to Existing Rule 147 and New Rule 147A
    3. Analysis of Amendments to Rule 504
    4. Analysis of Repeal of Rule 505
VI. Paperwork Reduction Act
    A. Rules 147(f)(1)(iii) and 147A(f)(1)(iii)
    B. Amendments to Rule 504 of Regulation D
VII. Final Regulatory Flexibility Act Analysis
VIII. Statutory Basis and Text of Final Amendments

I. Introduction and Background

    On October 30, 2015, we proposed amendments to Rule 147 and Rule 
504 under the Securities Act to assist smaller companies with capital 
formation consistent with other public policy goals, including investor 
protection.\6\ In developing final rules, we considered recommendations 
by the Advisory Committee on Small and Emerging Companies (``ACSEC'') 
\7\ and the most recent SEC Government-Business Forum on Small Business

[[Page 83495]]

Capital Formation (``Small Business Forum'') \8\ and comment letters 
received on the Proposing Release.\9\ Today we are amending Rule 147 
and establishing a new Securities Act exemption, designated Rule 147A. 
We are also amending Rule 504 of Regulation D. We believe the final 
rules will facilitate capital formation by smaller companies by 
increasing the utility of the current Securities Act exemptive 
framework for smaller offerings while maintaining appropriate 
protections for investors. The final rules complement recent efforts by 
the U.S. Congress,\10\ state legislatures,\11\ and state securities 
regulators \12\ to modernize existing federal and state securities laws 
and regulations to assist smaller companies with capital formation. We 
believe our amendment to Rule 504 to increase its aggregate offering 
ceiling from $1 million to $5 million will significantly diminish the 
utility of Rule 505 and we are therefore repealing that rule.
---------------------------------------------------------------------------

    \6\ See SEC Rel. No. 33-9973 [80 FR 69786] (Nov. 10, 2015) 
(``Proposing Release'').
    \7\ See Recommendation to the Commission by the Advisory 
Committee on Small and Emerging Companies to Modernize Rule 147 
under the Securities Act of 1933 (Sept. 23, 2015) (``2015 ACSEC 
Recommendation''), available at http://www.sec.gov/info/smallbus/
acsec/acsec-recommendation-modernize-rule-147.pdf. The Commission 
established the ACSEC in 2011 with the objective of providing the 
Commission with advice on its rules, regulations and policies with 
regard to its mission of protecting investors, maintaining fair, 
orderly and efficient markets and facilitating capital formation, as 
they relate to: (1) Capital raising by emerging privately-held small 
businesses (emerging companies) and publicly traded companies with 
less than $250 million in public market capitalization (smaller 
public companies) through securities offerings, including private 
and limited offerings and initial and other public offerings; (2) 
trading in the securities of emerging companies and smaller public 
companies; and (3) public reporting and corporate governance 
requirements of emerging companies and smaller public companies. 
Advisory Committee on Small and Emerging Companies, SEC Rel. No. 33-
9258 (Sept. 12, 2011) [76 FR 57769 (Sept. 16, 2011)].
    \8\ See Final Report of the 2015 SEC Government Business Forum 
on Small Business Capital Formation (April 2016) (``2015 Small 
Business Forum Recommendations''), available at http://www.sec.gov/
info/smallbus/gbfor34.pdf. The Small Business Investment Incentive 
Act of 1980 directed the Commission to conduct an annual government-
business forum to undertake an ongoing review of the financing 
problems of small businesses. 15 U.S.C. 80c-1. The Small Business 
Forum has met annually since 1982 to provide a platform to highlight 
perceived unnecessary impediments to small business capital 
formation and address whether they can be eliminated or reduced. 
Each forum seeks to develop recommendations for government and 
private action to improve the environment for small business capital 
formation, consistent with other public policy goals, including 
investor protection. Information about the Small Business Forum is 
available at http://www.sec.gov/info/smallbus/sbforum.shtml.
    \9\ The comment letters received in response to the Proposing 
Release are available at http://www.sec.gov/comments/s7-22-15/
s72215.shtml.
    \10\ Congress enacted the Jumpstart Our Business Startups Act of 
2012 (``JOBS Act''), which was signed into law by President Obama on 
April 5, 2012. Public Law 112-106, 126 Stat. 306. Pursuant to Title 
II of the JOBS Act, the Commission adopted new paragraph (c) of Rule 
506 of Regulation D, removing the prohibition on general 
solicitation or general advertising for securities offerings relying 
on Rule 506. See SEC Rel. No. 33-9415 (July 10, 2013). Pursuant to 
Title IV of the JOBS Act, the Commission amended Regulation A in 
order to permit issuers to raise up to $50 million annually. See SEC 
Rel. No. 33-9741 (Mar. 25, 2015) (``2015 Regulation A Release''). 
Pursuant to Title III of the JOBS Act, the Commission adopted rules 
permitting companies to use the Internet to offer and sell 
securities through crowdfunding (``Regulation Crowdfunding''). See 
SEC Rel. No. 33-9974 (Oct. 30, 2015) (``Regulation Crowdfunding 
Adopting Release''). Congress also enacted the Fixing America's 
Surface Transportation Act of 2015 (``FAST Act''), which was signed 
into law by President Obama on December 4, 2015. Public Law 114-94, 
Sec 129 Stat. 1312 (2015). The FAST Act includes several amendments 
to the federal securities laws, including a new exemption to Section 
4 of the Securities Act for secondary sales of securities that are 
purchased by an accredited investor, among other requirements 
(Section 76001), and changes to facilitate initial public offerings 
by emerging growth companies (Sections 71001 through 71003).
    \11\ See, e.g., Ala. Code Sec.  8-6-11 (2014); Ariz. Rev. Stat. 
Ann. Sec.  44-1844 (2015); Colo. Rev. Stat. Sec.  11-51-304(6) 
(2014); Fla. Stat. Sec.  571.021, 517.061, 517.0611, 517.12, 
517.121, 517.161, 626.9911; Ind. Code Sec.  6-3.1-24-14 (2014); Ky. 
Rev. Stat. Ann. Sec.  292.410-292.415 (2015); Me. Rev. Stat. Ann. 
tit. 32, Sec.  16304, sub-Sec.  6-a (2014).
    \12\ See, e.g., D.C. Mun Regs. tit. 26-B, Sec.  250 (2014); Ga. 
Comp. R. & Regs. 590-4-08 (2011); Idaho Code Ann. Sec.  30-14-203 
(providing an exemption by order on a case-by-case basis); Kan. 
Admin. Regs. Sec.  81-5-21 (2011).
---------------------------------------------------------------------------

    Consistent with commenters' suggestions \13\ and the 
recommendations of the 2015 Small Business Forum,\14\ we are retaining 
and modernizing Rule 147 under the Securities Act as a safe harbor for 
intrastate offerings exempt from registration pursuant to Securities 
Act Section 3(a)(11). These amendments will modernize the safe harbor, 
while keeping within the statutory parameters of Section 3(a)(11), so 
that issuers may continue to rely upon the rule for offerings pursuant 
to state law exemptions, including crowdfunding provisions, that are 
conditioned upon compliance with Section 3(a)(11) and Rule 147.
---------------------------------------------------------------------------

    \13\ Letter from David M. Lynn, Chair, Federal Regulation of 
Securities Committee, Business Law Section, American Bar 
Association, April 8, 2016 (``ABA Letter''); Letter from Christopher 
D. Miller, Economic and Downtown Development Director, City of 
Adrian, Michigan, January 8, 2016 (``City of Adrian Letter''); 
Letter from Keith Paul Bishop, Former California Commissioner of 
Corporations, December 30, 2015 (``Bishop Letter''); Letter from 
Deborah L. Gunny and Cathryn S. Gawne, Co-Chairs, Corporations 
Committee, Business Law Section, State Bar of California, January 8, 
2016 (``California Bar Letter''); Letter from Kim Wales, CEO, Wales 
Capital, and Executive Board Member, CrowdFund Intermediary 
Regulatory Advocates, January 11, 2016 (``CFIRA Letter''); Letter 
from Reps. Tom Emmer, Gwen Moore, Patrick McHenry, John Carney, 
Scott Garrett, Denny Heck, Randy Neugebauer, Terri Sewell, Luke 
Messer, Keith Ellison, Peter T. King, Robert Hurt, Robert Pittenger, 
Roger Williams and Stephen Fincher, U.S. House of Representatives, 
October 7, 2016 (``Congressional Letter''); Letter from Sara Hanks, 
CEO, CrowdCheck, Inc., January 2, 2016 (``CrowdCheck Letter''); 
Letter from Samuel S. Guzik, Securities Attorney, Guzik Associates, 
January 18, 2016 (``Guzik Letter''); Letter from Brian Knight, 
Associate Director, Financial Policy, and Staci Warden, Executive 
Director; Center for Financial Markets, Milken Institute, January 
11, 2016 (``Milken Letter''); Letter from Judith M. Shaw, President, 
North American Securities Administrators Association, Inc. 
(``NASAA'') and Maine Securities Administrator, January 11, 2016 
(``NASAA Letter''); Letter from Youngro Lee, Esq., Co-founder/CEO, 
NextSeed TX LLC, January 7, 2016 (``NextSeed Letter''); Letter from 
Amy E. Pearl, Founder and Executive Director, Hatch Innovation Inc., 
January 10, 2016 (``Pearl Letter''); Letter from Joe M. Wallin, 
Attorney, January 11, 2016 (``Wallin Letter''); Letter from Kristin 
Wolff, January 11, 2016 (``Wolff Letter''); Letter from Howard 
Orloff, CMO, ZacksInvest, November 19, 2015 (``Orloff Letter''); 
Letter from Anthony J. Zeoli, Partner, Freeborn & Peters LLP, 
November 5, 2016 (``Zeoli Letter''). No commenters supported the 
proposed elimination of Rule 147 as a safe harbor under Section 
3(a)(11).
    \14\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

    Securities Act Section 3(a)(11) provides an exemption from 
registration under the Securities Act for ``[a]ny security which is 
part of an issue offered and sold only to persons resident within a 
single State or Territory, where the issuer of such security is a 
person resident and doing business within, or, if a corporation, 
incorporated by and doing business within, such State or Territory.'' 
\15\ In 1974, the Commission adopted Rule 147 under the Securities Act 
to provide objective standards for local businesses seeking to rely on 
Section 3(a)(11).\16\ The Rule 147 safe harbor was intended to provide 
assurances that the intrastate offering exemption would be used for the 
purpose Congress intended in enacting Section 3(a)(11), namely the 
local financing of companies by investors within the company's state or 
territory.\17\ Rule 147 reflects this Congressional intent and 
generally relies upon state regulation to effectively protect 
investors.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 77c(a)(11).
    \16\ See SEC Rel. No. 33-5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 
21, 1974)] (``Rule 147 Adopting Release''). See also SEC Rel. No. 
33-5349 (Jan. 8, 1973) [38 FR 2468 (Jan. 26, 1973)] (``Rule 147 
Proposing Release'').
    \17\ See Rule 147 Adopting Release. See also H.R. Rep. No. 73-
85, at 6-7 (1933), H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. 
Rep.) and SEC Rel. No. 33-4434, at 4 (Dec. 6, 1961) [26 FR 11896 
(Dec. 13, 1961)] (``1961 Release'').
---------------------------------------------------------------------------

    Notwithstanding the importance of these limitations, due to 
developments in modern business practices and communications technology 
in the years since Rule 147 was adopted, we have determined that it is 
necessary to update the requirements of Rule 147 to ensure its 
continued utility.\18\ We are also establishing a new intrastate 
offering exemption under the Securities Act, designated Rule 147A, that 
will further accommodate modern business practices and communications 
technology and provide an alternative means for smaller companies to 
raise capital locally.
---------------------------------------------------------------------------

    \18\ The Commission has not amended Rule 147 since its adoption, 
other than in 2013 when the Commission adopted technical amendments 
to Rules 145, 147, 152 and 155 to update references to Section 4(2) 
of the Securities Act, which was renumbered as Section 4(a)(2) by 
Section 201(c) of the JOBS Act, Public Law 112-106, sec. 201(c), 126 
Stat. 306, 314 (Apr. 5, 2012). See SEC Rel. No. 33-9414 [78 FR 
44730] (July 10, 2013). See also ABA Letter; Milken Letter.
---------------------------------------------------------------------------

    We are adopting new Rule 147A pursuant to our general exemptive 
authority under Section 28 of the Securities Act,\19\ and therefore, 
new

[[Page 83496]]

Rule 147A will not be subject to the statutory limitations of Section 
3(a)(11). Accordingly, Rule 147A will have no restriction on offers, 
but will require that all sales be made only to residents of the 
issuer's state or territory to ensure the intrastate nature of the 
exemption. Rule 147A also will not require issuers to be incorporated 
or organized in the same state or territory where the offering occurs 
so long as issuers can demonstrate the in-state nature of their 
business, which we believe will expand the number of businesses that 
will be able to seek intrastate financing under Rule 147A, as compared 
to amended Rule 147. Certain provisions of existing Rule 147 concerning 
legends and mandatory disclosures to purchasers and prospective 
purchasers will apply to offerings conducted pursuant to amended Rule 
147 and Rule 147A.\20\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 77z-3. For the reasons discussed throughout this 
release, we find that the Rule 147A exemption being adopted today is 
necessary and appropriate in the public interest and consistent with 
the protection of investors.
    \20\ See Rules 147(f) and 147A(f).
---------------------------------------------------------------------------

    As in current Rule 147, nothing in either amended Rule 147 or new 
Rule 147A will obviate the need for compliance with any applicable 
state law relating to the offer and sale of securities. Thus, states 
will retain the flexibility to adopt requirements that are consistent 
with their respective interests in facilitating capital formation and 
protecting their resident investors in intrastate securities offerings, 
including the authority to impose additional disclosure requirements 
regarding offers and sales made to persons within their state or 
territory, or the authority to limit the ability of certain bad actors 
from relying on applicable state exemptions. In addition, both federal 
and state antifraud provisions will continue to apply to offers and 
sales made pursuant to amended Rule 147 and new Rule 147A.
    The staff will seek to collaborate with state regulators in 
gathering information about intrastate crowdfunding offerings and, 
based on the sharing of this information and other relevant inputs, the 
staff will undertake to study and submit a report to the Commission, no 
later than three years following the effective date of amended Rule 147 
and new Rule 147A, on capital formation and investor protection in 
offerings under these rules. The report will include, but not be 
limited to, a review of information about:
    (1) The use of amended Rule 147 and new Rule 147A;
    (2) repeat use by the same issuers of amended Rule 147 or new Rule 
147A;
    (3) the use by issuers of alternative federal offering exemptions 
concurrently or close in time to an offer or sale under amended Rule 
147 or new Rule 147A;
    (4) fraud associated with, or issuer non-compliance with provisions 
of, amended Rule 147 or new Rule 147A;
    (5) the role of intrastate broker-dealers and other intermediaries 
in offerings conducted pursuant to amended Rule 147 or new Rule 147A; 
and
    (6) the application of state bad actor disqualification provisions 
in offerings conducted pursuant to amended Rule 147 or new Rule 147A to 
inform whether the Commission should consider including bad actor 
disqualification provisions in amended Rule 147 and new Rule 147A.
    We also are amending Rule 504 of Regulation D under the Securities 
Act to increase the aggregate amount of securities that may be offered 
and sold pursuant to Rule 504 in any twelve-month period from $1 
million to $5 million and to disqualify certain bad actors from 
participation in Rule 504 offerings. The higher offering ceiling amount 
will promote capital formation by increasing the flexibility of state 
securities regulators to implement coordinated review programs to 
facilitate regional offerings.\21\ The bad actor disqualification 
provisions will provide for greater consistency across Regulation D. We 
believe these amendments to Rule 504 will significantly diminish the 
utility of Rule 505, which historically has been little utilized in 
comparison to Rule 506 of Regulation D.\22\ We, therefore, are 
repealing Rule 505.
---------------------------------------------------------------------------

    \21\ The state registration of securities offerings under 
coordinated review programs is an example of the efforts being 
undertaken by states to streamline the state registration process 
for issuers seeking to undertake multi-state registrations. These 
programs establish uniform review standards and are designed to 
expedite the registration process, thereby potentially saving 
issuers time and money. Participation in such programs is voluntary. 
The states have created coordinated review protocols for equity, 
small company and franchise offerings; direct participation program 
securities; and for certain offerings of securities pursuant to 
Regulation A. More information on coordinated review programs is 
available at http://www.nasaa.org/industry-resources/corporation-
finance/coordinated-review/.
    \22\ For the period 2009 through 2015, 132,091 Forms D were 
filed. Of these Forms D, 3,758 reported an offering made in reliance 
upon Rule 505 of Regulation D, representing approximately 3% of all 
offerings made in reliance upon Regulation D and 5% of all 
Regulation D offerings raising less than $5 million. During this 
time period, 1,548 Forms D reported reliance only on Rule 505, and 
2,210 Forms D reported reliance on Rule 505 and another Regulation D 
exemption. By contrast, for the period 2009 through 2015, 5,532 
filings reported an offering made in reliance upon Rule 504, 
representing approximately 4% of all offerings made in reliance upon 
Regulation D and 13% of all Regulation D offerings raising less than 
$1 million. During this time period, 4,308 Forms D reported reliance 
only on Rule 504, and 1,224 Forms D reported reliance on Rule 504 
and another Regulation D exemption. All other Form D filings during 
this period reported an offering made in reliance on Rule 506.
---------------------------------------------------------------------------

II. Amendments to Rule 147 and New Rule 147A

A. Explanation of Amendments to Rule 147 and New Rule 147A

    Numerous commenters \23\ and the 2015 Small Business Forum \24\ 
recommended retaining Rule 147 as a safe harbor under Section 3(a)(11). 
Many of these commenters also recommended adopting a substantially 
similar new exemption pursuant to the Commission's general exemptive 
authority under Section 28 as an alternative to the Section 3(a)(11) 
exemption and safe harbor for companies that wish to conduct intrastate 
offerings under slightly broader conditions than contemplated by 
Section 3(a)(11). After considering the comments, we are amending Rule 
147 to modernize the rule to incorporate most of our proposed 
amendments, except for the two proposed amendments that do not fit 
within the statutory limits of Section 3(a)(11)--allowing issuers to 
make offers accessible to out-of-state residents and to be incorporated 
out-of-state. These two provisions are the distinguishing features of 
the new Rule 147A exemption that we are establishing pursuant to our 
general exemptive authority under Section 28. Aside from these two 
provisions, the remaining provisions of new Rule 147A are substantively 
the same as the provisions of amended Rule 147.
---------------------------------------------------------------------------

    \23\ ABA Letter; City of Adrian Letter; Bishop Letter; 
California Bar Letter; CFIRA Letter; Congressional Letter; 
CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA Letter; 
NextSeed Letter; Pearl Letter; Wallin Letter; Wolff Letter; Orloff 
Letter; Zeoli Letter. No commenters supported the proposed 
elimination of Rule 147 as a safe harbor under Section 3(a)(11).
    \24\ 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

1. Manner of Offering
a. Proposed Amendments
    Rule 147, as proposed, would have required issuers to limit sales 
to in-state residents, but would no longer have limited offers by the 
issuer to in-state residents.\25\ Accordingly, under our proposal, 
amended Rule 147 would have permitted issuers to engage in general 
solicitation and general advertising that could reach out-of-state 
residents in order to locate potential in-state investors using any 
form of mass media, including unrestricted, publicly-available Internet 
Web sites, to advertise their offerings, so long as all sales of

[[Page 83497]]

securities so offered were made to residents of the state or territory 
in which the issuer has its principal place of business. In the 
Proposing Release, the Commission noted that market participants and 
commenters have indicated that the combined effect of the statutory 
limitation on offers in Section 3(a)(11) and the prescriptive threshold 
requirements of Rule 147 unduly limits the availability of the 
exemption for local companies that would otherwise conduct intrastate 
offerings.\26\
---------------------------------------------------------------------------

    \25\ See proposed Rule 147(d).
    \26\ See Proposing Release at text accompanying note 18.
---------------------------------------------------------------------------

    Given that proposed Rule 147 would have allowed offers to be made 
to or be accessible by out-of-state residents, including advertising 
offers on publicly-available Internet Web sites, the proposal would 
have required an issuer to include a prominent disclosure on all 
offering materials used in connection with a Rule 147 offering stating 
that sales will be made only to residents of the same state or 
territory as the issuer.\27\ This proposed disclosure requirement was 
intended to advise investors who are not residents of the state in 
which sales are being made that the intrastate offering would be 
unavailable to them.
---------------------------------------------------------------------------

    \27\ See proposed Rule 147(f)(3).
---------------------------------------------------------------------------

    As proposed, Rule 147 would no longer have remained a safe harbor 
for conducting a valid intrastate exempt offering under Section 
3(a)(11). An issuer that attempted to comply with Rule 147, as proposed 
to be amended, but failed to do so, could rely on any other available 
exemption. Failure to satisfy the requirements of Rule 147, as proposed 
to be amended, however, would also have likely resulted in a failure to 
satisfy the statutory requirements for the intrastate offering 
exemption under Section 3(a)(11), since the requirements of Section 
3(a)(11) would be more restrictive than under Rule 147, as proposed to 
be amended.
b. Comments on Proposed Amendments
    All commenters that addressed the issue expressed support for 
eliminating the limitation on offers to in-state residents while 
continuing to require that all sales be made to in-state residents.\28\ 
Many of these commenters also expressed support for retaining existing 
Rule 147 as a safe harbor under Section 3(a)(11), in order to allow 
issuers to take advantage of existing state crowdfunding 
provisions.\29\ As explained by one commenter, if the Commission 
eliminated the Rule 147 safe harbor, state legislative and/or 
rulemaking action would be required, since almost all of the state 
crowdfunding exemptions are premised on the offering qualifying under 
Section 3(a)(11) and its Rule 147 safe harbor.\30\ The commenter noted 
that eliminating the Rule 147 safe harbor would leave these state 
crowdfunding exemptions unavailable until states modified their 
exemptions to accommodate the removal of Rule 147 as a safe harbor to 
Section 3(a)(11).\31\ In order to avoid this problem, some commenters 
recommended that the Commission interpret Section 3(a)(11) and Rule 147 
to allow for offers to be viewed by out-of-state residents.\32\ A few 
of these commenters stated that Section 3(a)(11) should be interpreted 
to allow for offers to be viewed by out-of-state residents, so long as 
such offers indicate that they are being made to residents of a single 
state.\33\
---------------------------------------------------------------------------

    \28\ ABA Letter; NASAA Letter; Letter from Kurt N. Schacht, CFA, 
Managing Director, Standards and Advocacy, and Linda L. Rittenhouse, 
Director, Capital Markets Policy, CFA Institute, January 11, 2016 
(``CFA Letter''); CrowdCheck Letter; CFIRA Letter; Guzik Letter; 
NextSeed Letter; Milken Letter; Zeoli Letter; Bishop Letter; Wolff 
Letter; City of Adrian Letter; Pearl Letter; Finn Terdal, Technology 
Coordinator, Hatch Innovation, January 11, 2016 (``Terdal Letter''); 
Letter from Simon R. Love, Managing Director, Hatch Lab, January 11, 
2016 (``Love Letter''); Letter from John MacDougall, Founder & CEO, 
MacDougall & Sons Bat Co. Inc., January 10, 2016 (``MacDougall 
Letter''); Letter from Erin Ely, January 10, 2016 (``Ely Letter''); 
Letter from Jim Newcomer, Ph.D., 4mation Advisers, January 10, 2016 
(``Newcomer Letter''); Brandon P. Romano, Content Director, Brelion, 
LLC, January 6, 2016 (``Brelion Letter''); Letter from Sean 
Shepherd, CrwdCorp LLC, December 30, 2015 (``CrwdCorp Letter''). See 
also Congressional Letter (expressing general support for the 
proposed amendments to Rule 147).
    \29\ See ABA Letter; CFIRA Letter; Congressional Letter; 
CrowdCheck Letter; NASAA Letter; California Bar Letter; Guzik 
Letter; Milken Letter; NextSeed Letter; Zeoli Letter; Bishop Letter; 
Wolff Letter; Pearl Letter; City of Adrian Letter; Orloff Letter; 
Wallin Letter.
    \30\ NASAA Letter. According to the NASAA Letter, as of January 
2016, of the 29 states plus the District of Columbia that adopted or 
were finalizing rulemaking implementing crowdfunding exemptions, 29 
were premised on the offering qualifying under Section 3(a)(11) and 
its Rule 147 safe harbor: Alabama, Arizona, Colorado, District of 
Columbia, Georgia, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, 
Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, 
Mississippi, Montana, Nebraska, New Jersey, New Mexico, Oregon, 
South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, and 
Wisconsin. As of January 2016, the exemptions were effective in 27 
of the 30 jurisdictions: Minnesota and New Jersey were finalizing 
rulemaking, and New Mexico was working on draft regulations. Of the 
states with state crowdfunding exemptions, only Iowa and Vermont do 
not explicitly reference Rule 147, and Maine relies on Rule 504 
rather than Section 3(a)(11).
    \31\ Id.
    \32\ ABA Letter; Guzik Letter; Zeoli Letter; Milken Letter; 
Pearl Letter.
    \33\ ABA Letter; Guzik Letter; Zeoli Letter.
---------------------------------------------------------------------------

    One commenter also noted that issuers currently rely on Section 
3(a)(11) and Rule 147 to conduct forms of intrastate offerings other 
than pursuant to state crowdfunding provisions.\34\ In the view of this 
commenter, removal of Rule 147 as a safe harbor under Section 3(a)(11) 
would also present problems for these exempt offerings, thereby 
severely restricting other local capital raising options.\35\
---------------------------------------------------------------------------

    \34\ NASAA Letter. For example, issuers may rely upon Section 
3(a)(11) and Rule 147 for offerings registered under state 
securities laws, or pursuant to exemptions from state registration 
other than state crowdfunding provisions.
    \35\ Id.
---------------------------------------------------------------------------

    Although commenters overwhelmingly supported retaining existing 
Rule 147 as a safe harbor to Section 3(a)(11), many commenters also 
supported adopting a substantially similar new exemption under the 
Commission's general exemptive authority under Section 28 for companies 
that conduct an intrastate offering but may not qualify for the Section 
3(a)(11) exemption.\36\ Similarly, the 2015 Small Business Forum 
recommended that the Commission take a ``side-by-side'' approach in 
introducing a new Rule 147--as it did with Rule 506 and Regulation A 
\37\--keeping old Rule 147 in place as a safe harbor under Section 
3(a)(11) (but amending it to the extent permissible given the statutory 
limitations of Section 3(a)(11)) while also adopting a new 
exemption.\38\ Several commenters stated that establishing a new 
exemption under Section 28, in addition to retaining existing Rule 147, 
would afford the states time to amend their existing state crowdfunding 
provisions, as well as to adopt new state crowdfunding provisions.\39\ 
One commenter supported leaving the existing Rule 147 as a safe harbor 
to Section 3(a)(11) while adopting the proposed new exemption as new 
Rule 505.\40\
---------------------------------------------------------------------------

    \36\ ABA Letter; City of Adrian Letter; Bishop Letter; 
California Bar Letter; CFIRA Letter; Congressional Letter; 
CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA Letter; 
NextSeed Letter; Pearl Letter; Wallin Letter; Orloff Letter; Zeoli 
Letter.
    \37\ For example, pursuant to Title II of the JOBS Act, the 
Commission adopted the Rule 506(c) exemption that permits an issuer 
to engage in general solicitation under certain circumstances while 
retaining Rule 506(b) as a safe harbor, which prohibits general 
solicitation. Pursuant to Title IV of the JOBS Act, the Commission 
also adopted Tier 1 and Tier 2 categories under Regulation A.
    \38\ 2015 Small Business Forum Recommendations.
    \39\ See, e.g., Pearl Letter; Orloff Letter.
    \40\ Orloff Letter.
---------------------------------------------------------------------------

    Several commenters supported our proposal to require prominent 
disclosure on all offering materials used in connection with a Rule 147 
offering stating that sales will be made only to residents of the same 
state or territory as

[[Page 83498]]

the issuer.\41\ One commenter supported the proposed prominent 
disclosure requirement, but only to the extent it is required on all 
general solicitation and advertising materials.\42\ Two other 
commenters noted that appropriate accommodations should be made to 
permit use of space-constrained social media communications such as 
Twitter.\43\ Two commenters noted that the Commission's efforts to 
modernize these requirements should preserve state authority over 
intrastate offerings, including the authority to impose additional 
disclosure requirements.\44\
---------------------------------------------------------------------------

    \41\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter.
    \42\ NASAA Letter.
    \43\ CFIRA Letter; CrowdCheck Letter.
    \44\ Congressional Letter; NASAA Letter.
---------------------------------------------------------------------------

c. Final Rules
    After considering these comments and the recommendations of the 
2015 Small Business Forum, we are adopting new Rule 147A to allow 
issuers to make offers accessible to out-of-state residents, so long as 
sales are limited to in-state residents. We are also retaining amended 
Rule 147 as a safe harbor under Section 3(a)(11) to preserve the 
continued availability of existing state exemptive provisions that are 
specifically conditioned upon issuer reliance on Section 3(a)(11) and 
Rule 147. Issuers relying on amended Rule 147 as a safe harbor under 
Section 3(a)(11) must continue to limit all offers and sales to in-
state residents.\45\
---------------------------------------------------------------------------

    \45\ See Rule 147(b).
---------------------------------------------------------------------------

    We believe offers made over the Internet that can be viewed by a 
significant number of out-of-state residents are not consistent with 
Section 3(a)(11) and Rule 147, even if such offers include prominent 
disclosure stating that sales will be made only to residents of the 
same state or territory as the issuer.\46\ When Section 3(a)(11) was 
enacted in 1934, Congress noted, among other things, that ``a person 
who comes within the purpose of the exemption, but happens to use a 
newspaper for the circulation of his advertising literature, which 
newspaper is transmitted in interstate commerce, does not thereby lose 
the benefits of the exemption.'' \47\ Further, in 1937 the Commission 
released guidance on the nature of the Section 3(a)(11) exemption in 
the form of a letter from the Commission's General Counsel.\48\ The 
letter stated that securities exempt from registration pursuant to 
Section 3(a)(11) ``may be made the subject of general newspaper 
advertisement (provided the advertisement is appropriately limited to 
indicate that offers to purchase are solicited only from, and sales 
will be made only to, residents of the particular state involved).'' 
\49\ In its 1961 Release, the Commission explained that in order ``[t]o 
give effect to the fundamental purpose of the exemption, it is 
necessary that the entire issue of securities shall be offered and sold 
to, and come to rest only in the hands of residents within the state. 
If any part of the issue is offered or sold to a non-resident, the 
exemption is unavailable not only for the securities so sold, but for 
all securities forming a part of the issue, including those sold to 
residents.'' \50\ We do not read the legislative history for Section 
3(a)(11) and the prior Commission statements as envisioning widespread 
out-of-state offers, but rather as recognition that some media of 
communication, such as a local newspaper or periodical, could only be 
imperfectly targeted to residents of a particular state. The Internet, 
however, is not similarly targeted to residents of a particular state, 
making it difficult for issuers to keep the distribution of such offers 
local in nature.
---------------------------------------------------------------------------

    \46\ Cf. ABA Letter; Guzik Letter; Zeoli Letter; Milken Letter; 
Pearl Letter.
    \47\ See H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. Rep.). 
Section 3(a)(11) initially was enacted as Securities Act Section 
5(c). When Congress enacted the Securities Exchange Act of 1934, it 
also amended the Securities Act, including revising and 
redesignating Section 5(c) as Section 3(a)(11).
    \48\ See SEC Rel. No. 33-1459 (May 29, 1937) [11 FR 10958 (Sept. 
27, 1946)] (``1937 Letter of General Counsel'').
    \49\ Id.
    \50\ 1961 Release; see also 1937 Letter of General Counsel 
(stating that Section 3(a)(11) is ``limited to cases in which the 
entire issue of securities is offered and sold exclusively to 
residents of the state in question'').
---------------------------------------------------------------------------

    Given the foregoing, we believe that the most appropriate means to 
permit the offer and sale of securities on Internet Web sites, or using 
any other form of mass media likely to reach significant numbers of 
out-of-state residents, is to adopt a new intrastate offering exemption 
pursuant to the Commission's general exemptive authority under Section 
28. Accordingly, new Rule 147A will require issuers to limit sales to 
in-state residents, but will not limit offers by the issuer to in-state 
residents. New Rule 147A thereby will permit issuers to engage in 
general solicitation and general advertising of their offerings, using 
any form of mass media, including unrestricted, publicly-available 
Internet Web sites, so long as sales of securities so offered are made 
only to residents of the state or territory in which the issuer is 
resident.
    Consistent with the proposal, both Rule 147A and amended Rule 147 
will require issuers to include prominent disclosure with all offering 
materials stating that sales will be made only to residents of the same 
state or territory as the issuer.\51\ We believe this disclosure will 
help alert potential investors that only residents of the state in 
which the issuer is located are eligible to participate in the 
offering. Nothing in this disclosure requirement, however, will prevent 
state authorities from imposing additional disclosure requirements or 
other requirements on offers or sales made to persons within their 
states.
---------------------------------------------------------------------------

    \51\ See Rules 147(f)(3) and 147A(f)(3).
---------------------------------------------------------------------------

    Two commenters noted that appropriate accommodations should be made 
to permit use of space-constrained social media communications such as 
Twitter.\52\ To accommodate space-constrained social media 
communication, when offering materials are distributed through a 
communications medium that has technological limitations on the number 
of characters or amount of text that may be included in the 
communication and including the required statements in their entirety, 
together with the other information, would cause the communication to 
exceed the limit on the number of characters or amount of text, an 
issuer could satisfy the disclosure requirement by including an active 
hyperlink to the required disclosure that otherwise would be required 
by the rules.The communication should prominently convey, through 
introductory language, that required information is provided through 
the hyperlink. We believe this guidance will accommodate advancements 
in social media, while still providing potential investors with the 
disclosure required by the rules. Where an electronic communication is 
capable of including the entirety of the required disclosure, along 
with the other information, without exceeding the applicable limit on 
the number of characters or amount of text, the use of a hyperlink to 
the required statements should not be used.
---------------------------------------------------------------------------

    \52\ CFIRA Letter; CrowdCheck Letter.
---------------------------------------------------------------------------

2. Elimination of Residence Requirement for Issuers
a. Proposed Amendments
    For corporations, limited partnerships, trusts, or other forms of 
business organizations, we proposed to eliminate the current 
requirement in Rule 147 that limits the availability of the rule to 
issuers incorporated or

[[Page 83499]]

organized in the state in which an offering takes place. Our proposed 
amendments would have expanded the universe of eligible issuers by 
eliminating the current ``residence'' requirement, while continuing to 
require that an issuer have a sufficient in-state presence determined 
by the location of the issuer's principal place of business.\53\
---------------------------------------------------------------------------

    \53\ See proposed Rule 147(c)(1). See also discussion on 
principal place of business in Section II.B.1 below, and the related 
discussion of the proposed requirement that an issuer satisfy at 
least one of four threshold requirements in order to help ensure the 
in-state nature of its business.
---------------------------------------------------------------------------

    The proposed amendments also would have replaced the current rule's 
``principal office'' \54\ requirements for an issuer with a ``principal 
place of business'' requirement.\55\ The proposed rule defined the term 
``principal place of business'' to mean the location from which the 
officers, partners, or managers of the issuer primarily direct, control 
and coordinate the activities of the issuer.\56\ As noted in the 
Proposing Release, an issuer would have been able to have a ``principal 
place of business'' within only one state or territory and would have 
therefore been able to conduct an offering pursuant to amended Rule 147 
only within that particular state or territory. We also proposed to 
restrict the ability of an issuer that has changed its principal place 
of business from conducting an intrastate offering in a different state 
for a period of nine months from the date of the last sale in the prior 
state,\57\ which was consistent with the duration of the resale 
limitation period specified in proposed Rule 147(e).\58\
---------------------------------------------------------------------------

    \54\ See 17 CFR 230.147(c)(1)(ii) and 17 CFR 230.147(c)(2)(iv).
    \55\ See proposed Rule 147(c)(1).
    \56\ See proposed Rule 147(c)(1).
    \57\ See Note 1 to proposed Rule 147(c)(1).
    \58\ See proposed Rule 147(e) (proposing to limit resales of a 
given security purchased in an offering pursuant to Rule 147 to out-
of-state residents for a nine-month period from the date such 
security is sold by the issuer).
---------------------------------------------------------------------------

b. Comments on Proposed Amendments
    Commenters were divided on the proposal to eliminate the 
requirement in Rule 147 that entities be incorporated or organized 
under the laws of the state or territory in which the offering takes 
place. Several commenters supported eliminating this requirement and 
stated that the jurisdiction of entity formation should not affect the 
ability of an issuer to be considered resident for purposes of an 
intrastate offering and that there are valid business reasons for 
incorporating or organizing in states, such as Delaware, which do not 
detract from an issuer's connection to the state in which its principal 
place of business is located.\59\ Other commenters opposed eliminating 
the requirement that entities be incorporated or organized under the 
laws of the state in which the offering takes place,\60\ and some of 
these commenters stated that the intrastate exemption should promote 
state and local economic development goals in addition to capital 
formation--goals that, in their view, would be curtailed in the absence 
of an in-state organization requirement.\61\
---------------------------------------------------------------------------

    \59\ See Bishop Letter (``The application of state securities 
laws is not dependent upon the state of incorporation or 
organization of the issuer. Rather, the application of these laws 
depends upon whether an offer or sale is being made within the 
state.''); CFIRA Letter; CFA Letter (the proposed approach 
``continues the issuer-state connection through the actual business 
activities and employment aspects that accompany a principal place 
of business and recognizes the lack of connection between state of 
incorporation and actual business activities.''); CrowdCheck Letter; 
NASAA Letter; NextSeed Letter.
    \60\ Love Letter; MacDougall Letter; Newcomer Letter; Pearl 
Letter; Wolff Letter.
    \61\ Love Letter (``If the company is incorporated in the state 
where sales occur, it is another way to encourage local funds to be 
retained locally''); MacDougall Letter (stating that incorporating 
out of state to avoid state taxes ``goes against the `spirit' of the 
law and sends the wrong message''); Pearl Letter (``intrastate laws 
are focused on state economic development in addition to capital 
formation for entrepreneurs and financial return for investors, and 
therefore the retention of capital within the state is a necessary 
component of the successful spread of benefits''); Wolff Letter 
(stating that local investing confers benefits that extend beyond 
financial return and seeks to encourage the spread of such social, 
economic, and other benefits while lifting the restriction on state 
incorporation entirely changes the nature of the intrastate 
crowdfunding).
---------------------------------------------------------------------------

    Commenters also were divided on replacing the current in-state 
organization requirement in Rule 147(c)(1) with a principal place of 
business requirement. While two commenters viewed the principal place 
of business standard along with a ``doing business'' test as 
sufficiently demonstrating the in-state nature of an issuer's 
business,\62\ two other commenters opposed the proposed principal place 
of business requirement.\63\ One commenter noted that the 
jurisdictional reach of state securities laws is independent of whether 
an issuer is conducting any business within the state and indicated 
that a state's jurisdiction is established by the offer or sale of a 
security within the state.\64\ Another commenter stated that the 
principal place of business requirement is ``anti-competitive in nature 
and disruptive in spurring economic growth for small businesses.'' \65\
---------------------------------------------------------------------------

    \62\ NASAA Letter; NextSeed Letter.
    \63\ Bishop Letter; Letter from David L. Sjursen, CEO & Founder, 
Exante Regulatory Compliance Consultants Inc., December 2, 2015 
(``Exante Letter'').
    \64\ Bishop Letter (``[T]he Commission's proposed `presence' 
requirements would not augment California's ability to enforce its 
securities laws for the protection of resident investors as assumed 
by the Commission. If a state believes that its existing 
qualification or exemption requirements inadequately protect 
offerees and purchasers, it can amend those requirements. . . . [I]t 
is far more logical to require only that the issuer be organized in 
the state or territory or qualified to transact intrastate business 
in the state or territory'').
    \65\ Exante Letter.USGPO Galley End:?>
---------------------------------------------------------------------------

    Several commenters supported the proposed nine-month waiting period 
until the offering comes to rest, consistent with the requirements of 
proposed Rule 147(e), before an issuer may change its principal place 
of business to another state or territory and make a subsequent 
offering of securities in that new state or territory in reliance on 
proposed Rule 147.\66\ No commenters opposed the proposed waiting 
period.
---------------------------------------------------------------------------

    \66\ CFIRA Letter; CrowdCheck Letter; NASAA Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting changes to the residency requirements for issuers 
conducting exempt intrastate offerings largely as proposed, but with 
certain modifications to reflect our decision to retain existing Rule 
147 as a safe harbor to the Section 3(a)(11) exemption. Since we are 
retaining Rule 147 as a safe harbor and since Section 3(a)(11) 
expressly requires that if the issuer is a corporation that it be 
``incorporated by and doing business within, such state or territory,'' 
we are not eliminating the ``residence'' requirement in current 
paragraph (c)(1) of Rule 147, as proposed. Instead, we are retaining 
the requirement that an issuer shall be deemed a resident of a state or 
territory in which it is incorporated or organized for issuers that are 
incorporated or organized under state or territorial law, such as 
corporations, limited partnerships and trusts.
    In addition, for consistency between the provisions of Rule 147 and 
new Rule 147A,\67\ throughout amended Rule 147, we are replacing the 
``principal office'' requirement with the proposed ``principal place of 
business'' requirement.\68\ Instead of ``principal

[[Page 83500]]

office,'' amended Rule 147 and new Rule 147A will refer to the term 
``principal place of business'' to mean the location from which the 
officers, partners, or managers of the issuer primarily direct, control 
and coordinate the activities of the issuer.\69\ We do not expect this 
change will significantly alter the scope of existing Rule 147 as we 
believe ``principal place of business'' is conceptually similar to 
principal office location.
---------------------------------------------------------------------------

    \67\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1). 
The principal place of business definition is consistent with the 
use of that term in Exchange Act Rule 3a71-3, 17 CFR 240.3a71-3, for 
cross-border security based swap dealing activity, and the use of 
the term ``principal office and place of business'' in Investment 
Advisers Act Rule 203A-3(c), 17 CFR 275.203A-3(c).
    \68\ For example, as proposed, we are amending paragraph (d)(1) 
of Rule 147 to replace the ``principal office'' requirement with 
``principal place of business.'' See also Section II.B.3 below 
discussing the use of the ``principal place of business'' standard 
for the residence of entity purchasers.
    \69\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1).
---------------------------------------------------------------------------

    Under amended Rule 147, issuers that are incorporated or organized 
under state or territorial law will be deemed a ``resident'' of a 
particular state or territory in which they are both incorporated or 
organized and have their ``principal place of business.'' \70\ 
Specifically, the ``principal office'' requirement contained in current 
Rule 147(c)(2)(iv) \71\ will be updated and replaced with the 
``principal place of business'' requirement in amended Rule 
147(c)(1)(i). Similarly, issuers that are general partnerships, or in 
the form of another business organization not organized under any state 
or territorial law, shall be deemed to be a ``resident'' of the state 
or territory in which they have their ``principal place of business.'' 
\72\
---------------------------------------------------------------------------

    \70\ See 17 CFR 230.147(c)(1)(i).
    \71\ See 17 CFR 230.147(c)(1)(iv).
    \72\ See 17 CFR 230.147(c)(1)(ii).
---------------------------------------------------------------------------

    Consistent with the proposal, new Rule 147A(c)(1) will rely solely 
on the principal place of business requirement to determine the state 
or territory in which the issuer shall be deemed a ``resident,'' not 
only for corporate issuers, but for all issuers, including issuers that 
are not organized under any state or territorial law, such as general 
partnerships.\73\ Although commenters were divided on whether to retain 
the requirement that entities be incorporated or organized under the 
laws of the state in which the offering takes place, we continue to 
believe that using a principal place of business requirement in lieu of 
an in-state formation requirement to establish the issuer's residency 
is more consistent with modern business practices in which issuers are 
permitted to incorporate or organize in states other than the state or 
territory of their principal place of business, for example, to take 
advantage of well-established bodies of corporate or partnership 
law.\74\ We continue to believe that, outside the statutory 
requirements of Section 3(a)(11), the jurisdiction of entity formation 
should not affect the ability of an issuer to be considered 
``resident'' for purposes of an intrastate offering exemption at the 
federal level. While we recognize that some commenters supported 
retaining an in-state formation requirement as a means of ensuring that 
the economic and social benefits of the offering remain within the 
state, the objectives of our rulemaking in this area are more broadly 
focused on facilitating capital formation by small businesses.\75\ We 
believe that retaining an in-state formation requirement in new Rule 
147A would be unnecessarily restrictive and limit the usefulness of the 
exemption, potentially to the detriment of local economic development.
---------------------------------------------------------------------------

    \73\ See note 56 above.
    \74\ For example, data provided by issuers in Form D filings 
with the Commission indicates that approximately 37% of Rule 504 
offerings and 39% of Rule 505 offerings indicated in their Form D 
filings that they had different states of incorporation and 
principal places of business. Form D data also indicates that 
approximately 65% of all Rule 506 offerings initiated during 2009-
2015 reported different states of incorporation and operations. See 
discussion in Section V.B.2.b.ii below.
    \75\ See e.g., Rule 147 Adopting Release at text accompanying 
note 2.
---------------------------------------------------------------------------

    We are, however, retaining the proposed principal place of business 
requirement, despite the views of several commenters that such a 
requirement is unnecessary or inappropriate.\76\ Although, as noted by 
one commenter, the jurisdictional reach of state securities laws is 
independent of whether an issuer is conducting any business within the 
state since a state's jurisdiction is established by the offer or sale 
of a security within the state,\77\ we believe that states will have a 
particular interest in regulating intrastate offerings for the 
protection of investors where there is a meaningful nexus between the 
state, issuers and investors.
---------------------------------------------------------------------------

    \76\ Bishop Letter; Exante Letter.
    \77\ Bishop Letter.
---------------------------------------------------------------------------

    To ensure an appropriate connection between the state, issuers and 
investors, amended Rule 147(d) and Rule 147A(d) will require an issuer 
to be a resident of the same state where purchasers are resident or 
where the issuer reasonably believes they are resident.\78\ Viewed 
together, paragraphs (c) and (d) of each of Rules 147 and 147A help to 
ensure the local intrastate character of the offering by requiring that 
both issuers and purchasers reside and have their principal place of 
business (for purchasers, the principal place of business requirement 
only applies to purchasers who are legal entities) \79\ in the same 
state or territory where the offering takes place.
---------------------------------------------------------------------------

    \78\ See Rule 147A(c)(1).
    \79\ Under both amended Rule 147(d)(2) and Rule 147A(d)(2), the 
residence of an individual (natural person) is determined by the 
state or territory in which his or her principal residence is 
located at the time of the offer and sale to the individual.
---------------------------------------------------------------------------

    For situations where an issuer changes its principal place of 
business to another state after conducting an intrastate offering in 
reliance on Rule 147 or Rule 147A, we are adopting provisions in both 
rules that limit the ability of an issuer to conduct a subsequent 
intrastate offering pursuant to Rule 147 or Rule 147A until such time 
as securities sold in reliance on the exemption in the prior state have 
come to rest in that state.\80\ This is consistent with the view that 
securities sold in an intrastate offering in one state should have to 
come to rest within such state before purchasers may resell their 
securities to out-of-state residents.\81\ Accordingly, both rules 
provide that issuers who have previously conducted an intrastate 
offering pursuant to Rule 147 or Rule 147A will not be able to conduct 
another subsequent intrastate offering pursuant to either rule in a 
different state for a period of six months from the date of the last 
sale in the prior state, which is consistent with the duration of the 
resale limitation period specified in our amendments to Rule 147(e) and 
new Rule 147A(e).\82\ The use of a six-month period is a change from 
the proposed nine-month period, and aligns these provisions with 
changes being made to amended Rule 147(e) and new Rule 147A(e), 
consistent with commenters' suggestions to reduce the nine-month resale 
limitation period to six months.\83\
---------------------------------------------------------------------------

    \80\ See Rules 147(e) and 147A(e).
    \81\ See 1961 Release at 4.
    \82\ See Instruction to paragraph (c)(1) of Rule 147 and 
Instruction to paragraph (c)(1) of Rule 147A.
    \83\ See Section II.B.4.c below.
---------------------------------------------------------------------------

B. Common Requirements of the Amendments to Rule 147 and New Rule 147A

    Our amendments to Rule 147 and the provisions of new Rule 147A are 
substantially identical, except that, as discussed above, new Rule 147A 
allows an issuer to make offers accessible to out-of-state residents 
and to be incorporated or organized out-of-state.\84\ Under the rules 
we adopt today, both amended Rule 147 and new Rule 147A will include 
the following provisions:
---------------------------------------------------------------------------

    \84\ See Sections II.A.1and II.A.2 above.
---------------------------------------------------------------------------

     A requirement that the issuer satisfy at least one ``doing 
business'' requirement that will demonstrate the in-state nature of the 
issuer's business.

[[Page 83501]]

     A new ``reasonable belief'' standard for issuers to rely 
upon in determining the residence of the purchaser at the time of the 
sale of securities.
     A requirement that issuers obtain a written representation 
from each purchaser as to his or her residency.
     The residence of a purchaser that is a non-natural person, 
such as a corporation, partnership, trust or other form of business 
organization, will be defined as the location where, at the time of the 
sale, the entity has its ``principal place of business.''
     A limit on resales to persons resident within the state or 
territory of the offering for a period of six months from the date of 
the sale by the issuer to the purchaser of a security sold pursuant to 
the exemption.
     An integration safe harbor that will include any prior 
offers or sales of securities by the issuer, as well as certain 
subsequent offers or sales of securities by the issuer occurring after 
the completion of the offering.
     Disclosure requirements, including legend requirements, to 
offerees and purchasers about the limits on resales.
1. Requirements for Issuers ``Doing Business'' In-State
a. Proposed Amendments
    Under the proposed rules, an issuer would be required to meet at 
least one of the following requirements in order to be considered 
``doing business'' in-state:
     The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in or from the rendering of services within such state or territory; 
\85\
---------------------------------------------------------------------------

    \85\ See proposed Rule 147(c)(2)(i) and related notes to the 
rule indicating how and when an issuer would calculate its revenue 
for purposes of compliance with the proposed rule, based on when the 
first offer of securities is made pursuant to the exemption.
---------------------------------------------------------------------------

     The issuer had at the end of its most recent semi-annual 
fiscal period prior to the first offer of securities pursuant to the 
exemption, at least 80% of its consolidated assets located within such 
state or territory; \86\
---------------------------------------------------------------------------

    \86\ See proposed Rule 147(c)(2)(ii).
---------------------------------------------------------------------------

     The issuer intends to use and uses at least 80% of the net 
proceeds to the issuer from sales made pursuant to the exemption in 
connection with the operation of a business or of real property, the 
purchase of real property located in, or the rendering of services 
within such state or territory; \87\ or
---------------------------------------------------------------------------

    \87\ See proposed Rule 147(c)(2)(iii).
---------------------------------------------------------------------------

     A majority of the issuer's employees are based in such 
state or territory.\88\
---------------------------------------------------------------------------

    \88\ See proposed Rule 147(c)(2)(iv).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters supported our proposed amendments to the current 
``doing business'' requirements in Rule 147(c)(2).\89\ One commenter 
specifically favored the proposed disjunctive approach, requiring an 
issuer to satisfy one of four threshold tests, thereby enabling 
different types of issuers (e.g., a brick-and-mortar business versus an 
online business) to confirm local residency and demonstrate the in-
state nature of their business.\90\ Another commenter, although noting 
that the proposed requirements and thresholds appropriately reflect 
characteristics that are in keeping with establishing a local presence, 
was concerned that having to meet only one requirement may not 
establish the local connection of the issuer to the state to the degree 
anticipated by Section 3(a)(11) and encouraged a close review of this 
issue in a Commission study.\91\
---------------------------------------------------------------------------

    \89\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter.
    \90\ NASAA Letter.
    \91\ CFA Letter (``If the Commission determines to adopt the 
proposed approach, however, we encourage a close review in the study 
the Commission intends to undertake within three years of the 
adoption of the amendments.''). See note 106.
---------------------------------------------------------------------------

    Two commenters supported our proposed amendment to the ``doing 
business'' test to add an alternative threshold requirement based on 
the location of a majority of an issuer's employees.\92\ Several 
commenters supported using this additional criterion, but with 
different percentage thresholds.\93\ Some of these commenters 
recommended requiring that at least 80% of the issuer's employees be 
based in the state,\94\ while another commenter supported requiring 
that at least 75% of the issuer's employees be based in the state.\95\
---------------------------------------------------------------------------

    \92\ Milken Letter; NASAA Letter.
    \93\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter; 
Wolff Letter.
    \94\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter.
    \95\ Wolff Letter.
---------------------------------------------------------------------------

    Several commenters opposed our proposed ``doing business'' 
requirements in favor of alternative standards.\96\ For example, some 
of these commenters supported the use of five alternative criteria in 
order for an issuer to be deemed a ``state business,'' specifically: 
the issuer's main office be located in-state, and at least 80% of the 
funds raised be used in-state, work is done in-state, employees live 
in-state and owners reside in-state.\97\ Another commenter supported 
generally these same criteria, but using 75% thresholds as opposed to 
80% thresholds.\98\ Other commenters recommended a more flexible 
standard that would move away from the strict 80% thresholds in favor 
of majority requirements that would harmonize the current ``doing 
business'' tests with the proposed test for number of employees.\99\ 
Finally, another commenter suggested a periodic review by the 
Commission to evaluate the 80% thresholds to determine whether the 
exemption succeeds in facilitating the goal of small business capital 
formation while protecting investors.\100\
---------------------------------------------------------------------------

    \96\ Ely Letter; MacDougall Letter; Pearl Letter; Terdal Letter.
    \97\ Ely Letter; MacDougall Letter; Pearl Letter (recommending 
that an issuer be required to satisfy ``at least three'' of these 
five criteria or from an alternative ``reasonable list''). Cf. 
Terdal Letter (``A more appropriate test of a ``local company'' 
would be one that has at least 80% of the employees' wages paid in 
state, or perhaps 80% of the work (i.e. manufacturing, producing, 
brewing, etc.) be done in state.'').
    \98\ Wolff Letter (recommending 75% thresholds for use of funds, 
work done in-state, and number of employees residing in-state but 
that the rules require only a majority of the owners' primary 
residences be located in-state).
    \99\ Milken Letter (stating that the requirement for a precise 
80% threshold ``can be confusing and difficult for issuers to 
assess. Additionally, the high and precise threshold can exclude 
issuers that rationally should qualify.''); Pearl Letter.
    \100\ NASAA Letter.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting, as proposed, 
updated and modernized ``doing business'' requirements in Rule 147 and 
new Rule 147A to comport with contemporary small business 
practices.\101\ We believe these updated requirements will expand the 
universe of issuers that may rely on Section 3(a)(11) and the amended 
Rule 147 safe harbor, as well as new Rule 147A, to conduct exempt 
intrastate offerings, while continuing to require issuers to have an 
in-state presence sufficient to justify reliance on these provisions. 
Given the increasing ``interstate'' nature of small business 
activities, we believe it has become increasingly difficult for 
companies, even smaller companies that are physically located within a 
single state or territory, to satisfy the issuer ``doing business'' 
requirements of current Rule 147(c)(2).\102\ Accordingly, we believe 
these issuer ``doing business'' requirements, identical for both 
amended Rule 147 and new Rule 147A, will provide issuers with greater 
flexibility in conducting intrastate offerings and expand the 
availability of

[[Page 83502]]

these two intrastate offering provisions.\103\
---------------------------------------------------------------------------

    \101\ See Rules 147(c)(2) and 147A(c)(2).
    \102\ See discussion in Section II.A.2 above.
    \103\ See, e.g., Transcript of Record 82-91, SEC Advisory 
Committee on Small and Emerging Companies (June 3, 2015).
---------------------------------------------------------------------------

    As proposed, we are adopting amendments to Rule 147(c)(2) and 
including provisions in new Rule 147A(c)(2) that will provide issuers 
with greater flexibility to satisfy the current ``doing business'' 
requirements by adding an alternative test based on the location of a 
majority of the issuer's employees while retaining the three 80% 
threshold tests in current Rule 147(c)(2).\104\ Furthermore, while the 
substance of the three 80% threshold requirements of current Rule 
147(c)(2) is being retained in the final rules, compliance with any one 
of the 80% threshold requirements (or the additional test based on the 
majority of employees) will be sufficient to demonstrate the in-state 
nature of the issuer's business, as proposed. This is a change from 
current Rule 147(c)(2), which requires issuers to satisfy all three 80% 
threshold requirements.
---------------------------------------------------------------------------

    \104\ See Rules 147(c)(2) and 147A(c)(2).
---------------------------------------------------------------------------

    We recognize that commenters had various alternative views on these 
requirements. While some commenters sought to require issuers to meet 
additional criteria, other commenters sought to lower the percentage 
thresholds in the criteria to ease the issuer requirements. We believe 
that the approach we are adopting in the final rules will provide 
issuers with additional flexibility to satisfy the requirements, while 
continuing to function as meaningful indicia of the in-state nature of 
the issuer's business. In light of the fact that issuers will need to 
meet only one of the threshold tests, we are not changing the current 
80% threshold tests to a majority requirement as one commenter 
suggested.\105\ We believe it is appropriate to first observe how the 
updated doing business in-state requirements are used by issuers in 
practice before making any further changes.\106\ Except as discussed 
below, we also are not adopting alternative criteria for the doing 
business in-state requirements, as suggested by several 
commenters.\107\ We believe the existing criteria have generally served 
states, issuers and investors well by being easy to understand and 
apply, and when updated as discussed above, will appropriately reflect 
characteristics in keeping with a local business presence.\108\
---------------------------------------------------------------------------

    \105\ See Milken Letter.
    \106\ As we indicated in the Proposing Release, we expect the 
staff to undertake to study and submit a report to the Commission no 
later than three years following the effective date of the final 
rules on whether this new framework appropriately provides 
assurances that an issuer is doing business in the state in which 
the offering takes place.
    \107\ See Ely Letter; MacDougall Letter; Pearl Letter; Terdal 
Letter.
    \108\ See CFA Letter.
---------------------------------------------------------------------------

    We are also making certain technical revisions to the three current 
80% thresholds, as proposed, that we believe will simplify the 
structure and application of the rules.\109\ In light of our amendments 
to require issuers to satisfy only one of the threshold tests, we are 
eliminating the current provision in Rule 147(c)(2)(i)(B), which does 
not apply the revenue test to issuers with less than $5,000 in revenue 
during the prior fiscal year.\110\ While this accommodation may be 
reasonable in the context of the current conjunctive 80% threshold 
requirements of Rule 147(c)(2), we do not believe it is necessary under 
the new disjunctive approach that we are adopting in these rules.
---------------------------------------------------------------------------

    \109\ For example, in order to streamline the presentation of 
Rule 147(c)(2), we are re-designating current Rule 147(c)(2)(i)(A)-
(B), 17 CFR 230.147(c)(2)(i)(A)-(B), which includes instructions on 
how to calculate revenue under Rule 147(c)(2)(i), as Instruction to 
paragraph (c)(2)(i) of Rule 147. Similarly, Rule 147A will also 
include an instruction on how to calculate revenue under Rule 
147A(c)(2)(i).
    \110\ 17 CFR 230.147(c)(2)(i)(B).
---------------------------------------------------------------------------

    Consistent with the proposal, and as supported by commenters, we 
are adding an alternative requirement to the three modified 80% 
threshold requirements. This requirement, which relates to the location 
of a majority of the issuer's employees, will provide an additional 
method by which an issuer may demonstrate that it conducts in-state 
business sufficient to justify reliance on either Rule 147 or new Rule 
147A. For these purposes, we are permitting an issuer to satisfy the 
``doing business'' requirements by having a majority of its employees 
based in such state or territory.\111\ An employee would be based in 
the same state or territory of the issuer for purposes of this test if 
such employee is based out of offices located within such state or 
territory.\112\ For example, if an employee provides services in the 
Maryland, Virginia and Washington, DC metro area out of the offices of 
a company in Maryland, the employee would be based in Maryland for 
purposes of this test. While some commenters suggested different 
thresholds for the employee test (ranging from 75% to 80%), we believe 
that using a majority of the employees test provides a standard that 
more accurately captures the increasingly flexible ways that companies 
structure and conduct their business operations, while still requiring 
that more employees be located in-state than elsewhere. Current 
workforce trends, such as telecommuting, whereby employees often work 
in a different geographical location from their employer, suggest that 
flexibility is particularly needed in this area. We believe adding this 
criterion to expand upon the current doing business requirements in 
Rule 147(c)(2) will provide additional flexibility to issuers by making 
these requirements more consistent with modern business practices, 
especially in light of the different roles employees play within 
smaller companies and the different locations in which employees carry 
out such roles, while still providing important indicia of the in-state 
nature of an issuer's business.
---------------------------------------------------------------------------

    \111\ See Rules 147(c)(2)(iv) and 147A(c)(2)(iv).
    \112\ The state or territory in which an employee is based may, 
or may not, be the same state or territory in which the employee 
resides.
---------------------------------------------------------------------------

2. Reasonable Belief as to Purchaser Residency Status
a. Proposed Amendments
    Consistent with the requirements in Regulation D,\113\ we proposed 
to add a reasonable belief standard to the issuer's determination as to 
the residence of the purchaser at the time of the sale of the 
securities.\114\ As proposed, an issuer would satisfy the requirement 
that the purchaser in the offering be a resident of the same state or 
territory as the issuer's principal place of business by either the 
existence of the fact that the purchaser is a resident of the 
applicable state or territory, or by establishing that the issuer had a 
reasonable belief that the purchaser of the securities in the offering 
was a resident of such state or territory.\115\ We also proposed to 
eliminate the requirement in current Rule 147 that issuers obtain a 
written representation from each purchaser as to his or her residence, 
as we believed this requirement may be unnecessary in light of the 
proposed reasonable belief standard.\116\
---------------------------------------------------------------------------

    \113\ Rule 501(a) of Regulation D includes in the definition of 
``accredited investor,'' persons who come within the enumerated 
categories of the rule, or who the issuer reasonably believes come 
within any of such categories, at the time of sale to such person. 
17 CFR 230.501(a).
    \114\ See proposed Rule 147(d).
    \115\ Id.
    \116\ 17 CFR 230.147(f)(1)(iii).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters supported the proposal to include a reasonable 
belief standard.\117\ One of these commenters

[[Page 83503]]

stated that a reasonable belief standard will provide more certainty 
for issuers about the availability of the exemption and increase its 
utility without sacrificing investor protection.\118\
---------------------------------------------------------------------------

    \117\ ABA Letter; City of Adrian Letter; CFA Letter; NASAA 
Letter.
    \118\ NASAA Letter.
---------------------------------------------------------------------------

    Commenters were divided on whether to eliminate the requirement to 
obtain a written representation from the purchaser as to his or her 
residence, with two commenters supporting the proposed elimination of 
the requirement \119\ and two commenters opposing it.\120\ Commenters 
opposing elimination of the requirement stated that the written 
representation should not be the sole indication of residency under a 
facts and circumstances exercise, but asserted that it is a useful 
indication of residency.\121\
---------------------------------------------------------------------------

    \119\ CFIRA Letter; CrowdCheck Letter.
    \120\ CFA Letter; NASAA Letter.
    \121\ NASAA Letter (``this requirement should remain in place 
but may be construed as evidence of, but not be dispositive of, a 
reasonable belief of purchaser residency.'').
---------------------------------------------------------------------------

    Several commenters requested that the Commission provide a safe 
harbor for determining an individual purchaser's residence, based upon 
certain objective criteria.\122\ Two of those commenters supported the 
creation of a non-exclusive safe harbor setting out the means by which 
a reasonable belief may be established, including the circumstances in 
which an issuer may rely on the steps taken by a third-party, such as a 
service provider or intermediary.\123\ Another of those commenters 
stated that Commission staff should work with the states to standardize 
requirements for determining state of residency for purposes of 
investor participation in an offering to help ensure compliance with 
the residency requirement.\124\ In addition, the 2015 Small Business 
Forum recommended that the Commission create a safe harbor for 
determining the ``place of business'' of a non-natural person investor 
in Rule 147 offerings, which could be as simple as a self-certification 
as to its place of business.\125\
---------------------------------------------------------------------------

    \122\ CFIRA Letter; CrowdCheck Letter; Letter from Brandon 
Smith, Managing Principal, Localstake Marketplace LLC, November 17, 
2015 (``Localstake Letter''); Letter from Rose Oswald-Poels, 
President/CEO, Wisconsin Bankers Association, January 8, 2016 (``WBA 
Letter'').
    \123\ CFIRA Letter; CrowdCheck Letter.
    \124\ Localstake Letter.
    \125\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

c. Final Rules
    Consistent with the proposal, and with the determination of 
accredited investor status under Regulation D,\126\ we are adopting 
amendments to Rule 147 and a provision in new Rule 147A that will 
include a reasonable belief standard for the issuer's determination as 
to the residence of the purchaser at the time of the sale of the 
securities.\127\ Under the final rules, an issuer will satisfy the 
requirement that the purchaser in the offering be a resident of the 
same state or territory in which the issuer is resident by either the 
existence of the fact that the purchaser is a resident of the 
applicable state or territory, or by establishing that the issuer had a 
reasonable belief that the purchaser of the securities in the offering 
was a resident of such state or territory.\128\ Under current Rule 
147(d), regardless of the efforts an issuer takes to determine that 
potential investors are residents of the state in which the issuer is 
resident, the exemption is lost for the entire offering if securities 
are offered or sold to just one investor that was not in fact a 
resident of such state. We continue to believe that permitting issuers 
to sell on the basis of a reasonable belief of a purchaser's in-state 
residency status will increase the utility of amended Rule 147 and new 
Rule 147A by providing issuers with additional certainty about the 
availability of the exemption under Section 3(a)(11) or new Rule 147A 
while still providing appropriate investor protections.\129\
---------------------------------------------------------------------------

    \126\ See note 113 above.
    \127\ See Rules 147(d) and 147A(d).
    \128\ Id.
    \129\ The burden will continue to be on the issuer to establish 
that the purchaser is an in-state resident or that the issuer had a 
reasonable belief as to residency. Otherwise, the sale to a non-
resident purchaser would preclude reliance on amended Rule 147 or 
new Rule 147A.
---------------------------------------------------------------------------

    In a change from the proposal, both amended Rule 147 and new Rule 
147A will include a requirement that issuers obtain a written 
representation from each purchaser as to his or her residence.\130\ We 
are persuaded by those commenters who stated that this requirement 
should be retained and considered as evidence of, but not be 
dispositive of, the purchaser's residency. In the context of Section 
3(a)(11), the Commission has previously indicated that ``[t]he mere 
obtaining of formal representations of residence . . . should not be 
relied upon without more as establishing the availability of the 
exemption.'' \131\ Whether an issuer has formed a reasonable belief 
that the prospective purchaser is an in-state resident will be 
determined on the basis of all facts and circumstances. Obtaining a 
written representation from purchasers of in-state residency status 
will not, without more, be sufficient to establish a reasonable belief 
that such purchasers are in-state residents.\132\
---------------------------------------------------------------------------

    \130\ See Rules 147(f)(1)(iii) and 147A(f)(1)(iii).
    \131\ See 1961 Release at 3.
    \132\ See Instruction to paragraph (d) of Rule 147 and 
Instruction to paragraph (d) of Rule 147A.
---------------------------------------------------------------------------

    In addition to the written representation, other facts and 
circumstances could include, but will not be limited to, for example, a 
pre-existing relationship between the issuer and the prospective 
purchaser that provides the issuer with sufficient knowledge about the 
prospective purchaser's principal residence or principal place of 
business so as to enable the issuer to have a reasonable basis to 
believe that the prospective purchaser is an in-state resident. An 
issuer may also consider other facts and circumstances when 
establishing the residency of a prospective purchaser, such as evidence 
of the home address of the prospective purchaser, as documented by a 
recently dated utility bill, pay-stub, information contained in state 
or federal tax returns, any documentation issued by a federal, state, 
or local government authority, such as a driver's license or 
identification card, or a public or private database that the issuer 
has determined is reasonably reliable, including credit bureau 
databases, directory listings, and public records.
    While a few commenters \133\ and the 2015 Small Business Forum 
recommended that the Commission provide a safe harbor for determining a 
purchaser's residence, including the circumstances in which a 
reasonable belief may be established, we are not doing so in the final 
rules. Our rules do not provide a safe harbor for the reasonable belief 
determination made under Rule 501(a) of Regulation D for exempt 
offerings, and we do not believe that the determinations required for 
amended Rule 147 and new Rule 147A present a more compelling case for 
having such a provision. In addition, we are concerned that a safe 
harbor could be viewed as an exclusive or minimum standard. We believe 
that requiring issuers to consider the facts and circumstances in order 
to establish a reasonable basis to believe that the purchaser is a 
resident of the same state or territory in which the issuer is resident 
is appropriate and will provide sufficient certainty for issuers 
seeking to satisfy the requirements of the exemption. Commission staff 
will consider available information on issuer compliance with the 
``reasonable belief'' standards in connection with the study

[[Page 83504]]

of amended Rule 147 and new Rule 147A.\134\
---------------------------------------------------------------------------

    \133\ CFIRA Letter; CrowdCheck Letter; Localstake Letter; WBA 
Letter.
    \134\ See Section I above.
---------------------------------------------------------------------------

3. Residence of Entity Purchasers
a. Proposed Amendments
    We proposed to define the residence of a purchaser that is a legal 
entity, such as a corporation, partnership, trust or other form of 
business organization, as the location where, at the time of the sale, 
the entity has its principal place of business.\135\ For these 
purposes, we also proposed to define a purchaser's ``principal place of 
business,'' consistent with the proposed definition for issuer 
eligibility purposes, as the location in which the officers, partners, 
or managers of the entity primarily direct, control and coordinate its 
activities.\136\
---------------------------------------------------------------------------

    \135\ See proposed Rule 147(d). Under the current rule, an 
entity is a resident of the state or territory where the entity has 
its ``principal office.'' Current Rule 147 does not define 
``principal office.'' 17 CFR 230.147(c)(2)(iv).
    \136\ See proposed Rule 147(c)(1).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Two commenters supported the proposed amendments to replace the 
``principal office'' requirement for entity purchasers with the 
``principal place of business'' standard, consistent with the standard 
for issuers.\137\ One commenter suggested that the Commission clarify 
how the residency of non-business trusts should be determined.\138\
---------------------------------------------------------------------------

    \137\ NASAA Letter; NextSeed Letter.
    \138\ Bishop Letter (recommending that Rule 147(d)(1) be amended 
to add: ``A trust that is not deemed by the law of the state or 
territory of its creation to be a separate legal entity is deemed to 
be a resident of each state or territory in which its trustee is, or 
trustees are, resident.'').
---------------------------------------------------------------------------

c. Final Rules
    Consistent with the proposal, we are adopting amendments to Rule 
147 and a provision in new Rule 147A that will define the residence of 
a purchaser that is a legal entity, such as a corporation, partnership, 
trust or other form of business organization, as the location where, at 
the time of the sale, the entity has its principal place of 
business.\139\ The final rules define a purchaser's ``principal place 
of business,'' consistent with the definition for determining issuer 
residency contained in paragraph (c)(1) of Rules 147 and 147A, as the 
location in which the officers, partners, or managers of the entity 
primarily direct, control and coordinate its activities.\140\ In 
addition, as suggested by one commenter, \141\ we are adding an 
instruction to the requirement as to the residency of the purchaser 
stating that a trust that is not deemed by the law of the state or 
territory of its creation to be a separate legal entity should be 
deemed to be a resident of each state or territory in which its trustee 
is, or trustees are, resident.\142\
---------------------------------------------------------------------------

    \139\ See Rules 147(d) and 147A(d).
    \140\ See Rules 147(c)(1), 147(d)(1), 147A(c)(1) and 147A(d)(1).
    \141\ Bishop Letter.
    \142\ See Instruction 1 to paragraph (d)(1) of Rule 147 and 
Instruction 1 to paragraph (d)(1) of Rule 147A.
---------------------------------------------------------------------------

4. Limitation on Resales
a. Proposed Amendments
    We proposed to amend the limitation on resales in Rule 147(e) to 
provide that for a period of nine months from the date of the sale by 
the issuer of a security sold pursuant to this rule, any resale by a 
purchaser would need to be made only to residents within the 
purchaser's state or territory of residence.\143\ In contrast, Rule 
147(e) currently requires that during the period in which securities 
are offered and sold in reliance on the intrastate offering exemption, 
and for a period of nine months from the date of the last sale by the 
issuer of such securities, all resales of any securities sold in the 
offering shall only be made to persons resident within the state or 
territory of which the issuer is a resident. In the Proposing Release, 
we explained that the determination as to when a given purchase of 
securities in an intrastate offering has come to rest in-state depends 
less on a defined period of time after the final sale by the issuer in 
such offering than it does on whether a resident purchaser has taken 
the securities ``without a view to further distribution or resale to 
non-residents.'' \144\ In this regard, we believed that a time-based 
limitation on potential resales to non-residents that relates back to 
the date of the purchase by a resident investor from the issuer would 
more precisely address the concern regarding out-of-state resales.
---------------------------------------------------------------------------

    \143\ Proposed Rule 147(e).
    \144\ See Proposing Release, at text accompanying note 87.
---------------------------------------------------------------------------

    We also proposed to amend Rule 147(b) so that an issuer's ability 
to rely on Rule 147 would no longer be conditioned on a purchaser's 
compliance with Rule 147(e).\145\ We believed that this proposed 
amendment to the application of Rule 147(e), as it relates to Rule 
147(b), would increase the utility of the exemption by eliminating the 
uncertainty created in the offering process for issuers under the 
current rules. As proposed, issuers would remain subject to 
requirements relating to, for example, in-state sales limitations, 
legends, stop transfer instructions for transfer agents, and offeree 
and purchaser disclosures in order to satisfy the exemption at the 
federal level. In addition, issuers would continue to be subject to the 
antifraud and civil liability provisions of the federal securities 
laws, as well as state securities law requirements. Lastly, although we 
did not propose to amend our rules to provide that securities issued 
under amended Rule 147 be considered ``restricted securities'' under 
Rule 144(a)(3), \146\ we requested comments on this question.
---------------------------------------------------------------------------

    \145\ See proposed Rule 147(b). As proposed, current Rule 147(a) 
would be re-designated as Rule 147(b).
    \146\ 17 CFR 230.144(a)(3).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters supported the proposed change to the limitation 
on resales by resident purchasers to non-residents based on the date of 
sale by the issuer to the relevant purchaser rather than based on the 
date when the offering terminates.\147\ Commenters, however, had 
differing views on the length of the holding period from the date of 
sale. Two commenters supported a nine-month holding period from the 
date of sale.\148\ One of these commenters reasoned that this period 
sufficiently demonstrates the purchase was for investment without an 
intent to distribute out-of-state or avoid registration.\149\ Two other 
commenters stated that a period of six months is adequate to establish 
that securities have ``come to rest'' in a state.\150\ Those commenters 
noted that a nine-month period does not exist in any other securities 
law requirements, so the potential exists for confusion. One commenter 
recommended that the Commission clarify that bona fide gifts are not 
subject to the limitation on resales out-of-state, and that a donee is 
deemed to have acquired the securities when they were acquired by the 
donor.\151\
---------------------------------------------------------------------------

    \147\ CFA Letter; CFIRA Letter; CrowdCheck Letter; NASAA Letter.
    \148\ CFA Letter; NASAA Letter.
    \149\ NASAA Letter.
    \150\ CrowdCheck Letter; CFIRA Letter. These commenters stated 
that allowing a six-month period, by analogy to parts of Rule 144, 
is more appropriate.
    \151\ Bishop Letter.
---------------------------------------------------------------------------

    Commenters were divided on whether securities issued under amended 
Rule 147 should be considered ``restricted securities'' under Rule 
144(a)(3). One commenter stated that securities issued under amended 
Rule 147 should be considered ``restricted securities'' under Rule 
144(a)(3).\152\ Two other

[[Page 83505]]

commenters stated that the securities should not be treated as 
``restricted securities'' under Rule 144(a)(3), noting that the 
``coming to rest'' in-state purpose of the nine-month restriction is 
sufficiently distinct from the policy considerations underlying Rule 
144.\153\
---------------------------------------------------------------------------

    \152\ NASAA Letter.
    \153\ CFIRA Letter; CrowdCheck Letter.
---------------------------------------------------------------------------

    In addition, several commenters supported no longer conditioning 
the availability of the exemption on purchaser compliance with Rule 
147(e).\154\ One of those commenters reasoned that if an issuer takes 
reasonable steps to comply with the limitations on resale, the issuer 
should not lose the original exemption if a purchaser does not comply 
with the resale restrictions at a later date.\155\
---------------------------------------------------------------------------

    \154\ CFIRA Letter; CrowdCheck Letter; NASAA Letter.
    \155\ NASAA Letter.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting a requirement in 
amended Rule 147 and new Rule 147A providing that for a period of six 
months from the date of the sale of the security by the issuer any 
resale of the security shall be made only to persons resident within 
the state or territory in which the issuer was resident at the time of 
the sale of the security by the issuer.\156\ We are persuaded by those 
commenters that indicated that a period of six months is adequate to 
establish that securities sold in an intrastate offering have ``come to 
rest'' in a state by analogizing to provisions of Rule 144, in which a 
six-month holding period is deemed sufficient to establish a requisite 
investment intent.\157\ In this regard, given the use of a six-month 
resale restriction in the Rule 144 context, we believe that a similar 
resale restriction in the intrastate offering context should provide 
adequate assurance that the securities will come to rest in-state.\158\
---------------------------------------------------------------------------

    \156\ Rules 147(e) and 147A(e).
    \157\ See CFIRA Letter and CrowdCheck Letter. Rule 144 provides 
a safe-harbor from being deemed a ``statutory underwriter'' under 
Section 2(a)(11) of the Securities Act. Specifically, Rule 
144(d)(1)(i) requires a six-month holding period for restricted 
securities sold by issuers reporting under the Exchange Act in order 
for a purchaser to resell such securities and not be deemed an 
underwriter.
    \158\ In such circumstances, resales of securities that were 
initially purchased in an intrastate offering must themselves be 
registered or exempt from registration pursuant to any state 
securities laws where such resale takes place.
---------------------------------------------------------------------------

    We note that bona fide gifts are not subject to the limitation on 
resales in amended Rule 147 or new Rule 147A.\159\ Since bona fide 
gifts are not transactions for value, they require no investment 
decision by the donee and thus do not involve the sale of a security 
subject to regulation under the Securities Act.\160\ However, we note 
that subsequent resales of donated securities are subject to the resale 
restrictions regardless of the state in which the holder of the donated 
securities resides. To address bona fide gifts of securities to out-of-
state donees, as well as the resales of securities that were wrongfully 
sold to out-of-state purchasers, within the six month re-sale 
limitation period, we are revising our proposed resale limitation to 
focus on the state or territory in which the issuer was resident, as 
opposed to where the last purchaser of the securities may have resided. 
Accordingly, the resale limitation in the final rules limits resales to 
``persons resident within the state or territory in which the issuer 
was resident . . . at the time of the sale of the security by the 
issuer'' as opposed to limiting resales to ``persons resident within 
the purchaser's state or territory of residence,'' as proposed. We 
believe this revision will address situations in which purchasers in 
the offering subsequently gift or wrongfully sell their securities to 
out-of-state residents who then wish to resell their securities within 
the six month limitation of paragraph (e). This change to the rules 
makes clear that the six-month limitation on resales applies to all 
holders of the securities, including holders subsequent to the original 
purchaser, whether they received the shares as a gift, donation, or by 
purchase.\161\
---------------------------------------------------------------------------

    \159\ See Bishop Letter.
    \160\ Section 2(a)(3) of the Securities Act defines ``sale'' or 
``sell'' to ``include every contract of sale or disposition of a 
security or interest in a security, for value.'' A lack of monetary 
consideration, however, does not always mean that there was not a 
sale or offer for sale for purposes of Section 5. See, e.g., Capital 
General Corporation, 54 SEC Docket 1714, 1728-29 (July 23, 1993) 
(Capital General's ``gifting'' of securities constituted a sale 
because it was a disposition for value, the ``value'' arising ``by 
virtue of the creation of a public market for the issuer's 
securities.''). See also SEC v. Harwyn Industries Corp., 326 F. 
Supp. 943 (S.D.N.Y. 1971).
    \161\ See Rules 147(e) and 147A(e).
---------------------------------------------------------------------------

    As proposed, the resale limitation period for both amended Rule 
147(e) and new Rule 147A(e) will relate back to the date of purchase by 
a resident investor from the issuer, in contrast to current Rule 147(e) 
that does not start the resale limitation period until the offering has 
terminated (i.e., until all offers and sales have ceased).\162\ We 
continue to believe that a time-based limitation on potential resales 
to non-residents of securities purchased in an intrastate offering that 
relates back to the date of purchase by a resident investor from the 
issuer would more precisely address the concern regarding out-of-state 
resales.
---------------------------------------------------------------------------

    \162\ The resale limitation period may end on different dates 
for different purchasers if the issuer sold shares on multiple 
dates.
---------------------------------------------------------------------------

    In light of our revision to the resale limitation to focus on the 
state where the issuer is a resident, we are including additional 
language in amended Rule 147(e) and new Rule 147A(e) to specify that 
all re-sales during this six month resale limitation period will be 
restricted to the state or territory in which the issuer was a resident 
at the time of the sale of the security by the issuer to a purchaser. 
Accordingly, if an issuer were to change its state or territory of 
residence during the six month resale limitation period, all resales 
would, nevertheless, continue to be limited to the state or territory 
in which the issuer resided at the time of the original sale of 
securities in reliance upon either Rule 147 or Rule 147A. We believe 
this additional language will preserve the intent of the proposed 
resale restriction--to help ensure that the securities offered pursuant 
to an intrastate offering exemption have come to rest within the state 
of the offering before being resold.
    As proposed, an issuer's ability to rely on the respective rules 
will not be conditioned on a purchaser's compliance with Rule 147(e) 
and Rule 147A(e).\163\ As discussed in the Proposing Release, the 
application of current Rule 147(e) in the overall scheme of the safe 
harbor can cause uncertainty for issuers. We continue to believe that 
removing the condition on purchaser compliance with Rule 147(e) will 
increase the utility of the exemption by eliminating the uncertainty 
created in the offering process for issuers under the current rules. As 
one commenter noted, if an issuer takes reasonable steps to comply with 
the limitations on resale, it should not lose the availability of the 
exemption due to a purchaser not complying with the resale 
limitations.\164\ We continue to believe that eliminating this 
uncertainty should not result in an increased risk of issuer non-
compliance with the rules, because issuers will remain subject to 
requirements relating to, for example, in-state sales limitations, 
legends, stop transfer instructions for transfer agents, and offeree 
and purchaser disclosures, in order to satisfy the exemption at the 
federal level.\165\ In addition, issuers will

[[Page 83506]]

continue to be subject to the antifraud and civil liability provisions 
of the federal securities laws, as well as state securities law 
requirements.
---------------------------------------------------------------------------

    \163\ See Rules 147(b) and 147A(b). Current Rule 147(a) would be 
re-designated as Rule 147(b).
    \164\ NASAA Letter.
    \165\ Commission staff will seek to review information gathered 
by state regulators on issuer compliance with the legend 
requirements in amended Rule 147(f) and new Rule 147A(f) as part of 
the study of amended Rule 147 and new Rule 147A. See Section I.
---------------------------------------------------------------------------

    Lastly, while one commenter believed that securities issued under 
amended Rule 147 should be considered ``restricted securities'' under 
Rule 144(a)(3), \166\ we believe that limiting the resale of these 
securities only to persons resident within the same state or territory 
in which the issuer is a resident for a period of six months from the 
date of the sale of the security by the issuer to the purchaser is 
sufficient to assure that the offering has come to rest in the state or 
territory in which the issuer resides and thereby preserve the local 
character of the offering. We note that states are free to impose any 
additional requirements they believe are necessary to protect the 
residents of their states, including imposing further transfer 
restrictions on securities issued under amended Rule 147 or new Rule 
147A similar to that required under Rule 144(a)(3). In addition, 
persons reselling securities will need to consider whether they could 
be an ``underwriter'' if they acquired the securities with a view to 
``distribution'' or if they are participating in a ``distribution.'' 
\167\ A seller that complies with the conditions of the Rule 144 safe 
harbor will not be deemed to be an underwriter.\168\
---------------------------------------------------------------------------

    \166\ Id.
    \167\ See Section 4(a)(1) of the Securities Act (exempting from 
registration ``transactions by any person other than an issuer, 
underwriter, or dealer'') and Section 2(a)(11) of the Securities Act 
(defining the term ``underwriter''). 15 U.S.C. 77d(a)(1) and 15 
U.S.C. 77b(a)(11).
    \168\ 17 CFR 230.144.
---------------------------------------------------------------------------

5. Integration
a. Proposed Amendments
    The proposed Rule 147 integration safe harbor would include any 
prior offers or sales of securities by the issuer, as well as certain 
subsequent offers or sales of securities by the issuer occurring within 
six months after the completion of an offering exempted by Rule 147. As 
proposed, offers and sales made pursuant to Rule 147 would not be 
integrated with:
     Prior offers or sales of securities; or
     Subsequent offers or sales of securities that are:
     Registered under the Act, except as provided in proposed 
paragraph (h) of Rule 147;
     Exempt from registration under Regulation A (17 CFR 
230.251 et seq.);
     Exempt from registration under Rule 701 (17 CFR 230.701);
     Made pursuant to an employee benefit plan;
     Exempt from registration under Regulation S (17 CFR 
230.901 through 230.905);
     Exempt from registration under Section 4(a)(6) of the Act 
(15 U.S.C. 77d(a)(6)); or
     Made more than six months after the completion of an 
offering conducted pursuant to this rule.\169\
---------------------------------------------------------------------------

    \169\ See proposed Rule 147(g).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    One commenter supported including registered offers and sales and 
certain other exempt offerings occurring within six months after 
completion of the offering in the integration safe harbor, as 
proposed.\170\ The same commenter did not support providing a safe 
harbor for any and all prior offers or sales of securities by the 
issuer, as proposed in paragraph (g)(1) of the amended rule, and 
instead recommended restricting the safe harbor to cover only offers 
and sales of securities that take place before the six-month period 
immediately preceding the Rule 147 offering.\171\ While acknowledging 
that the proposed integration safe harbor is consistent with the 
integration safe harbor in Rule 251(c) of Regulation A, the commenter 
distinguished Regulation A from Rule 147 by noting that ``Regulation A 
is a quasi-registration subject to regulatory oversight by the 
Commission and the states while a Rule 147 offering may be exempt at 
both the federal and state level.'' In determining an integration safe 
harbor model to follow, the commenter indicated it would be better to 
look to Rule 502(a) of Regulation D, which limits the safe harbor for 
private offerings to offers and sales occurring either six months 
before, or six months after, a Regulation D offering.\172\
---------------------------------------------------------------------------

    \170\ NASAA Letter.
    \171\ Id.
    \172\ Id. Rule 502(a) provides that ``Offers and sales that are 
made more than six months before the start of a Regulation D 
offering or are made more than six months after completion of a 
Regulation D offering will not be considered part of that Regulation 
D offering, so long as during those six month periods there are no 
offers or sales of securities by or for the issuer that are of the 
same or a similar class as those offered or sold under Regulation D, 
other than those offers or sales of securities under an employee 
benefit plan as defined in Rule 405 under the Act.'' 17 CFR 
230.502(a).
---------------------------------------------------------------------------

    On the other hand, two commenters believed that Rule 147 offerings 
should not be integrated with any other exempt offerings.\173\ One of 
these commenters recommended that Rule 147 contain language expressly 
stating that an offering made in reliance on Rule 147 will not be 
integrated with another exempt offering made concurrently, provided 
that each offering meets the requirements of the claimed 
exemption.\174\
---------------------------------------------------------------------------

    \173\ NextSeed Letter; Localstake Letter.
    \174\ NextSeed Letter.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting amendments to the 
integration safe harbor under Rule 147 and providing an identical 
integration safe harbor provision in new Rule 147A, substantially as 
proposed. The integration safe harbor will cover any prior offers or 
sales of securities by the issuer, as well as certain subsequent offers 
or sales of securities by the issuer occurring after the completion of 
an offering pursuant to Rule 147 or Rule 147A, as applicable. 
Accordingly, offers and sales made pursuant to Rules 147 and 147A will 
not be integrated with:
     Offers or sales of securities made prior to the 
commencement of offers and sales of securities pursuant to Rules 147 or 
147A; or
     Offers or sales of securities made after completion of 
offers and sales pursuant to Rules 147 or 147A that are:
     Registered under the Securities Act, except as provided in 
Rule 147(h) or Rule 147A(h);
     Exempt from registration under Regulation A (17 CFR 
230.251 et seq.);
     Exempt from registration under Rule 701 (17 CFR 230.701);
     Made pursuant to an employee benefit plan;
     Exempt from registration under Regulation S (17 CFR 
230.901 through 230.905);
     Exempt from registration under Section 4(a)(6) of the Act 
(15 U.S.C. 77d(a)(6)); or
     Made more than six months after the completion of an 
offering conducted pursuant to Rules 147 or 147A.\175\
---------------------------------------------------------------------------

    \175\ See Rules 147(g) and 147A(g).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, integration safe harbors 
provide issuers, particularly smaller issuers whose capital needs often 
change, with greater certainty about their eligibility to comply with 
an exemption from Securities Act registration.\176\ Consistent with the 
proposal and the approach taken in Rule 251(c) of Regulation A, the 
safe harbor from integration provided by Rule 147(g) and Rule 147A(g) 
will expressly provide that any offer or sale made in reliance on the 
respective rules will not be integrated with any other offer or sale 
made either before the commencement of, or more than six

[[Page 83507]]

months after the completion of, the respective intrastate offerings 
under either Rule 147 or Rule 147A. For transactions that fall within 
the scope of the safe harbor, issuers will not have to conduct an 
integration analysis of the terms of any offering being conducted under 
the other specified provisions in order to determine whether the two 
offerings would be treated as one for purposes of qualifying for either 
exemption.\177\ While one commenter recommended that the Commission 
adopt a safe harbor more closely aligned with the provisions of Rule 
502(a) of Regulation D,\178\ we believe the integration safe harbor in 
Rule 251(c) of Regulation A is more consistent with the Commission's 
post-JOBS Act approach to integration that has evolved since the 
adoption of Regulation D in 1982 to better articulate the principles 
underlying the integration doctrine in light of current offering 
practices and developments in information and communication 
technology.\179\ As we explained in the Proposing Release, we believe 
that our approach to integration will provide issuers with greater 
certainty as to the availability of an exemption for a given offering 
and increase consistency in the application of the integration doctrine 
among the exemptive rules available to smaller issuers, while 
preserving important investor protections provided in each 
exemption.\180\
---------------------------------------------------------------------------

    \176\ See Proposing Release at Section II.B.4.d. (Integration); 
see also 2015 Regulation A Release at Section II.B.5. (Integration).
    \177\ The issuer will, however, need to comply with the 
requirements of each exemption that it is relying upon. For example, 
an offering made pursuant to Rule 506(b) will not be integrated with 
a subsequent offering pursuant to Rule 147A, but the issuer will 
need to comply with the requirements of each rule, including the 
limitation on general solicitation for offers made pursuant to Rule 
506(b).
    \178\ NASAA Letter.
    \179\ See also, Regulation Crowdfunding Adopting Release.
    \180\ See Proposing Release at text accompanying note 103. See 
also Rule 251(c) of Regulation A [17 CFR 230.251(c)]; Rule 701 [17 
CFR 230.701]. Each exemption is designed based on a particular type 
of offer and investor, with corresponding requirements that must be 
satisfied.
---------------------------------------------------------------------------

    The bright-line integration safe harbor we are adopting in amended 
Rule 147(g) and new Rule 147A(g) will assist issuers, particularly 
smaller issuers, in analyzing certain transactions, but will not 
address the issue of potential offers or sales that occur concurrently 
with, or close in time after, a Rule 147 or 147A offering. There is no 
presumption that offerings outside the integration safe harbors should 
be integrated. Rather, whether concurrent or subsequent offers and 
sales of securities will be integrated with any securities offered or 
sold pursuant to amended Rule 147 or new Rule 147A will depend on the 
particular facts and circumstances, including whether each offering 
complies with the requirements of the exemption that is being relied 
upon for the particular offering.\181\ 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 Rule 147 or new Rule 147A.\182\ If an offer fails to comply with the 
requirements of the exemption, and the offer is not registered and no 
other exemption is available, that offer would be in violation of 
Section 5 of the Securities Act.
---------------------------------------------------------------------------

    \181\ The integration concept was first articulated by the 
Commission in 1933 and was further developed in two interpretive 
releases issued in the 1960s. See SEC Rel. No. 33-97 (Dec. 28, 
1933); SEC Rel. No. 33-4434 (Dec. 6, 1961); SEC Rel. No. 33-4552 
(Nov. 6, 1962). The interpretive releases stated that determining 
whether a particular securities offering should be integrated with 
another offering requires an analysis of the specific facts and 
circumstances of the offerings. The Commission identified five 
factors to consider in making the determination of whether the 
offerings should be integrated. See SEC Rel. No. 33-4552 (Nov. 6, 
1962). See also Rule 502(a) of Regulation D. More recently, the 
Commission has provided additional guidance to help issuers evaluate 
whether two offerings should be integrated. In 2007, the Commission 
provided a framework for analyzing how an issuer can conduct 
simultaneous registered and private offerings. See SEC Release No. 
33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]. In 2015, when 
implementing provisions of the JOBS Act, the Commission applied this 
framework to concurrent exempt offerings, including situations where 
one offering permits general solicitation and the other does not. 
See 2015 Regulation A Release at Section II.B.5 and Regulation 
Crowdfunding Adopting Release at Section II.A.1.c. In those 
releases, the Commission noted that an offering made pursuant to 
Regulation A or Regulation Crowdfunding 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. Id.
    \182\ For a concurrent offering under Rule 506(b), purchasers in 
the Rule 506(b) offering could not be solicited by means of a 
general solicitation under Rule 147 or new Rule 147A. The issuer 
would need an alternative means of establishing how purchasers in 
the Rule 506(b) offering were solicited. For example, the issuer may 
have had a preexisting substantive relationship with such 
purchasers. Otherwise, the solicitation conducted in connection with 
the Rule 147 or Rule 147A offering would very likely preclude 
reliance on Rule 506(b). See also SEC Rel. No. 33-8828 (Aug. 3, 
2007) [72 FR 45116 (Aug. 10, 2007)].
---------------------------------------------------------------------------

    Amended Rule 147, as a safe harbor under Section 3(a)(11), will 
continue to prohibit out-of-state offers to any person not residing in 
the same state or territory in which the issuer is resident. 
Accordingly, an issuer conducting a concurrent exempt offering for 
which general solicitation is permitted across state lines would be 
unlikely to comply with the in-state offer restriction in Rule 
147(b).\183\ For example, issuers relying on amended Rule 147 will not 
be able to conduct a concurrent Regulation Crowdfunding offering, since 
by its nature a Regulation Crowdfunding offering would involve a 
multistate offer due to the offering terms being made publicly 
available from an intermediary's online platform.\184\
---------------------------------------------------------------------------

    \183\ See Rule 147(b).
    \184\ For the same reasons, issuers will not be able to rely on 
amended Rule 147 and conduct concurrent Regulation A offerings or 
registered public offerings.
---------------------------------------------------------------------------

    An issuer relying on the new Rule 147A exemption, which permits 
multi-state offers, may conduct a concurrent exempt offering for which 
general solicitation is permitted, so long as the issuer complies with 
the legend and disclosure requirements of Rule 147A(f), as well as any 
additional restrictions on the general solicitation required by the 
other exemption concurrently being relied upon by the issuer. For 
example, the limitations imposed on advertising the terms of the 
offering pursuant to Rule 204 of Regulation Crowdfunding would limit 
the issuer's general solicitation in a concurrent offering made 
pursuant to Rule 147A. Similarly, an issuer conducting a concurrent 
Rule 506(c) offering could not include in its Rule 506(c) general 
solicitation materials an advertisement of a concurrent Rule 147A 
offering, unless that advertisement also included the disclosure 
required by, and otherwise complied with, paragraph (f) of Rule 
147A.\185\
---------------------------------------------------------------------------

    \185\ See Rule 147A(f); see also discussion in Section II.A.1.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we are mindful of the risk 
that offers made pursuant to an exemption shortly before a registration 
statement is filed could be viewed as conditioning the market for that 
registered offering. Accordingly, final Rules 147 and 147A will exclude 
from the safe harbor any such offer made to persons other than 
qualified institutional buyers and institutional accredited investors 
within the 30-day period before a registration statement is filed with 
the Commission.\186\ Commission staff expects to review issuer 
compliance with the expanded integration safe harbor as part of the 
study of amended Rule 147 and new Rule 147A.\187\
---------------------------------------------------------------------------

    \186\ See Rules 147(h) and 147A(h). In such circumstances, 
whether an offer made within the thirty-day period before the filing 
of a registration statement constitutes an impermissible offer for 
purpose of Securities Act Section 5(c) will be based on the facts 
and circumstances of such offer.
    \187\ See Section I above.
---------------------------------------------------------------------------

6. Disclosures to Investors
a. Proposed Amendments
    We proposed to retain the substance of the disclosure requirements 
of

[[Page 83508]]

current Rule 147(f)(3), in modified form. As proposed, Rule 147(f)(3) 
would require issuers to make specified disclosures to offerees and 
purchasers about the limitations on resale contained in proposed Rule 
147(e) and to include the legend set forth in proposed Rule 
147(f)(1)(i) on the certificate or other document evidencing the 
offered security. Although the disclosure should be prominently 
disclosed to each offeree and purchaser at the time any offer or sale 
is made by the issuer to such person, the proposed amendments would no 
longer require that such disclosure be made in writing in all 
instances. Instead, the proposed amendments would require issuers to 
provide the required disclosure to offerees in the same manner in which 
an offer is communicated, while continuing to require written 
disclosure to all purchasers. In addition, the proposed amendments 
would no longer require issuers to disclose to offerees and purchasers 
the stop transfer instructions provided by an issuer to its transfer 
agent \188\ or the provisions of Rule 147(f)(2) regarding the issuance 
of new certificates during the Rule 147(e) resale period.\189\
---------------------------------------------------------------------------

    \188\ See 17 CFR 230.147(f)(1)(ii).
    \189\ See 17 CFR 230.147(f)(2).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Two commenters supported the proposal to include in the text of the 
amended rule the specific language of the required disclosure.\190\ 
These commenters also stated that all offerees and purchasers should 
continue to receive written disclosures, rather than, as proposed, 
permitting offerees to receive oral disclosures if the offer is 
communicated orally.\191\
---------------------------------------------------------------------------

    \190\ CFA Letter; NASAA Letter.
    \191\ Id.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting amendments to Rule 
147 and a provision in new Rule 147A that will require issuers to make 
specified disclosures to offerees and purchasers about the limitations 
on resale contained in Rules 147(e) and 147A(e), respectively. Issuers 
will also be required to meet the legend requirement of Rules 
147(f)(1)(i) and 147A(f)(1)(i), respectively. Although the disclosure 
should be prominently disclosed to each offeree and purchaser at the 
time any offer or sale is made by the issuer to such person, consistent 
with the proposal, the amendment and new rule will not require that 
such disclosure be made in writing in all instances.
    While two commenters recommended that we require issuers to provide 
all offerees written disclosures, rather than permitting offerees to 
receive oral disclosures if the offer is communicated orally,\192\ we 
are not adopting that requirement in our rules. We believe the approach 
we are adopting--requiring issuers to provide the disclosure to 
offerees in the same manner in which an offer is communicated--will 
provide appropriate flexibility to issuers in the conduct of their 
offerings and avoid potential confusion as to when, for example, an 
oral offer must be followed up with a written disclosure.\193\ 
Requiring the disclosure to be made orally if the offer is made orally 
also will help ensure that the investor receives the required 
disclosure when most relevant (i.e., immediately upon learning about 
the offer). Furthermore, we believe our amendments to Rule 147(f)(3) 
and the provision in new Rule 147A(f)(3) will maintain appropriate 
investor protections, especially in light of the new provision 
requiring issuers to provide written disclosure to all purchasers 
within a reasonable period of time before the date of sale. We note 
that this requirement to provide written disclosure a reasonable period 
of time before the date of sale is consistent with the disclosure 
delivery requirements of Regulation D and Rule 701.\194\ Finally, while 
we are not adopting commenters' suggestions to require that written 
disclosure be provided to all offerees, nothing in our rules prevents 
state regulators, that deem it necessary and appropriate, from 
requiring such written disclosures for offers to residents within their 
states. State regulators are in a position to tailor any such rules to 
their local capital markets in a manner that addresses capital market 
practices and investor protection measures they deem appropriate for 
offers and sales to residents of their state.
---------------------------------------------------------------------------

    \192\ Id.
    \193\ In addition, it may not be possible for an issuer to 
provide written disclosures to all offerees. For example, an issuer 
conducting an offer over the radio would not be able to provide the 
written disclosures to everyone listening to the offer on the radio 
as it would not know the identity of each of the offerees.
    \194\ See e.g., Rules 501(i)(4) and 502(b)(1) of Regulation D 
and Rule 701(e).
---------------------------------------------------------------------------

    Consistent with the proposal, issuers will also be required to 
satisfy the legend requirement in Rules 147(f)(1)(i) and 147A(f)(1)(i), 
respectively. However, issuers will not be required to disclose to 
offerees and purchasers the stop transfer instructions provided by an 
issuer to its transfer agent \195\ or the provisions of Rules 147(f)(2) 
and 147A(f)(2), respectively, regarding the issuance of new 
certificates during the resale period.\196\ Although issuers will have 
to comply with these transfer agent instruction requirements,\197\ we 
continue to believe that requiring issuers to disclose information 
regarding such requirements to offerees and purchasers at the time of 
the offer and/or sale will not enhance the disclosure requirements 
under Rules 147(e), 147A(e), 147(f)(1) or 147A(f)(1), and we therefore 
are eliminating the disclosure requirements related to stop transfer 
instructions and the issuance of new certificates from Rule 147 and not 
including them in new Rule 147A.\198\
---------------------------------------------------------------------------

    \195\ See 17 CFR 230.147(f)(1)(ii).
    \196\ See 17 CFR 230.147(f)(2). Additionally, as discussed in 
Section II.B.1 above, we are requiring issuers in offerings 
conducted pursuant to Rule 147 or Rule 147A to disclose to each 
offeree in the manner in which any offer is communicated and to each 
purchaser of a security in writing that sales will be made only to 
residents of the same state or territory as the issuer. See Rules 
147(f)(3) and 147A(f)(3).
    \197\ See Rules 147(f)(1)(ii), 147(f)(2), 147A(f)(1)(ii) and 
147A(f)(2).
    \198\ See Rules 147(f)(3) and 147A(f)(3).
---------------------------------------------------------------------------

    Finally, in order for the required disclosure to offerees and 
purchasers under amended Rule 147(f) and new Rule 147A(f) to be as 
clear as possible, and consistent with our revisions to make the 
issuer's state of residency the focus of the relevant resale 
restrictions, we are adding a requirement that the issuer identify in 
this disclosure the particular state or territory in which the issuer 
was resident at the time of the original sale of the security. Since a 
small business may change the location of its residence and principal 
activities within the six-month resale limitation period provided for 
in amended Rule 147(e) and new Rule 147A(e), we believe this 
information, which should be readily available to the issuer, will 
assist purchasers in understanding the implications of the applicable 
resale restrictions.
7. State Law Requirements
a. Proposed Amendments
    We proposed to limit the availability of Rule 147 to issuers that 
have registered an offering in the state in which all of the purchasers 
are resident or that conduct the offering pursuant to an exemption from 
state law registration in such state that limits the amount of 
securities an issuer may sell pursuant to such exemption to no more 
than $5 million in a twelvemonth period and that limits the amount of 
securities an investor can purchase in any such offering.\199\ In the 
Proposing Release, we expressed our preliminary view that, in light of 
the other proposed changes to

[[Page 83509]]

Rule 147, including a maximum offering amount limitation and investment 
limitations in the rule would provide investors with additional 
protection and would be consistent with existing state law crowdfunding 
provisions.\200\
---------------------------------------------------------------------------

    \199\ See proposed Rule 147(a).
    \200\ See Proposing Release.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    All commenters that addressed the issue opposed any limits at the 
federal level on offering size or investment size.\201\ In general, 
these commenters preferred that any limits be imposed through the state 
legislative and/or rulemaking process, which they stated may be better 
situated to making a determination about specific limits.\202\ 
Commenters also stated that the requirements are unnecessary at the 
federal level since these are local offerings where only the individual 
state's residents are involved.\203\ One of these commenters noted the 
potential disparate impact on larger versus smaller states with 
different resident populations and gross domestic products.\204\ 
Another of these commenters noted that, in addition to the regulation 
of these offerings at the state level, to the extent federal regulatory 
oversight is deemed necessary, these offerings are also subject to the 
Commission's powers to enforce the antifraud provisions of Section 
10(b) of the Exchange Act and Rule 10b-5 thereunder.\205\ Another of 
these commenters stated that the baseline cost of the proposed federal 
requirements may prevent state policy makers from adding investor 
protection provisions that the states consider to be more effective due 
to the cumulative compliance burden.\206\ In addition, the 2015 Small 
Business Forum recommended that the Commission remove the $5 million 
limit in the proposal, permitting the states to set their own limits as 
appropriate.\207\
---------------------------------------------------------------------------

    \201\ See ABA Letter; Letter from Rutheford B. Campbell, Jr., 
Spears-Gilbert Professor of Law, University of Kentucky College of 
Law, March 30, 2016 (``Campbell Letter''); CFIRA Letter; 
Congressional Letter (``the states are better positioned to 
determine offering and investment caps that best meet their local 
population and business needs''); CrowdCheck Letter; Guzik Letter; 
Milken Letter; NASAA Letter; NextSeed Letter; WBA Letter.
    \202\ See, e.g., ABA Letter; Campbell Letter; CFIRA Letter; 
Congressional Letter; CrowdCheck Letter; Guzik Letter; NASAA Letter; 
WBA Letter.
    \203\ ABA Letter; Campbell Letter; CFIRA Letter; CrowdCheck 
Letter; Guzik Letter; Milken Letter; NASAA Letter; NextSeed Letter; 
WBA Letter.
    \204\ NASAA Letter.
    \205\ Guzik Letter.
    \206\ Milken Letter.
    \207\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

    A few commenters stated that, if the proposed limits were retained, 
any limit on the amount a company can raise under Rule 147 should be 
indexed for inflation,\208\ with one of these commenters suggesting an 
automatic, periodic review of any such limits.\209\ One commenter 
strongly encouraged the Commission to raise the offering limit 
significantly.\210\ Two commenters believed that, if the proposed 
limits were retained, Rule 147 should be amended to require that the 
offering, not the state exemption, be limited to no more than $5 
million in order to allow issuers to rely upon existing state law 
exemptions.\211\ One of these commenters also suggested that, if the 
proposed investment limits were retained, the Commission should 
establish them as direct requirements of amended Rule 147 and should 
only apply them to non-accredited investors.\212\
---------------------------------------------------------------------------

    \208\ ABA Letter; NASAA Letter; Milken Letter.
    \209\ NASAA Letter.
    \210\ WBA Letter.
    \211\ Bishop Letter; WBA Letter.
    \212\ WBA Letter.
---------------------------------------------------------------------------

c. Final Rules
    Given the comments received, the recommendations of the 2015 Small 
Business Forum and the intrastate nature of the offerings, we are not 
limiting amended Rule 147 and new Rule 147A to offerings that either 
are registered in the state where all of the purchasers are resident or 
that are conducted pursuant to an exemption from state law registration 
in a state that limits the amount of securities an issuer may sell 
pursuant to such exemption to no more than $5 million in a twelve-month 
period and that limits the amount of securities an investor can 
purchase in any such offering. Consistent with the policy underlying 
Section 3(a)(11), we believe it appropriate that the resident investor 
protections in intrastate offerings primarily flow from the 
requirements of state securities law. For example, as with the federal 
securities laws, states generally require an issuer to register an 
offering with appropriate state authorities when offers or sales of 
securities are made to their residents, unless the state has adopted, 
by rule or statute, an exemption from registration. As noted in the 
Proposing Release, of the states that have adopted and/or enacted 
crowdfunding provisions that require an issuer to comply with Rule 147, 
either alone or in conjunction with Section 3(a)(11), no state has 
adopted and/or enacted a crowdfunding provision with an aggregate 
offering amount that exceeds $5 million.\213\ Additionally, almost all 
of these states have adopted provisions that impose investment 
limitations on investors.
---------------------------------------------------------------------------

    \213\ See http://www.nasaa.org/industry-resources/corporation-
finance/instrastate-crowdfunding-resource-center/intrastate-
crowdfunding-directory/. Illinois is the only state with a 
crowdfunding provision allowing for a maximum aggregate offering 
amount up to $5 million in a twelve-month period. All other states 
that have adopted some form of a state-based crowdfunding provision 
limit the aggregate offering amount to between $1 million and $2.5 
million. See Illinois House Bill 3429, Sec.  4.T. (2015), available 
at https://legiscan.com/IL/text/HB3429/id/1257029.
---------------------------------------------------------------------------

    In light of these existing limitations in state exemptions and the 
fact that all commenters opposed our proposed limits at the federal 
level on offering size and investment size, we are not adopting the 
proposed federal limits on state exemptions. As commenters noted, 
states can decide whether to adopt requirements not specifically 
contemplated by the federal requirements that are consistent with their 
respective interests in facilitating capital formation and protecting 
their resident investors in intrastate securities offerings within 
their jurisdiction.\214\ If any states determine to amend their 
statutes and/or rules to require compliance with new Rule 147A, those 
states can consider whether any additional requirements should be 
adopted at the state level given their interest in regulating local 
offerings within their jurisdiction. Moreover, in addition to state 
securities law requirements, issuers will continue to be subject to the 
antifraud and civil liability provisions of the federal securities 
laws.
---------------------------------------------------------------------------

    \214\ States currently employ this approach to varying degrees 
in their respective state crowdfunding statutes. See, e.g., D.C. 
Mun. Regs. tit. 26-B, Sec.  250 (2014) (escrow required until 
minimum offering amount satisfied), Ind. Code Sec.  6-3.1-24-14 
(2014) (funding portal required).
---------------------------------------------------------------------------

C. Additional Considerations

    In addition to soliciting specific comments on the proposals, we 
also solicited general comments, including additional or different 
revisions to the rules and other matters that may impact the proposals.
1. Notice Filings
    Commenters were divided on whether to require issuers utilizing the 
exemption to make a notice filing with the Commission. While one 
commenter specifically stated that additional federal administrative 
obligations, such as new minimum disclosure or delivery requirements, 
registration and/or additional filings with the Commission, should not 
be imposed on issuers for

[[Page 83510]]

conducting intrastate crowdfunding,\215\ another commenter recommended 
that the Commission require issuers utilizing Rule 147 to file a notice 
with the Commission, but (similar to Regulation D) the exemption should 
not be conditioned on the filing.\216\ Given the local intrastate 
nature of the exemptions, we continue to believe that the limited 
benefits of a notice filing with the Commission would not justify the 
costs and burdens on issuers to add such a requirement. We note, 
however, that states could make a notice filing (at the state level) a 
condition to any state law exemption.\217\ In this regard, we note that 
a vast majority of intrastate crowdfunding provisions require a notice 
filing with a state regulator.\218\ Commission staff will seek to 
collaborate with state regulators to consider filing data in connection 
with the study of amended Rule 147 and new Rule 147A.\219\
---------------------------------------------------------------------------

    \215\ NextSeed Letter.
    \216\ Campbell Letter.
    \217\ See NASAA Letter.
    \218\ E.g., Alabama, Arizona, Colorado, Delaware, Florida, 
Georgia, Idaho, Illinois, Iowa, Indiana, Kansas, Kentucky, Maine, 
Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, 
Nebraska, New Mexico, North Carolina, Oregon, South Carolina, 
Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin, 
Wyoming and the District of Columbia. Other states have pending 
legislation that would require notice filings for intrastate 
crowdfunded offerings, e.g., California, Hawaii, Missouri, Nevada, 
and New Hampshire.
    \219\ See Section I above.
---------------------------------------------------------------------------

2. Intrastate Broker Dealer Exemption
    Exchange Act Section 15(a)(1) exempts from broker-dealer 
registration requirements under Section 15(b) a broker-dealer whose 
business is exclusively intrastate and who does not use any facility of 
a national securities exchange (``intrastate broker-dealer 
exemption'').\220\ Several commenters supported interpreting the 
intrastate broker-dealer exemption under the Exchange Act to include 
intermediaries whose activities are limited to facilitating intrastate 
offerings using the Internet.\221\ One commenter was concerned that 
intrastate intermediaries operating exclusively online may not qualify 
for the intrastate exemption from registration if they post information 
on the Internet and it is accessed by out-of-state residents.\222\ The 
commenter, therefore, suggested that the Commission clarify that an 
entity will not relinquish its ability to rely on the intrastate 
broker-dealer exemption solely because it has a web presence, as long 
as it continues to operate and conduct sales intrastate.\223\ Two 
commenters similarly suggested that intrastate intermediaries should be 
able to rely on the intrastate broker-dealer exemption from broker-
dealer registration if they use the Internet to facilitate offerings 
being conducted in reliance on Rule 147.\224\
---------------------------------------------------------------------------

    \220\ Under Section 15(a)(1) of the Exchange Act, it is 
generally unlawful for any broker or dealer to use any means or 
instrumentality of interstate commerce to effect any transaction in, 
or to induce or attempt to induce the purchase or sale of, any 
security (other than an exempt security) unless the broker or dealer 
is registered with the Commission. Section 15(a)(1) provides an 
exemption from registration for ``a broker or dealer whose business 
is exclusively intrastate and who does not make use of any facility 
of a national securities exchange.''
    \221\ See NASAA Letter; NextSeed Letter; WBA Letter. The 
commenters were focused, in particular, on intermediaries that 
facilitate intrastate crowdfunding offerings using the Internet.
    \222\ NASAA Letter. This commenter noted that an SEC staff Guide 
to Broker-Dealer Registration indicates that information posted on 
the Internet that is accessible by persons in another state would be 
considered an interstate offer of securities and would require 
federal broker-dealer registration. See id. See also Guide to 
Broker-Dealer Registration, Division of Trading and Markets, U.S. 
Securities and Exchange Commission (Apr. 2008), available at https:/
/www.sec.gov/divisions/marketreg/bdguide.htm. The Commission has not 
previously spoken to this issue, and the guidance in this release is 
intended to take into account modern business practices of broker-
dealers and clarify the permissibility of the use of the Internet by 
broker-dealers relying on the intrastate broker-dealer exemption. To 
the extent the staff guidance is inconsistent, it is superseded.
    \223\ See NASAA Letter. The commenter also suggested that 
intrastate broker-dealers be permitted to advertise and use the 
Internet without having to register with the Commission so long as 
they used certain disclaimers. Id.
    \224\ NextSeed Letter (``[S]tate crowdfunding intermediaries 
should be permitted to use the internet to facilitate intrastate 
crowdfunding offerings pursuant to Rule 147 and still be able to 
rely on the intrastate broker-dealer exemption.''); WBA Letter (``If 
crowdfunding offerings conducted in accordance with amended Rule 147 
are intrastate in nature, then state crowdfunding portals which 
exclusively host such offerings should be deemed to conduct 
`exclusively intrastate' business under [Section] 15(a)(1).'').
---------------------------------------------------------------------------

    We agree with the commenters that it would be helpful to provide 
guidance regarding the use of the Internet by a person that seeks to 
rely on the intrastate broker-dealer exemption.\225\ In providing this 
guidance, we are seeking to take into account the contemporary business 
practices of broker-dealers, which have evolved over the years to 
include as a routine matter the use of the Internet as an essential 
tool in conducting business. As noted elsewhere, the actions we are 
taking today are intended to facilitate capital formation, while 
maintaining appropriate investor protections. We believe that a broker-
dealer whose business otherwise meets the requirements of the 
intrastate broker-dealer exemption should not cease to qualify for the 
intrastate broker-dealer exemption solely because it has a Web site 
that may be viewed by out-of-state persons, so long as the broker-
dealer takes measures reasonably designed to ensure that its business 
remains exclusively intrastate.\226\ The use of disclaimers clearly 
indicating that the broker-dealer's business is exclusively intrastate 
and that the broker-dealer can only act for or with, and provide 
broker-dealer services to, a person in its state could be one means 
reasonably designed to ensure that the broker-dealer's business remains 
exclusively intrastate so long as the broker-dealer does not provide 
brokerage services to a person that indicates that it is, or that the 
broker-dealer has reason to believe is, not within the broker-dealer's 
state of residence.\227\ These measures are not

[[Page 83511]]

intended to be exclusive. A broker-dealer could adopt other measures 
reasonably designed to ensure that it does not provide brokerage 
services to persons that are not within the same state as the broker-
dealer. We do not believe, however, that an intermediary's business 
would be ``exclusively intrastate'' if it sold securities or provided 
any other brokerage services to a person that indicates that it is, or 
that the broker-dealer has reason to believe is, not within the broker-
dealer's state of residence.\228\ We believe that this guidance will 
facilitate capital formation by smaller companies while maintaining 
appropriate protections for investors.\229\ This guidance also is 
consistent with, and will further, the goal of modernizing our rules to 
comport with contemporary business practices.
---------------------------------------------------------------------------

    \225\ Although commenters focused on broker-dealers who 
facilitate intrastate crowdfunding offerings, we are providing more 
general guidance not limited to offerings relying upon intrastate 
crowdfunding provisions under state law.
    \226\ As noted, Section 15(a)(1) of the Exchange Act provides an 
exemption from registration for ``a broker or dealer whose business 
is exclusively intrastate.'' Our guidance today is intended to 
provide clarity regarding when a broker-dealer's business will be 
``exclusively intrastate'' in connection with its use of the 
Internet. As discussed in this section of this release, a broker-
dealer with a Web site that may be viewed by an out-of-state person 
may still be able to rely on the intrastate exemption if the broker-
dealer implements measures reasonably designed to ensure that its 
business remains exclusively intrastate. This guidance is separate 
and apart from the question of whether a security may be offered and 
sold on the broker-dealer's Web site in reliance on an exemption 
from registration under Section 5 of the Securities Act. In this 
regard, we note that an offer in the context of the Securities Act 
has generally been defined broadly, and the considerations involved 
in determining whether an offer includes an impermissible general 
solicitation are necessarily distinct from the considerations as to 
whether a broker-dealer's activities occur exclusively within a 
single state. Therefore, a broker-dealer facilitating an offering 
pursuant to an exemption from registration under the Securities Act 
should be careful not to engage in activity that would compromise 
the issuer's ability to rely on the applicable exemption to 
Securities Act Section 5. See, e.g., Rules 147 and 147A, including 
paragraphs (d) and (f) and the Instruction to paragraph (d).
    \227\ This guidance is consistent with the concepts articulated 
in prior Commission guidance for foreign broker-dealers. See 
Interpretation: Re: Use of Internet Web sites to Offer Securities, 
Solicit Securities Transactions, or Advertise Investment Services 
Offshore, SEC Rel. No. 33-7516 (Mar. 23, 1998) (``Offshore 
Interpretation''). In the Offshore Interpretation, the Commission 
stated that it would not consider a foreign broker-dealer's 
advertising on an Internet Web site to constitute an attempt to 
induce a securities transaction with U.S. persons if the foreign 
broker-dealer takes measures reasonably designed to ensure that it 
does not effect securities transactions with U.S. persons as a 
result of its Internet activities. The Commission further stated 
that, as applied in the broker-dealer context, a foreign broker-
dealer generally would be considered to have taken measures 
reasonably designed to ensure it does not effect securities 
transactions with U.S. persons as a result of its Internet 
activities if it: (i) Posts a prominent disclaimer on the Web site 
either affirmatively delineating the countries in which the broker-
dealer's services are available, or stating that the services are 
not available to U.S. persons; and (ii) refuses to provide brokerage 
services to any potential customer that the broker-dealer has reason 
to believe is, or that indicates that it is, a U.S. person, based on 
residence, mailing address, payment method, or other grounds.
    \228\ See, e.g., In the Matter of Professional Investors, Inc., 
37 SE.C. 173, 175-176 (1956) (indicating that a broker-dealer that 
effected transactions on national securities exchanges for its 
customers and its own account and, as an underwriter, sold stock on 
behalf of an out-of-state issuer no longer had an exclusively 
intrastate business and the intrastate exemption from registration 
as a broker-dealer was therefore not available); Peoples Securities 
Company, 39 SE.C. 641, 652-653 (1960) (stating that a broker-
dealer's business was not exclusively intrastate based on its 
interstate activities, which included sales of securities to out-of-
state residents), aff'd sub nom. Peoples Securities Co. v. SE.C., 
289 F.2d 268 (C.A. 5, 1961).
    \229\ Commission staff expects to consider the role of 
intrastate broker-dealers and other intermediaries in offerings 
under amended Rule 147 or new Rule 147A in connection with its 
study. See Section I above.
---------------------------------------------------------------------------

3. Section 12(g) Registration
    Several commenters recommended exempting securities issued in 
reliance upon Rule 147 from the reporting requirements of Section 12(g) 
of the Exchange Act.\230\ Most of these commenters asserted that the 
Rule 147 exemption would be of limited utility if the securities were 
not exempted from Section 12(g).\231\ In addition, the 2015 Small 
Business Forum recommended that the Commission provide a permanent 
exemption from Section 12(g) registration under the Exchange Act for 
securities sold in a Rule 147 offering.\232\ As amended by the JOBS 
Act, Section 12(g) requires, among other things, that an issuer with 
total assets exceeding $10,000,000 and a class of securities held of 
record by either 2,000 persons or 500 persons who are not accredited 
investors to register such class of securities with the 
Commission.\233\
---------------------------------------------------------------------------

    \230\ CFIRA Letter; CrowdCheck Letter; Guzik Letter; Milken 
Letter; City of Adrian Letter.
    \231\ CFIRA Letter; CrowdCheck Letter; Guzik Letter; City of 
Adrian Letter.
    \232\ See 2015 Small Business Forum Recommendations.
    \233\ See Section 501 of the JOBS Act. See also 17 CFR 240.12g-
1. In the case of an issuer that is a bank, a savings and loan 
holding company or a bank holding company, Exchange Act Section 
12(g)(1)(B) (15 U.S.C. 78l(g)(1)(B)) requires, among other things, 
that the issuer, if it has total assets exceeding $10,000,000 and a 
class of securities held of record by 2,000 persons, register such 
class of securities with the Commission. See Section 601 of the JOBS 
Act and Section 85001 of the FAST Act. See also 17 CFR 240.12g-1.
---------------------------------------------------------------------------

    Section 12(g) was originally enacted by Congress as a way to ensure 
that purchasers of 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.\234\ 
Unlike Tier 2 offerings under Regulation A \235\ or Regulation 
Crowdfunding,\236\ where the Commission provided conditional exemptions 
from registration under Section 12(g), issuers that utilize the 
exemptions under amended Rule 147 or new Rule 147A will not be required 
to comply with ongoing reporting requirements. Given the lack of 
ongoing reporting requirements, we believe that the Section 12(g) 
record holder and asset thresholds continue to provide an important 
baseline above which issuers should generally be subject to the 
disclosure obligations of the Exchange Act. As the shareholder base of 
these issuers and their total assets grow, we believe that the 
additional protections that will be provided by registration under 
Section 12(g) are necessary and appropriate.
---------------------------------------------------------------------------

    \234\ 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.
    \235\ See 2015 Regulation A Release at Section II.B.6.
    \236\ See Regulation Crowdfunding Adopting Release at Section 
II.E.4.
---------------------------------------------------------------------------

4. Exclusion of Investment Companies
    In the proposing release, we asked whether we should leave existing 
Rule 147 in place and unchanged as a safe harbor under Section 3(a)(11) 
while adopting the proposed revisions to Rule 147 as a new rule, and if 
so, whether we should make any additional changes to the proposed rule. 
One commenter that recommended retaining the existing Rule 147 safe 
harbor and adopting a new exemption also recommended that the new 
exemption exclude investment companies subject to the Investment 
Company Act of 1940 (the ``Investment Company Act''),\237\ including 
private equity funds, from relying upon Rule 147.\238\ Under Section 
24(d) of the Investment Company Act,\239\ the Section 3(a)(11) 
exemption is not available for an investment company registered or 
required to be registered under the Investment Company Act.\240\ Since 
we are retaining Rule 147 as a safe harbor under Section 3(a)(11), Rule 
147 will continue to be unavailable for an investment company 
registered or required to be registered under the Investment Company 
Act. To provide a consistent treatment between Rule 147 and new Rule 
147A, we are specifically excluding an issuer that is an investment 
company registered or required to be registered under the Investment 
Company Act from relying on Rule 147A.\241\ As described above, the 
final rules maintain a consistent approach across the two intrastate 
offering exemptions, where possible, including with respect to issuer 
eligibility. In addition, this same commenter also recommended 
excluding other types of issuers from Rule 147.\242\ Since these other 
types of issuers are not excluded from existing Rule 147 and because we 
believe that, absent specific Congressional direction or evidence of 
abuse, the states should have the discretion to determine whether any 
additional restrictions are appropriate for offerings conducted 
exclusively within their jurisdiction, we

[[Page 83512]]

are not amending Rule 147 or including a provision in Rule 147A to 
exclude other types of issuers from these provisions.
---------------------------------------------------------------------------

    \237\ 15 U.S.C. 80a-1 et seq.
    \238\ NASAA Letter.
    \239\ 15 U.S.C. 80a-24(d).
    \240\ See 1961 Release at note 1.
    \241\ See Rule 147A(a). Investment companies are companies that 
are registered or required to be registered under the Investment 
Company Act. 15 U.S.C. 80a-1 et seq. Private funds (including 
private equity funds and other pooled investment vehicles) generally 
rely on the exclusions from the definition of ``investment company'' 
in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. See 15 
U.S.C. 80a-3(c). Private funds are precluded from relying on either 
of these exclusions if they make a public offering of their 
securities. Id. Accordingly, if such a private fund engaged in a 
public offering of its securities, that private fund would no longer 
be able to rely on the applicable exclusion under Section 3(c)(1) or 
(7) and thus would be required to be registered under the Investment 
Company Act, unless another exclusion or exemption is available. As 
a result, the private fund would be an ``investment company'' for 
purposes of Section 24(d) and would be excluded from the Section 
3(a)(11) exemption and safe harbor of existing Rule 147.
    \242\ Specifically, NASAA also recommended excluding the 
following types of issuers from the exemption: holding companies 
(i.e., companies whose principal purpose is owning stock in, or 
supervising the management of, other companies); blind pools; 
commodity pools; public companies reporting under the Exchange Act; 
and blank check companies (i.e., development stage companies that 
either 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 or other entity or 
person).
---------------------------------------------------------------------------

5. Trust Indenture Act
    Two commenters supported exempting securities issued in reliance 
upon Rule 147, as proposed to be amended, from the Trust Indenture Act 
of 1939.\243\ Rule 147 offerings are exempt from the Trust Indenture 
Act pursuant to Section 304(a)(4) which exempts any security issued in 
reliance on Section 3(a)(11) of the Securities Act.\244\ Since the 
Trust Indenture Act applies to any debt security sold through the use 
of the mails or interstate commerce, including debt securities sold in 
transactions that are exempt from Securities Act registration, the 
issuance of a debt security under new Rule 147A, as a new exemption not 
under Section 3(a)(11), raises questions about the applicability of the 
Trust Indenture Act. We note, however, that Trust Indenture Act Section 
304(a)(8) \245\ and Rule 4a-1 \246\ provide an exemption for the 
issuance of up to $50 million of debt securities without an indenture 
in any 12-month period. Given the existing exemption for up to $50 
million of debt securities, we do not believe that a specific exemption 
from the requirements of the Trust Indenture Act for offerings of debt 
securities under Rule 147A is necessary at this time.
---------------------------------------------------------------------------

    \243\ NextSeed Letter; WBA Letter.
    \244\ 15 U.S.C. 77ddd(a)(4).
    \245\ 15 U.S.C. 77ddd(a)(8).
    \246\ 17 CFR 260.4a-1.
---------------------------------------------------------------------------

6. Other Requirements
    Two commenters recommended that the Commission work with the states 
to encourage, or amend Rule 147 in a way that encourages, issuers to 
use any U.S. escrow agent, as opposed to using only escrow agents 
registered in the state of the offering, which is often a requirement 
of state law.\247\ Another commenter recommended amending Rule 147 to 
include bad actor disqualification provisions similar to those set 
forth under Rule 506(d).\248\
---------------------------------------------------------------------------

    \247\ City of Adrian Letter; Localstake Letter.
    \248\ NASAA Letter.
---------------------------------------------------------------------------

    As noted elsewhere, the amendments we are adopting today are 
intended to facilitate capital formation, while maintaining appropriate 
investor protections and providing state securities regulators with the 
flexibility to add additional investor protections they deem 
appropriate for offerings within their state. Moreover, a broad 
consensus of commenters opposed additional requirements for exempt 
intrastate offerings beyond those currently contemplated by our 
rules.\249\ State legislatures and/or securities regulators have a 
significant interest in intrastate offerings made to their residents 
and therefore may wish to impose, and are uniquely positioned to 
determine, additional requirements they deem necessary or appropriate 
for the protection of their residents. Consistent with our approach to 
other aspects of the final rules, we believe it is appropriate in these 
circumstances to defer to the states regarding which, if any, of the 
additional provisions recommended by commenters should supplement the 
federal rules. In this regard, we note that bad actor disqualification 
provisions are a feature of most state crowdfunding exemptions.\250\ In 
addition, a majority of states have adopted the Uniform Limited 
Offering Exemption (``ULOE''), or a variant of that uniform 
exemption.\251\ The ULOE includes a bad actor disqualification 
provision.\252\ Other state exemptions include bad actor 
disqualification provisions,\253\ and the small corporate offering 
registration (``SCOR'') program \254\ also contemplates 
disqualification of an issuer or any of its officers, directors, 
principal stockholders or promoters because of prior violations of the 
securities laws. We believe that state and federal regulators share an 
interest in collaborative efforts that facilitate capital formation and 
investor protection. Accordingly, Commission staff will seek to 
collaborate with state regulators to review data on the application of 
state bad actor disqualification provisions in offerings conducted 
pursuant to amended Rule 147 or new Rule 147A to inform whether the 
Commission should consider including bad actor disqualification 
provisions in Rules 147 and 147A.\255\
---------------------------------------------------------------------------

    \249\ See Section II.B.7 above.
    \250\ See NASAA Letter. See, e.g., Alabama, Arizona, Colorado, 
Florida, Georgia, Idaho, Illinois, Iowa, Indiana, Kansas, Kentucky, 
Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana, 
Nebraska, New Jersey, New Mexico, North Carolina, Oregon, South 
Carolina, Tennessee, Texas, Vermont, Washington, Wisconsin and the 
District of Columbia.
    \251\ See, e.g., Alabama, Arizona, Colorado, Georgia, Illinois, 
Iowa, Kansas, Louisiana, Massachusetts, Maryland, Mississippi, 
Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, 
Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, 
Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming and 
the District of Columbia. The Uniform Limited Offering Exemption was 
adopted by NASAA in 1983 and again in 1989 (available from the NASAA 
Web site at http://www.nasaa.org/wp-content/uploads/2011/07/UNIFORM-
LIMITED-OFFERING-EXEMPTION.pdf).
    \252\ See Section 1.B of the ULOE.
    \253\ See, e.g., the Model Accredited Investor Exemption 
(available from the NASAA Web site at http://www.nasaa.org/wp-
content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf), 
as well as other state exemptions such as the Small Issuer Exemption 
in Pennsylvania, 10 Pa. Code Sec.  203.187, and the Small Offering 
Exemption in Washington, WAC 460-44A-504.
    \254\ Forty-three states, the District of Columbia and the 
Commonwealth of Puerto Rico have adopted some form of the SCOR 
program or recognize the filing of Form U-7 (also referred to as 
uniform limited offering registration (``ULOR'')). See CCH Blue Sky 
Law Reporter, Blue Sky Findings Lists, Small Corporate Offering 
Registration Program and Form U-7, ] 6461 (2016). SCOR and Form U-7 
were developed by NASAA as a registration format for companies 
registering securities under state securities laws when relying upon 
an exemption from Securities Act registration, including Rule 504. A 
company may not use the SCOR Form to offer and sell its securities 
if the company or any of its officers, directors, principal 
stockholders or promoters are disqualified because of prior 
violations of the securities laws. A company also may not use 
salespersons who are disqualified because of prior violations of the 
securities laws. See SCOR Overview, available from the NASAA Web 
site at http://www.nasaa.org/industry-resources/corporation-finance/
scor-overview/.
    \255\ See Section I above.
---------------------------------------------------------------------------

III. Amendments to Rules 504 and 505 of Regulation D

A. Overview of Rules 504 and 505

    Rule 504 \256\ of Regulation D provides issuers with an exemption 
from registration for offers and sales of up to $1 million of 
securities in a twelve-month period, provided that the issuer is not:
---------------------------------------------------------------------------

    \256\ 17 CFR 230.504.
---------------------------------------------------------------------------

     Subject to reporting pursuant to Section 13 or 15(d) of 
the Exchange Act; \257\
---------------------------------------------------------------------------

    \257\ 17 CFR 230.504(a)(1).
---------------------------------------------------------------------------

     an investment company; \258\ or
---------------------------------------------------------------------------

    \258\ 17 CFR 230.504(a)(2).
---------------------------------------------------------------------------

     a development stage company that either has no specific 
business plan or purpose or that has indicated that its business plan 
is to engage in a merger or acquisition with an unidentified company or 
companies (``blank check company'').\259\
---------------------------------------------------------------------------

    \259\ 17 CFR 230.504(a)(3).
---------------------------------------------------------------------------

    Additionally, Rule 504 imposes certain conditions, including 
limitations on the use of general solicitation or general advertising 
in the offering and the restricted status of securities issued pursuant 
to the exemption, with limited exceptions for offers and sales made:
     Exclusively in one or more states that provide for the 
registration of the securities, and require the public filing and 
delivery to investors of a substantive disclosure document before sale, 
and are made in accordance with state law requirements;
     in one or more states that have no provision for the 
registration of the securities or the public filing or delivery

[[Page 83513]]

of a disclosure document before sale, if the securities have been 
registered in at least one state that provides for such registration, 
public filing and delivery before sale, offers and sales are made in 
that state in accordance with such provisions, and the disclosure 
document is delivered before sale to all purchasers (including those in 
the states that have no such procedure); or
     exclusively according to state law exemptions from 
registration that permit general solicitation and general advertising 
so long as sales are made only to ``accredited investors'' as defined 
in Rule 501(a) of Regulation D.\260\
---------------------------------------------------------------------------

    \260\ 17 CFR 230.504(b)(1). State exemptions of this nature 
include those based upon the ``Model Accredited Investor 
Exemption,'' which was adopted by NASAA in 1997. CCH NASAA Reporter 
Para. 361. Generally, the model rule exempts offers and sales of 
securities from state registration requirements, if among other 
matters, the securities are sold only to persons who are, or are 
reasonably believed to be, ``accredited investors'' as defined in 
Rule 501(a) of Regulation D, 17 CFR 230.501(a). The model rule 
restricts transfer of the securities for 12 months after issuance 
except to other accredited investors or if registered. General 
solicitations by any means under that provision are generally 
limited to a type of ``tombstone'' ad. See Model Accredited Investor 
Exemption, available from the NASAA Web site at http://
www.nasaa.org/wp-content/uploads/2011/07/24-
Model_Accredited_Investor_Exemption.pdf.
---------------------------------------------------------------------------

    Rule 504, together with Rules 505 and 506, comprise the Securities 
Act exemptions and safe harbor in Regulation D.\261\ Regulation D 
offerings are exempt from the registration requirements of the 
Securities Act. Offerings conducted pursuant to Rule 504 or Rule 505, 
however, must be registered in each state in which they are offered or 
sold unless an exemption to state registration is available under state 
securities laws.\262\ The vast majority of states have adopted a 
uniform registration form for offerings relying upon Rule 504.\263\ One 
state, however, recently adopted a form of state-based crowdfunding 
that permits the use of general solicitation but has provided for an 
abbreviated state registration procedure where, in addition to 
following various state-specific requirements for registration, an 
issuer also complies with Rule 504 of Regulation D.\264\ Additionally, 
offerings conducted pursuant to Rules 505 and 506 are subject to bad 
actor disqualification provisions, while offerings conducted pursuant 
to Rule 504 are not subject to such provisions.\265\
---------------------------------------------------------------------------

    \261\ 17 CFR 230.500 through 508. Rules 501 through 503 contain 
definitions, conditions, and other provisions that apply generally 
throughout Regulation D. Rules 504, 505 and 506(c) are exemptions 
from registration under the Securities Act, while Rule 506(b) is a 
``safe harbor'' for compliance with the non-public offering 
exemption in Section 4(a)(2) of the Securities Act. Rule 507 
disqualifies issuers from relying on Regulation D, under certain 
circumstances, for failure to file a Form D notice. Rule 508 
provides a safe harbor for certain insignificant deviations from a 
term, condition, or requirement of Regulation D.
    \262\ Section 18(b)(4)(D) of the Securities Act provides 
``covered security'' status to all securities sold in transactions 
exempt from registration under Commission rules promulgated under 
Section 4(a)(2), which includes Rule 506 of Regulation D. Covered 
security status under Section 18 provides for the preemption of 
state securities laws registration and qualification requirements 
for offerings of such securities. In comparison, securities issued 
pursuant to either Rules 504 or 505 are not covered securities as 
these two exemptions are adopted pursuant to the Commission's 
authority under Section 3(b)(1) of the Securities Act.
    \263\ See note 254 above.
    \264\ Of the 34 states and the District of Columbia that have 
adopted intrastate crowdfunding provisions, only Maine allows an 
issuer to rely upon Rule 504 of Regulation D where the issuer is 
required to file with the Maine securities regulator in an 
abbreviated registration procedure. See Me. Rev. Stat. tit. 32, 
Sec.  16304(6-A)(D) (2013).
    \265\ See Rule 505(b)(2)(iii), 17 CFR 230.505(b)(2)(iii), and 
Rule 506(d), 17 CFR 230.506(d), of Regulation D.
---------------------------------------------------------------------------

B. Amendments to Rule 504

1. Proposed Amendments to Rule 504
    In an effort to facilitate capital formation, including 
facilitating the development of comprehensive regional coordinated 
review programs at the state level, and enhance investor protection, we 
proposed to increase the aggregate amount of securities that may be 
offered and sold in any twelve-month period pursuant to Rule 504 from 
$1 million to $5 million and to disqualify certain bad actors from 
participation in Rule 504 offerings. We further proposed a technical 
amendment to Rules 504 and 505 to account for the re-designation of 
Securities Act Section 3(b) as Section 3(b)(1) that occurred as a 
result of the enactment of the JOBS Act in 2012.\266\ Additionally, to 
account for the proposed increase in the Rule 504 aggregate offering 
amount limitation, we proposed technical amendments to the notes to 
Rule 504(b)(2) that would update the current illustrations in the rule 
regarding how the aggregate offering limitation is calculated in the 
event that an issuer sells securities pursuant to Rule 504 and Rule 505 
within the same twelve-month period.\267\
---------------------------------------------------------------------------

    \266\ Public Law 112-106, 126 Stat. 306.
    \267\ See proposed Notes 1 and 2 to Rule 504(b)(2). See also 17 
CFR 230.504(b)(2).
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments to Rule 504
    Many commenters supported, and no commenters opposed, increasing 
the Rule 504 offering amount limit from $1 million to $5 million.\268\ 
These commenters stated that increasing the offering amount limit will 
allow more small businesses to use this capital raising tool, better 
satisfying the needs of these businesses for capital formation and 
helping to facilitate multi-state offerings.\269\ Several commenters 
stated that Rule 504 is currently being underutilized, in part, due to 
the low offering amount limit of $1 million and the erosion of the 
dollar's value due to inflation since the offering amount limit was 
last raised in 1988 from $500,000 to $1 million.\270\ As Rule 504 
allows issuers to conduct an offering in multiple states and provides 
an opportunity for states to coordinate a regional review of the 
offering, commenters stated that an increase in the Rule 504 offering 
amount limit will encourage new interstate, regional approaches to 
crowdfunding and other small business offerings and will provide 
greater utility to a regional review of those offerings.\271\ Two 
commenters stated that the offering amount limit should be increased to 
$10 million in order to offset the significant compliance costs 
involved in state registration and review.\272\ In addition, the 2015 
Small Business Forum recommended that the Commission increase the 
proposed limit on Rule 504 to $10 million, permitting the states to set 
their own limit as appropriate.\273\ Another commenter stated that Rule 
504 should be automatically indexed for inflation in order to preserve 
the utility of the rule from the erosion of the dollar's value in real 
terms.\274\ Two commenters stated the Commission should use its general 
exemptive

[[Page 83514]]

authority under Section 28 for future increases in the Rule 504 
offering limitation.\275\ Several commenters also supported, and no 
commenters opposed, amending Rule 504 to include bad actor 
disqualification provisions to provide a more uniform set of bad actor 
triggering events across Regulation D.\276\
---------------------------------------------------------------------------

    \268\ ABA Letter; CFA Letter; CFIRA Letter; CrowdCheck Letter; 
Milken Letter; NASAA Letter.
    \269\ Id.
    \270\ ABA Letter; Milken Letter; NASAA Letter.
    \271\ NASAA Letter (``Maine currently permits interstate 
crowdfunding under the federal exemption in Rule 504 and Mississippi 
and Vermont dually offer intrastate crowdfunding under Section 
3(a)(11) and interstate crowdfunding under Rule 504. Many other 
states are presently exploring a dual option for crowdfunding, 
including additional regional review programs under Rule 504.''). 
See also CFA Letter.
    \272\ CrowdCheck Letter (``Having recently gone through the 
coordinated review process in the context of a Regulation A 
offering, we believe that the compliance cost involved in state 
registration and review is significant, and Rule 504 will only be of 
interest to issuers if they can raise enough capital to offset this 
burden.''); CFIRA Letter.
    \273\ See 2015 Small Business Forum Recommendations.
    \274\ Milken Letter (``Rule 504's current obsolescence is 
largely a result of the erosion of the dollar's value in real terms 
. . . Indexing would place Rule 504 in a similar position to 
Regulation Crowdfunding offerings where, under Section 4A(h)(1) of 
the 1933 Act the annual dollar amount is to be adjusted for 
inflation at least every five years.'').
    \275\ ABA Letter; Milken Letter.
    \276\ ABA Letter; CFA Letter (``It not only clarifies the 
applicability to new Rule 504 offering limits, but also provides 
consistency across Regulation D.''); CFIRA Letter; CrowdCheck 
Letter; NASAA Letter (``We also strongly support a more uniform set 
of bad actor triggering events across Regulation D . . . as this 
would align with bad actor disqualification provisions already 
included in state crowdfunding exemptions.'').
---------------------------------------------------------------------------

    In response to our solicitation for comment on whether to repeal 
Rule 504(b)(1)(iii) or amend the rule to place limitations on resale, 
one commenter recommended that the Commission not repeal or amend Rule 
504(b)(1)(iii), but retain this provision to provide an environment 
that ``allow[s] the states to experiment'' and innovate in a manner 
that may prove useful for state and federal policy makers.\277\ Rule 
504(b)(1)(iii) provides an exemption from registration for offers and 
sales of securities that are conducted ``according to state law 
exemptions from registration that permit general solicitation and 
general advertising so long as sales are made only to `accredited 
investors' as defined in Rule 501(a).'' Securities sold without 
registration in reliance on this provision are not subject to the 
limitations on resale established in Rule 502(d) and, as such, are not 
``restricted securities'' for purposes of Rule 144(a)(3)(ii). Another 
commenter indicated that ``the Commission should consider amending Rule 
504 to permit resales of securities issued in Rule 504 `public 
offerings' in states where the offering complies with exemptions that 
permit general solicitation or advertising and that require 
dissemination of a state law compliant disclosure document.'' \278\
---------------------------------------------------------------------------

    \277\ Milken Letter (noting that this approach ``will allow for 
innovation in a tightly controlled environment that may prove useful 
for other state and federal policy makers.'').
    \278\ ABA Letter.
---------------------------------------------------------------------------

    One commenter recommended that the Commission exempt securities 
sold under Rule 147 and 504 from the requirements of Section 12(g) of 
the Securities Exchange Act of 1934.\279\ In addition, the 2015 Small 
Business Forum recommended that the Commission provide a permanent 
exemption from Section 12(g) registration under the Exchange Act for 
securities sold in a Rule 504 offering.\280\
---------------------------------------------------------------------------

    \279\ Milken Letter (``Given the expected local nature of Rule 
147 offerings and the likelihood that they will be made to the 
general public for relatively small amounts, it is very possible 
that small companies making even modest offerings would accrue 
sufficient numbers of non-accredited investors to be forced to 
register with the Commission.'').
    \280\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

3. Final Amendments to Rule 504
    The amendments that we are adopting to Rule 504 will raise the 
aggregate amount of securities an issuer may offer and sell in any 
twelve-month period from $1 million to $5 million, which is the maximum 
statutorily allowed under Section 3(b)(1).\281\ The Commission has not 
raised the 12-month aggregate offering amount limit in Rule 504 since 
1988, when the Commission increased the original Rule 504 offering 
amount limit of $500,000 to $1 million.\282\ Adjusted for inflation, 
the $1 million limit in 1988 would equate to approximately $2 million 
today.\283\ We believe the $5 million limit will facilitate issuers' 
ability to raise capital. We also believe that our amendments to 
increase the aggregate offering amount limit in Rule 504 to $5 million 
may bolster efforts among the states to enter into, or revise existing, 
regional coordinated review programs that are designed to increase 
efficiencies associated with the registration of securities offerings 
in multiple jurisdictions without increasing risks to investors. 
Increasing the aggregate offering amount limit from $1 million to $5 
million will also increase the flexibility of state securities 
regulators to set their own limits and to consider whether any 
additional requirements should be implemented at the state level.
---------------------------------------------------------------------------

    \281\ Rules 504 and 505 were adopted pursuant to the 
Commission's small issues exemptive authority under Section 3(b)(1) 
of the Securities Act, which gives the Commission authority to adopt 
an exemption for offerings not exceeding $5 million where the 
Commission believes registration under the Securities Act is not 
necessary by reason of the small amount involved or the limited 
character of the public offering.
    \282\ See SEC Rel. No. 33-6758 (Mar. 3, 1988) [53 FR 7870 (Mar. 
10, 1988)].
    \283\ Annual inflation rates (1988-2015) based on consumer price 
index data, for all urban consumers, obtained from the Bureau of 
Labor Statistics.
---------------------------------------------------------------------------

    Although two commenters and the 2015 Small Business Forum 
recommended that the Commission increase the Rule 504 offering amount 
limit to $10 million, we are not exceeding the maximum offering amount 
permitted under Section 3(b)(1). Although, as several commenters noted, 
we could use our exemptive authority under Section 28 of the Securities 
Act to raise the maximum offering amount above $5 million,\284\ in 
accord with the suggestion of one of those commenters,\285\ we believe 
it appropriate to first observe market activity under a new maximum 
offering amount of $5 million before raising the Rule 504 offering 
limit higher.
---------------------------------------------------------------------------

    \284\ ABA Letter; Milken Letter.
    \285\ ABA Letter (``If the increase to $5 million is adopted, 
after there is experience with the use and operation of new Rule 
504, the Commission may wish to consider using its exemption 
authority under Section 28 to increase the dollar limitation amount 
that may be offered under Rule 504.'').
---------------------------------------------------------------------------

    In conjunction with our increase to the Rule 504 aggregate offering 
amount limit, we are also adopting provisions that will disqualify 
certain bad actors from participation in offerings conducted pursuant 
to the exemption.\286\ We believe that the disqualification provisions 
that we are adopting, which are substantially similar to related 
provisions in Rule 506 of Regulation D,\287\ will create a more 
consistent regulatory regime across Regulation D and provide additional 
protections to investors in Rule 504 offerings.
---------------------------------------------------------------------------

    \286\ See Rule 504(b)(3).
    \287\ See 17 CFR 230.506(d). See also Rule 262 of Regulation A, 
17 CFR 230.262, and Rule 505(b)(2)(iii) of Regulation D, 17 CFR 
230.505(b)(2)(iii).
---------------------------------------------------------------------------

    The Rule 504 disqualification provisions will be implemented by 
reference to the disqualification provisions of Rule 506 of Regulation 
D.\288\ We believe that creating a uniform set of bad actor triggering 
events across the various exemptions from Securities Act registration 
should simplify due diligence, particularly for issuers that may engage 
in different types of exempt offerings. In accordance with the views of 
several commenters,\289\ the bad actor triggering events for Rule 504 
will be substantially similar to existing provisions in Regulation 
D,\290\ Regulation A,\291\ and Regulation Crowdfunding \292\ and will 
apply to the issuer and other covered persons (such as underwriters, 
placement agents, and the directors, officers and significant 
shareholders of the issuer). Consistent with the Commission's treatment 
of disqualification in Rule 506(e),\293\ disqualification will only 
occur for triggering events that occur after effectiveness of any 
amendments, but disclosure will be required for triggering

[[Page 83515]]

events that pre-date effectiveness of any amendments.\294\
---------------------------------------------------------------------------

    \288\ See Rule 504(b)(3), referencing the disqualification 
provisions of Rule 506(d), 17 CFR 230.506(d), and Instruction to 
paragraph (b)(3) of Rule 504, referencing the disclosure provisions 
of Rule 506(e), 17 CFR 230.506(e).
    \289\ CFA Letter; NASAA Letter.
    \290\ See Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17 
CFR 230.505(b)(2)(iii), 230.506(d).
    \291\ See Rule 262 of Regulation A, 17 CFR 230.262.
    \292\ See Rule 503 of Regulation Crowdfunding, 17 CFR 227.503.
    \293\ See 17 CFR 230.506(e).
    \294\ See Rule 504(b)(3).
---------------------------------------------------------------------------

    We also sought public comment on whether additional changes to Rule 
504 should be adopted in the final amendments. In particular, in 
conjunction with the increase in the Rule 504 offering amount limit, we 
contemplated amending the calculation of the aggregate offering limit 
in Rule 504(b)(2). Currently, this rule requires issuers to aggregate 
all securities sold within the preceding 12 months in any transaction 
that is exempt under Section 3(b) or in violation of Section 5(a) of 
the Securities Act for purposes of computing the aggregate offering 
amount under Rule 504.\295\ This rule also includes illustrations of 
how the aggregate offering limit is calculated in the event that an 
issuer sells securities pursuant to Rule 504 and Rule 505 within the 
same twelve-month period.\296\
---------------------------------------------------------------------------

    \295\ 17 CFR 230.504(b)(2); see also 17 CFR 230.505(b)(2).
    \296\ See 17 CFR 230.504(b)(2).
---------------------------------------------------------------------------

    When the current aggregation provisions in Rules 504 and 505 were 
originally adopted in Rule 505's predecessor, Rule 242, the Commission 
noted that aggregating offering amounts across offerings conducted 
pursuant to Section 3(b) was intended to ``limit the potential for the 
issuer to raise large sums by circumventing the registration provisions 
of the Securities Act through multiple offerings pursuant to Section 
3(b).'' \297\ In the intervening years, however, in implementing 
Congressional mandates,\298\ the Commission has increased the number of 
exemptive provisions available to issuers, particularly smaller 
issuers, to raise large sums of capital in a more cost-effective manner 
in offerings that are exempt from registration, while continuing to 
provide appropriate safeguards for investors.\299\ Therefore, we sought 
comment on whether the current requirements for Rule 504(b)(2), as they 
relate to the aggregation of offering proceeds across all offerings 
that are conducted pursuant to Securities Act Section 3(b)(1), should 
be retained in the amendments.\300\
---------------------------------------------------------------------------

    \297\ SEC Rel. No. 33-6180 (Jan. 17, 1980). This provision was 
subsequently carried over into Rule 505 and incorporated into Rule 
504 when Regulation D was adopted by the Commission in 1982. See SEC 
Rel. No. 33-6389 (Mar. 8, 1982); SEC Rel. No. 33-6339 (Aug. 7, 
1981).
    \298\ See JOBS Act, Public Law 112-106, 126 Stat. 306.
    \299\ See, e.g., Regulation A, 17 CFR 230.251 et seq., providing 
non-Exchange Act reporting companies with the option to raise up to 
$20 million annually pursuant to the requirements of Tier 1 and up 
to $50 million annually pursuant to the requirements of Tier 2.
    \300\ We are referring to Section 3(b)(1) instead of Section 
3(b), due to the changes that occurred as a result of the Securities 
Act amendments in Title IV of the JOBS Act.
---------------------------------------------------------------------------

    Although no commenters responded to our request for comment on this 
issue, in light of our repeal today of Rule 505, which is the only 
other existing exemption in Regulation D promulgated under Section 
3(b)(1), we are amending Rule 504(b)(2) to omit any reference to the 
aggregation of offering proceeds across all offerings that are 
conducted pursuant to Section 3(b) of the Securities Act. 
Correspondingly, we are also deleting the related note under Rule 
504(b)(2) illustrating how the aggregate offering amount limitation is 
calculated in the event that an issuer sells securities pursuant to 
Rule 504 and Rule 505 within the same twelve-month period.
    We are also adopting a further technical amendment to the second 
note to Rule 504(b)(2), as proposed. Specifically, we are updating the 
illustration of how the aggregate offering amount limitation is 
calculated to account for the increase to the Rule 504 aggregate 
offering amount limitation from $1 million to $5 million.\301\
---------------------------------------------------------------------------

    \301\ See Instruction to paragraph (b)(2) to Rule 504.
---------------------------------------------------------------------------

    One commenter \302\ and the 2015 Small Business Forum recommended 
that the Commission provide an exemption from Section 12(g) 
registration under the Exchange Act for securities sold in a Rule 504 
offering.\303\ As discussed above, Section 12(g) requires, among other 
things, that an issuer with total assets exceeding $10,000,000 and a 
class of securities held of record by either 2,000 persons, or 500 
persons who are not accredited investors, register such class of 
securities with the Commission.\304\ Unlike Tier 2 offerings under 
Regulation A \305\ or Regulation Crowdfunding,\306\ where the 
Commission provided conditional exemptions from registration under 
Section 12(g), issuers that utilize the exemptions under amended Rule 
504 will not be required to comply with ongoing reporting requirements. 
Given the lack of ongoing reporting requirements under Rule 504, we 
believe that the Section 12(g) record holder and asset thresholds 
continue to provide an important baseline above which issuers should 
generally be subject to the disclosure obligations of the Exchange Act. 
As the shareholder base of these companies and their total assets grow, 
we believe that the additional protections that will be provided by 
registration under Section 12(g) are necessary and appropriate.
---------------------------------------------------------------------------

    \302\ Milken Letter.
    \303\ See 2015 Small Business Forum Recommendations.
    \304\ See note 233 above.
    \305\ See 17 CFR part 251. See also 2015 Regulation A Release at 
Section II.B.6.
    \306\ See 17 CFR 227.100. See also Regulation Crowdfunding 
Adopting Release at Section II.E.4.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission amend Rule 504 to 
permit the resale of securities issued in Rule 504 ``public offerings'' 
in states where the offering complies with exemptions that permit 
general solicitation or advertising and that require a public filing 
and delivery of a state law compliant disclosure document before any 
sales to purchasers.\307\ As discussed above, Rule 504 currently 
permits the resale of securities issued in Rule 504 offerings that 
involve general solicitation or advertising where either the offering 
is registered in one or more states and one or more states require the 
dissemination of a state-approved disclosure document or the offering 
is exempt but sales are only made to accredited investors.\308\ 
Consistent with the limitations on resales in other Securities Act 
exemptions that permit general solicitation or advertising, such as 
Rule 506(c) and Regulation Crowdfunding, we have concerns with 
expanding the ability to issue freely tradable securities under Rule 
504 to offerings that permit general solicitation or advertising to 
non-accredited investors without state registration. Further, we 
believe that the additional protections that will be provided by the 
limitations on resale for securities offered and sold in these 
transactions, which are directed primarily to non-accredited 
investors,\309\ are necessary and appropriate given that these 
offerings are not registered at either the state or federal level.
---------------------------------------------------------------------------

    \307\ ABA Letter.
    \308\ See 17 CFR 230.504(b).
    \309\ In contrast, general solicitation or advertising is 
permitted under Rule 506(c), so long as the issuer limits all sales 
exclusively to accredited investors and the issuer takes reasonable 
steps to verify that the investor is an accredited investor.
---------------------------------------------------------------------------

C. Repeal of Rule 505

    In light of the proposed amendments to Rule 504, we solicited 
comments on whether we should repeal Rule 505 as an exemption from 
registration. Rule 505 is used far less frequently than Rule 506,\310\ 
and in the Proposing Release, we noted that an increase in the Rule 504 
offering amount limit from $1 million to $5 million could further 
diminish its utility.\311\
---------------------------------------------------------------------------

    \310\ See note 22 above. See also Table 5 in Section V.A.2.a 
below.
    \311\ See Proposing Release at Section III.C.

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

[[Page 83516]]

1. Comments on Repealing Rule 505
    Three commenters responded to our request for comment on Rule 505. 
One commenter recommended that the Commission review the Rule 505 
exemption ``to consider whether modifications may and/or should be made 
to modernize the exemption; for example, reviewing the aggregate 
offering amount or information requirements.'' \312\ This commenter 
strongly opposed, however, replacing Rule 505 with a new Securities Act 
exemption providing ``covered security status'' under Section 18 of the 
Securities Act to securities issued in reliance on the new 
exemption.\313\ This commenter cautioned ``against considering a new 
framework for Rule 505 that is contrary to the rule's original intent 
and purpose--to be a coordinated federal-state exemption and `to 
achieve a uniform system of federal-state limited offering exemptions 
that facilitates capital formation consistent with the protection of 
investors.' '' \314\
---------------------------------------------------------------------------

    \312\ NASAA Letter.
    \313\ Id. (opposing extension of covered security status ``by 
either enacting a new `safe harbor' pursuant to Securities Act 
Section 4(a)(2) or by defining purchasers of securities issued in an 
offering pursuant to the exemption as `qualified purchaser,' 
pursuant to Securities Act Section 18(b)(3).'')
    \314\ Id. (``In 1983, NASAA adopted a model exemption, the 
Uniform Limited Offering Exemption (``ULOE''), designed to provide 
an exemption at the state level for offerings that are exempt at the 
federal level under Rules 505 and 506 of Regulation D.'').
---------------------------------------------------------------------------

    Another commenter stated that changes to Rule 505 aimed at 
facilitating very small offerings by early stage companies merit 
further consideration.\315\ This commenter also recommended that the 
Commission consider ``whether an exempt, simple debt-only offering is 
feasible and could be made cost-efficient for smaller issuers.'' \316\ 
According to this commenter, the Commission should explore whether an 
exemption focused on simple debt securities could serve the needs of 
small businesses and investors, especially since the unique nature of 
simple debt securities may warrant more modest and easier compliance 
requirements, while not sacrificing investor protections, as compared 
to an exemption that permits both debt and equity offerings.\317\
---------------------------------------------------------------------------

    \315\ Milken Letter.
    \316\ Id.
    \317\ Id. In commenting on the proposed amendments to Rule 147, 
one commenter noted that small businesses are likely to seek debt 
financing more frequently than equity offerings. See Nextseed Letter 
(``equity offerings are more likely to be attractive to technology-
based, high growth companies that cannot financially support debt 
obligations,'' as compared to ``Main Street'' businesses (e.g., 
local restaurants operated by friends and families) that are 
inherently local in nature seeking to raise not millions of dollars, 
but much smaller amounts of capital that traditional lenders are 
increasingly reluctant to fund).
---------------------------------------------------------------------------

    Finally, another commenter stated that, if the proposed changes to 
Rule 504 are adopted, Rule 505 would be substantially similar to Rule 
504, making Rule 505 unnecessary, unless the Commission increases the 
aggregate offering amount that may be raised under Rule 505 in any 
twelve-month period.\318\ This commenter recommended, for example, that 
the ceiling could be raised from $5 million to $10 million or some 
larger amount, thereby preserving Rule 505 as a viable alternative 
exemption. Despite its infrequent use, the commenter noted that Rule 
505 serves the purpose of permitting issuers to sell to up to 35 non-
accredited investors without having to be satisfied that these 
investors meet a financial sophistication test.\319\
---------------------------------------------------------------------------

    \318\ ABA Letter.
    \319\ Id. In contrast, issuers relying upon Rule 506(b) may sell 
to up to 35 non-accredited investors, but each non-accredited 
investor must satisfy a financial sophistication test set forth in 
Rule 506(b)(2)(ii).
---------------------------------------------------------------------------

2. Repeal of Rule 505
    After considering these comments, we are repealing Rule 505. After 
the effective date of the repeal of Rule 505, issuers will no longer be 
able to make offers and sales of securities in reliance on Rule 505. We 
believe that amending Rule 504 to increase the aggregate offering 
amount from $1 million to $5 million will further reduce the incentives 
to use Rule 505 by issuers contemplating an exempt offering. We also 
believe that, even if we were to raise the Rule 505 aggregate offering 
amount limit from $5 million to $10 million, or some higher amount, 
such a higher limit would not increase the utility of the Rule 505 
exemption as compared to Rule 506, which has no limit, given the 
historical use of Rule 505 as compared to Rule 506. Further, although 
Rule 505 provides issuers the ability to sell securities to up to 35 
non-accredited investors without having to make a finding, as in Rule 
506(b)(2)(ii), that such persons have the knowledge and experience in 
financial matters that they are capable of evaluating the merits and 
risks of the prospective investment,\320\ this provision does not 
appear to have historically resulted in the Rule 505 exemption being 
widely utilized.\321\
---------------------------------------------------------------------------

    \320\ Cf., 17 CFR 230.506(b)(2)(ii).
    \321\ For the period 2009-2015, there were a total of 1,542 Rule 
505 offerings. During this same time period, there were a total of 
70,793 Rule 506(b) offerings of $5 million or less. See Table 5 in 
Section V.A.2.b below. See also Scott Bauguess, Rachita Gullapalli 
and Vladimir Ivanov, ``Capital Raising in the U.S.: An Analysis of 
the Market for Unregistered Securities Offerings, 2009-2014'' 
(October 2015) (``Unregistered Offerings White Paper''), available 
at http://www.sec.gov/dera/staff-papers/white-papers/unregistered-
offering10-2015.pdf.
---------------------------------------------------------------------------

    We believe the flexibility of the requirements of Rule 504, as 
amended today, as well as the availability of Rule 506(b) and Rule 
506(c) will continue to fulfill the original objectives of Regulation D 
to achieve uniformity between state and federal exemptions in order to 
facilitate capital formation consistent with the protection of 
investors.\322\ Amended Rule 504 will be available only to non-
reporting issuers \323\ that are not investment companies \324\ or 
development stage companies \325\ for offerings of up to $5 million in 
a twelve-month period and will permit general solicitation and the 
issuance of unrestricted securities in certain limited situations.\326\ 
Rule 506(b) and 506(c) are available to all issuers without any 
aggregate offering amount limitations. Rule 506(b) prohibits general 
solicitation and limits sales to no more than 35 non-accredited 
investors.\327\ Rule 506(c) permits general solicitation where all 
purchasers of the securities are accredited investors and the issuer 
takes reasonable steps to verify that the purchasers are accredited 
investors.\328\ Securities issued pursuant to Rules 506(b) and 506(c) 
are deemed restricted securities.\329\ Reporting issuers also can 
register the offer and sale of securities on Form S-1, for which the 
Commission recently promulgated rules permitting forward incorporation 
by reference.\330\
---------------------------------------------------------------------------

    \322\ See SEC Rel. No. 33-7644 (Feb. 25, 1999) [64 FR 11090 
(Mar. 8, 1999)] (``Seed Capital Release'') at text accompanying note 
4. See also Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251] 
(Regulation D adopting release).
    \323\ See Rule 504(a)(1).
    \324\ See Rule 504(a)(2).
    \325\ See Rule 504(a)(3).
    \326\ See Rule 504(b)(1).
    \327\ See 17 CFR 230.506(b)(2).
    \328\ See 17 CFR 230.506(c).
    \329\ See 17 CFR 230.506(b)(2) and 17 CFR 230.502(d).
    \330\ See SEC Release No. 33-10003 [81 FR 2743] (Jan. 19, 2016) 
(revising Form S-1 to permit a smaller reporting company to 
incorporate by reference into its registration statement any 
documents filed by the issuer subsequent to the effective date of 
the registration statement). The information delivery requirements 
under Rule 505 for an Exchange Act reporting issuer that sells 
securities to a non-accredited investor are similar to the 
disclosure requirements for a registered offering under the 
Securities Act. See Rule 502(b)(2)(ii).
---------------------------------------------------------------------------

IV. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid,

[[Page 83517]]

such invalidity shall not affect other provisions or application of 
such provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.

V. Economic Analysis

    This section analyzes the expected economic effects of the final 
rules relative to the current baseline, which is the regulatory 
framework and state of the market \331\ in existence today, including 
current provisions available to potential issuers to raise capital up 
to $5 million. We are mindful of the costs imposed by, and the benefits 
obtained from, the final rules. Relative to this baseline, our analysis 
considers the anticipated benefits and costs for market participants 
affected by the final rules as well as the impact of the final rules on 
efficiency, competition and capital formation.\332\ We also analyze the 
potential benefits and costs stemming from alternatives to the final 
rules that we considered. Many of the benefits and costs discussed 
below are difficult to quantify, especially when analyzing the likely 
effects of the final rules on efficiency, competition and capital 
formation. For example, it is difficult to precisely estimate the 
extent to which amended Rule 147 and new Rule 147A will promote future 
reliance by issuers on these provisions, or the extent to which future 
use of amended Rule 147 and new Rule 147A will affect the use of other 
offering methods. Similarly, it is difficult to quantify the effect of 
the final rules on investor protection. Therefore, much of the 
discussion in this section is qualitative in nature. However, where 
possible, we have attempted to quantify the expected effects of the 
final rules.
---------------------------------------------------------------------------

    \331\ The term ``market'' as used throughout this economic 
analysis refers to capital markets in general, and where discussed 
in the context of a specific rule, relates to the provisions of the 
relevant exemption or safe harbor. We refer, for example, to the 
Rule 147 safe harbor and Rule 504 exemption as the Rule 147 and Rule 
504 markets because each of those rules' provisions prescribe 
requirements that determine who can participate and how the 
participants (issuers/investors/intermediaries) can engage in 
transactions under each exemption. Participants face different 
trade-offs when choosing between the markets created by each of the 
exemptions and safe harbors.
    \332\ Securities Act Section 2(b) and Exchange Act Section 3(f) 
direct 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. See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f). In 
addition, Exchange Act Section 23(a)(2) requires us, when adopting 
rules, to consider the impact that any new rule would have on 
competition. See 15 U.S.C. 78w(a)(2)
---------------------------------------------------------------------------

A. Baseline

    The final rules will modernize Rule 147, a safe harbor under 
Section 3(a)(11), and establish new Rule 147A in order to facilitate 
intrastate offerings, including intrastate crowdfunded offerings under 
state securities laws. We also are amending Rule 504 of Regulation D to 
raise the aggregate amount that can be raised during a twelve-month 
period from $1 million as established in 1988, to $5 million and to 
disqualify certain bad actors from participating in Rule 504 offerings. 
In light of the amendments to Rule 504, we are also repealing Rule 505, 
an alternate exemption available under Regulation D for offerings of up 
to $5 million during a twelve-month period.
    The final rules will primarily impact the financing market for 
startups and small businesses.\333\ The baseline for our economic 
analysis--including the baseline for our consideration of the effects 
of the final rules on efficiency, competition and capital formation--is 
the regulatory framework and market structure in existence today in 
which startups and small businesses 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 existing exemption 
from registration under the federal securities laws.
---------------------------------------------------------------------------

    \333\ According to the Longitudinal Business Database of the 
U.S. Census Bureau, there were more than 6.7 million active 
establishments in the U.S., of which approximately 5.5 million had 
fewer than 500 paid employees and approximately 5.2 million had less 
than 100 paid employees. See U.S. Department of Commerce, United 
States Census Bureau, Business Dynamics Statistics, Data: Firm 
Characteristics (2013), available at http://www.census.gov/ces/
dataproducts/bds/data_firm.html.
---------------------------------------------------------------------------

    In addition to a description of the type and number of issuers that 
currently offer and sell securities in reliance on Rules 147, 504 and 
505, our analysis includes a description of the types of investors who 
purchase or may consider purchasing such securities and a discussion of 
the role of intermediaries in such offerings. Table 1 summarizes the 
main characteristics of Rules 147, 504 and 505.

[[Page 83518]]



                                            Table 1--Main Characteristics of Existing Rules 147, 504 and 505
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Blue sky law
                                                                               Issuer and                                                preemption and
       Type of offering          Offering limit \334\      Solicitation         investor        Filing requirement    Restriction on       bad actor
                                                                              requirements                                resale        disqualification
                                                                                                                                           provisions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 147......................  None..................  Only intrastate    All issuers must   None.................  Interstate        State Law
                                                         solicitation.      be incorporated                           resales are       Preemption: No.
                                                                            and ``doing                               restricted for   Bad Actor
                                                                            business'' in                             nine months       Provisions:
                                                                            state. Statutory                          from the later    Required by the
                                                                            exemption                                 of the last       majority of
                                                                            excludes                                  sale in, or the   states at the
                                                                            investment                                completion of,    state
                                                                            companies. All                            the offering      level.\336\
                                                                            investors must                            \335\.
                                                                            be residents in
                                                                            state.
Rule 504 Regulation D.........  $1 million............  General            Excludes           File Form D..........  Restricted,       State Law
                                                         solicitation       investment                                unless offering   Preemption: No.
                                                         permitted in       companies, blank-                         is within        Bad Actor
                                                         specified          check companies,                          specified         Provisions:
                                                         circumstances      and Exchange Act                          circumstances     Required by the
                                                         \337\.             reporting                                 \338\.            majority of
                                                                            companies.                                                  states at the
                                                                                                                                        state
                                                                                                                                        level.\339\
Rule 505 Regulation D.........  $5 million............  No general         Excludes           File Form D..........  Restricted        State Law
                                                         solicitation.      investment                                securities.       Preemption: No.
                                                                            companies.                                                 Bad Actor
                                                                            Unlimited                                                   Provisions: Yes.
                                                                            accredited
                                                                            investors and up
                                                                            to 35 non-
                                                                            accredited
                                                                            investors.
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Current Market Participants
---------------------------------------------------------------------------

    \334\ Aggregate offering limit on securities sold within a 12-
month period.
    \335\ See 17 CFR 230.147(e). Additional resale restrictions may 
apply under state securities laws.
    \336\ See text accompanying notes 250, 251, 252, 253 and 254 
above.
    \337\ 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 that 
permits general solicitation or advertising so long as sales are 
made only to accredited investors. See Rule 504(b).
    \338\ Restricted unless the offering is registered in a state 
requiring the use of a substantive disclosure document or sold under 
a state exemption limiting sales only to accredited investors. See 
Rule 504(b).
    \339\ See text accompanying notes 250, 251, 252, 253 and 254 
above.
---------------------------------------------------------------------------

    The final rules that amend existing Rules 147 and 504, establish 
new Rule 147A, and repeal Rule 505 will primarily affect securities 
issuers, particularly startups and small businesses, that rely on 
unregistered offerings under these and other provisions or safe harbors 
to raise capital, as well as accredited and non-accredited investors 
who participate in unregistered offerings.
a. Issuers
i. Rule 147 Issuers
    Under current Rule 147, there is no limit on the amount of capital 
that can be raised. Since the Section 3(a)(11) exemption is not 
available for an investment company registered or required to be 
registered under the Investment Company Act,\340\ the existing Rule 147 
safe harbor is also not available to these issuers. Current Rule 147 
has no other restrictions on the type of issuers that may rely on the 
safe harbor. However, there are in-state residency and eligibility 
requirements that an issuer must satisfy in order to rely on Rule 147. 
Eligible issuers are those that are incorporated or organized in-state, 
have their ``principal office'' in-state, and can satisfy three 80% 
threshold requirements concerning their revenues, assets and use of net 
proceeds.
---------------------------------------------------------------------------

    \340\ See 15 U.S.C. 80a-24(d) and 1961 Release at note 1.
---------------------------------------------------------------------------

    While we lack data on the number and size of Rule 147 offerings 
\341\ or the type of issuers currently relying on the Rule 147 safe 
harbor, the nature of the eligibility requirements and other 
restrictions of the rule lead us to believe that it is used by U.S. 
incorporated entities that are likely small businesses seeking to raise 
small amounts of capital locally without incurring the costs of 
registering with the Commission.
---------------------------------------------------------------------------

    \341\ Unlike Regulation D, which requires the filing of a Form 
D, Rule 147 does not require any filing with the Commission, and we 
thus have no source of reliable data about the prevalence and scope 
of Rule 147 offerings. Commission staff will seek to collaborate 
with state regulators in gathering information for the study of 
amended Rule 147 and new Rule 147A. See Section I above.
---------------------------------------------------------------------------

    Currently, most of the states that have enacted crowdfunding 
provisions require issuers that intend to conduct intrastate 
crowdfunding offerings to use Rule 147.\342\ Based on information from 
NASAA,\343\ as of May 20, 2016, 34 states and the District of Columbia 
have enacted crowdfunding provisions, and more states are expected to 
promulgate similar provisions in the near future. Since December 2011, 
when the first state (Kansas) enacted its crowdfunding provisions, 179 
state crowdfunding offerings have been reported to be filed with the 
respective state regulator.\344\ Of these offerings, 166 were reported 
to be approved or cleared, as of July 2016.\345\
---------------------------------------------------------------------------

    \342\ See http://www.nasaa.org/industry-resources/corporation-
finance/instrastate-crowdfunding-resource-center/intrastate-
crowdfunding-directory/.
    \343\ See NASAA's Intrastate Crowdfunding Resource Center at 
http://www.nasaa.org/industry-resources/corporation-finance/
instrastate-crowdfunding-resource-center/. See also http://
www.nasaa.org/industry-resources/corporation-finance/instrastate-
crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \344\ See Slide Presentation on ``NASAA Intrastate Crowdfunding 
Update,'' NASAA July 18, 2016 available at http://
nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/Intrastate-
Crowdfunding-Slides-7-18-16.pdf.
    \345\ Id. Most of the early approved or cleared offerings were 
in Georgia, Michigan, Oregon, Kansas and Indiana. See Slide 
Presentation on ``Intrastate Equity Crowdfunding'' by Anya Coverman, 
Deputy Director of Policy, NASAA at the SEC Government Business 
Forum on Small Business Capital Formation, November 19, 2015 
available at http://www.sec.gov/info/smallbus/sbforum119015-
coverman-presentation.pdf.
---------------------------------------------------------------------------

    Given that investment companies are statutorily restricted from 
relying on Section 3(a)(11) \346\ and that almost all the enacted state 
crowdfunding provisions currently exclude reporting companies, we 
expect that issuers that rely on Rule 147 are likely operating 
companies (``non-fund issuers'') that are not reporting under the 
Exchange Act. As stated above, information on the size of these issuers 
is not available. Data from NASAA shows that most issuers are from 
various industries including agriculture, manufacturing, business 
services, retail, entertainment, and technology.
---------------------------------------------------------------------------

    \346\ See also note 241 above.

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

[[Page 83519]]

    We anticipate that many potential issuers of securities under 
amended Rule 147 and new Rule 147A, particularly those utilizing the 
exemptions for intrastate crowdfunding, will continue to be small 
businesses, early stage firms and ``idea'' stage business ventures that 
have not yet commenced operations. Some of these issuers may lack 
business plans that are sufficiently developed to attract venture 
capitalists (VCs) or angel investors that invest in high risk ventures, 
or may not offer the profit potential or business model to attract such 
investors.\347\
---------------------------------------------------------------------------

    \347\ In this regard, a study of one large crowdfunding platform 
revealed that relatively few companies on that platform operate in 
technology sectors that typically attract VC investment activity. 
See Ethan R. Mollick, The Dynamics of Crowdfunding: An Exploratory 
Study, J. BUS. VENT., January 2014 (1-16).
---------------------------------------------------------------------------

ii. Rule 504 and Rule 505 Issuers
    Rules 504 and 505 of Regulation D provide exemptions from 
registration under Section 3(b)(1) of the Securities Act for small 
offerings where the Commission believes registration under the 
Securities Act is not necessary by reason of the small amount involved 
or the limited character of the public offering. An analysis of Form D 
filings indicates that reliance on these two exemptions has been 
declining over time. As shown in Figure 1, while offerings under Rule 
506(b) of Regulation D grew significantly from 1993 to 2015, offerings 
under Rule 504 and Rule 505 in 2015 were approximately a quarter of 
1993 levels. In addition, while offering activity under Rule 504 has 
been higher than under the Rule 505 exemption, the number of new Rule 
504 offerings peaked in 1999, with 3,402 new offerings initiated, and 
steeply declined afterward.\348\ Compared to the early 1990s when Rule 
504 offerings constituted approximately 28% of all new Regulation D 
offerings, the proportion of Rule 504 offerings between 2009 and 2015 
ranged between 3% and 4% of all new Regulation D offerings. The number 
of new Rule 505 offerings peaked in 1996 at 1,124 (12% of all new 
Regulation D offerings), and during 2015, less than 1% of all new 
Regulation D offerings claimed the Rule 505 exemption.
---------------------------------------------------------------------------

    \348\ While there is a strong, positive correlation of the 
incidence of new Regulation D offerings with the economic conditions 
of the public market (see Section 4.2 of Unregistered Offerings 
White Paper), some of the decline in Rule 504 offerings during the 
early 2000s could also be attributed to the 1999 Commission decision 
to reinstate the ban on general solicitation in Rule 504 offerings. 
See Seed Capital Release and Release No. 34-69959 (July 10, 2013). 
Though the incidence of new Rule 506 offerings recovered in 2003 
with improved conditions in the public markets, the number of new 
Rule 504 offerings remained well below the pre-2000 levels.
[GRAPHIC] [TIFF OMITTED] TR21NO16.000

    The current limited use of the Rule 504 and Rule 505 exemptions and 
the predominance of Rule 506, especially Rule 506(b), are also evident 
when we consider the total amount raised in offerings under each of 
these exemptions. Overall, capital formation in the Rule 504 and Rule 
505 markets individually constituted approximately 0.1% of the capital 
raised in all Regulation D offerings initiated during 2009-2015.\350\ 
Considering only Regulation D offerings of up to $1 million (the 
maximum amount that a Rule 504 offering can raise in a year) initiated 
by non-fund issuers, the share of Rule 504 offerings was slightly 
higher at approximately 7%. Similarly, considering only Regulation D 
offerings by non-fund issuers of up to $5 million (the maximum amount 
that an existing

[[Page 83520]]

Rule 505 offering or amended Rule 504 offering can raise in a year), 
the share of the total amount raised for Rule 505 offerings was less 
than 2%.
---------------------------------------------------------------------------

    \349\ Data is not readily available for the period 2002-2008 
during which Form D was a paper-based filing. The form became 
available electronically in March 2009. Since the data for year 2009 
is only for the period April to December, the number of new 
Regulation D offerings shown is underestimated for 2009.
    \350\ Based on staff analysis of Form D filings. See also 
Unregistered Offerings White Paper.
---------------------------------------------------------------------------

    Table 2 presents data on the number of new Rule 504 and 505 
offerings and amounts reported to be raised in these offerings during 
the period 2009-2015.\351\ Since investment companies are excluded from 
using the two exemptions, issuers relying on Rules 504 and 505 are 
predominantly non-fund issuers.\352\ Form D data also indicates that 
the mean and median Rule 504 offering sizes during 2009-2015 were 
approximately $0.5 million and $0.36 million, respectively, while the 
average and median Rule 505 offering sizes were approximately $1.90 
million and $1.54 million, respectively.
---------------------------------------------------------------------------

    \351\ Id. This analysis uses the same assumptions and 
methodologies described in the Unregistered Offerings White Paper.
    \352\ Non-fund issuers constituted 98% and 93% of all Rule 504 
and Rule 505 offerings, respectively. In terms of amounts reported 
to be raised, non-fund issuers raised 96% and 76% of all amounts 
reported to be raised in Rule 504 offerings and Rule 505 offerings, 
respectively. Based on information in Form D filings, funds using 
the Rule 504 or Rule 505 exemption were not registered under the 
Investment Company Act.

                       Table 2--Rule 504 and Rule 505 Capital Raising Activity, 2009-2015
----------------------------------------------------------------------------------------------------------------
                                                    Number of  offerings \353\        Total amount raised ($
                                                 --------------------------------            million)
                                                                                 -------------------------------
                                                     Rule 504        Rule 505        Rule 504        Rule 505
----------------------------------------------------------------------------------------------------------------
2009............................................             579             195             $91            $185
2010............................................             714             262             131             257
2011............................................             721             207             113             205
2012............................................             632             227             109             193
2013............................................             599             229              97             203
2014............................................             544             289              94             238
2015............................................             519             179              84             134
2009-2015.......................................           4,308           1,588             719           1,415
----------------------------------------------------------------------------------------------------------------

    Companies that file reports with the Commission under Section 
12(b), Section 12(g) or Section 15(d) of the Exchange Act can use the 
Rule 505 exemption but not the Rule 504 exemption. Data from Form D 
filings indicates that approximately 10 of 278 unique Rule 505 issuers 
during 2014 and 8 of 163 unique Rule 505 issuers during 2015 were 
reporting companies.\354\ These reporting companies initiated 12 Rule 
505 offerings during 2014 and 11 such offerings during 2015. The mean 
size of Rule 505 offerings by reporting companies was approximately 
$824,000 and the median size was approximately $200,000.
---------------------------------------------------------------------------

    \353\ Based on staff analysis of Form D filings. This analysis 
uses the same assumptions and methodologies described in the 
Unregistered Offerings White Paper. As noted in the Unregistered 
Offerings White Paper, some issuers in Regulation D offerings check 
multiple exemptions in their Form D filing. Under those 
circumstances, staff assigns the highest checked numerical exemption 
to the offering. While issuers in 4,308 offerings checked only the 
Rule 504 exemption and reported to raise $719 million during the 
period 2009-2015, issuers in an additional 1,224 offerings checked 
the Rule 504 exemption along with the Rule 505 and/or the Rule 506 
exemption and safe harbor. Similarly, issuers in 1,520 offerings 
checked only the Rule 505 exemption and reported to raise $1,399 
million during 2009-2015; issuers in an additional 68 new offerings 
checked the Rule 504 and 505 exemptions; and issuers in 2,170 new 
offerings checked the Rule 505 exemption along with the Rule 506 
exemption.
    \354\ Based on staff analysis of Form D filings and Form 10-K 
filings made during 2014 and 2015.
---------------------------------------------------------------------------

    Figure 2 shows the financial size of Rule 504 and Rule 505 issuers 
based on revenues or net asset value during the period 2009-2015.\355\ 
Of all the issuers that disclosed these metrics in their Form D filings 
(approximately 70% of all Rule 504 issuers and 80% of all Rule 505 
issuers), more than three quarters of those offerings were initiated by 
issuers that had no revenues or had revenues or net asset values of 
less than $1 million. From this reported size, we believe that a vast 
majority of Rule 504 and Rule 505 issuers likely consist of startups 
and small businesses. These issuers' small size is also consistent with 
their younger age, as measured by years since incorporation. Based on 
Form D filings, 51% of Rule 504 issuers and 62% of Rule 505 issuers 
initiated their offerings during the year of their incorporation or in 
the subsequent year. Another 14% of Rule 504 and Rule 505 issuers 
initiated their offerings between two and three years since 
incorporation.\356\
---------------------------------------------------------------------------

    \355\ Based on staff analysis of Form D filings.
    \356\ Id.

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

[[Page 83521]]

[GRAPHIC] [TIFF OMITTED] TR21NO16.001

    Most Rule 504 and Rule 505 issuers that initiated offerings in the 
past seven years operate in the technology, real estate or other 
industry (Figure 3).\357\
---------------------------------------------------------------------------

    \357\ Id.
    [GRAPHIC] [TIFF OMITTED] TR21NO16.002
    
    With regard to the geographical location of issuers, Form D filings 
indicate that during the period 2009-2015, most Rule 504 and Rule 505 
issuers had their principal place of business in California (22% and 
21%), followed by Texas, New York, Florida, Colorado and Illinois; most 
were incorporated in Delaware (19%, 23%),

[[Page 83522]]

California (13%, 12%), Nevada and Texas. In addition, approximately 37% 
of Rule 504 offerings and 39% of Rule 505 offerings reported having 
different states of incorporation and principal places of business. 
While only approximately 2% of Rule 504 and Rule 505 offerings were 
initiated by foreign-incorporated issuers, a larger number of issuers 
(4-5%) reported their principal place of business to be outside the 
United States. In addition, approximately 89% of issuers in the Rule 
504 market and 93% of issuers in the Rule 505 market initiated only one 
offering. Approximately 83% of Rule 504 offerings and 79% of Rule 505 
offerings during the period 2009-2015 were equity offerings.\358\
---------------------------------------------------------------------------

    \358\ Id.
---------------------------------------------------------------------------

b. Investors
    Currently, Rule 147 limits offers and sales to residents of the 
same state or territory as the issuer. While there are generally no 
limitations on who can invest in Rule 504 offerings, only accredited 
investors and up to 35 non-accredited investors can participate in Rule 
505 offerings. Although the Commission does not require a form to be 
filed in connection with Rule 147 offerings, and thus does not receive 
information concerning investors participating in these offerings, data 
from Form D filings provide some insights into the number and 
characteristics of investors in Rule 504 and Rule 505 offerings.
    Data in Table 3 below shows that more than 34,000 investors 
participated in new Rule 504 offerings initiated during the period 
2009-2015, while almost 14,400 investors participated in new Rule 505 
offerings initiated during the same period.\359\ An analysis of the 
same Form D filings indicates that, for new Rule 504 offerings that 
reported sales, the mean number of investors was approximately 11 and 
the median number of investors was approximately four. The mean and 
median number of investors in new Rule 505 offerings that reported 
sales was 12 and seven, respectively.
---------------------------------------------------------------------------

    \359\ Id. See also Unregistered Offerings White Paper.

                                      Table 3--Number and Type of Investors in Rule 504 Offerings, 2009-2015 \360\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Rule 504 Offerings                              Rule 505 Offerings
                                                        ------------------------------------------------------------------------------------------------
                                                                                           % Offerings                                      % Offerings
                                                              Total      Mean number of     with non-          Total      Mean number of     with non-
                                                            investors       investors       accredited       investors       investors      accredited
                                                                                            investors                                        investors
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009...................................................           4,004               9              53            1,818              12              38
2010...................................................           5,427              10              54            2,234              11              41
2011...................................................           5,512              11              57            1,676              12              43
2012...................................................           6,295              13              58            2,027              13              44
2013...................................................           5,573              13              61            2,167              13              41
2014...................................................           3,996              10              60            2,943              13              36
2015...................................................           3,398               9              61            1,520              11              43
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
2009-2015..............................................          34,205              11              57           14,385              12              41
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The presence of non-accredited investors was larger in Rule 504 
offerings, where the number of non-accredited investors is not limited, 
than in Rule 505 or Rule 506 offerings, where the number of non-
accredited investors is limited to 35. Data in Table 3 above shows that 
issuers in approximately 57% of Rule 504 offerings and 41% of Rule 505 
offerings during 2009-2015 reported having sold or intending to sell to 
non-accredited investors.\361\
---------------------------------------------------------------------------

    \360\ Id. The data shown in the table represents offerings that 
reported sales to investors.
    \361\ Form D data shows that Rule 504 offerings that involved 
non-accredited investors were, on average, smaller and had a fewer 
mean number of investors (8) than those offerings that involved only 
accredited investors (9). In contrast, Rule 505 offerings that 
indicated potential sales to non-accredited investors were, on 
average, larger and had a greater mean number of investors (11) than 
Rule 505 offerings that sold only to accredited investors (8). We 
note that since issuers do not file Form D at the close of the 
offering, the number of investors reported in initial Form D filings 
may be an underestimate (offerings reporting zero investors are 
included).
---------------------------------------------------------------------------

    Given existing investment limitations under state crowdfunding 
provisions, we believe that many investors affected by amended Rule 147 
and new Rule 147A will likely be individual retail investors whose 
broad access to potentially riskier investment opportunities in early-
stage ventures is currently limited, either because they do not have 
the necessary accreditation or sophistication to invest in most private 
offerings, or because they do not have sufficient funds to participate 
as angel investors. Intrastate crowdfunding offerings may provide 
retail investors with additional investment opportunities, although the 
extent to which they invest in such offerings will likely depend on 
their view of the potential return on investment as well as the 
potential risks, including fraud.
    In contrast, larger, more sophisticated or well-funded investors 
may be less likely to invest in intrastate crowdfunding offerings. The 
relatively low offering amount limits, in-state investor residency 
requirements, and low investment limits for crowdfunding investors 
under state laws \362\ may make these offerings less attractive for 
such investors, which include VCs and angel investors.\363\ While an 
intrastate crowdfunding offering can result in increased visibility for 
an issuer, it is likely that such investors will elect to invest in 
offerings relying on Rule 506, which are not subject to the investment 
limitations applicable to crowdfunding.
---------------------------------------------------------------------------

    \362\ Most state crowdfunding provisions allow up to a $2 
million offering size and a maximum investment of $10,000 by non-
accredited investors.
    \363\ An observer suggests that, unlike angels, VCs may be less 
interested in crowdfunding because, if VCs rely on crowdfunding 
sites for their deal flow, it would be difficult to justify charging 
a 2% management fee and 20% carried interest to their limited 
partners. See Ryan Caldbeck, Crowdfunding--Why Angels, Venture 
Capitalists And Private Equity Investors All May Benefit, Forbes, 
Aug. 7, 2013.
---------------------------------------------------------------------------

c. Intermediaries
    Issuers that undertake private offerings may use broker-dealers to 
help them with various aspects of the offering and to help ensure 
compliance with the ban on general solicitation and advertising that 
exists for most private offerings. Private offerings can also involve 
finders and investment advisers

[[Page 83523]]

who connect issuers with potential investors for a fee.\364\ We do not 
have information on the extent of intermediary use in Rule 147 
offerings; however, an analysis of Form D filings indicates that 
intermediaries are used less frequently in Rule 504 offerings than in 
registered offerings. Approximately 20% of Rule 504 offerings and 29% 
of Rule 505 offerings reported using an intermediary during the period 
2009-2015.\365\ The average commissions and fees paid by issuers that 
reported using an intermediary was approximately 6% of the offering 
amount for Rule 504 and 5.6% for Rule 505.\366\
---------------------------------------------------------------------------

    \364\ Depending on the nature and scope of their activities, 
these persons may need to be registered as broker-dealers or finders 
under state law.
    \365\ Based on staff analysis of Form D filings.
    \366\ Id.
---------------------------------------------------------------------------

    Although we are unable to predict the potential use of broker-
dealers, transfer agents,\367\ investment advisers and finders in 
private offerings as a result of the adoption of the final rules, data 
on the use of broker-dealers and finders in the Rule 506 market 
suggests that they do not currently play a large role in private 
offerings. Form D filings indicate that approximately 17% of Rule 506 
offerings with an offering size up to $5 million, including 18% of such 
Rule 506 offerings initiated by non-fund issuers, used an intermediary 
during 2009-2015.\368\ The use of a broker-dealer or a finder increased 
with offering size, while the average percentage of the total fee 
declined with offering size.\369\ We base these estimates, however, 
only on available data from the Regulation D market. It is possible 
that issuers engaging in other types of unregistered offerings, for 
which data is not available to us, may use broker-dealers and finders 
more frequently or less frequently.\370\
---------------------------------------------------------------------------

    \367\ Aside from their standard role in maintaining records of 
ownership of securities, transfer agents play an important role in 
private offerings that involve restricted securities, in which there 
may be limitations on resale of such securities for a certain period 
or to certain types of investors. In addition to ensuring compliance 
with such provisions, only a transfer agent can remove a restrictive 
legend from the security, which is done with the consent of the 
issuer.
    \368\ Based on staff analysis of Form D filings.
    \369\ Based on analysis of Form D filings for 2009-2015, 
approximately 20% of all Rule 506 offerings reported using an 
intermediary. Further, intermediaries participated in approximately 
16% of Rule 506 offerings of up to $1 million and 31% of offerings 
of more than $50 million during the period 2009-2015. The average 
total fee (commission plus finder fee) paid by issuers conducting 
offerings of up to $1 million was 6.2%, while the average total fee 
paid by issuers conducting offerings of more than $50 million was 
1.9%. See also Section 5.3 in the Unregistered Offerings White 
Paper.
    \370\ A number of states that have enacted crowdfunding 
provisions require that the offer and sale of securities by means of 
intrastate crowdfunding be conducted through a funding portal or a 
broker-dealer. Some intrastate crowdfunding provisions require the 
offering portals to be registered with the state or as a broker-
dealer. Based on FOCUS Reports filed with the Commission, as of 
December 2015, there were 4,122 registered broker-dealers, with 
average total assets of approximately $0.98 billion per broker-
dealer. The aggregate assets of these registered broker-dealers 
totaled approximately $4.1 trillion. See Regulation Crowdfunding 
Adopting Release for a more detailed discussion of intermediaries in 
crowdfunding offerings.
---------------------------------------------------------------------------

2. Alternative Methods of Raising Up to $5 Million of Capital
    The potential economic impact of the final rules, including their 
effects on efficiency, competition and capital formation, will depend 
primarily on the extent of use of amended Rules 147 and 504 and new 
Rule 147A and how these methods compare to alternative sources of 
capital that startups and small businesses can utilize.
    As the amendments to Rule 504 would permit offerings up to $5 
million by all types of issuers (other than investment companies, 
Exchange Act reporting companies and development stage companies), the 
analysis below discusses alternatives available for startups and small 
businesses to access up to $5 million in capital. Current state 
crowdfunding provisions, most of which require issuers to rely on Rule 
147 for federal exemption, have offering limits of up to $4 million and 
most restrict private funds from utilizing the crowdfunding provisions. 
In addition, final Rules 147, 147A and 504 all exclude investment 
companies. Thus, our analysis below also includes a discussion of 
alternative sources for non-fund issuers to raise capital up to $5 
million.\371\
---------------------------------------------------------------------------

    \371\ While offerings greater than $5 million that are 
registered or exempt under state law, subject to certain conditions, 
could be raised under amended Rule 147 or new Rule 147A, we believe 
that the impact of the final rules on larger offerings is not likely 
to be significant, given the local nature of offerings under these 
exemptions and current state regulations applicable for larger 
offerings. See Section V.B (discussing the impact of the final rules 
in detail).
---------------------------------------------------------------------------

    Startups and small businesses can potentially access a variety of 
external financing sources in the capital markets through, for example, 
registered or unregistered offerings of debt, equity or hybrid 
securities and bank loans. Issuers seeking to raise capital must 
register the offer and sale of securities under the Securities Act or 
qualify for an exemption from registration under the federal securities 
laws. Registered offerings, however, are generally too costly to be 
viable alternatives for startups and small businesses. Issuers 
conducting registered offerings incur a variety of fees and expenses 
related to registration and reporting requirements. Two surveys 
concluded that the average initial compliance cost associated with 
conducting an initial public offering is $2.5 million, followed by an 
ongoing compliance cost for public companies of $1.5 million per 
year.\372\ Moreover, issuers conducting registered offerings usually 
pay underwriter fees, which average approximately 7% for initial public 
offerings, approximately 5% for follow-on equity offerings and 
approximately 1-1.5% for public bond issuances.\373\ Hence, for a small 
issuer seeking to raise less than $5 million, a registered offering 
typically may not be economically feasible relative to options 
available under exempt offerings.
---------------------------------------------------------------------------

    \372\ See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20, 
2011), at 9, available at http://www.sec.gov/info/smallbus/acsec/
rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force''). The estimates 
should be interpreted with the caveat that most companies in the IPO 
Task Force surveys likely raised more than $1 million. The IPO Task 
Force surveys do not provide a breakdown of costs by offering size. 
However, compliance related costs of an initial public offering and 
subsequent compliance related costs of being a reporting company 
likely have a fixed cost component that would disproportionately 
affect smaller issuers.
    Title I of the JOBS Act provided certain accommodations to 
issuers that qualify as emerging growth companies (EGCs). According 
to a recent working paper, the underwriting, legal and accounting 
fees of EGC and non-EGC initial public offerings were similar (based 
on a time period from April 5, 2012 to April 30, 2015). For a median 
EGC initial public offering, gross spread comprised 7% of proceeds 
and accounting and legal fees comprised 2.4% of proceeds. See Susan 
Chaplinsky, Kathleen W. Hanley, and S. Katie Moon, ``The JOBS Act 
and the Costs of Going Public,'' working paper, October 4, 2015, 
available at http://papers.ssrn.com/sol3/
Papers.cfm?abstract_id=2492241, (``Chaplinsky Study'').
    \373\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, ``The Seven 
Percent Solution,'' 55 J. Fin. 1105-1131 (2000); Mark Abrahamson, 
Tim Jenkinson, and Howard Jones, ``Why Don't U.S. Issuers Demand 
European Fees for IPOs?'' 66 J. Fin. 2055-2082 (2011); Shane A. 
Corwin, ``The Determinants of Underpricing for Seasoned Equity 
Offers,'' 58 J. Fin. 2249-2279 (2003); Lily Hua Fang, ``Investment 
Bank Reputation and the Price and Quality of Underwriting 
Services,'' 60 J. Fin. 2729-2761 (2005); Rongbing Huang and Donghang 
Zhang, ``Managing Underwriters and the Marketing of Seasoned Equity 
Offerings,'' 46 J. Fin. Quant. Analysis 141-170 (2011); Stephen J. 
Brown, Bruce D. Grundy, Craig M. Lewis and Patrick Verwijmeren, 
``Convertibles and Hedge Funds as Distributors of Equity Exposure,'' 
25 Rev. Fin. Stud. 3077-3112 (2012).
    Recent studies that analyze IPOs by EGCs and non-EGCs find that 
the costs of raising capital through an IPO are similar pre- and 
post-JOBS Act. See, e.g., Michael Dambra, Laura Fields and Matthew 
Gustafson, ``The JOBS Act and IPO Volume: Evidence that Disclosure 
Costs Affect the IPO Decision'', 116 J. Fin. Econ.121-143 (2015); 
see also Chaplinsky Study.

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

[[Page 83524]]

a. Exempt Offerings
    For startups and small businesses that can potentially access 
capital under Rules 147, 504 and 505, offerings under other existing 
exemptions or safe harbors from registration may represent alternative 
methods of raising capital. For example, startups and small businesses 
could rely on current exemptions and safe harbors, such as Section 
3(a)(11), Section 4(a)(2),\374\ Regulation A,\375\ Section 
4(a)(6),\376\ and Rule 506 of Regulation D.\377\
---------------------------------------------------------------------------

    \374\ Securities Act Section 4(a)(2) provides that the 
provisions of the Securities Act shall not apply to ``transactions 
by an issuer not involving a public offering.''
    \375\ Regulation A provides an exemption from registration for 
certain small issuances. The Commission recently adopted amendments 
to Regulation A that became effective on June 19, 2015. See 2015 
Regulation A Release.
    \376\ Regulation Crowdfunding provides an exemption from 
registration for small offerings up to $1 million sold within a 
twelve month period. The rules became effective on May 16, 2016. See 
Regulation Crowdfunding Adopting Release.
    \377\ Rule 506(b) of Regulation D provides a nonexclusive safe 
harbor from registration for certain types of securities offerings. 
Rule 506(c) of Regulation D is an exemption from registration that 
the Commission adopted to implement Section 201(a) of the JOBS Act.
---------------------------------------------------------------------------

    Each of these provisions, however, includes restrictions that may 
limit its suitability for startups and small businesses seeking to 
raise capital up to $5 million. Table 4 below lists the main 
requirements of these provisions.
---------------------------------------------------------------------------

    \378\ Aggregate offering limit on securities sold within a 
twelve-month period.
    \379\ Although Section 3(a)(11) does not have explicit resale 
restrictions, the Commission has explained that ``to give effect to 
the fundamental purpose of the exemption, it is necessary that the 
entire issue of securities shall be offered and sold to, and come to 
rest only in the hands of residents within the state.'' See 1961 
Release. State securities laws also may have specific resale 
restrictions. Rule 147 limits resales to persons residing in-state 
for a period of nine months after the last sale by the issuer.
    \380\ See text accompanying notes 250, 251, 252, 253 and 254 
above.
    \381\ 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.'')
    \382\ The Regulation A exemption is also not available to 
companies that have been subject to any order of the Commission 
under Exchange Act Section 12(j) entered within the past five years, 
have not filed ongoing reports required by the regulation during the 
preceding two years, or are disqualified under the regulation's 
``bad actor'' disqualification rules.
    \383\ See Table 6 below for a more detailed comparison between 
Regulation Crowdfunding and intrastate crowdfunding provisions.
    \384\ General solicitation and general advertising is permitted 
under Rule 506(c). All purchasers must be accredited investors and 
the issuer must take reasonable steps to verify accredited investor 
status.

                                            Table 4--Other Provisions Currently Available for Capital Raising
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                        Blue sky law
                                                                                                                                     preemption and bad
     Type of offering         Offering limit        Solicitation     Issuer and investor   Filing requirement     Restriction on            actor
                                  \378\                                  requirements                                 resale          disqualification
                                                                                                                                         provisions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11).........  None...............  All offerees must    All issuers and      None...............  No \379\...........  State Law
                                                 be resident in       investors must be                                              Preemption: No.
                                                 state.               resident in state,                                            Bad Actor
                                                                      and an issuer, if                                              Provisions:
                                                                      a corporation,                                                 Required by the
                                                                      must be                                                        majority of states
                                                                      incorporated in                                                at the state level.
                                                                      state; investment                                              \380\
                                                                      companies are
                                                                      excluded.
Section 4(a)(2)..........  None...............  No general           Transactions by an   None...............  Restricted           State Law
                                                 solicitation.        issuer not                                securities.          Preemption: No.
                                                                      involving any                                                 Bad Actor
                                                                      public offering                                                Provisions: No.
                                                                      \381\.
Regulation A.............  Tier 1: up to $20    Testing the waters   U.S. or Canadian     File testing the     No.................  State Law
                            million with $6      permitted both       issuers, excluding   waters materials,                         Preemption: Tier 1:
                            million limit on     before and after     investment           Form 1-A for Tier                         No Tier 2: Yes.
                            secondary sales by   filing the           companies, blank-    1 and Tier 2                             Bad Actor
                            affiliates of the    offering statement.  check companies,     offerings; file                           Provisions: Yes.
                            issuer; Tier 2: up                        reporting            annual, semi-
                            to $50 million                            companies, and       annual, and
                            with $15 million                          issuers of           current reports
                            limit on secondary                        fractional           for Tier 2
                            sales by                                  undivided            offerings; file
                            affiliates of the                         interests in oil     exit report for
                            issuer.                                   or gas rights, or    Tier 1 offerings;
                                                                      similar interests    and file exit
                                                                      in other mineral     report to suspend
                                                                      rights \382\.        or terminate
                                                                                           reporting for Tier
                                                                                           2 offerings.
Section 4(a)(6)            $1 million.........  Allowed after Form   Excludes foreign     File Form C;         12-month resale      State Law
 Regulation Crowdfunding                         C is filed and       private issuers;     reviewed financial   limitation; resale   Preemption: Yes.
 \383\.                                          with limitations     investment           statements           within one year to  Bad Actor
                                                 on advertising.      limitations based    required for         issuer and certain   Provisions: Yes.
                                                                      on annual income     offerings greater    investors.
                                                                      and net worth.       than $100,000;
                                                                                           audited financial
                                                                                           statements
                                                                                           required for
                                                                                           offerings greater
                                                                                           than $500,000
                                                                                           (unless it is the
                                                                                           first offering
                                                                                           made pursuant to
                                                                                           the exemption);
                                                                                           file annual
                                                                                           reports.
Rule 506(b) Regulation D.  None...............  No general           No issuer            File Form D........  Restricted           State Law
                                                 solicitation.        exclusion;                                securities.          Preemption: Yes.
                                                                      unlimited                                                     Bad Actor
                                                                      accredited                                                     Provisions: Yes.
                                                                      investors and up
                                                                      to 35 non-
                                                                      accredited
                                                                      investors.
Rule 506(c) Regulation D.  None...............  General              No issuer            File Form D........  Restricted           State Law
                                                 solicitation is      exclusion;                                securities.          Preemption: Yes
                                                 permitted, subject   unlimited                                                     Bad Actor
                                                 to certain           accredited                                                     Provisions: Yes
                                                 conditions \384\.    investors; no non-
                                                                      accredited
                                                                      investors.
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 83525]]

    While we do not have data on offerings relying on an exemption 
under Section 3(a)(11) or Section 4(a)(2), data available from 
Regulation D and Regulation A filings allow us to gauge how frequently 
issuers seeking to raise up to $5 million rely on these provisions. 
Based on Form D filings from 2009 to 2015, a substantial number of 
issuers chose to raise capital by relying on Rule 506(b), even though 
their offering size would qualify under Rule 504 or Rule 505.\385\ As 
shown in the upper part of Table 5, most Regulation D issuers made 
offers for amounts of up to $1 million from 2009 to 2015. A large 
majority of offerings up to $5 million relied on the Rule 506(b) 
exemption. The lower part of Table 5 shows a similar pattern for the 
number of offerings by non-fund issuers.
---------------------------------------------------------------------------

    \385\ See Unregistered Offerings White Paper. This tendency 
could, in part, be attributed to two features of Rule 506: 
preemption from state registration (``blue sky'') requirements and 
an unlimited offering amount. See also report from U.S. Government 
Accountability Office, Factors That May Affect Trends in Regulation 
A Offerings, GAO-12-839 (Jul. 3, 2012), available at http://
www.gao.gov/products/GAO-12-839.
---------------------------------------------------------------------------

    The overwhelming majority of non-fund issuers (approximately 73%) 
conducting offerings less than $5 million were five years or younger, 
and 64% of such issuers were two years or younger, with a median age of 
approximately one year. More than 93% of the non-fund issuers that made 
Regulation D offerings of $5 million or less during this period were 
organized as either a corporation or a limited liability company. 
Almost 21% reported having no revenues, while approximately 20% had 
revenues of less than $5 million.\386\
---------------------------------------------------------------------------

    \386\ These percentages could be higher because almost 55% of 
the issuers that conduct Regulation D offerings of $5 million or 
less declined to disclose the size of the offering.

                  Table 5--Number of Regulation D and Regulation A Offerings By Size, 2009-2015
----------------------------------------------------------------------------------------------------------------
                                                                 Offering size
                             -----------------------------------------------------------------------------------
                               < = $1 million    $1-$2.5 million  $2.5-5 million   $5-50 million   > $50 million
----------------------------------------------------------------------------------------------------------------
All offerings:
    Rule 504................             4,224  ................  ..............  ..............  ..............
    Rule 505................               592               518             432  ..............  ..............
    Rule 506(b).............            35,688            18,998          16,107          31,978          14,726
    Rule 506(c).............             1,233               529             512             975             268
                             -----------------------------------------------------------------------------------
        Total...............            41,737            20,045          17,051          32,953          14,994
Regulation A................                10                 6              33               6  ..............
Non-fund offerings:
    Rule 504................             4,143  ................  ..............  ..............  ..............
    Rule 505................               568               496             378  ..............  ..............
    Rule 506(b).............            32,095            16,975          13,866          22,291           3,375
    Rule 506(c).............             1,007               447             472             763             153
                             -----------------------------------------------------------------------------------
        Total...............            37,813            17,918          14,716          23,054           3,528
----------------------------------------------------------------------------------------------------------------
Note: Data based on Form D filings for Regulation D offerings and Form 1-A filings for qualified Regulation A
  offerings from 2009 to 2015. We consider only new offerings and exclude offerings that do not report offering
  size and report amount sold as $0 on Form D. Data on Rule 506(c) offerings covers the period from September
  23, 2013 (the date the rule became effective) to December 31, 2015. We also use the maximum amount indicated
  in Form 1-A to determine offering size for Regulation A offerings.

    Table 5 also includes the number of Regulation A offerings by size. 
From 2009 to 2015, 49 issuers relied on Regulation A for offerings of 
up to $5 million.\387\ This data includes 17 offerings, of which 11 
have offering sizes of up to $5 million, initiated subsequent to the 
effectiveness of amendments to Regulation A in June 2015. The 
amendments allow issuers to raise up to $50 million over a 12-month 
period and preempt state registration requirements for certain 
Regulation A offerings (Tier 2 offerings). As these amendments became 
effective only recently, more time is needed to assess how the changes 
in Regulation A will affect capital raising by small issuers.\388\
---------------------------------------------------------------------------

    \387\ We only consider offerings with offering statements that 
have been qualified by the Commission. For purposes of counting 
offerings, we exclude amendments or multiple 1-A filings by the same 
issuer in a given year. For purposes of determining the offering 
size for Regulation A offerings, we use the maximum amount indicated 
on the latest pre-qualification Form 1-A or amended Form 1-A. We 
reclassify two offerings that are dividend reinvestment plans with 
uncertain offering amounts as having the maximum permitted offering 
amount.
    \388\ See 2015 Regulation A Adopting Release.
---------------------------------------------------------------------------

b. Regulation Crowdfunding
    The analysis above does not include data regarding securities-based 
crowdfunding transactions under the recently adopted Regulation 
Crowdfunding exemption. The new rules, which became effective on May 
16, 2016, supplement the existing regulatory scheme of exemptions and 
safe harbors that are described above and provide start-ups and small 
businesses with an alternate source for raising capital through 
offerings exempt from registration under the Securities Act. As of 
September 30, 2016, approximately 114 offerings relying on the federal 
crowdfunding exemption filed a Form C with the Commission.\389\
---------------------------------------------------------------------------

    \389\ Based on Form C filings, as of September 30, 2016. 
Analysis of data reported in Form C and Form C-U filings indicates 
that the mean maximum offer size was approximately $643,150 and the 
mean amount reported to be raised per offering was $440,480. Based 
on filings of Form C-U as of September 30, 2016, 12 offerings were 
reported to be completed.
---------------------------------------------------------------------------

    Offerings pursuant to these rules are limited to a maximum amount 
of $1 million over a 12-month period and are subject to ongoing 
disclosure requirements. Securities issued pursuant to these rules can 
be sold to an unlimited number of investors (subject to specified 
investment limits), are freely tradable after one year, and can be 
offered and sold without state qualification or registration. Unlike 
intrastate crowdfunding provisions enacted at the state level, the new 
federal crowdfunding exemption allows interstate offerings, whereby an 
issuer can make offers and sell to investors in multiple states. Table 
6 presents a comparison of the provisions of Regulation Crowdfunding 
and current intrastate crowdfunding provisions that rely on current 
Rule 147 for federal exemption.

[[Page 83526]]



 Table 6--Intrastate Crowdfunding and Regulation Crowdfunding Provisions
------------------------------------------------------------------------
                                 Current Rule 147
                                  + state level          Regulation
                                   crowdfunding         crowdfunding
                                 provisions \390\
------------------------------------------------------------------------
Investor Base.................  Rule 147 requires  All investors, all
                                 that all           states.
                                 investors reside
                                 in the state of
                                 the issuer.
State Registration............  Exemption          Preemption of state
                                 provided by        registration.
                                 state.
Issuer Incorporation/Residency  Rule 147 requires  Excludes foreign
 Limitations.                    issuer to be       private issuers.
                                 incorporated and
                                 ``doing-
                                 business'' in
                                 state.
Excluded Issuers..............  Investment         Exchange Act
                                 companies are      reporting companies,
                                 excluded under     investment
                                 the federal        companies, pooled
                                 exemption.         investment funds,
                                 Although not       and blank check
                                 excluded under     companies.
                                 Rule 147, most
                                 state
                                 crowdfunding
                                 provisions also
                                 exclude Exchange
                                 Act reporting
                                 companies and
                                 blank check
                                 companies.
Offering Size Limits..........  Although not       Up to $1 million.
                                 limited under
                                 Rule 147, state
                                 provisions limit
                                 between $250,000
                                 and $4 million,
                                 depending on
                                 state. Mean
                                 (median) limit:
                                 $1.6 ($2)
                                 million.
Security Type.................  Although not       Any security.
                                 limited under
                                 Rule 147, equity
                                 and debt
                                 permitted in
                                 some states;
                                 equity only in
                                 other states;
                                 any security in
                                 some other
                                 states.
Audited Financials Requirement  Although no        Required for
                                 requirements       offerings greater
                                 under Rule 147,    than $500,000 with
                                 most states        the exception of
                                 require, if        first-time
                                 offer greater      crowdfunding issuers
                                 than $1 million.   offering more than
                                                    $500,000 but not
                                                    more than
                                                    $1,000,000, who are
                                                    permitted to provide
                                                    financial statements
                                                    reviewed by an
                                                    independent
                                                    accountant, unless
                                                    the issuer has
                                                    audited statements
                                                    otherwise available.
                                                    Reviewed financial
                                                    statements are
                                                    required for
                                                    offerings greater
                                                    than $100,000 but
                                                    not more than
                                                    $500,000, unless the
                                                    issuer has audited
                                                    statements otherwise
                                                    available.
General Solicitation..........  Rule 147 and       Allowed after filing
                                 states allow,      of Form C and
                                 but only to        subject to
                                 investors          limitations on
                                 residing in        advertising.
                                 state.
Investment Limits.............  No limits under    (a) the greater of
                                 Rule 147.          $2,000 or 5% of the
                                $2,500-$10,000,     lesser of the
                                 depending on       investor's annual
                                 state, for non-    income or net worth
                                 accredited         if either annual
                                 investors.         income or net worth
                                None, in most       is less than
                                 states, for        $100,000, or (b) 10%
                                 accredited         of the lesser of the
                                 investors.         investor's annual
                                                    income or net worth
                                                    if both annual
                                                    income and net worth
                                                    are $100,000 or
                                                    more, subject to
                                                    investment cap of
                                                    $100,000.
Restrictions on Resale........  Rule 147           12-month resale
                                 restricts          limitation; resale
                                 interstate         within one year to
                                 resales for nine   issuer and certain
                                 months \391\.      investors.
Exemption from Section 12(g)    None.............  Conditional
 Registration Requirements.                         exemption, provided
                                                    that the issuer is
                                                    current in its
                                                    ongoing annual
                                                    reports required
                                                    pursuant to Rule 202
                                                    of Regulation
                                                    Crowdfunding, has
                                                    total assets as of
                                                    the end of its last
                                                    fiscal year not in
                                                    excess of $25
                                                    million, and has
                                                    engaged the services
                                                    of a transfer agent
                                                    registered with the
                                                    Commission pursuant
                                                    to Section 17A of
                                                    the Exchange Act.
------------------------------------------------------------------------

c. Private Debt Financing
---------------------------------------------------------------------------

    \390\ Information in this column is based on the provisions that 
are reflective of most states that have enacted crowdfunding 
provisions. See http://www.nasaa.org/industry-resources/corporation-
finance/instrastate-crowdfunding-resource-center/intrastate-
crowdfunding-directory/.
    \391\ See 17 CFR 230.147(e). States may impose additional resale 
restrictions.
---------------------------------------------------------------------------

    While equity-based financing, including principal owner equity, 
accounts for a significant proportion of the total capital of a typical 
small business, other sources of capital for startups and small 
businesses include loans from commercial banks, finance companies and 
other financial institutions, business credit cards and credit 
lines.\392\
---------------------------------------------------------------------------

    \392\ Using data from the 1993 Survey of Small Business Finance, 
one study indicates that financial institutions account for 
approximately 27% of small companies' borrowings. See Allen N. 
Berger and Gregory F. Udell, The Economics of Small Business 
Finance: The Roles of Private Equity and Debt Markets in the 
Financial Growth Cycle, 22 J. Banking & Fin. 613 (1998). See also 
1987, 1993, 1998 and 2003 Surveys of Small Business Finances, 
available at http://www.federalreserve.gov/pubs/oss/oss3/
nssbftoc.htm. The Survey of Small Business Finances was discontinued 
after 2003. Using data from the Kauffman Foundation Firm Surveys, 
one study finds that 44% of startups use loans from financial 
institutions. See Rebel A. Cole and Tatyana Sokolyk, How Do Start-Up 
Firms Finance Their Assets? Evidence from the Kauffman Firm Surveys 
(2012), available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2028176.
---------------------------------------------------------------------------

    For example, a 2014 study reports that startups frequently resort 
to bank financing early in their lifecycle.\393\ The study finds that 
businesses rely heavily in the first year after formation on external 
debt sources such as bank financing, mostly in the form of personal and 
commercial bank loans, business credit cards, and credit lines.\394\ 
Another report shows a decline in cumulative bank lending to small 
businesses, which fell by $100 billion from 2008 to 2011.\395\ This 
report also shows that less than one-third of small businesses reported 
having a business bank loan by 2012. Similarly, an FDIC report shows 
that, as of December 2015, small business lending, specifically 
business loans of up to $1 million, by

[[Page 83527]]

FDIC-insured depository institutions amounted to approximately $606 
billion, which is 15% lower than the June 2008 level but 2% above 
December 31, 2014 level.\396\
---------------------------------------------------------------------------

    \393\ See Alicia M. Robb, and David T. Robinson, 2014, The 
Capital Structure Decisions of New Firms, Review of Financial 
Studies 27(1), pp. 153-179 (``Robb Study'').
    \394\ See also NextSeed Letter.
    \395\ See The Kauffman Foundation, 2013 State of 
Entrepreneurship Address (Feb. 5, 2013), available at http://
www.kauffman.org/~/media/kauffman_org/
research%20reports%20and%20covers/2013/02/soe%20report_2013pdf.pdf. 
The report cautions against prematurely concluding that banks are 
not lending enough to small businesses as the sample period of the 
study includes the most recent recession.
    \396\ We define small business loans to include commercial and 
industrial loans of up to $1 million and loans secured by nonfarm 
nonresidential properties and commercial and industrial loans of up 
to $1 million to U.S. addressees. See Federal Deposit Insurance 
Corporation, Statistics on Depository Institutions Report, available 
at http://www2.fdic.gov/SDI/SOB/.
---------------------------------------------------------------------------

    An earlier study by Federal Reserve Board staff covering the pre-
recessionary period suggests that 60% of small businesses had 
outstanding credit in the form of a credit line, a loan or a capital 
lease.\397\ These loans were borrowed from two types of financial 
institutions: depository and non-depository institutions (e.g., finance 
companies, factoring or leasing companies).\398\ Lines of credit were 
the most widely used type of credit.\399\ Other types included mortgage 
loans, equipment loans, and motor vehicle loans.\400\
---------------------------------------------------------------------------

    \397\ See Federal Reserve Board, Financial Services Used by 
Small Businesses: Evidence from the 2003 Survey of Small Business 
Finances (October 2006), available at http://www.federalreserve.gov/
pubs/bulletin/2006/smallbusiness/smallbusiness.pdf (``2003 FRB 
Survey'').
    \398\ See Rebel Cole, What Do We Know About the Capital 
Structure of Privately Held Firms? Evidence from the Surveys of 
Small Business Finance (Working Paper) (Feb. 2013), available at 
http://onlinelibrary.wiley.com/doi/10.1111/fima.12015/epdf.
    \399\ See 2003 FRB Survey, note 397 (estimating that 34% of 
small businesses use lines of credit).
    \400\ Id.
---------------------------------------------------------------------------

    Small businesses may also receive funding from various loan 
guarantee programs of the Small Business Administration (``SBA''), 
which makes credit more accessible to small businesses by either 
lowering the interest rate of the loan or enabling a market-based loan 
that a lender would not be willing to provide, absent a guarantee.\401\ 
SBA loan programs include 7(a) loans,\402\ microloans \403\ and 
Certified Development Company loans (CDC loans).\404\ For example, in 
fiscal year 2015, the SBA supported approximately $33.2 billion in 7(a) 
and CDC loans, microloans and surety bonds distributed to approximately 
61,000 small businesses.\405\ In addition, investments in high-growth 
small businesses through its Small Business Investment Company program 
increased from $5.5 billion in 2014 to $6.3 billion in 2015.\406\ SBA 
guaranteed loans, however, currently account for a relatively small 
share (20%) of the balances of small business loans outstanding.\407\
---------------------------------------------------------------------------

    \401\ Numerous states also offer a variety of small business 
financing programs, such as Capital Access Programs, collateral 
support programs and loan guarantee programs. These programs are 
eligible for support under the State Small Business Credit 
Initiative, available at http://www.treasury.gov/resource-center/sb-
programs/Pages/ssbci.aspx.
    \402\ 15 U.S.C. 631 et seq. 7(a) loans provide small businesses 
with financing guarantees (up to $5 million) for a variety of 
general business purposes through participating lending 
institutions.
    \403\ SBA also offers the Microloan program, which provides 
funds to specially designated intermediary lenders that administer 
the program for eligible borrowers. The maximum loan amount is 
$50,000, but the average is approximately $13,000. See Microloan 
Program, U.S. Small Business Administration, available at http://
www.sba.gov/content/microloan-program.
    \404\ 15 U.S.C. 695 et seq. The CDC loans (up to $5.5 million) 
are made available through ``certified development companies'' or 
``CDCs,'' typically structured with the SBA providing 40% of the 
total project costs, a participating lender covering up to 50% of 
the total project costs and the borrower contributing 10% of the 
project costs.
    \405\ See U.S. Small Business Administration, Agency Financial 
Report: Fiscal Year 2015, available at https://www.sba.gov/sites/
default/files/aboutsbaarticle/Agency_Financial_Report_FY_2015.pdf.
    \406\ Id.
    \407\ As of the end of fiscal year 2015, the SBA guaranteed 
business loans outstanding (including 7(a) and CDC loans) equaled 
$118.8 billion. See SBA Agency Financial Report: Fiscal Year 2015. 
This comprises approximately 20% of the approximately $606 billion 
in outstanding small business loans for commercial real estate and 
commercial and industrial loans discussed above. In addition to loan 
guarantees, the SBA program portfolio also includes direct business 
loans, which are mainly microloans and disaster loans.
---------------------------------------------------------------------------

    Borrowing from financial institutions is, however, relatively 
costly for many early-stage issuers and small businesses as they may 
have low revenues, irregular cash-flow projections, insufficient assets 
to offer as collateral, and high external monitoring costs.\408\ Many 
startups and small businesses may find loan requirements imposed by 
financial institutions difficult to meet and may not be able to rely on 
these institutions to secure funding. For example, financial 
institutions generally require a borrower to provide collateral and/or 
a guarantee,\409\ which startups, small businesses and their owners may 
not be able to provide. Collateral may also be required for loans 
guaranteed by the SBA.
---------------------------------------------------------------------------

    \408\ See Robb Study.
    \409\ Approximately 92% of all small business debt to financial 
institutions is secured, and owners of the company guarantee about 
52% of that debt. See Allen N. Berger and Gregory F. 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, informationally opaque 
companies as a result of strategic use of soft information by local 
lenders. See Sumit Agarwal and Robert Hauswald, 2010, Distance and 
Private Information in Lending, Review of Financial Studies 13(7), 
pp. 2757-2788.
---------------------------------------------------------------------------

    Other sources of debt financing for startups and small businesses 
include peer-to-peer and peer-to-business lending,\410\ 
microfinance,\411\ and other alternative online lending channels.\412\ 
According to some industry estimates, the global volume of ``lending-
based crowdfunding,'' which includes peer-to-peer lending to consumers 
and businesses, had risen to approximately $11.08 billion in 2014.\413\ 
Technology has facilitated the growth of alternative models of small 
business lending. According to one academic study,\414\ the outstanding 
portfolio balance of online alternative lenders has doubled every year, 
albeit this market represents less than $10 billion in outstanding loan 
capital. According to the 2015 Small Business Credit survey,\415\ 20% 
of all

[[Page 83528]]

small businesses surveyed applied for credit with an online 
lender.\416\
---------------------------------------------------------------------------

    \410\ Such debt transactions are facilitated by online platforms 
that connect borrowers and lenders and potentially offer small 
businesses additional flexibility with regard to pricing, repayment 
schedules, collateral or guarantee requirements, and other terms. 
See Ian Galloway, Peer-to-Peer Lending and Community Development 
Finance, Federal Reserve Bank of San Francisco (Working Paper) 
(2009), available at http://www.frbsf.org/publications/community/
wpapers/2009/wp2009-06.pdf.
    \411\ See Craig Churchill and Cheryl Frankiewicz, Making 
Microfinance Work: Managing for Improved Performance, Geneva 
International Labor Organization (2006). Microfinance consists of 
small, working capital loans provided by microfinance institutions 
that are invested in microenterprises or income-generating 
activities. According to one report, in fiscal year 2012, the U.S. 
microfinance industry was estimated to have disbursed $292.1 million 
across 36,936 microloans, with an estimated $427.6 million in 
outstanding microloans (across 45,744 in microloans). See FIELD at 
the Aspen Institute, U.S. Microenterprise Census Highlights, FY 
2012, available at http://fieldus.org/Publications/
CensusHighlightsFY2012.pdf.
    \412\ Several models of online small business lending have 
emerged: Online lenders raising capital from institutional investors 
and lending on their own account (e.g., short-term loan products 
similar to a merchant cash advance); peer-to-peer platforms; and 
``lender[hyphen]agnostic'' online marketplaces that facilitate small 
business borrower access to various loan products from traditional 
and alternative lenders, including term loans, lines of credit, 
merchant cash advances and factoring products,. See Karen Gordon 
Mills and Brayden McCarthy, The State of Small Business Lending: 
Credit Access during the Recovery and How Technology May Change the 
Game, Harvard Business School Working Paper 15-004 (2014), available 
at http://ssrn.com/abstract=2470523 (``Mills Study'').
    \413\ See Massolution, 2015CF Crowdfunding Industry Report: 
Market Trends, Composition and Crowdfunding Platforms, available at 
http://reports.crowdsourcing.org/index.php?route=product/
product&product_id=54 (``Massolution 2015 Report'') at 56. The 
Massolution 2015 Report refers to peer-to-peer lending to consumers 
and peer-to-business lending to small businesses as ``lending 
based'' crowdfunding. Our discussion refers to peer-to-peer lending 
more broadly in a sense synonymous with ``lending-based'' 
crowdfunding.
    \414\ See Mills Study.
    \415\ The survey was conducted by the Federal Reserve Banks of 
New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond and St. 
Louis during 2015. It focused on credit access among businesses with 
fewer than 500 employees in 26 states. The survey authors note that 
since the sample is not a random sample, results were reweighted for 
industry, age, size, and geography to reduce coverage bias. See 2015 
Small Business Credit Survey: Report on Employer Firms, available at 
https://www.clevelandfed.org/community-development/small-business/
about-the-joint-small-business-credit-survey/2015-joint-small-
business-credit-survey.aspx.
    \416\ Id. The survey also showed differences in the use of 
online lenders by type of borrower: 26% and 21% of small businesses 
that have been in business for less than 2 years and 3-5 years, 
respectively, applied for credit with online lenders. By comparison, 
11% of small businesses with revenue between $1million-$10 million 
and 6% of small businesses with revenue greater than $10 million 
applied for credit to an online lender. Mature (older, higher 
revenue, greater number of employees) categories of small businesses 
were much more likely to apply for credit with bank lenders than 
with online lenders.
---------------------------------------------------------------------------

    Family and friends are also sources through which startups and 
small businesses can raise capital. This source of capital is usually 
available early in the lifecycle of a small business, before the 
business engages with arm's-length, more formal funding channels.\417\ 
Among other things, family and friends may donate funds, loan funds or 
acquire an equity stake in the business. A recent study finds that most 
of the capital supplied to startups by friends and family is in the 
form of loans.\418\ Family and friends, however, may be able to provide 
only a limited amount of capital compared to more formal sources. We do 
not have data available on these financing sources that could allow us 
to quantify their magnitude or compare them to other current sources of 
capital.
---------------------------------------------------------------------------

    \417\ See Paul Gompers and Josh Lerner, The Venture Capital 
Cycle (MIT Press 2006).
    \418\ See Robb Study, at 1219.
---------------------------------------------------------------------------

B. Analysis of Final Rules

1. Broad Economic Considerations
    The final rules are intended to streamline and modernize the 
capital raising options available to startups and small businesses, 
including through the use of intrastate and regional securities 
offering provisions that have been enacted or could be enacted by 
various states, and thereby promote capital formation within the larger 
economy.
    Securities-based crowdfunding is a relatively new and evolving 
capital market that provides startups and small businesses an 
alternative mechanism of raising funds by selling small amounts of 
securities to a large number of investors using the Internet. Title III 
of the JOBS Act directed the Commission to establish rules for an 
exemption that would facilitate this market at the federal level. 
Around the same time, some states began enacting intrastate 
crowdfunding statutes and rules that provide issuers with exemptions 
from state registration. Most intrastate crowdfunding provisions 
require issuers to comply with the requirements of Section 3(a)(11) and 
Rule 147, while three states currently provide issuers with the option 
of utilizing Rule 504 or another Regulation D exemption.\419\
---------------------------------------------------------------------------

    \419\ Maine's provisions currently permit interstate 
crowdfunding utilizing the Rule 504 exemption and Mississippi and 
Vermont dually offer intrastate crowdfunding under Section 3(a)(11) 
and interstate crowdfunding under Rule 504. See NASAA Letter.
---------------------------------------------------------------------------

    By establishing new Rule 147A and modernizing the existing 
requirements under Rule 147, the final rules could facilitate capital 
formation through intrastate crowdfunded offerings as well as through 
other state registered or state exempt offerings. Raising the offering 
amount limit under amended Rule 504 from $1 million to $5 million may 
facilitate smaller offerings, including those registered or exempt from 
registration in a particular state, or regional offerings made pursuant 
to regional state coordinated review programs.\420\ Such programs, when 
implemented, may enable issuers relying on Rule 504 to register an 
offering in any one rather than in each of the several states where 
they conduct offers and sales, thereby saving them time and money. In 
light of the current infrequent use of the Rule 505 exemption and the 
increase in the maximum offering size under Rule 504 to $5 million, 
repealing Rule 505 will simplify the existing Securities Act exemptive 
framework without significantly diminishing issuers' capital raising 
options.
---------------------------------------------------------------------------

    \420\ See http://www.nasaa.org/industry-resources/corporation-
finance/coordinated-review/. See also the ``Reciprocal Crowdfunding 
Exemption'' proposed by the Massachusetts Securities Division 
available at http://www.sec.state.ma.us/sct/crowdfundingreg/
Reciprocal%20Crowdfunding%20Exemption%20-%20MA.PDF.
---------------------------------------------------------------------------

    The amendments to Rule 147 and Rule 504 and the establishment of 
Rule 147A will remove or reduce certain impediments to capital raising 
identified by market participants and commenters.\421\ As discussed 
below, the effects of the final rules on capital formation will depend, 
first, on whether issuers that currently raise or plan to raise capital 
will choose to rely on the safe harbor and exemptions provided by 
amended Rules 147 and 504 and new Rule 147A in lieu of other methods of 
raising capital, such as Regulation Crowdfunding and Rule 506 of 
Regulation D. To assess the likely impact of the final rules on capital 
formation, we consider the features of amended Rules 147 and 504 and 
new Rule 147A that potentially could increase securities offerings by 
new issuers and by issuers that already rely on other private offering 
methods.
---------------------------------------------------------------------------

    \421\ See e.g., Transcript of Record at 78, SEC Advisory 
Committee on Small and Emerging Companies (June 3, 2015), available 
at http://www.sec.gov/info/smallbus/acsec/acsec-minutes-060315.pdf. 
See also 2015 Small Business Forum Recommendations; ABA Letter; 
CFIRA Letter; CrowdCheck Letter; Milken Letter.
---------------------------------------------------------------------------

    Second, to the extent that securities offerings relying on the 
final rules provide capital raising options for issuers that currently 
do not have access to capital, the final rules could enhance the 
overall level of capital formation in the economy, in addition to any 
reallocation of demand for capital amongst the various capital raising 
methods that could arise from issuers changing such methods.
    Third, to the extent that states currently have residency and 
eligibility requirements that correspond to existing Rule 147, the 
impact of amended Rule 147 and new Rule 147A on capital formation will 
significantly depend on whether state law is amended to align with the 
final rules. Any changes to intrastate and regional securities offering 
provisions that may be enacted by states would, in turn, affect the 
expected use of amended Rules 147 and 504 and new Rule 147A. Currently, 
most intrastate crowdfunding provisions require issuers to rely on Rule 
147 and Section 3(a)(11) for exemption from Securities Act 
registration. To the extent state law provisions are amended to allow 
these offerings to comply with amended Rule 147, new Rule 147A or 
amended Rule 504, the choice between these three exemptions could 
depend on issuers' preferences with respect to general solicitation, 
target investor base, issuer incorporation and investor location. For 
example, while issuers relying on the amended Rule 147 safe harbor must 
be incorporated in the state where they seek to conduct an intrastate 
offering, there is no such restriction for issuers relying on the Rule 
147A exemption. While both Rule 147 and Rule 147A offerings will be 
restricted to in-state investors, Rule 504 offerings will be available 
to investors in more than one state, thus facilitating regional 
offerings. At the same time, there is no limit on the maximum offering 
amount under amended Rule 147 or new Rule 147A, while amended Rule 504 
limits the maximum amount that can be sold over a twelve-month period 
to $5 million.
    Finally, the impact of the final rules on aggregate capital 
formation also will depend on whether new investors are attracted to 
the Rule 147, Rule 147A and Rule 504 markets or whether investors 
reallocate existing capital among

[[Page 83529]]

various types of offering methods. If the final rules allow issuers to 
reach a category of potential investors significantly different from 
those that they can reach through other offering methods, or attract 
existing investors to invest a greater share of their wealth in primary 
offerings, then capital formation, in aggregate, could increase. On the 
other hand, if the final rules are viewed as substantially similar to 
alternate offering methods, investors with limited investment capital 
may simply reallocate their capital from other markets to the Rule 147, 
Rule 147A or Rule 504 markets. Investor demand for securities offered 
under the final rules could, in particular, depend on the extent to 
which expected risk, return and liquidity of the offered securities 
compare to what investors can obtain from securities in other exempt 
offerings and in registered offerings.
    Investor demand also will depend on whether state disclosure 
requirements are sufficient to enable investors to evaluate the 
aforementioned characteristics of offerings made pursuant to Rules 147, 
147A or 504. For example, investors may be less willing to participate 
in offerings that are made in reliance on exemptions both from state 
and federal registration and that are subject to fewer disclosure 
requirements. For some investors, these concerns may be mitigated by 
other state and federal provisions, such as the amendment being adopted 
to disqualify certain bad actors from participation in Rule 504 
offerings or the disclosure requirements for larger intrastate 
crowdfunding offerings under state law provisions.\422\
---------------------------------------------------------------------------

    \422\ See NASAA's Intrastate Crowdfunding Resource Center, 
available at http://www.nasaa.org/industry-resources/corporation-
finance/instrastate-crowdfunding-resource-center/.
---------------------------------------------------------------------------

    In sum, we believe that the potential use of Rules 147, 147A and 
504 will depend largely on how issuers perceive the trade-off between 
the costs of compliance under federal provisions as well as state 
regulation, if any, and the benefits of access to non-accredited 
investors. For instance, relative to Regulation Crowdfunding, the 
extent to which issuers rely on Rules 147, 147A or 504 for intrastate 
crowdfunding offerings will depend on whether the benefits of a larger 
offering amount and fewer reporting requirements outweigh the costs of 
a more geographically limited investor base, compliance with issuer 
residency requirements and the potential for registration under Section 
12(g) of the Exchange Act. In this regard, we believe a small, local 
business that serves local customers (e.g., a hair salon or a pizza 
shop), rather than a scalable business like a technology start-up, is 
more likely to use intrastate crowdfunding than interstate 
crowdfunding.\423\ Compared to Rules 147, 147A and 504, other 
exemptions and safe harbors already being utilized could remain 
attractive to issuers. For example, offerings conducted pursuant to the 
exemption from registration under Rule 506(b) of Regulation D, which 
accounts for a significant amount of exempt offerings,\424\ are subject 
to limits on participation by non-accredited investors. In contrast, 
issuers relying on Rules 147, 147A or 504 could generally sell 
securities to an unlimited number of non-accredited investors, which 
would allow for a more diffuse investor base. General solicitation is 
currently permitted under Rule 506(c) of Regulation D, and issuers 
relying on Rule 506(c) can 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.\425\ In addition, offerings under Rule 506(b) that 
are limited to accredited investors require only a notice filing with 
the Commission and have no specified disclosure requirements. Finally, 
relative to Regulation A, Rules 147, 147A and 504 will have fewer 
disclosure and other regulatory requirements at the federal level. 
However, unlike securities issued in reliance on Regulation A, which 
are freely tradable, securities issued under Rules 147, 147A and 504 
could be less liquid due to their resale restrictions.
---------------------------------------------------------------------------

    \423\ See Nextseed Letter.
    \424\ See discussion in Section V.2 above.
    \425\ See e.g., NASDAQ Private Market overview, available at 
https://www.nasdaqprivatemarket.com/market/overview (explaining that 
``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.'').
---------------------------------------------------------------------------

    Overall, the amendments to Rules 147, 147A and 504 could increase 
the aggregate amount of capital raised if used by issuers that have not 
previously conducted securities offerings. The net effect also will 
depend on whether investors find the rules' investor protections to be 
sufficient to evaluate the expected return and risk of such offerings. 
As noted above, the final rules may have a limited impact on capital 
formation if they simply cause issuers to conduct, and investors to 
reallocate their participation across, different types of offerings. 
However, even redistribution among capital raising methods will have a 
net positive effect on capital formation and allocative efficiency if 
it allows issuers to access capital at a lower cost.
    As the final rules are not currently in effect, data does not exist 
to estimate the effect of the final rules on the potential rate of 
substitution between alternative methods of raising capital and the 
overall expansion or decline in capital raising by potential issuers 
affected by the rules. However, we anticipate that the final rules, by 
lowering investor search costs and easing issuer eligibility 
requirements, will result in an increased use of the federal intrastate 
offering provisions, including for intrastate crowdfunding, as more 
states enact provisions facilitating such offerings. Similarly, we 
expect the final rules will increase the use of the Rule 504 exemption, 
especially by facilitating efforts among state securities regulators to 
implement regional coordinated review programs that will enable 
regional offerings. Although it is not possible to predict the extent 
of such increase or the type and size of issuers that will conduct 
intrastate and small regional offerings, the current number of 
businesses pursuing similar levels of financing through alternative 
capital raising methods, as discussed in the baseline analysis above, 
provide an upper bound for Rule 147, Rule 147A and Rule 504 usage.\426\ 
Nevertheless, the baseline data show that the potential number of 
issuers that might seek to offer and sell securities in reliance on 
Rules 147, 147A and 504 is large, particularly when compared to the 
current number of approximately 9,000 reporting companies.\427\
---------------------------------------------------------------------------

    \426\ We believe the numbers in the baseline analysis provide an 
upper bound because, unlike Rule 147 offerings, investors from 
multiple states are permitted to invest in Regulation D offerings, 
which attracts more issuers, especially those that want to raise 
larger amounts. Similarly, unlike Rule 504, Rule 506 provides state 
law preemption and permits unlimited offering amounts, which appears 
to make Rule 506 offerings more attractive for issuers.
    \427\ See U.S. Securities and Exchange Commission, FY 2016 
Congressional Budget Justification, 2016 Annual Performance Plan, FY 
2014 Annual Performance Report, available at http://www.sec.gov/
about/reports/secfy16congbudgjust.pdf.
---------------------------------------------------------------------------

    We recognize that the amendments to Rules 147 and 504 and new Rule 
147A could raise investor protection concerns. For instance, as 
discussed in detail further in this section, allowing issuers with more 
geographically dispersed assets and revenues than currently permitted 
to rely on Rules 147 and 147A may raise concerns about reduced 
oversight by state securities regulators. We believe however, that the 
amended ``doing business'' tests along

[[Page 83530]]

with the principal place of business requirement are sufficient to 
provide assurance of the local nature of an issuer's business 
operations.\428\ We also believe such concerns are mitigated by the 
continuing applicability of state regulatory requirements, which may 
impose additional eligibility conditions for issuers in these 
offerings, as well as the residency requirements for investors that 
remain under the final rules.
---------------------------------------------------------------------------

    \428\ See also NASAA Letter and CFA Letter.
---------------------------------------------------------------------------

    Similarly, there could be concerns about not having an offering 
size limit at the federal level or not requiring a limit under state 
law if the issuer relies on a state exemption for an intrastate 
offering. In adopting existing Rules 147, 504 and 505, the Commission 
relied substantially upon state securities laws and regulations on the 
rationale that the size and/or local nature of smaller offerings 
conducted pursuant to these provisions does not warrant imposing 
extensive regulation at the federal level.\429\ The final rules 
preserve this approach by permitting state legislators and securities 
regulators to determine the specific additional rule requirements, if 
any, that should be mandated to regulate local offerings and provide 
additional investor protections. In this regard, the final rules 
provide greater flexibility to states in designing regulations that 
would work best for issuers and investors in their respective 
jurisdictions. We believe that such latitude could improve the 
efficiency of local capital markets and lead to competition between 
states in attracting issuers to locate to their jurisdictions.
---------------------------------------------------------------------------

    \429\ See Seed Capital Release and Rule 147 Adopting Release. 
See also, ABA Letter and NASAA Letter.
---------------------------------------------------------------------------

    In addition to state regulations, the amendments to Rule 504 to 
disqualify certain bad actors from participation in Rule 504 offerings 
could help to address such investor protection concerns. We also note 
that the Commission will retain authority under the antifraud 
provisions of the federal securities laws to pursue enforcement action 
against issuers and other persons involved in such offerings.\430\ 
Nevertheless, if investors demand higher returns because of a perceived 
increase in the risk of fraud as a result of less extensive federal 
regulation, issuers may face a higher cost of capital. We are unable to 
predict if or how the final rules will affect the incidence of fraud in 
intrastate and Rule 504 offerings.
---------------------------------------------------------------------------

    \430\ See, e.g., Seed Capital Release at note 20 and 
accompanying text (Rule 504 offerings are subject to Section 17 of 
the Securities Act [15 U.S.C. 77q(a), Section 10(b) of the Exchange 
Act [15 U.S.C. 78j(b) and Rule 10b-5 thereunder [17 CFR 240.10b-5]).
---------------------------------------------------------------------------

    The impact of the repeal of Rule 505 will depend on the trade-offs 
that Rule 505 issuers and investors face when switching to alternate 
offering methods, predominantly other unregistered offerings. This will 
be contingent on whether issuers can raise the desired amount of 
capital at the same or lesser cost as under Rule 505 in a timely 
manner.
    For example, if issuers switch to offerings under Rule 506(b), they 
may only offer and sell to investors that are accredited or that, 
unlike in a Rule 505 offering, either alone or with a purchaser 
representative,\431\ are sophisticated (i.e., have sufficient knowledge 
and experience in financial and business matters to make them capable 
of evaluating the merits and risks of the prospective investment). 
However, the possibility of raising unlimited amounts of capital and 
preemption from state blue sky laws may offset some of these concerns 
for potential issuers that subsequent to the repeal of Rule 505, would 
switch to a Rule 506 offering. In contrast, if issuers switch to 
offerings under amended Rule 504, they could replicate most 
characteristics of an offering under existing Rule 505 and receive some 
additional benefits, such as access to an unlimited number of non-
accredited investors and the ability to engage in general solicitation 
in certain situations. However, reporting companies, albeit a small 
proportion of all Rule 505 issuers,\432\ are not permitted to utilize 
the Rule 504 exemption.
---------------------------------------------------------------------------

    \431\ A purchaser representative is someone who is not an 
affiliate of the issuer but has such knowledge and experience in 
financial and business matters that he is capable of evaluating, 
alone, or together with other purchaser representatives of the 
purchaser, or together with the purchaser, the merits and risks of 
the prospective investment. See also Rule 501, Regulation D of 
Securities Act.
    \432\ As discussed in Section IV(A)(1)(ii), the number of 
reporting companies that conducted a Rule 505 offering during 2014 
and 2015 was 10 and 8, respectively.
---------------------------------------------------------------------------

    As an alternative to Rule 505, issuers may also opt for a 
registered offering to raise capital. As noted above, a registered 
offering may not be economically feasible for small issuers relative to 
an exempt offering,\433\ but may provide a reasonable alternative for 
Rule 505 issuers that are reporting companies. Registered offerings, 
unlike Rule 505 or Rule 506(b) offerings, have benefits like providing 
investors with unrestricted securities, and providing issuers access to 
an unlimited number of non-accredited investors and investors who 
prefer offerings that have the protections of the registration process. 
On the other hand, the costs of registering an offering compared with 
costs of raising capital through an exempt offering, including Rule 505 
or Rule 506(b) offerings, may also affect an issuer's willingness to 
switch to a registered offering. Such costs include the costs of 
disclosure required for a registered offering relative to the 
disclosure required under Rule 505 or 506(b) when non-accredited 
investors are solicited,\434\ including any costs associated with 
Commission staff review of the registration statement. Recent 
regulatory changes to Form S-1 \435\ that permit forward incorporation 
by reference of certain information required under Exchange Act 
reporting requirements may have lowered the costs of registered 
offerings for eligible smaller reporting companies by eliminating the 
need to update information in the Form S-1 that has become stale or is 
incomplete through a post-effective amendment. Whether Rule 505 
issuers, in particular those that are reporting companies, switch to a 
registered offering or another form of unregistered offering such as 
Rule 506 offering will depend on how they assess such costs of 
registration relative to the benefits like broader access to non-
accredited investors.\436\
---------------------------------------------------------------------------

    \433\ See discussion in Section V(A(1)(c)(2) above.
    \434\ The disclosure requirements under Rule 505 and Rule 506(b) 
for an Exchange Act reporting issuer that sells securities to a non-
accredited investor are similar to the disclosure requirements for a 
registered offering under the Securities Act. See Rule 502(b)(2)(ii) 
of Regulation D. Note that if the Rule 505 or 506(b) offering is 
soliciting only accredited investors, there is no equivalent 
requirement for information being furnished.
    \435\ See note 330 above.
    \436\ See, e.g., Armando Gomes and Gordon Phillips, ``Why Do 
Public Firms Issue Private and Public Securities?'', J. FINAN. 
INTERMEDIATION, March 21, 2012 which find that choice of public 
versus private financing depends on asymmetric information, risk and 
market timing. See also Hsuan-Chi Chen, Na Dai, John Schatzberg, 
``The Choice of Equity Selling Mechanisms: PIPEs versus SEOs'', J. 
CORP. FIN., August 21, 2009.
---------------------------------------------------------------------------

    The effect of the repeal of Rule 505 will also depend on investors' 
willingness and ability to participate in an alternate unregistered 
offering, such as a Rule 504 or Rule 506 offering, or a registered 
offering. This willingness will rest on whether investors find 
disclosure requirements and investor protections in alternate markets 
to be sufficient, relative to the Rule 505 market, to evaluate the 
expected return and risk of such offerings. For example, it is possible 
that investor protection levels will be perceived to be lower in a Rule 
506 offering as these offerings are preempted from state or Commission 
registration. In addition, ``unsophisticated'' non-accredited investors 
that may have been able to participate in a Rule 505 investment

[[Page 83531]]

opportunity may not be able to participate in a Rule 506(b) offering 
without a purchaser representative and hence may find their set of 
investment opportunities reduced. Similarly, while more than 35 non-
accredited investors (the maximum eligible to invest in a Rule 505 
offering) will be able to participate in an offering under amended Rule 
504, Rule 504 has fewer disclosure requirements at the federal level 
relative to a Rule 505 or 506 offering, which may raise potential 
investor protection concerns. Such concerns, however, may be offset by 
disclosure requirements imposed at the state level. Thus, the net 
impact on the overall level of investor protection will likely depend 
on the capital markets that substitute for the repealed Rule 505 
market.
    Overall, the repeal of Rule 505 may not have a significant or any 
impact on capital formation if issuers can successfully find 
commensurate investor interest in an alternate unregistered or 
registered offering market. If issuers are not able to find an 
alternate exemption and raise sufficient amounts of capital, an outcome 
we believe is unlikely, overall capital formation in the economy and 
allocative efficiency of capital markets could slightly decline.
    In the sections below, we analyze in more detail the potential 
costs and benefits stemming from the specific amendments and new rule 
being adopted today, as well as their impact on efficiency, competition 
and capital formation, relative to the baseline discussed above.
2. Analysis of Amendments to Existing Rule 147 and New Rule 147A
    The amendments to Rule 147 and new Rule 147A will modernize and 
expand the options available under federal law for exempt intrastate 
offerings by local companies, including offerings relying upon 
crowdfunding provisions under state securities laws.
a. Retention of Existing Rule 147
    The proposed amendments would have replaced the existing Rule 147 
safe harbor with a new intrastate offering exemption. In contrast, the 
final rules amend Rule 147 and retain it as a safe harbor under Section 
3(a)(11), while also establishing new Rule 147A pursuant to the 
Commission's general exemptive authority under Section 28. Because most 
state crowdfunding provisions require issuers to comply with Section 
3(a)(11) and Rule 147, retention of Rule 147 within the statutory 
parameters of Section 3(a)(11) will enable issuers to continue to rely 
upon the existing safe harbor to conduct intrastate offerings until 
states update their laws or regulations to allow issuers to rely on new 
Rule 147A.\437\ This will help to ensure that intrastate offering 
activity is not adversely affected during the interim period or in 
states that do not amend their laws, and will thus provide greater 
certainty to market participants, including issuers and investors who 
participate in such intrastate offerings.\438\ Together, the amendments 
to Rule 147 and new Rule 147A seek to modernize federal regulation of 
intrastate offerings to comport with contemporary business practices 
and communications technology, while retaining the underlying intent of 
the rules to permit issuers to raise money from investors resident 
within the same state without registering the offering at the federal 
level.
---------------------------------------------------------------------------

    \437\ Most states that have enacted state crowdfunding 
provisions require issuers to comply with the provisions of Section 
3(a)(11) and Rule 147. See note 30 above.
    \438\ See, e.g., ABA Letter, NASAA Letter, CrowdCheck Letter, 
Guzik Letter, NextSeed Letter and the 2015 Small Business Forum 
Recommendations.
---------------------------------------------------------------------------

    Amended Rule 147 will differ from new Rule 147A with respect to two 
provisions that are statutorily mandated by Section 3(a)(11). Under 
Section 3(a)(11), and by extension the safe harbor under Rule 147, 
offers can be made only to in-state residents and issuers are required 
to be incorporated in the state where they conduct the intrastate 
offering. The provisions of new Rule 147A will not include these two 
limitations; however, both Rule 147 and 147A will require an issuer to 
have its principal place of business within the state or territory of 
the offering. In the following sections, we first discuss the economic 
effects of not including the two statutory limitations contained in 
Rule 147 within new Rule 147A and then discuss the amendments that are 
substantially identical under Rules 147 and 147A.
b. Distinguishing Provisions Under New Rule 147A
i. Elimination of Restrictions on Manner of Offering
    Offers pursuant to current and amended Rule 147 must be limited to 
in-state residents.\439\ However, the provisions under new Rule 147A 
will allow an issuer to make offers to out-of-state residents, as long 
as sales are made only to residents of the issuer's state or 
territory.\440\ Both amended Rule 147 and new Rule 147A require issuers 
to include prominent disclosures on all offering materials stating that 
sales will be made only to residents of the same state or territory as 
the issuer, while also disclosing that the securities are being sold in 
an unregistered offering and have resale restrictions for a six-month 
period.\441\ In addition, under both rules, states retain the 
flexibility to impose additional disclosure or other requirements 
related to offers and sales made in the intrastate offering. As 
Internet-based advertising is easily accessible across state lines, 
issuers relying on existing Rule 147 that choose to disseminate 
offering materials using online media could have a higher risk of being 
non-compliant unless they take additional and potentially costly 
precautions to restrict any advertising that can be viewed outside 
their state of incorporation. Eliminating manner of offering 
restrictions in Rule 147A will allow issuers to engage in broad-based 
solicitations, including on publicly accessible Web sites, in order to 
successfully locate potential in-state investors. For example, an 
issuer resident in New Jersey will be permitted under Rule 147A to 
advertise and disseminate offering information through online media to 
reach New Jersey residents, including those who may work and access the 
online solicitation while in New York. Thus, Rule 147A will provide 
issuers with the flexibility to utilize a wider array of options to 
advertise their offerings, allowing them to take advantage of modern 
communication technologies such as the Internet and other social media 
platforms to reach investors.\442\ In this regard, we expect Rule 147A 
to be particularly effective at facilitating state-based crowdfunding 
offerings that rely heavily on online platforms to bring issuers and 
investors together.\443\ Online advertising provides a lower cost and 
more efficient means of communicating with a more diffused base of 
prospective investors. Consequently, eliminating manner of offering 
restrictions in Rule 147A should result in lower search costs for Rule 
147A issuers. The provisions may facilitate compliance with the rules' 
requirements as issuers will not need to limit advertising or take 
additional precautions to ensure that only in-state residents view the 
offering.
---------------------------------------------------------------------------

    \439\ See Rule 147(b).
    \440\ See Rule 147A(b).
    \441\ See Rules 147(f) and 147A(f).
    \442\ See also ABA Letter, CFA Letter, Nextseed Letter.
    \443\ See Massolution 2015 Report.
---------------------------------------------------------------------------

    Under the final rules, issuers will be able to choose between 
utilizing Rule 147 and Rule 147A for intrastate offerings based on 
their preferences for communicating with investors. This

[[Page 83532]]

could enable a larger number of issuers to utilize intrastate offerings 
to meet their capital raising needs. To the extent issuers shift from 
another unregistered capital market to the Rule 147A market, capital 
formation may not increase but the allocative efficiency of capital 
markets could improve, if issuers are able to meet their capital 
raising needs more effectively and investors are better able to find 
investment opportunities that satisfy their financial objectives. We 
believe that eliminating the manner of offering restrictions in Rule 
147A will attract a number of new issuers that previously could not 
avail themselves of lower-cost capital raising opportunities, such as 
intrastate crowdfunding, that primarily rely on online media to 
advertise the offering to large numbers of investors. Such improved 
access to cheaper capital raising methods may result in higher levels 
of capital formation in the economy.
    In addition, eliminating manner of offering restrictions in Rule 
147A may result in a greater number of investors becoming aware of a 
larger and more diverse set of investment opportunities in private 
offerings, enabling them to diversify their investment portfolios and 
allocate their capital more efficiently. Further, broadly advertised 
offerings under Rule 147A may compete for potential investors more 
effectively with offerings where general solicitation is also 
permitted, such as Rule 504, Rule 506(c), and Regulation A offerings. 
The final rules could thus intensify competition among unregistered 
capital markets for attracting issuers that want to raise capital and 
investors that are looking for suitable investment opportunities. An 
increase in competition could change the number and type of market 
participants across various markets, which would impact the relative 
demand for and supply of capital in each of these markets.
    However, as issuers utilizing Rule 147A advertise more widely and 
freely, the likelihood of out-of-state investors purchasing into an 
intrastate offering could increase. The inclusion of legends and other 
mandatory disclosures may mitigate this concern and may provide a 
certain measure of investor protection, although out-of-state investors 
in their desire to participate in an attractive investment opportunity 
may overlook the legends or disclosures or may simply disregard them. 
While issuers are required to have a reasonable belief that all their 
purchasers are resident within the state and obtain a written 
representation from each purchaser as to his or her residence, the 
probability of circumventing the out-of-state sale restrictions by 
investors who misrepresent their residency status could increase as 
out-of-state residents may view Internet-based advertising and become 
aware of Rule 147A offerings in another state. Likewise, there may be 
an increased probability that out-of-state purchasers will attempt to 
purchase in resale transactions that occur within the restricted 
period. However, due to inclusion of rule provisions such as the 
requirement of written representation by investors as to their 
residency status as well as requirements related to legends, transfer 
agent instructions and prominent disclosure about limitations on 
resales, we believe that such concerns may not be significantly higher 
than under amended Rule 147, which retains the restrictions related to 
manner of offerings. Allowing Internet-based advertising of Rule 147A 
offerings and the potential increased use of the intrastate offering 
exemptions could also impact the effectiveness of state oversight if 
regulators do not have adequate resources to monitor the manner in 
which these securities are marketed to the general public. Overall, we 
believe that the final rules will modernize existing regulations to 
reflect modern business practices and technological developments while 
maintaining appropriate investor protections.
ii. Incorporation and Principal Place of Business Requirements
    New Rule 147A will eliminate the current requirements in Rule 147 
for issuers to be incorporated and have their principal office in the 
state where an offering is being conducted. In order to establish 
sufficient in-state presence to be eligible to conduct an exempt 
intrastate offering, in lieu of such requirements, Rule 147A will 
require issuers to have their principal place of business in the state 
where an offering is conducted. The principal place of business will be 
defined as the location from which officers, partners or managers of 
the issuer primarily direct, control and coordinate the activities of 
the issuer.\444\
---------------------------------------------------------------------------

    \444\ See Rule 147A(c)(1). Corporations, limited partnerships 
and trusts relying on amended Rule 147 will continue to be required 
to be organized or incorporated in the state where the offering is 
being conducted in order to establish in-state residency. Rule 
147(c), however, will be amended by replacing the principal office 
requirement with a principal place of business requirement. We 
believe principal place of business is conceptually similar to 
principal office location. See Section II(A)(2).
---------------------------------------------------------------------------

    We believe that the elimination of the incorporation or 
organization in-state requirement in Rule 147A better comports with 
modern business practices and thereby will make it easier for a greater 
number of issuers to utilize the new exemption, relative to amended 
Rule 147. A significant number of public and private companies are 
incorporated in states other than the state in which their principal 
place of business is located, thereby precluding otherwise eligible 
issuers from utilizing Rule 147 to conduct an intrastate offering.\445\
---------------------------------------------------------------------------

    \445\ For example, based on analysis of EDGAR filing data, 76% 
of Exchange Act reporting companies indicated, in their 2015 Form 
10-K filings, that they had a separate state of principal executive 
office and state of incorporation. Analyzing by size (assets), more 
than two-thirds of the smallest 10% of reporting companies reported 
different states of incorporation and principal office. The practice 
of incorporating in different states extends beyond public companies 
to private and smaller companies. During 2009-2015, 37% of Rule 504 
offerings and 39% in Rule 505 offerings indicated in their Form D 
filings that they had different states of incorporation and 
principal place of business. See baseline analysis in Section 
IV(A)(1)(ii). Form D data also indicates that approximately 65% of 
all Rule 506 offerings initiated during 2009-2015 reported different 
states of incorporation and operations. While smaller companies may 
be less likely than larger companies to have separate states of 
incorporation and principal places of business, Form D data 
indicates that a considerable number of small businesses are 
currently unable to meet the state of incorporation requirement in 
existing Rule 147.
---------------------------------------------------------------------------

    Most of these companies have chosen to incorporate in jurisdictions 
where corporate laws are consistent with modern business practices or 
provide more flexibility.\446\ For example, according to one academic 
study, corporate laws affect company value, even after controlling for 
company size, diversification, profitability, investment opportunities 
and industry.\447\ Thus, companies may have strong incentives to select 
perceived favorable regimes, such as that of Delaware.\448\ These 
studies and industry practices indicate that companies' choice of state 
of incorporation depends on the economic benefits derived from the 
regulatory environment in which the company is organized and not 
necessarily where the company operates most efficiently.
---------------------------------------------------------------------------

    \446\ See ABA Letter, CFA Letter, CrowdCheck Letter, Milken 
Letter.
    \447\ Robert Daines, ``Does Delaware Law Improve Firm Value?'' 
J. Fin. Econ., Volume 62, Issue 3 (2001) at 525-558.
    \448\ See Scott D. Dyreng, Bradley P. Lindsey, Jacob R. 
Thornock, ``Exploring the Role Delaware Plays as a Domestic Tax 
Haven,'' J. Fin. Econ., Volume 108, Issue 3, (2013) at 751-772 
(explaining that Delaware's tax laws play an economically important 
role in U.S. companies' decision to locate in Delaware).
---------------------------------------------------------------------------

    Since the geographical location of investment and employment is 
aligned more closely with the principal place of business of a company 
than where it is incorporated, we believe replacing the current 
incorporation and residency requirements of current Rule 147 with a 
principal place of business requirement in Rule 147A will be sufficient 
to

[[Page 83533]]

establish the in-state nature of the issuer's business. Such a change 
will also be consistent with the objectives of the current intrastate 
offering exemption, while making it easier for more issuers to utilize 
the new exemption relative to the amended Rule 147 safe harbor under 
Section 3(a)(11).
    By not requiring issuers to be incorporated in-state, it may be 
possible for foreign incorporated issuers that have their principal 
place of business in a U.S. state to be able to access the Rule 147A 
capital market. This will create a uniform standard for companies that 
are operating locally, irrespective of their country or state of 
incorporation, to utilize the Rule 147A exemption. Form D filings for 
the period 2009-2015 reported that approximately 2.5% of Regulation D 
offerings (approximately 3,211 offerings) were initiated by issuers 
that were incorporated outside of the United States and had their 
principal place of business in a U.S. state. Allowing issuers to raise 
capital in the state in which it has its principal place of business, 
without regard to the jurisdiction of incorporation under new Rule 
147A, could enable issuers to organize or incorporate in foreign 
jurisdictions with perceived advantages that may increase the financial 
viability of such issuers, especially for early stage companies. 
However, to the extent that it is more difficult to enforce securities 
and other relevant laws against such foreign organized or incorporated 
issuers, risks to investors in such issuers could increase. Overall, 
given the intrastate character of Rule 147A offerings, we do not think 
it likely that a significant number of foreign issuers will seek to 
utilize this exemption.
    Under Rule 147 and Rule 147A, issuers will be able to have a 
``principal place of business'' within only one state or territory, and 
therefore the issuer will be able to conduct an intrastate (Rule 147 or 
Rule 147A) offering in only one state or territory. To mitigate the 
risk of issuers switching their principal place of business to a 
different state in order to conduct Rule 147 or Rule 147A offerings in 
multiple states, the final rules limit issuers that change their 
principal place of business from utilizing the exemption to conduct 
another intrastate offering in a different state for a period of six 
months from the date of last sale of securities under the prior Rule 
147 or Rule 147A offering. These provisions will help to deter issuers 
from misusing the amended residency requirements to change their 
principal place of business in order to sell to residents in multiple 
states. The duration of this limitation is consistent with the period 
for which resales to out-of-state investors will be prohibited.
    To the extent a change in principal place of business to a new 
state is motivated by business or regulatory considerations, this 
amendment could affect the capital raising prospects of companies by 
requiring them to delay their subsequent intrastate offerings or seek 
to conduct an offering under another exemption. For example, certain 
start-ups and small businesses that could potentially relocate their 
principal place of business in pursuit of costs savings could be 
affected by the final rules.
c. Common Requirements of Amended Rule 147 and New Rule 147A
i. ``Doing Business'' In-State Tests
    Similar to the proposed amendments, the final rules will modify the 
current ``doing business'' in-state requirements in Rule 147 by 
requiring issuers to satisfy one of four specified tests. A similar 
requirement will be included in Rule 147A. The specified tests will 
include a new test whereby issuers can satisfy the ``doing business'' 
requirement if a majority of their employees are located in the 
offering state. Specifically, under amended Rule 147 and new Rule 147A, 
in order to be deemed ``doing business'' in a state, issuers will have 
to satisfy at least one of the following requirements:
     80% of the issuer's consolidated assets are located within 
such state or territory;
     80% of the issuer's consolidated gross revenues are 
derived from the operation of a business or of real property located in 
or from the rendering of services within such state or territory;
     80% of the net proceeds from the offering are intended to 
be used by the issuer, and are in fact used, in connection with the 
operation of a business or of real property, the purchase of real 
property located in, or the rendering of services within such state or 
territory; or
     A majority of the issuer's employees are in such state or 
territory.
    The modifications to the existing ``doing business'' in-state tests 
will modernize the Rule 147 safe harbor and provide greater flexibility 
to potential issuers relying on Rules 147 and 147A to conduct 
intrastate offerings. This will ease issuer burden in complying with 
the provisions, while also better aligning the rules with modern 
business practices such that issuers will be able to use the test that 
best reflects the local nature of their business operations.\449\
---------------------------------------------------------------------------

    \449\ See also CFA Letter.
---------------------------------------------------------------------------

    Rule 147 currently requires issuers to satisfy all three ``doing 
business'' in-state tests, which can be burdensome even for small 
businesses that have a strong nexus to one state. For example, for some 
startups and early stage ventures that are unable to access alternate 
methods of raising capital and therefore seek to rely on the intrastate 
offering exemption, the existing ``doing business'' tests, by 
restricting these issuers' operations and capital investments 
substantially to one state may have adverse effects on their growth and 
viability. Moreover, in recent years new business models have emerged 
that may make satisfying all three tests ill-suited for issuers who 
would otherwise be able to rely on Rule 147 as a capital raising 
option. For example, businesses that use new technologies (e.g., e-
businesses) to make their operations more efficient tend to be more 
geographically distributed in their operations or revenues than what is 
permitted under current Rule 147.\450\ According to an academic study, 
advances in computing and communications have fundamentally changed how 
information can be stored, distributed, modified or assimilated, which 
has enabled businesses to become more geographically dispersed and 
modular rather than centralized into discrete units.\451\ Similarly, 
the growth of modern technologies has made it easier for companies, 
through e-commerce and shared logistical networks, to reach a larger 
and more diffused customer base, leading to more dispersed revenue 
streams.
---------------------------------------------------------------------------

    \450\ Consider the example of an e-commerce company that invests 
in distribution facilities outside its state to meet the needs of 
customers who are resident outside that state. Under current 
requirements, such an issuer may be able to invest only a small part 
(less than 20%) of the capital raised in a Rule 147 offering outside 
its principal state of business to remain eligible for the 
exemption. See also NASAA Letter.
    \451\ See Mohanbir Sawhney and Deval Parikh, ``Where Value Lives 
in A Networked World,'' Harvard Business Review (2001).
---------------------------------------------------------------------------

    Requiring an issuer to own a majority of its assets, invest most of 
the capital it raises, and obtain its revenue in one state could create 
inefficient constraints for startups and small businesses to operate 
and grow in the modern business environment. While the original intent 
of Section 3(a)(11) and Rule 147 was to ensure that investors and 
issuers are located in the same state so that they are potentially 
familiar with each other,\452\ current business practices of issuers, 
consumption habits of customers, and the set of available investment 
opportunities of investors have expanded greatly since Rule 147

[[Page 83534]]

was adopted in 1974. In view of these changes, we believe that the 
modifications to the ``doing business'' requirements in the final rules 
will provide issuers with greater flexibility in conducting intrastate 
offerings and help to eliminate potential uncertainty about the 
availability of intrastate offering exemptions.
---------------------------------------------------------------------------

    \452\ See Rule 147 Adopting Release.
---------------------------------------------------------------------------

    Compared to current Rule 147, the revised ``doing business'' 
requirements in the final rules will enable a greater number of 
companies to rely on Rule 147 or Rule 147A to raise capital through 
local offerings. Such new issuers could be those entities that are 
currently accessing capital through alternate means, or they could be 
issuers that could not previously raise sufficient amounts of capital 
in any market but would be able to use amended Rule 147 or new Rule 
147A to meet their funding needs. In addition, to the extent raising 
capital in a Rule 147 or Rule 147A offering is less costly than raising 
capital using alternate means, issuers will benefit from such lower 
costs. Easier access to local capital may enable issuers to finance 
investment opportunities in a timely manner, thereby accelerating 
company growth and promoting state employment and economic growth.
    As more companies become eligible or are willing to raise capital 
pursuant to amended Rule 147 or new Rule 147A, the set of investment 
opportunities for investors will also increase in a corresponding 
manner, resulting in greater allocative efficiency and capital 
formation. These economic benefits generally depend on the extent to 
which increased use of the intrastate offering provisions, compared to 
current Rule 147, arises as a result of substitution out of other types 
of offerings. On one hand, if increased use of the intrastate offering 
provisions causes issuers and investors to migrate from other types of 
offerings as a result of marginally more attractive prospects for 
investment and capital raising, the aggregate increase in capital 
formation may not be significant but competition amongst types of 
private offerings will be higher.\453\ On the other hand, if amended 
Rule 147 or new Rule 147A attracts new issuers, capital formation 
levels will increase in the economy. We believe that, by facilitating 
intrastate crowdfunding, the final rules could provide new company 
growth and consequently lead to an overall increase in capital 
formation. Further, the final rules could lead to increased capital 
formation by facilitating other state registered or exempt offerings, 
including those with amounts greater than what is allowed for 
intrastate crowdfunding offerings. However, since we do not have data 
on the existing use of Rule 147, we are unable to quantify or predict 
the extent of any increase in offering activity under amended Rule 147 
or new Rule 147A.
---------------------------------------------------------------------------

    \453\ We note that issuers that meet current requirements under 
existing Rule 147 will also be eligible to rely on amended Rule 147 
or Rule 147A.
---------------------------------------------------------------------------

    At the same time, if issuers with assets and operations dispersed 
over more than one state make use of amended Rule 147 or new Rule 147A, 
there may be concerns that state oversight of such issuers could 
weaken, with a consequent reduction in investor protection. We believe, 
however, that qualifying under any one of the four ``doing business'' 
in-state tests and requiring an issuer to have its principal place of 
business in the state, such that the officers and managers of the 
issuer primarily direct, control and coordinate the activities of the 
issuer in the state, will provide state regulators with a sufficient 
basis from which to monitor an issuer's activities and enforce state 
securities laws for the protection of their residents.\454\ Further, 
state enforcement actions aimed at protecting in-state investors can 
extend to issuers whose assets are located beyond the boundaries of the 
state, which could potentially deter issuers from engaging in 
fraudulent intrastate offerings. Moreover, with the adoption of 
amendments to Rule 147 and new Rule 147A, state regulators may choose 
to amend their state regulations to comport with these provisions, 
which would allow them to consider any additional requirements, 
including qualification tests, for issuers to comply with state 
securities offerings regulations.
---------------------------------------------------------------------------

    \454\ See also CFA Letter and NASAA letter.
---------------------------------------------------------------------------

    Finally, we note that the high threshold levels specified in the 
final rules' ``doing business'' tests may preclude certain issuers 
whose business models result in widely distributed operations (e.g., 
some e-commerce companies) from qualifying under any of the four tests 
and thus from relying on these intrastate offering provisions. Such 
issuers could rely on alternate capital raising methods such as 
Regulation Crowdfunding. To the extent these issuers are unable to 
raise the required capital through alternate methods, these provisions 
could adversely impact capital formation and investment opportunities 
for such firms. We believe, however, that the vast majority of issuers 
will be able to satisfy the ``doing business'' test requirements in 
order to qualify for local capital-raising.
ii. Reasonable Belief and Written Representation as to Purchaser 
Residency Status
    Amended Rule 147 and new Rule 147A include a reasonable belief 
standard for determining whether a purchaser is a state resident at the 
time of the sale of the securities. In a change from the proposed 
rules, the final rules will retain the requirement of current Rule 147 
that an issuer obtain investor representations as to his or her 
residency status. The reasonable belief standard is conceptually 
consistent with similar requirements in Regulation D offerings and will 
provide greater certainty to issuers as to their compliance with the 
conditions of the exemption, potentially encouraging greater reliance 
on the final rules.\455\
---------------------------------------------------------------------------

    \455\ See NASAA Letter.
---------------------------------------------------------------------------

    Retaining the written representation requirement could constrain 
issuer flexibility if the requirement predisposes them to rely on 
particular modes of residency verification over others.\456\ It could 
also result in somewhat higher compliance costs for issuers. At the 
same time, the requirement could help to better ensure that issuers are 
selling to investors who are residents of the state in which the 
offering is being conducted. In this way, requiring a representation as 
to the purchaser's residency may mitigate some of the investor 
protection concerns raised by commenters.\457\ While a formal 
representation of residency by itself is not sufficient to establish a 
reasonable belief that such purchasers are in-state residents, the 
representation requirement, together with the reasonable belief 
standard, may result in better compliance with the final rules, which 
would serve to increase investor protections. It is possible, however, 
that some issuers may consider a written representation to be 
dispositive of reasonable belief of investor's residency status, which 
would increase the risk of issuers' violating the final rules.
---------------------------------------------------------------------------

    \456\ For example, issuers may find it easier to obtain a proof 
of residency document directly from the purchaser along with a 
written representation, whereas they may have found it more 
efficient to rely on an alternate mode like third-party verification 
if a written representation was not required.
    \457\ See CFA Letter, CrowdCheck Letter, NASAA Letter.
---------------------------------------------------------------------------

    As an alternative, we considered providing a safe harbor for 
determining purchaser's residence, as requested by several 
commenters.\458\ A safe harbor could provide greater certainty for 
issuers as to their compliance with the rules' provisions, potentially

[[Page 83535]]

encouraging greater use of the intrastate offering exemptions and 
enhancing capital formation. However, a safe harbor also could be 
viewed as an exclusive or a minimum standard that could restrict issuer 
choice of verification methods, and we believe that requiring issuers 
to consider the facts and circumstances of the offering and sale will 
best serve issuers' compliance with the final rules.
---------------------------------------------------------------------------

    \458\ See CFIRA Letter; CrowdCheck Letter; Localstake Letter; 
WBA Letter.
---------------------------------------------------------------------------

iii. Residence of Entity Purchasers
    Amended Rule 147 and new Rule 147A define the residence of a 
purchaser that is a legal entity--such as a corporation, partnership, 
trust or other form of business organization--as the location where, at 
the time of the sale, the entity has its principal place of business. 
This definition will create consistency in defining the place of 
residence of entity investors with that of the issuer while also 
helping to ensure that investors are sufficiently local by nature.
iv. Limitations on Resales
    Consistent with the proposal, amended Rule 147 and new Rule 147A 
will limit resales to in-state residents during a defined restricted 
period from the date of sale by the issuer. In a change from the 
proposed rules, this restricted period has been reduced from nine to 
six months. Current Rule 147 provides a restricted period of nine 
months, and the start date for the restricted period is from ``date of 
last sale'' rather than from the ``date of sale'' for the particular 
security in question. In addition, the issuers' ability to rely on 
Rules 147 and 147A will not be conditioned on a purchaser's compliance 
with the rules' resale restrictions.
    Under the final rules, after expiration of the restricted period, 
investors will be able to sell their securities to out-of-state 
purchasers, even if the offering is not yet completed. While reducing 
the restricted period to six months may raise investor protection 
concerns, including concerns about increased probability that the 
securities will be purchased with an intention to distribute, we are 
persuaded by commenters that suggested a six-month period would be 
adequate to assure that the securities have come-to-rest in the state 
of issuance.\459\ In addition, state regulators will have the 
flexibility to impose additional transfer restrictions under amended 
Rule 147 or new Rule 147A, if warranted within their jurisdiction. 
Additional language in amended Rule 147(e) and new Rule 147A(e) that 
specifies that all re-sales during this six-month restricted period 
will be limited to the state or territory in which the issuer is a 
resident at the time of the sale of the security by the issuer will 
help to maintain the intrastate nature of the offering even if the 
issuer relocates its principal place of business to a different state. 
The final rules, by shortening the restricted period, will provide 
greater liquidity for Rule 147 and Rule 147A securities, making them 
more attractive to investors, which could lead to greater investor 
participation and an increase in the supply of capital available in 
intrastate offerings. Further, it could improve price discovery and 
lead to lower capital raising costs for issuers.
---------------------------------------------------------------------------

    \459\ See note 157. See also text accompanying notes 167 and 
168.
---------------------------------------------------------------------------

    Additionally, not conditioning the availability of amended Rule 147 
or new Rule 147A on the issuer complying with the provisions relating 
to resale restrictions will provide greater certainty to issuers 
conducting an offering pursuant to these provisions. For example, 
issuers will not need to be concerned about potentially losing the 
exemption if the resale provisions are violated under circumstances 
that are beyond their control. At the same time, given that issuers 
will continue to be subject to other compliance requirements, such as 
in-state sales limitations, mandatory offeree and purchaser 
disclosures, and stop transfer instructions, as well as federal 
antifraud and civil liability provisions, we believe that the final 
rules will not reduce investor protections.
    Rule 147(f) and new Rule 147A(f) require disclosure of the resale 
restrictions to every offeree in the manner in which the offering is 
communicated. Compared to the requirements in current Rule 147, which 
require written disclosure of resale restrictions, these provisions 
will provide greater flexibility to issuers and ease compliance burdens 
in cases of oral offers, while potentially making it easier for 
investors to be made aware of the resale restrictions at the time an 
offer is made. This change will lower the regulatory burden for 
issuers, especially smaller issuers; however, where an offer is 
communicated other than in writing, it also may adversely impact the 
information provided to potential investors (offerees) because the 
investor may not receive such information in writing at the time an 
offering is initially made and being considered. To the extent that 
investors would be more likely to comprehend or heed written 
disclosures, these changes may adversely impact investor protection. 
This impact will be mitigated by the requirement to provide disclosure 
about resale restrictions, in writing, to every purchaser a reasonable 
period of time before the date of sale.\460\
---------------------------------------------------------------------------

    \460\ Id.
---------------------------------------------------------------------------

    Rule 147(f)(3) is also being amended to remove the requirement to 
disclose to offerees and purchasers the stop transfer instructions 
provided by an issuer to its transfer agent and the provisions of Rule 
147(f)(2) regarding the issuance of new certificates during the resale 
period, which also will ease compliance burdens for issuers. These 
changes are not expected to adversely affect investor protection, since 
the information in question relates to technical aspects of the 
securities transfer process and does not address securities ownership 
rights as such.
v. Integration
    The final rules, similar to the proposed rules, will expand the 
current Rule 147 integration safe harbor such that offers and sales 
pursuant to amended Rule 147 or Rule 147A will not be integrated with: 
(i) Any offers or sales of securities made prior to the commencement of 
the offering, (ii) any offers or sales made more than six months after 
the completion of the offering, or (iii) any subsequent offer or sale 
of securities that is either registered under the Securities Act, 
exempt from registration pursuant to Regulation A, Regulation S, Rule 
701, or Section 4(a)(6), or made pursuant to an employee benefit plan. 
Compared to the integration safe harbor in current Rule 147, the 
expanded integration safe harbor in the final rules will provide 
issuers with greater certainty that they can engage in other exempt or 
registered offerings either prior to or near in time of an intrastate 
offering without risk of becoming ineligible to rely on Rule 147 or 
Rule 147A. Similarly, the addition of Section 4(a)(6) to the list of 
exempt offerings that will not be integrated with a Rule 147 or Rule 
147A offering will provide certainty to issuers that they can conduct 
concurrent crowdfunding offerings as per the provisions of the 
respective exemptions. This flexibility and ensuing regulatory 
predictability will be especially beneficial for small issuers who 
likely face greater challenges in relying on a single financing option 
for raising sufficient capital. While the expanded scope of the 
integration safe harbor may raise concerns that an issuer could more 
easily structure a single transaction as a series of exempt offerings 
to avoid securities registration,\461\ the final rules

[[Page 83536]]

provide for non-integration only to the extent that the issuer meets 
the requirements of each of the offering exemptions being used to raise 
capital.\462\ Furthermore, the final rules require an issuer to wait at 
least 30 calendar days between its last offer made to investors other 
than qualified institutional buyers or institutional accredited 
investors in reliance on Rule 147 or Rule 147A and the filing of a 
registration statement with the Commission, which will provide 
additional protection to investors in registered offerings who might 
otherwise be influenced by an earlier intrastate offering. Therefore, 
we do not believe that the adoption of the integration safe harbor will 
result in reduced investor protections.
---------------------------------------------------------------------------

    \461\ See NASAA Letter.
    \462\ See also note 177.
---------------------------------------------------------------------------

vi. Intrastate Broker-Dealer Exemption and Additional Considerations
    We are also providing guidance regarding the use of the Internet by 
a person that seeks to rely on the intrastate broker-dealer 
exemption.\463\ Our guidance clarifies that a person whose business 
otherwise meets the requirements of the intrastate broker-dealer 
exemption should not cease to qualify for the exemption solely because 
it has a Web site that may be viewed by out-of-state persons, so long 
as the broker-dealer takes measures reasonably designed to ensure that 
its business remains exclusively intrastate. This guidance will provide 
greater certainty to market participants about intermediaries' ability 
to participate in intrastate offerings that seek to raise capital via 
online media without having to register as a broker-dealer with the 
Commission. Such certainty may increase both the demand for and the 
supply of intermediaries in Rule 147 and Rule 147A offerings, which 
could facilitate a greater number of intrastate offerings, especially 
crowdfunding offerings. At the same time, despite the measures taken by 
broker-dealers that are reasonably designed to ensure that their 
businesses remain exclusively intrastate, the risk of non-compliance 
with the exemptions under Section 5 may somewhat increase for issuers 
if out-of-state investors, attracted by the intrastate broker's Web 
site, invest in the offering through misrepresentations of their 
residency status.
---------------------------------------------------------------------------

    \463\ Exchange Act Section 15(a)(1) exempts from broker-dealer 
registration requirements under Section 15(b) a broker-dealer whose 
business is exclusively intrastate and who does not use any facility 
of a national securities exchange.
---------------------------------------------------------------------------

vii. Alternatives Considered
    The paragraphs below discuss major alternatives that we considered 
in addition to the alternatives discussed in the individual sub-
sections above.
(a) ``Doing Business'' Tests
    As an alternative to the ``doing business'' tests in the final 
rules, we considered lowering the percentage thresholds for the 
existing tests but retaining the requirement that all tests be 
satisfied. For example, compared with the current 80% threshold 
requirements, requiring issuers to have the majority of their assets, 
derive the majority of their revenue, and use the majority of their 
offering proceeds in-state could better comport with modern business 
practices, provide greater flexibility and make it less burdensome for 
issuers to satisfy these requirements, while still providing some 
indicia of the in-state nature of the issuer's business.\464\ Such a 
change would also provide a consistent standard for the ``doing 
business'' tests in Rule 147 and Rule 147A, aligning the current tests 
with the new majority employees test and tests from other rules that 
use a majority threshold for determining issuer status, such as the 
test for determining foreign private issuer status.\465\ In this way, 
such an alternative could encourage greater reliance on Rule 147 and 
Rule 147A and thereby promote additional capital formation through 
exempt intrastate offerings. However, lowering the percentage 
thresholds would necessarily weaken the required nexus between the 
issuer and the state contemplated by current Rule 147 and Section 
3(a)(11). To the extent that such a change would result in less 
effective state regulation, there could be increased concerns that 
investor protections in exempt intrastate offerings may be reduced.
---------------------------------------------------------------------------

    \464\ See, e.g., Milken Letter.
    \465\ See Securities Act Rule 405 and Exchange Act Rule 3b-4.
---------------------------------------------------------------------------

    As another alternative to the final rules, we considered 
eliminating the requirement to qualify under any of the ``doing 
business'' tests. This alternative would significantly ease the burden 
for potential issuers in complying with Rules 147 and 147A, while also 
modernizing the rules to better align them with current business 
practices. As described above, in recent years new business models have 
emerged that may make the eligibility tests ill-suited for relying on 
the intrastate exemptions as a capital raising option. In view of broad 
changes in modern business practices, the principal place of business 
requirement may be sufficiently effective in establishing the local 
nature of an offering pursuant to Rule 147 or Rule 147A for purposes of 
compliance with the ``doing business'' in-state requirement at the 
federal level. The alternative will enable a larger number of issuers 
to qualify under the intrastate exemptions, which could increase 
capital formation. Relative to the adopted approach, this alternative 
also could provide more flexibility to state regulators to enact their 
own eligibility and residency requirements that better suit the 
interests of issuers and investors in their state, rather than imposing 
a uniform approach at the federal level that may function more 
effectively in some states than others.
    However, eliminating the ``doing business'' tests could allow 
issuers with widely-dispersed operations over more than one state or 
even no business operations (besides having a principal place of 
business in-state) to make greater use of amended Rule 147 or new Rule 
147A. Without sufficient local presence or an appropriate nexus with 
the issuer and the state, local oversight of such issuers could weaken, 
with a consequent decrease in investor protection. Although some of 
these concerns could be mitigated by continuing to restrict sales to 
in-state residents and the inclusion of the principal place of business 
requirement, as well as by the ability of states to extend their 
enforcement activities to issuers whose assets are located beyond state 
borders, we believe the approach we are adopting in the final rules 
will provide issuers with sufficient flexibility to satisfy these 
requirements, while maintaining important indicia of the in-state 
nature of the issuer's business. As noted above, given the other 
changes we are adopting to modernize our exemptive framework for 
intrastate offerings, we believe it is appropriate to first observe how 
the updated doing business in-state requirements are used by issuers in 
practice before making any further changes
(b) State Law Requirements and Additional Federal Restrictions
    In a change from the proposed rules, the final rules will not 
require that the offering be registered under state law or conducted 
pursuant to a state law exemption that limits the amount of securities 
an issuer may sell pursuant to amended Rule 147 or new Rule 147A and 
the amount of securities than can be purchased by an investor in the 
offering. These requirements, as proposed, could provide additional 
protections at the federal level and could mitigate investor protection 
concerns that may arise from

[[Page 83537]]

the modernization of the federal regulatory regime applicable to 
intrastate offerings. However, as noted by some commenters, 
conditioning the final rules on specified state law requirements would 
reduce the flexibility of state regulators to design rules that best 
conform to the requirements of issuers and investors in their states 
and, by imposing a uniform standard, could disadvantage certain 
jurisdictions relative to others.\466\ Such requirements could thus 
unduly restrict capital raising options of issuers, especially those 
issuers that sell primarily to accredited investors, and could also 
restrict legitimate state interests in permitting larger offerings 
within their jurisdictions that otherwise rely on the federal 
intrastate exemptions.
---------------------------------------------------------------------------

    \466\ See CFIRA Letter, Milken Letter, NASAA Letter, NextSeed 
letter. See also ABA Letter stating that such limits would be 
inconsistent ``with Congressional intent that local offerings do not 
require federal regulation and are best left to be regulated by the 
states''.
---------------------------------------------------------------------------

    We also note that the maximum amount that can be raised under 
existing intrastate crowdfunding provisions is less than the limit of 
$5 million that was proposed as a limit on certain intrastate 
offerings. Most of these states have also adopted provisions that 
impose investment limitations on investors. Thus, the protections 
provided by such limitations will remain available to investors in many 
intrastate crowdfunding offerings. States also retain the flexibility 
to enact additional measures under state law to strengthen issuer 
eligibility requirements for intrastate offerings.
    We recognize that conditioning the federal exemption on certain 
state law exemptions or requirements could raise concerns that the 
provisions will be utilized to conduct offerings in states that lack 
sufficient investor protection safeguards, leading to a ``race-to-the-
bottom'' between state legislators and regulators through significant 
easing of compliance provisions in order to attract more issuers. We 
believe, however, that such an outcome may be unlikely because state 
legislators and regulators have economic and reputational incentives to 
provide local issuers and investors with robust capital markets that 
are sustainable over the long run. Robust competition between states to 
enact securities laws that attract issuers to their territories would 
result in better regulations that promote effective functioning of 
local financial markets among the states, issuers and investors.
    We also considered excluding certain types of issuers from relying 
on Rule 147 or Rule 147A, since it is likely that intrastate offerings 
and, especially crowdfunded offerings, may have a large proportion of 
retail investors.\467\ Further, we also considered whether to extend 
bad actor disqualification provisions to these rules, similar to the 
provisions under Rule 506(d) of Regulation D.\468\ Such provisions 
could enhance investor protections and promote regulatory consistency 
with other unregistered offering exemptions. However, these provisions 
are already a feature of most state crowdfunding exemptions, and 
additional restrictions at the federal level could reduce states' 
flexibility in enacting provisions that work best for their local 
jurisdictions. In this regard, we believe that states are well 
positioned to determine whether these or additional requirements are 
necessary in their jurisdictions.
---------------------------------------------------------------------------

    \467\ See NASAA Letter.
    \468\ Id.
---------------------------------------------------------------------------

(c) Exemption From Section 12(g) Requirements
    Amended Rule 147 and new Rule 147A do not exempt securities issued 
in intrastate crowdfunding from reporting requirements under Section 
12(g) of the Exchange Act.\469\ As crowdfunded offerings are purchased 
in small amounts by a relatively large number of investors, issuers 
using Rule 147 or Rule 147A for state crowdfunding offerings may exceed 
record holder thresholds that trigger registration requirements under 
Section 12(g). In contrast to intrastate crowdfunding offerings, 
securities issued under Regulation Crowdfunding do not count toward the 
record holder thresholds for triggering registration under Section 
12(g), subject to certain conditions. This may place an additional 
regulatory burden on Rule 147 and Rule 147A issuers, making them less 
likely to initiate intrastate crowdfunding offerings. As an alternative 
to the final rules, an exemption from the registration requirements 
under Section 12(g) for intrastate crowdfunded offerings could 
encourage issuers to rely on Rule 147 or Rule 147A by allowing such 
issuers to delay registration, and thereby avoid the regulatory 
obligations of ongoing reporting requirements under the Exchange 
Act.\470\ However, as Rule 147 and Rule 147A issuers will not be 
required to submit financial reports on an ongoing basis, such a 
provision may result in less information about these issuers being 
available to the market to the possible detriment of existing and 
prospective investors. Such concerns are mitigated under Regulation 
Crowdfunding as issuers relying on that exemption are required to file 
ongoing financial reports with the Commission. Under Rule 147 and Rule 
147A, however, issuers will not be subject to any federal ongoing 
reporting requirements, which could make the additional protections 
provided by registration under Section 12(g) especially beneficial to 
the issuers' investors.
---------------------------------------------------------------------------

    \469\ See Section II.C. above.
    \470\ See CFIRA Letter, CrowdCheck Letter, Guzik Letter, Milken 
Letter. See also 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

3. Analysis of Amendments to Rule 504
    The final rules related to Rule 504 will increase the maximum 
aggregate amount that can be raised under a Rule 504 offering, in a 12-
month period, from $1 million to $5 million and will disqualify certain 
bad actors from participation in Rule 504 offerings. Additionally, in 
order to account for the increase in the Rule 504 aggregate offering 
amount limitation, we are adopting technical amendments to the notes to 
Rule 504(b)(2) that will update the current illustrations in the rule 
regarding how the aggregate offering limitation is calculated in the 
event that an issuer sells securities in multiple offerings pursuant to 
Rule 504, within the same twelve-month period.\471\ All other 
provisions of current Rule 504 of Regulation D will remain unchanged.
---------------------------------------------------------------------------

    \471\ See Notes 1 and 2 to Rule 504(b)(2), 17 CFR 230.504(b)(2).
---------------------------------------------------------------------------

a. Increase in Maximum Aggregate Amount to $5 Million
    As shown in the baseline analysis above, use of Rule 504 offerings 
has been declining over the past decade, in absolute terms as well as 
relative to Rule 506 of Regulation D. Compared to Rule 504 offerings, 
Rule 506 offerings have the advantage of preemption from state 
registration. Thus, even though Rule 506(b) offerings, unlike Rule 504 
offerings, are limited to accredited investors and up to 35 non-
accredited investors, capital raising activity during the last two 
decades suggests that the benefits of state preemption outweigh 
unrestricted access to non-accredited investors. With the adoption of 
Rule 506(c), which allows for general solicitation, the comparative 
advantage of current Rule 504 has further diminished.
    The current $1 million maximum amount was set by the Commission in 
1988 and was meant to provide ``seed capital'' for small and emerging 
businesses.\472\ Given the high costs of raising capital from public 
sources, the

[[Page 83538]]

unregistered offerings market has expanded significantly in the past 
twenty-five years. The growth of angel investors and VCs, who invest 
primarily through unregistered offerings, has also increased seed 
capital available for investment at the initial stages of a company. 
Angel investments in 2015 amounted to approximately $25 billion, and 
the average angel deal size was approximately $346,000.\473\ According 
to PWC MoneyTree, in 2008, U.S. VCs made $1.5 billion of seed 
investments in 440 companies.\474\ This represents an average seed 
investment of $3.5 million per company. While the involvement of VCs at 
the seed stage has been increasing over the years, it is reported that 
some angel investments at the seed stage have included investments as 
large as $2.5 million per entity.\475\ Given these changes, amending 
the Rule 504 offering size from $1 million to $5 million would better 
comport with market trends that indicate demand for larger seed capital 
infusions.
---------------------------------------------------------------------------

    \472\ See Seed Capital Release.
    \473\ According to a recent report, angel investments amounted 
to $24.6 billion in 2015, with approximately 71,100 entrepreneurial 
ventures receiving angel funding and approximately 304,930 active 
angel investors. Seed/startup stage investments accounted for 
approximately 28% of the $24.6 billion. See Jeffrey Sohl, The Angel 
Investor Market in 2015: A Buyer's Market, Center for Venture 
Research, May 25, 2015, available at https://paulcollege.unh.edu/
sites/paulcollege.unh.edu/files/webform/
Full%20Year%202015%20Analysis%20Report.pdf.
    \474\ See PricewaterhouseCoopers, Investment by Stage of 
Development, available at https://www.pwcmoneytree.com/
CurrentQuarter/BySoD.
    \475\ See Fenwick & West Survey 2012 (March 2013), available at 
https://www.fenwick.com/publications/Pages/Seed-Finance-Survey-
2012.aspx. The survey defines a ``seed'' financing as the first 
round of financing by a company in which the company raises between 
$250,000 and $2,500,000 and in which professional investors play a 
lead role.
---------------------------------------------------------------------------

    Four parallel developments may further change the regulatory 
landscape surrounding existing Rule 504. First, the use of current Rule 
504 could be diminished by interstate crowdfunding offerings pursuant 
to Regulation Crowdfunding, which allows issuers to raise up to $1 
million over a 12-month period with unlimited access to non-accredited 
investors, permits general solicitation, and provides preemption from 
state regulation and exemption from Exchange Act reporting, subject to 
certain conditions. Second, at least 34 states and the District of 
Columbia have enacted and several other states are in the process of 
enacting their own crowdfunding exemptions where the maximum amount 
that can be raised in a 12-month period ranges from $250,000 to $4 
million, depending on the state (up to $2 million for all but three 
states). The maximum offering amounts for intrastate crowdfunding thus 
exceed the current offer limit under Rule 504. While most state 
crowdfunding exemptions require use of Rule 147, currently three states 
allow issuers to conduct intrastate crowdfunding under the Rule 504 
exemption.\476\ Third, state regulators have been working to implement 
regional coordinated review programs in order to facilitate regional 
offerings that could potentially save issuers time and money. 
Additionally, at least one state is in the process of enacting 
reciprocal crowdfunding provisions, which may allow issuers to conduct 
regional crowdfunding offerings under state law.\477\ Since amended 
Rule 147 and new Rule 147A will be restricted to intrastate offerings, 
Rule 504 will be the most likely federal exemption that could be used 
for such regional offerings. Fourth, Tier 1 of amended Regulation A, 
which became effective in June 2015 and has similar eligibility 
criteria as Rule 504, allows offerings up to $20 million without any 
restrictions on resale of securities. In light of these developments, 
the increase in the maximum amount that can be raised in Rule 504 
offerings to $5 million could help make this market more attractive for 
startups and small businesses while also facilitating intrastate and 
regional offerings greater than $1 million.
---------------------------------------------------------------------------

    \476\ Maine's provisions currently permit interstate 
crowdfunding utilizing the Rule 504 exemption, and Mississippi and 
Vermont dually offer intrastate crowdfunding under Section 3(a)(11) 
and interstate crowdfunding under Rule 504. See NASAA Letter.
    \477\ See http://www.nasaa.org/industry-resources/corporation-
finance/coordinated-review/. See also, the ``Reciprocal Crowdfunding 
Exemption'' proposed by the Massachusetts Securities Division, 
available at http://www.sec.state.ma.us/sct/crowdfundingreg/
Reciprocal%20Crowdfunding%20Exemption%20-%20MA.PDF.
---------------------------------------------------------------------------

    A higher offering amount limit for Rule 504 offerings could 
increase the number of issuers that rely on the exemption.\478\ To the 
extent that amended Rule 504 permits issuers to raise larger amounts of 
capital at lower costs than other unregistered capital markets, the 
final rules could also lower issuer cost of capital and facilitate 
intrastate crowdfunding and the regional offerings market as it 
evolves. In addition to new issuers raising capital for the first time, 
it is likely that some issuers currently using other unregistered 
capital markets may shift to the amended Rule 504 market. Such 
potential trends would increase competition for supply of and demand 
for capital between the different unregistered markets, especially the 
exemptions pursuant to amended Rule 147, Rule 147A, Rule 506 of 
Regulation D, Regulation A, Regulation Crowdfunding, and Sections 
4(a)(2) and 3(a)(11). Further, modernizing our exemptive scheme in 
order to provide issuers, and especially small businesses, with more 
viable options for capital raising could foster an environment that 
encourages new market participants with promising ventures to enter the 
capital markets, thereby enhancing the overall level of capital 
formation in the economy and investment opportunities. The amendments 
could also encourage new interstate and regional approaches to 
crowdfunding and other offering methods \479\ and lead to greater 
coordination for regional review of capital raising options.
---------------------------------------------------------------------------

    \478\ See CFA Letter, CFIRA Letter, NASAA Letter.
    \479\ Id.
---------------------------------------------------------------------------

    Increasing the Rule 504 offering amount limit could also increase 
the number of investors (including non-accredited investors) that can 
access such exempt offerings, thereby providing them with a wider array 
of investment opportunities to diversify their investment portfolios. 
This, in turn, could have positive effects on the supply of capital and 
the allocative efficiency of unregistered capital markets. To the 
extent that non-accredited investors are less capable of evaluating 
investment opportunities than accredited investors,\480\ an increase in 
the number of Rule 504 offerings could raise investor protection 
concerns.
---------------------------------------------------------------------------

    \480\ See Staff of the U.S. Securities and Exchange Commission, 
Report on the Review of the Definition of ``Accredited Investor'' 
(Dec. 18, 2015) at 43-46 available at https://www.sec.gov/corpfin/
reportspubs/special-studies/review-definition-of-accredited-
investor-12-18-2015.pdf (describing criticisms of the current 
definition of accredited investor).
---------------------------------------------------------------------------

    A higher offering amount limit, together with a potential increase 
in the number of investors that can access Rule 504 offerings, may 
raise concerns about a potential increase in the incidence of fraud 
under the final rules. The Commission's experience with the elimination 
of the prohibition against general solicitation for Rule 504 offerings 
in 1992 \481\ and its subsequent reinstatement in 1999 as a result of 
heightened fraudulent activity \482\ illustrates the potential for 
fraud in the Rule 504 market. It should be noted, however, that in 1998 
and 1999 the Commission concluded that the increase in fraud occurred 
because of rule provisions that permitted general solicitation of 
investors and free

[[Page 83539]]

transferability of issued securities.\483\ As a result, under that 
regime, a non-reporting company was able to sell up to $1 million of 
unrestricted securities in a 12-month period and be subject only to the 
antifraud and civil liability provisions of the federal securities 
laws. In contrast, the final rules will only increase the aggregate 
offering amount limitation of Rule 504, thereby retaining existing 
restrictions on general solicitation and the restricted securities 
status of most offered securities. State registration requirements may 
also mitigate the risk for investor abuse in Rule 504 offerings.
---------------------------------------------------------------------------

    \481\ See Adoption of Small Business Initiatives, SEC Release 
No. 33-6949 (July 30, 1992).
    \482\ See Seed Capital Release.
    \483\ Id. See also Proposed Revision of Rule 504 of Regulation 
D, the ``Seed Capital'' Exemption, No. 33-7541 (May 21, 1998). As 
the Commission noted at the time it proposed to eliminate the 
unrestricted status of securities issued under Rule 504, securities 
issued in these Rule 504 offerings may have facilitated a number of 
fraudulent secondary transactions in the over-the-counter markets. 
The Commission also noted that these securities were issued by 
``microcap'' companies, characterized by thin capitalization, low 
share prices and little or no analyst coverage. As the freely-
tradable nature of the securities facilitated the fraudulent 
secondary transactions, the Commission proposed to ``implement the 
same resale restrictions on securities issued in a Rule 504 
transaction as apply to transactions under the other Regulation D 
exemptions,'' in addition to reinstating the prohibition against 
general solicitation. Although the Commission recognized that resale 
restrictions would have ``some impact upon small businesses trying 
to raise `seed capital' in bona fide transactions,'' it believed at 
the time that such restrictions were necessary so that 
``unscrupulous stock promoters will be less likely to use Rule 504 
as the source of the freely tradable securities they need to 
facilitate their fraudulent activities in the secondary markets.''
---------------------------------------------------------------------------

    Enforcement cases over the past several years involving Rule 504 
offerings could also raise concerns about the potential for increased 
incidence of fraud under the final rules. Most of these cases have 
involved promoters who engaged in secondary market sales of 
unrestricted securities that were previously issued in reliance on Rule 
504(b)(1)(iii), defrauding investors and, in some cases, 
unsophisticated issuers.\484\ Securities issued in reliance on Rule 
504(b)(1)(iii) are exempt from state registration, and issuers relying 
on the exemption are permitted to market the securities using general 
solicitation so long as sales are made only to accredited 
investors.\485\ We recognize that an increase in the maximum offering 
size could increase the risk of investor harm, at least in offerings 
that are exempt from state registration. Some of these concerns could 
be mitigated by the inclusion of bad actor disqualification provisions 
in Rule 504, as discussed below.
---------------------------------------------------------------------------

    \484\ See, e.g., SEC v. Stephen Czarnik, Case No. 10-cv-745 
(S.D.N.Y.), Litigation Release No. 21401 (Feb. 2, 2010); SEC v. 
Yossef Kahlon, a/k/a Jossef Kahlon and TJ Management Group, LLC, 
Case No. 4:12-cv-517 (E. D. Tex.) (Aug. 14, 2012).
    \485\ The extent to which general solicitation may be used in 
connection with an offering conducted in reliance on Rule 
504(b)(1)(iii) will depend on the specific state exemption being 
relied upon. In this regard, the NASAA Model Accredited Investor 
Exemption specifies that only a tombstone ad may be used in making a 
general solicitation. See Model Accredited Investor Exemption, 
available from the NASAA Web site at http://www.nasaa.org/wp-
content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf.
---------------------------------------------------------------------------

b. Bad Actor Disqualification Provisions and Additional Amendments
    The amendments to Rule 504 will include bad actor disqualification 
provisions that are substantially similar to related provisions in Rule 
506 of Regulation D. \486\ Consistent with Rule 506(d), the final rules 
will require that the covered person's status be assessed at the time 
of the sale of securities. As in Rule 506(d), the disqualification 
provisions 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 risks that arise when bad actors 
are associated with an offering. However, similar to Rule 506(e), 
issuers will be required to disclose bad actor disqualifying events 
that occurred prior to the effectiveness of the final rules. The risks 
to investors from participation of covered persons who otherwise would 
be disqualified may therefore be partly mitigated as investors will 
have access to relevant information that could inform their investment 
decisions. Disclosure of prior bad actor disqualifying events may make 
it more difficult for issuers to attract investors, and as a result, 
issuers may experience a similar impact to being disqualified. Some 
Rule 504 issuers may accordingly choose to exclude involvement by prior 
bad actors to avoid such disclosures.
---------------------------------------------------------------------------

    \486\ See Rule 506(d) of Regulation D, 17 CFR 230.506(d).
---------------------------------------------------------------------------

    We expect that the bad actor disqualification provisions could help 
reduce the potential for fraud in these types of offerings and thus 
strengthen investor protection.\487\ 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 the amended Rule 504 
exemption. In addition, the requirement that issuers determine whether 
any covered persons are subject to disqualification might reduce the 
need for investors to conduct their own due diligence on such persons 
and could therefore increase efficiency. While fraud can still occur 
without prior incidence of disqualification on the part of the issuer 
or covered persons, these provisions could mitigate some of the 
concerns relating to incidence of fraud in offerings pursuant to 
amended Rule 504, including offerings subject to regional coordinated 
review programs that could be registered in one jurisdiction but 
offered and sold in multiple other jurisdictions.
---------------------------------------------------------------------------

    \487\ See also ABA Letter, CFA Letter.
---------------------------------------------------------------------------

    The disqualification provisions could also impose costs on issuers 
and covered persons. Issuers that are disqualified from using amended 
Rule 504 may experience an increased cost of capital or a reduced 
availability of capital, which could have negative effects on capital 
formation. Similarly, other covered persons may experience reductions 
in revenue or market share (for market intermediaries) or demotion or 
termination of employment or other limitations on career advancement 
(for individuals) as a result of disqualification from Rule 504 
offerings. In addition, issuers may incur costs and transactional 
delays 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 by individuals subject to disqualification.
    The final rules will provide, by reference to Rule 506(d), a 
reasonable care exception, similar to other exemptions and safe harbors 
under Regulation D. A reasonable care exception could facilitate 
capital formation by encouraging issuers to proceed with Rule 504 
offerings in situations in which issuers otherwise might have been 
deterred from relying on Rule 504 if they risked potential liability 
under Section 5 of the Securities Act for unknown disqualifying events. 
At the same time, 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 
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. Finally, we note that

[[Page 83540]]

extending the disqualification provisions to Rule 504 will create a 
more consistent regulatory regime under Regulation D that will simplify 
due diligence requirements and thereby benefit issuers and investors 
that participate in different types of exempt offerings.\488\
---------------------------------------------------------------------------

    \488\ See NASAA Letter.
---------------------------------------------------------------------------

    The amendment to Rule 504(b)(2) will update the current 
illustrations of how the aggregate offering limitation is calculated in 
the event that an issuer sells securities in multiple offerings 
pursuant to Rule 504 within the same twelve-month period. By enabling 
market participants to calculate more easily the amounts permitted to 
be sold, this amendment will facilitate issuer compliance with the 
increased aggregate offering limitation.
c. Alternatives Considered
    As an alternative to the final rules, we considered raising the 
offering limit under Rule 504 to an amount less than $5 million. For 
example, adjusted for inflation, the $1 million in 1988 would equate to 
approximately $2 million today.\489\ Additionally, offering amount 
limits under various state crowdfunding provisions generally are set 
around $2 million for most jurisdictions, with $4 million being the 
highest offering limit in one state. Increasing the maximum Rule 504 
offering to an amount less than $5 million could help alleviate 
concerns about a decrease in investor protection from unlimited access 
to non-accredited investors. At the same time, this alternative could 
limit the use of Rule 504 as a capital raising option for issuers.
---------------------------------------------------------------------------

    \489\ Annual inflation rates (1988-2015) based on consumer price 
index data, for all urban consumers, obtained from the Bureau of 
Labor Statistics. See http://data.bls.gov/cgi-bin/surveymost?cu.
---------------------------------------------------------------------------

    We also considered increasing the maximum offering limit under 
amended Rule 504 to an amount greater than $5 million. For example, we 
could align the maximum offering limit to that of the Tier 1 offer 
limit ($20 million) under amended Regulation A. This could allow for 
more cost-effective state registration, while also providing a 
competitive alternative to eligible issuers in Tier 1 of the Regulation 
A market. However, unlike the Regulation A market, non-accredited 
investors have no investment limits under the Rule 504 provisions. 
Moreover, enforcement cases over the past several years have 
highlighted instances of fraud in Rule 504(b)(1)(iii) offerings.\490\ A 
higher maximum offering amount may thus lead to greater investor 
protection concerns.
---------------------------------------------------------------------------

    \490\ See note 484 and related discussion above.
---------------------------------------------------------------------------

    In light of concerns about potential abuses involving securities 
issued in reliance on Rule 504(b)(1)(iii),\491\ we considered, as an 
alternative, to impose resale restrictions on such securities. This 
could increase investor protection by helping to ensure that securities 
initially sold pursuant to the exemption are only resold by initial 
purchasers after the passage of a specified time period. However, these 
restrictions would reduce the liquidity of Rule 504(b)(1)(iii) 
securities, which could increase the cost of capital for issuers 
seeking to raise capital in reliance on this rule provision. At the 
same time, increasing investor protection through resale restrictions 
could attract somewhat greater investor interest and lower the expected 
risk premium, which would mitigate, to some extent, the higher costs 
arising from less liquid securities. We note that states are free to 
enact additional restrictions in such offerings if they deem them 
necessary or appropriate.
---------------------------------------------------------------------------

    \491\ Id.
---------------------------------------------------------------------------

    Additionally, Rule 504 could be amended to include additional 
mandatory disclosures, or other requirements, to address investor 
protection concerns arising from the increase in the maximum offering 
size. While such additional requirements could mitigate some of these 
concerns, they would also increase the compliance obligations for Rule 
504 issuers and may also overlap with similar requirements under state 
law in the jurisdiction in which such Rule 504 offering is registered.
4. Analysis of Repeal of Rule 505
    The final rules also eliminate the exemption under Rule 505 of 
Regulation D. Rule 505, like Rule 504, was created under Section 
3(b)(1) of the Securities Act to exempt offerings of up to $5 million 
over a 12-month period. As discussed in the baseline analysis, reliance 
on Rule 505 is much less frequent than even Rule 504 and has declined 
steadily in the past 15-20 years in terms of the number of new 
offerings and the amount of capital raised.\492\
---------------------------------------------------------------------------

    \492\ During the period 2009-2015, there were 1,588 new 
offerings of less than or equal to $5 million by non-fund issuers 
that relied on Rule 505 compared to 64,862 such offerings that 
relied on Rule 506. Including offerings in which the issuer checked 
both the Rule 505 and Rule 506 exemptions on the Form D (2,170 new 
offerings), the proportion of Rule 505 offerings in Regulation D 
offerings rises from 2% to 5.3%. See Section V.A.2 and Table 5.
---------------------------------------------------------------------------

    We believe that amended Rule 504, by allowing offerings up to $5 
million, will likely further diminish the utility of current Rule 505 
for issuers that are currently eligible to use both exemptions because 
Rule 504 provides access to an unlimited number of non-accredited 
investors and restricted access to general solicitation.\493\ Other 
exemptions from registration may also provide an alternative to Rule 
505 offerings. For example, Rule 506(b) enables issuers to raise 
unlimited amounts of capital along with providing preemption from state 
registration, although being limited to 35 non-accredited investors who 
need to be sophisticated, either individually or through a purchaser 
representative. Similarly, while Regulation A offerings have greater 
disclosure requirements, they may be sold to non-accredited investors 
and have the added benefit of unrestricted resales of securities. We 
recognize that reporting companies that are potential Rule 505 issuers 
may find it relatively harder to shift to another type of unregistered 
offering as they are excluded from using Rule 504, Regulation A and 
Regulation Crowdfunding. Such issuers, however, constitute a small 
proportion of current Rule 505 issuers and, absent disqualifying bad 
actor events, could likely avail themselves of Rule 506. Alternatively, 
Rule 505 issuers, particularly those that are reporting companies, 
could also raise capital through a registered offering if they seek 
investment from non-accredited investors and investors who prefer 
securities issued through registered offerings. In view of recent 
changes to Form S-1 \494\ and the availability of shelf registration to 
eligible reporting issuers, the costs of raising capital through a 
registered offering for issuers that are reporting companies, may be 
comparable to costs of a Rule 505 offering that solicits non-accredited 
investors and requires registration under state regulations. Whether 
Rule 505 issuers, particularly those that are reporting companies, 
switch to an unregistered offering such as a Rule 506 offering or a 
registered offering will depend on how these issuers assess the costs 
of registration relative to benefits such as broader access to non-
accredited investors and investors who prefer securities issued through 
registered offerings.\495\
---------------------------------------------------------------------------

    \493\ Unlike offerings conducted pursuant to Rule 506, Rule 504 
and Rule 505 offerings are subject to state securities law 
registration and qualification requirements.
    \494\ See note 435 above.
    \495\ See discussion in Section V(B)(1) and note 436.
---------------------------------------------------------------------------

    The impact of the elimination of Rule 505 will depend on whether 
issuers are

[[Page 83541]]

able to access alternate capital markets and raise the desired amount 
of capital at a comparable cost and in a timely manner, as they would 
in the current Rule 505 market. To the extent that issuers are not able 
to raise sufficient or any amount of capital in such alternate markets, 
overall capital formation in the economy and allocative efficiency of 
capital markets could decline. We believe that Rule 505 issuers likely 
will be able to shift to other exemptions or alternately to follow-on 
registered offerings in case of issuers that are reporting companies, 
at little or no additional cost. In the short term, the repeal likely 
will increase competition amongst markets for attracting potential Rule 
505 issuers and investors, but in the long-run, it may decrease the 
overall level of competition amongst the various capital markets to 
attract new issuers and investors.
    As discussed above, the impact on efficiency, competition and 
capital formation of the repeal of Rule 505 also will depend on 
investor willingness and ability to purchase in an alternate 
unregistered capital market. For example, unsophisticated investors 
that may be eligible to purchase in a Rule 505 offering may not be able 
to purchase in a Rule 506 offering and hence may find their set of 
investment opportunities reduced. Further, as Rule 506 offerings are 
preempted from state registration, potential Rule 505 investors may be 
reluctant to purchase in a Rule 506 offering once Rule 505 is repealed, 
due to investor protection concerns. Similarly, Rule 504 offerings are 
subject to fewer investor disclosure requirements at the federal level, 
relative to a Rule 505 offering, that could also raise potential 
investor protection concerns. The net impact on the overall level of 
investor participation could thus depend on the type of offering that 
primarily substitutes for the repealed Rule 505 market.
    Overall, we believe that the repeal of Rule 505 will not have a 
significant impact or any impact on capital formation because issuers 
will likely be successful at finding commensurate capital supply in an 
alternate unregistered capital market. Repeal of Rule 505 will 
streamline the existing exemptive framework to provide a clearer and 
less complex set of rules and regulations for the issuer to choose 
among.
    As an alternative to the repeal of Rule 505, we considered 
increasing the maximum amount that can be raised over a period of 12 
months to a higher amount. For example, adjusting for inflation, $5 
million in 1988 would equate to approximately $10 million today. 
Retention of Rule 505 with a higher offering limit would allow issuers 
(in contrast to Rule 506) to access to up to 35 non-accredited 
investors without having to ensure that these investors are 
sophisticated investors. It would also allow reporting companies (in 
contrast to Rule 504) to avail themselves of the exemption for raising 
capital. However, we believe that in view of the widespread use of Rule 
506 and the decreased use of Rule 505 in capital formation in the 
Regulation D market, a higher ceiling is not likely to increase 
reliance on the exemption.

VI. Paperwork Reduction Act

A. Rules 147(f)(1)(iii) and 147A(f)(1)(iii)

    Rule 147 and new Rule 147A contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\496\ Specifically, Rules 147(f)(1)(iii) and 147A(f)(1)(iii) 
each contain a provision requiring issuers relying on the rules to 
``obtain a written representation from each purchaser as to his or her 
residence.'' There are two titles for these collection of information 
requirements. The first title is: ``Rule 147(f)(1)(iii) Written 
Representation as to Purchaser Residency,'' a new collection of 
information. The second title is: ``Rule 147A(f)(1)(iii) Written 
Representation as to Purchaser Residency,'' a new collection of 
information. We are requesting comment on these collection of 
information requirements in this adopting release, and intend to submit 
these requirements to the Office of Management and Budget (``OMB'') for 
review in accordance with the PRA and its implementing 
regulations.\497\ If approved, responses to the new collection of 
information requirement would be mandatory for issuers seeking to rely 
upon the rules to conduct exempt intrastate offerings. An agency may 
not sponsor, and a person is not required to respond to, a collection 
of information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \496\ 44 U.S.C. 3501 et seq.
    \497\ In the Proposing Release, we did not submit a PRA analysis 
because we proposed to eliminate the written representation 
requirement in Rule 147(f)(1)(iii), and our other proposed 
amendments to Rule 147 did not contain a ``collection of 
information'' requirement within the meaning of the PRA. At this 
time, we do not have any comments regarding overall burden estimates 
for the final rules. This release is requesting such comments.
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment on our proposal to 
eliminate the requirement in Rule 147(f)(1)(iii) to obtain a written 
representation as to the purchaser's residency. In response to comments 
received, we have decided not to eliminate the requirement and are 
adopting an identical requirement in new Rule 147A(f)(1)(iii) under the 
Securities Act.\498\
---------------------------------------------------------------------------

    \498\ See text accompanying notes 119, 120, and 121 above.
---------------------------------------------------------------------------

    Both Rule 147(f)(1)(iii) and new Rule 147A(f)(1)(iii) will require 
the issuer to obtain from the purchaser a written representation as to 
the purchaser's residency. The representation is not required to be 
presented in any particular format, although it must be in writing. 
Representations obtained by the issuer are not required to be kept 
confidential, and there is no mandatory retention period. The hours and 
costs to the issuer and purchaser associated with preparing, 
furnishing, obtaining and collecting these written representations 
constitute paperwork burdens and costs imposed by these collection of 
information requirements.
    The required written representation by the purchaser as to his or 
her residence is identical under both Rule 147(f)(1)(iii) and new Rule 
147A(f)(1)(iii). Similarly, both rules define the residence of the 
purchaser in the same manner. If the purchaser is a corporation, 
partnership, limited liability company, trust or another form of 
business organization, it shall be deemed to be a resident of the 
territory or state if, at the time of the offer and sale to it, it has 
its principal place of business within such territory or state. 
Principal place of business is defined as the territory or state in 
which the officers, partners or managers of the entity primarily 
direct, control and coordinate the activities of the entity. If the 
purchaser is an individual, such person shall be deemed to be a 
resident of the territory or state if such person has, at the time of 
the offer and sale, his or her principal residence in the territory or 
state.\499\
---------------------------------------------------------------------------

    \499\ See Rules 147(d) and 147A(d).
---------------------------------------------------------------------------

    We expect that the determination of a purchaser's residence will be 
easiest for natural persons.\500\ This determination may be more 
difficult for purchasers who have more than one place of residence. We 
also expect this determination to be more difficult for purchasers who 
are legal entities, such as corporations, partnerships, limited 
liability companies and trusts which will have to undertake a factual 
inquiry to determine in what state or territory their ``principal place 
of business'' is located.
---------------------------------------------------------------------------

    \500\ See Section II.B.2(c) above.
---------------------------------------------------------------------------

    We anticipate that the requirement for issuers to obtain a written

[[Page 83542]]

representation from each purchaser as to his or her residence, as 
required under Rule 147(f)(1)(iii) and Rule 147A(f)(1)(iii), will 
result in a burden and cost to issuers to meet these requirements in 
order to sell securities in an exempt intrastate offering. For purposes 
of the PRA, for each of Rule 147 and Rule 147A, we estimate that the 
total annual paperwork burden for all affected issuers arising from 
this collection of information requirement will be approximately 175 
hours of issuer (company) personnel time and approximately $70,000 for 
the services of outside professionals at an average cost of $400 per 
hour.
    Similarly, we anticipate that the written representation required 
by purchasers, including the obligation to determinate the state or 
territory of their residence, as required under Rule 147(f)(1)(iii) and 
Rule 147A(f)(1)(iii), will result in a burden incurred by purchasers in 
order to purchase securities in an exempt intrastate offering. For 
purposes of the PRA, for each of Rule 147 and Rule 147A, we estimate 
that the total annual paperwork burden for all affected purchasers 
arising from this collection of information requirements will be 
approximately 1,750 hours of purchaser time and no cost incurred for 
the services of outside professionals.
    In deriving our estimates, we assume that:
     Approximately 700 issuers \501\ will conduct a Rule 147 
and Rule 147A offering each year, respectively, and each issuer will 
spend an average of fifteen minutes to obtain and collect the written 
representation from each purchaser in the offering as to his or her 
state or territory of residence;
---------------------------------------------------------------------------

    \501\ We rely upon the number of offerings under Rules 504 and 
505 of Regulation D for the year ended December 31, 2015 as a proxy 
for the average annual number of offerings under Rule 147 and new 
Rule 147A. Based on staff analysis of Form D filings, there were 519 
new Form D filings reporting reliance on Rule 504 and 179 new Form D 
filings reporting reliance on Rule 505 in 2015. See Figure 1 in 
Section V.A.1, above. For purposes of these PRA estimates, we 
estimate that an average of 700 issuers will conduct a Rule 147 and 
new Rule 147A offering each year, respectively.
---------------------------------------------------------------------------

     Each of the approximately 700 issuers will retain outside 
professional firms to spend an average of fifteen minutes helping the 
issuer comply with this requirement to obtain and collect the written 
statement of residency from each purchaser in the offering at an 
average cost of $400 per hour;
     Each Rule 147 and Rule 147A offering will have an average 
of approximately 10 purchasers of securities, resulting in 
approximately 7,000 purchasers per year for each exemption; and
     Each purchaser in a Rule 147 and Rule 147A offering will 
spend an average of approximately fifteen minutes preparing a written 
statement of residency to provide to the issuer and will incur no cost 
for the services of outside professionals to satisfy this requirement.
    Since Rule 147 does not require the issuer to file any type of 
notice form with the Commission, it is difficult to determine 
accurately the number of Rule 147 offerings conducted annually or 
estimate the annual number of offerings that will be made in reliance 
on the updated rule and the new Rule 147A exemption. As a result, we 
are using the number of offerings made in reliance on the exemptions in 
Rules 504 and 505 of Regulation D for the year ended December 31, 2015 
as a proxy to estimate the average annual number of Rule 147 offerings, 
given that both Rule 147 and Rules 504 and 505 provide exemptions to 
Securities Act registration designed to facilitate smaller issuers 
raising seed capital. Given that Rule 147A is very similar to Rule 147, 
as amended, we are using this same methodology and estimate for the 
number of offerings under newly adopted Rule 147A.
    It is also difficult to provide any standardized estimates of the 
burdens and costs involved for the issuer to obtain and collect these 
written statements of purchaser residency. We expect, however, that the 
burdens and costs to issuers may be higher or lower depending on the 
size of the offering and the number of purchasers acquiring securities 
in the offering, which may, in turn, be affected by the state or 
territory where the offering occurs.
    These estimates include the time and cost to the issuer to 
implement a system to obtain and collect the written statements of 
residency by purchasers in their offerings, including the preparation 
of written materials, such as subscription agreements or questionnaires 
to potential purchasers. These estimates also include the time and cost 
incurred by an issuer's in-house and outside counsel and executive 
officers of collecting these written statements received from 
purchasers in their offerings.
    In deriving our estimates, we recognize that these burdens and 
costs will likely vary among issuers based on the size of their 
offerings and the number of purchasers acquiring securities in their 
offerings. We believe that some issuers will experience burdens and 
costs in excess of these estimated averages and other issuers may 
experience less than these estimated average burdens and costs.
    Similarly, it is difficult to provide any standardized estimates of 
the burdens and costs to purchasers in determining their state or 
territory of residence and preparing their related written statements 
of residency to the issuer. We expect, however, that the burden to 
purchasers may be higher or lower depending on whether the purchaser is 
a natural person or legal entity, and, if a legal entity, the extent of 
the entity's activities in other states or territories. If a legal 
entity, we realize there may be a wide range of management structures, 
involving management teams potentially residing in multiple states or 
territories, thereby complicating the determination of the purchaser's 
principal place of business.
    These estimates include the time and cost to the purchaser to 
determine the purchaser's state or territory of residence and prepare a 
written statement of residency for the issuer. In the case of 
purchasers who are legal entities, these estimates also include the 
time and cost incurred by purchasers' in-house counsel and executive 
officers to undertake a factual inquiry to determine the state or 
territory of the purchaser's principal place of business.
    In deriving our estimates, we recognize that the burdens and costs 
will likely vary between natural person and legal entity purchasers. In 
the case of purchasers who are legal entities, these burdens and costs 
will be based on a number of factors, including the location and 
structure of their management teams. We believe that some natural 
person and legal entity purchasers will experience burdens and costs in 
excess of our estimated averages, and that others may experience 
burdens and costs less than our estimated averages.
Request for Comment
    We request comment on our approach and the accuracy of the current 
estimates. Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits 
comments to: (1) Evaluate whether the collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility; (2) 
evaluate the accuracy of the Commission's estimate of the burden of the 
collections of information; (3) determine whether there are ways to 
enhance the quality, utility and clarity of the information to be 
collected; and (4) evaluate whether there are ways to minimize the 
burden of the collections of information on those who are required to 
respond,

[[Page 83543]]

including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Commission by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/final.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-22-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

Comments should be received on or before: January 20, 2017. Comments 
submitted in response to this document will be summarized and/or 
included in the request for OMB approval of this information 
collection; they also will become a matter of public record.

B. Amendments to Rule 504 of Regulation D

    The amendments to Rule 504 of Regulation D contain ``collection of 
information'' requirements within the meaning of the PRA. There are two 
titles for the collection of information requirements contemplated by 
the amendments. The first title is: ``Form D'' (OMB Control No. 3235-
0076), an existing collection of information.\502\ The second title is: 
``Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure 
Statement,'' (OMB Control No. 3235-0746), a new collection of 
information. Although the amendments to Rule 504 do not alter the 
information requirements set forth in Form D, the amendments are 
expected to increase the number of new Form D filings made pursuant to 
Regulation D. Additionally, the mandatory bad actor disclosure 
provisions that will be required under Rule 504 contain ``collection of 
information'' requirements within the meaning of the PRA. We published 
a notice requesting comment on these collection of information 
requirements in the Proposing Release, and we submitted the proposed 
amendments to the Office of Management and Budget (``OMB'') for review 
and approval in accordance with the PRA and its implementing 
regulations.\503\ While several commenters provided qualitative 
comments on the possible costs of the proposed amendments, we did not 
receive comments on our PRA analysis and thus are adopting our 
estimates substantially as proposed, except as otherwise noted herein.
---------------------------------------------------------------------------

    \502\ Form D was adopted pursuant to Sections 2(a)(15), 3(b), 
4(a)(2), 19(a) and 19(c)(3) of the Securities Act, 15 U.S.C. 
77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3).
    \503\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The information collection requirements related to the filing of 
Form D with the Commission are mandatory to the extent that an issuer 
elects to make an offering of securities in reliance on the relevant 
exemption. Responses are not confidential, and there is no mandatory 
retention period for the information disclosed. The hours and costs 
associated with preparing and filing forms and retaining records 
constitute reporting and cost burdens imposed by the collection of 
information requirements. We applied for an OMB control number for the 
proposed new collection of information in accordance with 44 U.S.C. 
3507(j) and 5 CFR 1320.13, and OMB assigned a control number to the new 
collection, as specified above. Responses to the new collection of 
information will be mandatory for issuers raising capital under Rule 
504 of Regulation D.
Form D (OMB Control No. 3235-0076)
    The Form D filing is required for issuers as a notice of sales 
without registration under the Securities Act based on a claim of 
exemption under Regulation D or Section 4(a)(5) of the Securities Act. 
The Form D must include basic information about the issuer, certain 
related persons, and the offering. This information is used by the 
Commission to observe use of the Regulation D exemptions and safe 
harbor.
    As the amendments are not altering the information requirements of 
Form D, the amendments will not affect the paperwork burden of the 
form, and the burden for responding to the collection of information in 
Form D will be the same as before the amendments to Form D. However, we 
estimate that the amendments to increase the aggregate amount of 
securities that may be offered and sold in any 12-month period in 
reliance on Rule 504 will increase the number of Form D filings that 
are made with the Commission. We do not believe this increase will be 
materially offset by a decrease in the number of Form D filings that 
are made with the Commission attributable to our repeal of Rule 505 of 
Regulation D.
    The table below shows the current total annual compliance burden, 
in hours and in costs, of the collection of information pursuant to 
Form D. For purposes of the PRA, we estimate that, over a three-year 
period, the average burden estimate will be four hours per Form D. Our 
burden estimate represents the average burden for all issuers. This 
burden is reflected as a one hour burden of preparation on the company 
and a cost of $1,200 per filing. In deriving these estimates, we assume 
that 25% of the burden of preparation is carried by the issuer 
internally and that 75% of the burden of preparation is carried by 
outside professionals retained by the issuer at an average cost of $400 
per hour. The portion of the burden carried by outside professionals is 
reflected as a cost, while the portion of the burden carried by the 
issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         External
                                                 Number of      Burden  hours/  Total burden hours  Internal issuer    professional   Professional costs
                                                 responses           form                                 time             time
                                                   (A) \504\              (B)                   (C) = (A)*(B)  (D)              (E)      (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D......................................          25,900                4             103,600           25,900           77,700         $31,080,000
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 83544]]

    For the year ended 2015, there were 22,854 new Form D filings. The 
annual number of new Form D filings rose from 13,764 in 2009 to 22,854 
in 2015, an average increase of approximately 1,515 Form D filings per 
year, or approximately 9%. Assuming the number of Form D filings 
continues to increase by 1,515 filings per year for each of the next 
three years, the average number of Form D filings in each of the next 
three years would be approximately 25,900.
---------------------------------------------------------------------------

    \504\ Although the number of responses for Form D is reported as 
21,824 in the OMB's Inventory of Currently Approved Information 
Collections, available at http://www.reginfo.gov/public/do/
PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65, we have 
prepared a new estimate based on the historical trend of the annual 
number of new Form D filings. Based on an average increase of 
approximately 1,515 new Form D filings per year over the past six 
years, we believe that the average number of new Form D filings in 
each of the next three years will be approximately 25,884, or 25,900 
rounded to the nearest hundredth.
---------------------------------------------------------------------------

    We estimate that the amendments to Rule 504 will result in a much 
smaller annual increase in the number of new Form D filings than the 
average annual increase that has occurred over the past six years. To 
estimate how the amendments to Rule 504 will impact the number of new 
Form D filings, we used as a reference point the impact of a past rule 
change on the market for Regulation D offerings. In 1997, the 
Commission amended Rule 144(d) under the Securities Act \505\ to reduce 
the holding period for restricted securities from two years to one 
year,\506\ thereby increasing the attractiveness of Regulation D 
offerings to investors and to issuers. Prior to amending Rule 144(d), 
there were 10,341 Form D filings in 1996, which was followed by a 20% 
increase in the number of Form D filings in each of the subsequent 
three calendar years, reaching 17,830 by 1999. Although it is not 
possible to predict with any degree of certainty the increase in the 
number of Rule 504 offerings following the amendments, we estimate for 
purposes of the PRA that there will be a similar 20% increase over the 
number of new Form D offerings that relied on either Rule 504 or 505 in 
2015 after the amendments become effective.\507\ In 2015, there were 
519 new Form D filings reporting reliance on Rule 504 and 179 new Form 
D filings reporting reliance on Rule 505.\508\ We estimate that there 
will be approximately 100 new Form D filings in each of the next three 
years attributable to the amendments.\509\
---------------------------------------------------------------------------

    \505\ 17 CFR 230.144(d).
    \506\ See SEC Rel. No. 33-7390 (Feb. 20, 1997) [62 FR 9242].
    \507\ We include the number of new Form D filings that rely on 
Rule 505 in these estimates since we are repealing Rule 505, which 
has provided an alternative Regulation D exemption available for 
both non-reporting and reporting issuers under the Exchange Act. 
Rule 505 has a maximum offering limitation of no more than $5 
million in a twelve month period. We believe that issuers who are 
non-reporting under the Exchange Act that have previously relied 
upon Rule 505 will rely upon Rule 504 upon effectiveness of the 
amendments, which will raise the maximum offering limitation under 
Rule 504 from $1 million to $5 million. Reporting issuers under the 
Exchange Act, who would have otherwise relied upon Rule 505, will 
now have to rely upon Rule 506 of Regulation D, once the repeal of 
Rule 505 becomes effective, since Rule 504 is unavailable to 
reporting issuers.
    \508\ Only 10 of the 179 new Form D filings that reported 
reliance on Rule 505 in 2015 were filed by reporting issuers under 
the Exchange Act. The remaining 169 new Form D filings were filed by 
non-reporting issuers.
    \509\ We estimate the number of new Form D filings attributable 
to the amendments over the next three years, as follows: 698 new 
Form D filings in 2015 relying on either Rules 504 or 505, less 10 
new Form D filings made by reporting issuers under Rule 505 in 2015, 
multiplied by 20%, equals 138. Rounding 138 to the nearest hundredth 
provides an estimate of 100 new Form D filings attributable to the 
amendments.
---------------------------------------------------------------------------

    Based on these increases, we estimate that the total annual 
compliance burden of the collection of information requirements for 
issuers making Form D filings after amending Rule 504 to increase the 
aggregate offering amount from $1 million to $5 million will be 26,000 
hours of issuer personnel time and $31,200,000 for the services of 
outside professionals.

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden  hours/    Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \510\              (B)                (C) = (A)*(B)  (D)              (E)      (F) = (E) *
                                                                                                                                                   $400
 
rForm D...........................................          26,000                4          104,000           26,000           78,000      $31,200,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure 
Statement (OMB Control No. 3235-0746)
    Under the amendments, Rule 504 will disqualify issuers from 
reliance on Rule 504 if such issuer would be subject to 
disqualification under Rule 506(d) of Regulation D.\511\ Consistent 
with the requirements of Rule 506(e), the amendments require the issuer 
in a Rule 504 offering to furnish to each purchaser, a reasonable time 
prior to sale, a written description of any disqualifying events that 
occurred before effectiveness of the amendments and within the time 
periods described in the list of disqualification events set forth in 
Rule 506(d)(1) of Regulation D,\512\ for the issuer or any other 
``covered person'' associated with the offering. For purposes of the 
mandatory disclosure provision described in the note to Rule 
504(b)(3),\513\ issuers will be required to ascertain whether any 
disclosures are required in respect of covered persons involved in 
their offerings, prepare any required disclosures and furnish them to 
purchasers.
---------------------------------------------------------------------------

    \510\ The information in this column is not based on the number 
of responses for Form D of 21,824, as reported in the OMB's 
Inventory of Currently Approved Information Collections, but rather 
on a new estimate of the average number of new Form D filings in 
each of the next three years. We prepared this estimate based on the 
historical trend of the annual number of new Form D filings. See 
text accompanying note 503 above. Based on an average increase of 
approximately 1,515 new Form D filings per year over the past six 
years, we estimate that the number of new Form D filings after the 
amendment to Rule 504 would be the average number of new Form D 
filings we estimate in each of the next three years of 25,900, plus 
the additional 100 filings we estimate would be filed as a result of 
the amendment to Rule 504.
    \511\ See Rule 504(b)(3); see also 17 CFR 230.506(d).
    \512\ 17 CFR 230.506(d)(1).
    \513\ See Note to Rule 504(b)(3).
---------------------------------------------------------------------------

    The disclosure required to be furnished to investors does not 
involve submission of a form filed with the Commission and is not 
required to be presented in any particular format, although it must be 
in writing. The hours and costs associated with preparing and 
furnishing the required disclosure to investors in the offering 
constitute reporting and cost burdens imposed by the collection of 
information.
    The disclosure or paperwork burden imposed on issuers appears in an 
instruction to Rule 504(b)(3) and pertains to events that occurred 
before effectiveness of the final rules but which would have triggered 
disqualification had they occurred after effectiveness. Issuers relying 
on Rule 504 will be required to furnish disclosure of any relevant past 
events that would have triggered disqualification under Rule 504(b)(3) 
that relate to the issuer or any other covered person. If there are any 
such events, a disclosure statement will be required to be furnished, a 
reasonable time before sale, to all purchasers in the offering. The 
disclosure requirement will serve to protect purchasers by

[[Page 83545]]

ensuring that they receive information about any covered persons that 
were subject to such disqualifying events.
    The disclosure requirement will not apply to triggering events 
occurring after the effective date of the amendments, because those 
events will result in disqualification from reliance on Rule 504 
(absent a waiver or other exception provided in Rule 506(d)), rather 
than any disclosure obligation.
    The steps that issuers take to comply with the disclosure 
requirement are expected to mirror the steps they would take to 
determine whether they are disqualified from relying on Rule 504. For 
purposes of estimating burdens and costs, we have assumed that issuers 
planning or conducting a Rule 504 offering will undertake a factual 
inquiry to determine whether they are subject to any disqualification 
in order to utilize the reasonable care provisions set forth in Rule 
506(d)(2)(iv). Disqualification and mandatory disclosure will be 
triggered by the same types of events in respect of the same covered 
persons, with disqualification arising from triggering events occurring 
after the adoption and effectiveness of the amendments and mandatory 
disclosure applicable to events occurring before that date. Therefore, 
we expect that the factual inquiry process for the disclosure statement 
requirement will impose a limited incremental burden on issuers.
    The burdens and costs may vary depending on the size of the issuer 
and the circumstances of the particular Rule 504 offering. We do not 
anticipate that it will generally be necessary for any issuer or any 
compensated solicitor to make inquiry of any covered individual with 
respect to ascertaining the existence of events that require disclosure 
more than once, because the period to be covered by the inquiry will 
end with the effective date of the new disqualification rules. However, 
issuers may incur additional burden and costs for each Rule 504 
offering due to changes in management or intermediaries, other changes 
to the group of covered persons or if questions arise about the 
accuracy of previous responses.
    We anticipate that the Regulation D Rule 504(b)(3) Felons and Other 
Bad Actors Disclosure Statement will result in an incremental increase 
in the burdens and costs for issuers that rely on the Rule 504 
exemption. For purposes of the PRA, we estimate the total annual 
increase in paperwork burden for all affected Rule 504 issuers to 
comply with our collection of information requirements will be 
approximately 880 hours of company personnel time and approximately 
$9,600 for the services of outside professionals. These estimates 
include the incremental time and cost of conducting a factual inquiry 
to determine whether the Rule 504 issuers have any covered persons with 
past disqualifying events. The estimates also include the cost of 
preparing a disclosure statement that issuers will be required to 
furnish to each purchaser a reasonable time prior to sale.
    In deriving our estimates, consistent with those assumptions used 
in the PRA analysis for the Rule 506 bad actor disqualification 
provisions,\514\ we assume that:
---------------------------------------------------------------------------

    \514\ See SEC Rel. No. 33-9414 (July 10, 2013).
---------------------------------------------------------------------------

     Approximately 800 issuers \515\ relying on Rule 504 of 
Regulation D will spend on average one additional hour to conduct a 
factual inquiry to determine whether any covered persons had a 
disqualifying event that occurred before the effective date of the 
amendments; and
---------------------------------------------------------------------------

    \515\ Based on staff analysis of Form D filings, there were 519 
new Form D filings reporting reliance on Rule 504 and 179 new Form D 
filings reporting reliance on Rule 505 in 2015. See Figure 1 in 
Section V.A.1, above. Of the 179 new Form D filings reporting 
reliance on Rule 505 in 2015, 10 new Form D filings were made by 
reporting issuers under the Exchange Act and 169 new Form D filings 
were made by non-reporting issuers under the Exchange Act. For 
purposes of the PRA estimates, and based on the data provided for 
Rule 504 and Rule 505 offerings in 2015, we assume that 
approximately 800 issuers would file a Form D indicating reliance on 
Rule 504 after the effectiveness of the amendments to Rule 504 
(calculated as follows: 519 new Rule 504 filings and 169 new Rule 
505 filings by non-reporting issuers in 2015, rounded to the nearest 
hundredth, or 700 new Form D filings, plus 100 additional new Form D 
filings attributable to the amendments to Rule 504). This figure 
includes non-reporting issuers under the Exchange Act that, before 
adoption of amendments to Rule 504, would have conducted offerings 
pursuant to Rule 505, but that after adoption of the amendments to 
Rule 504 and repeal of Rule 505 will likely conduct their offerings 
pursuant to Rule 504.
---------------------------------------------------------------------------

     On the basis of the factual inquiry, approximately eight 
issuers (or approximately 1%) will spend ten hours to prepare a 
disclosure statement describing matters that would have triggered 
disqualification under Rule 504(b)(3) of Regulation D had they occurred 
on or after the effective date of the amendments; and
     For purposes of the Rule 504(b)(3) disclosure statement, 
approximately eight issuers will retain outside professional firms to 
spend three hours on disclosure preparation at an average cost of $400 
per hour.
    The increase in burdens and costs associated with conducting a 
factual inquiry for the disclosure statement requirement should be 
minimal given that issuers are likely to conduct simultaneously a 
similar factual inquiry for purposes of determining disqualification 
from Rule 504.
    It is difficult to provide any standardized estimates of the costs 
involved with the factual inquiry. There is no central repository that 
aggregates information from all federal and state courts and regulators 
that would be relevant in determining whether a covered person has a 
disqualifying event in his or her past. In this regard, we are 
currently unable to estimate the burdens and costs for issuers in a 
verifiable way. We expect, however, that the costs to issuers may be 
higher or lower depending on the size of the issuer and the number and 
roles of covered persons. We realize there may be a wide range of 
issuer sizes, management structures, and offering participants 
associated with Rule 504 offerings and that different issuers may 
develop a variety of different factual inquiry procedures.
    Where the issuer or any covered person will be subject to an event 
covered by Rule 504(b)(3) that existed before the effective date of 
these rules, the issuer will be required to prepare disclosure for each 
relevant Rule 504 offering. The estimates include the time and the cost 
of data gathering systems, the time and cost of preparing and reviewing 
disclosure by in-house and outside counsel and executive officers, and 
the time and cost of delivering or furnishing documents and retaining 
records.
    Issuers conducting ongoing or continuous offerings may need to 
update their factual inquiry and disclosure as necessary to address 
additional covered persons. The annual incremental paperwork burden, 
therefore, depends on an issuer's Rule 504 offering activity and the 
changes in covered persons from offering to offering. For example, some 
issuers may only conduct one Rule 504 offering during a year while 
other issuers may have multiple, separate Rule 504 offerings during the 
course of the same year involving different financial intermediaries, 
newly hired executive officers or new 20% shareholders, any of which 
will result in a different group of covered persons. In deriving our 
estimates, we recognize that the burdens will likely vary among 
individual companies based on a number of factors, including the size 
and complexity of their organizations. We believe that some companies 
will experience costs in excess of this estimated average and other 
companies may experience less than the estimated average costs.

[[Page 83546]]

VII. Final Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \516\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act,\517\ to consider the impact of those 
rules on small entities. The Commission has prepared this Final 
Regulatory Flexibility Analysis (``FRFA'') in accordance with Section 
604 of the RFA.\518\ This FRFA relates to the amendments to Rules 147 
and 504, new Rule 147A and the repeal of Rule 505, all of which rules 
are under the Securities Act. An Initial Regulatory Flexibility 
Analysis (IRFA) was prepared in accordance with the RFA and included in 
the Proposing Release.
---------------------------------------------------------------------------

    \516\ 5 U.S.C. 601 et seq.
    \517\ 5 U.S.C. 553.
    \518\ 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Need for the Rules

    The amendments to Rule 147 are designed to modernize the safe 
harbor, consistent with the Section 3(a)(11) exemption from 
registration for intrastate securities offerings. New Rule 147A, which 
will be similar to amended Rule 147 but will have no restriction on 
offers and will allow issuers to be incorporated or organized out-of-
state, establishes a new Securities Act exemption for intrastate 
offerings of securities by local companies. Together, the amendments to 
Rule 147 and new Rule 147A are designed to facilitate capital formation 
by making it easier to engage in exempt intrastate offerings while 
maintaining appropriate protections for investors who purchase 
securities in these offerings.
    The amendments to Rule 504 are designed to facilitate capital 
formation by increasing the flexibility of state securities regulators 
to implement regional coordinated review programs that will facilitate 
regional offerings. The amendments to Rule 504 will raise the aggregate 
amount of securities an issuer may offer and sell in any 12-month 
period from $1 million to $5 million and disqualify certain bad actors 
from participating in Rule 504 offerings. We believe that raising the 
aggregate offering limitation and disqualifying certain bad actors will 
maximize the flexibility of state securities regulators to implement 
regional coordinated review programs and provide for greater 
consistency across Regulation D. We believe our amendment to Rule 504 
to increase its aggregate offering ceiling from $1 million to $5 
million will significantly diminish the utility of Rule 505 of 
Regulation D, and we are therefore repealing that rule.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on all aspects 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 amendments. 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 Sections II. and 
III. above.
    Many commenters recommended making changes to the proposed rules 
that, in their view, would make the exemptions a more viable capital 
raising option for smaller issuers. Numerous commenters supported \519\ 
the proposal to eliminate the Rule 147 limitation on offers to in-state 
residents while continuing to require that all sales be made to in-
state residents. However, many commenters also supported \520\ and the 
2015 Small Business Forum recommended \521\ retaining Rule 147 as a 
safe harbor under Section 3(a)(11), while adopting a substantially 
similar new exemption pursuant to the Commission's general exemptive 
authority under Section 28 as an alternative to the Section 3(a)(11) 
exemption for companies that are conducting an intrastate offering. 
Many commenters opposed any limits at the federal level on offering 
size or investment size,\522\ and the 2015 Small Business Forum 
recommended permitting the states to set their own limits as 
appropriate.\523\ In addition, several commenters supported \524\ and 
the 2015 Small Business Forum recommended \525\ exempting securities 
issued in reliance upon Rule 147 from the reporting requirements of 
Section 12(g) of the Exchange Act. Several commenters also supported 
interpreting the intrastate broker-dealer exemption under the Exchange 
Act to include intermediaries whose activities are limited to 
facilitating intrastate offerings using the Internet.\526\
---------------------------------------------------------------------------

    \519\ ABA Letter; City of Adrian Letter; Bishop Letter; Brelion 
Letter; CFA Letter; CFIRA Letter; CrowdCheck Letter; CrwdCorp 
Letter; Ely Letter; Guzik Letter; Love Letter; MacDougall Letter; 
Milken Letter; NASAA Letter; Newcomer Letter; NextSeed Letter; Pearl 
Letter; Terdal Letter; Wolff Letter; Zeoli Letter. See also 
Congressional Letter (expressing general support for the proposed 
amendments to Rule 147).
    \520\ ABA Letter; City of Adrian Letter; Bishop Letter; 
California Bar Letter; CFIRA Letter; Congressional Letter; 
CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA Letter; 
NextSeed Letter; Pearl Letter; Wallin Letter; Orloff Letter; Zeoli 
Letter. No commenters supported eliminating Rule 147 as a safe 
harbor under Section 3(a)(11).
    \521\ See 2015 Small Business Forum Recommendations.
    \522\ ABA Letter; Campbell Letter; CFIRA Letter; Congressional 
Letter; CrowdCheck Letter; Guzik Letter; Milken Letter; NASAA 
Letter; NextSeed Letter; WBA Letter.
    \523\ See 2015 Small Business Forum Recommendations.
    \524\ CFIRA Letter; CrowdCheck Letter; Guzik Letter; Milken 
Letter; City of Adrian Letter.
    \525\ See 2015 Small Business Forum Recommendations.
    \526\ NASAA Letter; NextSeed Letter; WBA Letter.
---------------------------------------------------------------------------

    Amended Rule 147 and new Rule 147 take into account some of the 
suggestions by commenters and the recommendations of the 2015 Small 
Business Forum on ways to make the intrastate offering exemptions more 
useful for small entities. For example, the final rules retain Rule 147 
as a safe harbor under Section 3(a)(11), while adopting a substantially 
similar new exemption pursuant to the Commission's general exemptive 
authority under Section 28 as an alternative to the Section 3(a)(11) 
exemption for companies that are conducting an intrastate offering. As 
described above, the final rules will modernize existing Rule 147 and 
maintain a consistent approach across the two intrastate offering 
provisions, where possible. Also, given the comments received, the 
recommendations of the 2015 Small Business Forum and the local 
intrastate nature of the exemptions, amended Rule 147 and new Rule 147A 
will not contain any limits at the federal level on offering size or 
investment size.
    As noted in Section II.C above, however, we are not persuaded that 
securities issued in reliance upon Rule 147 or Rule 147A should be 
exempt from the reporting requirements of Section 12(g) of the Exchange 
Act. Given the lack of ongoing reporting requirements under these 
rules, we believe that the Section 12(g) record holder and asset 
thresholds continue to provide an important baseline above which 
issuers should generally be subject to the disclosure obligations of 
the Exchange Act. As the shareholder base and total assets of these 
issuers grow, we believe that the additional protections that will be 
provided by registration under Section 12(g) are necessary and 
appropriate.
    Additionally, as noted in Section II.B.2.c above, in response to 
the request by several commenters to interpret the intrastate broker-
dealer exemption

[[Page 83547]]

under the Exchange Act to include intermediaries whose activities are 
limited to facilitating intrastate offerings using the Internet,\527\ 
we are providing guidance that a broker-dealer whose business otherwise 
meets the requirements of the intrastate broker-dealer exemption should 
not cease to qualify for the intrastate broker-dealer exemption solely 
because it has a Web site that may be viewed by out-of-state persons, 
so long as the broker-dealer takes measures reasonably designed to 
ensure that its business remains exclusively intrastate.
---------------------------------------------------------------------------

    \527\ NASAA Letter; NextSeed Letter; WBA Letter.
---------------------------------------------------------------------------

    A few commenters also recommended changes to Rules 504 and 505 
that, in their view, would make the exemptions a more viable capital 
raising option for smaller issuers. Two commenters suggested \528\ and 
the 2015 Small Business Forum recommended \529\ that the Rule 504 
offering amount limit be increased to $10 million. In addition, one 
commenter suggested \530\ and the 2015 Small Business Forum recommended 
\531\ that securities sold under Rule 504 be exempt from the 
requirements of Section 12(g). For Rule 505, one commenter suggested 
that the Commission consider changes to Rule 505 to facilitate very 
small offerings by early stage companies, such as a simple debt-only 
offering exemption for smaller issuers.\532\ Another commenter noted 
that, if the proposed changes to Rule 504 are adopted, Rule 505 would 
be substantially similar to Rule 504, making Rule 505 unnecessary, 
unless the Commission increases the aggregate offering amount that may 
be raised under Rule 505 in any twelve-month period.\533\
---------------------------------------------------------------------------

    \528\ CrowdCheck Letter; CFIRA Letter.
    \529\ See 2015 Small Business Forum Recommendations.
    \530\ Milken Letter.
    \531\ See 2015 Small Business Forum Recommendations.
    \532\ Milken Letter.
    \533\ ABA Letter. This commenter recommended, for example, that 
the offering amount limit could be raised from $5 million to $10 
million or some larger amount, thereby preserving Rule 505 as a 
viable alternative exemption.
---------------------------------------------------------------------------

    As supported by many commenters, the final amendments to Rule 504 
will increase the offering amount limit from $1 million to $5 
million.\534\ We believe that the $5 million threshold will facilitate 
issuers' ability to raise capital, while remaining within the statutory 
requirements of Section 3(b)(1). As noted in Section III.B above, 
although two commenters and the 2015 Small Business Forum recommended 
that the Commission increase the Rule 504 offering amount limit to $10 
million, we are not exceeding the maximum offering amount permitted 
under Section 3(b)(1). Although, as several commenters noted, we could 
use our exemptive authority under Section 28 of the Securities Act to 
raise the maximum offering amount above $5 million,\535\ in accord with 
the suggestion of one of those commenters,\536\ we believe it 
appropriate to first observe market activity under a new maximum 
offering amount of $5 million before raising the Rule 504 offering 
limit any higher.
---------------------------------------------------------------------------

    \534\ ABA Letter; CFA Letter; CFIRA Letter; CrowdCheck Letter; 
Milken Letter; NASAA Letter.
    \535\ ABA Letter; Milken Letter.
    \536\ ABA Letter (``If the increase to $5 million is adopted, 
after there is experience with the use and operation of new Rule 
504, the Commission may wish to consider using its exemption 
authority under Section 28 to increase the dollar limitation amount 
that may be offered under Rule 204.'').
---------------------------------------------------------------------------

    As noted in Section III.B above, we are not persuaded that 
securities issued in reliance upon Rule 504 should be exempt from the 
reporting requirements of Section 12(g) of the Exchange Act. Similar to 
Rules 147 and 147A, given the lack of ongoing reporting requirements 
under Rule 504, we believe that the Section 12(g) record holder and 
asset thresholds continue to provide an important baseline above which 
issuers should generally be subject to the disclosure obligations of 
the Exchange Act. As the shareholder base and total assets of these 
companies grow, we believe that the additional protections that will be 
provided by registration under Section 12(g) are necessary and 
appropriate.
    After considering the comments, we are repealing Rule 505. As 
discussed in Section III.C, amending Rule 504 to increase the aggregate 
offering amount limit from $1 million to $5 million may further reduce 
the incentives to use Rule 505 by issuers contemplating an exempt 
offering. We also believe that, even if we were to raise the Rule 505 
aggregate offering amount limit from $5 million to $10 million, or some 
higher amount, such a higher limit would not increase the utility of 
the Rule 505 exemption as compared to Rule 506 which has no limit, 
given the historically diminished utility of Rule 505 as compared to 
Rule 506.\537\ Further, although Rule 505 provides issuers the ability 
to sell securities to up to 35 non-accredited investors without having 
to make a finding, as in Rule 506(b)(2)(ii), that such persons have the 
knowledge and experience in financial matters that they are capable of 
evaluating the merits and risks of the prospective investment, \538\ 
this provision does not appear to have historically resulted in the 
Rule 505 exemption being widely utilized.\539\ We will continue to 
evaluate whether we should replace Rule 505 with a substantially 
different exemption with new criteria, such as an exemption limited to 
a very small aggregate offering amount by early stage companies, or an 
exemption limited only to ``simple debt securities'' with very modest 
compliance requirements.
---------------------------------------------------------------------------

    \537\ See note 22 above.
    \538\ Cf. 17 CFR 230.506(b)(2)(ii).
    \539\ See Unregistered Offerings White Paper.
---------------------------------------------------------------------------

    In the light of the changes discussed above, we believe that the 
final rules provide smaller issuers with an appropriately tailored 
regulatory regime that takes into account the needs of small entities 
to have viable intrastate capital formation options, while maintaining 
appropriate investor protections.

C. Small Entities Subject to the Rules

    For purposes of the RFA, 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.\540\ For purposes of 
the RFA, an investment company is a small entity if it, together with 
other investment companies in the same group of related investment 
companies, has net assets of $50 million or less as of the end of its 
most recent fiscal year.\541\
---------------------------------------------------------------------------

    \540\ 17 CFR 230.157.
    \541\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    While we lack data on the number and size of Rule 147 offerings or 
the type of issuers currently relying on the Rule 147 safe harbor, the 
nature of the eligibility requirements and other restrictions of the 
rule lead us to believe that it is used by U.S. incorporated entities 
that are likely small businesses seeking to raise small amounts of 
capital locally without incurring the costs of registering with the 
Commission. Currently, most states that have enacted crowdfunding 
provisions require issuers that intend to conduct intrastate 
crowdfunding offerings to rely upon Rule 147. Since December 2011, when 
the first state crowdfunding provision was enacted, 179 state 
crowdfunding offerings have been reported to be filed with the 
respective state regulators.\542\ Of these offerings, 166 were reported 
to be approved or cleared, as of June 20,

[[Page 83548]]

2016.\543\ We expect that almost all of the entities conducting these 
offerings were small issuers.
---------------------------------------------------------------------------

    \542\ Based on estimates provided by NASAA in a meeting with 
staff of the SEC Division of Corporation Finance on July 20, 2016, 
available athttps://www.sec.gov/comments/s7-22-15/s72215-32.pdf.
    \543\ Id.
---------------------------------------------------------------------------

    It is difficult to predict the number of small entities that will 
use amended Rule 147 and new Rule 147A due to the many variables 
included in the amendments. Nevertheless, we believe that the final 
rules will increase the overall number of offerings relying on the 
intrastate exemptions due to the ability to make out-of-state offers 
under Rule 147A, the expanded number of issuers that will be eligible 
to use the intrastate exemptions due to the lack of an in-state 
incorporation requirement in Rule 147A and the modernized ``doing 
business'' requirements of Rules 147 and 147A, and other significant 
changes summarized in Section II above.
    The amendments to Rule 504 will affect small issuers that rely on 
this exemption from Securities Act registration. All issuers that sell 
securities in reliance on Regulation D are required to file a Form D 
with the Commission reporting the transaction. For the year ended 
December 31, 2015, 20,736 issuers made 22,854 new Form D filings, and 
of these Form D filings, 493 issuers relied on the Rule 504 exemption. 
Based on the information reported by issuers on Form D, we estimate 
that there were 269 small issuers \544\ relying on the Rule 504 
exemption in 2015. This number likely underestimates the actual number 
of small issuers relying on the Rule 504 exemption, however, because 
41% of issuers that are not pooled investment funds and 38% of issuers 
that are pooled investment funds declined to report their amount of 
revenues or assets on their Form D filed with the Commission.
---------------------------------------------------------------------------

    \544\ Of this number, 265 of these issuers are not pooled 
investment funds, and 4 are pooled investment funds. We also note 
that issuers that are not pooled investment funds disclose only 
revenues on Form D, and not total assets. To estimate the number of 
small issuers, for non-pooled investment funds, we have included 
issuers that disclosed up to $5 million in revenues, including those 
with no revenues, and for pooled investment funds, we have included 
issuers that disclosed up to $5 million in net asset value, 
including those with no asset value.
---------------------------------------------------------------------------

    It is difficult to predict the number of small entities that will 
use amended Rule 504 due to the variables included in the amendments. 
Nevertheless, we believe that the final rules for Rule 504 will 
increase the overall number of offerings relying on the exemption due 
to the increase in the offering amount limit from $1 million to $5 
million, as summarized in Section III above.
    The repeal of Rule 505 will affect small issuers that rely on this 
exemption from Securities Act registration. For the year ended December 
31, 2015, of the 20,736 issuers that made new Form D filings, 163 
issuers relied on the Rule 505 exemption. Based on the information 
reported by issuers on Form D, we estimate that there were 112 small 
issuers \545\ relying on the Rule 505 exemption in 2015. This number 
likely underestimates the actual number of small issuers relying on the 
Rule 504 exemption, however, because 25% of issuers that are not pooled 
investment funds and 38% of issuers that are pooled investment funds 
declined to report their amount of revenues or assets on their Form D 
filed with the Commission.
---------------------------------------------------------------------------

    \545\ Of this number, 107 are not pooled investment funds, and 5 
are pooled investment funds. We also note that issuers that are not 
pooled investment funds disclose only revenues on Form D and not 
total assets. To estimate the number of small issuers, for non-
pooled investment funds, we have included issuers that disclosed up 
to $5 million in revenues, including those with no revenues, and for 
pooled investment funds, we have included issuers that disclosed up 
to $5 million in net asset value, including those with no asset 
value.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Amended Rule 147 and new Rule 147A will not impose any reporting or 
recordkeeping requirements, but will require that issuers conducting 
offerings in reliance on these rules make certain specific disclosures 
to each offeree and purchaser in the offering. These disclosures will 
be made to each offeree in the manner in which any such offer is 
communicated and to each purchaser of a security in writing. Amended 
Rule 147 and new Rule 147A will also require that issuers place a 
specific legend on the certificate or other document evidencing the 
securities that are being offered in reliance on the rules.
    In order to comply with Rules 147(d) and 147A(d), sales of 
securities must be made only to residents of the state or territory in 
which the issuer has its residence or who the issuer reasonably 
believes, at the time of sale, are residents of the state or territory 
in which the issuer has its residence. In light of the comments 
received on the proposal, Rules 147 and 147A will include a requirement 
that issuers obtain a written representation from each purchaser as to 
his or her residence.\546\ This written representation, however, will 
not be sufficient, by itself, to establish reasonable belief. In 
addition to the written representation, an issuer will need to consider 
other facts and circumstances.
---------------------------------------------------------------------------

    \546\ See Rules 147(f)(1)(iii) and 147A(f)(1)(iii).
---------------------------------------------------------------------------

    The amendments to Rule 504 will increase the aggregate offering 
ceiling from $1 million to $5 million and disqualify certain bad actors 
from participating in Rule 504 offerings. Issuers will need to comply 
with all the current requirements of Rule 504, including the filing of 
a Form D.\547\ Also, as is the case under current Rule 504, issuers 
relying on the rule that wish to engage in general solicitation and 
issue freely tradable securities may also be required to register their 
offering with at least one state regulator. The amendments to Rule 504 
will also impose a disclosure requirement with respect to bad actor 
disqualifying events that occurred before the effective date of the 
disqualification provisions and that would have triggered 
disqualification had they occurred after that date.\548\ Such 
disclosure will be required to be in writing and furnished to each 
purchaser a reasonable time prior to sale. There no prescribed format 
for such disclosure.
---------------------------------------------------------------------------

    \547\ Rule 503 requires an issuer relying on any exemption under 
Regulation D to file a Form D within 15 calendar days after the 
first sale of securities in the offering.
    \548\ See Rule 504(b)(3).
---------------------------------------------------------------------------

    In addition, we assume that issuers will exercise reasonable care 
to ascertain whether a disqualification exists with respect to any 
covered person and document their exercise of reasonable care. The 
steps undertaken by issuers to exercise reasonable care may vary with 
the circumstances. In addition, issuers will have to prepare any 
necessary disclosure about preexisting events. We expect that the costs 
of compliance will vary depending on the size and nature of the 
offering but will generally be lower for small entities than for larger 
ones because of the relative simplicity of their organizational 
structures and securities offerings and the generally smaller numbers 
of individuals and entities involved.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives of our 
amendments, while minimizing any significant adverse impact on small 
entities. Specifically, we considered the following alternatives: (1) 
Establishing different compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) clarifying, consolidating or simplifying compliance and 
reporting requirements for small entities under the rule; (3) using 
performance rather than design

[[Page 83549]]

standards; and (4) exempting small entities from coverage of all or 
part of the amendments.
    With respect to clarification, consolidation and simplification of 
the final rules' compliance and reporting requirements for small 
entities, amended Rule 147 and new Rule 147A do not impose any new 
reporting requirements. To the extent the final rules may be considered 
to create a new compliance requirement to have a reasonable belief that 
a prospective purchaser is a resident of the state or territory in 
which the issuer is a resident, including a requirement that issuers 
obtain a written representation from each purchaser as to his or her 
residence (as currently required in Rule 147), the precise steps 
necessary to meet the ``reasonable belief'' requirement will vary 
according to the circumstances, and this flexible standard will be 
applicable to all issuers, regardless of size. Overall, the final rules 
are designed to streamline and modernize the rule for all issuers, both 
large and small.
    In connection with amended Rule 147 and new Rule 147A, we do not 
think it feasible or appropriate to establish different compliance or 
reporting requirements or timetables for small entities. The final 
rules are designed to facilitate access to capital for both large and 
small issuers, but particularly smaller issuers who may satisfy their 
financing needs by limiting the sales of their securities only to 
residents of the state or territory in which the issuers are resident. 
The final rules do not contain any reporting standards and the 
compliance requirements they do include are minimal and designed with 
the limited resources of smaller issuers in mind. Similarly, we do not 
believe it is necessary to clarify, consolidate or simplify reporting 
or compliance requirements for small entities as the final rules 
contain more streamlined requirements for all issuers, both large and 
small. For example, the rules simplify the ``doing business'' in-state 
determination by amending the current requirements in Rule 147 so that 
an issuer's ability to rely on the safe harbor will be based on its 
ability to satisfy updated and modernized issuer requirements, while 
continuing to require issuers to have an in-state presence sufficient 
to justify reliance on the Section 3(a)(11) exemption. New Rule 147A 
includes similar modernized ``doing business'' in-state requirements. 
With respect to using performance rather than design standards, we note 
that the final rules establish a ``reasonable belief'' standard for the 
determination of a prospective purchaser's residency status, which we 
believe is a performance standard. Although the final rules will 
require a written representation from investors, the rules recognize 
that reasonable belief can be established in a variety of ways (e.g., 
through pre-existing knowledge of the purchaser, obtaining supporting 
documentation, or using other appropriate methods). We believe that the 
use of a performance standard accommodates different types of offerings 
and purchasers without imposing overly burdensome methods that may be 
ill-suited or unnecessary to a particular offering or purchaser, given 
the facts and circumstances.
    With respect to exempting small entities from amended Rule 147 and 
new Rule 147A, we believe such an approach would increase, rather than 
decrease, their regulatory burden. The final rules are designed to 
facilitate an issuer's access to capital, regardless of the size of the 
issuer. We have endeavored throughout these rules to minimize the 
regulatory burden on all issuers, including small entities, while 
meeting our regulatory objectives.
    In connection with our amendments to Rule 504 of Regulation D, we 
do not think it is feasible or appropriate to establish different 
compliance or reporting requirements or timetables for small entities. 
Our amendments are intended to facilitate issuers' access to capital 
and are particularly designed for smaller issuers who are not subject 
to the reporting requirements of Section 13 or 15(d) of the Exchange 
Act and who are offering no more than $5 million of their securities in 
any twelve month period. The amendments also exclude felons and other 
``bad actors'' from involvement in Rule 504 offerings, which we believe 
could benefit small issuers by increasing investor protection and trust 
in such offerings. Increased investor trust could potentially reduce 
the cost of capital and create greater opportunities for small 
businesses to raise capital.
    With respect to clarification, consolidation and simplification of 
the compliance and reporting requirements for small entities, the 
amendments to Rule 504 do not impose any new reporting requirements. To 
the extent the amendments may be considered to create a new compliance 
requirement to exercise reasonable care to ascertain whether a 
disqualification exists with respect to any offering and to furnish a 
written description of preexisting triggering events, the precise steps 
necessary to meet that requirement will vary according to the 
circumstances. In general, we believe the requirement will more easily 
be met by small entities than by larger ones because we believe that 
their structures and securities offerings would be generally less 
complex and involve fewer participants.
    With respect to the use of performance or design standards, we note 
that the ``reasonable care'' exception is a performance standard. With 
respect to exempting small entities from coverage of these amendments, 
we believe that such an approach would increase, rather than decrease, 
their regulatory burden. Regulation D was designed, in part, to provide 
exemptive relief for smaller issuers. Furthermore, exempting small 
entities from Rule 504's bad actor provisions could result in a 
decrease in investor protection and trust in this small offerings 
market, thereby potentially increasing the issuer's cost of capital. We 
have endeavored to minimize the regulatory burden on all issuers, 
including small entities, while meeting our regulatory objectives, and 
have included a ``reasonable care'' exception and waiver authority for 
the Commission to provide additional flexibility with respect to the 
application of these amendments.

VIII. Statutory Basis and Text of Final Amendments

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 3(b)(1), 19 and 28 of the 
Securities Act of 1933, as amended, Sections 12, 13, 15, 23(a) and 36 
of the Securities Exchange Act of 1934, Section 38(a) of the Investment 
Company Act of 1940 and Section 211(a) of the Investment Advisers Act.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Organization and functions (Government 
agencies).

17 CFR 230, 239, 240, 249, 270 and 275

    Reporting and recordkeeping requirements, Securities.

Text of Final Amendments

    For the reasons set out above, the Commission is amending Title 17, 
chapter II of the Code of Federal Regulations, as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart A--Organization and Program Management

0
1. The authority citation for Part 200, Subpart A, continues to read, 
in part as follows:


[[Page 83550]]


    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.
* * * * *


Sec.  200.30-1   [Amended]

0
2. Amend Sec.  200.30-1 by:
0
a. In paragraph (a)(7), removing the references to ``4(3)'', 
``4(3)(b)'' and ``77d(3)(B)'' and adding in their places ``4(a)(3)'', 
``4(a)(3)(B)'' and ``77d(a)(3)(B)'' respectively; and
0
b. In paragraph (c), removing the reference to ``Sec. Sec.  
230.505(b)(2)(iii)(C)'' and adding in its place ``Sec. Sec.  
230.504(b)(3)''.

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

0
3. The authority citation for part 230 continues 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 Public Law 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *

0
4. Sec.  230.147 is revised to read as follows:


Sec.  230.147   Intrastate offers and sales.

    (a) This section shall not raise any presumption that the exemption 
provided by section 3(a)(11) of the Act (15 U.S.C. 77c(a)(11)) is not 
available for transactions by an issuer which do not satisfy all of the 
provisions of this section.
    (b) Manner of offers and sales. An issuer, or any person acting on 
behalf of the issuer, shall be deemed to conduct an offering in 
compliance with section 3(a)(11) of the Act (15 U.S.C. 77c(a)(11)), 
where offers and sales are made only to persons resident within the 
same state or territory in which the issuer is resident and doing 
business, within the meaning of section 3(a)(11) of the Act, so long as 
the issuer complies with the provisions of paragraphs (c), (d), and (f) 
through (h) of this section.
    (c) Nature of the issuer. The issuer of the securities shall at the 
time of any offers and sales be a person resident and doing business 
within the state or territory in which all of the offers and sales are 
made.
    (1) The issuer shall be deemed to be a resident of the state or 
territory in which:
    (i) It is incorporated or organized, and it has its principal place 
of business, if a corporation, limited partnership, trust or other form 
of business organization that is organized under state or territorial 
law. The issuer shall be deemed to have its principal place of business 
in a state or territory in which the officers, partners or managers of 
the issuer primarily direct, control and coordinate the activities of 
the issuer;
    (ii) It has its principal place of business, as defined in 
paragraph (c)(1)(i) of this section, if a general partnership or other 
form of business organization that is not organized under any state or 
territorial law;
    (iii) Such person's principal residence is located, if an 
individual.
    Instruction to paragraph (c)(1): An issuer that has previously 
conducted an intrastate offering pursuant to this section (Sec.  
230.147) or Rule 147A (Sec.  230.147A) may not conduct another 
intrastate offering pursuant to this section (Sec.  230.147) in a 
different state or territory, until the expiration of the time period 
specified in paragraph (e) of this section (Sec.  230.147(e)) or 
paragraph (e) of Rule 147A (Sec.  230.147A(e)), calculated on the basis 
of the date of the last sale in such offering.
    (2) The issuer shall be deemed to be doing business within a state 
or territory if the issuer satisfies at least one of the following 
requirements:
    (i) The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in or from the rendering of services within such state or territory;
    Instruction to paragraph (c)(2)(i): Revenues must be calculated 
based on the issuer's most recent fiscal year, if the first offer of 
securities pursuant to this section is made during the first six months 
of the issuer's current fiscal year, and based on the first six months 
of the issuer's current fiscal year or during the twelve-month fiscal 
period ending with such six-month period, if the first offer of 
securities pursuant to this section is made during the last six months 
of the issuer's current fiscal year.
    (ii) The issuer had at the end of its most recent semi-annual 
fiscal period prior to an initial offer of securities in any offering 
or subsequent offering pursuant to this section, at least 80% of its 
assets and those of its subsidiaries on a consolidated basis located 
within such state or territory;
    (iii) The issuer intends to use and uses at least 80% of the net 
proceeds to the issuer from sales made pursuant to this section (Sec.  
230.147) in connection with the operation of a business or of real 
property, the purchase of real property located in, or the rendering of 
services within such state or territory; or
    (iv) A majority of the issuer's employees are based in such state 
or territory.
    (d) Residence of offerees and purchasers. Offers and sales of 
securities pursuant to this section (Sec.  230.147) shall be made only 
to residents of the state or territory in which the issuer is resident, 
as determined pursuant to paragraph (c) of this section, or who the 
issuer reasonably believes, at the time of the offer and sale, are 
residents of the state or territory in which the issuer is resident. 
For purposes of determining the residence of offerees and purchasers:
    (1) A corporation, partnership, limited liability company, trust or 
other form of business organization shall be deemed to be a resident of 
a state or territory if, at the time of the offer and sale to it, it 
has its principal place of business, as defined in paragraph (c)(1)(i) 
of this section, within such state or territory.
    Instruction to paragraph (d)(1): A trust that is not deemed by the 
law of the state or territory of its creation to be a separate legal 
entity is deemed to be a resident of each state or territory in which 
its trustee is, or trustees are, resident.
    (2) Individuals shall be deemed to be residents of a state or 
territory if such individuals have, at the time of the offer and sale 
to them, their principal residence in the state or territory.
    (3) A corporation, partnership, trust or other form of business 
organization, which is organized for the specific purpose of acquiring 
securities offered pursuant to this section (Sec.  230.147), shall not 
be a resident of a state or territory unless all of the beneficial 
owners of such organization are residents of such state or territory.
    Instruction to paragraph (d): Obtaining a written representation 
from purchasers of in-state residency status will not, without more, be 
sufficient to establish a reasonable belief that such purchasers are 
in-state residents.
    (e) Limitation on resales. For a period of six months from the date 
of the sale by the issuer of a security pursuant to this section (Sec.  
230.147), any resale of such security shall be made only to persons 
resident within the state or territory in which the issuer was 
resident, as determined pursuant to paragraph (c) of this section, at 
the time of the sale of the security by the issuer.
    Instruction to paragraph (e): In the case of convertible 
securities, resales of either the convertible security, or if it is 
converted, the underlying security, could be made during the period 
described in paragraph (e) only to persons resident within such state 
or territory. For purposes of this paragraph

[[Page 83551]]

(e), a conversion in reliance on section 3(a)(9) of the Act (15 U.S.C. 
77c(a)(9)) does not begin a new period.
    (f) Precautions against interstate sales. (1) The issuer shall, in 
connection with any securities sold by it pursuant to this section:
    (i) Place a prominent legend on the certificate or other document 
evidencing the security stating that: ``Offers and sales of these 
securities were made under an exemption from registration and have not 
been registered under the Securities Act of 1933. For a period of six 
months from the date of the sale by the issuer of these securities, any 
resale of these securities (or the underlying securities in the case of 
convertible securities) shall be made only to persons resident within 
the state or territory of [identify the name of the state or territory 
in which the issuer was resident at the time of the sale of the 
securities by the issuer].'';
    (ii) Issue stop transfer instructions to the issuer's transfer 
agent, if any, with respect to the securities, or, if the issuer 
transfers its own securities, make a notation in the appropriate 
records of the issuer; and
    (iii) Obtain a written representation from each purchaser as to his 
or her residence.
    (2) The issuer shall, in connection with the issuance of new 
certificates for any of the securities that are sold pursuant to this 
section (Sec.  230.147) that are presented for transfer during the time 
period specified in paragraph (e), take the steps required by 
paragraphs (f)(1)(i) and (ii) of this section.
    (3) The issuer shall, at the time of any offer or sale by it of a 
security pursuant to this section (Sec.  230.147), prominently disclose 
to each offeree in the manner in which any such offer is communicated 
and to each purchaser of such security in writing a reasonable period 
of time before the date of sale, the following: ``Sales will be made 
only to residents of [identify the name of the state or territory in 
which the issuer was resident at the time of the sale of the securities 
by the issuer]. Offers and sales of these securities are made under an 
exemption from registration and have not been registered under the 
Securities Act of 1933. For a period of six months from the date of the 
sale by the issuer of the securities, any resale of the securities (or 
the underlying securities in the case of convertible securities) shall 
be made only to persons resident within the state or territory of 
[identify the name of the state or territory in which the issuer was 
resident at the time of the sale of the securities by the issuer].''
    (g) Integration with other offerings. Offers or sales made in 
reliance on this section will not be integrated with:
    (1) Offers or sales of securities made prior to the commencement of 
offers and sales of securities pursuant to this section (Sec.  
230.147); or
    (2) Offers or sales made after completion of offers and sales of 
securities pursuant to this section (Sec.  230.147) that are:
    (i) Registered under the Act, except as provided in paragraph (h) 
of this section (Sec.  230.147);
    (ii) Exempt from registration under Regulation A (Sec. Sec.  
230.251 through 230.263);
    (iii) Exempt from registration under Rule 701 (Sec.  230.701);
    (iv) Made pursuant to an employee benefit plan;
    (v) Exempt from registration under Regulation S (Sec. Sec.  230.901 
through 230.905);
    (vi) Exempt from registration under section 4(a)(6) of the Act (15 
U.S.C. 77d(a)(6)); or
    (vii) Made more than six months after the completion of an offering 
conducted pursuant to this section (Sec.  230.147).
    Instruction to paragraph (g): If none of the safe harbors applies, 
whether subsequent offers and sales of securities will be integrated 
with any securities offered or sold pursuant to this section (Sec.  
230.147) will depend on the particular facts and circumstances.
    (h) Offerings limited to qualified institutional buyers and 
institutional accredited investors. Where an issuer decides to register 
an offering under the Act after making offers in reliance on this 
section (Sec.  230.147) limited only to qualified institutional buyers 
and institutional accredited investors referenced in section 5(d) of 
the Act, such offers will not be subject to integration with any 
subsequent registered offering. If the issuer makes offers in reliance 
on this section (Sec.  230.147) to persons other than qualified 
institutional buyers and institutional accredited investors referenced 
in section 5(d) of the Act, such offers will 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 offer made in 
reliance on this section (Sec.  230.147) and the filing of the 
registration statement with the Commission.

0
5. Add Sec.  230.147A to read as follows:


Sec.  230.147A   Intrastate sales exemption.

    (a) Scope of the exemption. Offers and sales by or on behalf of an 
issuer of its securities made in accordance with this section (Sec.  
230.147A) are exempt from section 5 of the Act (15 U.S.C. 77e). This 
exemption is not available to an issuer that is an investment company 
registered or required to be registered under the Investment Company 
Act of 1940 (15 U.S.C. 80a-1 et seq.).
    (b) Manner of offers and sales. An issuer, or any person acting on 
behalf of the issuer, may rely on this exemption to make offers and 
sales using any form of general solicitation and general advertising, 
so long as the issuer complies with the provisions of paragraphs (c), 
(d), and (f) through (h) of this section.
    (c) Nature of the issuer. The issuer of the securities shall at the 
time of any offers and sales be a person resident and doing business 
within the state or territory in which all of the sales are made.
    (1) The issuer shall be deemed to be a resident of the state or 
territory in which it has its principal place of business. The issuer 
shall be deemed to have its principal place of business in a state or 
territory in which the officers, partners or managers of the issuer 
primarily direct, control and coordinate the activities of the issuer.
    (2) The issuer shall be deemed to be doing business within a state 
or territory if the issuer satisfies at least one of the following 
requirements:
    (i) The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in or from the rendering of services within such state or territory;
    Instruction to paragraph (c)(2)(i): Revenues must be calculated 
based on the issuer's most recent fiscal year, if the first offer of 
securities pursuant to this section is made during the first six months 
of the issuer's current fiscal year, and based on the first six months 
of the issuer's current fiscal year or during the twelve-month fiscal 
period ending with such six-month period, if the first offer of 
securities pursuant to this section is made during the last six months 
of the issuer's current fiscal year.
    (ii) The issuer had at the end of its most recent semi-annual 
fiscal period prior to an initial offer of securities in any offering 
or subsequent offering pursuant to this section, at least 80% of its 
assets and those of its subsidiaries on a consolidated basis located 
within such state or territory;
    (iii) The issuer intends to use and uses at least 80% of the net 
proceeds to the issuer from sales made pursuant to this section (Sec.  
230.147A) in connection with the operation of a business or of

[[Page 83552]]

real property, the purchase of real property located in, or the 
rendering of services within such state or territory; or
    (iv) A majority of the issuer's employees are based in such state 
or territory.
    Instruction to paragraph (c): An issuer that has previously 
conducted an intrastate offering pursuant to this section (Sec.  
230.147A) or Rule 147 (Sec.  230.147) may not conduct another 
intrastate offering pursuant to this section (Sec.  230.147A) in a 
different state or territory, until the expiration of the time period 
specified in paragraph (e) of this section (Sec.  230.147A(e)) or 
paragraph (e) of Rule 147 (Sec.  230.147(e)), calculated on the basis 
of the date of the last sale in such offering.
    (d) Residence of purchasers. Sales of securities pursuant to this 
section (Sec.  230.147A) shall be made only to residents of the state 
or territory in which the issuer is resident, as determined pursuant to 
paragraph (c) of this section, or who the issuer reasonably believes, 
at the time of sale, are residents of the state or territory in which 
the issuer is resident. For purposes of determining the residence of 
purchasers:
    (1) A corporation, partnership, limited liability company, trust or 
other form of business organization shall be deemed to be a resident of 
a state or territory if, at the time of sale to it, it has its 
principal place of business, as defined in paragraph (c)(1) of this 
section, within such state or territory.
    Instruction to paragraph (d)(1): A trust that is not deemed by the 
law of the state or territory of its creation to be a separate legal 
entity is deemed to be a resident of each state or territory in which 
its trustee is, or trustees are, resident.
    (2) Individuals shall be deemed to be residents of a state or 
territory if such individuals have, at the time of sale to them, their 
principal residence in the state or territory.
    (3) A corporation, partnership, trust or other form of business 
organization, which is organized for the specific purpose of acquiring 
securities offered pursuant to this section (Sec.  230.147A), shall not 
be a resident of a state or territory unless all of the beneficial 
owners of such organization are residents of such state or territory.
    Instruction to paragraph (d): Obtaining a written representation 
from purchasers of in-state residency status will not, without more, be 
sufficient to establish a reasonable belief that such purchasers are 
in-state residents.
    (e) Limitation on resales. For a period of six months from the date 
of the sale by the issuer of a security pursuant to this section (Sec.  
230.147A), any resale of such security shall be made only to persons 
resident within the state or territory in which the issuer was 
resident, as determined pursuant to paragraph (c) of this section, at 
the time of the sale of the security by the issuer.
    Instruction to paragraph (e): In the case of convertible 
securities, resales of either the convertible security, or if it is 
converted, the underlying security, could be made during the period 
described in paragraph (e) only to persons resident within such state 
or territory. For purposes of this paragraph (e), a conversion in 
reliance on section 3(a)(9) of the Act (15 U.S.C. 77c(a)(9)) does not 
begin a new period.
    (f) Precautions against interstate sales. (1) The issuer shall, in 
connection with any securities sold by it pursuant to this section:
    (i) Place a prominent legend on the certificate or other document 
evidencing the security stating that: ``Offers and sales of these 
securities were made under an exemption from registration and have not 
been registered under the Securities Act of 1933. For a period of six 
months from the date of the sale by the issuer of these securities, any 
resale of these securities (or the underlying securities in the case of 
convertible securities) shall be made only to persons resident within 
the state or territory of [identify the name of the state or territory 
in which the issuer was resident at the time of the sale of the 
securities by the issuer].'';
    (ii) Issue stop transfer instructions to the issuer's transfer 
agent, if any, with respect to the securities, or, if the issuer 
transfers its own securities, make a notation in the appropriate 
records of the issuer; and
    (iii) Obtain a written representation from each purchaser as to his 
or her residence.
    (2) The issuer shall, in connection with the issuance of new 
certificates for any of the securities that are sold pursuant to this 
section (Sec.  230.147A) that are presented for transfer during the 
time period specified in paragraph (e), take the steps required by 
paragraphs (f)(1)(i) and (ii) of this section.
    (3) The issuer shall, at the time of any offer or sale by it of a 
security pursuant to this section (Sec.  230.147A), prominently 
disclose to each offeree in the manner in which any such offer is 
communicated and to each purchaser of such security in writing a 
reasonable period of time before the date of sale, the following: 
``Sales will be made only to residents of the state or territory of 
[identify the name of the state or territory in which the issuer was 
resident at the time of the sale of the securities by the issuer]. 
Offers and sales of these securities are made under an exemption from 
registration and have not been registered under the Securities Act of 
1933. For a period of six months from the date of the sale by the 
issuer of the securities, any resale of the securities (or the 
underlying securities in the case of convertible securities) shall be 
made only to persons resident within the state or territory of 
[identify the name of the state or territory in which the issuer was 
resident at the time of the sale of the securities by the issuer].''
    (g) Integration with other offerings. Offers or sales made in 
reliance on this section will not be integrated with:
    (1) Offers or sales of securities made prior to the commencement of 
offers and sales of securities pursuant to this section (Sec.  
230.147A); or
    (2) Offers or sales of securities made after completion of offers 
and sales of securities pursuant to this section (Sec.  230.147A) that 
are:
    (i) Registered under the Act, except as provided in paragraph (h) 
of this section (Sec.  230.147A);
    (ii) Exempt from registration under Regulation A (Sec. Sec.  
230.251 through 230.263);
    (iii) Exempt from registration under Rule 701 (Sec.  230.701);
    (iv) Made pursuant to an employee benefit plan;
    (v) Exempt from registration under Regulation S (Sec. Sec.  230.901 
through 230.905);
    (vi) Exempt from registration under section 4(a)(6) of the Act (15 
U.S.C. 77d(a)(6)); or
    (vii) Made more than six months after the completion of an offering 
conducted pursuant to this section (Sec.  230.147A).
    Instruction to paragraph (g): If none of the safe harbors applies, 
whether subsequent offers and sales of securities will be integrated 
with any securities offered or sold pursuant to this section (Sec.  
230.147A) will depend on the particular facts and circumstances.
    (h) Offerings limited to qualified institutional buyers and 
institutional accredited investors. Where an issuer decides to register 
an offering under the Act after making offers in reliance on this 
section (Sec.  230.147A) limited only to qualified institutional buyers 
and institutional accredited investors referenced in section 5(d) of 
the Act, such offers will not be subject to integration with any 
subsequent registered offering. If the issuer makes offers in reliance 
on this section (Sec.  230.147A) to persons other than qualified 
institutional buyers and institutional accredited investors referenced 
in section 5(d) of the Act,

[[Page 83553]]

such offers will 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 offer made in reliance on this section (Sec.  230.147A) and 
the filing of the registration statement with the Commission.


Sec.  230.501   [Amended]

0
6. Amend Sec.  230.501 paragraph (e) introductory text by removing the 
reference to ``Sec. Sec.  230.505(b) and 230.506(b)'' and adding in its 
place ``Sec.  230.506(b)''.


Sec.  230.502   [Amended]

0
7. Amend Sec.  230.502 by:
0
a. In paragraph (b)(1), removing the reference to ``Sec.  230.505 or'';
0
b. In paragraph (b)(2)(iv), removing the reference to ``Sec.  230.505 
or'';
0
c. In paragraph (b)(2)(v), removing the reference to ``Sec.  230.505 
or''; and
0
d. In paragraph (b)(2)(vii), removing the reference to ``Sec.  230.505 
or'';


Sec.  230.503   [Amended]

0
8. Amend Sec.  230.503 paragraph (a)(1) by removing the comma after 
``Sec.  230.504'' and the reference to ``Sec.  230.505,''.

0
9. In Sec.  230.504, the section heading and paragraph (b)(2) are 
revised, and paragraph (b)(3) is added, to read as follows:


Sec.  230.504   Exemption for limited offerings and sales of securities 
not exceeding $5,000,000.

* * * * *
    (b) * * *
    (2) The aggregate offering price for an offering of securities 
under this Sec.  230.504, as defined in Sec.  230.501(c), shall not 
exceed $5,000,000, less the aggregate offering price for all securities 
sold within the twelve months before the start of and during the 
offering of securities under this Sec.  230.504, in violation of 
section 5(a) of the Securities Act.
    Instruction to paragraph (b)(2): If a transaction under Sec.  
230.504 fails to meet the limitation on the aggregate offering price, 
it does not affect the availability of this Sec.  230.504 for the other 
transactions considered in applying such limitation. For example, if an 
issuer sold $5,000,000 of its securities on January 1, 2014 under this 
Sec.  230.504 and an additional $500,000 of its securities on July 1, 
2014, this Sec.  230.504 would not be available for the later sale, but 
would still be applicable to the January 1, 2014 sale.
    (3) Disqualifications. No exemption under this section shall be 
available for the securities of any issuer if such issuer would be 
subject to disqualification under Sec.  230.506(d) on or after January 
20, 2017; provided that disclosure of prior ``bad actor'' events shall 
be required in accordance with Sec.  230.506(e).
    Instruction to paragraph (b)(3): For purposes of disclosure of 
prior ``bad actor'' events pursuant to Sec.  230.506(e), an issuer 
shall furnish to each purchaser, a reasonable time prior to sale, a 
description in writing of any matters that would have triggered 
disqualification under this paragraph (b)(3) but occurred before 
January 20, 2017.


Sec.  230.505   [Removed and Reserved]

0
10. Sec.  230.505 is removed and reserved.


Sec.  230.507   [Amended]

0
11. Amend Sec.  230.507 by:
0
a. In the section heading, removing the comma after ``Sec. Sec.  
230.504'' and the reference to ``230.505''; and
0
b. In paragraph (a), removing the reference to ``Sec.  230.505,'' and 
adding in its place ``Sec.  230.504'' and removing the reference to 
``Sec.  230.505.''


Sec.  230.508   [Amended]

0
12. Amend Sec.  230.508 by:
0
a. In paragraph (a) introductory text, removing the comma after ``Sec.  
230.504'' and the reference to ``Sec.  230.505'';
0
b. In paragraph (a)(2), removing the comma after ``Sec.  230.504'' and 
the reference to ``paragraphs (b)(2)(i) and (ii) of Sec.  230.505'':
0
c. In paragraph (a)(3), removing the comma after ``Sec.  230.504'' and 
the reference to ``Sec.  230.505''; and
0
d. In paragraph (b), removing the comma after ``Sec.  230.504'' and the 
reference to ``Sec.  230.505.''

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

0
13. The authority citation for part 239 continues 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, 80a-37, and Sec. 71003 and Sec. 84001, Pub. 
L. 114-94, 129 Stat. 1312, unless otherwise noted.
* * * * *


Sec.  239.500   [Amended]

0
14. Amend Sec.  239.500 by:
0
a. In the section heading, removing the reference to ``4(5)'' and 
adding in its place ``4(a)(5)'';
0
b. In paragraph (a)(1), removing the comma after ``Sec.  230.504'' and 
the reference to ``Sec.  230.505,''; and removing the reference to 
``4(5)'' and adding in its place ``4(a)(5)''; and
0
c. Amend Form D (referenced in Sec.  239.500) by:
0
i. In Item 6, removing the phrase ``Rule 505'' and the appropriate 
check box;
0
ii. Under ``Signature and Submission,'' replace the third paragraph 
under ``Terms of Submission'' with the following sentence: ``Certifying 
that, if the issuer is claiming a Regulation D exemption for the 
offering, the issuer is not disqualified from relying on Rule 504 or 
Rule 506 for one of the reasons stated in Rule 504(b)(3) or Rule 
506(d). ''

    (Note: The text of Form D does not, and the amendments will not, 
appear in the Code of Federal Regulations.)

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

0
15. 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.
* * * * *


Sec.  240.15g-9  [Amended]

0
16. Amend Sec.  240.15g-9 paragraph (c)(2) by removing the reference to 
``230.505 or''; and removing the reference to ``4(2)'' and adding in 
its place ``4(a)(2)''.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
17. 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.; 18 U.S.C. 1350; Sec. 953(b), Public Law 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Public Law 112-106, 126 Stat. 309 
(2012); Sec. 107, Public Law 112-106, 126 Stat. 313 (2012), and Sec. 
72001, Public Law 114-94, 129 Stat. 1312 (2015), unless otherwise 
noted.
* * * * *


Sec.  249.308  [Amended]

0
18. Amend the Instruction to Item 9.01 in Form 8-K (referenced in Sec.  
249.308) by removing the phrase ``Rules 505 and 506 of Regulation D (17

[[Page 83554]]

CFR 230.505 and'' and adding in its place ``Rule 506 of Regulation D 
(17 CFR''.

(Note: The text of Form 8-K does not, and the amendments will not, 
appear in the Code of Federal Regulations.)

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
19. The authority citation for Part 270 continues to read in part as 
follows:


    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *


Sec.  270.17j-1  [Amended]

0
20. Amend Sec.  270.17j-1 paragraph (a)(8) by removing the references 
to ``4(2)'', ``4(5)'', ``77d(2)'' and ``77d(5)'' and adding in their 
places ``4(a)(2)'', ``4(a)(5)'', ``77d(a)(2)'' and ``77d(a)(5)'', 
respectively; and removing the comma after ``rule 504'', the reference 
to ``rule 505,'', the comma after ``230.504'' and the reference to 
``230.505,''.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
21. The authority citation for Part 275 continues to read in part as 
follows:


    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *


Sec.  275.204A-1  [Amended]

0
22. Amend Sec.  275.204A-1 paragraph (e)(7) by removing the references 
to ``4(2)'', ``4(5)'', ``77d(2)'' and ``77d(5)'' and adding in their 
places ``4(a)(2)'', ``4(a)(5)'', ``77d(a)(2)'' and ``77d(a)(5)'', 
respectively; and removing the comma after ``230.504'' and the 
reference to ``230.505,''.

    Dated: October 26, 2016.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-26348 Filed 11-18-16; 8:45 am]
 BILLING CODE 8011-01-P