[Federal Register Volume 86, Number 9 (Thursday, January 14, 2021)]
[Rules and Regulations]
[Pages 3496-3605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24749]
[[Page 3495]]
Vol. 86
Thursday,
No. 9
January 14, 2021
Part III
Securities and Exchange Commission
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17 CFR Parts 227, 229, 230, et al.
Facilitating Capital Formation and Expanding Investment Opportunities
by Improving Access to Capital in Private Markets; Final Rule
Federal Register / Vol. 86 , No. 9 / Thursday, January 14, 2021 /
Rules and Regulations
[[Page 3496]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 227, 229, 230, 239, 240, 249, 270, and 274
[Release Nos. 33-10884; 34-90300; IC-34082; File No. S7-05-20]
RIN 3235-AM27
Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting amendments to facilitate capital formation and
increase opportunities for investors by expanding access to capital for
small and medium-sized businesses and entrepreneurs across the United
States. Specifically, the amendments simplify, harmonize, and improve
certain aspects of the exempt offering framework to promote capital
formation while preserving or enhancing important investor protections.
The amendments also seek to close gaps and reduce complexities in the
exempt offering framework that may impede access to investment
opportunities for investors and access to capital for businesses and
entrepreneurs.
DATES:
General: This final rule is effective on March 15, 2021.
Exceptions: 1. Revised 17 CFR 227.100(b)(7) (amendatory instruction
2), previously effective until Sept. 1, 2021 at 85 FR 27132, May 7,
2020, is now effective from January 14, 2021, to March 1, 2023.
2. Newly redesignated and revised 17 CFR 227.201(aa) (amendatory
instruction 4) is effective from January 14, 2021, and remains
effective until September 1, 2021.
3. 17 CFR 227.201(bb) (amendatory instruction 5) and 17 CFR
227.301(e) (amendatory instruction 10) are effective from January 14,
2021, to March 1, 2023.
4. Amendments to 17 CFR 227.303(g) (amendatory instruction 11) and
17 CFR 227.304(e) (amendatory instruction 12) are effective from
January 14, 2021, and remain effective until September 1, 2021.
5. The amendments to the introductory paragraph in the Optional
Question and Answer Format for an Offering Statement of Form C
(referenced in Sec. 239.900) are applicable from January 14, 2021, to
March 1, 2023.
FOR FURTHER INFORMATION CONTACT: Anthony Barone or John Byrne, Special
Counsel, Office of Small Business Policy, or Steven G. Hearne, Senior
Special Counsel, Office of Rulemaking, at (202) 551-3460, Division of
Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace,
Senior Counsel, at (202) 551-6999, Investment Adviser Regulation
Office, Division of Investment Management; U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to:
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a-1 et seq.
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Commission Reference CFR citation (17 CFR)
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Regulation Crowdfunding:
Rules 100 through 504................... Sec. Sec. 227.100 through
227.504.
Rule 100................................ Sec. 227.100.
Rule 201................................ Sec. 227.201.
Rule 203................................ Sec. 227.203.
Rule 204................................ Sec. 227.204.
Rule 206................................ Sec. 227.206.
Rule 301................................ Sec. 227.301.
Rule 303................................ Sec. 227.303.
Rule 304................................ Sec. 227.304.
Rule 503................................ Sec. 227.503.
Sec. 227.504.
Securities Act of 1933 (Securities Act):
\1\
Rule 147................................ Sec. 230.147.
Rule 147A............................... Sec. 230.147A.
Rule 148................................ Sec. 230.148.
Rule 152................................ Sec. 230.152.
Rule 155................................ Sec. 230.155.
Rule 241................................ Sec. 230.241.
Regulation A:
Rules 251 through 263................... Sec. Sec. 230.251 through
230.263.
Rule 251................................ Sec. 230.251.
Rule 255................................ Sec. 230.255.
Rule 259................................ Sec. 230.259.
Rule 262................................ Sec. 230.262.
Regulation D:
Rules 500 through 508................... Sec. Sec. 230.500 through
230.508.
Rule 500................................ Sec. 230.500.
Rule 502................................ Sec. 230.502.
Rule 504................................ Sec. 230.504.
Rule 506................................ Sec. 230.506.
Regulation S-K:
Items 10 through 1305................... Sec. Sec. 229.10 through
229.1305.
Item 601................................ Sec. 229.601.
Form S-6................................ Sec. 239.16.
Form N-14............................... Sec. 239.23.
Form 1-A................................ Sec. 239.90.
Form C.................................. Sec. 239.900.
Securities Exchange Act of 1934 (Exchange
Act): \2\
Rule 12g-6.............................. Sec. 240.12g-6.
Rule 12g5-1............................. Sec. 240.12g5-1.
Form 20-F............................... Sec. 249.220f.
Form 8-K................................ Sec. 249.308.
Investment Company Act of 1940 (Investment
Company Act): \3\
Rule 3a-9............................... Sec. 270.3a-9.
Form N-8B-2............................. Sec. 274.12.
Securities Act and Investment Company Act:
Form N-1A............................... Sec. Sec. 239.15A and
274.11A.
Form N-2................................ Sec. Sec. 239.14 and
274.11a-1.
Form N-3................................ Sec. Sec. 239.17a and
274.11b.
Form N-4................................ Sec. Sec. 239.17b and
274.11c.
Form N-5................................ Sec. Sec. 239.24 and
274.5.
Form N-6................................ Sec. Sec. 239.17c and
274.11d.
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Table of Contents
I. Introduction and Background
II. Discussion of Final Amendments
A. Integration
1. Integration Principles and Application (Rule 152(a) General
Principle and Introductory Language to Rule 152)
2. Integration Safe Harbors
3. Commencement, Termination, and Completion of Offerings (Rules
152(c) and 152(d))
4. Conforming Amendments to Securities Act Exemptions
B. General Solicitation and Offering Communications
1. Exemption From General Solicitation for ``Demo Days'' and
Similar Events
2. Solicitations of Interest
3. Other Regulation Crowdfunding Offering Communications
C. Rule 506(c) Verification Requirements
1. Proposed Amendments
2. Comments
3. Final Amendments
D. Harmonization of Disclosure Requirements
1. Rule 502(b) of Regulation D
2. Proposed Amendments To Simplify Compliance With Regulation A
3. Confidential Information Standard
E. Offering and Investment Limits
1. Regulation A
2. Rule 504
3. Regulation Crowdfunding
F. Regulation Crowdfunding and Regulation A Eligibility
1. Regulation Crowdfunding Eligible Issuers
2. Regulation Crowdfunding Eligible Securities
3. Regulation A Eligibility Restrictions for Delinquent Exchange
Act Filers
G. Bad Actor Disqualification Provisions
1. Proposed Amendments
2. Comments
3. Final Amendments
III. Other Matters
IV. Economic Analysis
A. Broad Economic Considerations
B. Baseline
C. Economic Effects of the Final Amendments
1. Integration
2. General Solicitation and Offering Communications
3. Rule 506(c) Verification Requirements
4. Disclosure Requirements
5. Offering and Investment Limits
6. Eligibility Requirements in Regulation Crowdfunding and
Regulation A
7. Bad Actor Disqualification Provisions
V. Paperwork Reduction Act
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
I. Introduction and Background
On March 4, 2020, the Securities and Exchange Commission (the
``SEC'' or ``Commission'') proposed amendments
[[Page 3497]]
to simplify, harmonize, and improve certain aspects of the exempt
offering framework to promote capital formation while preserving or
enhancing important investor protections.\4\ Specifically, the
Commission proposed amendments that (1) address the ability of issuers
to move from one exemption to another, (2) set clear and consistent
rules governing offering communications between investors and issuers,
(3) address potential gaps and inconsistencies in our rules relating to
offering and investment limits, and (4) harmonize certain disclosure
requirements and bad actor disqualification provisions.
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\4\ See Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets,
Release No. 33-10763 (Mar. 4, 2020) [85 FR 17956 (Mar. 31, 2020)]
(``Proposing Release'').
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The Securities Act requires that every offer \5\ and sale of
securities be registered with the Commission, unless an exemption from
registration is available. The Securities Act, however, also contains a
number of exemptions from its registration requirements and authorizes
the Commission to adopt additional exemptions. Section 3 of the
Securities Act generally provides exemptions that are based on
characteristics of the securities themselves.\6\ Section 4 of the
Securities Act identifies transactions that are exempt from the
registration requirements.\7\ In addition, Section 28 of the Securities
Act authorizes the Commission to exempt other persons, securities, or
transactions to the extent necessary or appropriate in the public
interest and consistent with the protection of investors.\8\ The
current exempt offering framework is complex and made up of differing,
exemption-specific requirements and conditions. The scope of the exempt
offering framework has evolved over time through Commission rules and
legislative changes, including most recently through the Jumpstart Our
Business Startups Act of 2012 (``JOBS Act''),\9\ the Fixing America's
Surface Transportation Act of 2015,\10\ and the Economic Growth,
Regulatory Relief, and Consumer Protection Act of 2018.\11\ On June 18,
2019, the Commission issued a concept release that solicited public
comment on possible ways to simplify, harmonize, and improve the exempt
offering framework under the Securities Act to promote capital
formation and expand investment opportunities while maintaining
appropriate investor protections.\12\ While commenters on the Concept
Release expressed many perspectives on what changes would best serve
the interests of emerging companies raising capital, a consistent theme
in many comments was that many elements of the current structure work
effectively and a major restructuring is not needed.\13\
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\5\ See 15 U.S.C. 77b(a)(3) (noting that an offer includes every
attempt to dispose of a security or interest in a security, for
value; or any solicitation of an offer to buy a security or interest
in a security).
\6\ See 15 U.S.C. 77c. However, some Section 3 exempted
securities are identified based on the transaction in which they are
offered or sold. For example, Section 3(b)(1) of the Securities Act
authorizes the Commission to exempt certain issues of securities
where the aggregate amount offered does not exceed $5 million. 15
U.S.C. 77c(b)(1).
\7\ See 15 U.S.C. 77d.
\8\ 15 U.S.C. 77z-3.
\9\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act,
among other things: (1) Directed the Commission to revise Rule 506
to eliminate the prohibition against general solicitation or general
advertising for offers and sales of securities to accredited
investors (See Section 201(a)(1)); (2) Added Section 4(a)(6) [15
U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-1(b)] to the
Securities Act and directed the Commission to issue rules to permit
certain crowdfunding offerings (See Section 302); and (3) Directed
the Commission to expand Regulation A (See Section 401).
\10\ Public Law 114-94, 129 Stat. 1312 (2015).
\11\ Public Law 115-174, 132 Stat. 1296 (2018).
\12\ See Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June
26, 2019)] (``Concept Release'').
\13\ See, e.g., Letter from AngelList Advisors, LLC dated Sept.
25, 2019; Letter from CrowdCheck, Inc. dated Oct. 30, 2019; and
Letter from Crowdfund Capital Advisors dated Sept. 24, 2019, in
response to the Concept Release, available at https://www.sec.gov/comments/s7-08-19/s70819.htm. See also Recommendation of the SEC
Small Business Capital Formation Advisory Committee regarding the
exemptive offering framework (Dec. 13, 2019), available at https://www.sec.gov/spotlight/sbcfac/recommendation-harmonization-general-principles.pdf (``2019 Small Business Advisory Committee
Recommendation on the Exemptive Offering Framework''); and Report of
the 2019 SEC Government-Business Forum on Small Business Capital
Formation (Dec. 2019), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf (``2019 Forum Report'').
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Building on the comments received in response to the Concept
Release and other comments and recommendations received from the SEC
Small Business Capital Formation Advisory Committee, the SEC Investor
Advisory Committee, the annual Government-Business Forums on Small
Business Capital Formation (each a ``Small Business Forum''), and other
market participants, the Commission proposed a set of amendments that
would generally retain the current exempt offering structure and reduce
potential friction points. The proposed amendments were intended to
facilitate capital formation while preserving and in some cases
enhancing investor protections. The proposed amendments were further
intended to address gaps and complexities in the exempt offering
framework and help provide viable alternatives to the dominant capital
raising tools.
We received many comment letters on the Proposing Release
expressing a range of views.\14\ We also received comments and
recommendations on the Proposing Release from the SEC Small Business
Capital Formation Advisory Committee \15\ and the 2020 Small Business
Forum.\16\ After considering the public comments received and the other
comments and recommendations, we are adopting the amendments
substantially as proposed but with certain modifications in response to
commenters' feedback. We believe that the final rules will facilitate
the use of the exempt offering framework, particularly by smaller
issuers.\17\ We acknowledge concerns about and recommendations relating
to transparency and investor protections in the private securities
marketplace.\18\ We further acknowledge concerns that by encouraging
exempt offerings, these amendments could reduce incentives for issuers
to conduct registered public offerings. However, we estimate, as
discussed further in Section IV (Economic Analysis) below, that while
these amendments may encourage more exempt offerings, these offerings
will
[[Page 3498]]
have only a marginal impact on the number of registered offerings.\19\
Commenters' views on different aspects of the proposed amendments, as
well as their effects, are discussed topically below.
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\14\ Unless otherwise indicated, comments cited in this release
are to comment letters received in response to the Proposing
Release, which are available at https://www.sec.gov/comments/s7-05-20/s70520.htm.
\15\ See Letter from SEC Small Business Capital Formation
Advisory Committee dated May 28, 2020 (``SEC SBCFAC Letter'').
\16\ See Final Report of the 2020 SEC Government-Business Forum
on Small Business Capital Formation (June 2020), available at
https://www.sec.gov/files/2020-oasb-forum-report-final_0.pdf (``2020
Forum Report'').
\17\ We are mindful of concerns expressed in the Recommendation
of the SEC Small Business Capital Formation Advisory Committee
regarding how our capital markets are serving underrepresented
founders and investors (Aug. 26, 2020), available at https://www.sec.gov/spotlight/sbcfac/underrepresented-founders-recommendation.pdf. The recommendation states that minority- and
women-owned businesses and funds face barriers to entry due to less
access to capital than their peers. We believe that the amendments
adopted in this release will enable small businesses generally to
access capital through exempt offerings more effectively and we
encourage further specific, tangible suggestions for action by the
Commission and are committed to continued engagement on this topic.
\18\ See Letter from North American Securities Administrators
Association, Inc. dated October 21, 2020 (``NASAA Letter II'').
NASAA Letter II recommended requiring the filing of a Form D
concurrent with the beginning of a general solicitation, expanding
the Form D to capture additional information about the offering, the
filing of a closing Form D amendment, and certain legends for Rule
506(c) offerings. While we did not propose and are not adopting
these recommended changes, we are committed to continued engagement
to enhance small business capital formation and investor protection.
\19\ See discussion of the Broad Economic Considerations in
Section IV.A. below, noting among other things that the amendments
with the greatest potential to expand the use of individual
exemptions affect the smallest market segments (Regulation
Crowdfunding and Regulation A), whose issuers tend to be at a much
earlier stage of development than those that conduct a traditional
initial public offering. In addition, based on data collected on
Regulation D offerings from 2009 through 2019, given the small size
of a typical Regulation D issuer and offering, the amendments,
including the adoption of a new comprehensive integration framework,
are unlikely to reduce the incentives or need of issuers
contemplating registered offerings. See infra note 596, infra Table
7 and related discussion.
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II. Discussion of Final Amendments
We are amending the exempt offering framework to close gaps and
reduce complexities that may impede access to capital for issuers and
thereby limit investment opportunities, while preserving or enhancing
important investor protections. The amendments generally:
Modernize and simplify the Securities Act integration
framework for registered and exempt offerings;
Set clear and consistent rules governing offering
communications between issuers and investors;
Increase offering and investment limits for certain
exemptions; and
Harmonize certain disclosure requirements and bad actor
disqualification provisions.
Table 1 summarizes key characteristics of the most commonly used
exemptions \20\ from registration, as amended by this release.\21\
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\20\ Commission rules also provide exemptions for certain
offerings where the purpose of the offering is other than to raise
capital. For example, 17 CFR 230.701 (``Rule 701'') exempts certain
sales of securities made to compensate employees, consultants, and
advisors.
\21\ Generally, Table 1 is organized by typical offering size
from largest to smallest. The information in this table is not
comprehensive and is intended only to highlight some of the more
significant aspects of the current rules. Certain regulatory
exemptions from registration provide specific frameworks or safe
harbors to comply with statutory exemptions. For example, offers and
sales of securities by an issuer that satisfy the conditions in
paragraphs (b) and (c) of Rule 506 are deemed to be transactions not
involving any public offering within the meaning of Section 4(a)(2)
of the Securities Act [15 U.S.C. 77d(a)(2)]. See 17 CFR 230.506(a).
Similarly, Rule 147 provides a safe harbor under Section 3(a)(11) of
the Securities Act [15 U.S.C. 77c(a)(11)]. In contrast, for example,
Rule 147A is a stand-alone exemption promulgated by the Commission
pursuant to its authority under Section 28 of the Securities Act [15
U.S.C. 77z-3]. See 17 CFR 230.147A(a).
Table 1--Overview of Capital-Raising Exemptions
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Preemption of
Offering limit state
Type of offering within 12-month General Issuer Investor SEC filing Restrictions on registration
period solicitation requirements requirements requirements resale and
qualification
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Section 4(a)(2).............. None............ No.............. None............ Transactions by None........... Yes. Restricted No.
an issuer not securities.
involving any
public
offering. See
SEC v. Ralston
Purina Co.
17 CFR 230.506(b) (``Rule None............ No.............. ``Bad actor'' Unlimited 17 CFR 239.500 Yes. Restricted Yes.
506(b)'' of Regulation D). disqualificatio accredited (``Form D''). securities.
ns apply. investors. Up
to 35
sophisticated
but non-
accredited
investors in a
90-day period.
17 CFR 230.506(c) (``Rule None............ Yes............. ``Bad actor'' Unlimited Form D......... Yes. Restricted Yes.
506(c)'') of Regulation D. disqualificatio accredited securities.
ns apply. investors.
Issuer must
take reasonable
steps to verify
that all
purchasers are
accredited
investors *.
Regulation A: Tier 1......... $20 million..... Permitted; U.S. or Canadian None............ Form 1-A, No............. No.
before issuers. including two
qualification, Excludes blank years of
testing the check financial
waters companies, statements.
permitted registered Exit report....
before and investment
after the companies,
offering business
statement is development
filed. companies,
issuers of
certain
securities,
certain issuers
subject to a
Section 12(j)
order, and
Regulation A
and Exchange
Act reporting
companies that
have not filed
certain
required
reports. ``Bad
actor''
disqualificatio
ns apply.* No
asset-backed
securities.
Regulation A: Tier 2......... $75 million..... ................ ................ Non-accredited Form 1-A, No............. Yes.
investors are including two
subject to years of
investment audited
limits based on financial
the greater of statements.
annual income Annual, semi-
and net worth, annual,
unless current, and
securities will exit reports.
be listed on a
national
securities
exchange.
[[Page 3499]]
Rule 504 of Regulation D..... $10 million..... Permitted in Excludes blank None............ Form D......... Yes. Restricted No.
limited check securities
circumstances. companies, except in
Exchange Act limited
reporting circumstances.
companies, and
investment
companies.
``Bad actor''
disqualificatio
ns apply.
Regulation Crowdfunding; $5 million...... Testing the Excludes non- No investment Form C, 12-month resale Yes.
Section 4(a)(6). waters U.S. issuers, limits for including two limitations.
permitted blank check accredited years of
before Form C companies, investors. Non- financial
is filed. Exchange Act accredited statements
Permitted with reporting investors are that are
limits on companies, and subject to certified,
advertising investment investment reviewed or
after Form C is companies. limits based on audited, as
filed. Offering ``Bad actor'' the greater of required.
must be disqualificatio annual income Progress and
conducted on an ns apply. and net worth. annual reports.
internet
platform
through a
registered
intermediary.
Intrastate: Section 3(a)(11). No Federal limit Offerees must be In-state Offerees and None........... Securities must No.
(generally, in-state residents purchasers must come to rest
individual residents. ``doing be in-state with in-state
State limits business'' and residents. residents.
between $1 and incorporated in-
$5 million). state; excludes
registered
investment
companies.
Intrastate: Rule 147......... No Federal limit Offerees must be In-state Offerees and None........... Yes. Resales No.
(generally, in-state residents purchasers must must be within
individual residents. ``doing be in-state State for six
State limits business'' and residents. months.
between $1 and incorporated in-
$5 million). state; excludes
registered
investment
companies.
Intrastate: Rule 147A........ No Federal limit Yes............. In-state Purchasers must None........... Yes. Resales No.
(generally, residents and be in-state must be within
individual ``doing residents. State for six
State limits business'' in- months.
between $1 and state; excludes
$5 million). registered
investment
companies.
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We discuss specific aspects of the final amendments in detail
below.
A. Integration
The integration doctrine seeks to prevent an issuer from improperly
avoiding registration by artificially dividing a single offering into
multiple offerings such that Securities Act exemptions would apply to
the multiple offerings that would not be available for the combined
offering.\22\ The Securities Act integration framework for registered
and exempt offerings consists of a mixture of rules and Commission
guidance for determining whether multiple securities transactions
should be considered part of the same offering. As the number of
exemptions from registration available to issuers has evolved over
time, the integration framework has grown more complex.\23\
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\22\ See, e.g., Revisions of Limited Offering Exemptions in
Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug.
10, 2007)] (``Regulation D 2007 Proposing Release''), at Section
II.C.1.
\23\ See Proposing Release, at Section II.A.
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The Commission first articulated the integration concept in 1933
and further developed it in two interpretive releases issued in the
1960s.\24\ The interpretive releases state 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 the following five factors
to consider in determining whether the offerings should be integrated:
(1) Whether the different offerings are part of a single plan of
financing; (2) Whether the offerings involve issuance of the same class
of security; (3) Whether the offerings are made at or about the same
time; (4) Whether the same type of consideration is to be received; and
(5) Whether the offerings are made for the same general purpose.\25\
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\24\ See Release No. 33-97 (Dec. 28, 1933); Section 3(a)(11)
Exemption for Local Offerings, Release No. 33-4434 (Dec. 6, 1961)
[26 FR 11896 (Dec, 13, 1961)] (``Section 3(a)(11) Release''); and
Non-Public Offering Exemption, Release No. 33-4552 (Nov. 6, 1962)
[27 FR 11316 (Nov. 16, 1962)] (``Non-Public Offering Exemption
Release'').
\25\ See Section 3(a)(11) Release; and Non-Public Offering
Exemption Release.
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In adopting Regulation D in 1982, the Commission relied on the
five-factor test in establishing a framework used to determine whether
two offerings that fall outside of the 17 CFR 230.502(a) (``Rule
502(a)'') safe harbor should be integrated and treated as one
offering.\26\ The Rule 502(a) safe harbor provided that offers and
sales more than six months before a Regulation D offering or more than
six months after the completion of a Regulation D offering will not be
considered part of the same offering. This provided issuers with a
bright-line test on which they could rely to avoid the integration of
multiple offerings. However, for offerings occurring within six months
of each other, the determination as to whether separate sales of
securities were part of the same offering (i.e., were considered
integrated) depended on the particular facts and circumstances of the
offerings, including an analysis of the five-factor test.\27\
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\26\ See Revision of Certain Exemptions From Registration for
Transactions Involving Limited Offers and Sales, Release No. 33-6389
(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (``Regulation D
Adopting Release''). See also Rule 502(a).
\27\ Notwithstanding the fact that Rule 502(a) only applies to
Regulation D offerings, the integration framework in Rule 502(a)--
including the use of the five-factor test for determining the
integration of offerings occurring within six months of each other--
is often referred to when considering integration issues arising in
other exempt offerings that do not have their own integration
guidelines, such as Section 4(a)(2).
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In 2007, the Commission issued guidance setting forth a framework
for analyzing the integration of simultaneous registered and private
offerings, where the five-factor test does not apply.\28\ The
Commission noted that the determination as to whether the filing of a
registration statement should be considered to be a general
[[Page 3500]]
solicitation or general advertising \29\ that would affect the
availability of the Section 4(a)(2) exemption for a concurrent private
placement should be based on a consideration of whether the investors
in the private placement were solicited by the registration statement
or through some other means that would not foreclose the availability
of the Section 4(a)(2) exemption.\30\
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\28\ See Regulation D 2007 Proposing Release, at Section II.C.1.
\29\ See Section II.B. infra for a discussion of the terms
``general solicitation'' and ``general advertising.'' In this
release, we sometimes refer to both general solicitation and general
advertising as they relate to an offer of securities as ``general
solicitation.''
\30\ See Regulation D 2007 Proposing Release. The Commission
stated that issuers should analyze whether the offering is exempt
under Section 4(a)(2) ``on its own,'' including whether securities
were offered and sold to the private placement investors through the
means of a general solicitation in the form of the registration
statement. The Commission provided the following examples: If an
issuer files a registration statement and then seeks to offer and
sell securities without registration to an investor who became
interested in the purportedly private placement offering by means of
the registration statement, then the Section 4(a)(2) exemption would
not be available for that offering. If the prospective private
placement investor became interested in the concurrent private
placement through some means other than the registration statement
that was consistent with Section 4(a)(2), such as through a
substantive, pre-existing relationship with the issuer or direct
contact by the issuer or its agents outside of the public offering
effort, then the filing of the registration statement generally
would not impact the potential availability of the Section 4(a)(2)
exemption for that private placement and the private placement could
be conducted while the registration statement for the public
offering was on file with the Commission. Similarly, if the issuer
is able to solicit interest in a concurrent private placement by
contacting prospective investors who (1) were not identified or
contacted through the marketing of the public offering, and (2) did
not independently contact the issuer as a result of the general
solicitation by means of the registration statement, then the
private placement could be conducted in accordance with Section
4(a)(2) while the registration statement for a separate public
offering was pending. See id.
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More recently, in connection with the Regulation A and Regulation
Crowdfunding rulemakings in 2015 and the Rule 147 and Rule 147A
rulemaking in 2016, the Commission set forth a facts-and-circumstances
integration framework in the context of concurrent exempt
offerings.\31\ The facts-and-circumstances integration framework
applies to situations where one offering permits general solicitation
and the other does not, as well as situations where both offerings rely
on exemptions permitting general solicitation. Under this analysis,
where an integration safe harbor is not available, integration of
concurrent or subsequent offers and sales of securities with any
offering conducted under Regulation A, Regulation Crowdfunding, Rule
147, or Rule 147A will depend on the particular facts and
circumstances, including whether each offering complies with the
requirements of the exemption on which the particular offering is
relying.\32\
---------------------------------------------------------------------------
\31\ See Amendments for Small and Additional Issues Exemptions
under the Securities Act (Regulation A), Release No. 33-9741 (Mar.
25, 2015) [80 FR 21805 (Apr. 20, 2015)] (``2015 Regulation A
Release'') at Section II.B.5; Crowdfunding, Release No. 33-9974
(Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] (``Crowdfunding
Adopting Release'') at Section II.A.1.c; and Exemptions to
Facilitate Intrastate and Regional Securities Offerings, Release No.
33-10238 (Oct. 26, 2016) [81 FR 83494 (Nov. 21, 2016)] (``Intrastate
and Regional Offerings Release'') at Section II.B.5.
\32\ 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 used in connection with an offering under
Regulation A (including any ``testing-the-waters'' communications),
Regulation Crowdfunding, or Rule 147 or 147A. The issuer would need
to establish that purchasers in the Rule 506(b) offering were
solicited through other means. For example, the issuer may have had
a pre-existing substantive relationship with such purchasers. See
2015 Regulation A Release, at Section II.B.5; Crowdfunding Adopting
Release, at Section II.A.1.c; and Intrastate and Regional Offerings
Release, at Section II.B.5.
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We believe that statutory and regulatory changes to the Securities
Act exemptive structure, including those arising from the JOBS Act,
developments in the capital markets, and the evolution of
communications technology make it necessary and appropriate for the
Commission to modernize and simplify the Securities Act integration
framework for registered and exempt offerings and its application
throughout the Securities Act rules. New Rule 152 builds on the
approach to integration in the Commission's recent rulemakings and
provides a comprehensive integration framework composed of a general
principle of integration, as set forth in new 17 CFR 230.152(a) (``Rule
152(a)''), and four safe harbors applicable to all securities offerings
under the Securities Act, including registered and exempt offerings, as
set forth in new 17 CFR 230.152(b) (``Rule 152(b)'').
Tables 2(a) and 2(b) provide an overview of the general integration
principle and safe harbors in new Rule 152, each discussed in more
detail below.
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\33\ Revised introductory language has been added to new Rule
152 clarifying that the plan or scheme to evade the registration
requirements language applies to the entire rule, and not just the
safe harbors, as proposed. Specifically, the new introductory
language states that because of the objectives of Rule 152 and the
policies underlying the Securities Act, the provisions of the rule
will not have the effect of avoiding integration for any transaction
or series of transactions that, although in technical compliance
with the rule, is part of a plan or scheme to evade the registration
requirements of the Securities Act.
Table 2(a)--Overview of the General Integration Principle in New Rule
152 33
------------------------------------------------------------------------
------------------------------------------------------------------------
Integration Principle in New Rule 152(a)
------------------------------------------------------------------------
General Principle of Integration.. If the safe harbors in Rule 152(b)
do not apply, in determining
whether two or more offerings are
to be treated as one for the
purpose of registration or
qualifying for an exemption from
registration under the Securities
Act, offers and sales will not be
integrated if, based on the
particular facts and circumstances,
the issuer can establish that each
offering either complies with the
registration requirements of the
Securities Act, or that an
exemption from registration is
available for the particular
offering.
Application of the General The issuer must have a reasonable
Principle to an exempt offering belief, based on the facts and
prohibiting general solicitation. circumstances, with respect to each
17 CFR 230.152(a)(1) (``Rule purchaser in the exempt offering
152(a)(1)''). prohibiting general solicitation,
that the issuer (or any person
acting on the issuer's behalf)
either:
(i) Did not solicit such purchaser
through the use of general
solicitation; or
(ii) Established a substantive
relationship with such purchaser
prior to the commencement of the
exempt offering prohibiting general
solicitation.
Application of the General In addition to satisfying the
Principle to concurrent exempt requirements of the particular
offerings that each allow general exemption relied on, general
solicitation. 17 CFR solicitation offering materials for
230.152(a)(2) (``Rule one offering that include
152(a)(2)''). information about the material
terms of a concurrent offering
under another exemption may
constitute an offer of the
securities in such other offering,
and therefore the offer must comply
with all the requirements for, and
restrictions on, offers under the
exemption being relied on for such
other offering, including any
legend requirements and
communications restrictions.
------------------------------------------------------------------------
[[Page 3501]]
Table 2(b)--Overview of the Integration Safe Harbors in New Rule 152 34
------------------------------------------------------------------------
------------------------------------------------------------------------
Non-Exclusive Integration Safe Harbors in New Rule 152(b)
------------------------------------------------------------------------
Safe Harbor 1: 17 CFR Any offering made more than 30
230.152(b)(1) (``Rule calendar days before the
152(b)(1)''). commencement of any other offering,
or more than 30 calendar days after
the termination or completion of
any other offering, will not be
integrated with such other
offering; provided that, for an
exempt offering for which general
solicitation is not permitted that
follows by 30 calendar days or more
an offering that allows general
solicitation, the provisions of
Rule 152(a)(1) shall apply.
Safe Harbor 2: 17 CFR Offers and sales made in compliance
230.152(b)(2) (``Rule with Rule 701, pursuant to an
152(b)(2)''). employee benefit plan, or in
compliance with 17 CFR 230.901
through 230.905 (``Regulation S'')
will not be integrated with other
offerings.
Safe Harbor 3: 17 CFR An offering for which a Securities
230.152(b)(1) (``Rule Act registration statement has been
152(b)(3)''). filed will not be integrated if it
is made subsequent to: (i) A
terminated or completed offering
for which general solicitation is
not permitted; (ii) a terminated or
completed offering for which
general solicitation is permitted
that was made only to qualified
institutional buyers (``QIBs'') and
institutional accredited investors
(``IAIs''); or (iii) an offering
for which general solicitation is
permitted that terminated or
completed more than 30 calendar
days prior to the commencement of
the registered offering. See 17 CFR
230.144(a)(1) for the definition of
``qualified institutional buyer,''
and 17 CFR 230.501(a)(1), (2), (3),
(7), (8), (9), (12), and (13) for a
list of entities that are
considered ``institutional
accredited investors.''
Safe Harbor 4: 17 CFR Offers and sales made in reliance on
230.152(b)(1) (``Rule an exemption for which general
152(b)(4)''). solicitation is permitted will not
be integrated if made subsequent to
any terminated or completed
offering.
------------------------------------------------------------------------
1. Integration Principles and Application (Rule 152(a) General
Principle and Introductory Language to Rule 152)
---------------------------------------------------------------------------
\34\ No integration analysis under Rule 152(a) is required if
any of the non-exclusive safe harbors in Rule 152(b) apply. In
addition, the revised introductory language to new Rule 152
clarifies that the plan or scheme to evade the registration
requirements language encompasses the entire rule, including the
safe harbors.
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a. Proposed Amendments
The Commission proposed to revise the integration framework by
establishing a general principle of integration in a revised Rule 152
that would require an issuer to consider the particular facts and
circumstances of each offering, including whether the issuer can
establish that each offering either complies with the registration
requirements of the Securities Act, or that an exemption from
registration is available for the particular offering.\35\ The general
principle of integration, as set forth in proposed Rule 152(a), would
be available for all offers and sales of securities not covered by one
of the four safe harbors set forth in proposed Rule 152(b).
---------------------------------------------------------------------------
\35\ This proposed facts-and-circumstances analysis of
integration would replace the traditional five-factor test first
articulated by the Commission in 1962.
---------------------------------------------------------------------------
The Commission also proposed to include two provisions applying the
general integration principles that would supplement and provide
greater specificity and guidance in applying the facts-and-
circumstances analysis. Proposed Rule 152(a)(1) would codify and build
on Commission guidance \36\ setting forth a framework for analyzing how
an issuer can conduct simultaneous registered and private offerings by
providing that for an exempt offering for which general solicitation is
not permitted, offers and sales would not be integrated with other
offerings if the issuer has a reasonable belief, based on the facts and
circumstances, that the purchasers in each exempt offering were not
solicited through the use of general solicitation, or the purchasers in
each exempt offering established a substantive relationship with the
issuer (or person acting on the issuer's behalf) prior to the
commencement of the offering prohibiting general solicitation. Proposed
Rule 152(a)(2) would clarify that for an exempt offering permitting
general solicitation that includes information about the material terms
of a concurrent exempt offering also permitting general solicitation,
the offering materials must comply with all the requirements for, or
restrictions on, offers under each exemption, including any legend
requirements or communications restrictions.
---------------------------------------------------------------------------
\36\ See Regulation D 2007 Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------
In addition, consistent with the introductory language of Rule 155,
the introductory language in proposed Rule 152 specified that the four
proposed safe harbors would not be available to any issuer for any
transaction or series of transactions that, although in technical
compliance with the rule, is part of a plan or scheme to evade the
registration requirements of the Securities Act.
b. Comments
i. Integration Framework and Establishment of General Principle of
Integration
Consistent with comments that we received on the Concept Release
\37\ and recommendations of the annual Small Business Forums \38\ that
generally supported clarifying and modernizing the existing integration
standards, many commenters supported the proposal to provide a
comprehensive integration framework applicable to all securities
[[Page 3502]]
offerings under the Securities Act, including registered and exempt
offerings, by establishing a general principle of integration and four
safe harbors in new Rule 152.\39\ These commenters generally supported
the Commission's proposal to create one broadly applicable framework to
clarify the ability of issuers to engage in contemporaneous or close in
time offerings under independent exemptions or pursuant to an effective
registration statement. Several of these commenters stated that the
structure of proposed Rule 152 would make clear the interaction between
the integration provisions in proposed Rule 152(a) and the non-
exclusive safe harbors in proposed Rule 152(b).\40\ The SEC Small
Business Capital Formation Advisory Committee also supported the
proposed integration framework, specifically stating their belief that
the new general principle of integration and the four proposed non-
exclusive safe harbors would reduce the complexities across the
offering framework by consistently defining and clarifying
integration.\41\
---------------------------------------------------------------------------
\37\ See, e.g., Letter responding to the Concept Release from
Davis Polk & Wardwell LLP dated Sept. 24, 2019; Letter responding to
the Concept Release from Dechert LLP dated Sept. 24, 2019; Letter
responding to the Concept Release from CrowdCheck dated Oct. 30,
2019 (``CrowdCheck Concept Release Letter''); and Letter responding
to the Concept Release from Securities Industry and Financial
Markets Association dated Sept. 24, 2019. See also 2019 Small
Business Advisory Committee Recommendation on the Exemptive Offering
Framework (stating ``Integration should be revised so that the
exemptions can be better utilized.''). But see Letter responding to
the Concept Release from Public Investors Advocate Bar Association
dated Sept. 24, 2019 (positing that shortening the six month period
in Rule 502(a) would ``serve to promote'' Ponzi schemes); and Letter
responding to the Concept Release from North American Securities
Administrators Association dated Oct. 11, 2019 (positing that
``loosening'' integration safe harbors would ``increase the
likelihood of regulatory arbitrage or create gaps in the investor
protection landscape''). Comment letters received in response to the
Concept Release are available at https://www.sec.gov/comments/s7-08-19/s70819.htm.
\38\ See Final Report of the 2016 SEC Government-Business Forum
on Small Business Capital Formation (Mar. 2017), available at
https://www.sec.gov/info/smallbus/gbfor35.pdf (``2016 Forum
Report''); Final Report of the 2017 SEC Government-Business Forum on
Small Business Capital Formation (Mar. 2018), available at https://www.sec.gov/files/gbfor36.pdf (``2017 Forum Report''); and Final
Report of the 2018 SEC Government-Business Forum on Small Business
Capital Formation (June 2019), available at https://www.sec.gov/info/smallbus/gbfor37.pdf (``2018 Forum Report'') (all three forums
recommending that the Commission clarify the relationship between
exempt offerings in which general solicitation is not permitted and
exempt offerings in which general solicitation is permitted, and
that Rule 152 applies to a Rule 506(c) offering so that an issuer
using Rule 506(c) may subsequently engage in a registered public
offering without adversely affecting the Rule 506(c) offering
exemption). See also 2019 Forum Report (recommending using
consistent terms in exempt offering rules for ease of understanding,
as well as bright line rules and examples).
\39\ See, e.g., Letter from Geraci LLP dated May 29, 2020
(``Geraci Law Letter''); Letter from Ketsal dated June 30, 2020
(``Ketsal Letter''); Letter from Netcapital Funding Portal Inc.
dated May 31, 2020 (``Netcapital Letter''); Letter from Republic
dated June 1, 2020 (``Republic Letter''); Letter from
S[omacr].Capital Inc. dated June 1, 2020 (``S[omacr].Capital
Letter''); Letter from William Hubbard, Hubbard Business Counsel
dated June 1, 2020 (``W. Hubbard Letter''); Letter from David R.
Burton, Senior Fellow in Economic Policy, The Heritage Foundation
dated June 1, 2020 (``D. Burton Letter''); Letter from CrowdCheck
Inc. dated June 11, 2020 (``CrowdCheck Letter''); Letter from
Shearman & Sterling LLP dated June 18, 2020 (``Shearman & Sterling
Letter''); Letter from Institute for Portfolio Alternatives dated
June 25, 2020 (``IPA Letter''); and Letter from Federal Regulation
of Securities Committee, the Private Equity and Venture Capital
Committee, and the Commercial Finance Committee of the Business Law
Section of the American Bar Association dated July 27, 2020 (``ABA
Letter''). One commenter supporting the proposal suggested that the
proposal would provide clarifying guidance that would enable issuers
to raise capital in reliance on Rule 506(c) which may reduce the
disparity between the amount of capital raised in reliance on Rule
506(b) versus Rule 506(c). See Letter from Fried, Frank Harris
Shriver & Jacobson LLP dated June 1, 2020 (``Fried Frank Letter'').
\40\ See, e.g., W. Hubbard Letter; D. Burton Letter; and ABA
Letter (stating that the proposed structure would add clarity,
reduce complexity and provide greater confidence to issuers in
planning and choosing their capital raising options). But see
CrowdCheck Letter (recommending that specific fact patterns be
included in the safe harbors rather than in the provisions that
apply the general principle).
\41\ See SEC SBCFAC Letter.
---------------------------------------------------------------------------
A number of commenters opposed the proposed integration
framework.\42\ Some of these commenters expressed concerns that the
proposed amendments would reduce the need or incentive for companies to
go public \43\ or allow issuers to evade the registration requirements
of the Securities Act.\44\ Two of these commenters also raised concerns
about potential abuse of the general principle by an issuer identifying
investors through a general solicitation in one offering and then
selling securities to those investors in an offering for which general
solicitation is prohibited.\45\ Another commenter recommended that the
integration analysis should involve two separate determinations:
Whether offerings are functionally the same offering should be
determined first; followed by an analysis of whether the integrated
offerings satisfy the requirements of an exemption.\46\
---------------------------------------------------------------------------
\42\ See Letter from Better Markets, et al. dated June 2, 2020
(``Better Markets Letter''); Letter from Consumer Federation of
America dated June 4, 2020 (``CFA Letter''); Letter from CFA
Institute dated June 12, 2020 (``CFA Institute Letter''); Letter
from Robert E. Rutkowski dated June 4, 2020 (``R. Rutkowski
Letter''); Letter from Rutheford B. Campbell, Jr. dated Aug. 3, 2020
(``R. Campbell Letter''); Letter from Committee on Securities Law of
the Business Law Section of the Maryland State Bar Association dated
June 1, 2020 (``Md. St. Bar Assoc. Letter''); and Letter from
Council of Institutional Investors dated May 28, 2020 (``CII
Letter'') (expressing concern that the proposed integration
framework and expansion of the safe harbors would weaken the
integration doctrine and result in the inclusion of large numbers of
non-accredited investors in exempt offerings). See also Letter from
North American Securities Administrators Association, Inc. dated
June 1, 2020 (``NASAA Letter'') (stating its objection to a 30-day
safe harbor in proposed Rule 152(b)(1), although not objecting to
the goal of harmonizing the integration regime and the safe harbors
in proposed Rule 152(b)(2) through (4)).
\43\ See CFA Letter (stating its concern that the amendments
could result in issuers being able to raise unlimited amounts of
capital from an unlimited number of investors through exempt
offerings, without ever needing to go through the registration
process). See generally CFA Institute Letter; and R. Rutkowski
Letter.
\44\ See, e.g., CFA Letter (stating that ``the original goal of
preventing issuers from artificially separating related transactions
into multiple offerings to avoid the registration requirement is
gone under this approach, so long as the individual offerings each
satisfy a particular exemption''); and R. Rutkowski Letter
(suggesting that the proposal would allow issuers to avoid
registration requirements by dividing large financings into multiple
smaller exempt offerings).
\45\ See, e.g., CFA Letter; and Md. St. Bar Assoc. Letter. But
see IPA Letter; and Fried Frank Letter (stating that an offering
made more than 30 days after the termination of another offering
should not be integrated, regardless of whether the purchasers in
the exempt offering may have been solicited using general
solicitation).
\46\ See Md. St. Bar Assoc. Letter.
---------------------------------------------------------------------------
Several commenters who supported the concept of revising the
integration framework offered alternative approaches to the
proposal.\47\ One of these commenters stated the current integration
doctrine should be replaced with general anti-evasion principles and
noted its potential adverse effect on early-stage companies.\48\
Another commenter recommended elimination of the current integration
doctrine and expressed concern that it has negative effects,
particularly for small companies that commonly rely on Section 4(a)(2),
Rule 504 or Rule 506(b) for their offerings.\49\
---------------------------------------------------------------------------
\47\ See CrowdCheck Letter; Letter from John R. Clarke, dated
May 30, 2020 (``J. Clarke Letter'') (stating that the integration
framework should be replaced with a filing requirement describing
all historical and current exempt and registered offerings made by
the issuer); and Letter from Invesco Ltd. dated June 1, 2020
(``Invesco Letter'') (recommending a single safe harbor permitting
offerings ``so long as those offerings are reasonably conducted
commensurate with the requirements under such rules'').
\48\ See CrowdCheck Letter (stating that, although the proposed
rule ``is a distinct improvement on the current state of affairs,''
they would prefer for the Commission to ``eliminate the concept of
integration altogether and rely on general anti-evasion
principles'').
\49\ See R. Campbell Letter (stating that the integration
doctrine ``drives up offering costs and provides no protection for
investors'' and ``its pernicious effects fall most heavily on small
issuers''). This commenter raised a concern that, as proposed with
its references to purchasers in ``each exempt offering,'' the
requirements of Rule 152(a)(1) would rarely be met for offerings
under Section 4(a)(2), Rule 504, or Rule 506(b)).
---------------------------------------------------------------------------
Some commenters specifically supported our proposal to replace the
five-factor test with the Commission's more recent approach to
integration adopted in 2015 and 2016 rulemakings involving Regulation
A, Regulation Crowdfunding and Rules 147 and 147A, namely whether the
issuer can establish that each offering either complies with the
registration requirements of the Securities Act or that an exemption
from registration is available for the particular offering.\50\ Other
commenters specifically recommended retaining the current five-factor
test.\51\ One commenter questioned the need for the proposed new
framework, stating that it was not aware of significant problems in
applying the current five-factor test,\52\ while another commenter
stated its concern that the proposal could permit concurrent and serial
offerings that are clearly part of a single plan of financing to avoid
integration.\53\
---------------------------------------------------------------------------
\50\ See ABA Letter; J. Clarke Letter; CrowdCheck Letter; Geraci
Letter (suggesting that it is difficult for issuers to determine
whether subsequent offers might be integrated into a single offering
under the five-factor test of integration); and W. Hubbard Letter
(suggesting that the five-factor test may continue to be useful in
limited situations).
\51\ See CFA Letter; and Md. St. Bar Assoc. Letter.
\52\ See Md. St. Bar Assoc. Letter.
\53\ See CFA Letter (stating that the purpose of integration is
to look at the totality of a financing scheme rather than different
components in isolation). See also R. Rutkowski Letter (stating that
the proposed integration framework greatly weakens the integration
doctrine by permitting issuers to conduct multiple exempt offerings
regardless of whether such offerings are part of a single plan of
financing, so long as each offering qualifies for an exemption from
Securities Act registration requirements and is separated by at
least 30 days).
---------------------------------------------------------------------------
[[Page 3503]]
ii. Introductory Language of Rule 152
One commenter suggested that the Commission expand the introductory
language to the proposed rule, concerning a ``plan or scheme to evade
the registration requirements of the Act'' to include not just the
rule's safe harbors, as proposed, but rather the entire rule, including
the rule's general principle of integration.\54\ This commenter also
suggested that the Commission provide examples of facts and
circumstances that might be relevant in applying the general principle
of integration set forth in proposed Rule 152(a).\55\
---------------------------------------------------------------------------
\54\ See Md. St. Bar Assoc. Letter.
\55\ See id (questioning the need for the reference to ``facts
and circumstances'').
---------------------------------------------------------------------------
iii. Provisions Applying the General Principle (Rules 152(a)(1) and
152(a)(2))
Commenters requested clarification and suggested modifications
concerning the guidance on the general principle of integration
provided in proposed Rule 152(a)(1)(i) and proposed Rule
152(a)(1)(ii).\56\ Some of these commenters asked the Commission to
revise new 17 CFR 230.152(a)(1)(i) (``Rule 152(a)(1)(i)'') and 17 CFR
230.152(a)(1)(ii) (``Rule 152(a)(1)(ii)'') to address an application of
the general principle for concurrent exempt offerings where general
solicitation is prohibited for one or more, but not all, such
offerings.\57\ Commenters also stated their concerns that an issuer
could identify investors through a general solicitation and then sell
to such investors in a subsequent private offering, and sought
clarification of the application of proposed Rule 152(a)(1)(i) and (ii)
to exempt offerings prohibiting general solicitation.\58\ Another
commenter recommended that the application of proposed Rule
152(a)(1)(i) and (ii) be tied to the particular purchaser, rather than
``purchasers.'' \59\ One commenter requested that the Commission
clarify the application of proposed Rule 152(a)(1) to whether an
offering permitting general solicitation would be integrated with an
investor's secondary offering in reliance on Section 4(a)(7) of the
Securities Act.\60\ Another commenter suggested that a ``certification
from the investor that the investor did not become aware of a potential
Rule 506(b) investment through a general solicitation'' should satisfy
an issuer's obligation under Rule 152(a)(1) to have, based on the facts
and circumstances, a reasonable belief that the investor in the Rule
506(b) offering was not solicited through the use of general
solicitation.\61\ In contrast, some commenters suggested that the
prohibition on general solicitation in exempt offerings should be
eliminated.\62\
---------------------------------------------------------------------------
\56\ See, e.g., Md. St. Bar Assoc. Letter; Fried Frank Letter;
IPA Letter; ABA Letter; CFA Letter; Invesco Letter; and CrowdCheck
Letter.
\57\ See Md. St. Bar Assoc. Letter (requesting clarification as
to whether Rule 152(a)(1), as proposed, would codify Commission
guidance first issued in 2007, involving one offering where general
solicitation is permitted and a private offering where general
solicitation is not permitted); Fried Frank Letter (stating that
``[t]he Commission should revise Rule 152(a)(1) to clarify that, so
long as its conditions are satisfied, an issuer may concurrently
engage in an offering in reliance on Rule 506(b) and another
offering in reliance on Rule 506(c).''); IPA Letter (recommending
that the requirement not be applicable to ``each exempt offering''
but to ``each exempt offering that prohibits the use of general
solicitation''); and ABA Letter (recommending revisions to
paragraphs (i) and (ii) of Rule 152(a)(1), as proposed, ``[s]ince
these Rule 152(a)(l) tests are intended to apply only to exempt
offerings for which general solicitation is not permitted, but may
be used in the context of concurrent or successive offerings with
one exempt offering permitting general solicitation (such as Rule
506(c)) and the other prohibiting general solicitation (such as Rule
506(b))''). See also 2016 Forum Report; 2017 Forum Report; and 2018
Forum Report (all three forums recommending that the Commission
clarify the relationship of exempt offerings in which general
solicitation is not permitted with Rule 506(c) offerings involving
general solicitation).
\58\ See e.g., CFA Letter; and Md. St. Bar Assoc. Letter.
\59\ See ABA Letter (``An issuer should be able to rely on Rule
152(a)(l) if the issuer has a reasonable belief, based on the facts
and circumstances, that each purchaser (rather than `purchasers') in
such exempt offering (rather than `each exempt offering') either (i)
was not solicited through the use of general solicitation in
connection with the offerings not permitting general solicitation
that are being analyzed or (ii) established a substantive
relationship with the issuer before the offer was made (rather than
`commenced') to that purchaser.'').
\60\ See Fried Frank Letter.
\61\ See IPA Letter.
\62\ See Invesco Letter (suggesting eliminating the prohibition
on general solicitation ``or combining the safe harbors laid out in
Rules 506(b) and (c) to permit open communications about an offering
when targeted at a limited group of purchasers at a higher
eligibility level than the minimums provided for in the `accredited
investor' definition.''); and IPA Letter (stating that the
prohibition on general solicitation in an exempt offering is
archaic, and there are a variety of ways that investor protections
can be built into securities offerings ``without regulating how the
investor became aware of the offering.'').
---------------------------------------------------------------------------
Other commenters requested clarifications and modifications with
respect to proposed Rule 152(a)(2), concerning an exempt offering
permitting general solicitation that includes information about the
material terms of a concurrent offering under another exemption also
permitting general solicitation. One commenter recommended revising the
rule to clarify whether the requirement in proposed Rule 152(a)(2) that
the offering materials mentioning the terms of the other concurrent
offering must comply with ``the requirements of each exemption'' refers
solely to the offering materials, or to the offering in general.\63\
This commenter also expressed concern that this aspect of the proposal
may contradict the general principle that each exempt offering should
be analyzed individually for compliance only with its claimed
exemption.\64\ Another commenter stated its specific concerns about
potential difficulties issuers may have in complying with Rule
152(a)(2) in connection with concurrent Regulation A and Regulation
Crowdfunding offerings.\65\
---------------------------------------------------------------------------
\63\ See Md. St. Bar Assoc. Letter.
\64\ See id.
\65\ See CrowdCheck Letter (stating that when a Form C discusses
the material terms of a concurrent Regulation A offering that has
been qualified, it is problematic for the issuer to file on EDGAR a
Form C with a live active hyperlink to the Regulation A offering
circular in order to satisfy the issuer's delivery obligation under
Regulation A, and also noting that a Form 1-A filed with the
Commission that discusses the material terms of a Regulation
Crowdfunding offering would not comply with the limitations on
advertising in Rule 204 of Regulation Crowdfunding).
---------------------------------------------------------------------------
c. Final Amendments
After considering the comments, we are adopting a new comprehensive
integration framework, in new Rule 152,\66\ substantially as proposed,
but with modifications in response to comments received. In addition to
introductory anti-evasion language, new Rule 152(a) sets forth a
general principle of integration, and applies the general principle to
two specific fact patterns, if the four safe harbors set forth in new
Rule 152(b) do not apply.
---------------------------------------------------------------------------
\66\ Revised Rule 152 as adopted will replace current Rules 152
and 155 concerning the integration of non-public and public
offerings and references to Rule 152 will replace the integration
provisions of Regulation D, Regulation A, Regulation Crowdfunding,
and Rules 147 and 147A. Consistent with current Rule 155, new Rule
152 specifies that the provisions of the rule are not available to
any issuer for any transaction or series of transactions that,
although in technical compliance with the rule, is part of a plan or
scheme to evade the registration requirements of the Securities Act.
As a result of the amendments, Rule 155 will be removed and
reserved.
---------------------------------------------------------------------------
i. Introductory Language
We are adopting the introductory language of Rule 152 substantially
as proposed to describe what is provided in the rule and caution
issuers that Rule 152 may not be used as part of a plan or scheme to
evade the registration requirements of the Securities Act. As suggested
by a commenter, we have revised the introductory language to encompass
all of the provisions of the rule, not just the provisions of the safe
harbors. Therefore, the provisions of
[[Page 3504]]
Rule 152 will not have the effect of avoiding integration for any
transaction or series of transactions that, although in technical
compliance with the rule, is part of a plan or scheme to evade the
registration requirements of the Securities Act. We believe this change
adds important clarity about the availability of Rule 152 as a basis
for concluding that two or more offerings will not be integrated in
certain situations by making it clear that, although it may be possible
to structure two or more offerings such that they appear to technically
comply with the terms of applicable exemptions, if that structuring is
part of a plan or scheme to evade the registration requirements of the
Securities Act, the offerings would still be subject to integration.
ii. Integration Framework and General Principle
The general principle of integration we are adopting in Rule 152(a)
looks to the particular facts and circumstances of each offering.\67\
Specifically, the general principle provides that, for all offerings
not covered by a safe harbor in Rule 152(b), offers and sales will not
be integrated if, based on the particular facts and circumstances, the
issuer can establish that each offering either complies with the
registration requirements of the Securities Act, or that an exemption
from registration is available for the particular offering.
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\67\ Consistent with the discussion in the Proposing Release and
to provide further clarification, we note that the focus of this
rulemaking effort is capital-raising offerings. However, the new
rules that we adopt in this release, especially new Rule 152, apply
equally to a series of transactions, whether registered or exempt
from Securities Act registration, that involve one or more business
combination transactions and/or capital-raising transactions that
occur concurrently or close in time. The new rules that we adopt in
this release do not otherwise alter or affect the current regulatory
scheme that governs communications made in connection with business
combination transactions, such as 17 CFR 230.162, 17 CFR 230.165,
and 17 CFR 230.166, which were adopted in recognition of the special
nature of business combination transactions (such as mergers,
recapitalizations, and acquisitions). See Regulation of Takeovers
and Security Holder Communications, Release No. 33-7760 (Oct. 22,
1999) [64 FR 61408 (Nov. 10, 1999)].
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We continue to believe that providing additional clarity on how
securities offerings interrelate, including the relationship between
exempt and registered offerings, and when two or more securities
offerings will be considered integrated as one offering, will reduce
perceived risk among issuers when considering and planning possible
capital raising alternatives, while preserving investor protections
built into the respective offering exemptions. We are not persuaded by
commenters who raised concerns that our proposed integration framework
may promote greater reliance on exempt offerings and thereby reduce the
need or incentive for issuers to undertake registered public
offerings.\68\ Rather, we are of the view that the greater clarity that
the integration framework will provide on how securities offerings
interrelate: (1) Will facilitate capital-raising in exempt markets when
using the public markets is not practical, and (2) will provide issuers
the flexibility to choose between types of offerings, which may
encourage more issuers to raise more capital in our securities markets,
including in both exempt and registered offerings.\69\ Because the
amended framework will provide certainty to an issuer conducting exempt
and registered offerings close in time, it may ultimately result in
more issuers undertaking the risks, time, and expense of conducting a
registered public offering. It may also facilitate some small issuers
in raising enough external financing to develop their business model
and scale up to a point where they may become viable candidates for a
registered public offering, thereby providing Main Street investors
with more registered investment options, as well as all the benefits
that flow from registration.
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\68\ See CFA Letter; and R. Rutkowski Letter. See also Md. St.
Bar Assoc. Letter.
\69\ See, e.g., Netcapital Letter (suggesting that clarification
and modernization of the existing integration standards is an
important objective that will reduce unnecessary complexities and
reduce uncertainties and risks for issuers when planning and
carrying out capital raising activities). Further, based on data
compiled by the Division of Economic and Risk Analysis on Regulation
D issuer and offering characteristics from 2009 through 2019,
extracted from Forms D filed with the Commission, we note that a
registered offering likely would not be appropriate for the typical
Regulation D issuer, based on the following: The median amount sold
(if reported) was $1.50 million; the median offer size (if reported)
was $2.25 million; the median years of a Regulation D issuer since
incorporation was two years; the median issuer size (if reported) of
Non-Fund Issuers (Revenue) was $1 million to $5 million; only 20% of
all Regulation D offerings used an intermediary; and the average
number of investors in an offering (if reported) was 10 investors.
See Report to Congress on Regulation A/Regulation D Performance: As
Directed by the House Committee on Appropriations in H.R. Rept. No.
116-122 (Aug. 25, 2020), available at https://www.sec.gov/files/report-congress-regulation-a-d.pdf (``Report to Congress on
Regulation A/Regulation D Performance'') at Table 2. See also infra
note 596 and Table 7.
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The final rules replace the five-factor test with the Commission's
more recent approach to integration adopted in rulemakings involving
Regulation A, Regulation Crowdfunding, and Rules 147 and 147A. We agree
with commenters who indicated that the amendments provide a clearer
framework for determining whether two offerings occurring close in time
may be considered as integrated than the five-factor test.\70\ As noted
above, we believe that our new integration framework will facilitate
both exempt and registered offerings, by providing greater clarity and
flexibility to issuers in choosing capital raising options to grow
their businesses without compromising investor protections.
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\70\ See, e.g., J. Clarke Letter; CrowdCheck Letter; Geraci
Letter; and W. Hubbard Letter.
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iii. Integration With Exempt Offerings Prohibiting General Solicitation
(Rule 152(a)(1))
We are adopting Rule 152(a)(1) substantially as proposed, with
clarifying changes in response to commenters' concerns. Accordingly,
for an issuer considering the application of the general principle to
an exempt offering prohibiting general solicitation and one or more
other offerings, new Rule 152(a)(1) requires that the issuer must have
a reasonable belief, based on the facts and circumstances, with respect
to each purchaser in the exempt offering prohibiting general
solicitation, that the issuer (or any person acting on the issuer's
behalf) either:
Did not solicit such purchaser through the use of general
solicitation; or
Established a substantive relationship with such purchaser
prior to the commencement of the exempt offering prohibiting general
solicitation.
New Rule 152(a)(1) has been revised from the proposal in several
ways. First, as suggested by several commenters, the language of Rule
152(a)(1) has been revised to clarify that the restrictions on the use
of general solicitation only apply to the exempt offering prohibiting
general solicitation that is being analyzed under the general
principle, and not to ``each exempt offering.'' We have also revised
Rule 152(a)(1) to clarify that in exempt offerings prohibiting general
solicitation, it is the obligation of the issuer, or any person acting
on the issuer's behalf, to refrain from the use of general solicitation
to solicit a purchaser.
New Rule 152(a)(1) codifies and expands on guidance the Commission
first issued in 2007, and updated through 2016, which sets forth a
framework for analyzing how an issuer can conduct simultaneous
registered and private offerings.\71\ Since the adoption of Rule 506(c)
by the Commission in 2013, commenters have requested that the
Commission's 2007 guidance on concurrent registered and
[[Page 3505]]
private offerings be extended to concurrent Rule 506(c) and Rule 506(b)
offerings.\72\ Under the new integration principle in Rule 152(a),
issuers may conduct concurrent Rule 506(c) and Rule 506(b) offerings,
or any other combination of concurrent offerings, involving an offering
prohibiting general solicitation and another offering permitting
general solicitation, without integration concerns, so long as the
provisions of Rule 152(a)(1) and all other conditions of the applicable
exemptions are satisfied.\73\
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\71\ See supra text accompanying notes 28-32.
\72\ See Fried Frank Letter; and Md. St. Bar Assoc. Letter. See
also 2016 Forum Report; 2017 Forum Report; and 2018 Forum Report
(all three forums recommended that the Commission clarify the
relationship of exempt offerings in which general solicitation is
not permitted with Rule 506(c) offerings involving general
solicitation).
\73\ We caution issuers, however, that a general solicitation
permitted in connection with one offering that mentions the material
terms of a concurrent or subsequent exempt offering prohibiting
general solicitation may constitute an offer for the concurrent or
subsequent exempt offering prohibiting general solicitation and
thereby violate the prohibition on general solicitation with respect
to that concurrent or subsequent offering prohibiting general
solicitation. See Interpretive Release on Regulation D, Release No.
33-6455 (Mar. 3, 1983) [48 FR 10045 (Mar. 10, 1983)] at Section
III(c).
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In response to commenters who raised concerns that the proposed
language of Rule 152(a)(1) could enable an issuer to identify investors
through a general solicitation and then sell to such investors in a
subsequent exempt offering prohibiting general solicitation,\74\ we
note the introductory language, discussed above, which clarifies that
Rule 152 may not be used as part of a plan or scheme to evade the
registration requirements of the Securities Act, as well as the
requirement in new Rule 152(a)(1) itself, which would not allow an
issuer to avoid integration of such offerings. For example, an issuer
could not engage in general solicitation in an offering made in
reliance on Rule 506(c) and then sell to investors in an offering made
in reliance on Rule 506(b), unless either the issuer did not solicit
the purchaser in the Rule 506(b) offering through the use of the
general solicitation used in the Rule 506(c) offering, or the issuer
established a substantive relationship with such purchaser prior to the
commencement of the Rule 506(b) offering.\75\
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\74\ See supra notes 57-58.
\75\ An issuer may not conduct a Rule 506(c) general
solicitation in order to identify potential investors for the Rule
506(b) offering. In that instance, such Rule 506(b) offering may be
deemed to be commenced at the time of such solicitation under new
Rule 152(c).
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New Rule 152(a)(1)(ii) codifies and expands the Commission's 2007
guidance that the existence of a pre-existing substantive relationship
between the issuer, or its agent, and a prospective investor may be one
means by which an investor may become interested in, or become aware
of, a private placement conducted while a registration statement for a
public offering is on file with the Commission that may be consistent
with Section 4(a)(2). In response to a commenter that questioned the
application of this guidance,\76\ we also confirm that the existence of
such a relationship prior to the commencement of an offering is one
means, but not the exclusive means, of demonstrating the absence of a
general solicitation in a Regulation D offering.\77\ Accordingly, an
offer of the issuer's securities to a person with whom the issuer, or a
person acting on its behalf, has a pre-existing substantive
relationship would not constitute a general solicitation, so long as
the relationship was established prior to the commencement of the
offering.
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\76\ See Md. St. Bar Assoc. Letter.
\77\ See Regulation D; Accredited Investor and Filing
Requirements, Release No. 33-6825 (Mar. 15, 1989) [54 FR 11369 (Mar.
20, 1989)], at note 12.
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We reiterate the guidance provided in the Proposing Release that we
generally view a ``pre-existing'' relationship as one that the issuer
has formed with an offeree prior to the commencement of the offering
or, alternatively, that was established through another person (for
example, a registered broker-dealer or investment adviser) prior to
that person's participation in the offering.\78\ A ``substantive''
relationship is one in which the issuer (or a person acting on its
behalf, such as a registered broker-dealer or investment adviser) has
sufficient information to evaluate, and does, in fact, evaluate, an
offeree's financial circumstances and sophistication, in determining
his or her status as an accredited or sophisticated investor.\79\
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\78\ Certain offerings by private funds that rely on the
exclusions from the definition of ``investment company'' set forth
in Investment Company Act Sections 3(c)(1) (15 U.S.C. 80a-3(c)(1)
and 3(c)(7) (15 U.S.C. 80a-3(c)(7) posted on a website or platform
may be able to rely on a limited staff accommodation with respect to
the timing of the formation of a relationship. See Division of
Investment Management no-action letter to Lamp Technologies, Inc.
(May 29, 1997).
\79\ We do not believe that self-certification alone (by
checking a box) without any other knowledge of a person's financial
circumstances or sophistication would be sufficient to form a
``substantive'' relationship for these purposes. Persons other than
registered broker-dealers and investment advisers may form a pre-
existing, substantive relationship with an offeree as a means of
establishing that a general solicitation is not involved in a
Regulation D offering. Generally, whether a ``pre-existing,
substantive relationship'' exists turns on procedures established by
broker-dealers in connection with their customers. This is because
traditional broker-dealer relationships require that a broker-dealer
deal fairly with, and make suitable recommendations to, customers,
and, thus, implies that a substantive relationship exists between
the broker-dealer and its customers. We have long stated, however,
that the presence or absence of a general solicitation is always
dependent on the facts and circumstances of each particular case.
Thus, there may be facts and circumstances in which a third party,
other than a registered broker-dealer, could establish a ``pre-
existing, substantive relationship'' sufficient to avoid a ``general
solicitation.'' See, e.g., Use of Electronic Media, Release No. 33-
7856 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (``Use of
Electronic Media Release''). We also recognize there may be
particular instances where issuers may develop pre-existing,
substantive relationships with offerees. However, in the absence of
a prior business relationship or a recognized legal duty to
offerees, it is likely more difficult for an issuer to establish a
pre-existing, substantive relationship, especially when
contemplating or engaged in an offering over the internet. Issuers
would have to consider not only whether they have sufficient
information about particular offerees, but also whether they in fact
use that information appropriately to evaluate the financial
circumstances and sophistication of the offerees prior to commencing
the offering.
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Investors with whom the issuer has a pre-existing substantive
relationship may include the issuer's existing or prior investors,
investors in prior deals of the issuer's management, or friends or
family of the issuer's control persons. Similarly, such investors may
also include customers of a registered broker-dealer or investment
adviser with whom the broker-dealer or investment adviser established a
substantive relationship prior to the participation in the exempt
offering by the broker-dealer or investment adviser.\80\
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\80\ Certain investment advisers that rely on an exemption from
registration under the Investment Advisers Act of 1940, 15 U.S.C.
80b-1 et seq. (``Advisers Act'') may be registered under an
appropriate State authority.
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We are not providing guidance, as requested by a commenter, with
respect to the relevant facts and circumstances to be considered in
applying Rule 152(a)(1). We believe it is incumbent on the issuer and
its agents to consider all relevant facts and circumstances when
analyzing whether the offering satisfies the requirements of Rule 152.
iv. Integration With Exempt Offerings Permitting General Solicitation
(Rule 152(a)(2))
We are adopting new Rule 152(a)(2), substantially as proposed, with
certain clarifying revisions in response to commenters' concerns. In
the context of two or more concurrent offerings each relying on a
Securities Act exemption permitting general solicitation,\81\ new
[[Page 3506]]
Rule 152(a)(2) clarifies that an issuer's general solicitation offering
materials for one offering that includes information about the material
terms of a concurrent offering under another exemption may constitute
an ``offer'' of the securities in such other offering, and therefore
the offer must comply with all the requirements for, and restrictions
on, offers under the exemption being relied on for such other offering,
including any necessary legends or communications restrictions.\82\
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\81\ For example, Rule 506(c), Regulation A, and Regulation
Crowdfunding. Concurrent offerings permitting general solicitation
may also include intrastate or regional offerings relying on Rules
147 and 147A or 17 CFR 230.504(b)(1)(i) (``Rule 504(b)(1)(i)''), 17
CFR 230.504(b)(1)(ii) (``Rule 504(b)(1)(ii)''), or 17 CFR
230.504(b)(1)(iii) (``Rule 504(b)(1)(iii)''), all of which permit
general solicitation but also require compliance with State
registration requirements or exemptions to State registration under
State securities laws. However, an issuer would not be able to
describe the terms of a Rule 147 offering using any form of general
solicitation viewable by out-of-state residents, as this would
constitute an offer by the issuer to residents residing out of the
State in which the issuer has its principal place of business, which
is prohibited by the Rule 147 safe harbor for a valid Section
3(a)(11) exempt offering. Two or more exempt offerings permitting
general solicitation occurring close in time, but not concurrent,
may be eligible for the safe harbor in new Rule 152(b)(4).
\82\ For example, the limitations on advertising the terms of an
offering pursuant to Rule 204 of Regulation Crowdfunding would limit
the issuer's ability to reference the terms of that offering in a
general solicitation in connection with a concurrent offering made
pursuant to Regulation A, Rule 506(c), or Rule 147A. See Concept
Release, at note 483. See infra Section II.B.3 for a discussion of
revisions we are making to Rule 204 of Regulation Crowdfunding.
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New Rule 152(a)(2) builds on the Commission guidance in its 2015
Regulation A and Regulation Crowdfunding rulemakings and in its 2016
Rule 147 and Rule 147A rulemaking to provide issuers with greater
flexibility and the ability to rely on existing Securities Act
exemptions more effectively without compromising the investor
protections of each exemption.\83\
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\83\ See 2015 Regulation A Release, at Section II.B.5;
Crowdfunding Adopting Release, at Section II.A.1.c; and Intrastate
and Regional Offerings Release, at Section II.B.5.
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For example, under new Rule 152(a)(2), an issuer may undertake an
offering in reliance on Rule 506(c), so long as the issuer meets all of
the conditions of that exemption, including taking reasonable steps to
verify that all purchasers in the Rule 506(c) offering are accredited
investors, while conducting a concurrent offering in reliance on
Regulation A, so long as the concurrent offering complies with all the
requirements of Regulation A. If this issuer were to discuss in its
Rule 506(c) general solicitation materials the material terms of the
Regulation A offering, new Rule 152(a)(2) would require the Rule 506(c)
general solicitation to comply with all the requirements for offers
under Regulation A, including all necessary legends and comply with any
restrictions on the use of general solicitation imposed on issuers
making offers under Regulation A.\84\ Similarly, an issuer undertaking
a Rule 506(c) offering concurrently with a Regulation Crowdfunding
offering must make sure that any general solicitation materials used in
connection with the Rule 506(c) offering that mention the material
terms of the Regulation Crowdfunding offering comply with the off-
portal offering limitations in Rule 204 of Regulation Crowdfunding.\85\
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\84\ Rule 255 of Regulation A requires certain statements in any
communications constituting offers made in reliance on Regulation A.
Any such legends or statements need not be included in the issuer's
Rule 506(c) general solicitation materials if such materials do not
mention the material terms of the other concurrent offering.
\85\ See infra Section II.B.3 for a discussion of revisions
adopted to Rule 204 of Regulation Crowdfunding.
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2. Integration Safe Harbors
The Commission proposed new Rule 152(b) which would provide four
non-exclusive safe harbors from integration. For offers and sales
meeting the conditions of these safe harbors, the issuer would not need
to conduct any further integration analysis. A number of commenters
supported the proposed safe harbors,\86\ indicating that the safe
harbors would provide clarity and bright line rules to simplify
compliance.\87\ Some commenters recommended expanding on the proposed
safe harbors.\88\
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\86\ See Fried Frank Letter; Geraci Law Letter; W. Hubbard
Letter; Letter from Raise Green Inc., and New Haven Community Solar,
LLC dated June 1, 2020 (``Raise Green & New Haven Comm. Solar
Letter''); D. Burton Letter; and Shearman & Sterling Letter.
\87\ See, e.g., ABA Letter (supporting harmonization of the
rules for both exempt and registered offerings and simplifying the
integration analysis); Geraci Law Letter; and Raise Green & New
Haven Comm. Solar Letter.
\88\ See Fried Frank Letter (recommending an additional safe
harbor providing that any offering commenced in reliance on an
exemption that does not permit general solicitation can be continued
in reliance on an exemption that does permit general solicitation);
and Shearman & Sterling Letter (recommending revisions to the
proposed safe harbors to cover shelf registration statements and the
exercise of outstanding warrants or the conversion of convertible or
exchangeable securities).
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Several commenters, however, opposed one or more of the proposed
safe harbors.\89\ Some of these commenters expressed particular concern
that the revisions could lead to more frequent offerings involving non-
accredited investors.\90\ One commenter expressed concern that a 30-day
integration safe harbor could render the integration doctrine a
nullity.\91\
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\89\ See, e.g., NASAA Letter; CFA Letter; Better Markets Letter;
Md. St. Bar Assoc. Letter; and CII Letter.
\90\ See, e.g., CII Letter; and NASAA Letter.
\91\ See NASAA Letter.
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Some commenters expressed concern with the proposed approach to
expanding the integration framework or offered alternatives for how to
expand the integration framework.\92\ One commenter recommended use of
a single integration safe harbor that would permit issuers intending to
conduct distinct offerings under different Securities Act rules to
treat them as separate so long as those offerings are reasonably
conducted commensurate with the requirements of such rules.\93\
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\92\ See, e.g., CrowdCheck Letter (expressing concern that the
focus on the safe harbors may lead to issuers relying on the safe
harbors instead of the general principles); Invesco Letter; W.
Hubbard Letter (recommending a safe harbor for all offers or sales
to investors with whom the issuer has a pre-existing substantive
relationship, but opposing a safe harbor for all offerings limited
to qualified institutional buyers and accredited investors that
would exclude non-accredited investors); and J. Clarke Letter
(recommending a safe harbor for issuers that comply with a new
recommended disclosure that integrates Form D, Form C, and an
issuer's offering statements).
\93\ See Invesco Letter.
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a. 30-Day Integration Safe Harbor (Rule 152(b)(1))
Current Securities Act integration safe harbors generally provide
for a six-month safe harbor time period, outside of which other
offerings will not be integrated or considered as part of the same
offering.\94\
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\94\ See Rule 502(a), 17 CFR 230.251(c) (``Rule 251(c)''), 17
CFR 230.147(g) (``Rule 147(g)''), and 17 CFR 230.147A(g) (``Rule
147A(g)''). These rules rely on a six-month time period, but include
exceptions for certain offers and sales under specific exemptions or
circumstances. For example, Rule 502(a) excludes offers or sales of
securities under an employee benefit plan as defined in 17 CFR
230.405 (``Rule 405''). In addition, Rules 251(c), 147(g), and
147A(g) all exclude from integration all prior offers and sales of
securities without regard to a time period so long as the prior
offers and sales have terminated. Under Rules 147, 147A, and 251,
subsequent offers and sales will not be integrated with offers and
sales that are registered under the Securities Act, exempt from
registration under Rule 701, Regulation A, Regulation S, or Section
4(a)(6) of the Securities Act, or made pursuant to an employee
benefit plan. Further, generally, transactions otherwise meeting the
requirements of an exemption will not be integrated with
simultaneous offers and sales of securities being made outside the
United States in compliance with Regulation S. See, e.g., 17 CFR
230.500(g) (``Rule 500(g)'') and Note to Rule 502(a).
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i. Proposed Amendments
The Commission proposed Rule 152(b)(1) to shorten the six-month
time period to 30 days and harmonize current Securities Act exemptions
by providing the same 30-day safe harbor time period throughout the
Securities Act's integration provisions. The proposed safe harbor would
apply to both offerings for which a registration
[[Page 3507]]
statement has been filed under the Securities Act and exempt
offerings.\95\ Specifically, the proposed safe harbor in Rule 152(b)(1)
would provide that any offering made more than 30 calendar days before
the commencement of any other offering, or more than 30 calendar days
after the termination or completion of any other offering, will not be
integrated with the other offering, provided that for an exempt
offering for which general solicitation is not permitted, the proposed
safe harbor would require either: (i) That the purchasers were not
solicited through the use of general solicitation, or (ii) that the
issuer established a substantive relationship with the purchasers prior
to the commencement of the offering.
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\95\ Both this proposed safe harbor and the safe harbor in
proposed Rule 152(b)(3)(iii) would apply to a registered offering
made more than 30 calendar days after the termination or completion
of any other offering.
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In conjunction with this safe harbor, the Commission also proposed
to amend 17 CFR 230.506(b)(2)(i) (``Rule 506(b)(2)(i)'') to address the
concern that a 30-day safe harbor could result in some issuers seeking
to undertake serial Rule 506(b) offerings each month, selling to up to
35 unique non-accredited investors in each offering, potentially
resulting in unregistered sales of securities to hundreds of non-
accredited investors in a year. As proposed, where an issuer conducts
more than one offering under Rule 506(b), the number of non-accredited
investors purchasing in all such offerings within 90 calendar days of
each other would be limited to 35.\96\
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\96\ Proposed Rule 506(b)(2)(i) provides that there are no more
than, or the issuer reasonably believes that there are no more than,
35 purchasers of securities from the issuer in offerings under this
section in any 90 calendar day period. Under 17 CFR 230.501(e), only
non-accredited investors are included in computing the number of
``purchasers.''
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In addition, because proposed Rule 152(b)(1) would generally
supersede the specific requirements in Rule 155 relating to the
integration of abandoned offerings with subsequent offerings, the
Commission proposed to remove and reserve Rule 155.\97\
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\97\ 17 CFR 230.155(b) (``Rule 155(b)'') and 17 CFR 230.155(c)
(``Rule 155(c)'') provide safe harbors for integration of abandoned
offerings. Specifically, Rule 155(b) provides that an abandoned
private offering of securities will not be considered part of an
offering for which the issuer later files a registration statement
if the offering meets certain enumerated conditions, including that
the issuer does not file the registration statement until at least
30 calendar days after termination of all offering activity in the
private offering, unless the issuer and any person acting on its
behalf offered securities in the private offering only to persons
who were (or who the issuer reasonably believes were) accredited
investors or who satisfy the knowledge and experience standard of
Rule 506(b)(2)(ii). Rule 155(c) provides a similar safe harbor for a
registered offering followed by a private offering of securities
subject to a similar set of enumerated conditions, including that
neither the issuer nor any person acting on the issuer's behalf
commences the private offering earlier than 30 calendar days after
the effective date of withdrawal of the registration statement.
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ii. Comments
Some commenters supported,\98\ and others opposed,\99\ proposed
Rule 152(b)(1). Some commenters supporting the 30-day safe harbor
expressed their belief that 30 days was sufficient to mitigate concerns
that an exempt offering may condition the market for a subsequent
offering or undermine the protections of a subsequent exempt
offering.\100\ Another commenter stated that a 30-day time period is
consistent with market practice in registered offerings to address gun-
jumping concerns.\101\ One supportive commenter suggested that the
Commission clarify that ``the 30-day period before and the 30-day
period after each offering--have to be free of offers in all cases.''
\102\ Commenters opposed to the proposed 30-day safe harbor expressed
concern that the 30 day time period was too short.\103\ Many of these
commenters recommended a 90-day safe harbor.\104\
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\98\ See, e.g., J. Clarke Letter; Republic Letter; Letter from
Securities Industry and Financial Markets Association dated June 1,
2020 (``SIFMA Letter''); W. Hubbard Letter; D. Burton Letter;
CrowdCheck Letter; and Shearman & Sterling Letter.
\99\ See, e.g., Letter from Silicon Prairie Holdings, Inc. dated
May 31, 2020 (``Silicon Prairie Letter''); NASAA Letter; Md. St. Bar
Assoc. Letter; Letter from Americans for Financial Reform Education
Fund dated June 1, 2020 (``AFREF Letter''); CFA Letter; R. Campbell
Letter; and R. Rutkowski Letter.
\100\ See, e.g., Shearman & Sterling Letter; and SIFMA Letter
(suggesting a 30-day cooling off period is appropriate given changes
to markets, technologies and the securities laws since the six-month
time frame was adopted).
\101\ See CrowdCheck Letter.
\102\ See ABA Letter (suggesting clarification that the 30-day
separation period be ``applied separately to each other offering
potentially subject to integration, on an individualized basis, with
a 30-day separation required between each pair of offerings relying
on this provision.'').
\103\ See, e.g., Silicon Prairie Letter; NASAA Letter; Md. St.
Bar Assoc. Letter; AFREF Letter; CFA Letter; and R. Rutkowski
Letter.
\104\ See Silicon Prairie Letter (suggesting that 30 days is not
enough time to assess an offering); NASAA Letter (expressing concern
that the 30-day safe harbor would render integration a nullity); Md.
St. Bar Assoc. Letter (suggesting that 90 days would more
effectively impede issuers from improperly avoiding registration by
artificially dividing a single offering into multiple offerings);
CFA Letter (citing to the Regulation D 2007 Proposing Release, at
note 135, and noting that for issuers that provide quarterly
reports, the 90-day requirement would provide transparency and time
for investors and the market to take into account the offering and
its results); AFREF Letter; CFA Letter; and R. Rutkowski Letter.
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Commenters addressing the proposal to revise Rule 506(b) to limit
the total number of non-accredited investors purchasing in such
offerings to 35 persons within 90 calendar days were divided in their
support for,\105\ or opposition to,\106\ the proposed amendments. One
commenter stated that limiting sales to non-accredited investors to no
more than 35 in any 90-day period will encourage issuers seeking
capital from non-accredited investors to use Regulation Crowdfunding
and Regulation A.\107\ Another commenter suggested shortening the time
period or increasing the number of non-accredited investors in the
proposal.\108\
---------------------------------------------------------------------------
\105\ See, e.g., Md. St. Bar Assoc. Letter (supporting the
proposal but acknowledging a preference for a 90-day, safe harbor);
and CFA Letter (contending that the speed with which information is
disseminated for a small, private company has not increased in the
way it has for public companies and that while the markets have
changed a great deal since the 1980s, today's markets do not look
all that different than they did in 2007, when the Commission
rejected a 30-day cooling off period for Regulation D offerings).
\106\ See, e.g., Ketsal Letter (recommending eliminating the
limit on sales to non-accredited investors); and Letter from Darshun
N. Kendrick dated May 14, 2020 (suggesting the proposed amendment
would not help with clarifying or streamlining the rules).
\107\ See Republic Letter.
\108\ See W. Hubbard Letter.
---------------------------------------------------------------------------
Commenters were also divided in their support for,\109\ or
opposition to,\110\ conditioning the availability of the 30-day safe
harbor on the requirement that, for an exempt offering for which
general solicitation is not permitted, the issuer did not solicit the
purchasers in such offering through the use of general solicitation or
that the issuer established a substantive relationship with the
purchaser prior to commencement of the offering for which general
solicitation is not permitted. One commenter opposed to these
requirements suggested that the effects of any offers made more than 30
days prior to or after the commencement of another offering would be
sufficiently diluted by intervening market developments so as to render
an integration analysis unnecessary.\111\ This commenter further stated
that an issuer should be able to rely on the general principle without
having to wait 30 calendar days from the termination of the prior
offering if the issuer has a reasonable belief, based on the facts and
circumstances, that purchasers in an
[[Page 3508]]
exempt offering for which general solicitation is not permitted were
either not solicited through general solicitation or had a pre-existing
relationship with the issuer or person acting on its behalf.\112\
Another commenter expressed concern that an issuer relying on the
exemptions provided by Section 4(a)(2), Rule 504, and Rule 506(b) would
not likely be able to satisfy the conditions to the availability of the
30-day safe harbor as proposed.\113\
---------------------------------------------------------------------------
\109\ See, e.g., CrowdCheck Letter; J. Clarke Letter; and W.
Hubbard Letter (recommending allowing a limited number of investors
to be solicited through general solicitation in a twelve month
period).
\110\ See, e.g., Fried Frank Letter (recommending not
integrating offerings after 30 days regardless of whether the
purchasers may have been solicited using general solicitation);
Shearman & Sterling Letter; and IPA Letter (suggesting that the
proposed amendment would address the integration concern, but not
the general solicitation concern).
\111\ See Shearman & Sterling Letter.
\112\ See id. See also ABA Letter (recommending that both Rule
152(a)(1) and Rule 152(b)(1) ``be tied to the particular
purchaser,'' rather than ``purchasers'').
\113\ See R. Campbell Letter (stating amending proposed Rule 152
``to provide clear and complete two-way safe harbor integration
protection for all exemptions . . . is especially important for the
exemptions used by small businesses, including the exemptions
provided by Section 4(a)(2), Rule 504 and Rule 506(b)'').
---------------------------------------------------------------------------
Some commenters also recommended that the Commission harmonize the
provisions in the general principle of integration in proposed Rule
152(a)(1) with the similar provision in the safe harbor in proposed
Rule 152(b)(1), or provide an explanation of how they differ.\114\
These commenters stated their belief that, although paragraph (a)(1)
and the proviso in paragraph (b)(1) of proposed Rule 152 have an almost
identical standard, unlike the general principle of integration in
proposed Rule 152(a)(1), the 30-day safe harbor in paragraph (b)(1)
omits the ``reasonable belief'' standard, as well as the provision
allowing a ``person acting on the issuer's behalf,'' to establish a
pre-existing substantive relationship with the purchaser.\115\
---------------------------------------------------------------------------
\114\ See, e.g., Md. St. Bar Assoc. Letter; and Shearman &
Sterling Letter (suggesting that as proposed, the non-solicitation
and pre-existing relationship conditions to the availability of the
30-day safe harbor are stricter than the corresponding requirements
in the general principle of integration).
\115\ Id.
---------------------------------------------------------------------------
Some commenters recommended alternative approaches to the proposal,
such as: Eliminating the prohibition on general solicitation in Rule
506(b), or combining the exemptions laid out in Rules 506(b) and (c) to
permit open communications to a more limited group of purchasers at a
higher eligibility level; \116\ or permitting serial offerings pursuant
to a new reporting form for exempt offerings.\117\
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\116\ See Invesco Letter.
\117\ See J. Clarke Letter.
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iii. Final Amendments
After considering the comments received, we are adopting the 30-day
non-exclusive safe harbor in Rule 152(b)(1) with modifications
consistent with certain commenters' suggestions. We are also
harmonizing current Securities Act exemptions by replacing their
existing integration provisions with a reference to Rule 152. This safe
harbor will apply to both offerings for which a registration statement
has been filed under the Securities Act and exempt offerings.\118\
---------------------------------------------------------------------------
\118\ Both this safe harbor and the safe harbor in 17 CFR
230.152(b)(3)(iii) (``Rule 152(b)(3)(iii)'') may apply to a
registered offering made more than 30 calendar days after the
termination or completion of any other offering.
---------------------------------------------------------------------------
Several commenters stated that a 90-day safe harbor may be more
effective at preventing issuers from attempting to improperly avoid
Securities Act registration by artificially dividing a single offering
into multiple offerings such that Securities Act exemptions would apply
to the multiple offerings that would not be available for the combined
offering. However, we believe that a 30-day time frame is sufficient to
mitigate concerns that an exempt offering may condition the market for
a subsequent registered offering or undermine the protections of a
subsequent exempt offering. In light of the changes in technology, the
markets, and the securities laws since the adoption of Regulation D in
1982, we believe that a 30-day safe harbor time period will enhance an
issuer's flexibility and expand the capital-raising options available
to issuers under the Securities Act to access capital when needed,
while still providing a sufficient length of time to impede what
integration seeks to prevent: Improperly avoiding registration by
artificially dividing a single offering into multiple offerings.
We are also not persuaded by commenters that suggested that a 90-
day time frame is preferable because it would allow needed time for
investors and the market to assess an offering, in light of the
accelerating speed and consumption of electronically disseminated
information in today's financial marketplace, and especially the
rapidly evolving informational environment since the adoption of a six-
month safe harbor in Regulation D in 1982.\119\ Because of this
informational access, we also think it likely that the effects of any
offers made more than 30 days prior to or after commencement of another
offering would be sufficiently diluted by intervening market
developments so as to render an integration analysis unnecessary.
---------------------------------------------------------------------------
\119\ See Regulation D Adopting Release, at text accompanying
note 18. See also Proposed Revisions of Certain Exemptions from the
Registration Provisions of the Securities Act of 1933 for
Transactions Involving Limited Offers and Sales, Release No. 33-6339
(Aug. 7, 1981) [46 FR 41791 (Aug. 18, 1981)], at Section V.C.1
(referring to uniform six month safe harbor provisions in now
rescinded 17 CFR 230.146(b)(1) and 17 CFR 230.242(b)).
---------------------------------------------------------------------------
Further, as proposed, we are shortening the current six-month time
frame in Rules 502(a), 251(c), 147(g), and 147A(g) to 30 days by
replacing these existing integration provisions with references to Rule
152.\120\ We believe that the 30-day safe harbor time period we are
adopting in Rule 152(b)(1) is appropriate throughout the exemptions
under the Securities Act. We note that a 30-day safe harbor time period
is consistent with several current integration provisions that also
require 30-day minimum waiting periods between offerings. For example,
in conjunction with certain other requirements, existing Rule 155
requires an issuer to wait at least 30 days between an abandoned
private offering and a subsequent registered offering,\121\ or an
abandoned registered offering followed by a subsequent private
offering.\122\ Similarly, 17 CFR 230.255(e) (``Rule 255(e)''), 17 CFR
230.147(h) (``Rule 147(h)'') and 17 CFR 230.147A(h) (``Rule 147A(h)'')
currently provide safe harbors from integration, if an issuer waits at
least 30 days between the last solicitation of interest in a
subsequently abandoned Regulation A offering, or the last offer made
pursuant to Rule 147 or Rule 147A, and the filing of a registration
statement for a subsequent offering.
---------------------------------------------------------------------------
\120\ See infra Section II.A.4.
\121\ See Rule 155(b). As discussed below, new Rule 152(b)(1)
supersedes existing Rule 155, which is being removed and reserved.
\122\ See Rule 155(c).
---------------------------------------------------------------------------
One commenter stated that a comparison with the 30-day safe harbors
set forth in Rule 155, Rule 147(h), Rule 147A(h) and Rule 255(e) was
not an appropriate justification for decreasing all integration safe
harbors to 30 days, but we believe that in light of the changes in
technology, the markets, and the securities laws over time, the
existing safe harbor time periods need to be shortened and updated to
account for the increasing speed and consumption of electronically
disseminated information in today's financial marketplace. As a result,
we believe that the current six-month safe harbor time period in Rules
502(a), 251(c), 147(g), and 147A(g) is longer than necessary to protect
investors and could inhibit issuers, particularly smaller issuers, from
meeting their capital raising needs.\123\
---------------------------------------------------------------------------
\123\ Smaller issuers may face capital raising challenges
because they are seeking relatively small amounts of capital. See,
e.g., Transcript of SEC Small Business Capital Formation Advisory
Committee (Nov. 12, 2019), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-111219.pdf, at 15-62 (discussing
the fact that transaction costs make raising amounts under $750,000
``not worth it''); and Transcript of SEC Small and Emerging
Companies Advisory Committee (Feb. 15, 2017), available at https://www.sec.gov/info/smallbus/acsec/acsec-transcript-021517.pdf, at 144-
145 (indicating that it is easier for issuers to access $100 million
of capital than amounts under $10 million).
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[[Page 3509]]
As proposed, we are also removing and reserving Rule 155. The new
safe harbors in Rule 152(b) will apply when determining whether
integration of abandoned offerings with subsequent offerings is
required, superseding the current requirements of Rule 155.
Specifically, for an abandoned private offering followed by a
registered offering that would currently be covered by Rule 155(b), an
issuer could look to the safe harbors in new Rule 152(b)(1) or Rule
152(b)(3). For an abandoned registered offering followed by a private
offering that would currently be covered by Rule 155(c), an issuer
could look to the safe harbors in new Rule 152(b)(1) or Rule 152(b)(4).
As a result, we believe the lists of conditions in Rules 155(b) and (c)
are no longer warranted and may be eliminated without compromising
investor protections for the same reasons that support our
determination to reduce the integration safe harbors from six months to
30 days.
In addition, we are adopting as proposed an amendment to Rule
506(b) to limit the number of non-accredited investors purchasing in
Rule 506(b) offerings to no more than 35 within a 90 calendar day
period. As we stated in the Proposing Release, we are mindful that a
shortened integration time frame could allow issuers to undertake
serial Rule 506(b) exempt offerings each month to up to 35 non-
accredited investors in reliance on a 30-day safe harbor, resulting in
unregistered sales to a significant number of non-accredited investors
in a year.\124\ Several commenters echoed this concern.\125\ As the
Commission stated in 2007, we believe that improper reliance on
exemptions from registration harms investors by depriving them of the
benefits of full and fair disclosure and the civil remedies that flow
from registration.\126\ While recent data suggests that shortening the
safe harbor to 30-days is not likely to result in a large increase in
the number of non-accredited investors participating in Rule 506(b)
offerings,\127\ we have determined that the rule change will prevent
issuers from using the new 30-day safe harbor to effectively conduct a
public distribution of securities to non-accredited investors.
---------------------------------------------------------------------------
\124\ See Proposing Release, at text accompanying note 93. See
also Regulation D 2007 Proposing Release, at Section II.C.1.
\125\ See Better Markets Letter; CFA Letter; CFA Institute
Letter; CII Letter; R. Rutkowski Letter; and Md. St. Bar Assoc.
Letter.
\126\ See Regulation D 2007 Proposing Release, at Section
II.C.1.
\127\ Based on the analysis of Form D data on initial Form D
filings, we estimate that, in 2019 among all Rule 506(b) offerings
by issuers other than pooled investment funds, between approximately
4.45 percent and 9 percent of offerings included non-accredited
purchasers. This estimated range is based on Division of Economic
and Risk Analysis staff analysis of data in initial Form D filings,
excluding pooled investment funds. In particular, the 4.45 percent
estimate is based on offerings that report that at least one non-
accredited investor already has invested in the offering as of the
Form D filing and may represent a lower bound because it relies on
available Form D filings, and because a final Form D upon the
conclusion of an offering is not required to be filed. If we also
include Rule 506(b) offerings on Form D that accept non-accredited
investors but reported having zero non-accredited investors in the
initial filing, the estimated percentage of offerings involving
accredited investors during 2019 is approximately 9 percent, which
may be viewed as an upper bound estimate.
---------------------------------------------------------------------------
Finally, in a change from the proposal, we are replacing the
conditions set forth in proposed Rule 152(b)(1), which were similar,
but not identical, to the conditions in proposed Rule 152(a)(1) with
language clarifying that for an exempt offering for which general
solicitation is not permitted that follows by 30 calendar days or more
an offering that allows general solicitation, the provisions of Rule
152(a)(1) shall apply. This means that such an issuer must have a
reasonable belief, based on the facts and circumstances, with respect
to each purchaser in the exempt offering prohibiting general
solicitation, that the issuer (or any person acting on the issuer's
behalf) either did not solicit such purchaser through the use of
general solicitation, or established a substantive relationship with
such purchaser prior to the commencement of the exempt offering
prohibiting general solicitation.
We also stress that this safe harbor may not be used as a means to
circumvent the prohibition on general solicitation in an exempt
offering to which such prohibition applies. That is, regardless of
whether an issuer meets the requirements of the 30-day safe harbor from
integration, an issuer conducting an offering of securities under an
exemption prohibiting general solicitation, such as Rule 506(b), must
still ensure that it has not engaged in a general solicitation, and
meets the other terms and conditions of the relevant offering
exemption. We are not persuaded by commenters who recommended that such
conditions to the availability of the 30-day safe harbor are not
necessary, given the requirements of the specific exemptions relied
on.\128\
---------------------------------------------------------------------------
\128\ See Shearman & Sterling Letter (stating that an issuer
should not have to comply with the conditions to the 30-day safe
harbor, because ``an issuer would still need to comply with the
exemption relied upon in connection with the subsequent offering,
but not as part of the integration analysis.'').
---------------------------------------------------------------------------
We also note that if an issuer waits less than 30 days after
terminating or completing an offering before commencing a subsequent
offering, and therefore cannot rely on the safe harbor in Rule
152(b)(1), it may still avoid integration if it meets the terms and
conditions of the general principle of integration in Rule 152(a).
b. Rule 701, Employee Benefit Plans and Regulation S (Rule 152(b)(2))
Certain Commission rules currently provide that offers and sales of
securities made pursuant to Rule 701 and other employee benefit plans
will not be integrated with certain other offerings.\129\ Similarly,
the Commission has stated that offshore transactions made in compliance
with Regulation S will not be integrated with registered domestic
offerings or domestic offerings that satisfy the requirements for an
exemption from registration under the Securities Act.\130\
---------------------------------------------------------------------------
\129\ The safe harbor integration provisions in current Rule
251(c), Rules 147(g), and 147A(g) for these offers or sales do not
cover offers or sales concurrent with another offering. See also 17
CFR 230.701(f) (``Rule 701(f)''). However, the six-month safe harbor
in Rule 502(a) provides an exception to the required six-month
separation between offerings for 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 that occur during the six-month
time periods under an employee benefit plan, as defined in Rule 405
under the Securities Act.
\130\ See Offshore Offers and Sales, Release No. 33-6863 (Apr.
24, 1990) [55 FR 18306 (May 2, 1990)] (``Offshore Offers and Sales
Release'') at Section III.C.1.
---------------------------------------------------------------------------
i. Proposed Amendments
The Commission proposed Rule 152(b)(2) to provide a non-exclusive
safe harbor for all offers and sales made in compliance with Rule
701,\131\ pursuant to an employee benefit plan, or made in compliance
with Regulation S,\132\
[[Page 3510]]
regardless of when these offerings occur, including offers and sales
made concurrently with other offerings.\133\
---------------------------------------------------------------------------
\131\ The Rule 701 exemption is only available to issuers that
are not subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act. See 17 CFR 230.701(b). The proposed safe harbor
is in accord with Rule 701(f), which provides that an offering under
Rule 701 will not be integrated with any other offering, as offers
and sales exempt under Rule 701 are deemed to be a part of a single,
discrete offering and are not subject to integration with any other
offers or sales, whether registered under the Securities Act or
otherwise exempt from the registration requirements of the
Securities Act.
\132\ Proposed Rule 152(b)(2) would codify the position that
``[o]ffshore transactions made in compliance with Regulation S will
not be integrated with registered domestic offerings or domestic
offerings that satisfy the requirements for an exemption from
registration under the Securities Act.'' See Offshore Offers and
Sales Release, at Section III.C.1.
\133\ The safe harbor integration provisions in current Rule
251(c), Rules 147(g) and 147A(g) for these offers or sales do not
cover offers or sales concurrent with another offering.
---------------------------------------------------------------------------
In conjunction with the proposed safe harbor, the Commission
proposed to amend the definition of ``directed selling efforts'' in 17
CFR 230.902 (``Rule 902'' of Regulation S) in order to address concerns
raised by market participants about whether it is possible to conduct
concurrent Regulation S and Rule 506(c) offerings, particularly when
the offerings are conducted using the internet, and if so, how to
comply with the requirement that separate offering materials be used in
each offering. Under the proposal, an issuer that engages in general
solicitation activity under an exemption that allows general
solicitation would not be considered to have engaged in ``directed
selling efforts'' in connection with an offering under Regulation S, if
the general solicitation activity is not undertaken for the purpose of
conditioning the market in the United States for any of the securities
being offered in reliance on Regulation S. This would be a narrowing of
the current definition of ``directed selling efforts,'' which covers
any activity undertaken for the purpose of, or that could reasonably be
expected to have the effect of, conditioning the market in the United
States for the Regulation S securities.\134\
---------------------------------------------------------------------------
\134\ See 17 CFR 230.902(c)(1).
---------------------------------------------------------------------------
The Commission also proposed Rule 906 of Regulation S, applicable
to securities offered and sold in a transaction subject to the
conditions of 17 CFR 230.901 or 903, that would require an issuer that
engages in general solicitation activity covered by the proposed
exclusion from the definition of ``directed selling efforts'' to
prohibit resales to U.S. persons (or for the account or benefit of a
U.S. person) of the Regulation S securities for a period of six months
from the date of sale, except for sales to QIBs or IAIs. The proposed
six-month limitation on resales would apply regardless of the
Regulation S category applicable to the securities, and
notwithstanding, and in addition to, any applicable distribution
compliance period.
ii. Comments
Commenters that addressed the proposal supported adopting the
integration safe harbor for all offerings made in compliance with Rule
701, pursuant to an employee benefit plan, or in compliance with
Regulation S, as proposed in Rule 152(b)(2).\135\ No commenters opposed
these proposed amendments. Several commenters asked the Commission to
specifically reference Rule 701 in Rule 152(b)(2).\136\
---------------------------------------------------------------------------
\135\ See, e.g., J. Clarke Letter; Md. St. Bar Assoc. Letter
(noting that the rationale for exempting offers and sales under Rule
701 is also applicable to offers and sales under employee benefit
plans generally); W. Hubbard Letter; D. Burton Letter; CrowdCheck
Letter; Shearman & Sterling Letter; and NASAA Letter.
\136\ See, e.g., W. Hubbard Letter; D. Burton Letter (suggesting
that referencing Rule 701 clarifies the Commission's intent with
respect to the application of the integration doctrine to offerings
under that rule); and CrowdCheck Letter.
---------------------------------------------------------------------------
Several commenters supported codifying an explicit integration safe
harbor for offers and sales made in compliance with Regulation S.\137\
One of these commenters stated that including this safe harbor in
proposed Rule 152 would enhance legal certainty and promote more
efficient capital raising.\138\
---------------------------------------------------------------------------
\137\ See, e.g., SIFMA Letter; Shearman & Sterling Letter; Md.
St. Bar Assoc. Letter; and ABA Letter (supporting the codification,
in proposed Rule 152(b)(2), of the Commission's guidance in the 1990
Regulation S Adopting Release that ``[o]ff shore transactions made
in compliance with Regulation S will not be integrated with
registered domestic offerings or domestic offerings that satisfy the
requirements for an exemption from registration under the Securities
Act.'') (citing Offshore Offers and Sales Release, at Section
III.C.1).
\138\ See Shearman & Sterling Letter.
---------------------------------------------------------------------------
Some commenters, however, opposed the proposed revisions to the
definition of ``directed selling efforts'' in Regulation S to exclude
activities that are ``reasonably expected'' to condition the U.S.
market for the Regulation S securities.\139\ One of these commenters
questioned the feasibility of determining what activities would
condition the market, and what problems preventing such activities
would avoid.\140\ Another of these commenters raised concerns that the
proposed changes would restrict the current market practice of
concurrently making Regulation S and 17 CFR 230.144A (``Rule 144A'')
offers.\141\ This commenter also raised concerns about the discussion
in the Proposing Release with respect to widely accessible internet or
similar communications in connection with concurrent Regulation S and
Rule 506(c) offerings, noting that the conclusion that such
communications would be deemed directed selling efforts would
effectively preclude combining an exempt offering that permits general
solicitation with a contemporaneous offshore offering under Regulation
S.\142\
---------------------------------------------------------------------------
\139\ See Shearman & Sterling Letter; ABA Letter; and CrowdCheck
Letter.
\140\ See CrowdCheck Letter.
\141\ See Shearman & Sterling Letter (expressing concern that if
communications that may be considered general solicitation in Rule
144A offerings are presumed to constitute directed selling efforts
that trigger a six-month distribution compliance period, issuers
would in many cases have to forgo the concurrent offshore offering
because imposing a distribution compliance period is often not
practicable).
\142\ See id.
---------------------------------------------------------------------------
One commenter expressed support for an amendment to Rule 902 as a
means to address uncertainty among market participants regarding
whether it is possible to conduct concurrent Regulation S and Rule
506(c) offerings, but recommended that the rule expressly provide that
the prohibition on directed selling efforts is not applicable when the
Regulation S offering is made concurrently with an offering in reliance
on an exemption that permits general solicitation, so long as the
issuer does not engage in such general solicitation for the purpose of
conditioning the market in the United States for any securities being
offered in reliance on Regulation S or registered under the Securities
Act.\143\ Other commenters stated that they had not experienced
significant uncertainty in determining the absence or presence of
directed selling efforts in connection with exempt offerings permitting
general solicitation.\144\
---------------------------------------------------------------------------
\143\ See Fried Frank Letter (recommending that the Commission
clarify that the issuer is not required to provide evidence for its
intent, and also recommending that the Commission state that
concurrent Rule 506(c) and Regulation S offerings will not be
integrated even if the issuer uses the same (or substantially
identical) offering materials).
\144\ See Shearman & Sterling Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------
Commenters were divided in their support for,\145\ or opposition
to,\146\ the proposed Rule 906 resale restrictions. Some commenters
opposing the proposed amendment expressed concern that it would be
difficult to implement or add unnecessary complexity to Regulation
S.\147\ Commenters also noted that the existing distribution compliance
period in Regulation S already protects against the
[[Page 3511]]
risk of flowback of Regulation S securities to the United States.\148\
Another commenter opposing the proposed rule recommended that the
resale limitation should limit resales in the first year to QIBs and
IAIs to align the rule with Regulation Crowdfunding.\149\
---------------------------------------------------------------------------
\145\ See Md. St. Bar Assoc. Letter (expressing support for the
proposal to codify a safe harbor for offers and sales made in
compliance with Regulation S and noting with favor proposed Rule 906
as a means to prevent flowback of securities to the United States);
and Republic Letter (supporting the proposal as a whole with respect
to Regulation S offerings).
\146\ See J. Clarke Letter; SIFMA Letter; Fried Frank Letter;
CrowdCheck Letter; and Shearman & Sterling Letter.
\147\ See, e.g., ABA Letter; SIFMA Letter (expressing concern
that issuers and other offering participants would find the
requirements of proposed Rule 906 burdensome and difficult to
implement, and would simply avoid relying on exemptions that allow
for general solicitation); and CrowdCheck Letter.
\148\ See SIFMA Letter (stating its belief that proposed Rule
906 is unnecessary and inconsistent with prior Commission guidance
on Regulation S, and that Regulation S already applies a
distribution compliance period to protect against flowback that is
calibrated, in duration and certain other respects, based on the
likelihood of flowback); CrowdCheck Letter (questioning whether
flowback was likely to occur given the resale restrictions); and ABA
Letter.
\149\ See J. Clarke Letter.
---------------------------------------------------------------------------
iii. Final Amendments
After considering the comments, we are adopting new Rule 152(b)(2),
to provide a non-exclusive safe harbor for all offers and sales made in
compliance with Rule 701, pursuant to an employee benefit plan, or in
compliance with Regulation S, regardless of when these offerings occur,
including offers and sales made concurrently with other offerings. For
the reasons discussed below, we have decided not to adopt the proposed
changes to Regulation S itself.
Offers and sales pursuant to Rule 701 and employee benefit plans
are limited to investors, such as employees, consultants, and advisors,
with whom the issuer has written compensation plans or agreements. We
continue to believe, given the relationship between these investors and
the issuer, that these offers and sales do not raise the same level of
investor protection concerns as offerings to other investors.
With respect to Regulation S offerings, Rule 152(b)(2) codifies the
long-standing Commission position that ``[o]ffshore transactions made
in compliance with Regulation S will not be integrated with registered
domestic offerings or domestic offerings that satisfy the requirements
for an exemption from registration under the Securities Act.'' \150\
Therefore, as noted in the Proposing Release, concurrent offshore
offerings that are conducted in compliance with Regulation S are not
currently, and will not be, integrated with registered domestic
offerings or domestic offerings that are conducted in compliance with
any exemption.\151\ When determining the availability of this safe
harbor, it will still be necessary to assess each transaction
separately for compliance with the applicable exemption.
---------------------------------------------------------------------------
\150\ See Offshore Offers and Sales Release, at Section III.C.1.
\151\ In addressing the offshore transaction component of the
Regulation S safe harbor, the Commission stated, ``Offers made in
the United States in connection with contemporaneous registered
offerings or offerings exempt from registration will not preclude
reliance on the safe harbors.'' Id. at note 36. Likewise, in
addressing directed selling efforts, the Commission stated,
``Offering activities in contemporaneous registered offerings or
offerings exempt from registration will not preclude reliance on the
safe harbors.'' Id. at note 47. See also Rule 500(g) of Regulation D
(formerly Preliminary Note No. 7 to Regulation D) (``Regulation S
may be relied upon for such offers and sales even if coincident
offers and sales are made in accordance with Regulation D inside the
United States.''); and Note to Rule 502(a) (``Generally,
transactions otherwise meeting the requirements of an exemption will
not be integrated with simultaneous offerings being made outside the
United States in compliance with Regulation S.'').
---------------------------------------------------------------------------
In light of certain perceived concerns about the ability of an
issuer to conduct concurrent Regulation S and Rule 506(c) offerings,
particularly when the offerings are conducted using the internet, we
proposed an amendment to the definition of ``directed selling efforts''
in Rule 902, and related proposed Rule 906, which would have applied to
issuers relying on the amended definition. After considering the
comments received, we have determined not to adopt the proposed
amendments to Regulation S. We are persuaded by commenters who asserted
that the existing regulatory framework appropriately addresses concerns
relating to the risk of flowback of Regulation S securities to the
United States or the use of general solicitation in an exempt offering
to condition the market in the United States for the Regulation S
securities and acknowledge commenters who expressed concern that the
proposal may disrupt existing market practices.
In light of the concerns expressed by commenters about the
implications of the proposed amendments and the related discussion in
the Proposing Release, we are also clarifying that we do not believe
that general solicitation activity for exempt domestic offerings would
preclude reliance on Regulation S for concurrent offshore offerings,
and reaffirm our existing guidance with respect to concurrent
Regulation S and domestic offerings.\152\
---------------------------------------------------------------------------
\152\ See id.
---------------------------------------------------------------------------
We are aware that issuers have conducted domestic exempt or
registered offerings concurrently with a Regulation S offering under
our existing guidance. Compliance with the terms of both Regulation S
and another applicable exemption, such as Rule 506(c), will depend on
the facts and circumstances of a particular situation. For example, the
use of the same website to solicit U.S. investors under Rule 506(c) and
offshore investors under Regulation S could raise concerns about the
issuer's compliance with the prohibition on directed selling efforts in
Regulation S because the offering material on the website could be
deemed to have the effect of conditioning the market in the United
States. In such situations, we believe an issuer can take certain steps
to distinguish the Regulation S and domestic offering materials, as the
Commission has previously discussed.\153\
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\153\ See Statement of the Commission Regarding Use of internet
websites to Offer Securities, Solicit Securities Transactions, or
Advertise Investment Services Offshore, Release No. 33-7516 (Mar.
23, 1998) [63 FR 14806 (Mar. 27, 1998)].
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c. Subsequent Registered Offerings (Rule 152(b)(3))
Existing Rule 152 provides that the phrase ``transactions by an
issuer not involving any public offering'' in Section 4(a)(2) shall be
deemed to apply to transactions that did not involve any public
offering at the time of the unregistered offering even if the issuer
decides subsequently to make a public offering and/or files a
registration statement. In 2007, the Commission clarified that an
issuer's contemplation of filing a Securities Act registration
statement at the same time that it is conducting an unregistered
offering under Section 4(a)(2) would not cause the Section 4(a)(2)
exemption to be unavailable for that unregistered offering.\154\ So
long as all of the applicable requirements of the exemption prohibiting
general solicitation were met for offers and sales that occurred prior
to the use of general solicitation in connection with the registered
public offering, the offers and sales of the exempt offering
prohibiting general solicitation would not be integrated with the
subsequent registered offering.\155\ Once the public offering is
commenced or the registration statement is filed, the safe harbor in
existing Rule 152 is no longer available for any concurrent or
subsequent offers or sales made in connection with an exempt offering
prohibiting general solicitation.
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\154\ See Regulation D 2007 Proposing Release, at text
accompanying note 124. See also Concept Release, at text
accompanying note 499.
\155\ In these circumstances, companies should be careful to
avoid any pre-filing communications regarding the contemplated
public offering that could render the Section 4(a)(2) exemption
unavailable for what would be an otherwise exempt private placement.
See Regulation D 2007 Proposing Release, at note 124.
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i. Proposed Amendments
The Commission proposed Rule 152(b)(3) to provide a non-exclusive
safe harbor for certain offerings made prior to the commencement of an
offering for which a Securities Act registration statement has been
filed, thus
[[Page 3512]]
permitting companies to conduct certain offerings shortly before the
filing of a Securities Act registration statement without concern that
the two offerings would be integrated. Proposed Rule 152(b)(3)(i) would
provide that an offering for which a Securities Act registration
statement has been filed will not be integrated with terminated or
completed offerings for which general solicitation is not permitted.
Proposed Rule 152(b)(3)(ii) would provide that an offering for which a
Securities Act registration statement has been filed will not be
integrated with a terminated or completed offering for which general
solicitation is permitted made only to QIBs and IAIs. Finally, proposed
Rule 152(b)(3)(iii) would make clear that an offering for which a
registration statement has been filed will not be integrated with any
offering for which general solicitation is permitted that terminated or
completed more than 30 calendar days prior to the registered offering.
ii. Comments
No commenters opposed the safe harbor in proposed Rule 152(b)(3),
and several commenters supported adopting proposed Rule
152(b)(3)(i).\156\ In support, one commenter noted that the proposed
safe harbor ``appears to be generally consistent with existing Rule
152, updated mainly to account for the fact that general solicitation
is now permitted for offerings conducted under Rule 506(c).'' \157\
Another commenter asked the Commission not to include the 30-day
cooling-off period contemplated as a condition for use of proposed Rule
152(b)(3)(iii), because the commenter believed it undercuts the
objective of the rules to ``encourage use of registration to the
maximum extent possible.'' \158\ Alternatively, the commenter suggested
that proposed Rule 152(b)(3)(ii) should be revised to refer to a
terminated or completed offering for which general solicitation is
permitted in which sales are made only to the specified institutional
investors.\159\
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\156\ See, e.g., Md. St. Bar Assoc. Letter; W. Hubbard Letter;
and NASAA Letter (not objecting to the proposed safe harbor).
\157\ See Md. St. Bar Assoc. Letter.
\158\ See ABA Letter (stating that the 30-day cooling-off period
serves ``no real practical purpose,'' noting that ``[i]n these
situations, investors in the registered offering will have the
benefit of the liability provisions set forth in Section 11 and
12(a)(2) of the Securities Act.'').
\159\ See id.
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iii. Final Amendments
After considering these comments, we are adopting new Rule
152(b)(3), as proposed, providing a non-exclusive safe harbor for
certain offerings made prior to the commencement of an offering for
which a Securities Act registration statement has been filed. New 17
CFR 230.152(b)(3)(i) (``Rule 152(b)(3)(i)'') provides that an offering
for which a Securities Act registration statement has been filed will
not be integrated with terminated or completed offerings for which
general solicitation is not permitted.\160\ New 17 CFR
230.152(b)(3)(ii) (``Rule 152(b)(3)(ii)'') provides that an offering
for which a Securities Act registration statement has been filed will
not be integrated with a terminated or completed offering for which
general solicitation is permitted made only to QIBs and IAIs.\161\
Finally, new Rule 152(b)(3)(iii) provides that an offering for which a
registration statement under the Securities Act has been filed will not
be integrated with any offering for which general solicitation is
permitted that terminated or completed more than 30 calendar days prior
to the registered offering.\162\
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\160\ New Rule 152(b)(3)(i) builds on the Commission's prior
integration guidance relating to offerings for which general
solicitation is not permitted. Offers and sales preceding registered
offerings that do not involve general solicitation are generally not
the type of offerings that, when taken together, appear to be
susceptible to concerns relating to the prior offers and sales
conditioning the market for the registered offering.
\161\ New Rule 152(b)(3)(ii) builds on current Rule 255(e) of
Regulation A, and current Rules 147(h) and 147A(h), which provide
that offerings limited to QIBs and IAIs are not integrated with a
subsequently filed registered offering. Similarly, where an issuer
has solicited interest in a contemplated, but subsequently abandoned
Regulation A offering only to QIBs or IAIs, the abandoned Regulation
A offering would not be subject to integration with a subsequently
filed registered offering. We do not believe it is appropriate, as
suggested by a commenter, that we revise this provision to refer
only to offerings in which sales are made to QIBs and IAIs, as to do
so would expand the scope of this safe harbor to effectively permit
broad use of general solicitation at any time, including immediately
prior to commencement of a registered offering, so long as the
issuer limits sales in the exempt offerings to the specified
institutional investors, thereby raising concerns about the prior
offers conditioning the market for the registered offering.
\162\ New Rule 152(b)(3)(iii) will work in coordination with new
Rule 152(b)(1) to clarify the application of the 30-day safe harbor
to subsequent registered offerings. As discussed with respect to the
non-exclusive safe harbor in new Rule 152(b)(1) in Section II.A.2,
if an issuer files a registration statement under the Securities Act
less than 30 calendar days after a terminated or completed offering
for which general solicitation is permitted, although new Rule
152(b)(3)(iii) would not be available, integration would depend on
the availability of the general principle of integration in Rule
152(a).
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We continue to believe that capital raising around the time of a
public offering, in particular an initial public offering, including
immediately before the filing of a registration statement, is often
critical if issuers are to have sufficient funds to continue to operate
while the public offering process is ongoing.\163\ We believe that Rule
152 as currently written is unnecessarily restrictive, given the
changing financial requirements and circumstances of issuers,
particularly smaller issuers, immediately prior to a registered public
offering and may be revised without compromising investor protections.
A lengthy waiting period prior to a registered offering combined with a
potentially uncertain registration process are particular concerns for
smaller issuers contemplating a registered public offering, whose
financing needs are often erratic and unpredictable, due in part to
limited amounts of working capital, cash reserves, and access to
credit.\164\ However, we are not persuaded by a commenter's suggestion
that we eliminate the 30-day period applicable to an offering for which
a registration statement under the Securities Act has been filed
subsequent to a terminated or completed offering for which general
solicitation is permitted. New Rule 152(b)(3)(iii) does not impose an
additional requirement beyond that set forth in the 30-day safe harbor
of new Rule 152(b)(1), but rather is meant to clarify the application
of that provision to subsequent registered offerings. As discussed
above, we believe a 30-day time frame is sufficient to mitigate
concerns that an exempt offering may condition the market for a
subsequent registered offering. For this reason, we are adopting new
Rule 152(b)(3) as proposed to permit issuers to conduct offerings
shortly before the filing of a Securities Act registration statement
without concern that the two offerings would be integrated.\165\
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\163\ See Regulation D 2007 Proposing Release, at Section II.C.
\164\ See, e.g., Final Report of the Advisory Committee on
Smaller Public Companies to the U.S. Securities and Exchange
Commission (Apr. 23, 2006), available at https://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf, at 96. See also Regulation D
2007 Proposing Release, at note 116 and accompanying text.
\165\ We note that, as discussed above, the plan or scheme to
evade restrictions in the introductory language to Rule 152 apply to
all the provisions of new Rule 152, including the safe harbors in
Rule 152(b), as well as the general principle of integration in new
Rule 152(a) when the safe harbors in new Rule 152(b) are not
available. In this regard, none of the provisions of new Rule 152
may be used as a means to circumvent the communication restrictions
prior to a registered offering, for example, for communications
occurring within 30 days of a registered offering. Section 5(c) of
the Securities Act prohibits any written or oral offers prior to the
filing of a registration statement. Generally, written and oral
offers prior to filing a registration statement are prohibited,
absent an exemption. Rule 163B, for example, provides an exemption
to issuers, and those authorized to act on their behalf, to gauge
market interest in a possible initial public offering or other
registered securities offering through discussions with certain
institutional investors prior to, or following, the filing of a
registration statement.
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[[Page 3513]]
d. Offers or Sales Preceding Exempt Offerings Permitting General
Solicitation (Rule 152(b)(4))
Rule 251(c) of Regulation A, and the intrastate offering safe
harbor and exemption in Rule 147(g) and Rule 147A(g), respectively,
currently provide that offers and sales made pursuant to these
exemptive provisions and safe harbors that permit general solicitation
will not be integrated with terminated or completed offers and sales
made prior to the commencement of these exempt offerings.\166\
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\166\ These integration provisions also provide that offers and
sales subsequent to these exempt offerings will not be integrated if
they are: (1) Registered under the Securities Act; (2) exempt from
registration under Rule 701; (3) made pursuant to an employee
benefit plan; (4) exempt from registration under Regulation S; (5)
exempt from registration under Section 4(a)(6) of the Securities
Act; (6) made more than six months after completion of the offering;
or (7) limited to QIBS and IAIs. See Rule 251(c); Rule 255(e); Rule
147(g) and (h); and Rule 147A(g) and (h).
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i. Proposed Amendments
The Commission proposed Rule 152(b)(4) to provide a safe harbor for
all offers and sales made in reliance on an exemption for which general
solicitation is permitted that follow any other terminated or completed
offering. The proposed safe harbor would expand the current integration
safe harbors in Regulation A and Rules 147 and 147A to include
offerings relying on: Regulation Crowdfunding; Rules 504(b)(1)(i),
(ii), or (iii) that, depending on State registration requirements,
permit general solicitation; and Rule 506(c).
ii. Comments
Several commenters supported the safe harbor in proposed Rule
152(b)(4) that would apply to any offering in reliance on an exemption
for which general solicitation is permitted made subsequent to an
offering that has been terminated or completed,\167\ while others
opposed the proposed safe harbor.\168\
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\167\ See W. Hubbard Letter; D. Burton Letter; CrowdCheck Letter
(expressing concern about issuer compliance with disclosure
requirements of Regulation Crowdfunding); and NASAA Letter (not
objecting to the proposed safe harbor).
\168\ See Md. St. Bar Assoc Letter; and CFA Letter.
---------------------------------------------------------------------------
One commenter supporting the proposal recommended that the
integration safe harbor should be the same whether the new or
terminated offering involves general solicitation or not.\169\ Another
commenter recommended an additional safe harbor providing that any
offering commenced in reliance on an exemption that does not permit
general solicitation may be continued in reliance on an exemption that
does permit general solicitation.\170\ According to this commenter,
such a safe harbor would be particularly beneficial to issuers
commencing an offering in reliance on Rule 506(b) and desiring to
continue it in reliance on Rule 506(c) and would permit the issuer to
use the same or substantially identical materials to continue the
offering in reliance on Rule 506(c).\171\ In contrast, one commenter
opposing the safe harbor in proposed Rule 152(b)(4) suggested that
permitting a Rule 506(c) offering to commence immediately following the
completion of a Rule 506(b) offering for the same securities at the
same price is essentially like permitting general solicitation in a
Rule 506(b) offering conducted in two phases.\172\ One commenter
questioned the Commission's basis for claiming that the exemptions
allowing general solicitation are sufficiently protective.\173\
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\169\ See D. Burton Letter.
\170\ See Fried Frank Letter (stating that this additional safe
harbor would be consistent with the Commission's guidance in its
2013 release adopting Rule 506(c)) (citing Eliminating the
Prohibition Against General Solicitation and General Advertising in
Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 10,
2013) [78 FR 44771 (July 24, 2013)] (``Rule 506(c) Adopting
Release'')).
\171\ See id.
\172\ See Md. St. Bar Assoc. Letter.
\173\ See CFA Letter (additionally expressing concern over fraud
in the Regulation A market and non-compliance in the Regulation
Crowdfunding market). See also CrowdCheck Letter.
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iii. Final Amendments
After considering comments, we are adopting new Rule 152(b)(4), as
proposed, to provide a non-exclusive safe harbor for all offers and
sales made in reliance on an exemption for which general solicitation
is permitted that follow any other terminated or completed offering.
This new safe harbor expands on the current integration safe harbors in
Regulation A and Rules 147 and 147A to include offerings relying on:
Regulation Crowdfunding; Rules 504(b)(1)(i), (ii), or (iii) that,
depending on State registration requirements, permit general
solicitation; and Rule 506(c). The following table summarizes the types
of offerings that will not be integrated under this new safe harbor:
Table 3--Summary of Types of Offerings Not Integrated Under the Safe
Harbor
------------------------------------------------------------------------
Offering 1 Offering 2
------------------------------------------------------------------------
Any offering, which includes: Exempt offering permitting
Exempt offering permitting general general solicitation,
solicitation, including: including:
Regulation A. Regulation A.
Regulation Crowdfunding. Regulation
Rule 147 or 147A. Crowdfunding.
Rules 504(b)(1)(i), (ii), or Rule 147 or 147A.
(iii). Rules 504(b)(1)(i),
Rule 506(c). (ii), or (iii).
Rule 506(c).
Exempt offering prohibiting general
solicitation, including:
17 CFR 230.504(b)(1).
Rule 506(b).
Section 4(a)(2).
Securities Act registered offering.
------------------------------------------------------------------------
Exempt offerings that permit general solicitation and follow other
offers and sales are generally not the type of offerings that appear to
be susceptible to concerns about the prior offers and sales
conditioning the market for the subsequent exempt offering. We do not
believe integrating any type of offers or sales with a subsequent
exempt offering permitting general solicitation, such as an offering
pursuant to Regulation A, Rule 147, Rule 147A, Rules 504(b)(1)(i),
(ii), or (iii), Rule 506(c), or Regulation Crowdfunding, is necessary
to further investor protection.
[[Page 3514]]
In response to a commenter's request,\174\ we are providing
guidance with respect to an issuer's ability to rely on Rule 152(b)(4)
with respect to an offering that was commenced in reliance on an
exemption that does not permit general solicitation, but that the
issuer wishes to continue in reliance on an exemption that does permit
general solicitation. We are of the view that an issuer may rely on the
safe harbor in new Rule 152(b)(4) if, for example, the issuer commences
an offering under Rule 506(b) and thereafter engages in general
solicitation in reliance on Rule 506(c) so long as once the issuer
engages in general solicitation, it relies on Rule 506(c) for all
subsequent sales, thereby effectively terminating the Rule 506(b)
offering, including by selling exclusively to accredited investors and
taking reasonable steps to verify the accredited investor status of
each purchaser.\175\ The use of general solicitation in reliance on
Rule 506(c) will not affect the exempt status of prior offers and sales
of securities made in reliance on Rule 506(b).\176\ It is also not
necessary for an issuer to use different offering materials for
offerings that rely on different exemptions, so long as the issuer
satisfies the disclosure and other requirements of each applicable
exemption.
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\174\ See Fried Frank Letter.
\175\ We do not believe that this approach will permit general
solicitation in a Rule 506(b) offering conducted in two phases, in
light of the significant investor protections of Rule 506(c) that
become applicable as soon as the issuer commences general
solicitation activity.
\176\ This guidance is consistent with the Commission's 2013
guidance in implementing Rule 506(c). See Rule 506(c) Adopting
Release, at Section II.A.3.
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3. Commencement, Termination, and Completion of Offerings (Rules 152(c)
and 152(d))
Existing rules under the Securities Act do not clearly define
commencement or completion with respect to exempt and registered
offerings, although several rules state when exempt offerings under
Regulation A \177\ and Regulation Crowdfunding terminate under certain
circumstances,\178\ as well as when registered offerings
terminate.\179\
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\177\ See, e.g., 17 CFR 230.257(a) (``Rule 257(a)'') (requiring
filing of ``an exit report on [17 CFR 239.94 (``Form 1-Z'')] not
later than 30 calendar days after the termination or completion of
[a Regulation A/Tier I] offering.''); 17 CFR 230.259(b) (``Rule
259(b)'') (declaration by the Commission that the offering statement
has been abandoned); and 17 CFR 230.251(d)(3)(i)(F) (``Rule
251(d)(3)(i)(F)'') (required termination of the offering by the
third anniversary of the initial qualification date of the offering
statement).
\178\ See, e.g., 17 CFR 230.201(g) (``Rule 201(g)'') (disclosure
required of the ``target offering amount and the deadline to reach
the target offering amount''); and 17 CFR 227.304(b) (``Rule
304(b)'') (notice provided by the Regulation Crowdfunding
intermediary of the early completion of an offering).
\179\ See, e.g., 17 CFR 230.477 (``Rule 477'') (withdrawal of
the registration statement after application granted by the
Commission); 17 CFR 230.479 (``Rule 479'') (order by the Commission
that the registration statement has been abandoned); and 17 CFR
230.415(a)(5) (``Rule 415(a)(5)'') (on the third anniversary of the
initial effective date of the registration statement).
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a. Proposed Amendments
To provide greater certainty to issuers as to the availability of
the safe harbors under proposed Rule 152(b) that require the prior
offering to be ``terminated or completed,'' \180\ the Commission
proposed Rule 152(c) to define ``terminated or completed'' in the
context of Rule 152 as follows:
---------------------------------------------------------------------------
\180\ See proposed Rules 152(b)(1), (b)(3), and (b)(4).
---------------------------------------------------------------------------
Offerings of securities made under Section 4(a)(2),
Regulation D, Rule 147 or 147A would be considered ``terminated or
completed,'' on the later of: (i) The date the issuer entered into a
binding commitment to sell securities under the offering (subject only
to conditions outside of the investor's control); or (ii) the date the
issuer and its agents ceased efforts to make further offers to sell the
issuer's securities.\181\
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\181\ Efforts to sell securities through the offering include,
but are not limited to, the distribution of any offering materials.
For purposes of exemptions permitting the use of general
solicitation, the cessation of selling efforts would require the
removal of any publicly available general solicitation materials, to
the extent possible.
---------------------------------------------------------------------------
Offerings under Regulation A would be considered
``terminated or completed'': (i) Upon the withdrawal of an offering
statement under 17 CFR 230.259(a) (``Rule 259(a)'' of Regulation A);
(ii) upon the filing of 17 CFR 239.94 (``Form 1-Z'') with respect to
that offering; (iii) upon the declaration by the Commission that the
offering statement has been abandoned under Rule 259(b) of Regulation
A; or (iv) on the third anniversary of the initial qualification date
of the offering statement, in the case of continuous or delayed
offerings.
Offerings under Regulation Crowdfunding would be
considered ``terminated or completed'' on the deadline of the offering
identified in the offering materials pursuant to Rule 201(g) of
Regulation Crowdfunding, or indicated by the Regulation Crowdfunding
intermediary in any notice to investors delivered under Rule 304(b) of
Regulation Crowdfunding.
Offerings for which a Securities Act registration
statement has been filed would be considered, ``terminated or
completed,'' for purposes of the proposed safe harbors: (i) Upon the
withdrawal of the registration statement after the Commission grants
such application under Rule 477; (ii) upon the filing of an amendment
or supplement to the registration statement indicating that the
registered offering has been terminated or completed and the
deregistering of any unsold securities if required by 17 CFR
229.512(a)(3); (iii) the entry of an order by the Commission declaring
that the registration statement has been abandoned under Rule 479; or
(iv) as set forth in Rule 415(a)(5).
b. Comments
Commenters provided various recommendations on how to provide
greater certainty to issuers as to the availability of the proposed
safe harbors that require a determination as to when an offering should
be considered ``terminated or completed.'' \182\ While one commenter
supported our proposed definitions of ``terminated or completed,''
\183\ another commenter recommended that the Commission provide
guidance for determining when offerings might be considered
``terminated or completed'' instead of defining the terms, as ``the
definitions might not catch all possible circumstances.'' \184\ In
order to facilitate an issuer terminating an offering of securities in
reliance on one exemption, for example, such as Rule 506(b) that
prohibits general solicitation, and simultaneously commencing an
offering of securities in reliance on another exemption, for example,
such as Rule 506(c) that permits general solicitation, one commenter
recommended revising the proposed definition of ``terminated or
completed'' in 17 CFR 230.152(c)(1)(ii) to clarify that the requirement
to cease selling efforts is limited only to a particular offering, as
opposed to the more general language ``to make further offers to sell
the issuer's securities,'' as proposed.\185\
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\182\ One comment letter supported the definitions as proposed.
See W. Hubbard Letter. Several other commenters either opposed or
suggested alternative definitions or approaches. See, e.g., Shearman
& Sterling Letter; CrowdCheck Letter; and J. Clarke Letter.
\183\ See W. Hubbard Letter (stating that under other
alternatives too many ``complications otherwise would arise.'').
\184\ See CrowdCheck Letter.
\185\ See Fried Frank Letter (stating that this may occur
because the issuer initially believes that it can raise capital
without engaging in general solicitation, but subsequently
determines that it is unable to raise the capital without engaging
in general solicitation and that the issuer should be able to
seamlessly, using the same (or substantially identical) offering
materials continue the offering in reliance on an exemption
permitting general solicitation, such as Rule 506(c)).
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[[Page 3515]]
Several commenters provided further recommendations with regard to
specific sections of the definitions on when an offering is considered
terminated or completed.\186\ In regard to continuous Regulation A Tier
2 offerings that have not been withdrawn or abandoned, one of these
commenters noted that under the proposed definition the offering would
be deemed completed on the third anniversary of qualification, which
would present a problem for purposes of the safe harbors, if the
offering by its own terms indicated that it will terminate earlier, for
example, one year after qualification.\187\
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\186\ See Shearman & Sterling Letter; and CrowdCheck Letter
(suggesting that the definition with regard to Section 4(a)(2),
Regulation D, or Rules 147 and 147A should reference ``conditions
outside the issuer's control'' instead of ``outside the investor's
control'').
\187\ See CrowdCheck Letter.
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Some commenters asked the Commission to provide guidance on when an
offering is considered to be ``commenced,'' \188\ including one
commenter who stated that such guidance would be useful, especially in
the context of testing the waters or seeking indications of interest in
a contemplated securities offering.\189\
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\188\ See CrowdCheck Letter; Shearman & Sterling Letter; and ABA
Letter (expressing concern that it is unclear how the
``commencement'' of an offering would be applied to continuous
offerings).
\189\ See CrowdCheck Letter. See also ABA Letter (stating that
determining the meaning of ``commencement'' of an offering can cause
uncertainty).
---------------------------------------------------------------------------
Another commenter raised concerns with respect to termination and
commencement in the context of shelf registration statements, and noted
that if a registered offering is deemed commenced with the filing of
the registration statement, the 30-day safe harbor may be effectively
unavailable for shelf registration statements.\190\ Accordingly, this
commenter suggested that in the case of shelf registration statements
on 17 CFR 239.13 (``Form S-3'') or 17 CFR 239.33 (``Form F-3''), the
relevant commencement date should be the commencement of public efforts
to sell the issuer's securities, rather than the filing or existence of
a shelf registration statement, and that a particular delayed
registered offering, commonly referred to as a take-down (or off the
shelf) from an effective shelf registration statement, should be deemed
terminated or completed when the distribution of the registered
securities has been completed or public efforts to sell the issuer's
securities in the proposed registered offering have been
abandoned.\191\ This commenter also suggested that the completion of
the distribution in a registered offering could be determined, for
example, by reference to the completion of the distribution within the
meaning of 17 CFR 242.100 through 105 (``Regulation M'') under the
Exchange Act.\192\
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\190\ See Shearman & Sterling Letter (stating that requiring
issuers to wait 30 days after the termination of a shelf
registration statement before commencing an exempt offering
prohibiting general solicitation, or requiring issuers that are
engaged in an exempt offering to postpone filing a new shelf
registration statement for 30 days after the termination of the
exempt offering in order for the safe harbor to be available, would
be burdensome for issuers and would not provide incremental
protections for investors).
\191\ See id.
\192\ See id.
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c. Final Amendments
We agree with many of the commenters' suggestions, and, as adopted,
we have modified Rule 152 accordingly. We are adopting the provisions
of proposed Rule 152(c) regarding when an offering is terminated or
completed as new 17 CFR 230.152(d) (``Rule 152(d)''). We also are
adopting provisions for determining when an offering has commenced as
new Rule 152(c). In addition, we have structured new Rules 152(c) and
152(d) as factors to consider, rather than definitions. We share the
concern expressed by a commenter that definitions might not catch all
possible circumstances so, consistent with this commenter's suggestion,
the rule includes factors to consider, instead of definitions.\193\ We
believe that this will provide more flexibility to issuers applying the
safe harbors to various offering scenarios and, should make both the
rule's general principle of integration and the safe harbors more
workable.
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\193\ See CrowdCheck Letter.
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New Rule 152(c) provides a non-exclusive list of factors to
consider in determining when an offering will be deemed to be commenced
for purposes of both the general principle of integration in Rule
152(a) and the safe harbors in Rule 152(b). Specifically, regardless of
the type of offering, new Rule 152(c) states that an offering of
securities will be deemed to be commenced for purposes of Rule 152 at
the time of the first offer of securities in the offering by the issuer
or its agents, and includes a non-exclusive list of factors that should
be considered in determining when an offering is deemed to be
commenced. The list of factors covers registered and exempt offerings,
noting that an issuer or its agents may commence an offering in
reliance on:
Rule 241, on the date the issuer first made a generic
offer soliciting interest in a contemplated securities offering for
which the issuer has not yet determined the exemption under the
Securities Act under which the offering of securities would be
conducted;
Section 4(a)(2), Regulation D, or Rule 147 or 147A, on the
date the issuer first made an offer of its securities in reliance on
these exemptions;
Regulation A, on the earlier of the date the issuer first
made an offer soliciting interest in a contemplated securities offering
in reliance on Rule 255, or the public filing of a Form 1-A offering
statement;
Regulation Crowdfunding, on the earlier of the date the
issuer first made an offer soliciting interest in a contemplated
securities offering in reliance on new Rule 206, or the public filing
of a Form C offering statement; and
A registration statement filed under the Securities Act
for:
[cir] A continuous offering that will commence promptly on the date
of initial effectiveness, on the date the issuer first filed its
registration statement for the offering with the Commission, or
[cir] A delayed offering, on the earliest date on which the issuer
or its agents commenced public efforts to offer and sell the
securities, which could be evidenced by the earlier of the first filing
of a prospectus supplement with the Commission describing the delayed
offering, or the issuance of a widely disseminated public disclosure,
such as a press release, confirming the commencement of the delayed
offering.
Due to their non-public nature, communications between an issuer,
or its agents and underwriters, and QIBs and IAIs, including those that
would qualify for the safe harbor in 17 CFR 230.163B (``Rule 163B''),
will not be considered as the commencement of a registered public
offering for purposes of new Rule 152. In contrast, the commencement of
private communications between an issuer, or its agents, including
private placement agents, and prospective investors in an exempt
offering in which general solicitation is prohibited, such as under
Rule 506(b) or Section 4(a)(2), may be considered as the commencement
of the non-public exempt offering for purposes of new Rule 152, if such
private communication involves an offer of securities.
We believe that the safe harbors in new Rule 152(b)(1) and (3)
should accommodate and facilitate seasoned
[[Page 3516]]
issuers filing shelf registration statements with the Commission.
Accordingly, consistent with one commenter's recommendation,\194\ for a
continuous registered offering that will commence promptly on the date
of initial effectiveness,\195\ we have included guidance that the
commencement of such an offering is likely to occur on the date the
issuer first filed its registration statement for the offering with the
Commission.\196\ However, in the case of a delayed registered offering,
we agree that the mere filing or existence of a shelf registration
statement, without any actual selling effort or description of the
securities to be offered and sold, is unlikely to meaningfully
condition the market for a subsequent exempt offering. Therefore, based
on the facts and circumstances, the initial public filing of a shelf
registration statement with the Commission will not necessarily be
deemed to be the commencement of the offering. Rather, commencement of
such an offering is likely to occur upon commencement of the public
efforts by the issuer, or its agents and underwriters, to offer and
sell the securities in the particular delayed registered offering,
including the issuance of a widely disseminated public disclosure, such
as a press release, or the public filing of a prospectus supplement
with the Commission.
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\194\ See Shearman & Sterling Letter (``In the past three years,
3,697 Form S-3 registration statements were filed by domestic
issuers and 405 Form F-3 registration statements by foreign private
issuers.''). In this regard, we note the critical importance of
shelf registration statements to capital formation. Based on staff
analysis of EDGAR filings, during calendar year 2019, we estimate
that there were 816 filings on Form S-3 and 273 filings on Form F-3.
In addition, we estimate that during this period there were 2,126
domestic automated shelf registration filings (S-3ASR) and 61
foreign automated shelf registration filings (F-3ASR).
\195\ See, e.g., 17 CFR 230.415(a)(1)(ix).
\196\ Confidentially submitted registration statements and
related materials would not be considered as filed for purposes of
these rules until they are publicly filed on the Commission's EDGAR
system.
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We are adopting new Rule 152(d) to provide a non-exclusive list of
factors to consider in determining when an offering is deemed to be
``terminated or completed,'' substantially as proposed, but with
modifications consistent with commenters' recommendations. Instead of
definitions, new Rule 152(d) provides a list of factors to consider in
determining when an offering will be deemed to be ``terminated or
completed.'' Regardless of the type of offering, Rule 152(d) states
that termination or completion of an offering is likely to occur when
the issuer and its agents cease efforts to make further offers to sell
the issuer's securities under such offering. The rule includes a non-
exclusive list of factors that should be considered in determining when
an offering is deemed to be terminated or completed, including for
offerings made in reliance on:
Section 4(a)(2), Regulation D, or Rule 147 or 147A, on the
later of the date:
[cir] The issuer entered into a binding commitment to sell all
securities to be sold under the offering (subject only to conditions
outside of the investor's control) \197\; or
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\197\ By limiting the conditions to those outside the investor's
control, an issuer may take the position that an offering is
terminated or completed at a point in time prior to the actual
closing of the transaction, so long as the only remaining conditions
are solely within the issuer's control.
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[cir] The issuer and its agents ceased efforts to make further
offers to sell the issuer's securities under such offering;
Regulation A, on:
[cir] The withdrawal of an offering statement under Rule 259(a);
[cir] The filing of a Form 1-Z with respect to a Tier I offering
under Rule 257(a);
[cir] The declaration by the Commission that the offering statement
has been abandoned under Rule 259(b); or
[cir] The date, after the third anniversary of the date the
offering statement was initially qualified, on which Rule
251(d)(3)(i)(F) prohibits the issuer from continuing to sell securities
using the offering statement, or any earlier date on which the offering
terminates by its terms;
Regulation Crowdfunding, on the deadline of the offering
identified in the offering materials pursuant to Rule 201(g), or
indicated by the Regulation Crowdfunding intermediary in any notice to
investors delivered under Rule 304(b); or
A registration statement filed under the Securities Act,
on:
[cir] The withdrawal of the registration statement after an
application is granted or deemed granted under Rule 477;
[cir] The filing of a prospectus supplement or amendment to the
registration statement indicating that the offering, or particular
delayed offering in the case of a shelf registration statement, has
been terminated or completed;
[cir] The entry of an order of the Commission declaring that the
registration statement has been abandoned under Rule 479;
[cir] The date, after the third anniversary of the initial
effective date of the registration statement, on which Rule 415(a)(5)
prohibits the issuer from continuing to sell securities using the
registration statement, or any earlier date on which the offering
terminates by its terms; or
[cir] Any other factors that indicate that the issuer has abandoned
or ceased its public selling efforts in furtherance of the offering, or
particular delayed offering in the case of a shelf registration
statement, which could be evidenced by:
[ssquf] The filing of a Current Report on Form 8-K; or
[ssquf] The issuance of a widely disseminated public disclosure by
the issuer, or its agents, informing the market that the offering, or
particular delayed offering, in the case of a shelf registration
statement, has been terminated or completed.
In response to a commenter's suggestion to facilitate reliance on
the proposed rule by issuers wishing to terminate an offering of
securities in reliance on one exemption and simultaneously commence an
offering of the same securities in reliance on another exemption that
may not be able to say that the issuer has ``ceased efforts to make
further offers to sell'' its securities,\198\ we are clarifying in new
17 CFR 230.152(d)(1)(ii) that an issuer and its agents must cease
efforts to make further offers to sell the issuer's securities under a
particular exempt offering.
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\198\ See Fried Frank Letter.
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In new 17 CFR 230.152(d)(2)(iv) (``Rule 152(d)(2)(iv)''), we have
also clarified that the date after the third anniversary of the date a
Regulation A offering statement was qualified may constitute the
termination or completion of an offering for Rule 152 purposes, due to
the operation of Rule 251(d)(3)(i)(F). In addition, in response to a
commenter's suggestion,\199\ we have also further clarified that a
Regulation A offering may terminate on any earlier date on which the
offering terminates by its terms.
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\199\ See CrowdCheck Letter.
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With respect to a registration statement filed under the Securities
Act, in accord with suggestions by another commenter to facilitate
issuers undertaking shelf offerings, we have provided that the
abandonment or cessation of public selling efforts may be evidenced by
the filing of a current report on Form 8-K, or the issuance of a widely
disseminated public disclosure by the issuer or its agents, informing
the market about the termination of a registered offering, or in the
case of a shelf registration statement, a particular
[[Page 3517]]
delayed offering.\200\ We note that a particular delayed offering may
be deemed terminated or completed, even though the issuer's shelf
registration statement may still have unused capacity, or an aggregate
amount of securities available to offer and sell in a later delayed
registered offering.
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\200\ See Shearman & Sterling Letter. We have not, however,
adopted this commenter's suggestion that the completion of
distribution in a registered offering could be determined by
reference to the completion of the distribution within the meaning
of Regulation M under the Exchange Act. We believe including such
language in the list of factors to be considered would add an
unnecessary layer of complexity to new Rule 152(d), and may also
cause unnecessary confusion with respect to the proper scope and
application of Regulation M (e.g., market participants may assume
incorrectly that Regulation M applies only to registered public
offerings, which is not the case).
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4. Conforming Amendments to Securities Act Exemptions
a. Proposed Amendments
The Commission proposed to replace the integration provisions of
several Securities Act exemptions with references to proposed Rule 152.
Specifically, the Commission proposed to amend current Rules 502(a),
251(c), 147(g), and 147A(g) to provide cross-references to the new Rule
152. Although Regulation Crowdfunding has no codified integration
provision, in the 2015 adopting release, the Commission provided
guidance on integration using the same facts-and-circumstances analysis
set forth in the Commission's 2015 amendments to Regulation A and 2016
amendments to Rule 147 and adoption of new Rule 147A.\201\ The
Commission proposed to amend Rule 100 of Regulation Crowdfunding to
cross-reference proposed Rule 152(b), which would codify the
Commission's existing guidance on integration.
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\201\ Securities Act Section 4A(g) states that ``[n]othing in
the exemption shall be construed as preventing an issuer from
raising capital through means other than [S]ection 4(a)(6).'' Given
this statutory language, the Commission provided guidance in the
Crowdfunding Adopting Release that an offering made in reliance on
Section 4(a)(6) is not required to be integrated with another exempt
offering made by the issuer to the extent that each offering
complies with the requirements of the applicable exemption that is
being relied on for that particular offering. See Crowdfunding
Adopting Release, at text accompanying notes 1343-1344.
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The Commission additionally proposed to eliminate Rules 255(e),
147(h), and 147A(h) as the relief provided by these rules would be
provided by proposed Rule 152(b)(3).
b. Comments
Commenters that addressed the proposal generally preferred our
proposed approach to replace the current integration provisions in each
Securities Act exemption with a cross-reference to proposed Rule 152,
instead of revising each exemption's current integration provisions to
reflect the provisions of proposed Rule 152.\202\
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\202\ See W. Hubbard Letter; D. Burton Letter; and CrowdCheck
Letter.
---------------------------------------------------------------------------
Commenters also supported codifying in Rule 100 of Regulation
Crowdfunding, as proposed, the Commission's existing integration
guidance providing that offers and sales made in reliance on Regulation
Crowdfunding will not be integrated with other exempt offerings made by
the issuer, provided that each offering complies with the requirements
of the applicable exemption that is being relied on for the particular
offering.\203\ One commenter, however, stated that this change was
unnecessary if proposed Rule 152 is adopted.\204\ Due to the
requirements in proposed Rule 152(a)(1) and (b)(1), another commenter
stated its belief that applying proposed Rule 152 to Regulation
Crowdfunding offerings would be an incomplete solution to Regulation
Crowdfunding issuers' concerns.\205\ Another commenter asked the
Commission to conform existing Rule 500(g) to clarify that the rule
applies in addition to, and is not a concept separate from, the general
integration rules in Rule 152, such as by cross-referencing Rule
152(b)(2) in Rule 500(g).\206\
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\203\ See J. Clarke Letter; Netcapital Letter; W. Hubbard
Letter; R. Campbell Letter; and D. Burton Letter.
\204\ See CrowdCheck Letter.
\205\ See R. Campbell Letter (explaining that due to the
requirements in proposed Rule 152(a)(1) and (b)(1), ``[a]n issuer
combining a crowdfunding offering with, for example, an offering
under Section 4(a)(2) would not be entitled to the integration
protection of proposed Rule 152.'').
\206\ See ABA Letter.
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c. Final Amendments
We are replacing the integration provisions of several Securities
Act exemptions with references to Rule 152, as proposed. Specifically,
we are amending Rule 502(a), Rule 251(c), Rule 147(g), and Rule 147A(g)
to provide cross-references to the new general principle of integration
and safe harbors for integration in Rule 152.We are also similarly
amending current Rule 500(g), consistent with a commenter's suggestion.
Although we did not propose amending Rule 500(g), we believe a cross-
reference to the safe harbor for offers and sales made in compliance
with Regulation S in new Rule 152(b)(2) is appropriate to avoid any
potential confusion about the intersection between those provisions.
This amendment will make it clear that Rule 500(g) provides specific
guidance in addition to, and not separate from, the general integration
rules in new Rule 152.
We are additionally eliminating Rule 255(e), Rule 147(h), and Rule
147A(h) as the relief provided by these rules is provided by new Rule
152(b)(3). All of these existing integration provisions currently refer
to a facts-and-circumstances analysis when their enumerated safe
harbors do not apply, and the new Rule 152(b) safe harbors are
generally consistent with the current safe harbors in the individual
rules.
As proposed, we are also codifying the Commission's guidance on
integration of Regulation Crowdfunding offerings by adding a cross-
reference to new Rule 152 in a new provision in Rule 100 of Regulation
Crowdfunding, which we believe will provide greater certainty to
issuers contemplating a Regulation Crowdfunding offering who also may
be considering other offerings under the Securities Act. Codification
of this guidance should provide issuers that may wish to conduct a
Regulation Crowdfunding offering concurrent with a Rule 506(c) offering
with certainty and flexibility to help them meet their capital needs.
B. General Solicitation and Offering Communications
The Securities Act defines, and the Commission historically has
interpreted, the term ``offer'' broadly.\207\ The Commission has
explained that ``the publication of information and publicity efforts,
made in advance of a proposed financing which have the effect of
conditioning the public mind or arousing public interest in the issuer
or in its securities constitutes an offer.'' \208\ Although the terms
``general solicitation'' and ``general advertising'' are not defined in
Regulation D, 17 CFR 230.502(c) (``Rule 502(c)'') does provide examples
of general solicitation and general advertising, including
advertisements published in newspapers and magazines, communications
broadcast over television and radio, and seminars where attendees have
been invited by general solicitation or general
[[Page 3518]]
advertising.\209\ The Commission has stated that other uses of publicly
available media, such as unrestricted websites, also constitute general
solicitation and general advertising.\210\
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\207\ See Securities Offering Reform, Release No. 33-8591 (July
19, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering Reform
Release''), at note 88 (``The term `offer' has been interpreted
broadly and goes beyond the common law concept of an offer.'')
(citing Diskin v. Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971) and
SEC v. Cavanaugh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998)). See also
Section 2(a)(3) of the Securities Act (noting that an offer includes
every attempt to dispose of a security or interest in a security,
for value; or any solicitation of an offer to buy a security or
interest in a security).
\208\ See Securities Offering Reform Release, at note 88.
\209\ See Rule 502(c).
\210\ See Use of Electronic Media for Delivery Purposes, Release
No. 33-7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)], at Section
II.A.D; and Use of Electronic Media Release, at Section II.C.2.
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Whether a transaction is one not involving any public offering
\211\ is essentially a question of fact and necessitates a
consideration of the surrounding circumstances, including factors such
as the relationship between the offerees and the issuer, and the
nature, scope, size, type, and manner of the offering. The Commission
adopted Rule 506 of Regulation D in 1982 as a non-exclusive safe harbor
under Section 4(a)(2), providing objective standards on which an issuer
could rely to meet the requirements of the Section 4(a)(2) exemption,
including a prohibition on the use of general solicitation to market
the securities.\212\
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\211\ Section 4(a)(2) of the Securities Act exempts from the
registration requirements ``transactions by an issuer not involving
any public offering,'' but does not define the phrase. 15 U.S.C.
77d(a)(2).
\212\ See Regulation D Adopting Release, at Section III.C.
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1. Exemption From General Solicitation for ``Demo Days'' and Similar
Events
``Demo days'' and similar events are generally organized by a group
or entity (such as a university, angel investors, an accelerator, or an
incubator) that invites issuers to present their businesses to
potential investors, with the aim of securing investment. As the
Commission stated in the Proposing Release, if the issuer's
presentation at a ``demo day'' or similar event constitutes an offer of
securities, the issuer would not be deemed to have engaged in general
solicitation if the organizer of the event has limited participation in
the event to individuals or groups of individuals with whom the issuer
or the organizer has a pre-existing substantive relationship or that
have been contacted through an informal, personal network of
experienced, financially sophisticated individuals, such as angel
investors.\213\ However, we understand that in many cases it may not be
practical for the organizer of the event to limit participation in such
a manner.
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\213\ See Proposing Release, at Section II.B.1.
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a. Proposed Amendments
The Commission proposed new Rule 148 to provide that certain ``demo
day'' communications would not be deemed general solicitation or
general advertising.\214\ Specifically, as proposed, an issuer would
not be deemed to have engaged in general solicitation if the
communications are made in connection with a seminar or meeting
sponsored by a college, university, or other institution of higher
education, a local government, a nonprofit organization, or an angel
investor group,\215\ incubator, or accelerator.
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\214\ Because communications that comply with proposed Rule 148
would not be deemed a general solicitation or general advertising,
the limitations on the manner of offering in Rule 502(c) of
Regulation D would not apply.
\215\ A proposed instruction to Rule 148 provided that for
purposes of the rules the term ``angel investor group'' means a
group: (A) Of accredited investors; (B) that holds regular meetings
and has written processes and procedures for making investment
decisions, either individually or among the membership of the group
as a whole; and (C) is neither associated nor affiliated with
brokers, dealers, or investment advisers.
---------------------------------------------------------------------------
With respect to the organization and conduct of the event, proposed
Rule 148 stated that a sponsor would not be permitted to:
Make investment recommendations or provide investment
advice to attendees of the event;
Engage in any investment negotiations between the issuer
and investors attending the event;
Charge attendees of the event any fees, other than
reasonable administrative fees;
Receive any compensation for making introductions between
attendees and issuers, or for investment negotiations between the
parties;
Receive any compensation with respect to the event that
would require it to register as a broker or dealer under the Exchange
Act or as an investment adviser under the Advisers Act.
In addition, proposed Rule 148 specified that the advertising for
the event may not reference any specific offering of securities by the
issuer and that the information conveyed at the event regarding the
offering of securities by or on behalf of the issuer would be limited
to:
Notification that the issuer is in the process of offering
or planning to offer securities;
The type and amount of securities being offered; and
The intended use of the proceeds of the offering.
b. Comments
The comments we received on the proposed exemption from general
solicitation for ``demo days'' and similar events were mixed. Many
commenters expressed support for the proposal.\216\ Some of the
commenters generally supported an exemption, but recommended fewer
limitations on the exemption.\217\ Commenters provided various views on
the limitations for entities organizing the events, with some
supporting the proposed limits \218\ and others recommending targeted
expansions, such as including State governments, or broad expansions of
the entities permitted to rely on the exemption.\219\ One commenter
also recommended limiting the pool of investors who may attend the
events, noting that the sponsors are likely to attract many non-
accredited investors who will be ineligible for many of the exempt
offerings that may be presented at an event.\220\ Some of the
commenters supporting the proposal recommended further clarification of
the language used in proposed Rule 148.\221\
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\216\ See, e.g., ABA Letter; Letter from Brandon Andrews, et al.
dated May 1, 2020 (``B. Andrews, et al. Letter''); Letter from Angel
Capital Association dated May 26, 2020 (``ACA Letter''); SEC SBCFAC
Letter; Geraci Law Letter; Md. St. Bar Assoc. Letter; Letter from
NextSeed Securities LLC dated June 1, 2020 (``NextSeed Letter'');
S[omacr].Capital Letter; W. Hubbard Letter; Letter from Shareholder
Advocacy Forum dated June 1, 2020 (``SAF Letter''); Letter from
Investment Adviser Association dated June 1, 2020 (``IAA Letter'');
Letter from SSTI dated June 1, 2020 (``SSTI Letter''); Invesco
Letter; D. Burton Letter; Letter from Morningstar, Inc. dated June
1, 2020 (``Morningstar Letter''); Letter from Crowdwise, LLC dated
June 8, 2020 (``Crowdwise Letter''); CrowdCheck Letter; Ketsal
Letter; and Letter from Pat Toomey, U.S. Senator dated July 1, 2020
(``Sen. Toomey Letter'').
\217\ See, e.g., CrowdCheck Letter (stating concern that the
proposed limits on issuer communications would render issuers unable
to answer any of the common questions posed by potential investors
and recommending only limitations on types of entities permitted to
sponsor events); IAA Letter (recommending permitting disclosure of
the unsubscribed amount in the offering); ACA Letter (recommending
that the Commission permit organizations other than those listed in
the proposal to sponsor events, revise the definition of angel
investor group, and permit disclosure of the unsubscribed amount in
an offering); and Ketsal Letter (recommending fewer limitations on
the scope of information conveyed).
\218\ See, e.g., CrowdCheck Letter; and Geraci Law Letter.
\219\ See, e.g., IAA Letter (recommending broadening the
exemption to permit SEC-registered investment advisers that are
sponsors of private funds to be included as an entity that may
sponsor an event); SSTI Letter (recommending adding ``state
governments'' and ``instrumentalities of state and local
governments''); ACA Letter (recommending permitting groups of any
type, including those associated or affiliated with investment
advisers, venture forums, venture capital associations, trade
associations, and professional organizations); and D. Burton Letter
(recommending including any business or organization other than a
broker-dealer or investment adviser).
\220\ See Geraci Law Letter. See also CFA Letter; and NASAA
Letter.
\221\ See ABA Letter (recommending the rule be expressly framed
as a non-exclusive ``safe harbor'' such that the issuer may rely on
other existing Commission guidance, and that the term ``information
regarding an offering'' be clarified to provide that content
limitations in the rule do not relate to or prevent communication of
factual business information); ACA Letter (recommending use of
``defined processes and procedures'' instead of ``written processes
and procedures'' in the definition of ``angel investor group'' to
better provide for how angel groups work); Morningstar Letter
(recommending that information provided to third parties conducting
independent analysis not constitute an offering); S[omacr].Capital
Letter (seeking clarification that traditional events, such as a
university-sponsored prominent speaker series, for which a fee is
typically charged, which may be supplemented by the sponsor to
include a ``demo day''-type event at no charge, would not be
prohibited); and SSTI Letter (recommending clarification of the
duration of the prohibition on investment negotiations, whether the
sponsor may negotiate with issuers or investors separately, and the
difference between providing advice and investment negotiations).
See also IAA Letter (recommending that the Commission provide
guidance that communications not intended for public consumption do
not constitute general solicitation).
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[[Page 3519]]
In contrast, a number of commenters opposed the proposed exemption,
expressing concerns about insufficient investor protections.\222\ One
of these commenters recommended limiting the exemption by prohibiting
any form of control or affiliation with the issuer or group of issuers,
prohibiting entities whose sole or primary purpose is to attract
investors to private issuers, and limiting an issuer's discussion to
factual business information and prohibiting discussion of any
potential securities offering.\223\
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\222\ See, e.g., NASAA Letter; AFREF Letter; Better Markets
Letter; CFA Letter; R. Rutkowski Letter; and CFA Institute Letter.
\223\ See NASAA Letter.
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c. Final Amendments
We are adopting Rule 148 substantially as proposed, with certain
modifications in response to commenter feedback. For the reasons
discussed in the Proposing Release and below, we believe that exempting
certain ``demo day'' communications from the registration requirements
of the Securities Act will further the public interest while being
consistent with the protection of investors.
As discussed above, the Commission proposed to include local
governments in the list of entities permitted to rely on the exemption.
In response to comments, we are expanding the types of entities that
may sponsor an event to include State governments and instrumentalities
of State and local governments. We are also revising the definition of
``angel investor group'' to specify that such a group must have
``defined'' processes and procedures for making investment decisions,
but that such processes and procedures do not necessarily need to be
written. In addition, to address concerns raised by commenters with
respect to the possibility of offering-related communications being
made broadly to non-accredited investors, we are adopting certain
limitations on the types of investors that may attend virtual events as
a condition to the availability of Rule 148. In a change from the
proposal, we have also added a requirement that more than one issuer
participate in the seminar or meeting in order for new Rule 148 to
apply.
As adopted, an issuer will not be deemed to have engaged in general
solicitation if the communications are made in connection with a
seminar or meeting sponsored by a college, university, or other
institution of higher education, a State or local government or
instrumentality of a State or local government, a nonprofit
organization, or an angel investor group, incubator, or accelerator. We
believe it is appropriate to add State governments and
instrumentalities of State or local governments to the list of eligible
sponsors, because, as mentioned by commenters, State as well as local
governments, and special entities created by such governments, may
conduct significant economic development activities. Due to their
similarities, we do not believe it is necessary to differentiate
between State and local governments for this purpose.
With respect to the definition of angel investor groups, we are
persuaded by commenters who recommended that such groups be required to
have ``defined processes and procedures'' for investment decisions
rather than requiring written processes and procedures. We understand
from such commenters that there are established angel investor groups
that have well-settled and defined, but not necessarily written,
processes and procedures for investment decisions. Therefore, this
change from the proposal will reflect the way that many angel groups
are organized and administered, and will not disrupt existing angel
investor group practices by requiring them to formally memorialize
their established processes and procedures.
We do not believe it is appropriate to further expand the list of
eligible sponsors, as suggested by some commenters, to include entities
such as sponsors of private funds, venture forums, venture capital
associations, trade associations, and professional organizations. In
addition, we do not believe it is appropriate to expand the proposed
definition of angel investor groups to include groups associated or
affiliated with brokers, dealers, or investment advisers, and therefore
are adopting the proposed instruction to Rule 148 that excludes such
groups from the definition.\224\ We note that some of these
organizations may be able to qualify as eligible sponsors under the
proposed categories, for example, if they are organized as non-profit
organizations. We also do not agree with commenters who recommended
that we exclude from the scope of the exemption any sponsors that
control or are affiliated with the issuer or group of issuers, in light
of the limits on the sponsors' activities. We believe the tailored list
of organizations eligible to act as event sponsors and the exclusion of
brokers, dealers and investment advisers from the scope of the
exemption will help to limit the application of Rule 148 to events
sponsored by organizations less likely to have a profit motive for
their involvement in the event or whose sole or primary purpose is to
attract investors to private issuers. In order to address commenters'
concerns about the potential misuse of the exemption and clarify the
nature of the events covered by new Rule 148, we have also added a
requirement that more than one issuer participate in the seminar or
meeting. This requirement will help to prevent an organization from
attempting to hold an event that is, in essence, a sales pitch for the
securities of one issuer, while characterizing the event as a ``demo
day.''
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\224\ We acknowledge that members of angel investor groups may
include individuals who are employed as brokers, dealers, or
investment advisers. Such an individual's membership in the group
will not, by itself, result in the angel investor group being deemed
to be associated or affiliated with brokers, dealers, or investment
advisers for the purpose of new Rule 148.
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As proposed, under the final rule the sponsor will not be permitted
to:
Make investment recommendations or provide investment
advice to attendees of the event;
Engage in any investment negotiations between the issuer
and investors attending the event;
Charge attendees of the event any fees, other than
reasonable administrative fees;
Receive any compensation for making introductions between
event attendees and issuers, or for investment negotiations between the
parties; or
Receive any compensation with respect to the event that
would require it to register as a broker or dealer under the Exchange
Act, or as an investment adviser under the Advisers Act.
In addition, as proposed, the advertising for the event may not
reference any specific offering of securities by the issuer.
We believe that these limitations on the sponsors' activities
provide
[[Page 3520]]
important investor protections by limiting the potential for a sponsor
to profit from its involvement or to have a potential conflict of
interest due to its relationships with either the issuer or investors
attending the event and that it is not necessary to adopt additional
restrictions on the relationship between sponsors and the issuers
involved in the event. Similarly, although some commenters sought
clarification, we are not providing bright-line rules as to whether the
administrative fees charged by the sponsor are reasonable, but
emphasize that the limitation on fees should be construed consistent
with our goal of limiting the potential for a sponsor to profit from
its involvement. We note that the limitation on fees charged to
attendees of an event is not intended to limit a sponsoring
organization's ability to collect membership dues or similar fees from
individuals.
As noted above, some commenters raised concerns about these events
allowing for broad offering-related communications to non-accredited
investors. We share this concern, particularly in light of the
increasing prevalence of virtual ``demo days'' that are more accessible
and widely attended by the general public. In light of these concerns,
we are persuaded that an incremental approach to relaxing ``demo day''
communication restrictions is warranted with respect to events that are
conducted, in whole or in part, in a virtual format. Accordingly, we
are narrowing the scope of the proposed exemption so that online
participation in the event is limited to: (a) Individuals who are
members of, or otherwise associated with the sponsor organization (for
example, members of an angel investor group or students, faculty, or
alumni of a college or university); (b) individuals that the sponsor
reasonably believes are accredited investors; or (c) individuals who
have been invited to the event by the sponsor based on industry or
investment-related experience reasonably selected by the sponsor in
good faith and disclosed in the public communications about the event.
In contrast to an online event, the number of potential investors
who can attend an in-person ``demo day'' event is limited by factors
such as venue size, administrative capacity, and distance from the
event. The limitations we are adopting will help prevent broad offering
communications over the internet to unlimited numbers of non-accredited
investors by requiring the sponsor to limit participation to a
population of potential investors related to the sponsor or about whose
qualifications the sponsor has some knowledge, but at the same time
will provide sponsors with ample flexibility to continue to conduct
such events.
We are adopting the limitations on the information conveyed at the
event regarding the offering of securities by or on behalf of the
issuer as proposed, with one expansion in response to comment. As
adopted the issuer is allowed to convey only:
Notification that the issuer is in the process of offering
or planning to offer securities;
The type and amount of securities being offered;
The intended use of the proceeds of the offering; and
The unsubscribed amount in an offering.
We believe that permitting an issuer to disclose the unsubscribed
amount in an offering will provide investors with useful information,
but is unlikely to affect investor protection in light of the limits on
the overall information about the offering that may be conveyed, and
the fact that potential investors will be able to seek additional
disclosure about the investment opportunity outside of the event
setting. We do not agree with commenters who suggested other expansion
of the information that issuers may convey about an offering of
securities. The exemption provided by new Rule 148 is not intended to
provide for broad communication about a securities offering at a ``demo
day'' event. Rather, the rule is intended to allow issuers, in
discussing their business plans with potential investors at these
events, the flexibility to note that they are seeking capital without
uncertainty as to whether they have jeopardized their ability to rely
on a certain exemption from registration.\225\
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\225\ We understand that small businesses may face challenges in
accessing capital when they are not able to note that they are
seeking capital when pitching their business to potential investors.
See, e.g., Transcript of SEC Small Business Capital Formation
Advisory Committee (May 8, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 70
(``Entrepreneurs, when they leave out this vital information, they
are pitching with one arm behind their back, and this is a deterrent
to accessing the capital from professional sources that help these
companies scale, create jobs and grow the U.S. economy.'').
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Overall, we believe that expanding the information permitted to be
conveyed beyond the limits in the final rules may undermine the
prohibition on general solicitation that is an important condition of
certain exemptions. The limited scope of the offering-related
communications permitted under the exemption, along with the
limitations on online participation and a sponsor's ability to profit
from the event, should help to address commenters' concerns about the
potential for increased risk of fraud or misconduct. Moreover, issuers
may continue to rely on our previously issued guidance, and not be
subject to the conditions of Rule 148, including the limit on
communications, if the organizer of the event has limited participation
in the event to individuals or groups of individuals with whom the
issuer or the organizer has a pre-existing substantive relationship or
that have been contacted through an informal, personal network of
experienced, financially sophisticated individuals.\226\
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\226\ See Proposing Release, at Section II.B.1.
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2. Solicitations of Interest
As discussed in the Proposing Release, we believe that it is
helpful for issuers to be able to gauge interest in a securities
offering prior to incurring the expense of preparing and conducting an
offering. Securities Act Rule 163B permits issuers and those authorized
to act on their behalf to gauge market interest in a registered
securities offering through discussions with QIBs and IAIs prior to, or
following, the filing of a registration statement.\227\ Regulation A
also permits issuers to test the waters with, or solicit interest in a
potential offering from, the general public either before or after the
filing of the offering statement.\228\ These solicitations of interest
are deemed to be offers of a security for sale for purposes of the
antifraud provisions of the Federal securities laws.\229\
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\227\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10699 (Sep. 25, 2019) [84 FR 53011 (Oct. 4,
2019)] (``Solicitations of Interest Release''). Securities Act
Section 5(d) [15 U.S.C. 77e(d)] statutorily provides these
accommodations to emerging growth companies. Securities Act Rule
163B extends these accommodations to all issuers, including fund
issuers.
\228\ See 17 CFR 230.255.
\229\ See Solicitations of Interest Release; and 17 CFR
230.255(a).
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a. Generic Solicitation of Interest Exemption
i. Proposed Amendments
The Commission proposed new Rule 241 to permit an issuer to use
generic solicitation of interest materials for an offer of securities
prior to a making a determination as to the exemption under which the
offering may be conducted.\230\ As proposed, Rule 241 would not permit
an issuer to identify the specific exemption from registration on which
it intends to rely for a subsequent offer and sale of the securities.
Proposed Rule 241(b) would
[[Page 3521]]
require the generic testing-the-waters materials to provide specific
disclosures notifying potential investors about the limitations of the
generic solicitation of interest.
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\230\ Proposed Rule 241 was substantially based on Rule 255 of
Regulation A.
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As proposed, these solicitations would be deemed to be offers of a
security for sale for purposes of the antifraud provisions of the
Federal securities laws.\231\ Furthermore, depending on the method of
dissemination of the information, such offers may be considered a
general solicitation. Proposed Rule 241 would provide an exemption from
registration only with respect to the generic solicitation of interest,
not for a subsequent offer or sale. Should the issuer move forward with
an exempt offering following the generic solicitation of interest, the
issuer would need to comply with an available exemption for the
subsequent offering, and investors would have the benefit of the
investor protections encompassed in such exemption.
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\231\ Proposed Rule 241(a).
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In the event that the issuer commences an offering under Regulation
A or Regulation Crowdfunding within 30 days of the generic
solicitation, in addition to the information currently required to be
disclosed under Regulation A and Regulation Crowdfunding, the
Commission proposed to require that the generic solicitation materials
be made publicly available as an exhibit to the offering materials
filed with the Commission.\232\ The Commission also proposed to require
an issuer that sells securities under Rule 506(b) to any purchaser that
is not an accredited investor within 30 days of the generic
solicitation of interest to provide such purchaser with any written
communication used under proposed Rule 241.
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\232\ See proposed Rule 201(z); and proposed paragraph 13 of
Form 1-A, Part III, Item 17. Currently, an issuer that solicits
indications of interest in reliance on Rule 255 of Regulation A is
required to submit or file solicitation materials to the Commission
as an exhibit when the offering statement is either submitted for
non-public review or filed (and update for substantive changes in
such material after the initial nonpublic submission or filing).
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ii. Comments
Commenters' views were mixed. Many commenters expressed support for
the proposal.\233\ Some commenters that supported the proposal
recommended that the Commission permit use of the exemption even if an
issuer has identified the exemption on which it intends to rely.\234\
One of these commenters stated that determining when an issuer has
decided to proceed with a specific exemption is difficult and could
work counter to thoughtful exploration of which exemption to use.\235\
This commenter recommended permitting issuers to use Rule 241 so long
as an offering statement under Regulation A or Regulation C has not
been filed. Some commenters that were generally supportive of the
proposal recommended that the exemption permit a generic public
solicitation followed by a private offering.\236\
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\233\ See, e.g., ABA Letter; B. Andrews, et al. Letter; Letter
from Crowdfunding Professional Association dated May 22, 2020
(``CfPA Letter''); SEC SBCFAC Letter; J. Clarke Letter; Republic
Letter; S[omacr].Capital Letter; Letter from Michael H. Shuman, Esq.
dated June 1, 2020 (``M. Shuman Letter''); W. Hubbard Letter; SAF
Letter; IAA Letter; Invesco Letter; D. Burton Letter; R. Campbell
Letter; and CrowdCheck Letter.
\234\ See, e.g., ABA Letter; SIFMA Letter; and Invesco Letter.
\235\ See ABA Letter.
\236\ See, e.g., ABA Letter (recommending permitting an issuer
to conduct an offering for which general solicitation is not
permitted 20 days following termination of the generic solicitation
or, in the alternative, another specific period of time such as 90
days as provided in proposed Rule 506(b)(2)(i)); CfPA Letter
(recommending a 90-day safe harbor after which a private offering
could be made following a generic public solicitation); SIFMA Letter
(recommending permitting a private offering to QIBs and IAIs after a
generic public solicitation); R. Campbell Letter (recommending
eliminating the requirements in proposed Rule 152(a)(1) and (b)(1),
so that issuers may rely on proposed Rule 152 for integration
protection, if the offering following the generic solicitation was
made pursuant to an exemption provided by Section 4(a)(2), Rule 504
or Rule 506(b)); and M. Shuman Letter (recommending permitting
private offerings after the generic solicitation).
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A number of commenters opposed the proposal.\237\ Some of these
expressed concern that expanding the testing-the-waters provisions
would weaken investor protection.\238\ One of these commenters
suggested that a generic testing-the-waters provision that provides
information without indicating what kind of offering is to follow blurs
the line between what is acceptable for a Rule 506(b) offering and what
constitutes general solicitation.\239\ One commenter expressed concern
that the proposed rule would permit an issuer to engage in testing-the-
waters communications with all types of investors prior to a registered
offering.\240\
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\237\ See, e.g., NASAA Letter; AFREF Letter; Better Markets
Letter (questioning the Commission's authority to adopt the rule);
CFA Letter; R. Rutkowski Letter; CFA Institute Letter; and IPA
Letter.
\238\ See, e.g., NASAA Letter (suggesting the rules would be
evaded and exploited); and CFA Letter.
\239\ See IPA Letter.
\240\ See Better Markets Letter.
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Commenters generally supported the proposed requirements to file
generic solicitation materials when followed by a Regulation A or
Regulation Crowdfunding offering \241\ and to provide those materials
to non-accredited investors in a Rule 506(b) exempt offering within 30
days of the generic solicitation.\242\ However, one commenter expressly
opposed requiring the filing of generic solicitation materials.\243\
Several commenters also recommended that the Commission preempt State
securities law registration and qualification requirements for offers
made under proposed Rule 241.\244\
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\241\ See, e.g., J. Clarke Letter; W. Hubbard Letter; CrowdCheck
Letter (recommending not requiring the filing of materials used more
than 30 days prior to the offering); and Ketsal Letter.
\242\ See, e.g., Geraci Law Letter; J. Clarke Letter
(recommending filing all solicitation materials); W. Hubbard Letter;
and CrowdCheck Letter (supporting providing the materials to
investors, but not filing with the Commission).
\243\ See NextSeed Letter (acknowledging, however, the potential
benefit of requiring the filing of materials that occurred
immediately prior to the offering).
\244\ See, e.g., D. Burton Letter; W. Hubbard Letter; CrowdCheck
Letter (suggesting lack of preemption would affect utility); R.
Campbell Letter (suggesting lack of preemption could subject the
issuer to civil and criminal liabilities under State securities laws
and legal counsel to risks relating to professional ethical rules);
and Ketsal Letter (suggesting there is no practical reason to
distinguish between communications made pursuant to any of Rule 506,
Rule 255, or proposed Rule 206, all of which preempt, or will
preempt, State securities law requirements, and proposed Rule 241).
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iii. Final Amendments
We are adopting the proposed amendments substantially as proposed,
using our exemptive authority under Section 28 of the Securities Act to
create a new offering exemption. New Rule 241 exempts the class of
persons who are issuers and use generic solicitation of interest
materials pursuant to the conditions of the rule from the prohibitions
on offers prior to filing a registration statement in Section 5(c) of
the Securities Act.\245\ As discussed in the Proposing Release and
below, we believe that the proposed amendments include appropriate
investor protections and further the public interest by allowing
issuers to gauge market interest, tailor the size and other terms
[[Page 3522]]
of the offering (possibly with input from potential investors), and
reduce the costs of conducting an exempt offering.\246\
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\245\ As noted above, one commenter questioned the Commission's
authority to adopt Rule 241. See Better Markets Letter. Section 28
of the Securities Act gives the Commission broad authority to
``conditionally or unconditionally exempt any person . . . or any
class or classes of persons . . . from any provision or provisions
of'' the Securities Act and rules or regulations issued thereunder
``to the extent that such exemption is necessary or appropriate in
the public interest, and is consistent with the protection of
investors.'' 15 U.S.C. 77z-3. Notwithstanding the commenter's
suggestion, nothing in the JOBS Act indicates that Congress sought
to limit the Commission's ability to extend the accommodations
currently available to emerging growth companies to other issuers,
nor does Section 28 include any such limitation. The final rule's
use of exemptive authority is thus consistent with the plain
language of Section 28.
\246\ See, e.g., Transcript of SEC Small Business Capital
Formation Advisory Committee (May 8, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 70
(``Startups and young companies, by their nature, are capital
constrained. Expanding that test-the-waters rule provides them
flexibility to explore the optimal avenue for raising capital before
spending multiple thousands of dollars on legal fees.'').
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As noted above, commenters that addressed the proposal were
generally supportive of the proposed changes. We are not persuaded by
commenters who recommended that we revise the rule to permit an issuer
to conduct a general solicitation of interest after the issuer has
identified the specific exemption on which it intends to rely. We
believe that limiting generic solicitations of interest to
solicitations prior to the issuer's determination of which exemption to
use appropriately and adequately differentiates these testing-the-
waters communications, which are meant to gauge preliminary market
interest, from offers that occur closer to the time of sale. Because
the determination of which exemption will be used is within the
issuer's control, we believe that issuers and their advisers should be
able to apply the new rule to their specific circumstances. We disagree
with the suggestion from a commenter that an issuer should be permitted
to rely on new Rule 241 after determining to conduct a Regulation
Crowdfunding or Regulation A offering, so long as the issuer has not
filed a Form C for a Regulation Crowdfunding offering or a Form 1-A for
a Regulation A offering. To do so would undermine the utility of the
existing Regulation A testing-the-waters provision and the new
Regulation Crowdfunding testing-the-waters provision we are adopting in
this release, and may lead to potential confusion for issuers and
investors over which rule applies once an issuer has determined the
exemption on which it will rely.
Under new Rule 241, an issuer or any person authorized to act on
behalf of an issuer may communicate orally or in writing to determine
whether there is any interest in a contemplated offering of securities
exempt from registration under the Securities Act.\247\ The rule
provides an exemption from registration only with respect to the
generic solicitation of interest and the solicitation will be deemed to
be an offer of a security for sale for purposes of the antifraud
provisions of the Federal securities laws. In addition, no solicitation
or acceptance of money or other consideration, nor of any commitment,
binding or otherwise, from any person is permitted until the issuer
makes a determination as to the exemption on which it will rely and
commences the offering in compliance with the exemption.
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\247\ To avoid any confusion with respect to the scope of the
exemption, we have revised Rule 241 from the proposal to make it
clear that it applies only to solicitations of interest relating to
contemplated offerings of securities exempt from registration under
the Securities Act.
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If the issuer moves forward with an exempt offering following the
generic solicitation of interest, it will be required to comply with an
applicable exemption for the subsequent offering, and investors will
have the benefit of the investor protections included in such
exemption. We are not persuaded by commenters that recommended
expanding the generic solicitation of interest rules to permit private
offerings immediately following public solicitations of interest or to
provide a safe harbor that would permit private offerings after a
prescribed period of time following a public solicitation of interest.
Similarly, we do not believe it is necessary to provide, as suggested
by a commenter, that testing-the-waters activity limited to QIBs and
IAIs would not result in the Rule 241 offer being integrated with a
subsequent private placement that does not permit general solicitation.
We believe, as the commenter noted, that an issuer may reasonably
conclude on its own that testing-the-waters activity so limited would
not constitute general solicitation, depending on the facts and
circumstances.
As discussed in the Proposing Release, if the generic solicitation
is done in a manner that would constitute general solicitation, and the
issuer ultimately decides to conduct an unregistered offering under an
exemption that does not permit general solicitation, the issuer will
need to analyze whether that solicitation and the subsequent private
offering will be integrated, thereby making unavailable an exemption
that does not permit general solicitation. Under the new integration
rules adopted in this release, an issuer will not be able to follow a
generic solicitation of interest that constituted a general
solicitation with an offering pursuant to an exemption that does not
permit general solicitation, such as Rule 506(b), unless the issuer has
a reasonable belief, based on the facts and circumstances, with respect
to each purchaser in the exempt offering prohibiting general
solicitation, that the issuer (or any person acting on the issuer's
behalf) either did not solicit such purchaser through the use of
general solicitation or established a substantive relationship with
such purchaser prior to the commencement of the exempt offering
prohibiting general solicitation.\248\
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\248\ See new Rules 152(a)(1) and 152(b)(1); and supra Sections
II.A.1 and II.A.2.
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Rule 241 further requires the generic testing-the-waters materials
to provide specified disclosures notifying potential investors about
the limitations of the generic solicitation. The issuer's
communications must state that:
(1) The issuer is considering an offering of securities exempt from
registration under the Act, but has not determined a specific exemption
from registration the issuer intends to rely on for the subsequent
offer and sale of the securities;
(2) No money or other consideration is being solicited, and if sent
in response, will not be accepted;
(3) No offer to buy the securities can be accepted and no part of
the purchase price can be received until the issuer determines the
exemption under which the offering is intended to be conducted and,
where applicable, the filing, disclosure, or qualification requirements
of such exemption are met; and
(4) A person's indication of interest involves no obligation or
commitment of any kind. The rule additionally provides that the
communication may include a means for a person to indicate interest in
a potential offering and an issuer may require such indication to
include the person's name, address, telephone number, and/or email
address. We are adopting these provisions as proposed as commenters
were generally supportive of this aspect of Rule 241, providing no
recommendation to further revise these requirements.
In addition, we are adopting amendments to Regulation A and
Regulation Crowdfunding as proposed to require that the Rule 241
generic solicitation materials be made publicly available as an exhibit
to the offering materials filed with the Commission if the Regulation A
or Regulation Crowdfunding offering is commenced within 30 days of the
generic solicitation.\249\ As discussed above, commenters generally
supported this aspect of the proposed rules. Although some commenters
expressed the view that such a requirement would be unnecessary, we
believe that issuers should be accountable for the content of
solicitation materials and that the
[[Page 3523]]
requirement will help ensure that issuers use solicitation materials
with appropriate caution. We are requiring issuers to file these
materials only during the 30-day time period because once 30 days
elapses following a terminated or completed generic solicitation, that
offer would not be subject to integration with a subsequent Regulation
Crowdfunding offering in accordance with new Rule 152(b)(1).
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\249\ See new Rule 201(z) and paragraph 13 of Form 1-A, Part
III, Item 17. In connection with this amendment to Rule 201, we are
also renumbering current paragraph (z), which is a temporary
provision, as paragraph (aa).
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We are also adopting, as proposed, the requirement that an issuer
provide purchasers with any written generic solicitation of interest
materials used under new Rule 241 if the issuer sells securities under
Rule 506(b) within 30 days of the generic solicitation of interest to
any purchaser that is not an accredited investor. This provision, which
we believe is appropriate for the same reasons as discussed above with
respect to Regulation A and Regulation Crowdfunding, will apply whether
or not the issuer engaged in general solicitation through its
communications under new Rule 241 and whether or not the generic
solicitation would be subject to integration with the Rule 506(b)
offering. Consistent with Rule 255 of Regulation A, these amendments to
Regulation A, Regulation Crowdfunding, and 17 CFR 230.502(b) (``Rule
502(b)'' of Regulation D) require issuers to provide any written
communications or broadcast scripts used under new Rule 241.
While some commenters recommended that we preempt State blue sky
laws for these offers, we are not doing so at this time. We acknowledge
the concerns raised by commenters about the possibility that the lack
of preemption will affect the utility of the new rule and potentially
subject issuers to civil and criminal liabilities under State blue sky
laws. However, in light of the novel nature of this new exemption and
the concerns expressed by other commenters about potential misuse of
the exemption, we believe a more measured approach is warranted.\250\
We believe that generic solicitation of interest can still be useful to
issuers and investors without such preemption and that issuers and
their advisers will be able to navigate applicable State law
requirements as they have done in connection with other Federal
exemptions from registration that do not provide for preemption.
Although we are not preempting State securities law registration and
qualification requirements at this time, the Commission will have the
opportunity to receive feedback on how State regulation may be
affecting the use of generic solicitations of interest through its
Small Business Capital Formation Advisory Committee and annual Small
Business Forum, and that feedback may help inform future determinations
about whether State law preemption is warranted.
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\250\ As we noted in the Proposing Release, in connection with
the 2015 amendments to Regulation A, the Commission did not provide
for preemption of State securities law registration and
qualification requirements for Tier 1 offerings in light of concerns
raised by State regulators about the testing-the-waters provisions
applicable to Regulation A, as well as what the Commission
anticipated would be the generally more local nature of Tier 1
offerings.
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b. Regulation Crowdfunding
Rule 255 of Regulation A permits an issuer to test the waters prior
to filing the offering statement with the Commission. In contrast to
Regulation A, an issuer conducting an offer pursuant to Regulation
Crowdfunding currently may not solicit interest or make offers or sales
under Regulation Crowdfunding prior to filing a Form C with the
Commission.\251\
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\251\ See Section 4A(b) of the Securities Act.
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i. Proposed Amendments
The Commission proposed to permit Regulation Crowdfunding issuers
to test the waters orally or in writing prior to filing a Form C with
the Commission under proposed Rule 206, which is based on existing Rule
255 of Regulation A.\252\ As proposed, Rule 206 would permit issuers to
test the waters with potential investors, and such testing-the-waters
materials would be considered offers subject to the antifraud
provisions of the Federal securities laws. Similar to Rule 255,
proposed Rule 206 would require issuers to include legends providing
that:
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\252\ The Commission also proposed an amendment to Rule 204 to
permit issuers to engage in communications under proposed Rule 206.
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No money or other consideration is being solicited, and if
sent, will not be accepted;
No sales will be made or commitments to purchase accepted
until the Form C offering statement is filed with the Commission and
only through an intermediary's platform; and
Prospective purchaser's indications of interest are non-
binding.
In addition, pursuant to proposed Rule 201(z), issuers would be
required to include any Rule 206 solicitation materials with the Form C
that is filed with the Commission. Unlike Rule 255 of Regulation A,
which permits issuers to use testing-the-waters materials both before
and after the filing of the offering statement with the Commission,
proposed Rule 206 would only permit testing the waters before the Form
C is filed. Once the Form C is filed, any offering communications would
be required to comply with the terms of Regulation Crowdfunding,
including the Rule 204 advertising restrictions.
ii. Comments
Commenters addressing the proposal generally supported permitting
testing-the-waters communications in Regulation Crowdfunding
offerings.\253\ Some of these commenters recommended permitting broad
testing the waters with few limits,\254\ while others recommended only
permitting testing the waters through the use of or after engaging an
intermediary.\255\ Some of these commenters additionally suggested that
permitting testing the waters in Regulation Crowdfunding will improve
the offering process for issuers \256\ and be a benefit to potential
investors.\257\ In contrast, one commenter expressed concern that
relaxing the restrictions on testing-the-waters communications in the
crowdfunding market could put investors at risk.\258\
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\253\ See, e.g., Letter from Andrew A. Schwartz dated May 21,
2020 (``A. Schwartz Letter''); Letter from Wefunder dated May 28,
2020 (``Wefunder Letter''); SEC SBCFAC Letter; J. Clarke Letter;
Silicon Prairie Letter; Republic Letter; NextSeed Letter;
S[omacr].Capital Letter; W. Hubbard Letter; SAF Letter; Letter from
Engine Advocacy dated June 1, 2020 (``Engine Letter''); D. Burton
Letter; Letter from InnaMed, Inc., et al. dated June 1, 2020
(``InnaMed, et al. Letter''); Letter from SeedInvest dated June 4,
2020 (``SeedInvest Letter''); Crowdwise Letter; CrowdCheck Letter;
Letter from Honeycomb Credit Inc. dated June 17, 2020 (``Honeycomb
Letter''); R. Campbell Letter; and Ketsal Letter. See also Letter
from Association of Online Investment Platforms, dated September 1,
2020 (``AOIP Letter'') (suggesting the Commission immediately allow
Regulation Crowdfunding issuers to test the waters prior to the
filing of a Form C in response to the COVID-19 pandemic).
\254\ See, e.g., A. Schwartz Letter (recommending permitting
advertising and general solicitations); and InnaMed, et al. Letter.
See also D. Burton Letter; and W. Hubbard Letter (each suggesting
that additional restrictions on the manner of communication are
unnecessary).
\255\ See, e.g., NextSeed Letter; and CrowdCheck Letter. See
also CFA Letter (expressing opposition to the proposal and
supporting restricting crowdfunding communications to communications
through intermediary platforms, both before and after a Form C is
filed with the Commission).
\256\ See, e.g., SeedInvest Letter; and Honeycomb Letter.
\257\ See, e.g., Wefunder Letter (suggesting investors may be
able to set more reasonable terms); and Engine Letter (suggesting
investors will be able to avoid committing equity to campaigns not
likely to be successful).
\258\ See CFA Letter (expressing concern about the proposal due
to the poor record of issuer compliance with Regulation Crowdfunding
rules).
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iii. Final Amendments
We are adopting the amendments as proposed to permit Regulation
Crowdfunding issuers to test the waters orally or in writing prior to
filing a Form
[[Page 3524]]
C with the Commission under Rule 206, which is based on existing Rule
255 of Regulation A.\259\ For the reasons discussed below, we believe
that permitting Regulation Crowdfunding issuers to engage in such
communications will further the public interest while being consistent
with the protection of investors.
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\259\ We are amending 17 CFR 227.203(a)(1) (``Rule 203(a)(1)'')
to clarify that a Regulation Crowdfunding issuer may rely on new
Rule 206 to offer securities prior to filing a Form C with the
Commission. We are also amending Rule 204, as proposed, to permit
issuers to engage in communications under new Rule 206.
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As adopted, new Rule 206 permits issuers to test the waters with
all potential investors. Like Rule 255, Rule 206 requires issuers to
include legends in the testing-the-waters materials. Specifically, Rule
206 requires issuers to state that: (1) No money or other consideration
is being solicited, and if sent, will not be accepted; (2) no offer to
buy the securities can be accepted and no part of the purchase price
can be received until the offering statement is filed and only through
an intermediary's platform; \260\ and (3) a prospective purchaser's
indication of interest is non-binding. These testing-the-waters
materials would be considered offers that are subject to the antifraud
provisions of the Federal securities laws. We are additionally amending
17 CFR 227.201(z) (``Rule 201(z)'') as proposed to require issuers to
include any Rule 206 solicitation materials with the Form C that is
filed with the Commission. We believe that making the solicitation
materials publicly available will promote accountability for the
content of those materials and help to ensure that they are consistent
with the information contained in the Regulation Crowdfunding offering
materials.
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\260\ The Proposing Release discussed, but the proposed text of
Rule 206 did not include, the phrase ``and only through an
intermediary's platform.'' Rule 206 as adopted includes this
language, which is consistent with 17 CFR 227.100(a)(3).
---------------------------------------------------------------------------
Unlike Rule 255 of Regulation A, which permits issuers to use
testing-the-waters materials both before and after the filing of the
offering statement with the Commission, Rule 206 will only permit
issuers to use testing-the-waters materials before the Form C is filed.
Once the Form C is filed, any offering communications are required to
comply with the terms of Regulation Crowdfunding, including the Rule
204 advertising restrictions. We believe this is appropriate because,
while sales under Regulation A may not occur until after the offering
statement is qualified, a Regulation Crowdfunding intermediary may
accept investment commitments from the time of filing the Form C.
Although some commenters suggested that we require testing the
waters to be conducted only through intermediary platforms, we believe
that such a requirement would unnecessarily limit the flexibility
provided by the new rule by effectively requiring an issuer to enter
into a formal relationship with an intermediary prior to determining
whether it will proceed with an offering under Regulation Crowdfunding.
Nevertheless, we believe issuers may choose to engage an intermediary
before testing the waters so that they have a readily available means
to receive feedback and questions from prospective investors.
We acknowledge the concern raised by some commenters about the
increased communications permitted by new Rule 206--and other proposed
changes to the requirements of Regulation Crowdfunding \261\--in light
of questions about the extent of issuer compliance with existing
Regulation Crowdfunding requirements. We remind issuers of their
obligation to comply with the terms, conditions, and requirements of
Regulation Crowdfunding and the serious consequences that may result
from a failure to do so, such as the potential loss of the exemption
and ensuing potential private rights of action for rescission for
violations of Section 5 of the Securities Act and loss of preemption
for State securities law registration requirements.\262\ We also remind
intermediaries of their obligation under 17 CFR 227.301(a) (``Rule
301(a)'') to have a reasonable basis for believing that an issuer
seeking to offer and sell securities in reliance on Section 4(a)(6)
through the intermediary's platform complies with the requirements in
Securities Act Section 4A(b) and the related requirements in Regulation
Crowdfunding.\263\ Commission staff will continue to work with FINRA to
assess issuer and intermediary compliance with the requirements of
Regulation Crowdfunding.
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\261\ See infra note 428.
\262\ While 17 CFR 227.502(a) sets forth a safe harbor for
insignificant deviations, 17 CFR 227.502(b) makes it clear that such
safe harbor does not preclude the Commission from bringing an
enforcement action seeking appropriate relief for an issuer's
failure to comply with all applicable terms, conditions, and
requirements of Regulation Crowdfunding.
\263\ Rule 301(a) also permits intermediaries to reasonably rely
on representations of the issuer, unless the intermediary has reason
to question the reliability of those representations. As discussed
in the Crowdfunding Adopting Release, in satisfying the requirements
of Rule 301(a), an intermediary has a responsibility to assess
whether it may reasonably rely on an issuer's representation of
compliance through the course of its interactions with potential
issuers. See Crowdfunding Adopting Release, at Section II.C.3.a.(3).
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In light of the foregoing, we believe that permitting issuers to
test the waters orally or in writing prior to incurring the expense of
filing a Form C with the Commission may greatly facilitate the use of
the Regulation Crowdfunding exemption, as well as limit the costs
incurred by those issuers. We further believe that the flexibility
afforded by the amendment will benefit investors, who will be able to
have input into the structuring of the offering and convey to the
issuer the types of information about which they are most
interested.\264\
---------------------------------------------------------------------------
\264\ See, e.g., Transcript of SEC Small Business Capital
Formation Advisory Committee (May 8, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 72-
73 (noting that when investors are involved earlier in the process,
it allows more time for them to ``garner more information to make a
well informed decision'' when it is time to make an investment).
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3. Other Regulation Crowdfunding Offering Communications
An issuer may not advertise the terms of a Regulation Crowdfunding
offering \265\ outside of the intermediary's platform except in a
notice that directs investors to the intermediary's platform and is
limited to the information enumerated in Rule 204 of Regulation
Crowdfunding.\266\ An issuer may communicate with investors and
potential investors about the terms of the offering through
communication channels provided on the intermediary's platform.\267\
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\265\ For purposes of Rule 204, the ``terms of [a Regulation
Crowdfunding] offering'' currently means the amount of securities
offered, the nature of the securities, the price of the securities
and the closing date of the offering period.
\266\ Rule 204 limits the information to: A statement that the
issuer is conducting an offering pursuant to Section 4(a)(6) of the
Securities Act, the name of the intermediary through which the
offering is being conducted, and a link directing the potential
investor to the intermediary's platform; the terms of the offering;
and specified factual information about the legal identity and
business location of the issuer.
\267\ See 17 CFR 227.204(c).
---------------------------------------------------------------------------
a. Proposed Amendments
The Commission proposed to amend Rule 204 to permit oral
communications with prospective investors once the Form C is filed, so
long as the communications comply with the requirements of Rule
204.\268\ The proposed changes would align the Regulation Crowdfunding
[[Page 3525]]
communication rules more closely with Rule 255 of Regulation A.
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\268\ For a discussion of the proposals regarding communications
prior to the filing of a Form C, see supra Section II.B.2.
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b. Comments
Most commenters that addressed permitting oral communications about
the offering outside of the funding portal's platform channels
supported the proposal,\269\ while some commenters opposed allowing
such communications.\270\ Some of the commenters supporting the
proposal recommended that the Commission go further and expand the
information that issuers are permitted to provide, such as allowing
disclosure of the planned use of proceeds and progress towards meeting
the issuer's funding goals.\271\
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\269\ See, e.g., CfPA Letter; R. Campbell Letter; J. Clarke
Letter (noting the importance of outside oral communications
directing investors to the platform for completion of the offering);
Netcapital Letter; Republic Letter; NextSeed Letter; W. Hubbard
Letter; Raise Green & New Haven Comm. Solar Letter; CrowdCheck
Letter; and Honeycomb Letter (recommending eliminating Rule 204).
Some of these commenters supported permitting information related to
concurrent offerings to be disclosed in those offering materials.
See J. Clarke Letter; and CrowdCheck Letter.
\270\ See, e.g., CFA Institute Letter.
\271\ See, e.g., CfPA Letter (recommending permitting both oral
and written communications); J. Clarke Letter (recommending
permitting disclosure of the use of proceeds as well as how the
offering is progressing); Netcapital Letter; Republic Letter
(recommending unrestricted communications); and W. Hubbard Letter.
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We requested comment in the Proposing Release as to whether we
should consider revisions to Regulation Crowdfunding that relate to
intermediaries involved in concurrent exempt offerings or provide
guidance regarding issues that may arise when an intermediary seeks to
host concurrent offerings. A few commenters supported permitting
Regulation Crowdfunding portals to be used to sell Rule 506(c)
offerings.\272\ One of these commenters also expressed support for
providing Commission guidance.\273\ Another commenter questioned the
need for guidance and stated its view that it is ``standard market
practice'' for concurrent Rule 506(c) offerings to be offered and sold
alongside Regulation Crowdfunding offerings on the same online
platform.\274\
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\272\ See Letter from Fred Pea dated Apr. 25, 2020; J. Clarke
Letter; and W. Hubbard Letter.
\273\ See W. Hubbard Letter.
\274\ See CrowdCheck Letter (``Where the platform is not a
registered broker-dealer, the Regulation [Crowdfunding] offering is
intermediated by a registered funding portal, and the Rule 506(c)
offering is not intermediated by the funding portal but hosted by
the same technology and no commission is charged.'').
---------------------------------------------------------------------------
c. Final Amendments
We are adopting the amendments substantially as proposed to permit
oral communications with prospective investors once the Form C is
filed, so long as the communications comply with the requirements of
Rule 204. In connection with this amendment to 17 CFR 227.204(a), we
have revised 17 CFR 227.204(b)(1) (``Rule 204(b)(1)''), as proposed, to
indicate that a link to the intermediary's platform is only required to
be provided when the communications are in writing. In response to
comment, we are also expanding the information that an issuer may
provide in accordance with Rule 204 to include:
A brief description of the planned use of proceeds of the
offering; and
Information on the issuer's progress toward meeting its
funding goals.
We believe that investors will find this information useful in
making an investment decision and that the incremental increase in the
limited information permitted to be provided under the amendments is
unlikely to affect investor protection, particularly because the
investors receiving the information will continue to be directed to the
intermediary's platform where they can access the disclosures necessary
for them to make informed investment decisions. We also believe that
these amendments to Rule 204 will improve the information available to
investors and provide issuers with certainty as to the acceptable form
and content of communications with potential investors.
In a further change from the proposal, in response to
comments,\275\ we are adding a new 17 CFR 227.204(d) to specify that an
issuer may provide information about the terms of an offering under
Regulation Crowdfunding in the offering materials for a concurrent
offering, such as in an offering statement on Form 1-A for a concurrent
Regulation A offering or a Securities Act registration statement filed
with the Commission, without violating Rule 204. To do so, the
information provided about the Regulation Crowdfunding offering must be
in compliance with Rule 204, including the requirement to include a
link directing the potential investor to the intermediary's platform as
required by Rule 204(b)(1). However, in accordance with the
Commission's rules with respect to the use of hyperlinks in electronic
filings, such link may not be a live hyperlink.\276\ We believe the
change to Rule 204 will allow issuers to conduct concurrent offerings
more easily under different exemptions, without sacrificing investor
protection.
---------------------------------------------------------------------------
\275\ See CrowdCheck Letter.
\276\ See 17 CFR 232.105(b). We note that the information
contained in the linked material will not be considered part of the
document for determining compliance with reporting obligations, but
the inclusion of the link will cause the filer to be subject to the
civil liability and antifraud provisions of the Federal securities
laws with reference to the information contained in the linked
material. See 17 CFR 232.105(c).
---------------------------------------------------------------------------
Further, in response to commenters who requested clarification on
whether funding portals can host concurrent offerings, we note that
under 17 CFR 227.401 (``Rule 401'' of Regulation Crowdfunding), a
funding portal is exempt from the broker registration requirements of
Section 15(a) of the Exchange Act only in connection with its
activities as an intermediary in a transaction involving the offer or
sale of securities for the account of others, pursuant to Section
4(a)(6) of the Securities Act. To the extent a funding portal seeks to
host a concurrent offering pursuant to another offering exemption, it
would need to consider whether these additional activities could cause
it to lose the exemption provided by Rule 401,\277\ or otherwise become
subject to broker registration requirements.\278\
---------------------------------------------------------------------------
\277\ Among other things, the funding portal should consider
whether it is clear that the offerings are being conducted under
different exemptions from registration, including whether the
funding portal has provided appropriate disclosures to avoid
investor confusion.
\278\ The question of whether a person is a broker within the
meaning of Section 3(a)(4) turns on the facts and circumstances of
the matter. Because the Exchange Act does not define what it means
to be ``engaged in the business'' or ``effecting transactions,'' the
Commission has looked to an array of factors in determining whether
a person is a broker within the meaning of the statute. See, e.g.,
SEC v. Helms, No. 13-cv-01036, 2015 WL 5010298, at *17 (W.D. Tex.
Aug. 21, 2015) (``In determining whether a person `effected
transactions [within the meaning of Section 3(a)(4)],' courts
consider several factors, such as whether the person: (1) Solicited
investors to purchase securities, (2) was involved in negotiations
between the issuer and the investor, and (3) received transaction-
related compensation.'') (citing cases initiated by the Commission).
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C. Rule 506(c) Verification Requirements
Rule 506(c) permits issuers to generally solicit and advertise an
offering, provided that all purchasers in the offering are accredited
investors, the issuer takes reasonable steps to verify that purchasers
are accredited investors, and certain other conditions in Regulation D
are satisfied.\279\ Rule 506(c) provides a principles-based method for
verification of accredited investor status as well as a non-exclusive
list of verification methods. The principles-based method of
verification requires an objective
[[Page 3526]]
determination by the issuer (or those acting on its behalf) as to
whether the steps taken are ``reasonable'' in the context of the
particular facts and circumstances of each purchaser and
transaction.\280\ Rule 506(c) includes a non-exclusive list of
verification methods that issuers may use, but are not required to use,
when seeking to satisfy the verification requirement with respect to
natural person purchasers.\281\
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\279\ See 17 CFR 230.501 (Definitions and terms used in
Regulation D); Rule 502(a) (Integration); and 17 CFR 230.502(d)
(Limitations on Resales).
\280\ See Rule 506(c) Adopting Release, at Section II.B.1.
\281\ The rule does not set forth a non-exclusive list of
methods for the verification of investors that are not natural
persons. In the adopting release, the Commission expressed the view
that the potential for uncertainty and the risk of participation by
non-accredited investors is highest in offerings involving natural
persons as investors. See Rule 506(c) Adopting Release, at Section
II.B.3.
---------------------------------------------------------------------------
1. Proposed Amendments
The Commission proposed to add a new item to the non-exclusive list
in Rule 506(c) that would allow an issuer to establish that an investor
that the issuer previously took reasonable steps to verify as an
accredited investor remains an accredited investor as of the time of a
subsequent sale if the investor provides a written representation that
the investor continues to qualify as an accredited investor and the
issuer is not aware of information to the contrary. In the Proposing
Release, the Commission expressed the view that this new method would
reduce the cost and burden of verification for issuers while
alleviating privacy concerns associated with investors having to
repeatedly provide financially sensitive information to the issuer and
noted that the risk of investor harm would be mitigated by the pre-
existing relationship between the issuer and such investor.\282\ The
Commission additionally reaffirmed its prior guidance that the
principles-based method in Rule 506(c) was intended to provide issuers
with significant flexibility in deciding the steps needed to verify a
person's accredited investor status and to avoid requiring them to
follow uniform verification methods that may be ill-suited or
unnecessary to a particular offering or purchaser in light of the facts
and circumstances.\283\
---------------------------------------------------------------------------
\282\ See Proposing Release, at Section II.C.
\283\ See id. See also Rule 506(c) Adopting Release, at Section
II.B.1.
---------------------------------------------------------------------------
2. Comments
Commenters that addressed verification generally supported the
proposal to allow an issuer to establish that an investor that the
issuer previously took reasonable steps to verify as an accredited
investor remains an accredited investor as of the time of a subsequent
sale if the investor provides a written representation that the
investor continues to qualify as an accredited investor and the issuer
is not aware of information to the contrary.\284\ A number of these
commenters expressed concern that the requirement to take reasonable
steps to verify accredited investor status has generally affected
issuers' willingness to use Rule 506(c).\285\ One commenter supported
eliminating the verification requirement entirely,\286\ while another
commenter expressed support for the existing standard.\287\
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\284\ See, e.g., ABA Letter; Geraci Law Letter; Netcapital
Letter; Md. St. Bar Assoc. Letter; NextSeed Letter; Letter from
Shaver Law Group, LLC dated June 1, 2020; W. Hubbard Letter; Letter
from Mark Schonberger dated June 1, 2020 (``M. Schonberger
Letter''); IAA Letter; Letter from TIAA dated June 1, 2020 (``TIAA
Letter''); Invesco Letter; D. Burton Letter; and IPA Letter.
\285\ See, e.g., Geraci Law Letter; J. Clarke Letter; NextSeed
Letter; W. Hubbard Letter; TIAA Letter; and D. Burton Letter
(suggesting that the income verification requirements are the
primary concern); and IPA Letter. In contrast, one commenter
suggested that the principal reason more issuers do not use Rule
506(c) is that they do not need it. See CrowdCheck Letter.
\286\ See W. Hubbard Letter.
\287\ See ABA Letter (supporting the existing principles-based
method and clear objective standards in the accredited investor
definition).
---------------------------------------------------------------------------
Some commenters, on the other hand, opposed the additional
verification method.\288\ These commenters expressed concern that
permitting reliance on previous verification would not account for
changes in investor financial circumstances over time and could
therefore result in issuers raising money from investors that may have
lost their accredited investor status.\289\ Some commenters that
supported permitting reliance on previous verification also supported
imposing time limits on such reliance in order to alleviate this
concern.\290\
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\288\ See, e.g., CFA Letter (noting that an investor's ability
to meet the financial thresholds that determine whether they are
accredited can and does change over time and suggesting that
permitting issuers to rely on previous verification will result in
purchasers that are not accredited investors in contravention of the
condition in Rule 506(c) that all purchasers must be accredited
investors); Better Markets Letter (expressing concern that
permitting reliance on the prior verification could lead to issuers,
especially issuers of risky investments, to design mechanisms that
maximize self-certification); and R. Rutkowski Letter. See also
CrowdCheck Letter (questioning whether additional verification
procedures would be helpful to increase utilization of Rule 506(c)).
\289\ See, e.g., CFA Letter; and Better Markets Letter.
\290\ See, e.g., Md. St. Bar Assoc. Letter (suggesting that an
unlimited time period could call into question the appropriateness
of the method and supporting a ``reasonable time limit''); NextSeed
Letter (acknowledging limits to reliance after an extended period of
time has passed, such as five years); W. Hubbard Letter (supporting
a three- to five-year time limit); Invesco Letter (supporting a two-
year lookback on verification which would tie the standard to the
two-year income test in Rule 501(a)(6). In contrast, some commenters
specifically opposed any time limit. See M. Schonberger Letter; and
Netcapital Letter.
---------------------------------------------------------------------------
A number of commenters expressed the need for additional guidance
under the principles-based reasonable steps approach.\291\ Several
commenters also supported additional or alternative verification
methods,\292\ with some commenters offering specific alternatives, such
as minimum investment amounts,\293\ self-certification,\294\ or
reliance on a financial intermediary.\295\
---------------------------------------------------------------------------
\291\ See, e.g., ABA Letter (recommending confirmation that the
means of verification may be relied on in making determinations
under Section 12(g)); IAA Letter (recommending that the Commission
provide clear assurances to issuers that they may rely on the
principles-based reasonable steps approach, including confirmation
that it could be reasonable under the facts and circumstances for
issuers to contract with a third party to conduct the required
verification); TIAA Letter (recommending clear guidance that the
non-exclusive list is not prescriptive); Fried Frank Letter
(recommending guidance with respect to verification of the status of
a trust); NextSeed Letter (recommending additional guidance with
respect to what actions would constitute ``reasonable steps''
generally and in particular with respect to verification of trusts);
and IPA Letter (recommending that the Commission reaffirm and
provide clarity on the Commission's prior guidance that the non-
exclusive list is not prescriptive, and that a range of verification
methods not enumerated in the rule may qualify as ``reasonable,''
and provide guidance with respect to verification by broker-dealers
and registered investment advisers). In contrast, one commenter
suggested that additional guidance is unnecessary. See CrowdCheck
Letter.
\292\ See, e.g., W. Hubbard Letter; Invesco Letter (recommending
verification only apply to natural persons); and IPA Letter
(recommending additional means to verify status including an annual
net worth certification process). In addition, some commenters
generally supported additional verification methods in light of the
amendments to the accredited investor definition. See, e.g., Geraci
Law Letter; W. Hubbard Letter; IAA Letter; and D. Burton Letter.
\293\ See, e.g., CrowdCheck Letter; Invesco Letter; and NextSeed
Letter.
\294\ See, e.g., Sen. Toomey Letter; IPA Letter; and NextSeed
Letter. See also D. Burton Letter; and J. Clarke Letter.
\295\ See, e.g., Fried Frank Letter (recommending not requiring
further verification for investors who have been verified as
accredited investors by registered broker-dealers and registered
investment advisers and that a representation from an investor to a
registered broker-dealer or registered investment adviser with which
the investor has a substantive pre-existing relationship is
sufficient verification); Letter from Macquarie Investment
Management dated June 29, 2020; and TIAA Letter (recommending not
requiring verification for offerings involving a registered
investment adviser, broker-dealer placement agent or other such
intermediary).
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3. Final Amendments
We are adopting the amendments substantially as proposed with some
changes in response to comments. In addition, we are re-affirming the
guidance in the Proposing Release. As
[[Page 3527]]
proposed, we are permitting an issuer to establish that an investor
that the issuer previously took reasonable steps to verify as an
accredited investor in accordance with Rule 506(c)(2)(ii) remains an
accredited investor as of the time of a subsequent sale if the investor
provides a written representation that the investor continues to
qualify as an accredited investor and the issuer is not aware of
information to the contrary. In a change from the proposal, in response
to commenter feedback, we are adding a time limit on the ability of an
issuer to rely on the earlier verification.
We believe that permitting an issuer to rely on a prior
verification of accredited investor status will reduce the cost and
burden of verification for issuers that engage in more than one Rule
506(c) offering over time, and therefore may, to some extent, address
commenters' concern that the requirement to take reasonable steps to
verify accredited investor status has affected issuers' willingness to
use Rule 506(c). We recognize, as some commenters expressed, that over
an unlimited time period permitting reliance on a prior verification
may not appropriately account for changes in investor financial
circumstances and could result in issuers raising money from non-
accredited investors. Because such concerns could call into question
the appropriateness of the verification method, we are adopting a five-
year time limit on the ability of issuers to rely on a prior
verification. A five-year period is not so remote that the initial
verification is no longer meaningful, but also provides issuers relying
on the prior verification substantial cost savings. We believe the
inclusion of a five-year time limit, together with the pre-existing
relationship between the issuer and such investor, will appropriately
balance reducing the cost and burden of verification for issuers with
the mitigation of risk of investor harm caused by issuers selling to
non-accredited investors.
In addition, as indicated in the Proposing Release, we are
reaffirming and updating the Commission's prior guidance with respect
to the principles-based method for verification, and in particular what
may be considered ``reasonable steps'' to verify an investor's
accredited investor status, in order to reduce concerns that an
issuer's method of verification may be second guessed by regulators or
other market participants without regard to the analysis performed by
the issuer in making the determination and to encourage more issuers to
rely on additional verification methods tailored to their specific
facts and circumstances.\296\ The principles-based method was intended
to provide issuers with significant flexibility in deciding the steps
needed to verify a person's accredited investor status and to avoid
requiring them to follow uniform verification methods that may be ill-
suited or unnecessary to a particular offering or purchaser in light of
the facts and circumstances.\297\ The Commission has previously
indicated, and we continue to believe, that the following factors are
among those an issuer should consider when using this principles-based
method of verification:
---------------------------------------------------------------------------
\296\ Commenters that addressed the issue of Commission guidance
generally supported the Commission's updated guidance. See supra
note 291.
\297\ See Rule 506(c) Adopting Release, at Section II.B.1.
---------------------------------------------------------------------------
The nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
The amount and type of information that the issuer has
about the purchaser; and
The nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.\298\
---------------------------------------------------------------------------
\298\ See id. at Section II.B.3.a.
---------------------------------------------------------------------------
We are of the view that, in some circumstances, the reasonable
steps determination may not be substantially different from an issuer's
development of a ``reasonable belief'' for Rule 506(b) purposes. For
example, an issuer's receipt of a representation from an investor as to
his or her accredited status could meet the ``reasonable steps''
requirement if the issuer reasonably takes into consideration a prior
substantive relationship with the investor or other facts that make
apparent the accredited status of the investor. That same
representation from an investor may not meet the ``reasonable steps''
requirement if the issuer has no other information about the investor
or has information that does not support the view that the investor was
an accredited investor.\299\
---------------------------------------------------------------------------
\299\ We caution issuers that we continue to believe that an
issuer will not be considered to have taken reasonable steps to
verify accredited investor status if it, or those acting on its
behalf, require only that a person check a box in a questionnaire or
sign a form, absent other information about the purchaser indicating
accredited investor status.
---------------------------------------------------------------------------
We are not adopting additional amendments to the definition to
expand the list of verification methods, as requested by some
commenters. We appreciate that the addition of further verification
methods to the non-exclusive list could provide greater certainty to
issuers as to satisfaction of the rule's verification requirement, but
are mindful that significant expansion of the list could further
undermine the use of the principles-based method of verification. We
believe that the methods suggested by commenters as possible additions
to the list may be considered by an issuer under the principles-based
method, depending on the particular facts and circumstances of its
offering, and do not wish to limit that flexibility.
We remind issuers that they are not required to use any of the
methods set forth in the non-exclusive list and can apply the
reasonableness standard directly to the specific facts and
circumstances presented by the offering and the investors. We do not
believe additional guidance is warranted at this time. We also do not
believe it is appropriate to provide guidance, as suggested by a
commenter, with respect to reliance on the specified verification
methods in making determinations of accredited investor status under
Section 12(g). We continue to believe that requiring issuers to
consider their particular facts and circumstances in establishing a
reasonable basis for their determination of accredited investor status
for Section 12(g) purposes provides issuers with appropriate
flexibility for making the determination.\300\
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\300\ See Changes to Exchange Act Registration Requirements to
Implement Title V and Title VI of the JOBS Act, Release No. 33-10075
(May 3, 2016) [81 FR 28689 (May 10, 2016)], at text accompanying
note 71. The term ``accredited investor'' for purposes of Section
12(g)(1) is as defined in 17 CFR 230.501(a), which provides that an
accredited investor is any person who comes within one or more of
the categories of investors specified therein, or whom the issuer
reasonably believes comes within any such category. Whether the
issuer has a reasonable belief depends on the particular facts and
circumstances surrounding the determination. Under 17 CFR 240.12g-1,
an issuer needs to determine, based on the facts and circumstances,
whether prior information provides a basis for a reasonable belief
that the security holder continues to be an accredited investor as
of the last day of the fiscal year. See id. at Section II.B.3.
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D. Harmonization of Disclosure Requirements
[[Page 3528]]
Currently, the exempt offerings rules provide different financial
statement information requirements for Regulation A and Regulation D.
Additionally, in some areas compliance with Regulation A is more
complex or difficult than for registered offerings, such as with
respect to the rules regarding redaction of confidential information in
material contracts and incorporation by reference. Finally, the Supreme
Court's decision in Food Marketing Institute v. Argus Leader Media
\301\ led the Commission to review its standard for allowing redaction
of information from certain exhibits.
---------------------------------------------------------------------------
\301\ 139 S.Ct. 2356 (2019) (``Food Marketing Institute'').
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1. Rule 502(b) of Regulation D
When non-accredited investors are participating in an offering
under Rule 506(b), the issuer conducting the offering must furnish the
information required by Rule 502(b),\302\ including specified financial
statement and non-financial information, to such non-accredited
investors a reasonable time prior to the sale of the securities and
must provide these investors with the opportunity to ask questions and
receive answers about the offering.\303\ This includes, if the issuer
is not subject to the reporting requirements of Section 13 \304\ or
15(d) \305\ of the Exchange Act, the following financial statement
information:
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\302\ See 17 CFR 230.502(b)(2)(i) through (vii).
\303\ See 17 CFR 230.502(b)(2)(v). Although not expressly
required by Rule 502(b), issuers and funds conducting Rule 506(b)
offerings exclusively to accredited investors often provide those
accredited investors with information about the issuer in view of
the antifraud provisions of the Federal securities laws. See Note to
Rule 502(b).
\304\ 15 U.S.C. 78m.
\305\ 15 U.S.C. 78o(d).
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For offerings up to $2 million: The information required
in 17 CFR 210.8-01 through 8-08 (``Article 8 of Regulation S-X''),
except that only the issuer's balance sheet, which shall be dated
within 120 days of the start of the offering, must be audited; \306\
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\306\ See 17 CFR 230.502(b)(2)(i)(B)(1) (``Rule
502(b)(2)(i)(B)(1)'').
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For offerings up to $7.5 million: The financial statement
information required in 17 CFR 239.11 (``Form S-1'') for smaller
reporting companies.\307\
---------------------------------------------------------------------------
\307\ See 17 CFR 230.502(b)(2)(i)(B)(2) (``Rule
502(b)(2)(i)(B)(2)''). See also 17 CFR 240.12b-2 (defining smaller
reporting company).
---------------------------------------------------------------------------
For offerings over $7.5 million: The financial statement
information as would be required in a registration statement filed
under the Securities Act on the form that the issuer would be entitled
to use; \308\ and
---------------------------------------------------------------------------
\308\ See 17 CFR 230.502(b)(2)(i)(B)(3) (``Rule
502(b)(2)(i)(B)(3)''). For offerings above $2 million, issuers that
cannot obtain audited financial statements without unreasonable
effort and expense, that are not limited partnerships, are only
required to have the balance sheet, which must be dated within 120
days of the start of the offering, audited. If the issuer is a
limited partnership, and it cannot obtain audited financial
statements without unreasonable effort and expense it may furnish
financial statements that have been prepared on the basis of Federal
income tax requirements and examined and reported on in accordance
with generally accepted auditing standards by an independent public
or certified accountant. See Rules 502(b)(2)(i)(B)(2) and (3).
---------------------------------------------------------------------------
For offerings by foreign private issuers eligible to use
17 CFR 249.220f (``Form 20-F''): The same kind of information required
to be included in a registration statement filed under the Securities
Act on the form that the issuer would be entitled to use.\309\
---------------------------------------------------------------------------
\309\ See 17 CFR 230.502(b)(2)(i)(C). The financial statements
provided by foreign private issuers eligible to use Form 20-F need
be certified only to the extent required by paragraph Rules
502(b)(2)(i)(B)(1), (2), or (3), as appropriate. See id.
---------------------------------------------------------------------------
Similarly, issuers conducting offerings pursuant to Regulation A
are required to provide certain financial statement and non-financial
information to investors. Table 4 summarizes the financial information
issuers conducting a Regulation A offering are required to provide
under Part F/S of Form 1-A.
Table 4--Current Regulation A Financial Statement Requirements
----------------------------------------------------------------------------------------------------------------
Financial statement Age of financial
Offering size information required statements Audit required
----------------------------------------------------------------------------------------------------------------
Up to $20 million (Tier 1)........... Consolidated balance Not more than nine No, unless issuer has
sheets of the issuer months before the date already obtained an
for the two previous of non-public audit for another
fiscal year ends (or submission, filing or purpose.
for such shorter time qualification, with
that the issuer has the most recent annual
been in existence);. or interim balance
Consolidated statements sheet not older than
of comprehensive nine months.
income, cash flows,
and stockholders'
equity of the issuer;
and.
Financial statements of
guarantors and issuers
of guaranteed
securities, affiliates
whose securities
collateralize an
issuance, significant
acquired or to be
acquired businesses
and real estate
operations, and pro
forma information
relating to
significant business
combinations.
Up to $50 million (Tier 2)........... Financial statements in Not more than nine Yes (but see paragraph
compliance with months before the date (c) in Part F/S of
Article 8 of of non-public Form 1-A noting that
Regulation S-X. submission, filing or interim financial
qualification, with statements need not be
the most recent annual audited).
or interim balance
sheet not older than
nine months.
----------------------------------------------------------------------------------------------------------------
a. Proposed Amendments
The Commission proposed to amend Rule 502(b)'s requirements
governing the financial information that non-reporting companies must
provide to non-accredited investors participating in Regulation D
offerings to align with the financial information that issuers must
provide investors in Regulation A
[[Page 3529]]
offerings. Specifically, for Regulation D offerings of $20 million or
less, proposed Rule 502(b)(2)(i)(B)(1) would refer such issuers to
paragraph (b) of part F/S of Form 1-A, which applies to Tier 1
Regulation A offerings. For offerings of greater than $20 million,
proposed Rule 502(b)(2)(i)(B)(2) would refer issuers to paragraph (c)
of part F/S of Form 1-A, which applies to Tier 2 Regulation A
offerings.\310\ This proposed amendment would eliminate the current
Rule 502(b) provisions that permit an issuer, other than a limited
partnership, that cannot obtain audited financial statements without
unreasonable effort or expense, to provide only the issuer's audited
balance sheet.\311\
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\310\ As proposed, issuers need not comply with the other
ongoing non-financial statement disclosure requirements in Tier 2
Regulation A offerings. Instead, the proposed requirement would be
limited to harmonization of the financial statement disclosure
requirements outlined in the offering circular.
\311\ See Rules 502(b)(2)(i)(B)(2) and (3).
---------------------------------------------------------------------------
In addition, under the proposed amendments, a foreign private
issuer that is not an Exchange Act reporting company would be required
to provide financial statement disclosure consistent with the
Regulation A requirements.\312\ The foreign private issuer would be
permitted to provide financial statements prepared in accordance with
either U.S. GAAP or International Financial Reporting Standards as
issued by the International Accounting Standards Board. For business
combinations and exchange offers, an issuer that is not an Exchange Act
reporting company would provide financial statements consistent with
the Regulation A requirements.
---------------------------------------------------------------------------
\312\ The term ``foreign private issuer'' means any foreign
issuer, other than a foreign government, except an issuer meeting
the following conditions as of the last business day of its most
recently completed second fiscal quarter: (i) More than 50 percent
of the outstanding voting securities of such issuer are directly or
indirectly owned of record by residents of the United States; and
(ii) any of the following: (a) The majority of the executive
officers or directors are United States citizens or residents; (b)
more than 50 percent of the assets of the issuer are located in the
United States; or (c) the business of the issuer is administered
principally in the United States. See 17 CFR 230.405.
---------------------------------------------------------------------------
b. Comments
Commenters were divided on the proposal. Some commenters supported
aligning the financial statement information requirements in Rule
502(b) with the requirements of Regulation A,\313\ while others opposed
the proposal.\314\ One commenter, who opposed the proposal, questioned
whether the financial statement information requirements in Rule 502(b)
are overly burdensome given the amounts raised under Rule 506(b) and
whether the Regulation A disclosure requirements were appropriate for
Regulation D, given that the Regulation A disclosures are reviewed by
the Commission.\315\ Another commenter who opposed the proposal
expressed concern that removing the audit requirement for financial
statements in Rule 506(b) offerings under $20 million would deprive
investors of critical information.\316\
---------------------------------------------------------------------------
\313\ See ABA Letter (suggesting that the disclosure
requirements of Regulation A provide adequate information upon which
a non-accredited investor can make an informed investment decision);
CfPA Letter; SEC SBCFAC Letter; Geraci Law Letter; Letter from
Carta, Inc. dated June 1, 2020 (``Carta Letter''); W. Hubbard
Letter; CrowdCheck Letter; and IPA Letter.
\314\ See J. Clarke Letter; NASAA Letter (opposing harmonization
of the financial statement requirements with Regulation A because of
the difference in the terms of the two exemptions); Better Markets
Letter (expressing concern about a loss of investor protection
because the proposal would allow companies, including foreign
companies, to raise capital without providing audited financial
statements); CFA Letter (expressing concern that the proposal would
reduce transparency and weaken investor protections); and CFA
Institute Letter (stating that harmonization with the Regulation A
requirement is not appropriate because Rule 506(b) lacks investor
protections that Regulation A Tier 1 (and Regulation Crowdfunding)
provide to non-accredited investors).
\315\ See NASAA Letter.
\316\ See CFA Institute Letter.
---------------------------------------------------------------------------
Several commenters addressed further aspects of the proposed
harmonization of financial disclosure requirements. One commenter
recommended harmonizing the Rule 502(b) disclosures with Regulation
Crowdfunding.\317\ Another commenter expressly opposed requiring
issuers conducting Regulation D offerings above the Regulation A Tier 2
offering limit to comply with the financial information requirements
applicable to smaller reporting companies under Article 8 of Regulation
S-X.\318\
---------------------------------------------------------------------------
\317\ See J. Clarke Letter.
\318\ See W. Hubbard Letter (stating that the current Reg A Tier
2 approach to financial statement disclosure requirements is
understandable and straightforward and adding financial disclosure
requirements for offerings above $50 million will not provide a
commensurate benefit or protection to investors however will likely
discourage issuers from using the exemption).
---------------------------------------------------------------------------
The 2020 Government-Business Forum on Small Business Capital
Formation generally recommended that the Commission revise the
disclosures required for non-accredited investors in offerings made
under Rule 506(b).\319\
---------------------------------------------------------------------------
\319\ See 2020 Forum Report.
---------------------------------------------------------------------------
c. Final Amendments
We are adopting the amendments as proposed. By aligning the
disclosure requirements in Rule 502(b) with those in Regulation A,
additional issuers may be willing to include non-accredited investors
in their offerings pursuant to Rule 506(b), which would expand
investment opportunities for those investors. In addition, we continue
to believe, as stated in comments received on the Concept Release, that
many issuers view the current financial statement requirements of Rule
502(b) as overly burdensome.\320\ We believe revising the disclosure
requirements will help address those concerns, while continuing to
provide investors with material information about the issuer. We
acknowledge that there are differences in the terms and conditions of
Regulation A and Rule 506(b) offerings involving non-accredited
investors, in particular the fact that the financial statements
provided pursuant to Rule 502(b) are not subject to staff review and
qualification. We also note that staff review and qualification is not
a guarantee that the disclosure is complete and accurate. Nevertheless,
we have determined that the financial statement requirements of
Regulation A provide adequate information to non-accredited investors
in such offerings, and we believe that the same is true for non-
accredited investors in the Rule 506(b) context.\321\ Further, as noted
in the Proposing Release, the information disclosed to investors will
continue to be subject to the anti-fraud provisions of the Federal and
State securities laws.
---------------------------------------------------------------------------
\320\ See Proposing Release, at text accompanying notes 195-198.
\321\ Regulation A is available only to U.S. or Canadian
issuers, and excludes, among others, blank check companies,
registered investment companies, business development companies, and
issuers of certain securities including asset-backed securities.
These limitations do not apply to Regulation D; therefore, such
issuers shall apply the Regulation A financial statement
requirements as if they were eligible to do so under Regulation A.
With respect to foreign private issuers, we are adopting as proposed
a provision stating that a foreign private issuer that is not an
Exchange Act reporting company would be permitted to provide
financial statements prepared in accordance with U.S. GAAP or
International Financial Reporting Standards as issued by the
International Accounting Standards Board.
---------------------------------------------------------------------------
We are not persuaded by commenters who suggested that we harmonize
the disclosure requirements in Rule 502(b) with those in Regulation
Crowdfunding. We also do not believe harmonizing the disclosure
requirements in Rule 502(b) with Regulation Crowdfunding for offerings
below $5 million and with Regulation A for offerings above $5 million
would alleviate any additional burdens on issuers. Instead, such a
requirement would create additional complexity for issuers with
offerings that could cross from below to above $5 million, by requiring
them to
[[Page 3530]]
simultaneously consider the disclosure requirements of Regulation A and
Regulation Crowdfunding.
2. Proposed Amendments To Simplify Compliance With Regulation A
In its review of the exempt offering framework, the Commission
identified several areas where compliance with Regulation A is more
complex or difficult than for registered offerings, including the rules
regarding the redaction of confidential information in material
contracts, making draft offering statements public on EDGAR,
incorporation by reference, and the abandonment of a post-qualification
amendment.
a. Redaction of Confidential Information in Certain Exhibits
In March 2019, the Commission amended several rules to permit
registrants to file redacted material contracts and plans of
acquisition, reorganization, arrangement, liquidation, or succession
without applying for confidential treatment.\322\ These rules require
registrants to mark the exhibit index to indicate that portions of the
exhibit or exhibits have been omitted, include a prominent statement on
the first page of the redacted exhibit that certain identified
information has been excluded from the exhibit because it is both not
material and would be competitively harmful if publicly disclosed, and
indicate with brackets where the information has been omitted from the
filed version of the exhibit.\323\ This process for filing redacted
exhibits was not extended to Regulation A offerings at that time. As a
result, Regulation A issuers are still compelled to submit an
application for confidential treatment in order to redact immaterial
confidential information from material contracts and plans of
acquisition, reorganization, arrangement, liquidation, or succession.
---------------------------------------------------------------------------
\322\ See FAST Act Modernization and Simplification of
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674
(Apr. 2, 2019)] (``FAST Act Modernization Release'') at text
accompanying notes 45-73 (amending 17 CFR 229.601(b)(2)(ii) and 17
CFR 229.601(b)(10)(iv)).
\323\ See 17 CFR 229.601(b)(2) (``Item 601(b)(2)'' of Regulation
S-K) and 17 CFR 229.601(b)(10)(iv) (``Item 601(b)(10)(iv)'' of
Regulation S-K). Redacted exhibits are subject to compliance reviews
by the staff.
---------------------------------------------------------------------------
i. Proposed Amendments
The Commission proposed to amend Item 17 of Form 1-A to provide
issuers with the option to file redacted material contracts \324\ and
plans of acquisition, reorganization, arrangement, liquidation, or
succession,\325\ consistent with the recent amendments to Regulation S-
K). Issuers would still have the option to file such exhibits pursuant
to the existing confidential treatment application process, which would
remain unchanged.
---------------------------------------------------------------------------
\324\ See Item 17.6 of Form 1-A.
\325\ See Item 17.7 of Form 1-A.
---------------------------------------------------------------------------
ii. Comments
Commenters that addressed the proposed amendments supported the
proposal to apply the simplified confidential treatment process to
Regulation A filers.\326\
---------------------------------------------------------------------------
\326\ See Republic Letter; W. Hubbard Letter; M. Schonberger
Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------
iii. Final Amendments
We are adopting the amendments as proposed to add a new instruction
to Item 17 of Form 1-A that applies to paragraphs 6 and 7 of that item
and includes procedures similar to Items 601(b)(2) and (b)(10) of
Regulation S-K for filing redacted material contracts or plans of
acquisition, reorganization, arrangement, liquidation, or succession.
We are making one change to the proposed instruction, to further
harmonize the procedures for redacting information under Item 17 of
Form 1-A with those in 17 CFR 229.601(a)(6) (``Item 601(a)(6)'' of
Regulation S-K), by allowing issuers to redact information that ``would
constitute a clearly unwarranted invasion of personal privacy'' in any
of the exhibits listed in Item 17 of Form 1-A. As a matter of practice,
the staff generally does not object where an issuer omits sensitive
personally identifiable information, such as bank account numbers,
social security numbers, home addresses, and similar information
(``PII'') from exhibits without also submitting a confidential
treatment request. As with the adoption of Item 601(a)(6) of Regulation
S-K, codifying this staff practice in Item 17 of Form 1-A will
alleviate the burden from issuers of having to provide an analysis in
order to redact PII from exhibits, and will also better safeguard PII
by limiting its dissemination.\327\
---------------------------------------------------------------------------
\327\ See FAST Act Modernization Release, at Section
II.B.5.b.ii. (adopting Item 601(a)(6) of Regulation S-K).
---------------------------------------------------------------------------
Commission staff will continue to review Forms 1-A filed in
connection with Regulation A offerings and selectively assess whether
redactions from exhibits appear to be limited to information that meets
the appropriate standard.\328\ Upon request, issuers will be expected
to promptly provide supplemental materials to the staff similar to
those currently required, including an unredacted copy of the exhibit
and an analysis of why the redacted information is both not material
and the type of information that the issuer both customarily and
actually treats as private and confidential.\329\ If the issuer's
supplemental materials do not support its redactions, the staff may
request that the issuer file an amendment that includes some, or all,
of the previously redacted information, similar to the process the
staff currently follows for confidential treatment requests in
connection with Regulation A offerings.\330\
---------------------------------------------------------------------------
\328\ As discussed below, we are amending the standard for
redaction of information under this streamlined process, which
currently requires that the redactions from exhibits be limited to
information that is not material and that would cause competitive
harm if publicly disclosed. The amended standard is patterned on the
Supreme Court's language set out in Food Marketing Institute. See
supra note 301.
\329\ Pursuant to 17 CFR 200.83, companies are permitted to
request confidential treatment of this supplemental information
while it is in the staff's possession.
\330\ After completing its review of the supplemental materials,
the Commission or its staff will return or destroy them at the
request of the company, as applicable.
---------------------------------------------------------------------------
b. Amendment to Form 1-A Item 17.16(a) Requirement
Issuers that are conducting Regulation A offerings are permitted to
submit non-public draft offering statements and amendments for review
by the Commission staff if they have not previously sold securities
pursuant to (i) a qualified offering statement under Regulation A or
(ii) an effective Securities Act registration statement.\331\ Such
issuers also may submit related non-public correspondence to the
Commission staff for review confidentially. Current rules require that
these non-public offering statements, amendments and correspondence be
filed as an exhibit to a publicly filed offering statement at least
twenty-one calendar days prior to the qualification of the offering
statement.\332\ Similarly, an emerging growth company may, prior to its
initial public offering date, submit a draft registration statement and
amendments to the Commission for non-public review by the staff.\333\
However, unlike issuers submitting Regulation A offering statements for
non-public review, there is no corresponding Securities Act rule or
item requiring registration statements and amendments confidentially
submitted by emerging growth companies to be filed as an exhibit to a
publicly filed registration statement.
[[Page 3531]]
Instead issuers satisfy their public filing requirement by logging into
their EDGAR account, selecting materials previously submitted non-
publicly, and releasing them for public dissemination.\334\
---------------------------------------------------------------------------
\331\ See 17 CFR 230.252(d).
\332\ See Item 17, paragraph 16(a) of Form 1-A and 17 CFR
230.252(d).
\333\ See Section 6(e)(1) of the Securities Act.
\334\ See Announcement by the Division of Corporation Finance,
Draft Registration Statements to Be Submitted and Filed on EDGAR
(Sep. 26, 2012), available at https://www.sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
---------------------------------------------------------------------------
i. Proposed Amendments
The Commission proposed to amend Item 17.16(a) of Form 1-A to
harmonize the procedures for publicly filing draft Regulation A
offering statements with those for draft Securities Act registration
statements. Instead of requiring documents previously submitted for
non-public review by the staff and related, non-public correspondence
to be filed as exhibits to a publicly filed offering statement, issuers
conducting offerings exempt from registration pursuant to Regulation A
would be able to make such documents available to the public via EDGAR
to comply with the requirements of 17 CFR 230.252(d).
ii. Comments
Commenters that addressed the proposed amendment supported the
proposal to amend Item 17.16(a) of Form 1-A to allow non-public draft
offering statements, amendments and related non-public correspondence
to be made publicly available through the use of the EDGAR system.\335\
---------------------------------------------------------------------------
\335\ See J. Clarke Letter; Republic Letter; W. Hubbard Letter;
M. Schonberger Letter; CrowdCheck Letter; and IPA Letter.
---------------------------------------------------------------------------
iii. Final Amendments
We are adopting the amendments as proposed, with two changes to
renumber the exhibit paragraphs for clarity. As adopted, we are
renumbering paragraph 16 of Item 17 of Form 1-A so that it will be
referred to as ``99. Additional Exhibits,'' and will be the last
paragraph in Item 17, and former paragraph 16 will be designated as
``reserved.'' In addition, as proposed, we are deleting sub-paragraph
(a) of that paragraph so that issuers no longer will be required to
file the non-public offering statements and related amendments and
correspondence as exhibits. Instead, Regulation A issuers will be able
to make previously non-public documents available to the public on
EDGAR using the same process as issuers conducting a registered
offering. We believe that this change simplifies the process of moving
from a draft offering statement to a publicly filed document for
issuers conducting Regulation A offerings, saving both time and money
for such issuers. In addition, because all previously submitted
offering statements and related amendments and correspondence will be
available to the public on EDGAR, rather than attached as exhibits to a
given offering statement, this change should make it easier for
investors to learn about the issuer and the Regulation A offering
itself, furthering their ability to make informed investment decisions.
c. Incorporation by Reference of Previously Filed Financial Statements
in Form 1-A for Regulation A Offerings
The ability to incorporate financial statements by reference to
Exchange Act reports filed before the effective date of a registration
statement is permitted on Form S-1, subject to certain conditions.\336\
Specifically, General Instruction VII of Form S-1 permits registrants
that meet certain eligibility standards \337\ to incorporate by
reference the information required by Item 11 of Form S-1, which
includes information about the registrant, such as, among other things,
financial statement information meeting the requirements of 17 CFR
210.1-01 through 12-29.\338\ Regulation A issuers, however, are
required to include the issuer's financial statements, prepared in
accordance with the applicable requirements of Tier 1 or Tier 2 of
Regulation A, in their Regulation A offering circular that is
distributed to investors.\339\
---------------------------------------------------------------------------
\336\ See General Instruction VII to Form S-1.
\337\ These criteria include, but are not limited to, that the
registrant: (i) Is subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, (ii) has filed all reports
and other materials required to be filed by Sections 13(a), 14, or
15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports and materials), (iii) has filed an annual report required
under Section 13(a) or Section 15(d) of the Exchange Act for its
most recently completed fiscal year and (iv) is not, and during the
past three years neither it nor any of its predecessors was: (a) A
blank check company; (b) a shell company, other than a business
combination related shell company; or (c) offering penny stock. The
registrant must make its periodic and current reports filed pursuant
to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference pursuant to Item 11A or Item 12 of Form S-
1 readily available and accessible on a website maintained by or for
the registrant and containing information about the registrant.
\338\ See Item 12 to Form S-1.
\339\ See General Rule (a) to Part F/S of Form 1-A.
---------------------------------------------------------------------------
i. Proposed Amendments
The Commission proposed to permit issuers to incorporate previously
filed financial statements by reference into a Regulation A offering
circular. The Commission proposed that an issuer must satisfy criteria
similar to the requirement in connection with Form S-1. Specifically,
issuers that have a reporting obligation under 17 CFR 230.257 (``Rule
257'') or the Exchange Act must be current in their reporting
obligations. Issuers would be required to make incorporated financial
statements readily available and accessible on a website maintained by
or for the issuer and to disclose in the offering statement that such
financial statements will be provided upon request.\340\ Issuers
conducting ongoing offerings would need to continue to file post-
qualification amendments to Form 1-A annually to include the financial
statements that would be required to be included in a Form 1-A as of
such date.\341\ These financial statements could be either filed with
such post-qualification amendment or incorporated by reference to a
previously filed periodic or current report. In addition, issuers would
remain liable for such financial statements under Section 12(a)(2) of
the Securities Act \342\ to the same extent as if they had been filed
rather than incorporated by reference.
---------------------------------------------------------------------------
\340\ General Instruction III(b) of Form 1-A requires the
inclusion of a hyperlink in the offering circular to material
incorporated by reference, which would include an issuer's
previously filed financial statements on EDGAR.
\341\ See 17 CFR 230.252(f)(2)(i).
\342\ 15 U.S.C. 77l(a)(2).
---------------------------------------------------------------------------
ii. Comments
Commenters generally supported the proposal to permit incorporation
by reference of an issuer's previously filed financial statements.\343\
Some commenters additionally supported permitting forward incorporation
by reference in Regulation A,\344\ with some of these commenters
further supporting the elimination of the requirement to file annual
post-qualification amendments.\345\
---------------------------------------------------------------------------
\343\ See J. Clarke Letter; Republic Letter; W. Hubbard Letter;
M. Schonberger Letter; and CrowdCheck Letter.
\344\ See W. Hubbard Letter; M. Schonberger Letter; and
CrowdCheck Letter.
\345\ See M. Schonberger Letter; and CrowdCheck Letter
(supporting elimination of post-qualification amendments where the
auditor's consent was included in the 17 CFR 239.91 (``Form 1-K'')).
In contrast, one commenter supported continuing to require annual
post-qualification amendments to ensure that filings remain subject
to ongoing staff review. See W. Hubbard Letter.
---------------------------------------------------------------------------
iii. Final Amendments
We are adopting the amendments as proposed. We believe that
allowing incorporation by reference of previously filed financial
statements should decrease existing filing burdens on Regulation A
issuers. We are not expanding Regulation A to allow for
[[Page 3532]]
forward incorporation by reference as recommended by some commenters,
as we believe doing so could increase investor search costs and would
eliminate the benefit of staff review of post-qualification amendments
prior to their qualification.
d. Amendment to Abandonment Provision of Regulation A
Regulation A permits the Commission to declare an offering
statement abandoned, but does not provide the same authority for post-
qualification amendments.
i. Proposed Amendments
The Commission proposed to amend the abandonment provisions of Rule
259(b) to permit the Commission to declare a post-qualification
amendment to an offering statement abandoned, consistent with 17 CFR
230.479, the rule applicable to registered offerings.
ii. Comments
Commenters who addressed the proposed amendment to the abandonment
provisions of Rule 259(b) supported the proposal.\346\
---------------------------------------------------------------------------
\346\ See Republic Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------
iii. Final Amendments
We are adopting the amendments as proposed. We continue believe
there are situations where it is appropriate for the Commission to be
able to declare a specific post-qualification amendment abandoned,
instead of the entire offering statement. For example, Commission staff
has observed some issuers attempting to use post-qualification
amendments for separate classes of securities that are not otherwise
being offered under the offering statement. Under the final rules, if
an issuer fails to qualify a post-qualification amendment for such a
separate class, but otherwise is in compliance with all of its
Regulation A obligations, the Commission will be able to declare that
specific post-qualification amendment abandoned so as to avoid
potential investor confusion arising from the presence of the
unqualified post-qualification amendment on EDGAR.
3. Confidential Information Standard
The current requirements for registrants to file material contracts
as exhibits to their disclosure documents permit registrants to redact
provisions or terms of exhibits required to be filed if those
provisions or terms are both (i) not material and (ii) would likely
cause competitive harm to the registrant if publicly disclosed.\347\
The ``competitive harm'' requirement was patterned on the standard then
being used by the U.S. Circuit Court of Appeals for the District of
Columbia \348\ to define what information is confidential under
Exemption 4 of the Freedom of Information Act, which protects ``trade
secrets and commercial or financial information obtained from a person
[if they are] privileged or confidential.'' \349\ In June 2019, the
Supreme Court rejected the Circuit Court's longstanding test for
determining what information was confidential under Exemption 4 and
adopted a new definition of ``confidential'' that does not include a
competitive harm requirement.\350\ The Supreme Court stated that ``[a]t
least where commercial or financial information is both customarily and
actually treated as private by its owner and provided to the government
under an assurance of privacy, the information is `confidential' within
the meaning of Exemption 4.'' \351\
---------------------------------------------------------------------------
\347\ See, e.g., FAST Act Modernization Release, at text
accompanying notes 45-73 (amending paragraphs (b)(2)(ii) and
(b)(10)(iv) of Item 601 of Reg. S-K).
\348\ See National Parks and Conservation Association v. Morton,
498 F.2d 765 (D.C. Cir. 1974); and National Parks and Conservation
Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976).
\349\ 5 U.S.C. 552(b)(4).
\350\ See Food Marketing Institute.
\351\ Id. at 2366.
---------------------------------------------------------------------------
a. Proposed Amendments
The Commission proposed to adjust the exhibit filing requirements
by removing the competitive harm requirement and replacing it with a
standard more closely aligned with the Supreme Court's definition of
``confidential.'' Under the proposed amendments, information may be
redacted from material contracts if it is the type of information that
the issuer both customarily and actually treats as private and
confidential and that is also not material.\352\
---------------------------------------------------------------------------
\352\ The Commission proposed changes to the following rules and
forms to update the standard: Item 601(b)(2) and (b)(10) of
Regulation S-K; Form S-6; Form N-14; Form 20-F; Form 8-K; Form N-1A;
Form N-2; Form N-3; Form N-4; Form N-5; Form N-6; and Form N-8B-2.
---------------------------------------------------------------------------
b. Comments
We received no comments on the proposed amendments to revise the
confidential information standard, other than one comment expressing
support for the proposed revisions in the context of variable product
registration statement forms.\353\ This commenter also suggested that
we revise Form N-6 to expand the types of exhibits to which the
standard would apply to include participation agreements and
administrative contracts.\354\ The commenter stated that this would
provide greater consistency between Form N-4, which relates to variable
annuities, and Form N-6, which relates to variable life insurance
contracts.\355\
---------------------------------------------------------------------------
\353\ See Letter from the Committee of Annuity Insurers dated
May 6, 2020 (``Comm. of Annuity Insurers Letter'').
\354\ See id.
\355\ See id.
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c. Final Amendments
We are adopting the amendments as proposed to adjust the exhibit
filing requirements by removing the competitive harm requirement and
replacing it with a standard that permits information to be redacted
from material contracts if it is the type of information that the
issuer both customarily and actually treats as private and
confidential, and which is also not material.\356\
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\356\ We did not propose, and are not adopting, changes to 17
CFR 229.402(b) (``Item 402(b)'' of Regulation S-K). Instruction 4 to
Item 402(b) and Instruction 2 to 17 CFR 229.402(e) (``Item
402(e)(1)''), which reference a competitive harm standard that is
the same as would apply under the current rules when a registrant
requests confidential treatment of confidential trade secrets or
confidential commercial or financial information pursuant to 17 CFR
230.406 and 17 CFR 240.24b-2. The changes we are adopting to the
exhibit requirements do not alter the existing standard applicable
to Items 402(b) and 402(e) of Regulation S-K.
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We did not propose to revise Form N-6 to modify the types of
exhibits to which the confidential information standard applies and
decline to do so here. Information contained in such exhibits is
already disclosed to investors in other contexts and, in our staff's
experience, these exhibits do not contain confidential or proprietary
information. Further, as part of our adoption of updated disclosure
requirements for variable annuity and variable life insurance
products,\357\ among other changes, the instructions to exhibits in
Form N-6 and Form N-4 will be revised to eliminate discrepancies
related to the categories of exhibits eligible for redaction.\358\
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\357\ See Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts, Release
No. IC-33814 (May 1, 2020) [FR 24964 (May 1, 2020)] (``VASP
Release''). For purposes of this release, we refer to the versions
of the relevant forms adopted by the VASP Release as the ``VASP
amended'' versions of Forms N-3, N-4, and N-6 (e.g., ``VASP amended
Form N-3''). The changes to the exhibit filing requirements that we
are adopting in this release, which replace the competitive harm
standard, also apply to the parallel instruction in each of Item 32
of VASP amended Form N-3, Item 27 of VASP amended Form N-4, and Item
30 of VASP amended Form N-6.
\358\ See Instruction 3 to Item 27 of VASP amended Form N-4
(allowing for the redaction of reinsurance contracts and other
material contracts); see also Instruction 3 to Item 30 of amended
Form N-6 (allowing for the redaction of reinsurance contracts and
other material contracts). Registrants must comply with these rule
and form amendments by January 1, 2022. See VASP Release, at Section
II.G.
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[[Page 3533]]
E. Offering and Investment Limits
Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D
contain a variety of requirements and investor protections, including
limits on the amount of securities that may be offered and sold under
the exemptions. Regulation A and Regulation Crowdfunding also include
limits on how much an individual may invest. The Commission has
estimated that approximately $2.7 trillion of new capital was raised
through exempt offering channels in 2019, of which approximately $1.3
billion (0.05 percent) was raised under Regulation A, Regulation
Crowdfunding, and Rule 504 combined.\359\
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\359\ See Concept Release, at Section II. Preliminary estimates
from 2019 similarly reflect limited capital raising under the rules,
with $1.042 billion raised under Regulation A, $228 million under
Rule 504, and $62 million under Regulation Crowdfunding.
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1. Regulation A
Regulation A establishes two tiers of offerings: Tier 1, for
offerings that do not exceed $20 million in a 12-month period; and Tier
2, for offerings that do not exceed $50 million in a 12-month period.
The Commission is required by Section 3(b)(5) of the Securities Act to
review the $50 million Tier 2 offering limit specified in Section
3(b)(2) of the Securities Act every two years, and the statute
authorizes the Commission to increase the annual offering limit if the
Commission determines that it would be appropriate to do so.
Earlier this year, the Divisions of Corporation Finance and
Economic and Risk Analysis conducted a Regulation A Lookback Study and
Offering Limit Review Analysis (``2020 Regulation A Review'') as
required by the 2015 Regulation A Release.\360\ The 2020 Regulation A
Review found that from June 2015 to December 2019, $2.4 billion was
reported raised by 183 issuers in ongoing and closed Regulation A
offerings, including $230 million in Tier 1 and $2.2 billion in Tier 2
offerings.\361\
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\360\ See Staff of the U.S. Securities and Exchange Commission,
Report to the Commission, Regulation A Lookback Study and Offering
Limit Review Analysis, 2020 (Mar. 4, 2020), available at https://www.sec.gov/smallbusiness/exemptofferings/rega/2020Report. The
report includes a review of: The amount of capital raised under the
amendments; the number of issuances and amount raised by both Tier 1
and Tier 2 offerings; the number of placement agents and brokers
facilitating the Regulation A offerings; the number of Federal,
State, or any other actions taken against issuers, placement agents,
or brokers with respect to both Tier 1 and Tier 2 offerings; and
whether any additional investor protections appear necessary for
either Tier 1 or Tier 2.
\361\ Over this time period issuers sought $11.2 billion across
487 Regulation A offerings, of which 382 were qualified offering
statements seeking up to $9.1 billion. See 2020 Regulation A Review.
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a. Proposed Amendments
Since adoption of the 2015 amendments, the Commission has continued
to receive feedback on, and has considered further enhancements to,
Regulation A.\362\ This feedback and consideration informed our
proposal to increase the maximum offering amount under Tier 2 of
Regulation A from $50 million to $75 million. Consistent with the
Commission's approach to limitations on secondary sales when adopting
the Regulation A amendments, the Commission also proposed to increase
the maximum offering amount for secondary sales under Tier 2 of
Regulation A from $15 million to $22.5 million.
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\362\ While the Commission has received feedback from market
participants and commenters seeking an increase in the Tier 2
offering limit, these commenters did not seek an increase in the
Tier 1 limit. See 2017 Forum Report; 2018 Forum Report; and A
Financial System That Creates Economic Opportunities--Capital
Markets (Oct. 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury Report'').
---------------------------------------------------------------------------
b. Comments
While most commenters that addressed the proposal supported raising
the Tier 2 offering limits,\363\ some opposed the increase.\364\
Commenters supporting the increase suggested that an increase could
encourage development of the smaller initial public offering market,
encouraging more issuers to conduct offerings and providing more
investment opportunities for investors.\365\ Some of these commenters
additionally suggested that the higher offering limits would improve
the economics for issuers and broker dealers to participate in the
Regulation A market.\366\ A number of commenters supported raising the
limit further to $100 million.\367\ Several commenters also
specifically supported raising the limit for secondary sales.\368\ We
additionally received many letters urging the Commission to provide
Federal preemption for secondary sales of a Tier 2 Regulation A
offering.\369\
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\363\ See, e.g., ABA Letter; Letter from Bruce D. Wertz, Sr.
dated Mar. 10, 2020; B. Andrews, et al. Letter; SEC SBCFAC Letter;
Geraci Law Letter (suggesting the increased offering limits will
attract a more seasoned pool of investors as well as institutional
investors); Carta Letter; SAF Letter; M. Schonberger Letter; D.
Burton Letter; InnaMed, et al. Letter; CrowdCheck Letter; IPA
Letter; Republic Letter; and Sen. Toomey Letter. Some of these
commenters further supported indexing additional increases for
inflation. See, e.g., Carta Letter; IPA Letter; and Sen. Toomey
Letter. Other commenters offered further suggestions to improve the
offering process and raise effective offering limits. See, e.g., M.
Schonberger Letter (recommending Regulation A be amended to apply
the 180-day selling extension for continuous offerings to certain
post-qualification amendment filings). See also Annual Report for
Fiscal Year 2019: Office of the Advocate for Small Business Capital
Formation (``2019 OASB Annual Report''), available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf, at 41 (recommending
that the Commission tie offering limits to expressed marketplace
needs for capital and provide flexibility for future review and
adjustment).
\364\ See, e.g., CII Letter; NASAA Letter; Md. St. Bar Assoc.
Letter; AFREF Letter; Better Markets Letter; CFA Letter; R.
Rutkowski Letter; and CFA Institute Letter.
\365\ See, e.g., Letter from Chamber of Digital Commerce dated
June 1, 2020 (``Chamber of Digital Commerce Letter''); J. Clarke
Letter; W. Hubbard Letter; CrowdCheck Letter; and Ketsal Letter.
\366\ See, e.g., Chamber of Digital Commerce Letter, IPA Letter;
and Hubbard Letter.
\367\ See, e.g., J. Clarke Letter; Chamber of Digital Commerce
Letter; Ketsal Letter; IPA Letter; Sen. Toomey Letter; Letter from
Biotechnology Innovation Organization dated July 21, 2020; M.
Schonberger Letter (suggesting higher offering limits reduce the
burden on issuers by permitting them to raise more capital before
having to file post qualification amendments or new offering
statements); and CrowdCheck Letter. See also Carta Letter; and Sen.
Toomey (additionally recommending indexing the limit for inflation).
But see ABA Letter (supporting the Commission's proposed incremental
approach and suggesting that precedent, prestige of the public
offering process and customary use of investment bankers likely will
mean that registered offerings will be more frequently used for
relatively larger offerings).
\368\ See, e.g., Carta Letter; and IPA Letter.
\369\ See Form Letter Type A; and Carta Letter.
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Commenters opposed to the increase suggested that there is not
compelling evidence supporting a need to raise the offering limit \370\
and stated that issuers raising such large amounts of capital should be
subject to the full disclosure and protections provided in the
Securities Act.\371\ One commenter expressed concern over the negative
effects of increasing the use of Regulation A for unsophisticated non-
accredited retail investors due to what it perceived as the lower
quality of Regulation A issuers and increased risks
[[Page 3534]]
of investor losses.\372\ Another commenter suggested that the reason
Regulation A Tier 2 is underutilized is not that the offering limits
are too low, but rather that the issuers and investments involve
greater risk.\373\ Additionally, one commenter opposed to the increase
and one commenter supporting the increase expressed concern relating to
the Commission's use of its general exemptive authority under Section
28 of the Securities Act to increase the limit.\374\
---------------------------------------------------------------------------
\370\ See, e.g., CII Letter; CFA Letter; CFA Institute Letter
(noting that issuers that have exhausted the Tier II offering limits
have been almost exclusively real estate industry issuers, and that
the real estate industry is one marked by significant volatility and
risk); and Md. St. Bar Assoc. Letter (noting that the 2020
Regulation A Review found that only approximately 10% of issuers
conducting Regulation A Tier 2 offerings have reached the $50
million offering limit).
\371\ See, e.g., Md. St. Bar Assoc. Letter; CFA Institute Letter
(suggesting the expansion of exempt offerings undermines the
traditional trade-off between the burdens of public disclosure and
the benefits of the right to raise capital from the general public);
and NASAA Letter. See also R. Rutkowski Letter (suggesting that the
proposal would weaken private offering rules in way that would
discourage public market offerings and the associated disclosure and
governance protections).
\372\ See CFA Letter. See also CFA Institute Letter (expressing
concerns with compliance by issuers in the exempt markets and its
perception of the lower quality of issuers offering in the
Regulation A market).
\373\ See, e.g., NASAA Letter (recommending strengthening
corporate governance and disclosure obligations and rescinding
preemption of State securities regulation to increase the regulatory
oversight of these companies making them more attractive to and
safer for investors).
\374\ See Better Markets Letter (opposing the increase); and
CrowdCheck Letter (supporting the increase).
---------------------------------------------------------------------------
Although many commenters were supportive of raising the Tier 2
offering limits, only one commenter recommended increasing the Tier 1
offering limit.\375\ This commenter also recommended that the
Commission reconsider whether ``covered securities'' status under
Section 18 of the Securities Act should be extended to Tier 1 of
Regulation A.\376\ Other commenters that addressed Tier 1 offering
limits, however, were generally opposed to increasing those
limits.\377\
---------------------------------------------------------------------------
\375\ See Chamber of Digital Commerce Letter.
\376\ See id.
\377\ See, e.g., CII Letter; NASAA Letter; and CrowdCheck
Letter.
---------------------------------------------------------------------------
c. Final Amendments
In order to facilitate use of Tier 2 Regulation A offerings and
having considered the comments on the Proposing Release, the 2020
Regulation A Review, feedback that the Commission received from the
Small Business Forums \378\ and in response to the Concept Release, we
are increasing the maximum offering amount under Tier 2 of Regulation A
from $50 million to $75 million as proposed. Section 3(b)(5) of the
Securities Act expressly authorizes the Commission to review and raise
the offering limit as appropriate.\379\ Consistent with the
Commission's approach to limitations on secondary sales when adopting
the Regulation A amendments, we are also increasing the maximum
offering amount for secondary sales under Tier 2 of Regulation A from
$15 million to $22.5 million.\380\
---------------------------------------------------------------------------
\378\ See 2017 Forum Report; and 2018 Forum Report.
\379\ We also believe that the Commission has general exemptive
authority under Securities Act Section 28 to raise the Regulation A
offering limit if it finds that raising the limit is necessary or
appropriate in the public interest and consistent with the
protection of investors.
\380\ The Commission observed in connection with the 2014
amendments to Regulation A that selling security holder access to
Regulation A has historically been an important part of the
exemptive scheme. See Amendments for Small and Additional Issues
Exemptions Under Section 3(b) of the Securities Act, Release No. 33-
9497 (Dec. 18, 2013) [79 FR 3925 (Jan. 23, 2014)], at Section
II.B.3; and 2015 Regulation A Adopting Release, at Section II.B.3.c.
Consistent with existing and historical provisions of Regulation A,
we are continuing to permit secondary sales under Regulation A up to
30 percent of the maximum offering amount permitted under the
applicable tier.
---------------------------------------------------------------------------
While the 2015 amendments have stimulated the Regulation A offering
market, aggregate Regulation A financing levels remain modest relative
to traditional IPOs and the Regulation D market.\381\ The 2020
Regulation A Review noted that these financing levels are likely
related to a combination of factors, including: The pool of issuers and
investors drawn to the market under existing conditions; the
availability to issuers of attractive private placement alternatives
without an offering limit; the availability to investors of attractive
investment alternatives outside of Regulation A with a more diversified
pool of issuers; limited intermediary participation and a lack of
traditional underwriting; and a lack of secondary market
liquidity.\382\
---------------------------------------------------------------------------
\381\ See 2020 Regulation A Review.
\382\ See id.
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We are raising the Tier 2 offering limit in order to enhance the
ability of Regulation A issuers that have exhausted existing offering
limits to raise additional capital.\383\ Further, public commentary
since the 2015 amendments indicates that a higher offering limit may
help attract a larger and potentially more seasoned pool of issuers and
intermediaries or institutional investors to the Regulation A
market.\384\ In addition, a higher offering limit may make Regulation A
offerings more attractive to more established Exchange Act reporting
companies.\385\ Although some commenters suggested raising the offering
limit to $100 million, we believe it is more appropriate to pursue an
incremental approach to increasing the threshold,\386\ which will
provide the Commission with a reasonable opportunity to assess the
impact of the increased offering limit on the Regulation A market
before considering further changes. In this regard, we note that the
Commission is required by Section 3(b)(5) of the Securities Act to
review and consider increasing the new $75 million Tier 2 offering
limit every two years.\387\ In addition, we believe that the issuer
eligibility requirements, content, and filing requirements for offering
statements and ongoing reporting requirements for issuers in Tier 2
Regulation A offerings continue to provide appropriate protections for
investors at this higher offering limit. For these reasons, we believe
that it is necessary and appropriate in the public interest and
consistent with the protection of investors to raise the Tier 2
offering limit as proposed.\388\
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\383\ The 2020 Regulation A Review estimates that approximately
10 percent of issuers in Tier 2 offerings have reached the $50
million offering limit across completed and ongoing offerings. See
id. at Table 4. As discussed in the 2020 Regulation A Review and
noted by one commenter, these issuers have primarily been from the
real estate industry. See CFA Institute Letter. While raising the
offering limit will permit all issuers to raise additional capital,
we believe that the disclosure requirements of Regulation A will
help investors to evaluate the risk of such investments.
\384\ See, e.g., letter in response to the Concept Release from
Committee on Securities Regulation of the Business Law Section of
the New York State Bar Association dated Oct. 16, 2019.
\385\ See 2020 Regulation A Review, at Section F.1. However, as
noted in the 2020 Regulation A Review, the staff lacks data that
would allow it to assess how a specific offering limit increase
would affect the size and composition of the pool of prospective
issuers, intermediaries, and investors in the Regulation A market.
See infra Section IV.C.5.a.i.
\386\ We note that adjusting the existing offering limit for
inflation from 2015 to present would increase the Tier 2 offering
limit by only $5.845 million. See 2020 Regulation A Review, at Table
7. Such a change likely would not attract additional institutional
investors, intermediaries, or traditional underwriters to the
Regulation A market.
\387\ As noted above, because of the statutory obligation to
review the limit every two years, we do not think it is necessary to
index the offering limit for inflation, as some commenters
suggested. See Carta Letter; and Sen. Toomey Letter.
\388\ We did not propose and are not increasing the Tier 1
offering limit. While one commenter recommended an increase, we do
not believe it is likely to result in the kinds of benefits
discussed above that we expect may result from the increased Tier 2
offering limit, such as attracting a larger and more seasoned pool
of issuers and intermediaries or institutional investors to the
Regulation A market. As discussed in the 2020 Regulation A Review,
while an increase in the Tier 1 offering limit could draw more
issuers to Tier 1, Tier 2 may remain more attractive to issuers due
to, for example, preemption of state review, an easier path to
quotation on the upper tiers of the OTC market in the presence of
periodic reports required by Tier 2, and the flexibility to raise
more capital without having to undergo a re-qualification. See 2020
Regulation A Review at Section F.2. While we do not believe an
increase is warranted at this time, we will continue to consider the
Tier 1 offering limitation and the appropriate investor protections
under Tier 1 when we conduct the Tier 2 offering limit review
required by Section 3(b)(5) of the Securities Act.
---------------------------------------------------------------------------
We note that under the final amendments, Tier 2 offerings will
continue to be preempted from State law registration and qualification
requirements.\389\ We believe this is
[[Page 3535]]
appropriate because we expect that Tier 2 offerings will continue to be
more national in nature. While issuers in Tier 2 offerings are required
to qualify offerings with the Commission before sales can be made
pursuant to Regulation A, they are not required to register or qualify
their offerings with State securities regulators. Section 18 of the
Securities Act generally provides for preemption of State law
registration and qualification requirements for ``covered securities.''
\390\ Section 18(b)(4)(D) of the Securities Act further provides that
securities issued pursuant to Section 3(b)(2) of the Securities Act are
covered securities if they are listed, or will be listed, on a national
securities exchange or if they are offered or sold to a ``qualified
purchaser,'' \391\ which the Commission has defined to include any
person to whom securities are offered or sold in a Tier 2
offering.\392\ We are not extending ``covered securities'' status under
Section 18 of the Securities Act to Tier 1, as suggested by one
commenter. We continue to believe that, in light of concerns raised by
state regulators and the generally more local nature of Tier 1
offerings, it is appropriate for the States to retain oversight over
Tier 1 offerings.\393\
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\389\ Many commenters recommended preempting State securities
law regulation of secondary trading of Regulation A securities
issued in Tier 2 offerings. While such preemption could further
advance the development of a national securities market by easing
the compliance obligations of investors that trade in the secondary
markets, we believe this recommendation merits careful consideration
and an opportunity for market participants to receive notice and
comment on a specific proposal. Accordingly, we are not adopting any
changes to preemption of State securities laws for secondary trading
at this time.
\390\ See 15 U.S.C. 77r(c).
\391\ See 15 U.S.C. 77r(b)(4)(D).
\392\ See 17 CFR 230.256.
\393\ See 2015 Regulation A Release, at Section II.H.3.
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2. Rule 504
Rule 504 of Regulation D provides an exemption for eligible issuers
\394\ from registration under the Securities Act for the offer and sale
of up to $5 million of securities in a 12-month period. In 2016, the
Commission amended Rule 504 to raise the aggregate amount of securities
an issuer may offer and sell in any 12-month period from $1 million to
$5 million.\395\ From 2009 through 2019, for issuers other than pooled
investment funds, two percent of the capital raised in Regulation D
offerings under $5 million was offered under Rule 504 (and under Rule
505, prior to its repeal), and 98 percent of the capital raised was
offered under Rule 506.\396\
---------------------------------------------------------------------------
\394\ Issuers that are required to file reports under Exchange
Act Section 13(a) or 15(d), investment companies, blank check
companies, and issuers that are disqualified under Rule 504's ``bad
actor'' disqualification provisions are not eligible to use Rule
504.
\395\ Five million dollars is the maximum amount statutorily
allowed under Securities Act Section 3(b)(1). See Intrastate and
Regional Offerings Release. In light of the increased offering
threshold under Rule 504, the Commission repealed Rule 505. Most
issuers previously using Rule 505 are able to conduct an offering up
to $5 million under Rule 504.
\396\ See Proposing Release, at note 263 and accompanying text.
---------------------------------------------------------------------------
a. Proposed Amendments
The Commission proposed to use its general exemptive authority
under Section 28 of the Securities Act to raise the maximum offering
amount under Rule 504 from $5 million to $10 million.
b. Comments
We received mixed comments on the proposal to raise the Rule 504
maximum offering amount to $10 million with some commenters supporting
\397\ and others opposing \398\ the proposal. Commenters who supported
increasing the maximum offering amount stated that it would allow
issuers to more easily raise capital,\399\ make offerings more cost
effective,\400\ and encourage greater use of the exemption.\401\ One of
these commenters additionally suggested that because Rule 504 offerings
will remain subject to applicable federal and state securities law
requirements, including antifraud provisions, it is reasonable to
expect that the increase ``will not meaningfully decrease investor
protection or incentivize bad actors to enter the marketplace.'' \402\
Commenters opposed to the increase stated that issuers do not use the
full capacity under the existing limit and that an increase may not
drive more regional multistate offerings.\403\ Commenters also
expressed concern that the Commission's analysis of the impact of
raising the Rule 504 limit was insufficient,\404\ and that increasing
the limits may be detrimental to the public markets.\405\ Other
commenters questioned the Commission's statutory authority to increase
the limit.\406\
---------------------------------------------------------------------------
\397\ See, e.g., ABA Letter; B. Andrews, et al. Letter; SEC
SBCFAC Letter; Geraci Law Letter (further recommending that
securities sold pursuant to Rule 504 be considered ``covered
securities''); SAF Letter; Carta Letter; and Ketsal Letter. See also
2019 OASB Annual Report, at 41 (suggesting that the Commission
ensure that dollar amount caps used in exemptions are ``tied to
expressed marketplace needs for capital and provide flexibility for
future review and adjustment'').
\398\ See, e.g., CII Letter; NASAA Letter; AFREF Letter; Better
Markets Letter; CFA Letter; R. Rutkowski Letter; and CFA Institute
Letter. Some of these commenters suggested that increased offering
limits increase investor risk by creating more opportunities for
high risk issuers to sell to unsophisticated investors. See, e.g.,
CFA Letter and CFA Institute Letter.
\399\ See ABA Letter.
\400\ See Carta Letter.
\401\ See Ketsal Letter. See also Carta Letter (stating that the
increase would make the exemption more attractive to a broader group
of issuers).
\402\ See ABA Letter.
\403\ See, e.g., NASAA Letter (stating its belief that raising
the threshold above $5 million would require issuers to comply with
Securities Act Section 3(b)(2), which carries with it obligations
including mandatory filing of audited financial statements with the
Commission.); CFA Letter; and CrowdCheck Letter.
\404\ See, e.g., CFA Letter (stating that the Commission's
analysis lacks data or a methodological approach to determine the
impacts of raising the offering limit); CII Letter (stating that the
Commission's analysis fails to adequately consider the potential
impact on long-term investors and the capital markets from expanding
the exempt offering framework); AFREF Letter (stating that the
Commission's analysis does not adequately analyze the negative
effects of the amendments); and R. Rutkowski Letter.
\405\ See, e.g., AFREF Letter; CFA Letter; R. Rutkowski Letter;
and CFA Institute Letter.
\406\ See, e.g., Better Markets Letter; CFA Letter; and Public
Interest Comment Letter from Andrew N. Vollmer and Brian R. Knight,
Mercatus Center at George Mason University dated Oct. 30, 2020
(``Mercatus Center Letter''). See infra note 429.
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c. Final Amendments
Based on our consideration of the available data and the feedback
that we received on the Concept Release, on the Proposing Release, and
from the Small Business Capital Formation Advisory Committee, and in
order to facilitate use of Rule 504 for capital raising, we are
amending the rules as proposed to raise the offering limit from $5
million to $10 million. We believe that increasing the offering limit
in reliance on our general exemptive authority under Securities Act
Section 28 \407\ is appropriate in the public interest because
permitting larger offerings under Rule 504 may encourage more issuers
to use the exemption, could encourage more issuers to conduct regional
multistate offerings and make use of State coordinated review programs,
and could make the exemption a more efficient capital raising option
for smaller issuers by lowering the offering costs per dollar raised.
At the same time, we do not believe that raising the offering limit
would expand the private markets at the expense of the public
markets.\408\
[[Page 3536]]
Furthermore, we believe that increasing the offering limit is
consistent with the protection of investors because the amendments
would not alter the significant protections applicable under Rule 504,
such as potential State review and prohibitions on ``bad actor''
participation.
---------------------------------------------------------------------------
\407\ Securities Act Section 3(b)(1) currently sets the maximum
offering amount for small issues exempted under that section at $5
million. See 15 U.S.C. 77c(b)(1). As explained above, we are relying
on our general exemptive authority to raise the threshold in Rule
504 to $10 million. We therefore do not agree with the commenter who
stated that raising the threshold above $5 million would require
compliance with Securities Act Section 3(b)(2).
\408\ As discussed in Section IV.A below, Rule 504, like
Regulation Crowdfunding, currently represents a small segment of the
private offering market, and issuers that raise capital pursuant to
the exemption tend to be at a much earlier stage of development than
those that conduct a traditional initial public offering.
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3. Regulation Crowdfunding
Regulation Crowdfunding provides an exemption from registration for
certain crowdfunding transactions including limits on the amount an
issuer may raise; limits on the amount an individual may invest; and a
requirement that the transactions be conducted through an intermediary
that is registered as either a broker-dealer or a ``funding portal.''
The exemption from registration provided by Section 4(a)(6) is
available provided that ``the aggregate amount sold to all investors by
the issuer, including any amount sold in reliance on the exemption
provided under [Section 4(a)(6)] during the 12-month period preceding
the date of such transaction, is not more than $1,000,000.'' Under
Securities Act Section 4A(h), the Commission is required to adjust the
dollar amounts in Section 4(a)(6) ``not less frequently than once every
five years, by notice published in the Federal Register, to reflect any
change in the Consumer Price Index for All Urban Consumers published by
the Bureau of Labor Statistics.'' \409\ The Commission adjusted the
maximum offering limit to $1.07 million ($1.0 million adjusted to
reflect changes in the Consumer Price Index (``CPI'')) in 2017.\410\
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\409\ See 15 U.S.C. 77d(a)(6) and 15 U.S.C. 77d-1(h). See also
17 CFR 227.100(a)(1) (``Rule 100(a)(1)'' of Regulation
Crowdfunding).
\410\ See Inflation Adjustments and Other Technical Amendments
under Titles I and III of the JOBS Act (Technical Amendments;
Interpretation), Rel. No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
---------------------------------------------------------------------------
In addition, Regulation Crowdfunding also limits the amount
individual investors are allowed to invest across all Regulation
Crowdfunding offerings over the course of a 12-month period. The
limitation on how much an individual can invest during that period
depends on his or her net worth and annual income and may not exceed
$107,000. Individual investors are limited to:
The greater of $2,200 or five percent of the lesser of the
investor's annual income or net worth, if either of an investor's
annual income or net worth is less than $107,000; or
Ten percent of the lesser of his or her annual income or
net worth, if both annual income and net worth are equal to or more
than $107,000.\411\
---------------------------------------------------------------------------
\411\ See 17 CFR 227.100(a)(2) (``Rule 100(a)(2)'' of Regulation
Crowdfunding). Rule 100(a)(2) is based on the requirement in Section
4(a)(6).
---------------------------------------------------------------------------
Further, the offering statement for a Regulation Crowdfunding
offering must include specified information, including a discussion of
the issuer's financial condition and financial statements. Regulation
Crowdfunding's financial statement requirements are based on the amount
offered and sold in reliance on the exemption within the preceding
twelve-month period, with progressively increasing requirements and
involvement of outside accountants as offering size increases.\412\ On
May 4, 2020, the Commission adopted temporary final rules under
Regulation Crowdfunding to facilitate capital formation for small
businesses impacted by COVID-19, which include, among other things, an
exemption from certain financial statement review requirements for
issuers offering $250,000 or less of securities in reliance on
Regulation Crowdfunding within a 12-month period.\413\ These temporary
final rules were subsequently extended and apply to offerings initiated
under Regulation Crowdfunding between May 4, 2020, and February 28,
2021.\414\
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\412\ See 17 CFR 230.201(t).
\413\ See Temporary Amendments to Regulation Crowdfunding,
Release No. 33-10781 (May 4, 2020) [85 FR 27116 (May 7, 2020)]
(``Temporary Amendments Adopting Release''). The amendments adopted
in this release do not affect the application of these temporary
final rules.
\414\ See Temporary Amendments to Regulation Crowdfunding;
Extension, Release No. 33-10829 (Aug. 28, 2020) [85 FR 54483 (Sept.
2, 2020)] (``Temporary Amendments Extension''). The temporary final
rules expire on September 1, 2021.
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In 2019, the Commission staff undertook a study of the available
information on the capital formation and investor protection impacts of
Regulation Crowdfunding. The resulting report to the Commission
summarized quantitative information, where it was available to the
staff, as well as qualitative observations of Commission staff and
FINRA staff and input from market participants regarding their
experience with Regulation Crowdfunding.\415\ The study found that
during the considered period, the number of offerings and the total
amount of funding were relatively modest, with issuers raising $108
million under Regulation Crowdfunding from May 16, 2016, through
December 31, 2018.\416\ The study also found that the typical offering
during the considered period was small and raised less than the 12-
month offering limit.\417\
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\415\ See Report to the Commission: Regulation Crowdfunding
(June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf (``2019 Regulation Crowdfunding Report'').
\416\ See id.
\417\ See id., at Section I.
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a. Proposed Amendments
The Commission proposed to use its general exemptive authority
under Securities Act Section 28 to raise the offering limit in
Regulation Crowdfunding from $1.07 million to $5 million. The
Commission also proposed to increase the investment limits for
investors in Regulation Crowdfunding offerings. First, the Commission
proposed to no longer apply any investment limits to accredited
investors. The proposed amendments would treat accredited investors
under Regulation Crowdfunding in the same manner as other exempt
offerings. Second, the Commission proposed to amend the Regulation
Crowdfunding calculation method for the investment limits for non-
accredited investors to allow them to rely on the greater of their
annual income or net worth. The proposed amendment would conform this
aspect of Regulation Crowdfunding with Tier 2 of Regulation A and would
apply a consistent approach to limiting the potential losses investors
may incur in offerings conducted in reliance on the two
exemptions.\418\ The Commission did not propose to adjust the financial
statement requirements in Regulation Crowdfunding, although the
economic analysis in the Proposing Release considered alternatives that
would amend these disclosure requirements and solicited comment on
them.
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\418\ Under Regulation A accredited investors are not limited in
the amount of securities they may purchase and other investors are
limited to purchasing in a Tier 2 offering no more than: (a) Ten
percent of the greater of annual income or net worth (for natural
persons); or (b) ten percent of the greater of annual revenue or net
assets at fiscal year-end (for non-natural persons). See 17 CFR
230.251(d)(2)(i)(C). This limit does not, however, apply to
purchases of securities that will be listed on a national securities
exchange upon qualification.
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b. Comments
Commenters were broadly supportive of raising the Regulation
Crowdfunding offering limit to $5 million.\419\ Many
[[Page 3537]]
commenters recommended raising the limit in light of economic concerns
raised by COVID-19.\420\ Some additionally supported raising the limit
beyond $5 million.\421\ Some commenters supportive of an increased
offering limit also supported further action by the Commission to
enhance compliance with Regulation Crowdfunding.\422\ In particular,
some commenters supported relaxing the disclosure and financial
statement requirements for smaller Regulation Crowdfunding
offerings.\423\ Others supported Federal preemption of State securities
law registration and qualification requirements for secondary
sales.\424\
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\419\ See, e.g., B. Andrews, et al. Letter; CfPA Letter; SEC
SBCFAC Letter; Geraci Law Letter; Letter from Crowdfund Capital
Advisors dated May 29, 2020 (``CCA Letter'') (suggesting that
increasing the offering limit will reduce the cost of capital and
permit larger, more stable and lower risk issuers to use the
exemption); Silicon Prairie Letter; Letter from Social Enterprise
Investments, Inc. dated May 31, 2020 (``SEI Letter''); Netcapital
Letter; Carta Letter; Republic Letter; NextSeed Letter; Chamber of
Digital Commerce Letter; SAF Letter; Engine Letter; Raise Green &
New Haven Comm. Solar Letter; InnaMed, et al. Letter; SeedInvest
Letter; Crowdwise Letter; Letter from Mark Roderick dated May 31,
2020 (``M. Roderick Letter''); Letter from Representative Patrick
McHenry dated June 8, 2020 (``Rep. McHenry Letter''); and Sen.
Toomey Letter. See also 2019 OASB Annual Report, at 41 (suggesting
that the Commission ensure that dollar amount caps used in
exemptions are ``tied to expressed marketplace needs for capital and
provide flexibility for future review and adjustment'') and 47
(specifically supporting an increase offering cap for Regulation
Crowdfunding offerings, stating an increase ``would allow companies
to raise meaningful early-stage capital using crowdfunding rather
than limiting companies' options to a narrower set of exemptions'');
and AOIP Letter (suggesting the Commission immediately increase the
Regulation Crowdfunding limit in response to the COVID-19 pandemic).
\420\ See, e.g., B. Andrews, et al. Letter; Letter from Stuart
Halperin dated Mar. 27, 2020; Letter from Kevin Wolf dated Mar. 27,
2020; and AOIP Letter.
\421\ See, e.g., CCA Letter; J. Clarke Letter; SEI Letter;
Netcapital Letter; Republic Letter; Engine Letter; Raise Green & New
Haven Comm. Solar Letter; InnaMed, et al. Letter; and Sen. Toomey
Letter. Some commenters further suggested indexing these new higher
amounts for inflation. See, e.g., Carta Letter; and Sen. Toomey
Letter.
\422\ See, e.g., CfPA Letter (recommending funding portals be
required to certify that they have reviewed a campaign for
compliance prior to posting it on their platform); and M. Roderick
Letter (recommending additional disclosure regarding target offering
amounts).
\423\ See, e.g., Silicon Prairie Letter (recommending relaxing
the financial information requirements for offerings under $1
million); CrowdCheck Letter (supporting a micro-offering tier below
$25,000); Nextseed Letter (recommending a micro-offering tier below
$250,000); R. Campbell Letter (recommending eliminating the burden
of ongoing reporting requirements for small crowdfunding offerings);
Honeycomb Letter; Letter from MainVest, Inc. dated May 7, 2020
(recommending the requirement for reviewed financials not apply for
offerings under $500,000); Raise Green & New Haven Comm. Solar
Letter; M. Roderick Letter (supporting raising the threshold for
reviewed financial statements to at least $350,000); CfPA Letter
(recommending financial disclosures are only be required to be
provided to the extent that they are ``material to an understanding
of the issuer, its business and the securities being offered'') and
Sen. Toomey Letter (supporting tailored auditing requirements). See
also 2019 OASB Annual Report, at 48 (recommending the Commission
reevaluate Regulation Crowdfunding's disclosure obligations, and
specifically suggesting that ``reporting requirements could be
simplified for companies raising under $250,000''). But see Better
Markets Letter (expressing concern about the temporary Regulation
Crowdfunding relief).
\424\ See Form Letter Type A.
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Some commenters expressed concern or opposition to increasing the
offering limit.\425\ A number of these commenters suggested that there
is not compelling evidence of the need for an increase or that more
information is needed to determine whether such an increase is
appropriate.\426\ Some of these commenters expressed concern that the
proposals would expand the private markets at the expense of the public
markets.\427\ Other commenters expressed concern with compliance by
issuers under Regulation Crowdfunding \428\ and the Commission's
authority to increase the limit.\429\ One commenter recommended that if
the Commission raises the threshold above the statutory limit, it
should make clear the basis of its authority and the status of
securities issued under the increased offering limit under State
securities laws, such as whether those securities are ``covered
securities'' under Section 18 of the Securities Act.\430\
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\425\ See, e.g., Letter from Bridget Richardson dated Mar. 31,
2020 (``B. Richardson Letter''); Letter from Jeffrey Marks, Alliance
Legal Partners, Inc. dated Apr. 17, 2020 (``J. Marks Letter''); CII
Letter; Md. St. Bar Assoc. Letter; AFREF Letter; Morningstar Letter
(noting a lack of investment advice such as from a broker or
investment adviser that investors might have access to with regard
to an investment in a public company); Better Markets Letter; CFA
Letter; R. Rutkowski Letter; CrowdCheck Letter (noting compliance
failures and recommending any increase be coupled with a robust
enforcement program); and CFA Institute Letter.
\426\ See, e.g., CII Letter; CFA Letter; CFA Institute Letter;
B. Richardson Letter; and Md. St. Bar Assoc. Letter.
\427\ See, e.g., Better Markets Letter; CFA Letter; CFA
Institute Letter; and R. Rutkowski Letter. See also J. Marks Letter
(suggesting that larger offerings are appropriately subject to
additional Commission oversight); CFA Letter; and CFA Institute
Letter (suggesting that the amendments will be detrimental to retail
investors by providing them greater access to the least attractive
private offerings).
\428\ See, e.g., ABA Letter (suggesting that the Commission
should be satisfied that the crowdfunding requirements are being
complied with before increasing the limits); CFA Letter (contending
that the Commission has a responsibility to examine non-compliance
in crowdfunding markets and remedy those deficiencies before
expanding the exemption); and CrowdCheck Letter.
\429\ See, e.g., Better Markets Letter; and CFA Letter. See also
Mercatus Center Letter. Although the Mercatus Center Letter in
particular was received one business day before the publicly-noticed
open meeting at which the Commission would consider these amendments
[Pub. L. 94-409] and long after the expiration of the comment
period, the issues regarding our use of exemptive authority,
including the questions raised in that letter, have been carefully
considered. As noted above, Section 28 of the Securities Act gives
the Commission broad authority to ``conditionally or unconditionally
exempt any person . . . or any class or classes of persons . . .
from any provision or provisions of'' the Securities Act and rules
or regulations issued thereunder ``to the extent that such exemption
is necessary or appropriate in the public interest, and is
consistent with the protection of investors.'' 15 U.S.C. 77z-3. We
believe that exempting additional classes of transactions above the
statutory threshold in Section 4(a)(6) is in the public interest and
consistent with the protection of investors for the reasons
discussed below, and is thus consistent with the plain language of
Section 28. In reaching this determination, we have been informed by
the staff's experience administering Regulation Crowdfunding since
2015, the 2019 Regulation Crowdfunding Report, and the feedback of
numerous market participants in recent years, including in response
to the Concept Release. Section 28 was intended to provide
flexibility to the Commission to respond to precisely these sorts of
market developments. See Rule 701--Exempt Offerings Pursuant to
Compensatory Arrangements, Release No. 33-7645 (Feb. 25, 1999)
(noting that, in enacting the National Securities Markets
Improvement Act of 1996, Congress expected the Commission to use its
new authority under Section 28, among other things, to raise the
offering limit for Rule 701 compensatory offerings beyond the
statutorily prescribed limit of $5 million). We thus view these
amendments as appropriate and well within our statutory authority.
\430\ See ABA Letter.
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Commenters that addressed the issue generally supported amending
the rules to remove the investment limits for accredited investors
\431\ and to use the greater of annual income or net worth in
calculating investment limits for non-accredited investors.\432\ Some
commenters, however, opposed removing the investment limits for
accredited investors,\433\ or increasing the investment limits for non-
accredited
[[Page 3538]]
investors.\434\ Some commenters supporting the amendment suggested
requiring verification of accredited investor status,\435\ while others
were against verification standards.\436\ One commenter supporting the
amendments to the investment limits also expressly supported not
adjusting or increasing Regulation Crowdfunding's financial statement
requirements.\437\
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\431\ See, e.g., ABA Letter; B. Andrews, et al. Letter; SEC
SBCFAC Letter; SEI Letter; Netcapital Letter; Carta Letter; Republic
Letter; NextSeed Letter; Chamber of Digital Commerce Letter; Engine
Letter; Raise Green & New Haven Comm. Solar Letter; Morningstar
Letter; InnaMed, et al. Letter; Crowdwise Letter; Rep. McHenry
Letter; Honeycomb Letter; M. Roderick Letter; and Ketsal Letter. See
also CrowdCheck Letter (supporting removing the limits if the
investor protections in Regulation A are replicated in Regulation
Crowdfunding); and AOIP Letter (suggesting the Commission
immediately remove the investment limits for accredited investor in
response to the COVID-19 pandemic). See also 2019 OASB Annual
Report, at 48.
\432\ See, e.g., ABA Letter; Letter from Regulated Funding
Portal Industry Association dated Mar. 6, 2020; B. Andrews, et al.
Letter; SEC SBCFAC Letter; CCA Letter; Silicon Prairie Letter
(recommending further simplification of the threshold and use of a
``certified investor'' designation); SEI Letter; Netcapital Letter;
Carta Letter; Republic Letter; NextSeed Letter; Chamber of Digital
Commerce Letter; Engine Letter; Raise Green & New Haven Comm. Solar
Letter (recommending increasing the limit); InnaMed, et al. Letter.;
Crowdwise Letter; CrowdCheck Letter; CfPA Letter (recommending all
investors be permitted to invest $2,200 per transaction); and Ketsal
Letter. Some of these commenters recommended applying the limits on
a per offering basis. See, e.g., Crowdwise Letter; InnaMed, et al.
Letter; Silicon Prairie Letter; and Republic Letter. See also AOIP
Letter (suggesting the Commission immediately use the greater of
annual income or net worth in response to the COVID-19 pandemic, and
also suggesting the limits be applicable on a per offering basis).
\433\ See, e.g., Letter from Jason Pampena dated May 22, 2020
(``J. Pampena Letter'') (expressing concern that removing the
investment limits for accredited investors will reduce investment
opportunities for non-accredited investors).
\434\ See, e.g., CII Letter; and Morningstar Letter
(recommending a cautious approach to changing the investment limit
standards and expressing concern that there is limited investment
advice for these investors). See also NASAA Letter; and CFA Letter
(generally opposing the amendments).
\435\ See, e.g., J. Clarke Letter; and Raise Green & New Haven
Comm. Solar Letter.
\436\ See, e.g., Honeycomb Letter (supporting self-
verifications).
\437\ See ABA Letter.
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c. Final Amendments
Based on our consideration of the available data, the staff's 2019
Regulation Crowdfunding Report, and the feedback that we received on
the Concept Release, the Proposing Release and from Small Business
Forums \438\ and the Small Business Capital Formation Advisory
Committee, and in order to facilitate use of Regulation Crowdfunding
for capital raising, we are amending the rules as proposed: (1) To
raise the issuer offering limits in Regulation Crowdfunding; and (2) to
remove or increase the investment limits by no longer applying those
limits to accredited investors and allowing investors to rely on the
greater of their income or net worth in calculating their investment
limit.\439\ We are raising the offering limit in Regulation
Crowdfunding from $1.07 million to $5 million and are adjusting the
investment limits in reliance on the general exemptive authority under
Securities Act Section 28.\440\ We believe that reliance on Section 28
to raise the offering limit is an appropriate use of our exemptive
authority because the amendments will extend the exemption under
Section 4(a)(6) of the Securities Act to additional classes of
transactions (i.e., those that would cause the aggregate amount sold to
all investors by the issuer in the 12 months preceding the transaction
to be greater than $1 million,\441\ but not more than $5 million, and
those involving accredited investors who invest above the statutory
investment limits).\442\ We are also extending certain temporary rules
relating to the financial statement requirements for Regulation
Crowdfunding.
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\438\ See 2017 Forum Report; 2018 Forum Report; 2019 Forum
Report; and 2020 Forum Report.
\439\ We are not, as some commenters recommended, preempting
State securities law regulation of secondary trading of securities
issued in Regulation Crowdfunding offerings. We believe this
recommendation merits careful consideration and an opportunity for
market participants to receive notice and comment on a specific
proposal.
\440\ Securities Act Section 4(a)(6) currently sets the maximum
offering limit at $1.07 million ($1.0 million adjusted to reflect
changes in the CPI). See 15 U.S.C. 77d(a)(6) and 15 U.S.C. 77d-1(h).
See also Rule 100(a)(1) of Regulation Crowdfunding.
\441\ As adjusted for inflation pursuant to Section 4A(h) of the
Securities Act [15 U.S.C. 77d-1(h)].
\442\ In contrast, the change to permit non-accredited investors
to base their investment limit on the ``greater of'' rather than the
``lesser of'' their income or net worth is a discretionary choice
that we are making to carry out the statutory exemption. See Section
302(c) of the JOBS Act; Section 19(a) of the Securities Act [15
U.S.C. 77s(a)]. In the proposing and adopting releases for
Regulation Crowdfunding, the Commission noted the statutory
ambiguity in Section 4(a)(6)(B) of the Securities Act as to
application of the investment limits. See Crowdfunding Adopting
Release, at Section II.A.2. After considering the comments received,
the Commission adopted a ``lesser of'' standard in Regulation
Crowdfunding. In light of our experience with Regulation
Crowdfunding since its adoption in 2015, and concerns raised that
the existing limits may be hampering the utility of the exemption,
however, the Commission proposed to apply a less restrictive
approach by using the ``greater of'' standard instead of the
``lesser of'' standard. As discussed below, we are adopting the
``greater of'' standard.
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Currently, securities issued pursuant to the exemption under
Section 4(a)(6) are deemed to be ``covered securities'' and thus the
offer and sale of such securities by an issuer are not subject to State
securities law registration and qualification requirements pursuant to
Section 18 of the Securities Act. Nevertheless, in light of questions
raised by commenters and in order to provide certainty with respect to
the status of the exemption and the coverage of Section 18 of the
Securities Act, we are adding new 17 CFR 227.504 to Regulation
Crowdfunding to provide that for purposes of Section 18(b)(3) of the
Securities Act, a ``qualified purchaser'' means any person to whom
securities are offered or sold pursuant to an offering under Regulation
Crowdfunding.\443\ As securities offered and sold to qualified
purchasers also are ``covered securities'' under Section 18 of the
Securities Act, this amendment should remove any doubt that State
securities law registration and qualification requirements do not apply
to securities offered and sold under Regulation Crowdfunding, as
amended.
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\443\ We believe it is appropriate to define ``qualified
purchaser'' to include any person to whom securities are offered and
sold pursuant to an offering under Regulation Crowdfunding. Defining
qualified purchaser in this manner is consistent with the public
interest because it would provide certainty as to the application of
State securities law registration and qualification requirements. We
also believe that offerings conducted pursuant to Regulation
Crowdfunding, similar to Tier 2 offerings under Regulation A, are
likely to be more national in nature. Furthermore, significant and
appropriate investor protections would continue to apply, including
intermediary requirements and the eligibility, disclosure, and
ongoing reporting requirements for issuers, as discussed below. For
similar reasons, we are also amending 17 CFR 240.12g-6 (``Rule 12g-
6'') to provide clarity with respect to the continuing application
of that rule's conditional exemption from Section 12(g) for
securities issued pursuant to Regulation Crowdfunding.
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While approximately 2,000 offerings were initiated pursuant to
Regulation Crowdfunding in the approximately three and a half years
from the time the exemption first became available through December 31,
2019, market participants have expressed concern that the vitality of
the market and the number of offerings is being constrained by the
$1.07 million offering limit.\444\ As we noted in the Proposing
Release, the current offering limits may not reflect current capital
raising trends.\445\ Commenters further suggested that start-ups and
small businesses seeking to raise between $1 million and $5 million
need to spend ``additional time and expense pursuing other exempt
offering types'' in addition to Regulation Crowdfunding in order to
meet their funding needs, as the existing offering limits in Regulation
Crowdfunding are insufficient to meet those needs.\446\ We believe that
permitting larger offerings under Regulation Crowdfunding may encourage
more issuers to use the exemption and could lower the offering costs
per dollar raised,\447\ which would make the exemption a more efficient
capital raising option for smaller issuers. At the same time, we do not
believe that raising the offering limit would expand the private market
at the expense of the public market. As discussed in Section IV.A
below, Regulation Crowdfunding represents a relatively small segment of
the private offering market, and issuers that raise capital pursuant to
the exemption tend to be at a much earlier stage of development than
those that conduct a traditional initial public offering. Thus, we
anticipate these offerings will have only a marginal impact on the
number of registered offerings.
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\444\ See, e.g., InnaMed Letter; SeedInvest Letter; and Letter
from J. Vinokur, dated May 1, 2020.
\445\ See Proposing Release, at note 231 (citing to 2019 OASB
Annual Report, which noted companies are seeking increased capital
to fund early-stage operations finding that the average seed funding
increased from $1.3 million in 2010 to $5.7 million in 2018).
\446\ See, e.g., SeedInvest Letter; and InnaMed Letter.
\447\ See, e.g., CCA Letter.
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We also believe that existing Regulation Crowdfunding requirements,
including the intermediary requirements and the eligibility,
disclosure, and ongoing reporting requirements for issuers will
continue to
[[Page 3539]]
provide appropriate investor protections at this higher offering limit.
We acknowledge the concerns raised by commenters about the increased
offering limit in light of questions regarding issuer compliance with
existing Regulation Crowdfunding requirements. As discussed in more
detail in Section II.B.2 above, we remind issuers and intermediaries in
Regulation Crowdfunding offerings of their obligation to comply with
the terms of the exemption and the serious consequences that may result
from a failure to do so. At this time, we do not believe additional
disclosure or other requirements on issuers or intermediaries is
appropriate, or would necessarily be effective in addressing these
compliance concerns.\448\ Commission staff will continue to work with
FINRA to assess issuer and intermediary compliance with the
requirements of Regulation Crowdfunding.
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\448\ We note, for example, that one commenter recommended we
require a certification from an intermediary that it has reviewed a
campaign for compliance prior to posting it on their platform. See
CfPA Letter. However, intermediaries are already required to have a
reasonable basis for believing that an issuer seeking to offer and
sell securities through the intermediary's platform complies with
requirements of Regulation Crowdfunding.
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For these reasons, we continue to believe that it is necessary and
appropriate in the public interest and consistent with the protection
of investors to raise the Regulation Crowdfunding offering limit as
proposed.
In response to commenters who recommended that we adjust the
financial statement requirements or permanently adopt the temporary
relief with respect to the financial statement review
requirements,\449\ we are extending certain provisions of the temporary
final rules for an additional 18 months so that they will apply to
offerings initiated under Regulation Crowdfunding between May 4, 2020,
and August 28, 2022.\450\
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\449\ See, e.g., Silicon Prairie Letter (recommending relaxing
the financial information requirements for offerings under $1
million); Nextseed Letter (highlighting the ability under the
temporary relief to raise up to $250,000 without need for CPA-
reviewed financials and recommending the Commission make the
temporary relief provisions permanent as a micro-offering tier below
$250,000); Honeycomb Letter (noting that the current financial
statement thresholds and disclosure requirements impose additional
costs on issuers without providing material benefit to investors--
particularly for small businesses raising under $250,000.); Letter
from MainVest, Inc. dated May 7, 2020 (recommending the requirement
for reviewed financials not apply for offerings under $500,000); and
Letter from Republic dated Aug. 22, 2020 (recommending that the
Commission permanently adopt the temporary relief or extend the
relief for at least 12 months). See also 2019 OASB Annual Report, at
48 (recommending the Commission reevaluate Regulation Crowdfunding's
disclosure obligations, and specifically suggesting that ``reporting
requirements could be simplified for companies raising under
$250,000'').
\450\ These amendments will be effective upon publication in the
Federal Register and will expire on March 1, 2023. We find that
there is good cause for the amendments to be effective immediately
upon publication because a delay in implementation would
substantially undermine the relief provided by the temporary rules
and could exacerbate the existing challenges faced by many small
businesses in need of capital to continue their operations. We also
note that these temporary amendments grant an exemption or relieve a
restriction. See 5 U.S.C. 553(d)(1) and (3).
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Specifically, we are adopting new temporary Rule 201(bb) to extend
the relief provided by existing temporary 17 CFR 227.201(z)(3), which
applies to an eligible issuer in an offering or offerings that,
together with all other amounts sold in Regulation Crowdfunding
offerings within the preceding 12-month period, have, in the aggregate,
a target offering amount of more than $107,000, but not more than
$250,000. Such an issuer may provide financial statements of the issuer
and certain information from the issuer's Federal income tax returns,
both certified by the principal executive officer, in accordance with
17 CFR 227.201(t)(1) (``Rule 201(t)(1)''), instead of the financial
statements reviewed by a public accountant that is independent of the
issuer that would otherwise be required by 17 CFR 227.201(t)(2) (``Rule
201(t)(2)''). This temporary relief will apply only if reviewed or
audited financial statements of the issuer are not otherwise available.
In connection with the extension of this provision, we are also
extending the disclosure requirement currently required by existing
temporary 17 CFR 227.201(z)(1)(iii),\451\ which requires an issuer
relying on the temporary rule to provide prominent disclosure that
financial information certified by the principal executive officer of
the issuer has been provided instead of financial statements reviewed
by a public accountant that is independent of the issuer.\452\ We are
also extending the enhanced eligibility requirements of temporary 17
CFR 227.100(b)(7)(i) and 17 CFR 227.100(b)(7)(ii).\453\
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\451\ As part of these amendments, we have added a new provision
to Rule 201 to be designated as Rule 201(z), therefore we are
renumbering existing Rule 201(z) as Rule 201(aa). See Section
II.B.2.b.
\452\ We are temporarily amending the introductory paragraphs to
the section of Form C entitled ``Optional Question & Answer Format
for an Offering Statement'' to include a reminder to issuers relying
on these temporary rules to review and tailor their responses to
certain questions in the Form C appropriately.
\453\ To rely on the temporary rules, issuers must meet the
existing eligibility criteria and also cannot have been organized
and cannot have been operating for less than six months prior to the
commencement of the offering. In addition, an issuer that has sold
securities in a Regulation Crowdfunding offering in the past must
have complied with the requirements in 15 U.S.C. 77d-1(b) (``Section
4A(b)'') of the Securities Act and the related rules. In connection
with the amendment to extend the eligibility criteria, we are making
a related amendment to Rule 301, consistent with current temporary
Rule 301(d), to require that an intermediary involved in an offering
by an issuer that is relying on the temporary relief must have a
reasonable basis for believing that the issuer has complied with the
requirements of Section 4A(b) and the related requirements of
Regulation Crowdfunding in prior offerings. For this requirement,
the intermediary may reasonably rely on the representations of the
issuer concerning compliance with these requirements unless the
intermediary has reason to question the reliability of those
representations.
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We believe that this extension of these portions of the temporary
final rules is appropriate, particularly in light of the significant
challenges for small businesses that COVID-19 continues to present. We
continue to believe that a securities offering under Regulation
Crowdfunding may be an attractive fundraising option for some small
businesses at this time, particularly as a means of allowing an issuer
to make use of the internet to reach out to its customers or members of
its local community as potential investors as well as to existing
investors. We understand that the temporary final rules have been well
received to date and have proven effective for some issuers to raise
capital under the current conditions, and we have received positive
feedback from market participants with respect to the benefits of
current temporary Rule 201(z)(3). The extension of these provisions of
the temporary final rules also will provide us with the opportunity to
analyze the use of the exemption and gather additional feedback from
issuers, investors and other market participants as we consider its
benefits and whether to adopt the provision on a permanent basis.
We are not adjusting, on either a temporary or permanent basis the
financial statement requirements for offerings over $535,000. We have
seen no evidence to indicate that investors should receive less
information in offerings under Regulation Crowdfunding at this level,
and continue to believe that the current requirements provide important
information to investors. Offerings of more than $535,000 up to the
increased $5 million offering limit will be subject to the financial
statement requirements of 17 CFR 230.201(t)(3). We believe that this
standard, which (1) requires the provision of audited financial
statements similar to the requirements for other exempt offerings with
higher
[[Page 3540]]
offering limits, and (2) currently applies to issuers offering more
than $535,000 of their securities, is sufficient for offerings subject
to the increased $5 million offering limit.
We are amending the rules as proposed to remove or increase the
investment limits for investors in Regulation Crowdfunding
offerings.\454\ First, we are amending the rules to no longer apply any
investment limits to accredited investors. Commenters generally
supported increasing the investment limits of accredited
investors.\455\ In addition, the 2018 Small Business Forum recommended
that the Commission increase the investment limits for all
investors,\456\ and the 2017, 2018, and 2019 Small Business Forums, the
SEC Small Business Capital Formation Advisory Committee, and the 2017
Treasury Report all recommended that the investment limits not apply to
accredited investors, who face no such limits under other
exemptions.\457\
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\454\ Consistent with the current approach to investment limits,
an issuer may rely on efforts that an intermediary is required to
undertake in order to determine that the investor is an accredited
investor, or that the aggregate amount of securities purchased by an
investor does not cause the investor to exceed the investment
limits, provided that the issuer does not have knowledge that the
investor has exceeded, or will exceed, the investment limits as a
result of purchasing securities in the issuer's offering. See
Instruction 3 to 17 CFR 270.100(a)(2) of Regulation Crowdfunding.
\455\ See supra note 431. Only one commenter expressed a
specific concern regarding increasing the investment limits of
accredited investors. See J. Pampena Letter. We believe, however,
that rather than decreasing investment opportunities for non-
accredited investors, permitting more investment by accredited
investors may lead to a more robust market for offerings under
Regulation Crowdfunding, which would provide more and better
opportunities for non-accredited investors.
\456\ See 2018 Forum Report.
\457\ See, e.g., 2017 Treasury Report, at 41; 2018 Forum Report;
2017 Forum Report, at 17; Recommendation of the SEC Small Business
Capital Formation Advisory Committee regarding Regulation
Crowdfunding (Dec. 13, 2019), available at https://www.sec.gov/spotlight/sbcfac/recommendation-regulation-crowdfunding.pdf. See
also Final Report of the 2015 SEC Government-Business Forum on Small
Business Capital Formation (Nov. 2015), available at https://www.sec.gov/info/smallbus/gbfor34.pdf (recommending increasing the
investment limit for accredited investors). In conjunction with
removing the investment limits for individual accredited investors,
the 2018 Small Business Forum recommended verification of accredited
investor status.
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When the Commission considered investment limits for Tier 2
Regulation A offerings, it determined that such limitations were
unnecessary for accredited investors because these individuals satisfy
certain criteria that suggest they are capable of protecting themselves
in transactions that are exempt from registration under the Securities
Act.\458\ For similar reasons, we believe that investment limits for
accredited investors under Regulation Crowdfunding are
unnecessary.\459\ Accordingly, we believe it is appropriate in the
public interest and consistent with the protection of investors to
treat accredited investors under Regulation Crowdfunding in the same
manner as other exempt offerings.
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\458\ See 2015 Regulation A Release, at note 145 and
accompanying text.
\459\ While a few commenters suggested that we add an accredited
investor verification requirement, we believe that a verification
requirement is unnecessary. See, e.g., J. Clarke Letter; and Raise
Green & New Haven Comm. Solar Letter. In making this determination,
we note that there is no accredited investor verification
requirement with respect to investors participating in Regulation A
or other exempt offerings outside of offerings seeking to rely on
Rule 506(c) and that Regulation Crowdfunding, like Regulation A,
layers in additional protections for investors, such as required
reporting and the use of intermediaries, that are not provided to
investors in offerings relying on Rule 506(c).
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Second, we are amending the Regulation Crowdfunding calculation
method for the investment limits for non-accredited investors to allow
them to rely on the greater of their annual income or net worth.
Currently, Regulation Crowdfunding imposes a limit that is the lesser
of a percentage of the investor's annual income or net worth subject to
an absolute maximum of $107,000.\460\ Some market participants
recommended basing the limits on the greater of the investor's net
worth or income, noting that the accredited investor definition only
requires the investor to meet either the net worth or the income
standard.\461\ Commenters on the proposal also generally supported
increasing these investment limits.\462\
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\460\ Rule 100(a)(2) of Regulation Crowdfunding is based on the
requirement in Section 4(a)(6) that provides an exemption where the
aggregate amount sold to an investor by an issuer does not exceed a
given percentage of the annual income or net worth of such investor.
The statutory language does not expressly provide that the investor
use the lesser of annual income or net worth.
\461\ See supra note 457.
\462\ See supra note 432. While one commenter expressed concern
about raising the investment limits for non-accredited investors and
recommended that the Commission undertake any such changes
cautiously, we believe that making this incremental change
appropriately allows investors greater flexibility in making choices
relating to their investments and risk tolerance choices, while
still retaining substantial loss limitation standards through a
consistent approach to investment limits across Regulation A and
Regulation Crowdfunding. See Morningstar Letter.
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When adopting Regulation Crowdfunding, the Commission considered
whether to use a ``greater of'' or ``lesser of'' standard for the
exemption's investment limits and determined to use the ``lesser of''
standard at that time due to concerns about investors incurring
unaffordable losses.\463\ By contrast, when the Commission considered
investment limits for Tier 2 Regulation A offerings, it determined to
permit investors to look to a percentage of the greater of their annual
income or net worth.\464\ At that time, the Commission indicated that
limiting the amount of securities that a non-accredited investor can
purchase in a particular Tier 2 offering should help to mitigate
concerns that such investors may not be able to absorb the potential
loss of the investment and that a limitation based on a percentage of
the greater of such investor's net worth/net assets and annual income/
revenue is generally consistent with similar maximum investment
limitations placed on investors in Title III of the JOBS Act and would
help set a loss limitation standard in such offerings.\465\ The
amendment conforms Regulation Crowdfunding with Tier 2 of Regulation A
and applies a consistent approach to limiting potential losses
investors may incur in offerings conducted in reliance on the two
exemptions. In light of our experience with Regulation Crowdfunding
since its adoption and the concerns that the existing investment limits
may be hampering the utility of the exemption, we believe it is
appropriate to use this less restrictive approach. Additionally, this
change provides investors with more flexibility in making their
investment decisions. Moreover, we are not aware of evidence since
Regulation Crowdfunding's adoption to indicate this market requires a
more stringent approach to investment limits than other exemptive
regimes.\466\
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\463\ See Crowdfunding Adopting Release, at Section II.A.2.c.
\464\ See 17 CFR 230.251(d)(2)(i)(C)(2); and 2015 Regulation A
Release, at Section II.B.4.
\465\ See Section 301 of the JOBS Act; and 2015 Regulation A
Release, at notes 161 and 162 and accompanying text.
\466\ See 2019 Regulation Crowdfunding Report, at Section
III.C.3.
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F. Regulation Crowdfunding and Regulation A Eligibility
The Commission's exempt offering framework includes specific
eligibility restrictions excluding certain types of entities or
activities by issuers that apply to both Regulation A \467\ and
[[Page 3541]]
Regulation Crowdfunding.\468\ While Regulation Crowdfunding does not
restrict the types of securities eligible to be sold under the
exemption, the types of securities eligible for sale under Regulation A
are limited to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.\469\ The Commission proposed to amend
Regulation Crowdfunding:
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\467\ See 17 CFR 230.251(b). Regulation A is not available to:
Issuers that are organized in or have their principal place of
business outside of the United States or Canada; investment
companies registered or required to be registered under the
Investment Company Act or business development companies; blank
check companies; issuers of fractional undivided interests in oil or
gas rights, or similar interests in other mineral rights; issuers
that are required to, but that have not, filed with the Commission
the ongoing reports required by the rules under Regulation A during
the two years immediately preceding the filing of a new offering
statement (or for such shorter period that the issuer was required
to file such reports); issuers that are or have been subject to an
order by the Commission denying, suspending, or revoking the
registration of a class of securities pursuant to Section 12(j) of
the Exchange Act that was entered within five years before the
filing of the offering statement; or issuers subject to ``bad
actor'' disqualification under 15 CFR 230.262.
\468\ Section 4A specifically excludes: Non-U.S. issuers;
issuers that are required to file reports under Exchange Act Section
13(a) or 15(d); certain investment companies; and other issuers that
the Commission, by rule or regulation, determines appropriate. See
15 U.S.C. 77d-1. Regulation Crowdfunding further excludes: Issuers
disqualified under disqualification provisions that are
substantially similar to those in 17 CFR 230.506(d) (``Rule
506(d)''); issuers that have failed to comply with the annual
reporting requirements under Regulation Crowdfunding during the two
years immediately preceding the filing of the offering statement;
and blank check companies. See 17 CFR 227.100(b).
\469\ See 17 CFR 230.261 (``Rule 261''). Regulation A also
specifically excludes asset-backed securities. See Rule 251
(providing that only ``eligible securities'' can be offered or sold
under Regulation A); and Rule 261 (defining ``eligible
securities''). An asset-backed security generally means a security
that is primarily serviced by the cash flows of a discrete pool of
receivables or other financial assets, either fixed or revolving,
that by their terms convert into cash within a finite time period,
plus any rights or other assets designed to assure the servicing or
timely distributions of proceeds to the security holders. See 17 CFR
229.1101(c).
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To permit the use of certain special purpose vehicles to
facilitate investing in Regulation Crowdfunding issuers; and
To limit the securities eligible to be sold under
Regulation Crowdfunding.
The Commission additionally proposed to amend Regulation A to
exclude Exchange Act registrants that are delinquent in their Exchange
Act reporting obligations from relying on the exemption.
1. Regulation Crowdfunding Eligible Issuers
Section 4A(f)(3) of the Securities Act prohibits investment
companies, as defined in the Investment Company Act (or companies that
are excluded from the definition of an investment company under section
3(b) or 3(c) of the Investment Company Act), from using the Regulation
Crowdfunding exemption. When adopting Regulation Crowdfunding, the
Commission did not create, as suggested by some commenters, an
exception to this statutory prohibition that would have allowed a
single purpose fund organized to invest in, or lend money to, a single
company, to use Regulation Crowdfunding.\470\ As a result, issuers may
not use special purpose vehicles that invest in a single company
(``SPVs'') that are investment companies (or companies that are
excluded from the definition of an investment company under section
3(b) or 3(c) of the Investment Company Act) to conduct Regulation
Crowdfunding offerings. Investors purchasing securities in an offering
under Regulation Crowdfunding thus must hold the securities in their
own name, which can create certain practical impediments to issuers'
use of Regulation Crowdfunding. For example, we understand that a large
number of investors on an issuer's capitalization table can be
unwieldy, creating administrative complexities and potentially impeding
future financing.\471\
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\470\ See Crowdfunding Adopting Release, at 71397. In explaining
its decision, the Commission stated that the primary purpose of
Section 4(a)(6) is to facilitate capital formation by early stage
companies that might not otherwise have access to capital, and
expressed its belief that investment companies did not constitute
the type of issuer that Section 4(a)(6) and Regulation Crowdfunding
were intended to benefit. Id.
\471\ See Concept Release, at Section II.F.1.a. See also
Proposing Release, at note 323 and accompanying text (noting that
commenters on the Concept Release stated that it can be difficult to
obtain consent or approval from hundreds of investors as it relates
to governance issues, strategic decisions, and later financing
rounds).
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a. Proposed Amendments
The Commission proposed to add a new exclusion under the Investment
Company Act for limited-purpose crowdfunding vehicles (``crowdfunding
vehicles''). Proposed Rule 3a-9 under the Investment Company Act would
exclude from the definition of ``investment company'' under that Act a
crowdfunding vehicle that meets certain conditions designed to require
that it function as a conduit for investors to invest in a business
that seeks to raise capital through a crowdfunding vehicle.\472\ As a
result, Section 4A(f)(3) of the Securities Act would not preclude an
SPV that meets this definition of a crowdfunding vehicle from relying
on Regulation Crowdfunding.
---------------------------------------------------------------------------
\472\ See proposed Rule 3a-9(a). A crowdfunding vehicle
complying with the proposed rule would not be an investment company
as defined in the Investment Company Act or an entity that is
excluded from the definition of investment company by section 3(b)
or section 3(c) of that Act, and would therefore not be precluded
from relying on Regulation Crowdfunding by Section 4A(f)(3) of the
Securities Act. See 17 CFR 227.100(b)(3).
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In proposing this exclusion, the Commission expressed its belief
that proposed Rule 3a-9 would be consistent with the intent of Section
4(a)(6) because it would not be aimed at allowing investment companies
or similar issuers to raise capital, but rather, solely at facilitating
crowdfunding offerings by eligible issuers, and under the proposed
rule, a crowdfunding vehicle would serve merely as a conduit for
investors to invest in a single underlying issuer and would not have a
separate business purpose. The proposed crowdfunding vehicle was
intended to allow investors in the vehicle to achieve the same economic
exposure, voting power, and ability to assert State and Federal law
rights, and receive the same disclosures under Regulation Crowdfunding,
as if they had invested directly in the underlying issuer in an
offering made under Regulation Crowdfunding. The proposed approach also
would allow an eligible issuer (``crowdfunding issuer'') to maintain a
simplified capitalization table and, by reducing the administrative
complexities associated with a large and diffuse shareholder base, may
encourage crowdfunding issuers to offer voting rights, or other terms
not currently offered as frequently to investors.\473\
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\473\ See Proposing Release, at note 328.
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Proposed Rule 3a-9 defined a crowdfunding issuer as a company that
seeks to raise capital as a co-issuer in an offering with a
crowdfunding vehicle that complies with all of the requirements under
Section 4(a)(6) of the Securities Act and Regulation Crowdfunding.\474\
The Commission also proposed to define a crowdfunding vehicle as an
issuer \475\ formed by or on behalf of a crowdfunding issuer for the
purpose of conducting an offering under Section 4(a)(6) of the
Securities Act as a co-issuer with the crowdfunding issuer, which
offering would be controlled by the crowdfunding issuer. The proposed
limitations on the nature and scope of the crowdfunding vehicle's
activities were designed to ensure that
[[Page 3542]]
the crowdfunding vehicle would function as a means for the crowdfunding
issuer to raise capital rather than as an independent investment
vehicle that would be subject to regulation under the Investment
Company Act.
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\474\ As co-issuers, the crowdfunding issuer and crowdfunding
vehicle would be jointly relying on Regulation Crowdfunding for the
combined offering of the crowdfunding issuer's securities and the
crowdfunding vehicle's securities to the investors. See, e.g., 17
CFR 230.140. The crowdfunding issuer would also rely on Regulation
Crowdfunding, and the Form C filed in connection with the offering
of the crowdfunding vehicle's securities, for the offering of its
securities to the crowdfunding vehicle.
\475\ Under the Investment Company Act, an issuer means every
person who issues or proposes to issue any security, or has
outstanding any security which it has issued. See 15 U.S.C. 80-
2(a)(22).
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The proposed rule included several conditions for crowdfunding
vehicles intended to address specific investor protection concerns
raised by a vehicle that acts as a conduit for investments in a
crowdfunding issuer.\476\ Specifically, under the proposed rule, the
crowdfunding vehicle:
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\476\ See generally proposed Rule 3a-9(a) for the proposed
conditions.
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Must be organized and operated for the sole purpose of
acquiring, holding, and disposing of securities issued by a single
crowdfunding issuer and raising capital in one or more offerings made
in compliance with Regulation Crowdfunding;
Would not be permitted to borrow money and would be
required to use the proceeds of the securities it sells solely to
purchase a single class of securities of a single crowdfunding issuer;
Would be permitted to issue only one class of securities
in one or more offerings under Regulation Crowdfunding in which the
crowdfunding vehicle and the crowdfunding issuer are deemed to be co-
issuers under the Securities Act;
Would be required to obtain a written undertaking from the
crowdfunding issuer to fund or reimburse the expenses associated with
the crowdfunding vehicle's formation, operation, or winding up, and the
crowdfunding vehicle would not be permitted to receive other
compensation, and any compensation paid to any person operating the
vehicle would be required to be paid solely by the crowdfunding issuer;
Would be required to maintain the same fiscal year end as
the crowdfunding issuer, and maintain a one-to-one relationship between
the number, denomination, type and rights of crowdfunding issuer
securities it owns and the number, denomination, type and rights of its
securities outstanding;
Would be required to vote the crowdfunding issuer
securities, and participate in tender or exchange offers or similar
transactions, only in accordance with instructions from the investors
in the crowdfunding vehicle;
Would receive all of the disclosures and other information
required under Regulation Crowdfunding from the crowdfunding issuer and
would then be required promptly to provide such disclosures and
information to the investors and potential investors in the
crowdfunding vehicle's securities and to the relevant intermediary; and
Would be required to provide to each investor the right to
direct the crowdfunding vehicle to assert the rights under State and
Federal law that the investor would have if he or she had invested
directly in the crowdfunding issuer and provide each investor any
information that it receives from the crowdfunding issuer as a
shareholder of record of the crowdfunding issuer.
Under the proposal, the crowdfunding issuer and the crowdfunding
vehicle would be co-issuers under the Securities Act, meaning each
would be deemed to be the maker of any statements by the crowdfunding
vehicle and any material misstatements or omissions with respect to the
offering.\477\ As co-issuers, the crowdfunding issuer and the
crowdfunding vehicle would be required to jointly file a Form C,
providing all of the required Form C disclosure with respect to (i) the
offer and sale of the crowdfunding issuer's securities to the
crowdfunding vehicle and (ii) the offer and sale of the crowdfunding
vehicle's securities to investors.\478\
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\477\ See, e.g., 17 CFR 230.140. The crowdfunding vehicle's
business would consist only of the purchase of securities of the
crowdfunding issuer, and it would use the sale of its own securities
to make such purchases of securities of the crowdfunding issuer.
\478\ The Commission proposed to amend Rule 201 of Regulation
Crowdfunding and Form C to require disclosure about the co-issuer in
the offering statement. Because the crowdfunding vehicle would only
be acting as a conduit for the crowdfunding issuer, we did not
believe that the individual investment limitations under Regulation
Crowdfunding should apply to transfer of the securities from the
crowdfunding issuer to the crowdfunding vehicle. In addition, the
amount of securities issued by the crowdfunding issuer to the
crowdfunding vehicle would not reduce the amount of securities that
could be offered and sold to the investors in the crowdfunding
vehicle for purposes of the offering limit in Rule 100(a) of
Regulation Crowdfunding.
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Finally, the Commission specifically considered, but did not
propose, requiring that a registered investment adviser manage the
crowdfunding vehicle. The Commission stated that it did not propose
this requirement because of concerns that it could make the
crowdfunding vehicle more than a conduit to hold the securities of the
crowdfunding issuer and because of questions regarding economic
feasibility.\479\
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\479\ See Proposing Release, at Section II.F.1.
---------------------------------------------------------------------------
b. Comments
Commenters generally supported permitting crowdfunding issuers to
use crowdfunding vehicles,\480\ while a few commenters were
opposed.\481\ One commenter stated that crowdfunding vehicles would
help issuers manage the large number of direct investors that can
result from an offering under Regulation Crowdfunding and provide
smaller investors with more leverage to negotiate better terms and
protections.\482\ Another commenter stated that SPVs may make
crowdfunding safer and more profitable for investors, which could
attract more capital and thereby offer more opportunities for
startups.\483\
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\480\ See, e.g., Wefunder Letter; SEC SBCFAC Letter; CCA Letter;
J. Clarke Letter; SEI Letter; NextSeed Letter; W. Hubbard Letter;
Engine Letter; Raise Green & New Haven Comm. Solar Letter; D. Burton
Letter; Rep. McHenry Letter; CrowdCheck Letter; and ABA Letter. See
also 2019 OASB Annual Report, at 48.
\481\ See CII Letter; and CFA Letter (stating that allowing the
use of SPVs ``would further undermine transparency of private
offerings and further erode incentives private companies have to
become public companies once they have acquired a large and widely
dispersed shareholder base.'').
\482\ See ABA Letter. See also J. Clarke Letter (stating that
the proposal would encourage issuers to offer voting rights to
investors).
\483\ See Engine Letter.
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SPV Structure
Several commenters, while supportive of allowing crowdfunding
issuers to use SPVs, questioned whether the proposed crowdfunding
vehicle was structured appropriately.\484\ Some commenters stated that
the proposed structure was too prescriptive and costly, with little
benefit to either investors or issuers.\485\ For example, one commenter
stated that investing through an SPV may have tax implications for
certain investments and administrative burdens related to how the SPV
is structured.\486\
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\484\ See e.g., Wefunder Letter; CrowdCheck Letter; Crowdwise
Letter; and D. Burton Letter.
\485\ See Wefunder Letter; D. Burton Letter; and CrowdCheck
Letter.
\486\ See Crowdwise Letter (stating that the proposed approach
would create a Schedule K-1 burden for issuers with respect to SPVs
organized as limited liability companies, and disadvantage investors
by disqualifying them from certain preferential tax treatment).
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Several commenters proposed alternative structures. One commenter
suggested that an exempt reporting adviser (``ERA'') should be able to
form SPVs.\487\ This commenter also stated that an appropriately
structured SPV should include a compensated lead investor associated
with the ERA.\488\
[[Page 3543]]
Other commenters suggested that a crowdfunding vehicle should be
managed by a registered investment adviser, ERA, or ``compensated
administrator'' with a fiduciary duty to investors.\489\ Some
commenters stated that the Commission would need to address certain
issues before a registered investment adviser would be interested in
participating in this market, such as compliance with the Custody
Rule.\490\ Other commenters opposed requiring a registered investment
adviser to manage the SPV,\491\ with one commenter stating that the
associated costs might deter small-medium enterprises, community
groups, or women- and minority-owned businesses from utilizing an
SPV.\492\ One commenter suggested that a funding portal would be better
situated to manage a crowdfunding vehicle due to the vehicle's small
size.\493\ Another commenter stated that many small investors do not
want to spend time reading legal documents to authorize corporate
actions and would rather authorize a lead investor to make such
decisions.\494\ Finally, one commenter suggested using an ``SEC-
registered transfer agent'' as a custodian, with the ``portal entity''
paying all associated costs.\495\
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\487\ See Wefunder Letter. The commenter also requested guidance
from the Commission that, in the absence of an ERA-advised SPV
structure, an SPV would be permitted to hire a registered investment
adviser that does not custody securities and that is permitted to
charge performance fees to Regulation Crowdfunding investors,
provided that certain conditions are met.
\488\ An ERA is an investment adviser that qualifies for the
exemption from registration under Section 203(l) of the Advisers Act
because it is an adviser solely to one or more venture capital
funds, or under 17 CFR 275.203(m)-1 because it is an adviser solely
to private funds and has assets under management in the United
States of less than $150 million. See Exemptions for Advisers to
Venture Capital Funds, Private Fund Advisers With Less Than $150
Million in Assets Under Management, and Foreign Private Advisers,
Release No. IA-3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)].
This commenter stated that the Commission should create a ``new
class'' of ERAs that are exempt from registration for an
``investment adviser to one or more crowdfunding vehicles'' that
would be able to receive incentive compensation (and share such
compensation with a lead investor), and as such not be subject to
the audit requirement under 17 CFR 275.206(4)-2 (the ``Custody
Rule''), which would otherwise make the arrangement uneconomical.
See Wefunder Letter.
\489\ See CrowdCheck Letter; NextSeed Letter (stating that a
registered investment adviser or ERA could ensure all legal,
regulatory and tax requirements of operating the vehicle are
fulfilled); and NASAA Letter (stating rule should require the SPV be
managed by a registered investment adviser or another fiduciary
manager).
\490\ See CrowdCheck Letter; and Wefunder Letter.
\491\ See J. Clarke Letter; W. Hubbard Letter; and Raise Green &
New Haven Comm. Solar. Letter.
\492\ See Raise Green & New Haven Comm. Solar Letter.
\493\ See id.
\494\ See Wefunder Letter.
\495\ See id.
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SPV Conditions
Most commenters generally supported permitting crowdfunding issuers
to use crowdfunding vehicles but suggested certain modifications to the
proposed conditions.\496\ For example, two commenters stated that they
supported the proposed conditions and restrictions designed to require
the crowdfunding vehicle act as a conduit for investors to invest in a
single crowdfunding issuer.\497\ One of these commenters also supported
the required redemption of the crowdfunding vehicle's securities upon a
liquidity event at the crowdfunding issuer level.\498\ However, another
commenter stated that the rule should not limit the number of issuers
in which a crowdfunding vehicle can invest.\499\ Similarly, several
commenters stated that the rule should permit investment advisers to
form funds for non-accredited investors that invest in multiple
crowdfunding issuers.\500\ Additionally, commenters suggested allowing
crowdfunding vehicles to issue more than one class of securities.\501\
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\496\ See J. Clarke Letter; W. Hubbard Letter; Raise Green & New
Haven Comm. Solar Letter; CrowdCheck Letter; and SEI Letter.
\497\ See J. Clarke Letter; and W. Hubbard Letter.
\498\ See W. Hubbard Letter.
\499\ See SEI Letter.
\500\ See Hubbard Letter; Raise Green & New Haven Comm. Solar
Letter (noting that this approach would decrease investors' risk by
spreading their capital over multiple offerings and increase the
ease with which an issuer could raise capital, as it would be
``directed from one investment adviser and could be done in a
recurrent fashion.''); and CrowdCheck Letter.
\501\ See Raise Green & New Haven Comm. Solar Letter (also
opposing requiring a crowdfunding vehicle to redeem or offer to
repurchase its securities if there is a liquidity event at the
crowdfunding issuer level and the requirement in the proposal that
the crowdfunding issuer pay the costs of the crowdfunding vehicle);
and W. Hubbard Letter. But see CrowdCheck Letter (stating that
crowdfunding vehicles do not need to have multiple classes of
securities since they are likely to be formed as series limited
liability companies).
---------------------------------------------------------------------------
Commenters were generally supportive of the proposed conditions
intended to provide investors in the crowdfunding vehicle the same
economic exposure, voting power, and Regulation Crowdfunding
disclosures as if the investors had invested directly in the
crowdfunding issuers, but some suggested certain modifications.\502\
Some commenters also supported deeming the crowdfunding vehicle and the
crowdfunding issuer to be co-issuers for purposes of the Securities
Act.\503\ One commenter also suggested that over time the Commission
should lessen the rule's restrictions.\504\
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\502\ See J. Clarke Letter; W. Hubbard Letter; Raise Green & New
Haven Comm. Solar Letter; and CrowdCheck Letter.
\503\ See Raise Green & New Haven Comm. Solar Letter; and
CrowdCheck Letter.
\504\ See W. Hubbard Letter.
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One commenter supported requiring crowdfunding vehicles to maintain
a one-to-one relationship between the crowdfunding issuer securities it
owns and the crowdfunding vehicle securities outstanding to provide
investors in the crowdfunding vehicle the same economic exposure as
they had invested directly in the crowdfunding issuer.\505\ Other
commenters opposed this one-to-one requirement.\506\
---------------------------------------------------------------------------
\505\ See J. Clarke Letter.
\506\ See CrowdCheck letter (stating that exact replication of
rights is not possible since a crowdfunding issuer may be a
corporation, an LLC or a limited partnership formed under the laws
of any State or territory, while the crowdfunding vehicle will have
to be a pass-through entity); and Raise Green & New Haven Comm.
Solar Letter.
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Commenters generally supported the proposal's requirement that the
crowdfunding vehicle be required to seek instructions from its
investors to vote the crowdfunding issuer securities it holds, and to
participate in tender or exchange offers or similar transactions
conducted by the crowdfunding issuer.\507\ One commenter opposed this
requirement, and asked the Commission to fully articulate what actions
the SPV will take on behalf of its investors or, alternatively, to
adopt a principles-based rule that would require the SPV to take all
actions directed by its investors collectively.\508\ One commenter
suggested that the crowdfunding vehicle should automatically vote with
the majority to simplify the voting process.\509\ Other commenters
stated that the rule should also address appraisal rights and allow for
proxies.\510\
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\507\ See J. Clarke Letter; W. Hubbard Letter; Raise Green & New
Haven Comm. Solar Letter; and CrowdCheck Letter.
\508\ See NASAA Letter.
\509\ See J Clarke Letter.
\510\ See W. Hubbard Letter; and Raise Green & New Haven Comm.
Solar Letter.
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Commenters generally supported the proposed rule's disclosure
requirements.\511\ One commenter stated that the disclosures would
improve compliance with ongoing reporting requirements under Regulation
Crowdfunding by requiring the crowdfunding issuer to provide mandated
information.\512\ Another commenter stated that the proposed
requirements would provide shareholders with the necessary information
to determine whether to direct the crowdfunding vehicle to assert
Federal and State rights for shareholders and would adequately pass
through such rights.\513\
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\511\ See J. Clarke Letter; W. Hubbard Letter; and CrowdCheck
Letter.
\512\ See CrowdCheck Letter.
\513\ See Hubbard Letter. The commenter also stated that while
disclosure in writing of the differences may suffice from a
substantive standpoint, ``the mechanics and funding for vehicle
operations will likely require, from an operational standpoint, a
separate vehicle account with funds deemed sufficient for such
purposes.'' See id.
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[[Page 3544]]
Form C Filings
Commenters supported requiring crowdfunding issuers and
crowdfunding vehicles to jointly file a Form C, and several commenters
noted its simplicity and efficiency.\514\ One commenter also stated
that having both parties file the same Form C and the same Form C-AR
would reduce market confusion, help investors access information more
easily, and assist the administrator of the crowdfunding vehicle in
enforcing the crowdfunding issuer's ongoing reporting obligations.\515\
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\514\ See J. Clarke Letter; SEI Letter; W. Hubbard Letter; Raise
Green & New Haven Comm. Solar Letter; and CrowdCheck Letter (noting
that filing obligations of the crowdfunding issuer and the
crowdfunding vehicle should be coterminous and coordinated).
\515\ See CrowdCheck letter.
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Some commenters supported requiring a crowdfunding issuer to file
its own Form C if it is separately offering securities through a
crowdfunding vehicle and directly to investors.\516\ The commenters
were concerned a joint filing in these circumstances could lead to
investor confusion. Other commenters opposed this approach, stating
that a joint form in these circumstances is necessary to focus the
investment on the venture, instead of the crowdfunding vehicle.\517\
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\516\ See W. Hubbard Letter; Raise Green & New Haven Comm. Solar
Letter; and CrowdCheck Letter.
\517\ See J. Clarke Letter; and SEI Letter.
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Treatment Under Other Sections of the Securities Laws
The Commission stated in the Proposing Release that a crowdfunding
vehicle may constitute a single record holder for purposes of Section
12(g) of the Exchange Act, rather than treating each of the
crowdfunding vehicle's investors as record holders, which would be the
case if they had invested in the crowdfunding issuer directly, and
solicited comment on the appropriate treatment.\518\ Commenters
generally supported treating a crowdfunding vehicle as a single record
holder for Section 12(g) purposes.\519\ Some of these commenters stated
that treating crowdfunding vehicles as a single record-holder for
Section 12(g) eases record-keeping, capital structures, and entity
development \520\ and is consistent with what they believed to be the
intent of Section 12(g).\521\ Commenters opposing this treatment stated
that they were concerned that it would allow private companies to avoid
going public and therefore reduce market transparency.\522\
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\518\ See Proposing Release, at Request for Comment 76 and text
accompanying notes 420 and 421.
\519\ See Wefunder Letter (also requesting clarification that it
is permissible for a securities intermediary to hold securities in
``street name,'' and that ``that those beneficial owners don't count
towards the 12(g) threshold.''); J. Clarke Letter; Carta Letter
(noting that securities issued pursuant to Regulation Crowdfunding
are conditionally exempted from Section 12(g)'s holder of record
limit, but commending the Commission for proposing that the SPV be
treated as a single holder of record to minimize any concerns around
this threshold for those issuers who may have concerns.); W. Hubbard
Letter; Raise Green & New Haven Comm. Solar Letter; and CrowdCheck
Letter. See also 2019 OASB Annual Report, at 48 (suggesting that
allowing SPVs to be used in Regulation Crowdfunding offerings would
mitigate concerns related to Section 12(g)).
\520\ See W. Hubbard Letter.
\521\ See Raise Green & New Haven Comm. Solar Letter.
\522\ See CFA Letter; and AFREF letter.
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The Proposing Release requested comment on whether the Commission
should further address the status of a crowdfunding vehicle and persons
operating the vehicle for purposes of the definition of broker under
Section 3(a)(4) of the Exchange Act or dealer under Section 3(a)(5) of
the Exchange Act. Commenters addressing the issue agreed that further
clarity would be helpful but suggested differing approaches.\523\
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\523\ See J. Clarke Letter (requesting the Commission clarify
that the portal platform is acting as the broker, since the SPV is
not taking dealer inventory risk); W. Hubbard Letter (suggesting
``[a] regulatorily conclusive presumption at some point statutorily
codified may be helpful.''); Raise Green & New Haven Comm. Solar
Letter (stating a need for ``a safe harbor to assure a crowdfunded
issuer and for the intermediary that neither would trigger
registration as a broker under Section 15(a) of the Exchange
Act.''); and CrowdCheck Letter (stating that ``a [registered
investment adviser] operating a crowdfunding vehicle . . . would not
be a broker-dealer and that it would be appropriate for the
Commission to confirm that doing so would not result in the operator
being required to register as either a broker or a dealer.'').
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Finally, with respect to the proposed definition of ``crowdfunding
issuer,'' one commenter stated that it was unclear in the proposed rule
whether the offering or the crowdfunding vehicle would be required to
comply with all of the requirements of Section 4(a)(6) of the
Securities Act and Regulation Crowdfunding.\524\
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\524\ See ABA Letter (suggesting that the rule text be revised
to state ``a company that seeks to raise capital as a co-issuer with
a crowdfunding vehicle in an offering that complies with all of the
requirements under Section 4(a)(6) of the Securities Act and
Regulation Crowdfunding'').
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c. Final Amendments
We are adopting Rule 3a-9 under the Investment Company Act,
substantially as proposed, to exclude from the definition of
``investment company'' under that Act a crowdfunding vehicle that meets
certain conditions designed to require that it function as a conduit
for investors to invest in a business that seeks to raise capital
through a crowdfunding vehicle. After considering the comments on the
proposed structure and alternative structures commenters suggested, we
believe that the ``conduit'' structure we proposed is consistent with
the intent of Section 4(a)(6). We also continue to believe that this
conduit structure would address concerns associated with managing the
potentially large number of direct investors that could result from a
crowdfunding offering.\525\
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\525\ In particular, the crowdfunding vehicle may be able to
appear as a single entry on the crowdfunding issuer's capitalization
table. Several commenters stated that the permitting crowdfunding
vehicles would help solve the ``messy cap table'' issues. See
CrowdCheck Letter; and W. Hubbard Letter.
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While some commenters suggested requiring a registered investment
adviser or ERA to manage a crowdfunding vehicle, we do not believe this
condition is necessary from an investor protection perspective given
the conditions set forth in Rule 3a-9. For similar reasons, we do not
believe it is necessary to create a new exemption from registration
with the Commission for advisers to crowdfunding vehicles.\526\
Collectively, the conditions in the rule require the crowdfunding
vehicle to act solely as a conduit by limiting the scope of the
activities in which the crowdfunding vehicle can engage, and
restricting the compensation it can receive. In particular, Rule 3a-9's
conditions are designed to limit the crowdfunding vehicle's activities
to that of acting solely as a conduit to directly hold the securities
of the crowdfunding issuer without the ability for independent
investment decisions to be made on behalf of the crowdfunding vehicle.
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\526\ See Wefunder Letter.
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Consistent with the concerns raised by commenters with respect to
costs, we also continue to believe that it would not be economically
feasible to require a registered investment adviser to manage the
vehicle.\527\ For example, we believe that compliance with the Custody
Rule, coupled with the small size of the typical crowdfunding offering
\528\ and the fees and other expenses associated with operating a
registered investment adviser, would
[[Page 3545]]
not make it economically feasible for a registered investment adviser
to serve as the manager of a crowdfunding vehicle. As some commenters
suggested, requiring an adviser to manage the crowdfunding vehicle,
along with the associated costs, also could deter small to medium
enterprises, or women- or minority-owned businesses, which may not have
access to such investment advisory expertise, from using the
crowdfunding vehicle.\529\ It is also unlikely that a registered
investment adviser could receive performance-based compensation for
managing a crowdfunding vehicle, since the typical crowdfunding
investor may not meet the threshold to qualify as a qualified
client.\530\ We similarly do not believe that it would be economically
feasible to require an ERA to manage the vehicle. Given that one of our
objectives is for an investor to achieve the same economic exposure as
if he or she had invested directly in the crowdfunding issuer, we
continue to believe that it is not appropriate for investors in the
crowdfunding vehicle to bear directly the cost of any compensation paid
to any person operating the vehicle, and we are not convinced that the
issuer would be willing to bear the additional cost associated with
hiring an investment adviser, whether registered or exempt from
registration.
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\527\ See Proposing Release, at text accompanying note 349.
\528\ Between May 16, 2016, and December 31, 2018, the average
Regulation Crowdfunding offering had a maximum offering amount of
approximately $577,385 and raised approximately $208,300 (see 2019
Regulation Crowdfunding Report, at 4), with a maximum offering size
of $1.07 million pursuant to Rule 100(a)(1) of Regulation
Crowdfunding.
\529\ See Raise Green & New Haven Comm. Solar Letter.
\530\ 17 CFR 275.205-3 permits registered investment advisers to
receive performance-based compensation only when the client is a
qualified client. The rule's definition of ``qualified client''
includes a natural person who, or a company that, immediately after
entering into the investment contract has at least $1,000,000 under
the management of the investment adviser, and a natural person who,
or a company that, the investment adviser entering into the
investment contract (and any person acting on his behalf) reasonably
believes, immediately prior to entering into the contract, has a net
worth (together, in the case of a natural person, with assets held
jointly with a spouse) of more than $2,100,000 (exclude the value of
a person's primary residence and certain associated debt).
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We also do not believe that we should expand the scope of the
activities in which the crowdfunding vehicle can engage and allow a
compensated lead investor to make decisions on behalf of all investors.
We believe this approach would be inconsistent with the ``conduit''
structure we are using to ensure that there is no material difference
between an investment in the crowdfunding issuer and the crowdfunding
vehicle. We also are concerned that a compensated lead investor may not
serve as an advocate for the interests of other investors in the
vehicle, given the potential conflicts of interest that could arise
between the lead investor and other investors in the vehicle. For
similar reasons, a ``SEC-registered transfer agent'' structure is
inconsistent with the ``conduit'' structure we are adopting in this
release.\531\
---------------------------------------------------------------------------
\531\ The commenter also requested guidance from the Commission
on two additional issues that we believe are outside the scope of
this rulemaking. See supra notes 493 and 517.
---------------------------------------------------------------------------
We recognize that there are costs associated with organizing and
maintaining the crowdfunding vehicle under Rule 3a-9. However, we
believe these costs and burdens are necessary to provide investors in
the crowdfunding vehicle the same economic exposure, voting power, and
ability to assert State and Federal law rights, and receive the same
disclosures under Regulation Crowdfunding, as if they had invested
directly in the crowdfunding issuer. As discussed in Section IV.C.6
below, because the use of the crowdfunding vehicle structure will be
voluntary, we expect issuers to use a crowdfunding vehicle only when an
issuer determines that the benefits justify the costs. The balance of
these tradeoffs is likely to vary depending on a number of factors,
including the issuer's offering experience, potential for raising
follow-on financing from a large investor, costs associated with the
creation and administration of the crowdfunding vehicle, and the number
of small investors participating in the crowdfunding offering.
Some commenters recommended that we permit advisers to form funds
for non-accredited investors to invest in multiple crowdfunding
issuers, effectively creating a ``private fund'' like structure for
non-accredited investors. This ``fund'' structure is inconsistent with
the ``conduit'' nature of the crowdfunding vehicle structure in Rule
3a-9, which underlies the limited exemption from Section 3(a) of the
Investment Company Act that we are adopting. In addition, this conduit
nature also protects investors by simply passing along the same
exposures, rights and disclosures as if they had invested directly in
the crowdfunding issuer in an offering made under Regulation
Crowdfunding.\532\
---------------------------------------------------------------------------
\532\ See Raise Green & New Haven Comm. Solar Letter.
---------------------------------------------------------------------------
In response to the commenter who stated that it was unclear whether
the offering or the crowdfunding vehicle would be required to comply
with applicable requirements, we are slightly modifying the definition
of ``crowdfunding issuer'' from the proposal to clarify that the
crowdfunding issuer is acting as a co-issuer with the crowdfunding
vehicle and the combined offering of the crowdfunding issuer's
securities and the crowdfunding vehicle's securities must comply with
of Section 4(a)(6) of the Securities Act and Regulation Crowdfunding.
In order to clarify that we do not intend to permit a crowdfunding
vehicle to invest in another crowdfunding vehicle, creating a multi-
tier structure to invest in one crowdfunding issuer, we are slightly
modifying proposed Rule 3a-9(a)(1) to specify that crowdfunding
vehicles must be organized and operated for the sole purpose of
directly acquiring, holding, and disposing of securities issued by a
single crowdfunding issuer and raising capital in one or more offerings
made in compliance with Regulation Crowdfunding. As discussed below, we
believe this is appropriate given our treatment of the crowdfunding
vehicle under Section 12(g) of the Exchange Act in order to prevent a
multi-tier crowdfunding vehicle from further excluding investors from
the Section 12(g) calculation.
In response to commenters who requested guidance on this point, we
are clarifying that a crowdfunding vehicle and persons operating the
vehicle will not implicate the broker-dealer registration requirements
of Section 15(a) of the Exchange act so long as the crowdfunding
vehicle and persons operating the vehicle limit their activities solely
to those permitted by new Rule 3a-9. Under Rule 3a-9, the crowdfunding
vehicle would be a co-issuer formed by or on behalf of the underlying
crowdfunding issuer to serve merely as a conduit for investors to
invest in the crowdfunding issuer and will not have a separate business
purpose. Issuers generally are not considered to be ``brokers'' within
the meaning of Section 3(a)(4) of the Exchange Act because they sell
securities for their own accounts and not for the accounts of others;
nor are issuers generally considered to be ``dealers'' within the
meaning of Section 3(a)(5) of the Exchange Act because they do not buy
and sell their securities for their own accounts as part of a regular
business. Further, given the limited activities in which a crowdfunding
vehicle may engage under Rule 3a-9 and, in particular, the limitations
17 CFR 270.3a-9(a)(4) places on the receipt of compensation by and the
payment of compensation to the crowdfunding vehicle, the Commission
similarly does not believe that a person operating the crowdfunding
vehicle in accordance with Rule 3a-9 would be in the business of
effecting securities transactions for the account of others, or in the
business
[[Page 3546]]
of buying and selling securities for the account of the crowdfunding
vehicle.
We are adopting the conditions, as proposed, to address specific
investor protection concerns raised by a vehicle that acts as a conduit
for investments in a crowdfunding issuer.\533\ While some commenters
suggested modifications to these conditions to expand the crowdfunding
vehicle's permissible investments, we believe these capabilities would
make the crowdfunding vehicle more like a traditional investment fund,
rather than merely a conduit entity for a single issuer consistent with
its purpose. For the same reasons, we also do not believe that it is
appropriate to permit the crowdfunding vehicle to issue different
securities for different rounds of a Regulation Crowdfunding offering
or to issue multiple classes of securities. Additionally, consistent
with the crowdfunding vehicle's purpose as a conduit, the rule will
require the crowdfunding vehicle to redeem or offer to repurchase its
securities if there is a liquidity event at the crowdfunding issuer
level since its reason for existence will cease on the occurrence of
such liquidity event.
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\533\ See 17 CFR 270.3a-9(a) (``Rule 3a-9(a)'').
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We disagree with one commenter's suggestion that we eliminate the
requirement that the crowdfunding issuer pay the costs of the
crowdfunding vehicle.\534\ The crowdfunding vehicle provides direct
benefits to the crowdfunding issuer, such as reducing capitalization
table concerns and providing for greater efficiency for the
administration of a large and diffuse investor base, and we believe
that it is appropriate for the crowdfunding issuer itself to bear the
direct costs of the crowdfunding vehicle. Additionally, requiring
investors in the crowdfunding vehicle to bear directly the costs of the
crowdfunding vehicle would be inconsistent with our goal of providing
those investors with the same economic exposure as if they had invested
directly in the crowdfunding issuer given the conduit nature of the SPV
structure.
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\534\ See Raise Green & New Haven Comm. Solar Letter. A third-
party (e.g., a funding portal) could contribute to the issuer's
coverage of these costs, as long as the crowdfunding issuer, and not
the crowdfunding vehicle, ultimately bears the costs.
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As one commenter pointed out, because investors are investing in
the crowdfunding vehicle, and not directly in the crowdfunding issuer,
there may be slight differences in the rights in the crowdfunding
vehicle that investors receive.\535\ However, we do not believe these
slight differences in rights should in any way affect the ability of
the crowdfunding vehicle to issue securities with rights that are
materially indistinguishable from the rights a direct investor in the
crowdfunding issuer would have. The rule as adopted will require a one-
to-one relationship between the number, denomination, type and rights
of crowdfunding issuer securities the crowdfunding vehicle owns and the
number, denomination, type, and rights of its securities outstanding to
ensure that there is no material difference in rights between investing
in the crowdfunding vehicle and investing directly in the crowdfunding
issuer. This requirement is designed to ensure that the crowdfunding
vehicle maintains its character as a conduit to the crowdfunding
issuer.
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\535\ See CrowdCheck Letter (stating that the exact replication
of the rights attached to the securities of the crowdfunding issuer
is impossible because of, for example, possible differences in legal
structure and state of incorporation).
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With respect to a commenter's concerns regarding voting, we do not
believe that the rule is too narrow with respect to the specific
actions the crowdfunding vehicle is required to take, nor do we think
it is too ambiguous with respect to the assertion of investor
rights.\536\ The rule's voting conditions were designed to provide
flexibility, knowing that it is impossible to anticipate every possible
action that a crowdfunding vehicle will need to take in its lifespan.
Furthermore, in response to one commenter's suggestion that we address
appraisal rights,\537\ we believe that the assertion of such rights is
captured under the prong of the rule that provides each investor the
right to direct the crowdfunding vehicle to assert the rights under
State and Federal law that the investor would have if he or she had
invested directly in the crowdfunding issuer.\538\
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\536\ See NASAA Letter.
\537\ See W. Hubbard Letter.
\538\ See 17 CFR 270.3a-9(a)(9).
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We recognize that permitting the crowdfunding vehicle to vote
automatically with the majority or permitting the crowdfunding
investors to otherwise delegate voting authority may simplify the
voting process.\539\ However, we do not believe the rule should permit
either approach to voting because both would be inconsistent with the
vehicle's purpose, which is to act merely as a conduit and not an
independent investment entity like a fund or other similar investment
vehicle. Furthermore, we do not believe that a registered investment
adviser is necessary to assert rights attendant to an investment in the
issuer as the ability to assert such rights (and the flow through of
information related to thereto) will pass directly to investors as if
they were direct investors in the crowdfunding issuer.\540\
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\539\ See J. Clarke Letter; W. Hubbard Letter.
\540\ See CrowdCheck Letter (suggesting this is an area where a
pro-active registered investment adviser could better provide
investor protection).
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We are adopting as proposed the requirement that crowdfunding
vehicles jointly file a Form C with the crowdfunding issuer,\541\ as
opposed to requiring that each file a separate Form C or only requiring
the crowdfunding vehicle to file a Form C. We continue to believe that
by jointly filing a Form C describing both transactions and providing
disclosure about both co-issuers, investors will be provided all
information necessary to analyze both their direct investment in the
crowdfunding vehicle and the terms of the crowdfunding vehicle's
investment in the crowdfunding issuer.\542\ This approach also will
allow investors to review the entire business of the crowdfunding
issuer and crowdfunding vehicle in one location (avoiding any confusion
that could arise if the crowdfunding vehicle and crowdfunding issuer
provided separate disclosure on the separate transactions, for example,
on separate Forms C).
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\541\ See amended Rule 201 of Regulation Crowdfunding and Form
C.
\542\ See 17 CFR 227.201(m). See also J. Clarke Letter; SEI
Letter; W. Hubbard Letter; Raise Green & New Haven Comm. Solar
Letter; and CrowdCheck Letter.
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Additionally, we agree with commenters that supported requiring a
crowdfunding issuer to file its own Form C if it is separately offering
securities both through a crowdfunding vehicle and directly to
investors, and are therefore clarifying this in Rule 203(a)(1). We
believe that to do otherwise, as noted by commenters, would likely be
confusing to investors and overcomplicate and unnecessarily burden the
preparation, compliance, and related administrative responsibilities of
both the crowdfunding issuer and the crowdfunding vehicle. We do not
believe, as one opposing commenter suggested, that having two Form Cs
in this context would only promote confusion, as each separate offering
would have its own corresponding Form C.
As stated in the Proposing Release, we continue to believe that,
because the crowdfunding vehicle is only acting as a conduit for the
crowdfunding issuer, the individual investment limitations under
Regulation Crowdfunding should not apply to transfer of the securities
from the crowdfunding issuer to the
[[Page 3547]]
crowdfunding vehicle.\543\ In addition, we do not believe that the
amount of securities issued by the crowdfunding issuer to the
crowdfunding vehicle should reduce the amount of securities that could
be offered and sold to the investors in the crowdfunding vehicle for
purposes of the offering limit in Rule 100(a) of Regulation
Crowdfunding. To clarify this treatment of the transfer of securities
from the crowdfunding issuer to the crowdfunding vehicle, we are
amending 17 CFR 227.100(d) to state that a crowdfunding vehicle is not
considered an investor for the purposes of Regulation Crowdfunding.
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\543\ See Proposing Release, at note 333.
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After considering comments, we have determined that a crowdfunding
vehicle should constitute a single record holder in the crowdfunding
issuer for purposes of Section 12(g) of the Exchange Act, but only to
the extent that all investors in the crowdfunding vehicle are natural
persons. As a result, we are adopting amendments to Exchange Act Rule
12g5-1. New Rule 12g5-1(a)(9) will specify that, for purposes of
determining whether a crowdfunding issuer is required to register a
class of equity securities with the Commission pursuant to Section
12(g)(1) of the Exchange Act, a crowdfunding issuer may exclude
securities issued by a crowdfunding vehicle in accordance with Rule 3a-
9 that are held by natural persons, but must include securities issued
by a crowdfunding vehicle that are held by investors that are not
natural persons.\544\ The same provision will also apply to a
crowdfunding vehicle, which is a separate legal entity from the
crowdfunding issuer and itself is subject to Section 12(g). In
connection with this new provision, we are also amending Rule 12g5-
1(a)(2) to clarify that a crowdfunding issuer that makes use of Rule
3a-9 should look to new Rule 12g5-1(a)(9), even though the crowdfunding
vehicle may otherwise have been considered a corporation, partnership,
trust or other organization for purposes of Rule 12g5-1(a)(2).
Regardless of the crowdfunding vehicle's Section 12(g) treatment, under
the final rules, investors in the crowdfunding vehicle will have the
same economic exposure, voting power, and ability to assert State and
Federal law rights, and receive the same disclosures under Regulation
Crowdfunding, as if they had invested directly in the crowdfunding
issuer.
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\544\ For purposes of the crowdfunding vehicle's calculation of
holders of record, such non-natural persons will be treated the same
way they would be if they held the crowdfunding issuer's securities
directly.
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We believe that this treatment of natural person and non-natural
person investors is appropriate in light of the novel crowdfunding
issuer-crowdfunding vehicle structure we are adopting and the types of
offerings the Crowdfunding exemption was intended to facilitate.\545\
It recognizes that the crowdfunding vehicle is a separate organization,
holding the crowdfunding issuer securities in its own name, but by
counting non-natural persons differently reduces the risk that the
structure is used by either the crowdfunding issuer or the crowdfunding
vehicle to further exclude investors from the Section 12(g)
calculation.
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\545\ See Crowdfunding Adopting Release, at note 2 and text
accompanying note 2 (discussing the intent of the crowdfunding
provisions of the JOBS Act to help provide startups and small
businesses with capital by making relatively low dollar offerings of
securities, featuring relatively low dollar investments by the
``crowd,'' less costly).
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Although commenters expressed concern that treating the
crowdfunding vehicle as a single entity for Section 12(g) purposes
would allow crowdfunding issuers to delay having to register a class of
equity securities under Section 12(g) and reduce transparency, we do
not believe it is necessary to require a crowdfunding issuer to ``look
through'' the crowdfunding vehicle to count all of the holders in the
vehicle. While this may result in some crowdfunding issuers being able
to delay Exchange Act registration, we note that, as is the case for
any Regulation Crowdfunding issuer, if the crowdfunding issuer and
crowdfunding vehicle both meet the terms of Rule 12g-6, they will be
able to rely on that conditional exemption. As a result, only the
largest issuers that sell securities under Regulation Crowdfunding are
likely to trigger a Section 12(g) registration requirement at any time,
regardless of the approach we are adopting. Further, we believe that
concerns about transparency are mitigated by the existing ongoing
reporting requirements of Regulation Crowdfunding, which are tailored
to the types of issuers and offerings the exemption is intended to
accommodate.\546\ Finally, not counting natural persons holding through
the crowdfunding vehicle as holders for Section 12(g) purposes also has
no impact on the requirement that investors in the crowdfunding vehicle
receive the same disclosures as if they had invested directly in the
crowdfunding issuer, ensuring that the investors have the full
transparency into the crowdfunding issuer required by Regulation
Crowdfunding.
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\546\ See, e.g., Crowdfunding Adopting Release, at Section
II.B.1.a.(1)(b)(iii) (noting that issuers engaging in crowdfunding
transactions may have businesses at various stages of development in
different industries, and the need for flexibility for these issuers
regarding what information they disclose about their businesses).
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We also do not agree with the commenter that suggested that the
proposed crowdfunding vehicle is a complex and costly way to have one
record holder for the purposes of Section 12(g) without benefits to the
issuer that still needs to communicate with possibly thousands of
strangers to make corporate decisions. Rule 3a-9 allows issuers to
shift the administrative burden to the crowdfunding vehicle, meaning
the crowdfunding vehicle could engage a third party (such as a funding
portal) to handle the burden of communicating with investors regarding
votes and for other administrative matters.
2. Regulation Crowdfunding Eligible Securities
Unlike Regulation A, which limits the types of securities eligible
for sale to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities,\547\ Regulation Crowdfunding does not
restrict the type of security that may be offered and sold in reliance
on the exemption. As a result, issuers using Regulation Crowdfunding
have offered and sold a number of non-traditional securities, such as
Simple Agreements for Future Equity (``SAFEs''), Simple Agreements for
Future Tokens, and certain revenue sharing agreements.
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\547\ See 17 CFR 230.261.
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a. Proposed Amendments
The Commission proposed to amend Regulation Crowdfunding to
harmonize the rule with Regulation A and limit the types of securities
that may be offered under the exemption to correspond with the eligible
securities provision of Regulation A. As proposed, the types of
securities eligible for sale in an offering under Regulation
Crowdfunding would be limited to equity securities, debt securities,
and securities convertible or exchangeable to equity interests,
including any guarantees of such securities.
b. Comments
Commenters were divided on whether to revise Regulation
Crowdfunding to restrict the securities eligible under the exemption to
those included in Regulation A's list of eligible securities. Some
commenters generally supported harmonizing the eligible securities
[[Page 3548]]
under the two exemptions,\548\ while other commenters supported
harmonizing the exemptions by citing concerns regarding the use of
SAFEs.\549\ One of the commenters who supported harmonizing the
eligible securities under the two exemptions specifically stated that
``tokenized securities and other forms of digital assets should not be
included as eligible securities under Regulation Crowdfunding'' as they
pose particular risks to investors.\550\ A number of commenters
specifically opposed revising Regulation Crowdfunding to track the
securities eligible under Regulation A.\551\ Of these commenters, many
recommended there be no restrictions on the types of securities that
can be offered under Regulation Crowdfunding.\552\
---------------------------------------------------------------------------
\548\ See, e.g., ABA Letter; SEI Letter; SEC SBCFAC Letter;
Wefunder Letter; and Letter from Y Combinator dated May 29, 2020
(``Y Combinator Letter''). Some of these commenters supported
harmonization but indicated that SAFEs should be allowed under
Regulation Crowdfunding. See Wefunder Letter; and Y Combinator
Letter.
\549\ See, e.g., CrowdCheck Letter; and CFA Letter.
\550\ See ABA Letter (expressing concern that non-traditional
securities can create confusion for retail investors and potentially
jeopardize the reputation of the Regulation Crowdfunding market and
further recommending that tokenized securities and other forms of
digital assets should not be included as eligible securities under
Regulation Crowdfunding due to the continued regulatory uncertainty
and risks that they pose to investors and issuers).
\551\ See, e.g., J. Clarke Letter; W. Hubbard Letter; Letter
from Shane Hadden dated May 26, 2020 (``S. Hadden Letter''); Silicon
Prairie Letter; Chamber of Digital Commerce Letter; Letter from
Vezzit, Inc. dated July 13, 2020 (``Vezzit Letter''); Raise Green &
New Haven Comm. Solar Letter; and Ketsal Letter.
\552\ See, e.g., S. Hadden Letter; Silicon Prairie Letter;
Chamber of Digital Commerce Letter; Vezzit Letter; Raise Green & New
Haven Comm. Solar Letter; and Ketsal Letter.
---------------------------------------------------------------------------
Commenters were similarly divided on whether to permit SAFEs under
Regulation Crowdfunding. A number of commenters generally opposed
revising the Regulation Crowdfunding eligible securities to
specifically prohibit the offering and selling of SAFEs.\553\ These
commenters suggested that prohibiting the use of SAFEs under Regulation
Crowdfunding would limit the usefulness of the exemption for many
issuers \554\ and indicated that there was not significant evidence
that SAFEs pose undue risks for investors.\555\ Another commenter
recommended the Commission require issuers and portals to disclose a
list of ``potentially risky or problematic deal terms'' in lieu of
prohibiting SAFEs.\556\ In contrast, a number of commenters supported
explicitly prohibiting the offering and selling of SAFEs under
Regulation Crowdfunding.\557\
---------------------------------------------------------------------------
\553\ See, e.g., S. Hadden Letter; Wefunder Letter; Y Combinator
Letter; Silicon Prairie Letter; Republic Letter; NextSeed Letter;
Chamber of Digital Commerce Letter; Vezzit Letter; Raise Green & New
Haven Comm. Solar Letter; InnaMed, et al. Letter; Crowdwise Letter;
Ketsal Letter; and Letter from Marshall E. Uzzle and Ron Montana
dated June 1, 2020. Some of these commenters also contended that
harmonizing securities eligible under Regulation Crowdfunding with
Regulation A would not prohibit the use of SAFEs, as SAFEs are
``securities convertible into equity securities.'' See Letter from
Joe Spivak dated Mar. 18, 2020; Y Combinator Letter; and Republic
Letter.
\554\ See, e.g., Wefunder Letter; and Republic Letter.
\555\ See Vezzit Letter.
\556\ See Crowdwise Letter.
\557\ See, e.g., Letters from Miguel Costa dated Mar. 10, 2020,
Mar. 14, 2020, and Mar. 22, 2020; J. Clarke Letter; SEI Letter;
NASAA Letter; W. Hubbard Letter; CFA Letter; CrowdCheck Letter; and
CFA Institute Letter.
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c. Final Amendments
We are not adopting the proposed amendments to harmonize the
securities eligible under Regulation Crowdfunding with the securities
eligible under Regulation A at this time in light of commenters'
concerns that doing so would limit the utility of Regulation
Crowdfunding. We are also not adopting rule changes that would
specifically prohibit SAFEs under Regulation Crowdfunding. We recognize
the concern that the offer and sale of non-traditional securities to
retail investors in an exempt offering could result in harm to
investors who may face challenges in analyzing and valuing such
securities or who may be confused by the descriptions of such
securities on the funding portals. However, we believe that many of
these concerns can be addressed by providing adequate disclosure to
investors. To this end, issuers assessing their compliance with
Regulation Crowdfunding should carefully consider whether they are
clearly describing the terms of the offered securities, especially in
the case of non-traditional securities, such as SAFEs. 17 CFR
227.201(m) requires issuers to disclose the terms of the securities
being offered whether or not such securities have voting rights, any
limitations on such voting rights, how the terms of the securities
being offered may be modified and a summary of the differences between
such securities and each other class of security of the issuer, and how
the rights of the securities being offered may be materially limited,
diluted or qualified by the rights of any other class of security of
the issuer. We remind issuers of non-traditional securities of the need
to carefully consider their obligations under this rule.
3. Regulation A Eligibility Restrictions for Delinquent Exchange Act
Filers
Regulation A includes an eligibility requirement that an issuer
conducting a Regulation A offering must have filed with the Commission
all reports required to be filed, if any, pursuant to Rule 257 during
the two years before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports).\558\
However, because Exchange Act registrants are not required to file
reports pursuant to Rule 257, the existing eligibility provision does
not expressly require those registrants to have filed their Exchange
Act reports in order to rely on Regulation A.
---------------------------------------------------------------------------
\558\ See 17 CFR 230.251(b)(7). Rule 257 requires issuers
conducting Tier 2 offerings to comply with certain ongoing and
periodic reporting requirements.
---------------------------------------------------------------------------
a. Proposed Amendments
The Commission proposed to amend Regulation A to require issuers
that are subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act to meet a similar eligibility requirement with
respect to Exchange Act reports. As proposed, issuers that do not file
all the reports required to have been filed by Sections 13 or 15(d) of
the Exchange Act in the two-year period preceding the filing of an
offering statement would be ineligible to conduct a Regulation A
offering.\559\
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\559\ If an issuer is delayed in filing a report, it would need
to become current in its reports over the last two years in order to
become eligible again.
---------------------------------------------------------------------------
b. Comments
Commenters that addressed the issue generally supported requiring
Exchange Act reporting Regulation A issuers to be current in their
Exchange Act reporting obligations.\560\ Only one commenter opposed
requiring applicable issuers to be current in their Exchange Act
reporting obligations, arguing that because non-reporting companies can
rely on Regulation A, there should be no requirement for reporting
companies to be current in their reporting obligations.\561\ Another
commenter recommended that the Commission additionally make Regulation
A available to business development companies as defined in Section
2(a)(48) of the Investment Company Act.\562\
---------------------------------------------------------------------------
\560\ See CII Letter; NASAA Letter; CrowdCheck Letter; and CFA
Institute Letter.
\561\ See J. Clarke Letter.
\562\ See ABA Letter.
---------------------------------------------------------------------------
c. Final Amendments
We are adopting the amendment as proposed. The amendment holds
Exchange Act reporting companies to
[[Page 3549]]
the same standard as repeat Regulation A issuers. This requirement will
benefit investors by assuring that they have access to historical
financial and non-financial statement disclosure about Exchange Act
reporting companies that are conducting Regulation A offerings and may
facilitate the development of an efficient secondary market for the
securities they purchase in Regulation A offerings. Furthermore,
because they are already required to file such reports, the requirement
does not increase the burden of making a Regulation A offering for
Exchange Act reporting companies or issuers that were Exchange Act
reporting companies within the two years prior to making a Regulation A
offering. We are not persuaded by the commenter that suggested that
because non-reporting companies can use Regulation A, reporting
companies should not be required to be current in their reporting
obligations. We believe Regulation A investors should be able to look
to the Exchange Act filings of reporting company issuers for
information supplemental to the issuers' Regulation A disclosures.\563\
---------------------------------------------------------------------------
\563\ See, e.g., 2020 Regulation A Review (stating that the
requirement for Regulation A reporting company issuers to be current
in their reporting requirements ``would benefit investors by
ensuring that they have access to historical financial and non-
financial statement disclosure about Exchange Act reporting
companies that are conducting Regulation A offerings and may
facilitate the development of an efficient secondary market for the
securities they purchase in Regulation A offerings''). See also
NASAA Letter (``By helping to make clear that issuers are expected
to behave as public companies once they enter the public markets,
even through the means of exempt offerings, the Commission is at
least partly addressing the concern that the current proposals will
cause even substantial companies to remain in the private markets
permanently.'')
---------------------------------------------------------------------------
We are not amending Regulation A as recommended by a commenter to
make the exemption available to business development companies at this
time. While we acknowledge that business development companies serve an
important function in facilitating capital formation for small,
developing and financially troubled companies, there are important
considerations with respect to the application of Regulation A's
requirements to such entities that we believe we should assess before
expanding the eligibility criteria.
G. Bad Actor Disqualification Provisions
The Commission's exempt offering framework includes rules
disqualifying certain covered persons, including felons and other ``bad
actors,'' from relying on Regulation A, Regulation Crowdfunding, and
Regulation D to offer and sell securities. While the disqualification
provisions are substantially similar,\564\ the lookback period for
determining whether a covered person is disqualified differs between
Regulation D and the other exemptions. For Regulation D, the lookback
period is measured from the time of the sale of securities in the
relevant offering. For 17 CFR 230.262(a) (``Rule 262(a)'' of Regulation
A) and 17 CFR 227.503(a) (``Rule 503(a)'' of Regulation Crowdfunding),
the lookback period is measured from the time the issuer files an
offering statement.\565\
---------------------------------------------------------------------------
\564\ Section 3(b)(2)(G)(ii) of the Securities Act [15 U.S.C.
77c(b)(2)(G)(ii)] provides the Commission with authority to issue
bad actor disqualification rules under Regulation A that are
``substantially similar'' to those adopted for securities offerings
under Rule 506 of Regulation D pursuant to Section 926 of the Dodd-
Frank Act. See 2015 Regulation A Release; Disqualification of
Felons, Other ``Bad Actors'' from Rule 506 Offerings, Release No.
33-9414 (July 10, 2013) [78 FR 44729 (July 24, 2013)] (``Rule 506(d)
Final Release''); and Crowdfunding Adopting Release.
\565\ Rule 503(a) provides lookback language based on ``the
filing of the offering statement'' or ``the filing of the
information required by section 4A(b) of the Securities Act'' on
Form C. See 17 CFR 227.503. While the disqualification events in
Securities Act Rule 262 and Regulation Crowdfunding Rule 503 are
generally tied to the filing of an offering statement, 17 CFR
230.262(a)(6); and 17 CFR 227.503(a)(6) are not.
---------------------------------------------------------------------------
Under Regulation A, if a covered person triggers one of the
disqualifying events in Rule 262, the Commission may suspend reliance
on the Regulation A exemption through 17 CFR 230.258 (``Rule 258''),
which requires a notice and hearing opportunity for the issuer prior to
the suspension becoming permanent. Furthermore, if a covered person
triggers one of the disqualifying events, the issuer may need to
consider whether it must suspend the offering until it files a post-
qualification amendment to reflect a fundamental change in the
information set forth in the most recent offering statement or post-
qualification amendment.\566\ Regulation Crowdfunding, which similarly
measures the lookback from the time of filing of the offering
statement, does not have a suspension provision. Similar to Regulation
A, it requires an issuer to amend the offering statement to disclose
material changes, additions, or updates to information that it provides
to investors for offerings that have not been completed or
terminated.\567\ Nevertheless, in certain circumstances, periods of
time may exist during Regulation A and Regulation Crowdfunding
offerings between the filing of the offering statement and the next
required filing where an offering could continue despite an event that
would have constituted a disqualifying event at the time of filing.
---------------------------------------------------------------------------
\566\ See 17 CFR 230.252(f)(2).
\567\ See 17 CFR 230.203(a)(2).
---------------------------------------------------------------------------
1. Proposed Amendments
The Commission proposed to harmonize the bad actor disqualification
provisions in Rule 506(d) of Regulation D, Rule 262(a) of Regulation A
and Rule 503(a) of Regulation Crowdfunding by adjusting the lookback
requirements in Regulation A and Regulation Crowdfunding to include the
time of sale in addition to the time of filing. Specifically, the
Commission proposed to add ``or such sale'' to any lookback references
that refer to the time of filing, such as the ``filing of the offerings
statement,'' ``such filing,'' or ``the filing of the information
required by Section 4A(b) of the Securities Act'' in Rule 262(a) and
Rule 503(a).
In order to reflect the offering statement filing requirement
before the first Regulation Crowdfunding sale, and more closely track
the requirement in Rule 262(a) of Regulation A, the Commission proposed
including ``any promoter connected with the issuer in any capacity at
the time of filing, any offer after filing, or such sale'' in Rule
503(a).\568\ The proposed amendments would not alter the availability
of the existing reasonable care exception, an issuer's ability to seek
a waiver from disqualification from the Commission, or the exception
applicable when a court or regulatory authority advises in writing that
disqualification should not arise.\569\ Nonetheless, with respect to
the latter provision, the Commission proposed to amend 17 CFR
230.262(b)(3) (``Rule 262(b)(3)'') and 17 CFR 227.503(b)(3) (``Rule
503(b)(3)''), which currently provide that a court's or regulatory
authority's advice with respect to the disqualifying effect of an
order, judgment or decree must occur before: (i) The time of ``the
filing of the offering statement,'' in the case of Regulation A, or
(ii) ``the filing of the information required by section 4A(b) of the
Securities Act,'' in the case of Regulation Crowdfunding. The proposed
amendments would conform the existing language in Rules 262(b)(3) and
503(b)(3) with the parallel lookback language in 17 CFR
230.506(d)(2)(iii) by adding the phrase ``before . . . [the relevant/
such] sale.''
---------------------------------------------------------------------------
\568\ Rule 503(a) currently covers only promoters connected with
the issuer in any capacity ``at the time of such sale,'' making it
possible that a promoter that previously engaged in fraudulent
activities or violated securities or other laws or regulations,
could be involved in offering activities under Regulation
Crowdfunding so long as such promoter is not connected with the
issuer in any capacity at the time of sale.
\569\ See 17 CFR 230.262(b)(3).
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[[Page 3550]]
2. Comments
Commenters generally supported revising the bad actor lookback
provisions in Regulation A and Regulation Crowdfunding as
proposed.\570\ One commenter recommended that the Commission provide
guidance on how often bad actor checks should be performed, using the
same timing for all bad actor lookback periods, and including 20%
holders in the revised lookback provisions.\571\ Another commenter
suggested establishing a consistent standard for bad actor
determinations in conjunction with FINRA and providing a centralized
bad actor database.\572\ Other commenters recommended permitting
issuers to continue their offerings and provide investors with
disclosure and an option to cancel their investment commitments after a
disqualifying event first arises.\573\ Commenters also generally
supported revising the bad actor language in Rule 503(a) of Regulation
D to include ``any promoter connected with the issuer in any capacity
at the time of filing, any offer after filing, or such sale,'' to more
closely track Rule 262(a) of Regulation A.\574\
---------------------------------------------------------------------------
\570\ See, e.g., J. Clarke Letter; Netcapital Letter; NASAA
Letter; Md. St. Bar Assoc. Letter; W. Hubbard Letter; CrowdCheck
Letter; and IPA Letter.
\571\ See CrowdCheck Letter. In contrast, one commenter
supported continuing to use the time of filing, rather than time of
sale, for covered persons. See J. Clarke Letter.
\572\ See IPA Letter.
\573\ See Geraci Law Letter; J. Clarke Letter; NextSeed Letter;
and W. Hubbard Letter. But see CrowdCheck Letter contending that
permitting the offerings to continue would treat more recent
disqualifying events as less serious than older ones.
\574\ See, e.g., Geraci Law Letter; Netcapital Letter; NASAA
Letter; Md. St. Bar Assoc. Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------
One commenter opposed the revisions, suggesting the additional
monitoring cost will prevent issuers from relying on Regulation
Crowdfunding.\575\ Another commenter, who was supportive of the
revisions, also acknowledged the potential for significant monitoring
costs, especially in Regulation Crowdfunding offerings.\576\
---------------------------------------------------------------------------
\575\ See NextSeed Letter.
\576\ See CrowdCheck Letter.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting the amendments as proposed to further harmonize the
disqualification provisions in Regulation A, Regulation Crowdfunding,
and Regulation D by using the same disqualification lookback period.
Although the amendments may, to some extent, increase the compliance
costs associated with conducting an offering under Regulation A or
Regulation Crowdfunding, for issuers that conduct offerings in reliance
on more than one of these exemptions, using the same disqualification
lookback period across exemptions may simplify compliance and due
diligence for issuers.\577\ In addition, the revised lookback period,
which looks to both the time of filing of the offering document and the
time of sale, will improve investor protections by further limiting the
role of ``bad actors'' in exempt offerings and reducing the chance that
investors may unknowingly participate in securities offerings involving
offering participants who have engaged in fraudulent activities or
violated securities or other laws or regulations.\578\
---------------------------------------------------------------------------
\577\ See 2015 Regulation A Release, at Section II.G. In
adopting the 2015 Regulation A amendments, the Commission stated
that a uniform set of bad actor triggering events would simplify due
diligence, particularly for issuers that may engage in different
types of exempt offerings.
\578\ This may be particularly true for regulating the conduct
of promoters connected with an issuer throughout an ongoing
offering.
---------------------------------------------------------------------------
The disqualification provisions in Regulation A and Regulation
Crowdfunding were intended to be ``substantially similar'' to those in
Regulation D.\579\ When the Commission adopted disqualification
provisions under Regulation D, the Commission also adopted an exception
from disqualification for offerings where the issuer establishes that
it did not know and, in the exercise of reasonable care, could not have
known that a disqualification existed. At that time, the Commission was
cognizant of the monitoring costs associated with Rule 506(d)'s
disqualification provisions, particularly the costs of monitoring
beneficial owners of 20 percent or more of the issuer's outstanding
voting securities.\580\
---------------------------------------------------------------------------
\579\ See 2015 Regulation A Release and Crowdfunding Adopting
Release. Section 302(d) of the JOBS Act requires the Commission to
establish disqualification provisions under which an issuer would
not be eligible to offer securities pursuant to Section 4(a)(6) and
an intermediary would not be eligible to effect or participate in
transactions pursuant to Section 4(a)(6). Section 302(d)(2)
specifies that the disqualification provisions must be
``substantially similar'' to the ``bad actor'' disqualification
provisions contained in Rule 262 of Regulation A. As noted above,
the disqualification provisions under Regulation A are required to
be ``substantially similar'' to those adopted for securities
offerings under Rule 506. See supra note 564.
\580\ See Rule 506(d) Final Release, at Section II.B. The
Commission clarified that, for ongoing offerings, the issuer's
reasonable care duty to monitor covered persons generally ``includes
updating the factual inquiry'' on a periodic basis. Id. at Section
II.D.2.
---------------------------------------------------------------------------
For Regulation A and Regulation Crowdfunding issuers, monitoring
covered beneficial owners may pose different challenges than for
issuers in Regulation D offerings because shares sold under Regulation
A are potentially freely tradable immediately following an investor's
initial purchase, and shares sold under Regulation Crowdfunding are
generally freely tradable after a holding period. In recognition of the
additional monitoring burdens associated with Regulation A and
Regulation Crowdfunding offerings, and the potential for such burdens
to discourage reliance on Regulation Crowdfunding, we are, as proposed,
retaining the current lookback period applicable to covered beneficial
owners in Regulation A and Regulation Crowdfunding rather than amending
it to start at the time of sale. We do not believe that permitting
issuers to continue their offerings and provide investors with
disclosure and an option to cancel their investment commitments after a
disqualifying event first arises would provide sufficient investor
protections, as it would treat issuers with older disqualifying events
differently from issuers with more recent disqualifying events,
prohibiting the former from engaging in a Regulation A or Regulation
Crowdfunding offering but permitting the latter to engage in the
offering with only updated disclosure provided.\581\
---------------------------------------------------------------------------
\581\ See CrowdCheck Letter.
---------------------------------------------------------------------------
III. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, 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.
Pursuant to the Congressional Review Act,\582\ the Office of
Information and Regulatory Affairs has designated these rules a ``major
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------
\582\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
IV. Economic Analysis
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(b) of the Securities Act,\583\ Section 3(f)
of the Exchange Act,\584\ and Section 2(c) of the Investment Company
Act \585\ require us, when engaging in rulemaking that requires us to
consider or determine whether an action is necessary or appropriate in
(or, with respect to the
[[Page 3551]]
Investment Company Act, consistent with) the public interest, to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation. In
addition, Section 23(a)(2) of the Exchange Act requires the Commission
to consider the effects on competition of any rules the Commission
adopts under the Exchange Act and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\586\
---------------------------------------------------------------------------
\583\ 15 U.S.C. 77b(b).
\584\ 15 U.S.C. 78c(f).
\585\ 15 U.S.C. 80a-2(c).
\586\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
We have considered the economic effects of the final amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be
quantified.\587\ Consequently, while we have, wherever possible,
attempted to quantify the expected economic effects, much of the
discussion remains qualitative in nature.
---------------------------------------------------------------------------
\587\ For example, as discussed in the Proposing Release and
noted by commenters (see, e.g., Better Markets Letter; CFA Letter;
Letter from Healthy Markets Association dated March 16, 2020 (``HMA
Letter''); and NASAA Letter), scaled disclosures and a lack of
secondary trading complicate the gathering of performance data on
all exempt offerings. Where available, such data is not necessarily
directly comparable to public market returns. See Proposing Release,
at note 372. The analysis of available evidence on the performance
of exempt offerings can be found in Report to Congress on Regulation
A/Regulation D Performance. See also CCA Letter (discussing evidence
on the performance of crowdfunding offerings) and Letter on the
Concept Release from AngelList Venture dated September 14, 2020
(``AngelList Letter'') (discussing evidence on the performance of
investments through their platform).
---------------------------------------------------------------------------
A. Broad Economic Considerations
The final amendments will simplify, harmonize, and improve certain
aspects of the Commission's exempt offering framework, including
Regulation D, Regulation A, Regulation Crowdfunding, and other related
rules. By providing a more streamlined and consistent exempt offering
framework, these amendments are expected to incrementally facilitate
capital formation through exempt offerings, expanding issuers' ability
to pursue positive net present value (``NPV'') investment and growth
opportunities. For example, the amendments to Regulation A and
Regulation Crowdfunding that raise offering limits and incrementally
facilitate compliance are expected to draw a larger and more
diversified set of issuers, including issuers with high growth
potential and associated high financing needs that might otherwise
forgo these exemptions due to the costs of compliance combined with the
existing, lower limits.\588\ The final amendments may also address
current uncertainties in the ability to use exempt offerings prior to,
or concurrent with, registered offerings, which could ease the path to
a registered offering for some private issuers.
---------------------------------------------------------------------------
\588\ The amended offering limits also may attract financial
intermediaries that might presently opt out of this market segment
because of fixed costs of due diligence and marketing or a small
issuer pool.
---------------------------------------------------------------------------
We recognize that many of the issuers that rely on the amended
exemptions likely would have relied on an exemption from registration
without the final amendments.\589\ For example, issuers using amended
Regulation A, Regulation Crowdfunding, or Rule 504 might have relied on
these exemptions in their current form, or, alternatively, relied on
Rule 506 of Regulation D, which does not have an offering limit and
does not require the filing of an offering statement or ongoing
disclosures. The substitution between different offering methods is
likely to limit the economic effects of the amendments. Nevertheless,
the increased flexibility afforded by the amendments may enable some
issuers to optimize their financing strategy and reduce their financing
costs, helping them fund a broader range of investment projects and
growth opportunities. Financing cost savings and enhanced ability to
fund positive-NPV investment opportunities would in turn benefit
shareholders through greater shareholder value.
---------------------------------------------------------------------------
\589\ Aggregate conditions, such as a prolonged period of low
interest rates, may also contribute to sustained reliance on exempt
offerings. See, e.g., Elisabeth de Fontenay, The Deregulation of
Private Capital and the Decline in the Public Company. 68 Hastings
L. J. 445 (2017), at footnote 7; McKinsey, Private Markets Come of
Age: McKinsey Global Private Markets Review (2019), https://
www.mckinsey.com/~/media/mckinsey/industries/
private%20equity%20and%20principal%20investors/our%20insights/
private%20markets%20come%20of%20age/private-markets-come-of-age-
mckinsey-global-private-markets-review-2019-vf.ashx (noting the role
of low interest rates in investor pursuit of high-yield investments,
including in private capital markets).
---------------------------------------------------------------------------
The amendments may also provide incrementally greater choice of
investment opportunities for investors. Importantly, the investor
protections applicable to these exemptions will continue to provide
significant safeguards against the risk of losses for non-accredited
investors. The amendments we are adopting could expand non-accredited
investor access to investment opportunities, such as through the
following:
Amendments to Regulation A, Regulation Crowdfunding, and
Rule 504, which do not limit the number of non-accredited investors,
may attract additional issuers or larger offerings.
Amendments to Regulation Crowdfunding will increase
investment limits for the subset of non-accredited investors whose
annual income diverges from net worth, which may allow such investors
to participate in more crowdfunding offerings.
Amendments to Rule 506(b) may on the margin lead to
additional offerings that permit non-accredited investors; however, the
35-person cap on the number of non-accredited purchasers in any Rule
506(b) offering in a 90-day period and the historically low proportion
of Rule 506(b) offerings with non-accredited investors are expected to
significantly limit this effect.
Greater flexibility under the amendments may enable non-accredited
investors to optimize their capital allocation through incrementally
greater access to exempt offering investment opportunities. The
magnitude of the effect would depend on several factors, including:
Whether issuers switch between offering methods that allow
non-accredited investors, in which case the set of investment
opportunities for non-accredited investors may change very little.
Whether issuers prefer accredited investors due to their
industry connections and expertise or due to the potential costs of
having multiple non-accredited investors (e.g., capitalization table
concerns in light of subsequent financing plans \590\ or Section 12(g)
registration thresholds, costs of investor relations, or risks of
proprietary information disclosure).
---------------------------------------------------------------------------
\590\ See, e.g., supra Section II.F.
---------------------------------------------------------------------------
Whether non-accredited investors choose not to invest in
exempt offerings (e.g., due to illiquidity; transaction, search, due
diligence, and agency costs; or investment minimums).
The efficiency of portfolio allocation of non-accredited
investors. Such efficiency would depend on such investors' skill at
obtaining and analyzing information about issuers that provide less
disclosure compared to registered offerings.\591\ Non-accredited
investors may in some cases benefit from monitoring and screening by
accredited investors, although the effect may be limited if the
securities held by accredited investors offer different terms or
payoffs.\592\
---------------------------------------------------------------------------
\591\ See also Proposing Release, at note 375.
\592\ See also Proposing Release, at note 376. Differences in
payoffs may be compensation for value added by the expertise,
advice, governance, and network connections contributed by large
investors.
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[[Page 3552]]
Today non-accredited investors may invest in a wide range of
financial assets with high risk or due diligence costs, both as part of
the securities market (e.g., leveraged investments in individual listed
securities; short positions; holdings of registered securities of
foreign, small-cap, and over-the-counter (OTC) issuers; and holdings of
registered nontraded securities, including REITs and structured notes)
and outside the securities market (e.g., futures, foreign exchange,
real estate, individual small businesses, peer-to-peer lending, and
financial transactions that entail high risk or leverage). Thus, the
incremental effects on non-accredited investors of potential additional
investment in exempt offerings under the amendments should be assessed
relative to the existing market conditions.
Some commenters expressed concerns that facilitating capital
raising through exempt offerings may incrementally contribute to the
ongoing decline in U.S. registered offerings, limiting the overall set
of investment opportunities and information available to non-accredited
investors.\593\ While the aggregate trend of the decline in U.S.
registered offerings, which dates back to the aftermath of the 2000
stock market crash, is an important element of the baseline, we expect
the amendments being adopted in this release to have at most a marginal
impact on this trend for the following reasons:
---------------------------------------------------------------------------
\593\ See, e.g., Better Markets Letter; Letter from Center for
American Progress, et al. dated May 26, 2020 (``CAP, et al.
Letter''); CFA Letter; and HMA Letter.
---------------------------------------------------------------------------
Amendments to individual exemptions that have the greatest
potential to result in the growth in capital raising pursuant to those
exemptions relative to the baseline affect the market segments that are
relatively small in absolute terms today (Regulation A, Regulation
Crowdfunding, and Rule 504). While individual issuers may realize
significant gains in the form of greater availability or decreased cost
of capital, the aggregate effects of the amendments on the market as a
whole are likely to be modest in absolute terms. Moreover, issuers that
rely on Regulation A, Regulation Crowdfunding, and Rule 504 tend to be
at a much earlier stage of development than a traditional IPO
issuer.\594\ While expanded offering limits may attract some additional
issuers that are larger or more mature, the typical issuer relying on
these exemptions--especially Regulation Crowdfunding--is unlikely to be
able to conduct a traditional IPO at the issuer's present stage of
development. This should mitigate concerns about increased substitution
of traditional IPOs for Regulation Crowdfunding or Regulation A under
the amendments.
---------------------------------------------------------------------------
\594\ See infra note 596.
---------------------------------------------------------------------------
While changes to the disclosure requirements for sales to
non-accredited investors under Rule 506(b) will reduce the cost to
issuers of sales to such investors and may draw additional issuers to
allow non-accredited investors in Rule 506(b) offerings, Rule 506(b)
offerings with non-accredited investors currently comprise a relatively
small portion of the market. Almost all such offerings report only
having accredited investors.\595\ Exempt offering integration
amendments are most likely to affect issuers that rely on multiple
exemptions, particularly ones involving non-accredited investors. We
believe that the added flexibility and reduced cost of capital raising
may be highly beneficial to the affected issuers--particularly for
smaller issuers and issuers that lack an established network of angel
investors or venture backing and thus rely on a combination of capital
raising strategies to finance their growth. Nevertheless, for the
majority of non-reporting issuers that raise financing from accredited
investors without general solicitation (see Table 6 below), the
integration amendments will likely have limited effects.
---------------------------------------------------------------------------
\595\ See supra note 127.
---------------------------------------------------------------------------
Further, the integration amendments we are adopting
include provisions intended to facilitate exempt and registered
offerings occurring close in time and, as such, may make it easier for
some issuers to attempt registered offerings. For some issuers looking
to do bridge financing right before an IPO, the additional certainty
provided by the new integration rule may allow them to accelerate the
process of initiating the IPO (or at least provide additional certainty
that the prior offering will not be integrated with the IPO).
To the extent that the amendments contribute to some substitution
between registered and exempt offerings, it is important to consider
any such substitution in the context of other economic channels through
which the amendments affect capital allocation and the availability of
investable opportunities:
We do not expect the amendments to deter a significant
proportion of the issuers that are large and mature enough to be on the
cusp of going public from pursuing a public offering. Such issuers
likely already have a developed network of angel investors and/or
backing from venture capitalists on which they can rely to raise the
necessary amount of financing today. Thus, such issuers' decision to go
public is likely driven more by the benefits of being a reporting
company (relative to the cost of a registered offering and being a
reporting company).\596\
---------------------------------------------------------------------------
\596\ One commenter stated that ``[w]hile we do not disagree
with the statement that provisions of the Release would not be
expected to `deter a significant portion' of issuers from pursing a
public offering, we believe . . . that the provisions of the Release
would be expected to contribute to a lower (rather than higher)
number of SEC-registered companies.'' See CII Letter. However, the
data on IPO issuer age and size over time appears to support our
view. See, e.g., Jay R. Ritter, Initial Public Offerings: Median Age
of IPOs Through 2019, (Jan. 14, 2020), available at https://site.warrington.ufl.edu/ritter/files/2020/02/IPOs2019Age.pdf (citing
median IPO issuer age during 2001 through 2019 as ten years) and Jay
R. Ritter, Initial Public Offerings: Sales Statistics Through 2019,
(Mar. 10, 2020), available at https://site.warrington.ufl.edu/ritter/files/IPOs2019_Sales.pdf (citing in Table 12 median sales of
IPO issuers, expressed in 2005 dollars, as approximately $47 million
in 2019). By comparison, the age and size of Regulation A and
Regulation Crowdfunding issuers is much smaller. The median
Regulation Crowdfunding issuer had no revenues and had an age of
approximately two years. See Table 9 below. The median Regulation A
issuer had no revenues and had an age of approximately three years.
See 2020 Regulation A Review, at Table 5. In Regulation D offerings,
the median issuer age is two years; the median non-fund issuer size
(revenues), where reported, is $1 million-$5 million; to the extent
that the offering proceeds can serve as a proxy for issuer size and
financing needs in offerings without an offering limit, the median
Rule 506(b) reported proceeds were $1.5 million. See Table 7 below.
Thus, we continue to believe that the amendments to offering limits
and integration provisions will not result in significant
substitution between new IPO activity and additional exempt
offerings.
---------------------------------------------------------------------------
Additional flexibility in access to capital can help
existing issuers meet their financing needs at a lower cost and
allocate capital to growth opportunities more efficiently, with the
resulting benefits for economic growth, competition, and capital
markets as a whole.
The amendments might have the most significant effects on
smaller growth issuers that presently lack sufficient access to
financing that they require to develop their business model and gain
scale. Such issuers may face significant financing constraints and lack
an established network of angel investors or venture capital backing
and may be too early in their lifecycle to be a candidate for a public
offering. Thus, if the flexibility added by the amendments allows some
of these small issuers to raise enough external financing to develop
their business model and scale up to a point where they may become
viable candidates for a public offering, the amendments might diversify
the pool of prospective issuers that are able to conduct a registered
[[Page 3553]]
offering, which could result in a higher number of IPOs in the
future.\597\
---------------------------------------------------------------------------
\597\ Private capital can provide a critical lifeline to startup
and other small private firms to proceed from a development stage to
implementing their business model, generating revenue, and growing
in size. Larger firms, firms past the development stage, and firms
that have venture capital backing (although private capital may also
take other, non-venture capital forms) are more likely to achieve a
successful IPO exit (as opposed to, for instance, being acquired by
a larger competitor). See, e.g., Annette B. Poulsen & Mike
Stegemoller, Moving from Private to Public Ownership: Selling out to
Public Firms versus Initial Public Offerings, 37 Fin. Mgmt. 81
(2008), at Table 7; James C. Brau, Bill Francis & Ninon Kohers, The
Choice of IPO versus Takeover: Empirical Evidence, 76 J. Bus. 583
(2003), at 583; Onur Bayar & Thomas Chemmanur, What Drives the
Valuation Premium in IPOs versus Acquisitions? An Empirical
Analysis, 18 J. Corp. Fin. 451 (2012), at Table 3. See also supra
note 596 (discussing the substantial size of a typical IPO issuer).
---------------------------------------------------------------------------
Overall, expanded access to capital may draw new
businesses to capital markets, which might have otherwise found a
securities offering to be impractical or too costly. Without a
securities offering, some of these businesses might not have been able
to grow their operations (and in the process create value for their
owners).
Some of the amendments affect the same offerings and issuers or
have mutually reinforcing or partly offsetting effects, which makes it
more difficult to draw conclusions about the net effects of the final
amendments package as a whole. For example, it is difficult to predict
how the amendments that expand, simplify, and increase the uniformity
of integration safe harbors will affect issuer reliance on individual
exemptions. Nevertheless, we expect that these integration amendments
will overall facilitate capital formation by harmonizing requirements,
reducing legal costs, and providing additional flexibility to issuers
seeking an exemption from registration or transitioning to a registered
offering. The amendments to offering limits for individual exemptions
may lead to increased substitution between exemptions. On the other
hand, Regulation Crowdfunding amendments relaxing investment limits and
raising offering limits may result in mutually reinforcing benefits for
capital formation.
Finally, we recognize that the amendments to exemptions that are
relatively infrequently used today compared to Rule 506(b) of
Regulation D (such as Regulation Crowdfunding, Regulation A, Rule 504,
and Rule 506(c)) are likely to have limited aggregate economic effects
on issuers and on investors in absolute terms, even if the percentage
changes in the offering activity conducted under those exemptions are
significant.
Recently, the Commission amended the accredited investor
definition.\598\ Those amendments may affect the economic effects of
the amendments considered here. In particular, some of the economic
effects of the amendments discussed here that facilitate exempt
offerings to accredited investors (e.g., expanded integration safe
harbors, exemption of accredited investors from Regulation Crowdfunding
investment limits) will be amplified to the extent that issuers can
offer securities to an expanded pool of accredited investors. In turn,
some of the effects of the amendments discussed here that facilitate
exempt offerings to non-accredited investors (e.g., expanded offering
limits under Regulation A, Regulation Crowdfunding, and Rule 504,
testing-the-waters and crowdfunding vehicle provisions of amended
Regulation Crowdfunding, and amendments to non-accredited investor
disclosure requirements under Rule 506(b)) may be smaller to the extent
that issuers able to access an expanded accredited investor pool become
less reliant on exempt offerings to non-accredited investors.
---------------------------------------------------------------------------
\598\ See Amending the ``Accredited Investor'' Definition, Rel.
No. 33-10824 (Aug. 26, 2020) [85 FR 63726 (Oct. 9, 2020)].
---------------------------------------------------------------------------
B. Baseline
We examine the economic effects of the final amendments relative to
the baseline, which comprises the existing regulatory requirements
(described in detail in Section I above) and market practices related
to exempt offerings (described below).
Generally, the parties affected by the amendments include current
and prospective issuers and investors in exempt offerings. To the
extent that the amendments affect how issuers choose between registered
and exempt offerings, the amendments also might affect issuers and
investors in the registered offering market. In cases where
intermediaries are involved in exempt offerings and either receive
transaction-based compensation or perform some of the offering-related
or compliance functions on behalf of issuers, intermediaries will also
be affected by the amendments. In particular, Regulation Crowdfunding
requires offerings to be conducted through an intermediary's online
platform. Thus, to the extent that the amendments affect Regulation
Crowdfunding offering activity, they are expected to have direct
effects on all crowdfunding intermediaries. In other instances, the
effects of the amendments on intermediaries might be more limited
(e.g., intermediaries might verify investor status for issuers under
Rule 506(c), be authorized by some issuers to test the waters with
investors prior to an offering, or be drawn to the Regulation A market
if they find that the increase in the offering limit makes underwriting
more cost-effective).
Below we present data on the recent state of the market affected by
the amendments. In 2019, registered offerings accounted for $1.2
trillion (30.8 percent) of new capital, compared to approximately $2.7
trillion (69.2 percent) that we estimate was raised through exempt
offerings.\599\ Of the approximately $2.7 trillion estimated as raised
in exempt offerings in 2019, the following table shows the amounts that
we estimate were raised under each of the identified exemptions.\600\
---------------------------------------------------------------------------
\599\ Unless otherwise indicated, information in this release on
Regulation D, Regulation A, and Regulation Crowdfunding offerings is
based on analyses by staff in the Commission's Division of Economic
Risk and Analysis of data collected from SEC filings.
\600\ ``Other exempt offerings'' includes Section 4(a)(2),
Regulation S, and Rule 144A offerings. The data used to estimate the
amounts raised in 2019 for other exempt offerings includes: (1)
Offerings under Section 4(a)(2) of the Securities Act that were
collected from Thomson Financial's SDC Platinum, which uses
information from underwriters, issuer websites, and issuer
Commission filings to compile its Private Issues database; (2)
offerings under Regulation S that were collected from Thomson
Financial's SDC Platinum service; and (3) resale offerings under
Rule 144A that were collected from Thomson Financial SDC New Issues
database, Dealogic, the Mergent database, and the
Asset[hyphen]Backed Alert and Commercial Mortgage Alert
publications, to further estimate the exempt offerings under Section
4(a)(2) and Regulation S. We include amounts sold in Rule 144A
resale offerings because those securities are typically issued
initially in a transaction under Section 4(a)(2) or Regulation S but
generally are not included in the Section 4(a)(2) or Regulation S
data identified above. These numbers are accurate only to the extent
that these databases are able to collect such information and may
understate the actual amount of capital raised under these offerings
if issuers and underwriters do not make this data available. The
data on Rule 144A debt offerings from Mergent is available only
through the end of August 2019. We have extrapolated the data to
obtain a full calendar year.
[[Page 3554]]
Table 5--Overview of Amounts Raised in the Exempt Market in 2019
------------------------------------------------------------------------
Amounts reported
or estimated as
Exemption raised in 2019
(billion)
------------------------------------------------------------------------
Rule 506(b) of Regulation D........................... $1,492
Rule 506(c) of Regulation D........................... 66
Regulation A: Tier 1.................................. 0.044
Regulation A: Tier 2.................................. 0.998
Rule 504 of Regulation D.............................. 0.228
Regulation Crowdfunding............................... 0.062
Other exempt offerings................................ 1,167
------------------------------------------------------------------------
The following table \601\ summarizes recent data on the Regulation
D market.
---------------------------------------------------------------------------
\601\ This table includes offerings by pooled investment funds.
Information on Regulation D offerings, including offerings under
Rule 504 and Rule 506, is based on staff analysis of data from Form
D filings on EDGAR. The amount raised is based on the amounts
reported as ``Total amount sold'' in all Form D filings (new filings
and amendments) on EDGAR. Subsequent amendments to a new filing were
treated as incremental fundraising and recorded in the calendar year
in which the amendment was filed. It is likely that the reported
data on Regulation D offerings underestimates the actual amount
raised through these offerings. First, Rule 503 of Regulation D
requires issuers to file a Form D no later than 15 days after the
first sale of securities, but a failure to file the notice does not
invalidate the exemption. Accordingly, it is possible that some
issuers do not file Form D for offerings relying on Regulation D.
Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10 percent.
Table 6--Offerings Under Regulation D in 2019
----------------------------------------------------------------------------------------------------------------
Rule 504 Rule 506(b) Rule 506(c)
----------------------------------------------------------------------------------------------------------------
Number of New Offerings........... 476.................. 24,636............... 2,269.
Amount Reported Raised............ $0.2 billion......... $1,491.9 billion..... $66.3 billion.
----------------------------------------------------------------------------------------------------------------
As can be seen from Table 6, Rule 506(b) dominates the market for
exempt securities offerings. Amounts raised under Rule 506(b) also
exceeded the amounts raised in the registered market, estimated to be
$1.2 trillion in 2019.\602\
---------------------------------------------------------------------------
\602\ See also Concept Release; and Scott Bauguess, Rachita
Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.: An
Analysis of the Market for Unregistered Securities Offerings, 2009-
2017 (U.S. Sec. and Exch. Comm'n, Division of Economic and Risk
Analysis White Paper, Aug. 1, 2018), available at https://www.sec.gov/dera/staff-papers/white-papers/dera_white_paper_regulation_d_082018.
---------------------------------------------------------------------------
The table below presents summary statistics for Regulation D
offering and issuer characteristics over 2009-2019.
Table 7--Summary of Regulation D Issuer and Offering Characteristics,
2009-2019 \603\
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of issuers.......................... 173,697.
Number of Offerings........................ 242,070.
Amounts Reported Sold...................... $13,576 billion.
Mean Amount Sold (if reported)............. $58 million.
Median Amount Sold (if reported)........... $1.50 million.
Mean Offer Size (if reported).............. $71 million.
Median Offer Size (if reported)............ $2.25 million.
Median Years Since Incorporation........... 2.
Median Issuer Size (if reported):
Private Funds (Net Asset Value)........ $25 million-$50 million.
Non-Fund Issuers (Revenue)............. $1 million-$5 million.
Used Intermediary.......................... 20%.
Total Investors:
As reported in initial Form D filings.. 3.4 million.
All filings, including amendments...... 5.9 million.
Average Investors/Offering (if reported)... 10.
------------------------------------------------------------------------
The table below \604\ summarizes amounts sought and reported raised
in offerings under Regulation Crowdfunding since its inception.\605\
---------------------------------------------------------------------------
\603\ See also supra note 601. The number of issuers is based on
a unique Central Index Key (CIK) identifier. Number of offerings
represents all new offerings initiated during the period 2009
through 2019, as represented by a Form D filing, and offerings
initiated prior to 2009 but continuing into the period 2009 through
2019 (as represented by an amendment filed). Amounts Reported Sold
is calculated as described above and includes amounts sold reported
in initial Form D filings and incremental amounts sold reported in
amendment filings. Total number of investors, as reported in Form D
and Form D/A filings, is calculated similarly. Issuers are not
required to file a Form D at the close of offering. Not all
offerings report amounts raised sold in their initial Form D filing.
\604\ See supra note 599. Issuers that have not raised the
target amount or not filed a report on Form C-U are not included in
the estimate of proceeds.
\605\ For a discussion of the Regulation Crowdfunding market,
see also 2019 Regulation Crowdfunding Report.
[[Page 3555]]
Table 8--Regulation Crowdfunding Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2019
----------------------------------------------------------------------------------------------------------------
Aggregate
Number Average Median (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings..... 2,003 $63,791 $25,000 $126.9
Maximum amount sought in initiated offerings.... 2,003 599,835 535,000 1,174.2
Amounts reported as raised in completed 795 213,678 106,900 169.9
offerings......................................
----------------------------------------------------------------------------------------------------------------
Given the offering limits, crowdfunding is used primarily by
relatively small issuers. The table below \606\ presents data on the
characteristics of issuers in crowdfunding offerings.
---------------------------------------------------------------------------
\606\ See supra note 599. The estimates are based on data from
Form C or the latest amendment to it, excluding withdrawals. See
also 2019 Regulation Crowdfunding Report.
Table 9--Characteristics of Issuers in Regulation Crowdfunding
Offerings, May 16, 2016-December 31, 2019
------------------------------------------------------------------------
Average Median
------------------------------------------------------------------------
Age in years............................ 2.9 1.8
Number of employees..................... 5.3 3.0
Total assets............................ $455,280 $29,982
Total revenues.......................... $325,481 $0
------------------------------------------------------------------------
Based on information in new Form C filings, the median crowdfunding
offering was by an issuer that was incorporated approximately two years
prior to the offering and employed about three people. The median
issuer had total assets of approximately $30,000 and no revenues (just
over half of the offerings were by issuers with no revenues).
Approximately ten percent of offerings were by issuers that had
attained profitability in the most recent fiscal year prior to the
offering.
The following table \607\ summarizes amounts sought and reported
raised in offerings under Regulation A since the effective date of the
2015 Regulation A amendments.
---------------------------------------------------------------------------
\607\ The estimates include post-qualification amendments and
exclude abandoned or withdrawn offerings. See also 2020 Regulation A
Review.
Table 10--Regulation A Offering Amounts and Reported Proceeds in $ Million, June 19, 2015-December 31, 2019
----------------------------------------------------------------------------------------------------------------
Tiers 1 & 2 Tier 1 Tier 2
----------------------------------------------------------------------------------------------------------------
All Filed Offerings:
Aggregate dollar amount sought... $11,170.2 million...... $1,101.5 million....... $10,068.6 million.
Number of offerings.............. 487.................... 145.................... 342.
Average dollar amount sought..... $22.9 million.......... $7.6 million........... $29.4 million.
Offerings Qualified by Commission
Staff:
Aggregate dollar amount sought... $9,094.8 million....... $759.0 million......... $8,335.8 million.
Number of offerings.............. 382.................... 105.................... 277.
Average dollar amount sought..... $23.8 million.......... $7.2 million........... $30.1 million.
Capital Reported Raised:
Aggregate dollar amount reported $2,445.9 million....... $230.4 million......... $2,215.6 million.
raised.
Number of issuers reporting 183.................... 39..................... 144.
proceeds.
Average dollar amount reported $13.4 million.......... $5.9 million........... $15.4 million.
raised.
----------------------------------------------------------------------------------------------------------------
As can be seen, Tier 2 accounted for the majority of Regulation A
offerings (70 percent of filed and 73 percent of qualified offerings),
amounts sought (90 percent of amounts sought in filed offerings and 9
percent of amounts sought in qualified offerings), and reported
proceeds (91 percent) during this period.
Because reliance on integration safe harbors is not required to be
disclosed, we lack a way to reliably quantify the pool of issuers and
offerings that would be affected by the amended approach to
integration. Nevertheless, some indication of the scope of issuers
affected by integration provisions may come from indirect sources: In
2019, based on the analysis of Form D filings, we estimate that
approximately 1,256 issuers other than pooled investment funds filed
more than one Form D (excluding amendments) and an additional 258
issuers filed one new Form D and either had a registration statement
declared effective, had a Regulation A offering statement qualified, or
filed a new or amended Form C. Many private placements, however, rely
on Section 4(a)(2) rather than on the Regulation D safe harbor. We lack
data on Section 4(a)(2) offerings due to the absence of filing or
disclosure requirements associated with this statutory exemption. Also,
for issuers filing forms for multiple offerings, in most cases we
cannot reliably determine if, and when, proceeds were raised or the
offering closed, or whether the specific offerings were eventually
subject to integration or not. For instance, a closeout filing on Form
D is
[[Page 3556]]
not required, making it difficult to know when the offering closed or
how much was raised. Similarly, proceeds data for Regulation A and
Regulation Crowdfunding can be lagged or incomplete.
Except where specified otherwise, the analysis is based on
available data through the most recently completed calendar year
(2019). Subsequent to the end of the period analyzed here, as of
September 2020, the U.S. market has experienced significant
macroeconomic and market dislocations related to the global effects of
COVID-19 and the related response.\608\ These factors are expected to
have a negative market-wide impact on the levels of offering activity
(including under Regulation A, Regulation D, and Regulation
Crowdfunding).\609\ Offering activity data through the second quarter
of 2020 is likely not reflective of the full-year effects of this shock
due to significant lags in the completion of offerings and reporting of
proceeds data: For the twelve months ending June 2020, approximately
$1.50 trillion in proceeds was reported under Regulation D (including
$0.2 billion under Rule 504, $1,430.8 billion under Rule 506(b), and
$68.6 billion under Rule 506(c)); $1.3 billion under Regulation A; and
$88 million under Regulation Crowdfunding (compared to approximately
$1.56 trillion in proceeds under Regulation D; $1 billion under
Regulation A and approximately $62 million under Regulation
Crowdfunding during calendar year 2019).\610\ Irrespective of these
short-term fluctuations, we believe that the economic analysis
considerations discussed below generally continue to apply. Inherent
cyclicality of offering activity, irrespective of the cause of the
macroeconomic shock, is a part of the baseline and prior academic
research.\611\ While macroeconomic shocks generally reduce capital
formation levels (due to both supply and demand factors), which in the
short run will negatively affect offering activity incremental to the
rule in absolute terms, the effects of the economic considerations we
discuss below are likely to remain applicable over the medium- to long-
run, which encompasses periods of sustained growth interspersed with
market contractions.
---------------------------------------------------------------------------
\608\ See, e.g., Scott R. Baker, Nicholas Bloom, Steven J.
Davis, Kyle J. Kost, Marco C. Sammon, & Tasaneeya Viratyosin, The
Unprecedented Stock Market Impact of COVID-19, (NBER Working Paper
26945, 2020). See also Maryam Haque, Startup Ecosystem Faces Capital
Crunch over Coming Months--What We Expect & Why It Matters, (NVCA
White Paper, 2020), https://nvca.org/wp-content/uploads/2020/04/Startup-Ecosystem-Faces-Capital-Crunch-over-Coming-Months-5.pdf.
\609\ For a discussion of the effects of COVID-19 and temporary
relief for Regulation Crowdfunding issuers, see Temporary Amendments
Adopting Release and Temporary Amendments Extension.
\610\ As an important caveat, Regulation A and Regulation
Crowdfunding issuers were also provided temporary relief from
certain periodic reporting requirements on March 26, 2020. Thus,
proceeds information reported as of June 30, 2020, may be incomplete
to the extent that issuers had offering proceeds but availed
themselves of this relief. See SEC Rel. No. 33-10768 (Mar. 26, 2020)
Relief for Form ID Filers and Regulation Crowdfunding and Regulation
A Issuers Related to Coronavirus Disease 2019 (COVID-19) [85 FR
17747 (Mar. 31, 2020)].
\611\ See, e.g., Michelle Lowry, Why Does IPO Volume Fluctuate
So Much? 67 J. Fin. ECON. 3 (2003); Chris Yung, Gonul Colak, & Wei
Wang, Cycles in the IPO Market, 89 J. Fin. Econ. 192 (2008); Amy
Dittmar & Robert Dittmar, The Timing of Financing Decisions: An
Examination of the Correlation in Financing Waves, 90 J. Fin. Econ.
59 (2008).
---------------------------------------------------------------------------
Further, on May 4, 2020, the Commission adopted temporary final
rules under Regulation Crowdfunding to facilitate capital formation for
small businesses impacted by COVID-19, which include, among other
things, an exemption from certain financial statement review
requirements for issuers offering $250,000 or less of securities in
reliance on Regulation Crowdfunding within a 12-month period.\612\
These temporary final rules were subsequently extended and apply to
offerings initiated under Regulation Crowdfunding between May 4, 2020,
and February 28, 2021.\613\
---------------------------------------------------------------------------
\612\ See Temporary Amendments Adopting Release.
\613\ See Temporary Amendments Extension.
---------------------------------------------------------------------------
C. Economic Effects of the Final Amendments
1. Integration
The final amendments will revise the framework for integration
analysis. As discussed in greater detail in Section II.A, the
amendments update and expand existing integration provisions to provide
greater uniformity and flexibility to issuers regarding integration of
offerings. Considered together, the final amendments are expected to
facilitate compliance and reduce issuer costs through greater
consistency and uniformity across exemptions, and thus promote the use
of exemptions by issuers that undertake multiple offerings.
a. Benefits
The final amendments expand and simplify the integration framework,
provide greater uniformity in integration tests applicable across
offering types, and in many cases shorten the period of time that
issuers must wait between offerings to rely on a safe harbor from
integration. The amendments are expected to reduce the cost of
compliance with the integration requirements for issuers, which was
generally supported by commenters.\614\ In particular, the reduction in
certain safe harbor periods from six months to 30 days is expected to
facilitate compliance for issuers that might need to adjust their
financing strategy as a result of evolving business circumstances,
growing financing needs, or an inability to attract sufficient capital
through a single offering method. A six-month waiting period between
consecutive offerings, or the need to assess whether consecutive
offerings can be treated as separate offerings or whether they must be
integrated, can significantly limit such issuers' ability to raise
sufficient capital or react to dynamic business conditions. Similarly,
expanding the bright-line safe harbors from integration to a broader
set of offering types generally reduces the need for an issuer to
conduct an in-depth facts-and-circumstances analysis, as Rule 152(b)
states that ``[n]o integration analysis under paragraph (a) of this
section is required, if any of the following non-exclusive safe harbors
apply.'' This is expected to reduce the costs for issuers seeking to
raise capital through multiple offering exemptions. Overall, greater
emphasis in the integration analysis on whether a particular offering
satisfies the registration requirements or conditions of the specific
exemption is expected to reduce integration-specific compliance
efforts. The amendments are expected to reduce the costs of compliance
with the provisions of the exemptions for issuers that conducted an
offering before, or close in time with, another offering. The resulting
decrease in compliance costs may encourage additional issuers to pursue
one or more exempt offerings or to pursue a private placement and a
registered offering.
---------------------------------------------------------------------------
\614\ See supra notes 39-41 and accompanying text.
---------------------------------------------------------------------------
The amendments are expected to be particularly beneficial to young,
financially constrained, or high-growth issuers whose capital needs,
and thus preferred capital raising methods, may change more frequently.
The flexibility may be especially valuable in cases where one or more
of the exempt offerings conducted by an issuer is subject to offering
limits, as well as in cases where an issuer conducts multiple offerings
that are subject to different solicitation, disclosure, offering size,
or investor requirements. Overall, this flexibility may promote capital
formation and enable issuers to optimize their financing strategy so as
to attain a lower overall cost of capital
[[Page 3557]]
while raising the required amount of external financing. The described
benefits also are expected to accrue to the shareholders of those
issuers through enhanced shareholder value, particularly if the
increased flexibility in accessing external financing enables issuers
to more efficiently pursue high-growth investment opportunities.
The described benefits may be limited in cases of amendments that
codify existing guidance, to the extent that the market has already
developed similar practices. Further, if issuers in certain exempt
offerings, such as offerings under Rule 506(c), Regulation A, or
Regulation Crowdfunding, account for most of the use of the integration
safe harbor amendments, the aggregate effects of the integration
amendments are expected to be limited, given the relatively small
market share of these exemptions, compared to the far more prevalent
Rule 506(b) and Section 4(a)(2) offerings.\615\ Because Rule 506(b)
does not impose an offering limit, and most such offerings do not
involve non-accredited investors,\616\ many issuers are likely able to
meet their financing needs without having to conduct multiple
offerings, which may further limit the effects of the integration
amendments.
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\615\ We recognize that other amendments we are adopting in this
release, such as increased offering limits under Regulation A and
Regulation Crowdfunding, increased investment limits under
Regulation Crowdfunding, and additional optional means of
verification of accredited investor status under Rule 506(c), might
increase the use of Regulation A, Regulation Crowdfunding, and Rule
506(c).
\616\ We recognize that the amendments to non-accredited
investor disclosure requirements might increase the incidence of
non-accredited investors in Rule 506(b) offerings.
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b. Costs
The amendments could on the margin result in additional financing
being raised from non-accredited investors without registration
requirements.\617\ The disclosure requirements of all of these
exemptions are less extensive than the requirements associated with a
registered offering, which could result in less public disclosure
generally if companies that would have become reporting companies
decide to remain non-reporting companies.
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\617\ For example, conducting a Rule 506(b) offering and a
Regulation A or Regulation Crowdfunding offering may enable an
issuer to reach a broader non-accredited investor base and/or raise
a greater amount of non-accredited investor capital. Certain
exemptions (Regulation Crowdfunding, Regulation A Tier 2) also
conditionally exempt securities offered under the respective
exemption from the number of shareholders of record for purposes of
Section 12(g). See supra note 52 and accompanying text (discussing
commenters that opposed the integration amendments because they
would allow an issuer to do indirectly what it cannot do directly).
For example, one commenter stated that the amendments would allow
issuers to ``easily avoid registration requirements by dividing
large financings into multiple smaller exempt offerings separated by
only a brief period of time.'' See R. Rutkowski Letter. Another
commenter stated that, under the proposed integration framework,
``the original goal of preventing issuers from artificially
separating related transactions into multiple offerings to avoid the
registration requirement is gone under this approach.'' See CFA
Letter. Requiring no integration so long as each individual offering
satisfies a particular exemption, according to this commenter,
``subverts the purpose of integration, which specifically looks at
the totality of a financing scheme rather than different components
in isolation.'' Id. This commenter stated that the proposal ``would
enshrine a framework that effectively allows concurrent and serial
offerings that are clearly part of a single plan of financing to
avoid integration.'' Id.
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Another potential concern is that a decrease in the integration of
multiple offerings might result in inadvertent overlaps in solicitation
of investors for offerings with different communications provisions.
For example, Rule 506(b) and Section 4(a)(2) offerings, which do not
allow general solicitation, may be preceded by offerings relying on
exemptions that allow general solicitation (such as Regulation
Crowdfunding, Regulation A, or Rule 506(c)), which could condition the
market for the subsequent private placement offering. This may
marginally increase risks to non-accredited investors that may
participate in the subsequent private placement offering to the extent
such investors rely on the general solicitation, because private
placement offerings incorporate fewer investor protections.\618\
Several factors are expected to largely alleviate these potential risks
to investors. Importantly, the amendments do not alter the substantive
requirements, including investor protections, associated with
individual offering methods. The amendments more closely align issuer
efforts to comply with integration provisions and requirements of the
respective exemptions, including, importantly, the investor protection
provisions of each respective exemption. Moreover, nothing in the
amendments eliminates the requirements of the respective exemption or,
in the context of registered offerings, the registration and gun
jumping provisions of the Securities Act. New Rule 152 specifies that
the provisions of the rule will not have the effect of avoiding
integration for any transaction or series of transactions that,
although in technical compliance with the rule, is part of a plan or
scheme to evade the registration requirements of the Securities Act.
Further, issuers remain prohibited from using general solicitation in a
Rule 506(b) offering, through any means, irrespective of the
integration amendments.
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\618\ For instance, Regulation A and Regulation Crowdfunding
offerings are subject to more extensive substantive disclosure
requirements. Rule 506(c) offerings do not incorporate disclosure
requirements but require verification of accredited investor status,
reducing the likelihood of inadvertent non-accredited investor
participation, compared to a Rule 506(b) offering.
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The amendments contain several other specific safeguards that are
expected to minimize potential costs and risks to investors. Rule
152(a)(1) requires that for an exempt offering prohibiting general
solicitation, the issuer must have a reasonable belief, based on the
facts and circumstances, with respect to each purchaser in the exempt
offering prohibiting general solicitation, that the issuer (or any
person acting on the issuer's behalf) either did not solicit such
purchaser through the use of general solicitation, or established a
substantive relationship with such purchaser prior to the commencement
of the exempt offering prohibiting general solicitation. This provision
is expected to minimize the effect on investors of possible
solicitation overlaps in cases of multiple offerings. This provision
further bolsters existing solicitation restrictions in the individual
exemptions and, crucially, focuses the integration analysis on the
requirement that the issuer comply with solicitation restrictions
intended to protect investors.
Further, Rule 152(a)(2) provides that an issuer conducting two or
more concurrent exempt offerings permitting general solicitation, in
addition to satisfying the particular requirements of each exemption
relied on, general solicitation offering materials for one offering
that include information about the material terms of a concurrent
offering under another exemption may constitute an offer of the
securities in such other offering, and therefore the offer must comply
with all the requirements for, and restrictions on, offers under the
exemption being relied on for such other offering, including any legend
requirements and communications restrictions. This requirement will
strengthen investor protection by assuring that one exemption is not
being improperly used to make offers under the second exemption,
without being subject to the same offering restrictions. The legend
requirement will provide notice to investors and thereby help minimize
potential confusion about the offering methods, reducing the risk of
uninformed investor decisions as a result of reliance on preliminary
information contained in such solicitations.
[[Page 3558]]
The amended non-exclusive safe harbors from integration are
designed to minimize potential risks to investors. The 30-day period in
the first safe harbor is expected to minimize inadvertent overlaps
between offerings and investor solicitation for different offerings
while providing issuers greater flexibility to adjust their financing
strategy as a result of evolving circumstances. For an exempt offering
for which general solicitation is not permitted that follows by 30
calendar days or more an offering that allows general solicitation, the
provisions of Rule 152(a)(1) shall apply,\619\ which is expected to
further mitigate such concerns. In addition, if an issuer conducts more
than one offering under Rule 506(b), the number of non-accredited
investors purchasing in all such offerings within 90 calendar days of
each other may not exceed 35. This requirement is expected to address
concerns that failure to integrate multiple Rule 506(b) offerings could
result in sales to a large number of non-accredited investors.
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\619\ The provision requires that the issuer must have a
reasonable belief, based on the facts and circumstances, with
respect to each purchaser in the exempt offering prohibiting general
solicitation, that the issuer (or any person acting on the issuer's
behalf) either: (i) Did not solicit such purchaser through the use
of general solicitation, or (ii) established a substantive
relationship with such purchaser prior to the commencement of the
exempt offering prohibiting general solicitation.
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The second safe harbor involves offerings under Rule 701 or
Regulation S. As discussed above, offers and sales pursuant to Rule 701
and employee benefit plans are limited to employees, consultants and
advisors, with whom the issuer has written compensation plans or
agreements. Given the relationship between these investors and the
issuer, excluding such offerings from integration is not likely to
raise meaningful investor protection concerns. The amendments also
codify a long-standing Commission position with respect to integration
of offshore transactions made in compliance with Regulation S with
registered domestic offerings or domestic offerings that satisfy the
requirements for an exemption from registration under the Securities
Act.\620\ When determining the availability of this safe harbor, it
will still be necessary to assess each transaction separately for
compliance with Regulation S or the other exemption. After considering
commenter input, to avoid disruption to the existing Regulation S
market practices, we are not adopting the proposed amendment to
Regulation S that would have changed the definition of ``directed
selling efforts'' in Rule 902 nor the proposed requirement that a
Regulation S issuer that engages in general solicitation activity
prohibit resales to U.S. persons of the Regulation S securities for a
period of six months from the date of sale except to QIBs or IAIs. We
recognize that general solicitation activity undertaken in connection
with offers and sales under an exemption from registration concurrent
with a Regulation S offering may raise concerns about flowback of the
Regulation S securities to the United States. However, the Commission
has previously addressed the risks related to abuse of Regulation S by
imposing enhanced restrictions applicable to offshore sales of equity
securities of domestic issuers \621\ and we are of the view that these
existing requirements will continue to be effective in addressing such
concerns.
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\620\ See Offshore Offers and Sales (Regulation S), Release No.
33-7505 (Feb. 17, 1998) [63 FR 9632 (Feb. 25, 1998)] (``Offshore
Offers and Sales Release''), at Section III.C.1.
\621\ See Offshore Offers and Sales Release.
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The third safe harbor concerns offerings for which a Securities Act
registration statement has been filed following a completed or
terminated offering. The third safe harbor provides that an offering
for which a Securities Act registration statement has been filed will
not be integrated if it is made subsequent to a terminated or completed
offering for which general solicitation is not permitted. Because
private placements would continue to restrict general solicitation, the
impact on investors in the private placement, most of which are deemed
to have the financial sophistication and ability to sustain the risk of
loss of investment or fend for themselves, is likely to be minimal. In
turn, because private placements do not permit general solicitation,
and because the extensive registration requirements apply to the
registered offering, it is unlikely to have any impact on investors in
the registered offering. The third safe harbor also provides that a
registered offering will not be integrated if made subsequent to a
completed or terminated exempt offering for which general solicitation
is permitted but that was either limited to QIBs and IAIs, or was
terminated or completed more than 30 calendar days prior to
commencement of the registered offering. This is similar to current
Rule 147(h), Rule 147A(h), and Rule 255(e) of Regulation A. Because of
the extensive protections built into the registration requirements and
the 30-day waiting period that would apply if a solicitation involved
investors other than QIBs or IAIs, this safe harbor is unlikely to have
adverse impacts on investors in the registered offering. In cases where
solicitation was limited to QIBs and IAIs, due to the sophistication of
those investors, we do not believe that the lack of a 30-day waiting
period in the integration safe harbor meaningfully affects investor
protection. The amendment is also consistent with Securities Act
Section 5(d) and Rule 163B, which allow solicitation of QIBs and IAIs
at any time prior to a registered offering.
The fourth safe harbor extends the approach in Regulation A and
Rules 147 and 147A and in the guidance regarding Regulation
Crowdfunding to provide that offers and sales made in reliance on an
exemption for which general solicitation is permitted will not be
integrated if made subsequent to any prior terminated or completed
offering. The disclosure and substantive requirements of these
exemptions should minimize potential costs to investors from not
integrating these offerings with prior offers and sales.
We believe these amendments appropriately calibrate the effort
required on the part of issuers to address potential overlaps between
multiple offerings by the same issuer that may raise investor
protection concerns. Overall, because the amendments contain anti-
evasion language and issuers must continue to meet the conditions of
each exemption they are relying on, and because investor protection
provisions of each exemption as well as general antifraud provisions
continue to apply, the amendments are not expected to have significant
adverse effects on investor protection.
We recognize that issuers seeking to rely on one or more of the
integration provisions will incur costs of analyzing the facts and
circumstances of the contemplated offerings and/or the respective
integration safe harbors. While we believe that the amendments
substantially simplify and streamline the integration safe harbors, we
recognize that some issuers might find that navigating the amended
integration framework requires additional time and effort. Because use
of the integration safe harbors will remain voluntary, we expect that
issuers will only rely on the safe harbors if such reliance might
reduce their compliance costs.
c. Effects of Efficiency, Competition, and Capital Formation
The amended integration provisions are expected to improve capital
formation by enabling issuers to combine financing under different
[[Page 3559]]
exemptions and registered offerings more optimally as part of their
financing strategy. However, the net capital formation benefits may be
modest for issuers that do not need multiple offerings (e.g., relying
on a single Rule 506(b) offering with no, or few, non-accredited
investors but seeking a larger amount of financing).
It is unclear how the integration amendments will affect
competition for investor capital. To the extent the amendments reduce
issuer compliance costs associated with accessing a broader range of
offering exemptions, competition for investor capital in those market
segments might increase. However, net effects on overall competition
for investor capital may be limited to the extent that issuers
reallocate between offering exemptions or additional investor capital
is drawn to these markets under the amendments.
As discussed above, the amendments might offer the greatest
benefits to smaller issuers that have varying financing needs or to
issuers that need to rely on multiple offering exemptions to meet their
financing needs (e.g., because they lack an established accredited
investor network to support financing exclusively through Rule 506(b)
and need to rely on non-accredited investors or general solicitation).
By streamlining and harmonizing integration safe harbors, the
amendments are expected to improve the efficiency and reduce the cost
of an issuer's compliance efforts, particularly for issuers conducting
multiple offerings.
d. Reasonable Alternatives
As an alternative, we could adopt a uniform safe harbor with a time
period other than 30 days (e.g., 15, 45, 60, 75, or 90 days). Compared
to the final amendments, the alternative of a universal safe harbor
with a shorter (longer) time period would reduce (increase) the
likelihood that multiple offerings are integrated and, accordingly,
reduce (increase) issuer costs of compliance. Compared to the final
amendments, the alternative of a safe harbor with a shorter (longer)
time period would provide issuers with greater (lower) flexibility in
tailoring their capital raising strategy to changing financing needs
and market conditions. Compared to the final amendments, such an
alternative also might increase (reduce) the number of instances where
issuers improperly divide a single plan of financing into multiple
offerings.
As another alternative, we could replace the integration doctrine
with general anti-evasion principles \622\ or a disclosure
requirement.\623\ Compared to the amendments, this alternative would
increase the likelihood that multiple offerings could be conducted
consistent with Section 5 or the terms of any applicable exemptions
and, accordingly, reduce costs of compliance for some issuers that seek
to avoid or postpone registration. However, conducting an anti-evasion
analysis or providing disclosures in cases of multiple offerings under
this alternative could increase compliance costs for some issuers,
compared to the amendments, depending on the nature of the disclosure
requirement and issuer circumstances. Compared to the final amendments,
this alternative would provide issuers with greater flexibility in
tailoring their capital raising strategy to changing financing needs
and market conditions. However, compared to the final amendments, such
an alternative also would likely increase the number of instances where
issuers improperly divide a single plan of financing into multiple
offerings, even in the presence of general anti-evasion or disclosure
requirements.
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\622\ See CrowdCheck Letter. In a comment on the Concept
Release, this commenter explained its view that the ``integration
doctrine should only be retained as an anti-avoidance mechanism
where an issuer artificially divides an offering in order to comply
with a number-of-investors or dollar offering limit.'' See
CrowdCheck Concept Release Letter.
\623\ See J. Clarke Letter (suggesting to replace the concept of
integration with a form required by all issuers to file and keep
current describing all historical and current exempt and registered
offerings made by the issuer).
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The amendments replace the five-factor test. As another
alternative, we could codify the use of the five-factor test for all
analyses of integration.\624\ Compared to the final amendments, such an
alternative could be more successful in identifying instances where
issuers improperly divide what is economically a single offering into
multiple offerings to avoid exemption limitations. However, it also
would result in additional costs for issuers and reduced flexibility to
combine multiple offering methods.
---------------------------------------------------------------------------
\624\ See CFA Letter; and Md. St. Bar Assoc. Letter (suggesting
that the five-factor test be retained).
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2. General Solicitation and Offering Communications
a. ``Demo Days'' and Similar Events
As discussed in greater detail in Section II.B.1 above, we are
adding certain ``demo day'' communications to the list of
communications that will not be deemed general solicitation. In a
change from the proposal, in response to comments, we are expanding the
types of entities that may sponsor an event in reliance on the
exemption to include State governments and instrumentalities of State
and local governments (in addition to local governments, as proposed).
We are also revising the definition of ``angel investor group'' to
specify that, such a group must have ``defined'' processes and
procedures for making investment decisions, but that such processes and
procedures do not necessarily need to be written. In response to
commenters,\625\ we are also revising the information that issuers may
convey about an offering of securities during a ``demo day'' to add the
unsubscribed amount in an offering. These changes may incrementally
increase the reliance on the exemption, compared to the proposed
provision. In addition, as discussed above, to address concerns raised
by commenters with respect to the possibility of offering-related
communications being made broadly to non-accredited investors, we are
adopting certain limitations on the pool of investors that may
virtually attend such events. This change may incrementally reduce
reliance on the exemption, compared to the proposed provision.
---------------------------------------------------------------------------
\625\ See, e.g., IAA Letter; ACA Letter; Transcript of SEC Small
Business Capital Formation Advisory Committee (May 8, 2020),
available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 70. An issuer would also be able to
disclose at a ``demo day,'' as proposed, that (i) it is in the
process of offering or planning to offer securities; (ii) the type
and amount of securities being offered; and (iii) the intended use
of the proceeds of the offering.
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i. Benefits
The amendments to Rule 148 specify that certain limited ``demo
day'' activities would not be deemed general solicitation. These events
are generally organized by a group or entity (such as a university,
angel investors, an accelerator, or an incubator) that invites issuers
to present their businesses to potential investors, with the aim of
securing investment. These amendments are expected to benefit issuers
by expanding the range of options for communicating about their
business with prospective investors without incurring the cost of
restrictions associated with general solicitation and by allowing them
to more efficiently access potential investors, as supported by various
commenters.\626\ These benefits may be relatively more pronounced for
small and emerging issuers that may not have a sufficient existing
angel investor network to rely on in a Rule 506(b) or Section 4(a)(2)
offering. The additional restrictions on the virtual participation of
prospective
[[Page 3560]]
investors in ``demo day'' events excluded from the definition of
general solicitation are expected to reduce the likelihood of non-
accredited investor participation, thus decreasing potential risk to
investors.
---------------------------------------------------------------------------
\626\ See supra note 216.
---------------------------------------------------------------------------
ii. Costs
Several commenters expressed concern about the effect of the
amendments on investors,\627\ for example, because such expanded use of
``demo day'' activities could lead to an increase in instances of
fraud.\628\ Overall, we expect costs to investors from the ``demo day''
amendments to be modest because the amendments significantly restrict
permissible activities of ``demo day'' sponsors. In particular, the
sponsor of the seminar or meeting will not be allowed to: make
investment recommendations or provide investment advice to attendees of
the event; engage in any investment negotiations between the issuer and
investors attending the event; charge attendees of the event any fees,
other than reasonable administrative fees; receive any compensation for
making introductions between event attendees and issuers or for
investment negotiations between such parties; or receive any
compensation with respect to the event that would require registration
of the sponsor as a broker-dealer or an investment adviser. These
restrictions are expected to mitigate the risk that investors would be
improperly induced into an investment as a result of misleading
information or sales pressure from financially incentivized ``demo
day'' sponsors.
---------------------------------------------------------------------------
\627\ See supra note 222.
\628\ See Better Markets Letter.
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iii. Effects on Efficiency, Competition, and Capital Formation
The final amendments are expected to make it easier for issuers to
participate in ``demo days'' without incurring the costs of
restrictions associated with general solicitation. To the extent that
the amendments encourage some additional issuers to participate in
``demo days,'' and such participation facilitates their efforts to
raise capital, issuers might realize capital formation benefits.
Overall, the effects of the amendments on efficiency, competition, and
capital formation are expected to be modest because issuers may offer
securities to the same individuals and groups other than through a
``demo day''.
iv. Reasonable Alternatives
As an alternative, we could limit the ``demo day'' exception under
the amendments by prohibiting any form of control or affiliation with
the issuer or group of issuers, prohibiting entities whose sole or
primary purpose is to attract investors to private issuers, and
limiting issuer's discussion to factual business information and
prohibiting discussion of any potential securities offering, as
suggested by one commenter.\629\ This alternative would potentially
reduce the risk of investors receiving biased information about the
investment opportunity at the ``demo day''. However, the restrictions
under this alternative could significantly reduce the flexibility for
issuers to solicit prospective investors and raise capital.
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\629\ See NASAA Letter.
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As another alternative, we could adopt a definition of general
solicitation that would either narrow or expand the scope of
communications that constitute general solicitation. The alternative of
narrowing (expanding) the scope of communications that constitute
general solicitation, either through changes to the examples of
communications that constitute general solicitation or through a
definition of general solicitation, would provide greater (lower)
flexibility to issuers with regard to the manner of communicating
offers of securities and reaching prospective investors, potentially
expanding (limiting) the ability of issuers that lack an established
network of investors with whom they have a pre-existing relationship to
raise capital through an exempt offering. Narrowing (expanding) the
scope of communications that constitute general solicitation also could
expose investors, including non-accredited investors, to more (fewer)
offers of securities from prospective issuers. Additional offers of
securities might reduce investor search costs for investors eligible
and seeking to invest in the offerings of issuers that engage in
solicitation, enabling investors to potentially make more informed
decisions and allocate capital more efficiently to a broader range of
investment opportunities, and vice versa. The alternative of providing
a specific definition of general solicitation might incrementally
reduce the compliance costs of issuers to determine whether
communications that fall outside the list of provided examples
constitute general solicitation. However, this alternative could
decrease the flexibility for issuers to consider all relevant facts and
circumstances in determining whether a particular communication
constitutes general solicitation.
As another alternative, we could simplify the existing framework
for all exempt offerings by deregulating offers, thus eliminating
general solicitation restrictions and focusing on disclosure
requirements for sales.\630\ This alternative would significantly
expand the options for pre-offering and offering-related
communications, giving issuers greater flexibility and reducing costs
compared to the final amendments, some of which expand pre-offering
communications but impose additional conditions (such as filing and
legending). However, by shifting the investor protections to
requirements for sales and antifraud provisions, this alternative might
result in investors that are used to relying on information in offers
having to wait for the disclosures required in conjunction with a sale.
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\630\ See CrowdCheck Letter.
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b. Solicitations of Interest and Other Offering Communications
As discussed in greater detail in Section II.B.2 above, we are
adopting a generic test-the-waters exemption that would permit an
issuer to use testing-the-waters materials for an offer of securities
prior to making a determination as to the exemption under which the
offering may be conducted. In connection with this exemption, we are
requiring that the generic solicitation materials be made publicly
available as an exhibit to, or with, the offering materials filed with
the Commission, if the Regulation A or Regulation Crowdfunding offering
is commenced within 30 days of the generic solicitation. Further, if
the issuer sells securities under Rule 506(b) within 30 days of the
generic solicitation to non-accredited investors, the issuer would be
required to provide such investors with any written communication used
under the generic testing-the-waters exemption. We are also expanding
permissible offering communications under Regulation Crowdfunding by
permitting testing the waters prior to filing a Form C with the
Commission. Issuers will be required to use legends and to include any
solicitation materials with the Form C that is filed with the
Commission. The economic effects of the amendments will be limited if
issuers are reluctant to test the waters, for example, as a result of
the filing requirements or applicable State restrictions. Finally, as
discussed in Section II.B.3 above, we are amending Rule 204 to expand
communications permissible under Regulation Crowdfunding after the
filing of Form C.
[[Page 3561]]
i. Benefits
In general, allowing issuers to gauge interest through expanded
testing the waters is expected to reduce uncertainty about whether an
offering could be completed successfully.\631\ Allowing solicitation
prior to conducting an offering will enable issuers to determine market
interest in their securities before incurring the costs of preparing
and conducting an offering. Testing the waters before filing can reduce
the risk of a failed offering and the associated reputational costs.
If, after testing the waters, the issuer is not confident that it would
attract sufficient investor interest, the issuer could consider
modifying offering plans or the target amount of the offering,
reconsidering the contemplated offering structure and terms, postponing
the offering, or exploring alternative methods of raising capital. This
option might be useful for smaller issuers, especially early stage
issuers, first-time issuers, issuers in lines of business characterized
by a considerable degree of uncertainty, and other issuers with a high
degree of information asymmetry. The ability to engage in testing-the-
waters communications might attract certain issuers--those that may be
uncertain about the prospects of raising investor capital--to consider
using an exempt offering, thus potentially promoting competition for
investor capital as well as capital formation. Importantly, the
amendments could benefit issuers that find after testing the waters
that their offering is unlikely to be successful and choose not to
proceed with an offering, thus saving disclosure preparation and filing
costs (including, where applicable, the cost of review or audit of
financial statements by an independent accountant), lowering the risk
of disclosure of potentially sensitive proprietary information to
competitors and mitigating the reputational cost from a failed
offering.
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\631\ See supra notes 233 (discussing commenter support for
generic testing the waters) and 253 (discussing commenter support
for testing the waters under Regulation Crowdfunding) and
accompanying text.
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Enabling issuers to engage in generic testing-the-waters
communications prior to determining the specific exemption type may
provide additional flexibility to gauge market interest that is likely
to be especially valuable for smaller, less well known issuers that may
lack an accurate understanding of prospective investor demand for their
securities. Similarly, permitting issuers to solicit investor interest,
orally or in writing, in Regulation Crowdfunding offerings is expected
to benefit issuers by enabling them to gauge investor interest in a
prospective Regulation Crowdfunding offering before incurring the full
costs of preparing and filing an offering circular.
The requirement to include legends is expected to provide notice to
investors of the preliminary nature of these communications. Issuers
that proceed with an offering under Regulation A or Regulation
Crowdfunding after testing the waters will be required to include as
exhibits to the offering statement any written materials used in a
generic testing-the-waters communication within 30 days prior to the
filing of a Regulation A or Regulation Crowdfunding offering statement.
Issuers will also be required to include as exhibits any Regulation
Crowdfunding testing-the-waters materials. Combined, these requirements
are expected to provide informational benefits to investors and allow
them to compare the solicitation materials with the offering statement
disclosures, leading to potentially more informed investment decisions.
The requirement to provide materials used for a generic testing-the-
waters solicitation to any non-accredited investors in a Rule 506(b)
offering that occurs within 30 days of such solicitation is expected to
incrementally enhance the ability of investors in the offering to make
informed decisions.
The amendments expanding communications permissible under
Regulation Crowdfunding after the filing of Form C are expected to
benefit issuers by allowing greater flexibility to communicate with
prospective investors about the offering.\632\ In addition to
permitting oral communications, in response to comments received, we
are expanding the information that an issuer may provide in accordance
with Rule 204 to include a brief description of the use of proceeds of
the offering and information on the progress of the offering toward its
funding goals. We are also amending Rule 204 to clarify that an issuer
may provide information about the terms of an offering under Regulation
Crowdfunding in the offering materials for a concurrent offering (such
as a Form 1-A for a concurrent Regulation A offering or a Securities
Act registration statement). Being able to communicate with prospective
investors outside the communications channels provided by the online
crowdfunding platform is expected to facilitate the efforts of issuers
to solicit prospective investors and advertise the offering,
potentially resulting in a higher rate of offering success and more
capital formation, particularly for lesser known, small issuers. Off-
portal communications about the terms of the offering are also expected
to incrementally improve the information available to investors and
reduce costs of searching for information about offering terms for some
prospective investors (e.g., investors that may have prior knowledge
of, or be customers of, the issuer) that would prefer to find out about
offering terms without first reviewing the crowdfunding platform's
website and communications channels. Should such prospective investors
decide to invest in an offering, they would still have to do so through
the portal and would have access therein to the filed offering
materials, other offering information, and investor education materials
required by Regulation Crowdfunding. Communications intended to drive
traffic to the intermediary's website, and therefore to the issuer's
offering, would continue to be governed by the Regulation Crowdfunding
advertising restrictions.
---------------------------------------------------------------------------
\632\ See supra note 269 (discussing commenters that supported
expanded oral communications by Regulation Crowdfunding issuers).
---------------------------------------------------------------------------
ii. Costs
We recognize that there might also be potential costs associated
with expanding the use of testing-the-waters communications in
connection with a contemplated Regulation Crowdfunding offering or
another exempt offering. If the contents of the offering circular
differ substantively from the material distributed through testing-the-
waters communications, and if investors rely on testing-the-waters
materials when making investment decisions, this might lead investors
to make less informed investment decisions.\633\ For example, if the
information conveyed through testing-the-waters communications is an
incomplete representation of the risk of an offering, and if investors
fail to read the subsequent offering circular before making the
investment decision, they might make a less informed investment
decision. These investor costs might be exacerbated to the extent that,
currently, investors in Regulation Crowdfunding offerings are likely to
be small and potentially limited in their capacity to process
information contained in testing-the-waters communications. The removal
of accredited investor investment limits under the Regulation
Crowdfunding amendments is expected to increase the participation of
accredited investors in such offerings
[[Page 3562]]
and thus the average Regulation Crowdfunding investor's size and
financial sophistication.
---------------------------------------------------------------------------
\633\ See supra notes 237 (discussing commenters that expressed
concern about generic testing the waters) and 258 (discussing
commenters that opposed testing the waters under Regulation
Crowdfunding), and accompanying text.
---------------------------------------------------------------------------
These potential investor protection concerns are expected to be
alleviated by several factors:
The application of the antifraud provisions of the Federal
and State securities laws; \634\
---------------------------------------------------------------------------
\634\ Testing-the-waters communications under Regulation
Crowdfunding would be treated as offers of securities, similar to
testing-the-waters communications under Regulation A, Section 5(d),
and the recently adopted Rule 163B.
---------------------------------------------------------------------------
For issuers that proceed with a Regulation Crowdfunding
offering:
[cir] The availability of an offering circular, allowing investors
to review disclosures compliant with Regulation Crowdfunding prior to
investing;
[cir] The requirement that written testing-the-waters materials be
included with Form C, allowing the public and Commission staff to
review written solicitation materials and compare them to the contents
of the offering circular;
[cir] The availability of investor education materials required to
be provided by crowdfunding intermediaries before investing; and
[cir] The continued application of other provisions of Regulation
Crowdfunding, including ones expected to provide additional investor
protection, such as investment limits for non-accredited investors,
offering limits, crowdfunding intermediary requirements, periodic
reporting requirements, and issuer eligibility restrictions; and
The reputational incentives of issuers and intermediaries,
as well as the risk of litigation (particularly for issuers and
intermediaries that have assets and that engage in testing-the-waters
communications).
Further, concerns about costs of expanding testing-the-waters
communications to investors should be considered in the context of the
baseline. Investors in Regulation Crowdfunding offerings today might
perform an incomplete analysis of the offering risks if they base their
investment decision on the promotional video or summary information
from the crowdfunding platform's campaign page and fail to review the
entire contents of the offering materials. Low investment minimums
(many around $100, and some as low as $25) might make it optimal for
investors to allocate a limited amount of time to due diligence
regarding prospective crowdfunding investments. While some unscrupulous
issuers might seek to disseminate misleading information through
testing-the-waters communications, such issuers or intermediaries
already could engage in misleading communications today, and such
misleading offering communications would remain violations of the
antifraud provisions of the Federal securities laws.
The amendments to Rule 204 of Regulation Crowdfunding expanding the
ability to advertise the ongoing offering and discuss it in off-portal
oral and written communications with prospective investors might
similarly result in some investors receiving incomplete information
about the offering from the issuer, and, if such investors fail to
review the offering circular and other filed offering materials,
potentially making less well informed investment decisions.\635\
---------------------------------------------------------------------------
\635\ See supra note 270 (discussing commenters that opposed
expanded oral communications by Regulation Crowdfunding issuers).
---------------------------------------------------------------------------
Several factors are expected to mitigate potential costs to
investors due to expanded off-portal communications:
The availability of the offering circular containing
disclosures compliant with Regulation Crowdfunding prior to investing,
as well as the continued applicability of Rule 204 requirements, such
as the requirement to include a link directing the potential investor
to the intermediary's platform where the Form C disclosure document is
available;
The application of antifraud provisions of Federal and
State securities laws;
The availability of investor education materials required
to be provided by funding portals;
The other provisions of Regulation Crowdfunding, including
ones expected to provide additional investor protection, such as
investment limits, offering limits, crowdfunding intermediary
requirements, periodic reporting requirements, and issuer eligibility
restrictions, continue to apply; and
The reputational incentives of issuers, as well as the
risk of litigation (for issuers with assets).
The amendments that allow issuers to engage in testing the waters
prior to determining the specific exemption type might lead to investor
confusion with regard to the regulatory framework applicable to the
contemplated offering, particularly for non-accredited investors that
may be less sophisticated. However, for issuers that proceed with an
exempt offering, the investor protections of the respective exemption
would continue to apply. Importantly, because investors would be able
to review the offering circular that clearly delineates the exemption
relied on for issuers that proceed with a Regulation A or Regulation
Crowdfunding offering, investors are expected to receive the disclosure
necessary to reach an informed investment decision. Furthermore, should
an issuer elect to proceed with a Regulation A or Regulation
Crowdfunding offering within 30 days of a generic testing-the-waters
communication, the testing-the-waters materials must be filed as an
exhibit to, or with, the offering statement, enabling investors and the
Commission staff to review testing-the-waters materials and compare
them against the disclosures in the offering statement. In cases where
an issuer decides to proceed with a Rule 506(c) offering after testing
the waters, non-accredited investors that might have received
solicitations would remain restricted from participation in a Rule
506(c) offering.
In cases of issuers that choose not to proceed with a Rule 506(c),
Regulation A, or Regulation Crowdfunding offering following testing the
waters for an exempt offering, but that choose instead to undertake an
exempt offering under an exemption that does not permit general
solicitation, the amendments are not expected to have significant
effects on investors in such a private placement or registered
offering. Restrictions specific to private placements, including a
restriction on general solicitation for a Rule 506(b) or a Section
4(a)(2) offering would continue to apply in that case. In cases of
issuers proceeding with a registered offering, gun jumping provisions
of the Securities Act and other investor protections associated with
registered offerings (including staff review, Section 11 liability,
disclosure requirements in the registration statement, and Exchange Act
reporting requirements) would continue to apply.
Because the use of testing-the-waters communications will remain
voluntary, we anticipate that issuers will rely on testing-the-waters
communications only if the benefits anticipated by issuers justify the
expected costs. Issuers that elect to test the waters may incur costs,
including direct costs of identifying prospective investors and
developing testing-the-waters solicitation materials; indirect costs of
potential disclosure of proprietary information to solicited investors;
and in some instances, potential legal costs associated with liability
arising from testing-the-waters communications with prospective
investors. We note that issuers that proceed with an exempt offering
without testing the waters similarly might incur costs of searching and
soliciting investors, either on their own or through an intermediary.
[[Page 3563]]
iii. Effects of Efficiency, Competition, and Capital Formation
The expansion of permissible testing the waters prior to exempt
offerings is expected to facilitate capital formation for small issuers
by giving prospective issuers that might not otherwise consider an
exempt offering a low-cost method of assessing investor interest in a
potential offering and efficiently adjusting their financing strategy
to reflect information about market demand. These effects are expected
to be particularly significant for issuers contemplating Regulation
Crowdfunding offerings that presently have to incur the compliance
costs of preparing and filing Form C and the risk of disclosure of
proprietary information to competitors, as well as the reputational
risk of a failed offering, and do not have a cost-effective way of
gauging investor demand. Similarly, the amendments to expand
permissible issuer communications in Regulation Crowdfunding offerings
might promote capital formation in the Regulation Crowdfunding market
by allowing issuers to more effectively reach prospective investors as
part of marketing the offering and to more efficiently structure the
offering based on feedback from prospective investors. Combined, these
amendments might make it easier for the smallest issuers with low
investor recognition and limited or no securities offering experience
to access the Regulation Crowdfunding market or issue securities
pursuant to another offering exemption, resulting in potential positive
effects on competition. To the extent that these amendments result in
issuers switching between offering exemptions, the net effects on
capital allocation might be modest. However, in that scenario some
issuers might still benefit from a lower cost of capital if they are
able to obtain preliminary information that helps them to identify the
most cost-effective offering method and terms that are likely to
attract sufficient investor demand.
iv. Reasonable Alternatives
The final amendments permit testing-the-waters communications about
a contemplated exempt offering for issuers that have not yet narrowed
their offering plans to a specific exemption, so long as the testing-
the-waters materials contain required legends and, should an issuer
proceed with an exempt offering under Regulation A or Regulation
Crowdfunding within 30 days, that written testing-the-waters
communications be filed. As an alternative, we could have permitted
testing-the-waters communications in conjunction with a contemplated
exempt offering that does not currently permit such communications, but
required the issuer to have determined and to specify in a legend the
offering exemption that would be used. Compared to the proposal, by
informing solicited investors about the contours of the exempt offering
that is being contemplated, this alternative could potentially increase
the utility of the information in the solicitation to prospective
investors (e.g., whether the offering would be open to non-accredited
investors, and if it is, whether investment limits or other
requirements apply). However, because small and early stage issuers
might be testing the waters to gauge their optimal offering strategy,
including how much capital might in principle be raised (and thus,
whether a Regulation A offering, or for instance, a Regulation
Crowdfunding offering, is more cost-effective), such an alternative
would significantly limit the flexibility of issuers to obtain valuable
information from pre-offering communications. It also may not result in
meaningful investor protection benefits compared to the final
amendments in light of the legend requirements, antifraud provisions,
and, for issuers that proceed with an offering, the exhibit filing
requirements and other investor protections specific to the respective
exemption the issuer uses.
The final amendments permit testing-the-waters communications in
connection with Regulation Crowdfunding offerings prior to the filing
of Form C. As an alternative, we could permit testing-the-waters
communications both before and after the filing of Form C.\636\ This
alternative would provide greater flexibility to issuers compared to
the final amendments, potentially increasing the likelihood that the
issuer would raise the desired amount of capital. This option might be
most useful for smaller and early stage issuers. This alternative might
also require investors to expend additional effort to compare testing-
the-waters communications after the filing of an offering statement
with the filed offering statement disclosures. However, the incremental
economic effects of this alternative on investors and issuers might be
limited because of the advertising permitted under Rule 204 and because
the incremental costs of filing testing-the-waters materials might
discourage the use of testing the waters after the filing of Form C
under this alternative.
---------------------------------------------------------------------------
\636\ Under Regulation A, testing the waters is permitted before
and after the filing of Form 1-A before the qualification of Form 1-
A. However, unlike Regulation Crowdfunding, Regulation A issuers are
not able to accept investor commitments between the filing and the
qualification of Form 1-A. Under Regulation Crowdfunding, issuers
may accept investor commitments upon the filing of Form C because
Commission qualification is not applicable to Form C. Thus,
permitting testing-the-waters communications before the filing of
Form C would be more consistent with the testing-the-waters
communications permissible under Regulation A, before investor
commitments may be accepted.
---------------------------------------------------------------------------
As an alternative, we could require testing the waters to be
conducted through a registered intermediary, as suggested by some
commenters.\637\ Including the registered intermediary in the testing-
the-waters process under the alternative could provide an additional
layer of investor protections, compared to the amendments,
particularly, for non-accredited investors that could participate in a
Regulation Crowdfunding offering if it is launched. However, such
benefits may be attenuated by the other investor protections included
in the amendments (such as the filing requirement and the availability
of the offering circular containing disclosures compliant with
Regulation Crowdfunding prior to investing), and in the event the
offering is launched, by the general investor protections of Regulation
Crowdfunding. Compared to the amendments, this alternative could result
in additional costs for issuers that already incur various other costs
to launch a small offering. By limiting the options for testing-the-
waters communications to intermediary-facilitated communications, this
alternative also could reduce issuer ability and flexibility to reach
prospective investors.
---------------------------------------------------------------------------
\637\ See NextSeed Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------
Issuers that proceed with a Regulation Crowdfunding offering will
be subject to a filing requirement with respect to written testing-the-
waters communications, consistent with Rule 255 of Regulation A. As an
alternative, we could allow testing-the-waters communications prior to
a contemplated Regulation Crowdfunding offering but not impose a filing
requirement. As another alternative, we could waive the filing
requirement for testing-the-waters communications prior to any exempt
offering, including a Regulation A offering. Issuers that have elected
to use testing-the-waters communications have already incurred the cost
of preparing the materials, so the incremental direct cost of the
requirement to file the materials with the Commission would be
relatively low. We recognize that this alternative could reduce the
indirect costs of some
[[Page 3564]]
issuers by limiting the ability of the issuer's competitors to discover
information about the issuer or the costs associated with requesting
confidential treatment for the proprietary portions of the information.
However, we note that this information may become available to
competitors in any event through the solicitation process or as part of
the offering materials (to the extent that the offering materials
contain similar information). Furthermore, removing the requirement to
publicly file the materials for issuers that proceed with an offering
might result in adverse effects on the protection of investors to the
extent that it may facilitate fraudulent statements by issuers to all
or a selected group of investors that might fail to compare the
statements in the solicitation materials against the offering circular.
This consideration is especially salient because testing-the-waters
communications under Rule 255 and under the amendments could be
directed at any investor, including non-accredited investors. On
balance, we believe that the requirements governing the use of testing-
the-waters communications appropriately balance the goals of providing
flexibility to issuers and protection to investors.
Amended Rule 204 allows oral communications with prospective
investors once the Form C is filed, so long as the communications
comply with the requirements of Rule 204, and moderately expands the
information that an issuer may provide in accordance with that rule. As
an alternative, we could expand Rule 204 further, broadening the range
of terms an issuer may advertise or not restricting the scope of issues
that may be addressed in offering advertisements, as suggested by some
commenters.\638\ Such an alternative would provide greater flexibility
to issuers to advertise the offering to prospective investors, which
might increase the likelihood of offering success and yield capital
formation benefits. However, such an alternative might increase
information processing challenges for investors--particularly less
sophisticated investors--that might incur greater effort to compare the
more extensive advertising content with the offering statement
disclosure, or if they are unable to validate the extended advertising
content against the offering statement disclosure, potentially be at
risk of less informed investment decisions.
---------------------------------------------------------------------------
\638\ See supra note 271.
---------------------------------------------------------------------------
3. Rule 506(c) Verification Requirements
As discussed in Section II.C above, to address some of the concerns
about challenges and costs associated with accredited investor status
verification in Rule 506(c) offerings, the amendments add a new item to
the non-exclusive list in Rule 506(c) that allows an issuer (or those
acting on its behalf) to establish that an investor remains an
accredited investor as of the time of sale if the issuer (or those
acting on its behalf) previously took reasonable steps to verify that
investor as an accredited investor, the investor provides a written
representation that the investor continues to qualify as an accredited
investor to the issuer (or those acting on its behalf), and the issuer
(or those acting on its behalf) is not aware of information to the
contrary. After considering commenter input, we are adding a five-year
limitation on the use of this verification method, after which the
issuer must take reasonable steps to verify that the investor is an
accredited investor.
a. Benefits
The addition to the non-exclusive list in Rule 506(c) concerning
verification of investors for which the issuer previously took
reasonable steps to verify accredited investor status is expected to
reduce the cost of verification for issuers that may opt to engage in
more than one Rule 506(c) offering over time with potential repeat
investors.\639\ This new method also may help reduce the risk of harm
to investors from continually having to provide financially sensitive
information to the issuer (or those acting on its behalf) when the
additional investor protection benefits of doing so are limited given
the pre-existing relationship between the issuer (or those acting on
its behalf) and such investors.
---------------------------------------------------------------------------
\639\ See supra note 284 and accompanying text.
---------------------------------------------------------------------------
b. Costs
Generally, because the amendment represents an incremental revision
to the principles-based approach to verification in Rule 506(c), its
costs are expected to be modest. However, we recognize that some
previously verified investors that experience changes in financial
circumstances and lose accredited investor status over time might
provide written representations that they are accredited
investors,\640\ and if issuers are not aware of information to the
contrary, such issuers might sell securities to those non-accredited
investors under Rule 506(c). As noted above, we expect these risks
would be mitigated by the pre-existing relationship between the issuer
(or those acting on its behalf) and such investors. Further, consistent
with some commenters' suggestions,\641\ in a change from the proposal,
we are adopting a time limit in conjunction with this additional means
of verification of accredited investor status. We expect this time
limit will further mitigate the likelihood of the costs to investors
described above.
---------------------------------------------------------------------------
\640\ See supra note 288.
\641\ See supra note 290.
---------------------------------------------------------------------------
c. Effects on Efficiency, Competition, and Capital Formation
Generally, because the final amendments represent an incremental
revision to the principles-based approach to verification in Rule
506(c), we expect modest effects on efficiency, competition, and
capital formation.
d. Reasonable Alternatives
We are adopting amendments to the existing non-exclusive list of
verification methods. As an alternative, we could rescind the non-
exclusive list. Compared to the final amendments, this alternative
could reduce costs for some issuers that presently feel constrained to
use one of the listed verification methods, even though other, less
costly methods may be better suited for their particular facts and
circumstances. However, the effects of eliminating the non-exclusive
list might be limited if issuers that presently rely on the listed
verification methods continue to do so under a more principles-based
approach.
We are allowing issuers to establish that a previously verified
investor remains accredited for up to a five-year period if the
investor provides a representation to that effect and the issuer is not
aware of information to the contrary. As an alternative, as proposed,
we could allow issuers to make such a determination for an unlimited
period of time. Compared to the final amendments, this alternative
could reduce costs for issuers with repeat investors through less
frequent verification of investor status. At the same time, this
alternative could increase the likelihood of having investors that
previously were accredited but subsequently exited accredited investor
status (e.g., due to a change in income or net worth) and thus may have
a lower ability to incur the risks of a Rule 506(c) offering becoming
purchasers in a Rule 506(c) offering.
As another alternative, we could adopt additional means of
verification of accredited investor status (such as
[[Page 3565]]
investment amounts \642\ or self-certification \643\) as suggested by
some commenters.\644\ Compared to the final amendments, these
alternatives would further reduce the costs of accredited investor
status verification for issuers. However, they would result in a
significantly higher likelihood of non-accredited investors becoming
purchasers in an offering involving general solicitation under Rule
506(c). In particular, self-certification would be a significantly less
rigorous means of verification that, in conjunction with general
solicitation, could significantly increase risks to non-accredited
investors. Relatedly, the alternative of basing verification on the
amount invested would increase the likelihood that a non-accredited
investor participates in an offering. Moreover, this alternative would
increase risks to such non-accredited investors because they would be
more likely to have an underdiversified position in the event they
allocate a high investment amount to an investment opportunity under
Rule 506(c) to meet the verification requirement, resulting in a
greater risk of losses to such investors.
---------------------------------------------------------------------------
\642\ See, e.g., CrowdCheck Letter; Invesco Letter; and NextSeed
Letter.
\643\ See, e.g., Sen. Toomey Letter; IPA Letter; and NextSeed
Letter. See also D. Burton Letter; and J. Clarke Letter.
\644\ See supra note 290.
---------------------------------------------------------------------------
As another alternative, we could amend Rule 506(c) to add the fact
that an offering is conducted through a registered intermediary to the
optional means of accredited investor status verification, building on
the suggestion of one commenter.\645\ The benefit of this alternative
compared to the amendments would be to reduce costs for issuers. As
some commenters have stated, the requirement to take reasonable steps
to verify accredited investor status has generally impacted issuers'
willingness to use Rule 506(c).\646\ However, because this alternative
would not involve verifying each purchaser's accredited investor
status, it could significantly increase the likelihood of non-
accredited investors that learned about the offering through general
solicitation under Rule 506(c) becoming purchasers in the offering,
with the associated increase in risks to such investors.
---------------------------------------------------------------------------
\645\ See, e.g., TIAA Letter (recommending not requiring
verification for offerings involving a registered investment
adviser, broker-dealer placement agent or other such intermediary).
\646\ See supra note 285.
---------------------------------------------------------------------------
4. Disclosure Requirements
a. Required Disclosures to Non-Accredited Investors in Rule 506(b)
Offerings
The amendments to Rule 502(b) generally align financial disclosure
requirements for non-reporting companies that sell to non-accredited
investors under Rule 506(b) with the disclosures required for offerings
under Tier 1 and Tier 2 of Regulation A, which also allows sales to
non-accredited investors.
i. Benefits
The amendments to the Rule 502(b) disclosure requirements for sales
to non-accredited investors will lower the burden of preparing
financial disclosures, particularly the costs of audited financial
statements, for issuers in Rule 506(b) offerings up to $20 million that
would no longer be subject to those requirements.\647\ We do not have
information on the costs of an audit in Rule 506(b) offerings involving
sales to non-accredited investors. As a proxy, we consider audit costs
reported by Regulation A Tier 2 issuers and smaller reporting company
issuers. Based on Regulation A Tier 2 offerings qualified from June
2015 through December 2019, the average (median) audit cost, where
reported, was $29,015 ($12,319). Based on information from Audit
Analytics, the average (median) audit fees, where available, for
reporting companies with market capitalization up to $75 million were
$386,876 ($95,000) for fiscal years ending in 2018 or 2019.\648\ We
recognize that these costs may differ from the costs incurred by
issuers in Rule 506(b) offerings to non-accredited investors. Overall,
relatively few non-accredited investors participated in Rule 506(b)
offerings affected by these amendments. We estimate that in 2019 among
new Rule 506(b) offerings by non-reporting issuers other than pooled
investment funds seeking up to $20 million, between approximately 4.6
percent and 9.5 percent had at least one non-accredited investor.\649\
---------------------------------------------------------------------------
\647\ See supra note 313.
\648\ Estimates reflect data as recorded in Audit Analytics as
of August 26, 2020, including the full set of filings due for fiscal
year ending in 2019.
\649\ See supra note 127. This estimate is based on the analysis
of data in initial Form D filings with reported offer size,
excluding pooled investment fund issuers and reporting issuers.
Reporting issuers are identified based on 2019 filings of annual
reports or amendments to them.
---------------------------------------------------------------------------
Lowering costs of sales to non-accredited investors under Rule
506(b) may expand access to capital for some issuers that are not able
to obtain sufficient external financing through other methods or
through sales of securities to accredited investors only under Rule
506(b). Compliance cost savings in the offering process and expanded
access to external financing are expected to enhance shareholder value
and thus benefit the issuer's existing shareholders.
As a result of lower disclosure costs, some issuers in Rule 506(b)
offerings that presently do not sell securities to non-accredited
investors may be more willing to sell securities to non-accredited
investors, which could increase the number of issuers subject to the
amendments compared to the estimates above. If the amendments result in
more issuers selling securities to non-accredited investors under Rule
506(b), those non-accredited investors could benefit from an expanded
set of investment opportunities, which might allow them to allocate
their capital more efficiently. These benefits might be attenuated if
the increase in sales to non-accredited investors under Rule 506(b) is
driven by issuers switching from Rule 504, Regulation A, or Regulation
Crowdfunding offerings, which also accept non-accredited investors, to
Rule 506(b), resulting in little change in the set of investment
opportunities available to non-accredited investors. It is difficult to
predict whether an increase in sales to non-accredited investors under
Rule 506(b), if any, will be due to additional non-accredited investors
in Rule 506(b) offerings or greater participation by existing non-
accredited investors in other issuers' Rule 506(b) offerings. Due to
the limited data disclosed about investors on Form D, we cannot
estimate the number of unique non-accredited purchasers in such
offerings because a single investor may be a purchaser in multiple Rule
506(b) offerings in a given year.
ii. Costs
Scaling Rule 502(b) disclosure requirements for sales to non-
accredited investors--and particularly repealing the requirement to
provide audited balance sheets in offerings up to $20 million--can
result in less informed investor decisions by some non-accredited
investors.\650\ For instance, to the extent that audited financial
statements are valuable for informed investment decisions,\651\ scaled
[[Page 3566]]
disclosures in offerings of up to $20 million might cause some non-
accredited investors to incorrectly value the offered securities and to
make less well informed investment decisions. Further, the elimination
of audit requirements for disclosures to non-accredited investors in
Rule 506(b) offerings of up to $20 million might encourage some issuers
with relatively higher information risk to sell securities to non-
accredited investors given the absence of investment limits in such
offerings. Costs to investor protection from scaling the audit
requirement in Rule 506(b) offerings with non-accredited purchasers may
be higher than in Regulation A offerings because Rule 506(b) offerings
do not undergo Commission review.\652\ The requirement that non-
accredited investors must satisfy the knowledge and experience standard
of 17 CFR 230.506(b)(2)(ii) (``Rule 506(b)(2)(ii)'') in order to be
eligible to participate in an offering under such rule is expected to
mitigate some of these costs. Further, in the aggregate these costs to
investors are expected to be limited by the cap on the number of non-
accredited investors that can participate in a Rule 506(b) offering.
---------------------------------------------------------------------------
\650\ See supra note 314.
\651\ See, e.g., Erik Boyle & Melissa Lewis-Western, The Value-
Add of an Audit in a Post-SOX World (Working Paper, Apr. 2018)
(finding that an audit continues to be associated with reduced
financial statement error at public companies post-SOX and that the
size of the effect is economically significant); Petro Lisowsky &
Michael Minnis, The Silent Majority: Private U.S. Firms and
Financial Reporting Choices (Univ. of Chi. Booth Sch. of Bus.,
Research Paper No. 14-01, Apr. 12, 2018) (finding that ``[n]early
two-thirds [of private firms] do not produce audited GAAP financial
statements. Moreover, while firms with external capital are more
likely to produce audited GAAP statements, we find that thousands of
firms with external debt and dispersed ownership do not. Equity and
trade credit are potentially more important factors than debt in
affecting private firms' production of audited GAAP reports.
Finally, young, high growth firms lacking tangible assets are
significantly more likely to produce audited GAAP reports relative
to established firms with physical assets, suggesting that audited
financial reports play an important information role in capital
allocation when business activity is less verifiable.''); Michael
Minnis, The Value of Financial Statement Verification in Debt
Financing: Evidence from Private U.S. Firms, 49 J. Acct. Res, 457
(2011) (showing the value of audited financial statements for
private debt pricing); David W. Blackwell, Thomas R. Noland, & Drew
B. Winters, The Value of Auditor Assurance: Evidence from Loan
Pricing, 36 J. Acct. Res. 57 (1998) (finding cost of debt reductions
in a small sample of small private firms with audited financial
statements); and Jeong[hyphen]Bon Kim et al., Voluntary Audits and
the Cost of Debt Capital for Privately Held Firms: Korean Evidence,
28 Contemp. Acct. Res. 585 (2011) (confirming the result in a Korean
sample). See also Ciao-Wei Chen, The Disciplinary Role of Financial
Statements: Evidence from Mergers and Acquisitions of Privately Held
Targets, 57 J. Acct. Res. 391 (2019) (examining ``whether requiring
the disclosure of audited financial statements disciplines managers'
mergers and acquisitions (M&As) decisions'' and finding that ``the
disclosure of private targets' financial statements is associated
with better acquisition decisions . . . [and] that this disciplining
effect of disclosure is more pronounced when monitoring by outside
capital providers is more difficult and costly'').
However, two studies using survey data from the Federal
Reserve's Survey of Small Business Finances do not find that an
audit is significantly associated with a lower interest rate in
small privately held firms. See Kristian D. Allee & Teri Lombardi
Yohn, The Demand for Financial Statements in an Unregulated
Environment: An Examination of the Production and Use of Financial
Statements by Privately-Held Small Businesses, 84 Acct. Rev. 1
(2009); and Gavin Cassar, Christopher D. Ittner, & Ken S.
Cavalluzzo, Alternative Information Sources and Information
Asymmetry Reduction: Evidence from Small Business Debt, 59 J. Acct.
& Econ. 242 (2015).
\652\ See NASAA Letter.
---------------------------------------------------------------------------
In evaluating the investor costs of the amendments, we consider the
baseline, which includes similarly scaled requirements for financial
disclosures required to be made to non-accredited investors in
Regulation A Tier 1 and Regulation Crowdfunding offerings of the same
size. However, those offering types are associated with certain
additional provisions intended to protect non-accredited investors,
which are not afforded to non-accredited purchasers in Rule 506(b)
offerings (e.g., Commission qualification and State registration of
Regulation A Tier 1 offerings, offering statement disclosure
requirements in Regulation A and Regulation Crowdfunding offerings, as
well as investment limit, periodic disclosure, and funding portal
requirements in Regulation Crowdfunding offerings). If non-accredited
investors remain infrequently represented in Rule 506(b) offerings, the
aggregate impacts on costs to investors may be limited. However, the
aggregate impacts on investor protection could be amplified if the
scaled requirements encourage additional issuers to accept non-
accredited investors in Rule 506(b) offerings.
iii. Effects on Efficiency, Competition, and Capital Formation
If scaled financial statement disclosures lead to more non-
accredited investor offerings under Rule 506(b), and if such investors
contribute additional capital the issuers would not have otherwise
raised from accredited investors, the amendments may incrementally
promote capital formation through Rule 506(b). If non-accredited
investor capital drawn to Rule 506(b) offerings is mostly reallocated
from other offerings to non-accredited investors (e.g., registered
offerings or offerings under Regulation A, Regulation Crowdfunding,
Rule 504, Rule 147/147A, etc.), the net effects on aggregate capital
formation will be limited. However, in that instance, issuers may still
benefit if they are able to obtain a lower cost of capital under the
amendments (e.g., because of lower compliance costs in Rule 506(b)
offerings, even after providing disclosures to non-accredited
investors, or because non-accredited investors in Rule 506(b) offerings
provide better financing terms).
Streamlining disclosure requirements in Rule 506(b) offerings with
non-accredited investors to be more aligned with those under Regulation
A is expected to make compliance more efficient for those issuers that
undertake these types of offerings along with Rule 506(b) offerings to
non-accredited investors.
The amendments also may incrementally increase the availability of
Rule 506(b) offerings that allow non-accredited investors, potentially
enabling more efficient allocation of capital of non-accredited
investors among investment alternatives that are otherwise unavailable
to them. While non-accredited investors can participate in other exempt
offerings, Rule 506(b) offerings account for the largest share of the
exempt offerings market and draw issuers that typically do not
participate in Regulation A or Regulation Crowdfunding offerings. The
majority of Rule 506(b) offerings are by issuers that are not reporting
companies. While non-accredited investors can invest in registered
offerings, in most cases issuers in registered offerings have a
different profile than issuers in private placements.\653\ Expanding
opportunities
[[Page 3567]]
for investment in operating company and exempt investment fund
offerings under Rule 506(b) might allow non-accredited investors to
construct a more efficient portfolio.\654\ However, as discussed above,
the amendments also may in some cases result in less informed
investment decisions, lowering the efficiency of capital allocation.
---------------------------------------------------------------------------
\653\ Investors in public firms can access more extensive
disclosures and rely on the protections of the Securities Act
registration and Exchange Act reporting regimes. Listed public firms
are more likely to have analyst coverage, which may provide
additional information to investors.
Past academic studies comparing private and publicly listed
firms arrive at somewhat mixed conclusions about investment and
innovation behavior of such firms. For example, one study finds that
public firms' patents rely more on existing knowledge, are more
exploitative, and are less likely in new technology classes, while
private firms' patents are broader in scope and more exploratory.
See Huasheng Gao, Po-Hsuan Hsu, & Kai Li, Innovation Strategy of
Private Firms, 53 J. Fin. & Quantitative Analysis 1 (2018). See also
Daniel Ferreira, Gustavo Manso, & Andr[eacute] C. Silva, Incentives
to Innovate and the Decision to Go Public or Private, 27 Rev. Fin.
Stud. 256 (2014) (showing, in a theoretical model, that private
ownership creates incentives for innovation). Another study shows
that public firms in external finance dependent (but not in internal
finance dependent) industries spend more on research and development
and generate a better patent portfolio than their private
counterparts. See Viral Acharya & Zhaoxia Xu, Financial Dependence
and Innovation: The Case of Public versus Private Firms, 124 J. Fin.
Econ. 223 (2017). A different U.S. study finds that listed firms
invest less and are less responsive to changes in investment
opportunities compared to observably similar, matched private firms,
especially in industries in which stock prices are particularly
sensitive to current earnings. See John Asker, Joan Farre-Mensa, &
Alexander Ljungqvist, Corporate Investment and Stock Market Listing:
A Puzzle?, 28 Rev. Fin. Stud. 342 (2015). But see Naomi E. Feldman
et al., The Long and the Short of It: Do Public and Private Firms
Invest Differently? (Working Paper, 2019) (finding that public firms
invest more in long-term assets--particularly innovation--than
private firms). See also Vojislav Maksimovic, Gordon M. Phillips, &
Liu Yang, Do Public Firms Respond to Investment Opportunities More
than Private Firms? The Impact of Initial Firm Quality (Nat'l Bureau
of Econ. Research, Working Paper No. 24104, Dec. 2017) (finding that
public firms respond more to demand shocks after their IPO and are
more productive than their matched private counterparts,
particularly in industries that are capital intensive and dependent
on external financing); and Sandra Mortal & Natalia Reisel, Capital
Allocation by Public and Private Firms, 48 J. & Quantitative
Analysis 77 (2013) (a cross-country study showing that public listed
firms take better advantage of growth opportunities than private
firms, although the differential only exists in countries with well-
developed stock markets).
Some studies also find that private and public firms differ in
their financing, cash, and payout decisions, cost of capital, and
other characteristics. See, e.g., Kim P. Huynh, Teodora Paligorova,
& Robert Petrunia, Debt Financing in Private and Public Firms, 14
Annals Fin. 465 (2018); Huasheng Gao, Jarrad Harford, & Kai Li,
Determinants of Corporate Cash Policy: Insights from Private Firms,
109 J. Fin. Econ. 623 (2013); Sandra Mortal, Vikram Nanda, & Natalia
Reisel, Why Do Private Firms Hold Less Cash than Public Firms?
International Evidence on Cash Holdings and Borrowing Costs, 113 J.
Banking & Fin. 1 (2020); Roni Michaely & Michael R. Roberts,
Corporate Dividend Policies: Lessons from Private Firms, 25 Rev.
Fin. Stud. 711 (2012); Menachem Abudy, Simon Benning, & Efrat Shust,
The Cost of Equity for Private Firms, 37 J. Corp. Fin. 431 (2016);
Ilan Cooper & Richard Priestley, The Expected Returns and Valuations
of Private and Public Firms, 120 J. Fin. Econ. 41 (2016); and Serkan
Akguc, Jongmoo Jay Choi, & Suk-Joong Kim, Do Private Firms Perform
Better than Public Firms? (Working Paper, 2015).
\654\ In portfolio theory, constraining the set of investment
opportunities yields a potentially inferior optimal portfolio.
However, the presence of information frictions due to a lack of
investor sophistication might reverse this general prediction and
result in lower portfolio risk-adjusted returns. See supra note 591.
---------------------------------------------------------------------------
The incremental economic effects of the amendments to non-
accredited investor disclosures in Rule 506(b) offerings discussed
above might be modest, relative to the baseline, for several reasons:
(i) While non-accredited investors are not subject to investment limits
in Rule 506(b) offerings, their participation in Rule 506(b) offerings
remains highly limited by the restriction that no more than 35
investors participate and that such investors must meet the knowledge
and experience standard of the rule; (ii) non-accredited investors may
be unwilling to participate in the majority of Rule 506(b) offerings
because of the higher due diligence and transaction costs, potentially
higher investment minimums that may be inconsistent with optimal
diversification in their portfolio, and significantly lower liquidity
involved in private placements due to transferability restrictions and
a highly limited secondary market; (iii) issuers may be unwilling to
accept non-accredited investors in Rule 506(b) offerings for reasons
other than the cost of disclosures (e.g., a preference to attract
accredited investors that may be able to bring a larger amount of
capital and business expertise, an unwillingness to expand the
capitalization table that may make future angel investors or venture
capital (``VC'') funding less interested in providing funding to the
issuer, an unwillingness to increase the number of non-accredited
investors that may draw the issuer incrementally closer to the Section
12(g) registration threshold, or concerns about investor relations and
risk of litigation involving less informed investors); and (iv) even
though required disclosures to non-accredited investors would be scaled
under the amendments, the direct and indirect costs of such disclosures
(such as risks of disclosure of proprietary information to a broader
range of investors) may discourage issuers from selling to non-
accredited investors in Rule 506(b) offerings.
iv. Reasonable Alternatives
We are repealing audit requirements for Rule 506(b) offerings of up
to $20 million involving non-accredited investors. As an alternative,
we could repeal audit requirements for all Rule 506(b) offerings,
irrespective of offer size. As compared to the proposal, this
alternative would result in additional compliance cost savings for
issuers in Rule 506(b) offerings with sales to non-accredited investors
and might induce additional Rule 506(b) issuers to accept non-
accredited investors. However, the relative benefits of compliance cost
savings under this alternative might have a more limited impact in
larger offerings. Further, such an alternative could increase costs to
non-accredited investors as a result of less well informed investment
decisions, particularly if non-accredited investors, which are not
subject to investment limits in Rule 506(b), invest significant amounts
in large Rule 506(b) offerings without the benefit of audited financial
statements. Limitations on the number and types of non-accredited
investors that are eligible to participate in Rule 506(b) offerings (no
more than 35 non-accredited investors are allowed to participate and
such investors must possess sophistication) would limit the aggregate
costs to non-accredited investors under this alternative. Such an
alternative would also be inconsistent with the requirements applicable
to other larger offerings available to non-accredited investors,
including larger offerings under Regulation A Tier 2 and registered
offerings, both of which require audited financial statements.
Under the final amendments, audited financial statement disclosures
will not be required for sales to non-accredited investors in Rule
506(b) offerings of up to $20 million by non-reporting issuers,
irrespective of how much capital is invested by non-accredited
purchasers. As another alternative, we could require audited financial
statement disclosures in Rule 506(b) offerings by non-reporting issuers
that have up to $20 million in sales to non-accredited investors. On
the one hand, this alternative would reduce costs for non-reporting
issuers with limited sales to non-accredited investors under Rule
506(b). On the other hand, each non-accredited investor that is a
purchaser in such an offering may incur a potentially significant loss
of information and increase in due diligence costs, which do not depend
on the amount of capital committed by other non-accredited investors to
this offering.
As another alternative, rather than scale disclosure requirements
in Rule 506(b) offerings by non-reporting issuers of up to $20 million
with sales to non-accredited investors, we could waive the requirements
for disclosures to non-accredited investors altogether. This
alternative would result in significantly lower compliance costs for
issuers and could encourage more issuers to sell securities to non-
accredited investors under Rule 506(b). However, the loss of
information to non-accredited investors could significantly reduce
their ability to allocate capital in an informed manner, particularly
because a lack of a secondary trading market in many cases precludes
effective price discovery through other sources. Alternatively, we
could require issuers to provide the same disclosures to non-accredited
investors if they provide any disclosures, such as a private placement
memorandum, to accredited investors. While such a provision could
significantly lower non-accredited investor information risk and due
diligence costs in some cases, without dramatically increasing issuer
costs (because they already would have to incur many of the direct
costs to provide the disclosure to accredited investors), non-
accredited investors might suffer a significant loss of information in
cases where the issuer's disclosures to accredited investors are
limited. The existing requirement that the non-
[[Page 3568]]
accredited investor satisfy the knowledge and experience standard of
Rule 506(b)(2)(ii), as well as the continued application of the
antifraud provisions of the Federal securities laws, might mitigate
some of the investor protection risks under this alternative.
We are extending the disclosure requirements of Regulation A Tier 2
for sales to non-accredited investors by non-reporting issuers under
Rule 506(b), irrespective of the size of the Rule 506(b) offering above
$20 million. As an alternative, we could extend the financial statement
requirements of Regulation A Tier 2 to sales to non-accredited
investors in offerings under Rule 506(b) up to $75 million (the amended
Regulation A Tier 2 offer limit), and continue to apply the existing
financial statement disclosure requirements (that are aligned with the
financial statement disclosure requirements applicable to registration
statements) to Rule 506(b) offerings exceeding $75 million that include
sales to non-accredited investors. Compared to the final amendments,
this alternative might increase compliance costs for non-reporting
issuers seeking to raise over $75 million under Rule 506(b) and sell
securities to non-accredited investors. At the same time, these
financial statement disclosures may lower the risk of less informed
investment decisions by non-accredited investors in such offerings
compared to the proposal, particularly for small and pre-revenue
issuers with large financing needs. However, the impact of this
alternative may be modest because relatively few offerings would be
affected by this alternative compared to the final amendments. We
estimate that in 2019 there were approximately 383 offerings under Rule
506(b) by non-reporting issuers other than pooled investment funds with
offer sizes in excess of $75 million (excluding undefined offer sizes),
of which between 3.1 percent and 4.4 percent of offerings involved non-
accredited investors.\655\ This alternative might also decrease the
willingness of non-reporting issuers to accept non-accredited investors
in Rule 506(b) offerings exceeding $75 million, resulting in
potentially fewer investment opportunities for non-accredited investors
compared to the proposal.
---------------------------------------------------------------------------
\655\ See supra note 127. This estimate is based on the analysis
of Form D data in initial Form D filings with reported offer size,
excluding pooled investment fund issuers and reporting issuers.
Reporting issuers are identified based on 2019 filings of annual
reports or amendments to them.
---------------------------------------------------------------------------
As another alternative, we could extend Regulation Crowdfunding
financial statement disclosure requirements to Rule 506(b) offerings
with non-accredited purchasers, as suggested by one commenter.\656\
Under such an alternative, issuers in offerings above $107,000 and up
to $5 million (the amended Regulation Crowdfunding limit) would have to
provide non-accredited purchasers with financial statements that have
been either reviewed or audited by an independent accountant (depending
on offering size). Compared to the amendments, which only require
audited financial statements in offerings with non-accredited
purchasers of above $20 million, this alternative could provide non-
accredited purchasers in such offerings with additional certainty about
financial statement disclosures. However, it also would introduce
additional costs for such issuers to obtain an independent accountant
review \657\ or audit of its financial statements.
---------------------------------------------------------------------------
\656\ See, e.g., J. Clarke Letter.
\657\ In the Regulation Crowdfunding Adopting Release, the
Commission estimated review costs to be approximately $1,500 to
$18,000. See Regulation Crowdfunding Adopting Release, at 71499.
Recent reports and commenters estimate such costs at between $1,500
and $6,000. See Temporary Amendments Adopting Release, at 27127.
---------------------------------------------------------------------------
b. Simplification of Disclosure Requirements in Regulation A Offerings
The final amendments extend to Regulation A issuers certain
accommodations presently available to reporting companies, namely: (1)
The option to redact confidential information from material contracts
and certain other agreements filed as exhibits without a need to submit
a confidential treatment request; (2) the option to redact information
that would constitute a clearly unwarranted invasion of personal
privacy in any exhibit; and (3) the option of incorporating by
reference financial statement information into Regulation A offering
statements. The amendments also eliminate the requirement to file a
draft offering statement as a separate exhibit with Form 1-A and
instead enable automated public dissemination of the draft offering
statement through EDGAR, similar to the framework in place for
registered offerings. In addition, the amendments permit the Commission
to declare an offering statement, or a post-qualification amendment to
such offering statement, abandoned, consistent with the rule applicable
to registered offerings.
i. Benefits
Extending to Regulation A issuers the option to redact confidential
information from material contracts and certain other agreements filed
as exhibits without a need to submit a confidential treatment request--
provided that information is not material and is the type of
information that the issuer both customarily and actually treats as
private and confidential--is expected to reduce disclosure costs for
Regulation A issuers and expedite the filing process by eliminating the
need to file a confidential treatment application and the associated
cost, which was supported by the commenters that addressed these
amendments.\658\ Similarly, extending to Regulation A issuers the
option to redact information that would constitute a clearly
unwarranted invasion of personal privacy in any exhibit is expected to
reduce disclosure costs and expedite the filing process for affected
Regulation A issuers. These accommodations are currently available to
reporting companies. Submitting a confidential treatment request
requires a filer to prepare a detailed application to the Commission
that identifies the particular text for which confidential treatment is
sought, a statement of the legal grounds for the exemption, and an
explanation of why, based on the facts and circumstances of the
particular case, disclosure of the information is unnecessary for the
protection of investors. If the Commission staff issues comments on the
application, the filer might need to revise and resubmit the
application. These requirements impose direct compliance costs on
filers, for instance, in the form of legal counsel costs. For filers
not willing or not able to incur such costs, inclusion of confidential
information of proprietary value in a material contract or similar
exhibit that is filed publicly can result in significant indirect costs
due to the disclosure of sensitive information to potential
competitors. While under the amendments, filers would still need to
determine whether information they are redacting is material, they will
not need to follow the confidential treatment application process.
---------------------------------------------------------------------------
\658\ See supra note 326.
---------------------------------------------------------------------------
Based on EDGAR filings analysis, we have identified 11 issuers in
qualified Regulation A offerings that have also filed confidential
treatment applications as of December 2019. We lack data to determine
how many of those filers had filed confidential treatment applications
with regard to information that could be redacted under the amendments.
In general, more than 90 percent of the confidential treatment requests
granted by the Commission in fiscal year 2018
[[Page 3569]]
were made in reliance on the exemption concerning competitive harm. It
is also difficult to gauge how many filers had proprietary information
in material contracts or similar exhibits but opted not to file a
confidential treatment request due to legal and other costs of
preparing such a request. One commenter on the FAST Act Modernization
Release estimated that legal fees for confidential treatment requests
ranged from $35,000 to over $200,000,\659\ while another commenter
estimated that attorneys and paralegals at the company spend an average
of 80 hours each quarter preparing redacted exhibits and related
confidential treatment requests.\660\ According to another commenter,
the cost savings of streamlining the confidential treatment process are
expected to be relatively more impactful for smaller filers because
such issuers have a lower threshold for determining whether a contract
is material and therefore required to be filed publicly, as well as for
issuers in industries that are associated with more confidential
treatment requests, such as biotechnology.\661\ We generally expect
similar cost savings from extending this accommodation to Regulation A
issuers.
---------------------------------------------------------------------------
\659\ See FAST Act Modernization Release, at note 341.
\660\ See FAST Act Modernization Release, at note 342. Under the
amendments, filers will still need to prepare redacted exhibits and
in some cases filers will incur costs to respond to a staff request
to demonstrate that redacted information was not material.
\661\ See FAST Act Modernization Release, at note 343 and
accompanying text.
---------------------------------------------------------------------------
Similarly, extending to Regulation A issuers the option of
incorporation by reference of previously filed financial statement
information into the offering statement, consistent with the current
rules applicable to registered securities offerings filed on Form S-1,
is expected to incrementally reduce Form 1-A preparation costs.
Enabling automated dissemination of draft offering statements in
lieu of the existing exhibit filing requirement, consistent with the
process of dissemination of draft registration statements, is expected
to incrementally reduce filer effort to prepare the offering statement
and promote greater efficiency of the filing process and regulatory
harmonization.
Similarly, permitting the Commission to declare an offering
statement, or a post-qualification amendment to such offering
statement, abandoned, consistent with the rule applicable to registered
offerings, is expected to promote greater regulatory harmonization and
to incrementally promote efficiency of the filing process in cases
where only a post-qualification amendment, rather than the entire
offering, is abandoned. The amendments are expected to benefit
investors by reducing potential investor confusion arising from the
presence of the unqualified post-qualification amendment on EDGAR.
ii. Costs
The extension of the option to redact confidential information from
material contracts filed as exhibits to Regulation A filings is not
expected to result in a significant loss of information to investors
because of the condition that any information being omitted not be
material. Filers electing to rely on this accommodation would still
need to incur costs to determine that information meets the standard
for redaction, as they do today when they file a confidential treatment
request, but they would not incur the cost of preparing a confidential
treatment application.\662\ One potential cost of the final amendments
to Regulation A investors is that information might be redacted by
filers that would not otherwise be afforded confidential treatment by
the staff. However, based on previous experience and a review of
confidential treatment applications by reporting companies, we believe
that such instances would be rare.\663\
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\662\ Filers may be asked by the Commission staff to provide on
a supplemental basis an unredacted copy of the exhibit and provide
an analysis of why the redactions are consistent with the redacted
exhibit rules, which might result in incremental additional costs.
\663\ See FAST Act Modernization Release, at Section VI.D.2.
---------------------------------------------------------------------------
Allowing Regulation A issuers to rely on incorporation by reference
of financial statement information from previously filed periodic
reports may marginally increase search time for potential investors.
Instead of having all the information available in one location,
investors may need to separately access the incorporated reports in
order to price the offered security. However, the inclusion of
hyperlinks should facilitate the retrieval of such information by
investors. As a result, any increase in the costs to investors of
assembling and assimilating necessary information is expected to be
minimal. We do not have data to assess if, and to what extent, the Form
1-A revision would be burdensome to investors.
iii. Effects on Efficiency, Competition, and Capital Formation
Extending certain disclosure accommodations presently available to
reporting companies to Regulation A issuers is expected to have an
incremental beneficial effect on capital formation under Regulation A
by reducing disclosure and compliance costs required to undertake a
Regulation A offering. If lower compliance costs encourage new issuers,
particularly smaller issuers with less compliance experience that might
not have otherwise been able to access external financing, to raise
capital under Regulation A, the amendments may, on the margin, promote
competition. Compliance cost savings may have relatively greater
benefits for smaller issuers to the extent that such costs have a fixed
component.
If the amendments marginally reduce the amount of information
available to investors such that the ability to make informed
investment decisions is affected, they may result in less efficient
capital allocation and, for Regulation A securities with a secondary
market (e.g., OTC-quoted Regulation A securities), less informationally
efficient secondary market prices.
iv. Reasonable Alternatives
[[Page 3570]]
The amendments will permit Regulation A issuers to incorporate
previously filed financial statements by reference. As an alternative,
we could also permit forward incorporation by reference on Form 1-A
with the same conditions as the ones for forward incorporation by
reference available to smaller reporting companies on Form S-1. Forward
incorporation by reference allows an issuer to automatically
incorporate by reference periodic and current reports filed subsequent
to the qualification of the registration statement. This would result
in compliance cost savings for Regulation A issuers and allow for
greater regulatory harmonization and more uniformity in disclosure
requirements applicable to different categories of offerings by small
issuers. Forward incorporation by reference would eliminate the need
for Regulation A issuers to update information in a qualified Form 1-A
filing that has become stale or is incomplete and file post-
qualification amendments solely related to updating information from
periodic reports, thereby reducing compliance costs.\664\ By avoiding
the need to file certain post-qualification amendments, under this
alternative Regulation A issuers might be able to move more quickly and
at a lower cost to raise capital when favorable market conditions
occur. Forward incorporation by reference, however, could increase
investor search costs and eliminate the benefit of staff review of
post-qualification amendments. Because issuers with a relatively higher
level of information risk--for instance, issuers not current in their
reports, blank check companies, shell companies (other than business
combination related shell companies), and penny stock issuers, as well
as issuers whose reports are not available on a website maintained by
or for the issuer--would be ineligible for forward incorporation under
this alternative, the increase in investor information gathering costs
under this alternative might be small.
---------------------------------------------------------------------------
\664\ We lack data for a reliable estimate of the number of
affected issuers because it is difficult to determine which of the
post-qualification filings solely update information from periodic
reports versus other information, such as offering price, amount
sought, offering deadline, as well as financial information. Based
on the analysis of EDGAR filings from June 2015 through December
2019, we estimate that the average (median) issuer in a qualified
Regulation A offering has filed 1.7 (0) post-qualification
amendments.
---------------------------------------------------------------------------
The disclosure simplification amendments will apply to all
Regulation A issuers. As an alternative, we could extend the provisions
only to Regulation A issuers that are reporting companies. This
alternative would be generally consistent with the treatment of
reporting companies in registered offerings. It would decrease the
potential for loss of information available to Regulation A investors
about material contracts and similar agreements and marginally reduce
their costs of retrieving financial statement information from
previously filed periodic reports that are incorporated by reference
for issuers other than reporting companies. However, this alternative
also would decrease the benefits of the rule, compared to the
proposal.\665\
---------------------------------------------------------------------------
\665\ The change to permit Exchange Act registrants to use
Regulation A was adopted in December 2018 and approximately 17
Exchange Act registrants sought to use Regulation A to conduct an
offering in 2019, of which 11 of those offerings were qualified.
---------------------------------------------------------------------------
c. Confidential Information Standard
As discussed in Section II.D.3 above, the current requirements for
registrants to file material contracts as exhibits to their disclosure
documents permit registrants to redact provisions or terms of exhibits
required to be filed if those provisions or terms are both (i) not
material and (ii) would likely cause competitive harm to the registrant
if publicly disclosed. We are adopting as proposed the amendments to
the exhibit filing requirements by removing the competitive harm
requirement and replacing it with a standard more closely aligned with
the Supreme Court's definition of ``confidential'' that permits
information to be redacted from material contracts if it is the type of
information that the issuer both customarily and actually treats as
private and confidential and that is also not material. These
amendments are expected to benefit issuers through greater regulatory
simplification and harmonization of the requirements governing
confidential information in exhibits with the Supreme Court's
definition, enabling more efficient compliance and greater flexibility
to redact confidential information from exhibits. To the extent that
the amendments makes the option to redact certain information from
exhibits more attractive to issuers, it may result in a marginally
decreased availability of information to investors.
As an alternative, as suggested by one commenter, we could have
extended the amendments to include participation agreement and
administrative contract exhibits to Form N-6.\666\ This alternative
would be unlikely to result in significant benefits to issuers because
information contained in such exhibits is already disclosed to
investors in other contexts and, in our staff's experience, these
exhibits do not contain confidential or proprietary information.
---------------------------------------------------------------------------
\666\ See Comm. of Annuity Insurers Letter.
---------------------------------------------------------------------------
5. Offering and Investment Limits
a. Offering and Investment Limits Under Regulation A, Regulation
Crowdfunding, and Rule 504
As proposed, the final amendments increase the 12-month offering
limit for Regulation Crowdfunding, presently set at $1.07 million, to
$5 million; the 12-month offering limit for Regulation A Tier 2,
presently set at $50 million, to $75 million with the associated
revision of the 12-month offering limit for sales by existing affiliate
security holders from $15 million to $22.5 million; and the 12-month
offering limit for Rule 504, presently set at $5 million, to $10
million.
We can gain some insight into the likely capital formation benefits
of a higher offering limit from repeat issuers that have raised
multiple rounds of financing under the capped offering exemptions. Some
of those issuers might have had to raise financing over multiple years
because of the existing offering limits. The following table examines
total proceeds per issuer reported raised during 2016 through 2019.
Table 11--Capital Raising During 2016-2019 by Repeat Issuers Using
Affected Exemptions
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Regulation A issuers that raised at 14.
least $50 million.
Average (median) amount reported raised......... $13.4 million ($5.0
million).
Number of Regulation Crowdfunding issuers that 51 (27).
raised at least $1.0 million ($1.07 million).
Average (median) amount reported raised......... $213,678 ($106,900).
Number of Rule 504 issuers other than pooled 7.
investment funds that raised at least $5
million.
Average (median) amount reported raised......... $384,200 ($100,000).
------------------------------------------------------------------------
[[Page 3571]]
Some of the existing issuers under the exemptions being amended
have conducted other types of offerings that are not subject to
offering limits. Information about offering sizes in Rule 506 can
provide additional insights for the review of the offering limits for
Regulation A, Regulation Crowdfunding, and Rule 504.\667\ Generally,
however, we do not know whether those issuers used Rule 506 because the
offering limits of the exemptions being amended were too low for their
needs or for other reasons. The table below shows the capital raising
under Rule 506 in 2019 by issuers using offering exemptions being
amended.\668\
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\667\ We focus on Rule 506 offerings due to data limitations.
First, reporting companies are ineligible under Rule 504.
Additionally, we have identified only one Regulation Crowdfunding
issuer that has undertaken a registered offering as of December 31,
2019. Further, very few Regulation A issuers have undertaken a
registered offering during this period, resulting in a lack of
reliable data on such issuers' registered offering proceeds. From
June 19, 2015, through December 31, 2019, we identified 14 issuers
in qualified Regulation A offerings that had a registration
statement declared effective, based on the analysis of EDGAR
filings. These were issuers that proceeded to list on an exchange
after their Regulation A offering and then sought follow-on
financing through a registered offering.
\668\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.
Table 12--Capital Raising Under Rule 506 in 2019 by Issuers Using
Affected Exemptions
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Regulation A issuers raising financing 34.
under Rule 506.
Average (median) amount reported raised under $5.8 million ($0.2
Rule 506 per Regulation A issuer. million).
Number of Regulation Crowdfunding issuers 139.
raising financing under Rule 506.
Average (median) amount reported raised under $2.4 million ($0.2
Rule 506 per Regulation Crowdfunding issuer. million).
Number of Rule 504 issuers raising financing 110.
under Rule 506.
Average (median) amount reported raised under $1.4 million ($0.3
Rule 506 per Rule 504 issuer. million).
------------------------------------------------------------------------
Evidence in Tables 11 and 12 suggests that most issuers that rely
on Regulation A, Regulation Crowdfunding, and Rule 504 tend to raise
amounts of financing, both under these exemptions and when they raise
financing under Rule 506, which has no offering limit, that are below
the existing offering limits. This observation is based on the pool of
issuers attracted to these offering exemptions with the provisions that
are in place today. It is likely that issuers with larger financing
needs forgo the exemptions with offering limits that are too low for
their financing needs. Expanding the offering limits is therefore
expected to attract additional issuers to these exemptions.
It is difficult to predict how many new issuers will be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the amended
offering limits. Because of potential unobservable differences in
issuer characteristics, comparisons presented below are intended as
illustrative examples. The table below \669\ examines the use of other
securities offering methods by issuers that raised amounts above the
existing limits but below the amended offering limit thresholds, some
of which may consider using the amended exemptions. We consider (1)
Rule 506 and registered offerings for purposes of analyzing the amended
offering limit threshold under Regulation A; (2) Regulation A, Rule
504, and Rule 506 offerings for purposes of analyzing the amended
offering limit threshold under Regulation Crowdfunding; and (3)
Regulation A and Rule 506 offerings for purposes of analyzing the
amended offering limit threshold under Rule 504.\670\ Information on
amounts raised under Section 4(a)(2), Section 3(a)(11), and Rules 147/
147A is not available to us.
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\669\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.
\670\ For purposes of analyzing the amended offering limit
thresholds under Regulation Crowdfunding and Rule 504, we do not
consider registered offering activity, as registered offerings are
not likely to be a cost-effective alternative at those offer sizes.
Table 13--Evaluation of Offering Limit Amendments Based on Evidence From
Select Other Securities Offering Methods in 2019
------------------------------------------------------------------------
------------------------------------------------------------------------
Regulation A: Offering limit increase from $50 million to $75 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $50
million and up to $75 million:
Rule 506 \a\........................................... 171
Registered offerings \b\............................... 57
------------------------------------------------------------------------
Regulation Crowdfunding: Offering limit increase from $1.07 million to
$5 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $1.07
million and up to $5 million:
Regulation A \c\....................................... 13
Rule 504 \d\........................................... 55
Rule 506 \e\........................................... 4,004
------------------------------------------------------------------------
Rule 504: Offering limit increase from $5 million to $10 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $5 million
and up to $10 million:
Regulation A \f\....................................... 10
[[Page 3572]]
Rule 506 \g\........................................... 1,618
------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and
blank check companies and limit the exemption to U.S. and Canadian
issuers, so for comparability pooled investment funds and issuers
outside the U.S. and Canada are excluded from the Rule 506 proceeds
used in this estimate. Reporting companies are eligible to rely on
Regulation A under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in
SDC Platinum for U.S. public offerings of equity, debt, and
convertible securities with issue dates in 2019, excluding withdrawn,
postponed, and rumored offerings, asset-backed securities offerings,
blank check issuers, investment fund issuers, and issuers outside the
U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds
reported in 2019 are considered, as opposed to cumulative proceeds
reported from June 2015 through December 2019. Regulation Crowdfunding
eligibility criteria limit the exemption to U.S. issuers and exclude
Exchange Act reporting companies, so for comparability non-U.S.
issuers and reporting companies are excluded from the Regulation A
proceeds used in this estimate.
\d\ Regulation Crowdfunding eligibility criteria exclude investment
companies and Exchange Act reporting companies and limit the exemption
to U.S. issuers, so for comparability pooled investment funds and non-
U.S. issuers are excluded from Rule 504 proceeds used in this
estimate. Reporting companies are ineligible under Rule 504.
\e\ Regulation Crowdfunding eligibility criteria exclude investment
companies and Exchange Act reporting companies and limit the exemption
to U.S. issuers, so for comparability pooled investment funds,
reporting companies, and non-U.S. issuers are excluded from Rule 506
proceeds used in this estimate. Reporting companies are identified
based on annual reports or amendments to them filed in 2019.
\f\ For purposes of this table, only incremental Regulation A proceeds
reported in 2019 are considered, as opposed to cumulative proceeds
reported from June 2015 through the end of the period. Rule 504
eligibility criteria exclude Exchange Act reporting companies, so for
comparability reporting companies are excluded from the Regulation A
proceeds used in this estimate.
\g\ For comparability with other estimates in this table, we exclude
reporting companies and pooled investment funds from Rule 506 proceeds
used in this estimate. Reporting companies are identified based on
annual reports or amendments to them filed in 2019.
Given the scale of Regulation A offering activity today, the number
of Rule 506 and registered offerings in the $50 million to $75 million
range suggests potential for a significant relative increase in
Regulation A activity under the amended offering limit. As a crucial
caveat, issuers choosing to rely on Rule 506 or registered offerings
today may be inherently different from the types of issuers that might
find Regulation A attractive under the amended limit. Further, the
number of Rule 506 offerings in the $1.07 million to $5 million range
significantly exceeds the absolute number of Regulation Crowdfunding
offerings today, which thus may suggest potential for a significant
relative increase in Regulation Crowdfunding activity under the amended
offering limit. Similarly, the number of Rule 506 offerings in the $5
million to $10 million range significantly exceeds the absolute number
of Rule 504 offerings today, which thus may suggest potential for a
significant relative increase in Rule 504 activity under the amended
offering limit. As a caveat, issuers choosing to rely on Rule 506 today
may be inherently different from the types of issuers that might find
Regulation Crowdfunding or Rule 504 attractive under the amended
limits. Importantly, historical use of other offering methods may not
fully represent potential future use of the exemptions being amended,
particularly if the amendments facilitate offerings by issuers that may
not currently rely on securities offerings. We lack data or a
methodology to predict how many new issuers that would not have
otherwise undertaken any securities offering will be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the
amendments.
As discussed above, in response to commenters, we also are
extending for an additional 18 months the temporary relief from certain
financial statement review requirements for eligible issuers offering
up to $250,000 of securities in reliance on Regulation Crowdfunding in
a 12-month period. The temporary final rules adopted on May 4, 2020,
and subsequently extended on August 28, 2020, serve as the economic
baseline against which the costs and benefits, as well as the impact on
efficiency, competition, and capital formation, of these amendments are
measured. Consistent with the existing temporary relief, the
eligibility criteria exclude (1) issuers that were organized or had
operations for less than six months prior to the commencement of the
offering and (2) issuers that were not compliant with Regulation
Crowdfunding requirements with regard to any prior offerings in which
they sold securities. Historical data provides an indication of the
potential share of offerings eligible for the extended relief among all
offerings. From the inception of Regulation Crowdfunding through
December 31, 2019, we estimate that 1,537 (approximately 77 percent of
the total number of crowdfunding offerings during this period) were
initiated by 1,407 issuers that were eligible or would have been
eligible for the relief under the six-month eligibility criteria.\671\
It is more difficult to estimate the percentage of prior Regulation
Crowdfunding issuers that would not be eligible because they were not
compliant with one or more of the requirements of Regulation
Crowdfunding in a prior offering. From inception through December 31,
2019, we estimate that there were 149 repeat Regulation Crowdfunding
issuers, including 116 such issuers that had reported successful
completion of at least one Regulation Crowdfunding offering on Form C-
U.\672\ We are unable to predict precisely the number of issuers likely
to rely on this provision among eligible issuers.\673\ A review of new
filings made on Form C on or after May 4, 2020, provides some
information about issuer reliance on this provision under the existing
temporary relief. As of September 30, 2020, we find that, of the 400
new offerings on Form C by eligible issuers (excluding filings
withdrawn as of September 30, 2020, and duplicate filings, across
offerings of all sizes), 53 offerings, or 13% provided certified
[[Page 3573]]
rather than reviewed financial statements.\674\
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\671\ For this estimate, eligibility was estimated approximately
based on the issuer having been formed at least six months prior to
the filing date of the offering as reported in the XML portion of
Form C and having had (1) either positive assets, revenues, net
income, debt, accounts receivable, cost of goods sold, taxes paid,
or employees in the most recent fiscal year reported in the XML
portion of Form C, or (2) a prior Regulation Crowdfunding offering.
In addition, we recognize that many of the past Regulation
Crowdfunding issuers may meet the six-month eligibility criterion as
of the effective date of these amendments, should they wish to avail
themselves of the relief for a follow-on offering under Regulation
Crowdfunding.
\672\ This figure likely provides a lower bound on the number of
issuers that have initiated a follow-on offering after successfully
completing a prior offering due to incomplete reporting of offering
proceeds on Form C-U. Follow-on issuance activity may differ from
historical data due to changes in the crowdfunding market as a
result of confounding market factors and continued uptake of the
relief under the temporary rules by past issuers. See also Temporary
Amendments Adopting Release, at 27124.
\673\ For a more detailed discussion, see Temporary Amendments
Adopting Release, at 27124-5.
\674\ See supra note 671 for the definition of eligible issuer
used in this estimate. This estimate may represent a lower bound
because reliance on the provisions is not disclosed in a structured
data or in a standardized format and was evaluated based on manual
review of filings for mention of the temporary rules. Of the issuers
in the 53 offerings, we identified 48 as first-time issuers and five
as repeat Regulation Crowdfunding issuers based on having made a
prior filing on Form C. Each of the five repeat Regulation
Crowdfunding issuers had made a filing on Form C-U and a filing on
Form C-AR (annual report), however, our review did not examine the
details of these filings for specific content. In addition to the
issuers in the 53 offerings discussed above (which listed dates of
organization that were six months or more prior to filing), we
examined all issuers using reviewed financial statement relief
between May 4, 2020, and September 30, 2020, and we identified four
issuers (all of which were first-time issuers) in offerings seeking
above $107,000 and up to $250,000 that listed a date of organization
that was less than six months prior to filing. We could not confirm,
based on the filings, whether the issuers may have been organized
prior to the date listed, such as in a different corporate form
(e.g., a limited liability company instead of a corporation). Our
review of the recent Regulation Crowdfunding filings focused on the
use of the relief and the small sample size on which these estimates
are based limits our ability to draw systematic inference about
issuers relying on the relief.
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i. Benefits
The amended Regulation A Tier 2, Regulation Crowdfunding, and Rule
504 offering limits are expected to increase capital formation in those
markets by enabling existing issuers that are approaching offering
limits to raise larger amounts of financing, as well as by drawing new
issuers that are deterred by relatively low offering limits today.\675\
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\675\ See supra notes 363 and 365 (noting commenters supporting
the benefits of an increased Regulation A limit); supra note 419
(noting commenters supporting the benefits of an increased
Regulation Crowdfunding limit); and supra note 397 (noting
commenters supporting the benefits of an increased Rule 504 limit).
Many individual commenters recommended raising the Regulation
Crowdfunding limit in light of economic concerns raised by COVID-19.
---------------------------------------------------------------------------
We recognize that these benefits will be limited if issuers raise
amounts below the limit. We note that some commenters suggested that
there is not compelling evidence of the need for increased offering
limits in Regulation A, Regulation Crowdfunding, or Rule 504 or that
more information is needed to determine whether such an increase is
appropriate.\676\ While historical utilization rates for these
exemptions have not reached offering limits for the average issuer, it
is important to note that estimates from past data obtained under the
existing limits are inevitably subject to selection bias--high-growth
issuers or larger issuers with considerable financing needs may forgo
these offering methods because it may not make sense for such issuers
to incur the cost of an offering with a lower offering limit in
addition to pursuing other financing options. Similarly, the high fixed
cost of due diligence and marketing related to the kinds of small
issuers and offerings represented in the market today may cause
intermediaries to be unwilling to participate in the Regulation A
market under the existing offering limits. As a result, if smaller
issuers, issuers with a lower growth rate, or issuers without
intermediaries are overrepresented in the Regulation A market today,
they may account for relatively low average proceeds raised. Thus,
historical utilization rates could fail to capture the potentially
expanded pool of prospective issuers with larger financing needs that
may consider these exemptions, and pursue larger offerings, under the
amendments, as well as the potentially expanded pool of intermediaries
and investors that are expected to be drawn to the Regulation A market
under the amended offering limit. Similarly, startups whose financing
needs may exceed the existing $1.07 million annual Regulation
Crowdfunding limit or the existing $5 million Rule 504 limit--such as
startups with a significant growth potential--may be reluctant to
consider Regulation Crowdfunding or Rule 504 because even after they
incur the cost of compliance and other offering costs, they would still
have to resort to other financing to meet their remaining financing
needs. Thus, the existing offering limits likely shape the composition
of issuers, intermediaries, and investors attracted to these
exemptions. While it is possible that low utilization will continue to
be driven by factors other than the offering limit, significant caution
is warranted with respect to any prediction of future utilization under
an expanded offering limit extrapolated from historical data.
---------------------------------------------------------------------------
\676\ See supra notes 370, 425, and 398.
---------------------------------------------------------------------------
The effects on aggregate capital formation will also be limited if
the issuers drawn to the amended exemptions are switching from other
securities offering methods; \677\ however, such issuers may still
benefit from optimizing their financing strategy and lowering their
cost of capital.
---------------------------------------------------------------------------
\677\ See supra note 427 (discussing concerns of commenters
about substitution between registered offering and exempt offering
markets).
---------------------------------------------------------------------------
The amendments also may lead to changes in the composition of the
pool of issuers relying on these exemptions by drawing a larger and
more diversified set of issuers with high growth potential and
financing needs in excess of the existing limits.\678\ Today such
startups may forgo an exemption with an offering limit in favor of a
Rule 506 offering. A broader and more diversified range of investment
opportunities may benefit investors in these market segments,
particularly non-accredited investors that seek exposure to private
companies but are constrained from participation in private placements.
The amended offering limits also may make the exemptions more
attractive to a broader range of intermediaries, some of which may be
deterred from participating in these markets today by fixed costs
(e.g., due diligence, compliance, crowdfunding platform operation,
etc.) in proportion to potential compensation.\679\
---------------------------------------------------------------------------
\678\ See, e.g., supra note 365 (discussing comment letters that
suggested that an increase in the Regulation A offering limit could
encourage development of the smaller initial public offering market,
encouraging more issuers to conduct offerings and providing more
investment opportunities for investors).
\679\ See, e.g., supra note 366 (discussing commenters that
suggested that the higher offering limits would improve the
economics for issuers and broker dealers to participate in the
Regulation A market).
---------------------------------------------------------------------------
Under the existing rules, Regulation A Tier 2 offerings are not
subject to State registration and qualification requirements. We are
not making changes to this provision, which will continue to apply to
Tier 2 offerings up to the amended offering limit. Under the existing
rules, Regulation Crowdfunding offerings up to $1.07 million similarly
are preempted from State registration and qualification requirements
under Section 4(a)(6). The amendments we are adopting in this release
extend the preemption of State registration and qualification
requirements to Regulation Crowdfunding offerings in excess of $1.07
million and not exceeding the amended offering limit ($5 million). This
provision will benefit prospective issuers seeking above $1.07 million
in a 12-month period under Regulation Crowdfunding through lower costs
of compliance and a more streamlined offering process than if the
offering had been subject to State review. An additional benefit to our
approach is that issuers and intermediaries will potentially incur
lower legal costs due to greater certainty as to the application of
preemption to Regulation Crowdfunding offerings above $1.07
million.\680\ Rule 504 offerings will remain subject to State
registration and qualification requirements. Because issuers in small
offerings continue to have a choice of securities offering exemptions,
issuers that seek to avail themselves of the State review regime
[[Page 3574]]
may continue to do so through a Regulation A Tier 1 or a Rule 504
offering.
---------------------------------------------------------------------------
\680\ See supra Section II.E.3.c.
---------------------------------------------------------------------------
The temporary final rules currently in effect serve as the economic
baseline against which the benefits of the amendments extending the
relief from certain Regulation Crowdfunding financial statement review
requirements are measured. Thus, we do not expect additional
significant benefits to result from the extension. Extension of the
temporary relief will allow small businesses to continue to avail
themselves of the benefits of the relief as they do today under the
baseline,\681\ particularly in the face of significant challenges
facing small businesses as a result of the COVID-19 crisis.\682\ While
the existing temporary rule specifies that it applies to issuers
affected by COVID-19, the extension of this relief under the final
rules does not include this condition. Given the broad scope of the
direct and indirect impact that COVID-19 has had on small business
issuers and the continuing challenges they face, we do not expect this
change in conjunction with the 18-month extension to have a substantial
economic impact.\683\ We note that several commenters supported
extending the temporary relief.\684\
---------------------------------------------------------------------------
\681\ The relief allows issuers to raise capital without
incurring costs and delays involved in an independent accountant's
review of their financial statements. This incrementally enhances
the efficiency of conducting the offering and yields capital
formation benefits for eligible issuers. See also Temporary
Amendments Adopting Release, at 27127. The upfront costs of
obtaining a review report may be nontrivial for small issuers,
particularly issuers experiencing declines in internal cash flows as
a result of the COVID-19 crisis. In the Crowdfunding Adopting
Release, the Commission estimated review costs to be approximately
$1,500-$18,000. See Crowdfunding Adopting Release, at 71499. More
recent information about the costs of a review report is available
from commenters and industry sources. For example, one industry
source estimates the cost of a review as $2,000-$2,450 for a single-
owner LLC/S-Corp/Sole Proprietor issuer that has not previously had
a review or audit but is in possession of full financial records and
$2,400-$2,950 for a single-owner issuer that has not previously had
a review or audit and instead tracks financials in a spreadsheet
format. These are estimates based on a hypothetical issuer. Costs
may vary depending on the accountant and the issuer's circumstances.
See CrowdfundCPA Crowdfunding Audit/Review Cost Calculator,
available at: http://crowdfundcpa.com/cost-estimate---calculator.html (retrieved April 22, 2020). A commenter on the
Concept Release stated that it has ``interviewed dozens of CPA firms
and found that the average cost of reviewing a company that has two
years of financial history is at least $6,000'' and that ``[f]or a
company with no history, this quote (from many CPA firms) has been
in the $1,500 to $2,500 range.'' See Letter from Mainvest (Sep. 24,
2019), available at: https://www.sec.gov/comments/s7-08-19/s70819-6193357-192513.pdf.
\682\ See infra note 695.
\683\ See id.
\684\ See supra note 449.
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ii. Costs
The amendments may increase aggregate potential investor
losses.\685\ Increased offering limits under Regulation A Tier 2,
Regulation Crowdfunding, and Rule 504 may make it easier for smaller,
higher-risk issuers to access capital through these exemptions.\686\
The increased offering limits could also make the exemptions more
attractive to issuers that cannot meet more restrictive requirements
applicable to larger offerings today, resulting in potentially greater
representation of such issuers among the issuers relying on the amended
exemptions.\687\ For example, some issuers seeking up to $5 million
that are unable to meet State or Commission qualification requirements
under Regulation A would instead be able to offer $5 million, rather
than only $1.07 million, under Regulation Crowdfunding, which does not
require State or Commission review prior to sales. As another example,
some issuers seeking up to $75 million in an offering and also seeking
to avoid the more extensive periodic reporting, beneficial ownership
reporting, proxy disclosure, and 17 CFR 243.100 through 243.103
requirements associated with being a public reporting company would be
able to forgo registration and offer up to $75 million, rather than $50
million, under Regulation A. Issuers seeking up to $75 million and
seeking to avoid restrictions on testing the waters with individual
investors, as well as unlisted issuers seeking to avoid State law
restrictions on primary offers and sales, may find amended Regulation A
Tier 2 to be increasingly attractive compared to a registered offering.
To the extent that issuers under Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 are subject to fewer rules and requirements
or fail to comply with those rules and requirements, investors may be
at an increased risk of loss.\688\
---------------------------------------------------------------------------
\685\ See, e.g., CFA Letter (expressing concern about the
negative effects of increasing the use of Regulation A for non-
accredited investors and increased risks of investor losses); R.
Rutkowski Letter (expressing concern about risk to non-accredited
investors in Regulation A and Regulation Crowdfunding offerings);
and Morningstar Letter (noting a lack of investment advice such as
from a broker or investment adviser that investors might have access
to with regard to an investment in a public company).
\686\ See, e.g., Md. St. Bar Assoc. Letter (expressing concern
that Regulation Crowdfunding will draw non-accredited investors to
issuers that accredited investors refused to fund and further
stating that companies that require more than $50 million every 12
months should be raising capital through registered offerings rather
than Regulation A); B. Richardson Letter (discussing uncertainty
about Regulation Crowdfunding issuer outcomes); Better Markets
Letter (stating that early-stage companies have a high risk of
failure and that retail investors cannot adequately diversify among
such firms due to the ``dearth of investable funds''); CFA Letter
(stating that ``worse deals are sold to members of the general
public subject to Reg. A, Reg. CF, and Rule 504''); CFA Institute
Letter (stating that increased offering limits ``may attract other
high-risk issuers''); AFREF Letter and R. Rutkowski Letter
(expressing concern about risk to retail investors from the
expansion of offering limits under Regulation A, Regulation
Crowdfunding, and Rule 504). See also CFA Institute Letter (noting
``the outsized role played by a single industry--real estate--in
Regulation A markets''). Real estate issuers have accounted for the
majority of financing under Regulation A to date. See Report to
Congress on Regulation A/Regulation D Performance, at p. 32. We
recognize that unlisted REITs, including Regulation A REITs, may
pose risks to some non-accredited investors. We note that such
investors already may invest in unlisted REITs that are registered
under Section 12(g). See Investor Bulletin: Non-traded REITs,
available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html. Although Regulation A Tier 2 REIT offerings
are eligible for certain additional relief relative to unlisted
REITs registered under Section 12(g) (including testing the waters
and semi-annual rather than quarterly reporting), Regulation A Tier
2 offerings are subject to non-accredited investor investment
limits. The ability to access unlisted real estate offerings may
offer benefits--as well as risks--to investors. Real estate is
associated with considerable returns among private funds (to which
non-accredited investors generally lack access). See Report to
Congress on Regulation A/Regulation D Performance, at Table 14. Real
estate also accounts for the largest share of non-fund Regulation D
offerings (to which non-accredited investors also rarely have access
today). See id, at Figure 9. Non-accredited investor access to real
estate private equity through Regulation A could expand their
investable opportunity set and potential for diversification,
allowing them to potentially construct more efficient portfolios.
See, e.g., IPA Letter (supporting ``increased access to investment
strategies with low correlation to the equity markets, including net
asset value real estate investment trusts (``REITs''), lifecycle
REITs, business development companies, interval funds and direct
participation programs . . . individual investor access to a wide
variety of asset classes that have historically been available only
to institutional investors''). See also supra note 654.
\687\ See, e.g., CFA Institute Letter (expressing concern about
risks to non-accredited investors from adverse selection in
Regulation A and Regulation Crowdfunding offerings); and Md. St. Bar
Assoc. Letter.
\688\ See, e.g., CII Letter (discussing concerns about
Regulation A issuer compliance); NASAA Letter (recommending
strengthening corporate governance and disclosure obligations and
rescinding preemption of State securities regulation to increase the
regulatory oversight of these companies making them more attractive
to and safer for investors); and J. Marks Letter (expressing concern
about Regulation Crowdfunding issuer compliance). See also, e.g.,
Mercer Bullard, Crowdfunding's Culture of Noncompliance: An
Empirical Analysis, 24 Lewis & Clark L. Rev. 899 (2020).
---------------------------------------------------------------------------
The increased offering limits for Regulation A Tier 2, as well as
the increased offering limit for Regulation Crowdfunding (combined with
the Regulation Crowdfunding qualified purchaser amendments) also will
expand the scope of offerings that are not subject to State
registration and qualification requirements, potentially increasing
risk of investor losses to the
[[Page 3575]]
extent not mitigated by other investor protection provisions. Rule 504
offerings will remain subject to State registration and qualification
requirements.
The investor costs described above are expected to be mitigated by
the investor protection provisions of each exemption. In particular,
Regulation A Tier 2 offerings will remain subject to offering statement
and ongoing disclosure requirements, non-accredited investor investment
limits, bad actor disqualification provisions, and issuer eligibility
requirements, and will continue to be required to undergo Commission
qualification before sales can be made. Regulation Crowdfunding
offerings will remain subject to offering statement and periodic
disclosure requirements, intermediary requirements, including investor
education and measures to reduce the risk of fraud, as well as non-
accredited investor investment limits, bad actor disqualification
provisions, and issuer eligibility requirements. Moreover, costs to
investors are expected to be further mitigated by the continued
application of the antifraud provisions of Federal and State securities
laws and the role of reputational incentives of issuers and, if
applicable, intermediaries, in these offerings. Rule 504 offerings will
remain subject to issuer eligibility requirements, bad actor
disqualification provisions, and State registration and qualification
requirements.
As discussed above, the temporary final rules currently in effect
serve as the economic baseline against which the costs of the
amendments extending the relief from certain Regulation Crowdfunding
review requirements are measured. Thus, we do not expect additional
significant costs to result from the extension. We recognize that costs
to investors associated with the temporary final rules will continue to
be incurred under the amendments extending the rules, similar to the
baseline.\689\ Importantly, several provisions of the temporary rules
are expected to continue to mitigate potential risks to investors.
Issuers relying on the temporary rules must still provide prominent
disclosure that financial information certified by the principal
executive officer of the issuer has been provided instead of financial
statements reviewed by a public accountant that is independent of the
issuer. Moreover, temporary relief from the review report requirement
does not preclude liability in instances of materially misleading
financial disclosures provided at the time of the offering, and general
anti-fraud provisions and liability for offers under Regulation
Crowdfunding will continue to apply. Finally, the remaining investor
protections of Regulation Crowdfunding continue to provide significant
safeguards for investors in offerings reliant on the temporary relief
from the review report requirement.
---------------------------------------------------------------------------
\689\ Although a review report provides a more limited level of
assurance compared to an audit report, reviewed financial statements
confer valuable informational benefits to investors. See, e.g., Brad
A. Badertscher et al., Verification Services and Financial Reporting
Quality: Assessing the Potential of Review Procedures (Simon Bus.
Sch., Working Paper No. FR 17-17, July 2018) (``[B]oth reviews and
audits yield significantly better reporting quality scores and lower
cost of debt than zero-verification compilations. However, model-
based reporting quality scores of reviews and audits are
indistinguishable statistically, on average. Regarding broader
economics, we find that relative to compilations, reviews yield more
than half the added interest rate benefit associated with an audit,
at considerably less than half the added cost. Overall, our results
suggest reviews may provide a cost-effective verification
alternative to audits, and the potential of analytical procedures
warrants more attention by audit researchers and regulators.'');
Evisa Bogdani, Monika Causholli & W. Robert Knechel, The Role of
Assurance in Equity Crowdfunding (Working Paper, 2019) (finding that
``firms that provide either reviewed or audited financial statements
are more likely to reach their target capital, attract a greater
number of investors, and raise more capital relative to firms that
only provide management-certified financial statements'' in equity
crowdfunding). Thus, in cases of issuers temporarily exempted from
the review report requirement, particularly in an environment of
heightened market uncertainty, investors may have less information
in making their investor decisions and may incur additional risks.
Exemptive relief from the review report requirement also may
continue to weaken the incentives of some issuers to provide
compliant financial statement disclosures since they no longer would
be required to undergo a review by an independent accountant and to
provide such a report to investors, resulting in potentially less
informative financial disclosures provided to investors in affected
offerings. For example, some financial statement disclosures
provided by issuers below the existing review report threshold are
not prepared in a U.S. GAAP-compliant manner. See, e.g., Letter from
CrowdCheck (Oct. 30, 2019) commenting on the Concept Release,
available at: https://www.sec.gov/comments/s7-08-19/s70819-6368811-196431.pdf. However, to the extent that issuer financial disclosures
are historical in nature, such disclosures might be relatively less
meaningful for purposes of assessing the current financial condition
and growth prospects of an issuer that was financially sound but has
experienced significant adverse effects as a result of the COVID-19
crisis. Further, historical financial disclosures may be
incrementally less meaningful for evaluating the business of a
recently formed or development-stage issuer. See, e.g., Letter from
Mainvest (stating that ``a company with no operating history simply
does not have historical financial information that can be reviewed.
Issuers on our platform unfortunately are required to get CPA
reviews of a balance sheet with almost no zeros [sic]. This adds
practically no value to investor protections and significantly
increases up-front costs to companies.'').
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iii. Effects on Efficiency, Competition, and Capital Formation
The amendments to the Regulation A, Regulation Crowdfunding, and
Rule 504 offering limits are expected to increase capital formation in
those markets and to provide issuers that cannot meet their financing
needs under existing exemptions with a means of raising external
financing and potentially lowering their cost of capital (e.g., as a
result of economies of scale and fixed cost of initiating an offering),
resulting in more efficient allocation of capital to growth
opportunities. The capital formation effects of the amendments are
expected to be more limited if issuers raise amounts of financing below
the amended offering limits or if some of the capital raised under the
amended exemptions would have been otherwise raised through other
securities offering methods. For example, raising the Regulation
Crowdfunding offering limit may draw some of the issuers that would
have otherwise sought between $1.07 and $5 million under Rule 504, Rule
506, or Regulation A. Similarly, raising the Rule 504 offering limit
may draw some of the issuers that would have otherwise sought between
$5 and $10 million under Rule 506 or Regulation A. Those scenarios
entail the switching of issuers between offering methods rather than
new capital formation.
As discussed above, these amendments may enable some issuers to
delay or forgo a registered offering, thereby avoiding the associated
costs of Exchange Act registration and being a public reporting
company. For example, the higher offering limits for the discussed
exemptions may allow more issuers to raise capital from non-accredited
investors without registration. This could result in less disclosure
and lower liquidity for some of these investors. However, this
possibility must be considered in the context of the baseline, under
which those issuers otherwise might have relied on Rule 506, which
significantly limits non-accredited investor access and, for non-
accredited investors that do invest, restricts resales as well as
limits the ability to obtain current information about the issuer.
Alternatively, issuers on the margin between a Regulation A Tier 2
offering and a registered offering might have registered their
securities but not listed on an exchange in a traditional public
offering (due to cost, small size, lack of underwriter or institutional
investor interest, etc.). As a result, their securities would have no
secondary market or be quoted over-the-counter, which affords only
marginal
[[Page 3576]]
benefits, if any, of liquidity and information availability compared to
a Regulation A Tier 2 offering.
If the amended offering limits draw additional issuers to these
exemptions, which accept an unlimited number of non-accredited
investors, the amendments could expand the set and nature of investable
opportunities for non-accredited investors seeking exposure to issuers
that have not yet registered an offering. The effects on competition
for investor capital will depend on how the additional investor capital
drawn to the affected markets compares to the amount of additional
financing sought by issuers in these markets. By promoting access to
external financing for smaller issuers, the amendments may increase
product market competition among small issuers and between small
issuers and more established issuers.
As discussed above, the temporary final rules currently in effect
serve as the economic baseline against which the economic effects of
the amendments extending the relief from the review report requirements
are measured. Thus, we do not expect additional significant effects on
efficiency, competition, or capital formation to result from the
extension.
iv. Reasonable Alternatives
As an alternative, we could have adopted different offering limits.
For example, we could have adopted smaller increases to the offering
limits, such as an adjustment to the existing offering limits to
reflect the rate of inflation since the enactment of the JOBS Act in
April 2012.\690\ As another alternative, we could have adopted larger
increases in the offering limits, as suggested by some commenters.\691\
Compared to the final amendments, a higher (lower) offering limit could
make an offering under the exemption more (less) cost-effective for
issuers (and if applicable, intermediaries) facing fixed offering and
due diligence costs, resulting in larger (smaller) capital formation
benefits. Compared to the final amendments, a higher (lower) offering
limit could draw a larger (smaller) pool of additional issuers to the
respective segment of the exempt market and potentially expand
investment opportunities for non-accredited investors seeking exposure
to issuers that have not yet registered their securities. The net
impacts of these alternatives on capital formation, investor
protection, and competition could be limited if most of the incremental
offering activity under these alternatives is due to issuers switching
between various offering methods. Even if most of the additional
issuers under these alternatives would have otherwise raised financing
through another offering method, such issuers might still be able to
benefit from a lower cost of capital under the alternative of increased
offering limits. The net impacts of the alternative would be further
attenuated to the extent that the majority of issuers continue to raise
amounts below the offering limits.\692\ As a caveat, similar to the
discussion above, existing data on issuers approaching the offering
limits may not be representative of the amounts that would be raised if
a different pool of issuers or investors is drawn to the respective
market segment under alternative offering limits.
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\690\ The Regulation A offering limit has not been adjusted for
inflation since the enactment of the JOBS Act. Between April 2012,
when the JOBS Act was enacted, and December 2019, the rate of CPI
inflation was 11.7 percent according to Bureau of Labor Statistics
(``BLS'') data. Adjusting for inflation would yield a Regulation A
limit of $55.845 million ($50 million x 1.1169). The Regulation
Crowdfunding offering limit was last adjusted for inflation in April
2017. Between April 2017 and December 2019, the rate of CPI
inflation was 5.09 percent, according to BLS data. Adjusting for
inflation would yield a Regulation Crowdfunding offering limit of
$1.124 million ($1.07 million x 1.0509). The Rule 504 offering limit
was raised to $5 million in October 2016. Between October 2016 and
December 2019, the rate of CPI inflation was 6.31 percent. Adjusting
for inflation would yield a Rule 504 offering limit of $5.316
million ($5 million x 1.0631).
\691\ For instance, some commenters have suggested raising the
Regulation A offering limit to $100 million. See supra note 367.
Some commenters have suggested raising the Regulation Crowdfunding
offering limit above $5 million. See supra note 421.
\692\ For example, the average (median) Regulation Crowdfunding
offering reported proceeds of $213,678 ($106,900) between the
inception of Regulation Crowdfunding (May 16, 2016) through December
31, 2019; the average (median) Regulation A issuer reported raising
$13.4 million ($5.0 million) between the effective date of 2015
Regulation A amendments (June 19, 2015) and December 31, 2019.
---------------------------------------------------------------------------
It is difficult to predict how many new issuers that would not have
otherwise engaged in a securities offering would be drawn to the
respective exempt market segment under these alternatives, compared to
the amended offering limits. The table below examines the use of
alternative securities offering methods that are most likely to be
relied on by issuers that raise amounts above existing offering limits
but below several alternative offering limit thresholds to illustrate
the potential number of additional issuers that presently utilize other
offering methods that do not have a cap but that might see the amended
exemption as an option under these alternatives. The caveats that
accompany Table 12 continue to apply.
Table 14--Evaluation of Alternatives to the Amended Offering Limits Using Evidence From Capital Raising in 2019
Through Select Other Securities Offering Methods
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Evaluation of Alternative Regulation A Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $50 million and up to: Number of Number of
issuers in issuers in
offerings registered
under Rule 506 offerings \b\
\a\
----------------------------------------------------------------------------------------------------------------
$55.845 million (inflation adjustment).......................................... 51 17
$60 million..................................................................... 85 29
$70 million..................................................................... 144 46
$75 million (amended offering limit)............................................ 171 57
$80 million..................................................................... 198 72
$90 million..................................................................... 231 90
$100 million.................................................................... 270 122
$110 million.................................................................... 298 143
$120 million.................................................................... 315 151
$125 million.................................................................... 325 162
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[[Page 3577]]
Evaluation of Alternative Regulation Crowdfunding Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $1.07 million and up to: Number of Number of Number of
issuers in issuers in issuers in
offerings offerings offerings
under Rule 504 under Rule 506 under
\c\ \d\ Regulation A
\e\
----------------------------------------------------------------------------------------------------------------
$1.124 million (inflation adjustment)........................... 2 104 0
$2 million...................................................... 31 1,542 2
$3 million...................................................... 44 2,662 7
$4 million...................................................... 51 3,388 10
$5 million (amended offering limit)............................. 55 4,004 13
$6 million...................................................... .............. 4,454 15
$7 million...................................................... .............. 4,813 17
$8 million...................................................... .............. 5,127 20
$9 million...................................................... .............. 5,333 21
$10 million..................................................... .............. 5,567 23
$15 million..................................................... .............. 6,233 29
$20 million..................................................... .............. 6,604 31
----------------------------------------------------------------------------------------------------------------
Evaluation of Alternative Rule 504 Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $5 million and up to: Number of Number of
issuers in issuers in
offerings offerings
under Rule 506 under
\f\ Regulation A
\g\
----------------------------------------------------------------------------------------------------------------
$5.316 million (inflation adjustment)........................... .............. 152 0
$6 million...................................................... .............. 464 2
$7 million...................................................... .............. 834 4
$8 million...................................................... .............. 1,166 7
$9 million...................................................... .............. 1,377 8
$10 million (amended offering limit)............................ .............. 1,618 10
$15 million..................................................... .............. 2,315 16
$20 million..................................................... .............. 2,695 18
$25 million..................................................... .............. 2,974 19
----------------------------------------------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and blank check companies and limit the
exemption to U.S. and Canadian issuers, so for comparability pooled investment funds and issuers outside the
U.S. and Canada are excluded from the Rule 506 proceeds used in this estimate. Reporting companies are
eligible to rely on Regulation A under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in SDC Platinum for U.S. public offerings
of equity, debt, and convertible securities with issue dates in 2019, excluding withdrawn, postponed, and
rumored offerings, asset-backed securities offerings, blank check issuers, investment fund issuers, and
issuers outside the U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
opposed to cumulative proceeds reported from June 2015 through December 2019. Regulation Crowdfunding
eligibility criteria limit the exemption to U.S. issuers and exclude Exchange Act reporting companies, so for
comparability non-U.S. issuers and reporting companies are excluded from the Regulation A proceeds used in
this estimate.
\d\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds and non-U.S.
issuers are excluded from Rule 504 proceeds used in this estimate. Reporting companies are ineligible under
Rule 504.
\e\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds, reporting
companies, and non-U.S. issuers are excluded from Rule 506 proceeds used in this estimate. Reporting companies
are identified based on annual reports or amendments to them filed in 2019.
\f\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
opposed to cumulative proceeds reported from June 2015 through the end of the period. Rule 504 eligibility
criteria exclude Exchange Act reporting companies, so for comparability reporting companies are excluded from
the Regulation A proceeds used in this estimate.
\g\ For comparability with other estimates in this table, we exclude Exchange Act reporting companies and pooled
investment funds from Rule 506 proceeds used in this estimate. Reporting companies are identified based on
annual reports or amendments to them filed in 2019.
After considering these alternatives and public comment, we
continue to believe that the amended offering limits are most likely to
provide meaningful capital formation benefits and increased access to
investment opportunities to investors while representing a balanced
approach to expansion of the respective offering exemptions.
We are amending the Regulation A Tier 2 offering limit but not the
Tier 1 offering limit. As an alternative, we could amend the Tier 1
offering limit, as suggested by one commenter.\693\ For example, we
could raise the Tier 1 offering limit proportionately to the increase
in the Tier 2 offering limit, by 50 percent, from $20 million to $30
million. The economic effects of this alternative are similar to the
ones considered above. A higher (lower) Tier 1 offering limit could
draw more (fewer) issuers to Tier 1 of Regulation A. Some of the
additional issuers drawn to Tier 1 under this alternative might be
switching from Tier 2 or other exempt offering methods, which might
limit the net impact on capital formation.\694\ Even
[[Page 3578]]
in that case, some issuers switching from Tier 2 or other offering
methods might be able to decrease their cost of capital.
---------------------------------------------------------------------------
\693\ See Chamber of Digital Commerce Letter. But see CII
Letter; NASAA Letter; and CrowdCheck Letter (opposing an increase in
the Tier 1 offering limit).
\694\ For example, from June 2015 through December 2019, we have
identified seven Tier 2 issuers that reported raising between $20
million and $30 million in financing under Regulation A and that
could become newly eligible to raise the same amount of financing
under Tier 1, if it were amended under this alternative. However,
they also might not choose to switch to Tier 1 if they find Tier 2
to be more attractive (e.g., due to preemption of State review or an
easier path to quotation on the upper tiers of the OTC market in the
presence of periodic reports required by Tier 2). For example, from
June 2015 through December 2019, we estimate that 112 Tier 2 issuers
reported raising up to $20 million in financing under Regulation A
even though that amount would have made them eligible to use Tier 1
as well. Further, some issuers might still prefer Tier 2 because it
allows issuers to undertake an offering with a higher maximum
offering amount, which provides issuers with flexibility to raise
more capital without having to undergo a re-qualification (e.g., if
market conditions improve) even if the average issuer's proceeds do
not reach the amount sought.
---------------------------------------------------------------------------
We are raising the Regulation Crowdfunding offering limit to $5
million, which may create redundancies between Regulation Crowdfunding
and Rule 504. The amended Rule 504 offering limit also may create
redundancies between Rule 504 and Regulation A. As an alternative, we
could eliminate Rule 504. Such an alternative might contribute to
regulatory simplification. However, it also might be disruptive for
those issuers that rely on Rule 504 and find it to be cost-effective
for their financing strategy (e.g., due to a lack of the intermediary
and periodic reporting requirements).
We are extending temporary relief from the review report
requirement for eligible issuers in Regulation Crowdfunding offerings
of up to $250,000 for an additional 18 months. As an alternative, we
could have amended the Regulation Crowdfunding offering limit but not
extended the temporary relief from certain review requirements for
eligible issuers in offerings of up to $250,000. As a general matter,
the flexibility to access limited amounts of capital under Regulation
Crowdfunding on an expedited basis, without incurring the cost of an
independent accountant's review report, facilitates capital formation
and reduces some of the barriers to accessing capital markets for the
smallest issuers, allowing some issuers to raise additional capital or
to optimize their financing cost through a more efficient and
streamlined offering process. By providing targeted relief in a market
segment that primarily attracts small businesses, which are
disproportionately affected by downturns, the amendments extending the
temporary relief also serve to incrementally enhance competition
between small businesses and larger businesses (which tend to be less
financially constrained).\695\ The alternative of not extending the
relief would impose costs and reduce the flexibility for small issuers
adversely affected by COVID-19 seeking to meet their financing needs
through Regulation Crowdfunding. It also would create competitive
disparities for otherwise similar issuers that initiate offerings of
this size before and after the expiration of the existing relief
(February 28, 2021).
---------------------------------------------------------------------------
\695\ Research has related small size to financing constraints,
and conversely, larger size to being less financially constrained.
See, e.g., Nathalie Moyen, Investment--Cash Flow Sensitivities:
Constrained versus Unconstrained Firms, 59 J. FIN. 2061 (2004);
Christopher Hennessy, Amnon Levy, & Toni Whited, Testing Q Theory
with Financing Frictions, 83 J. FIN 691 (2007). Other studies also
show that diversified firms can rely on internal capital markets to
mitigate financing constraints. See, e.g., Venkat Kuppuswamy &
Bel[eacute]n Villalonga, Does Diversification Create Value in the
Presence of External Financing Constraints? Evidence from the 2007-
2009 Financial Crisis, 62 MGMT. SCI. 905 (2016) (showing that ``the
value of corporate diversification increased during the 2007-2009
financial crisis'' and that ``conglomerates' access to internal
capital markets became more valuable''). See also, e.g., several
recent working papers examining impacts of the COVID-19 crisis on
small businesses: Alexander W. Bartik et al., How Are Small
Businesses Adjusting to COVID-19? Early Evidence from a Survey,
(Nat'l Bureau of Econ. Research, Working Paper No. 26989, 2020);
Jose Maria Barrero, Nicholas Bloom, & Steven J. Davis, COVID-19 Is
Also a Reallocation Shock, (Nat'l Bureau of Econ. Research, Working
Paper No. 27137, 2020); John Eric Humphries, Christopher Neilson, &
Gabriel Ulyssea, The Evolving Impacts of COVID-19 on Small
Businesses Since the CARES Act, (Cowles Foundation, Discussion Paper
No. 2230, 2020); Robert W. Fairlie, The Impact of COVID[hyphen]19 on
Small Business Owners: Evidence from the First Three Months after
Widespread Social-Distancing Restrictions, 29 J. Econ. Mgmt.
Strategy 727 (2020).
---------------------------------------------------------------------------
We recognize that the alternative of allowing the temporary relief
to expire could incrementally decrease concerns about investor
protection compared to extending the relief.\696\ Generally, however,
the aggregate incremental effect of the temporary rules on retail
investor protection is likely limited by various factors, including the
tailoring of the relief (through the eligibility requirements and the
narrow scope and time-limited nature of the relief) and the modest size
of the Regulation Crowdfunding market compared to other market segments
that draw retail investors.\697\ Further, issuers are required to
disclose reliance on the temporary relief to investors, enabling more
informed decisions. In addition, several essential safeguards contained
in the 2015 Regulation Crowdfunding rules continue to apply, such as
offering and investment limits, the use of registered crowdfunding
intermediaries to conduct Regulation Crowdfunding offerings, other
disclosure requirements of Form C, and annual report obligations. While
we recognize that there may be somewhat greater investor protection
concerns with an extension of the temporary final rules compared to an
alternative of allowing the temporary relief to expire, overall we do
not believe the difference to be significant in light of the other
features of these offerings.
---------------------------------------------------------------------------
\696\ See also Temporary Amendments Adopting Release, at 27122;
Better Markets Letter.
\697\ See also Temporary Amendments Extension, at 54489.
---------------------------------------------------------------------------
We could also extend the relief from review report requirements for
eligible issuers in offerings of up to $250,000 for a shorter or longer
time period than specified in these amendments. The alternative of
extending the relief for a shorter (longer) time period would lead to
fewer (more) potential issuers being afforded the flexibility in
capital raising under the temporary rules, compared to the amendments.
Because of the severe and continuing economic impact of the COVID-19
crisis, we believe that the extension of the temporary rules is
appropriate.
As another alternative, we could permanently raise the financial
statement requirement thresholds, for instance, in proportion to the
increase in the offering limit: $500,000 for reviewed financial
statements (in lieu of $107,000); $2.5 million for audited financial
statements for follow-on offerings (in lieu of $535,000); and $5
million for audited financial statements for initial offerings (in lieu
of $1.07 million).\698\ As another alternative, we could waive certain
other disclosure requirements (e.g., progress updates and/or annual
reports) for the lower tier of crowdfunding offerings (e.g., offerings
up to $250,000 or $1 million) to make crowdfunding offerings more cost-
effective for the smallest issuers, many of which have not yet begun
generating revenue and might not have enough liquid assets or access to
loans to cover the compliance costs of a Regulation Crowdfunding
offering. Scaling disclosure requirements for Regulation Crowdfunding
offerings under these alternatives could attract a larger set of early
stage issuers that seek to raise small amounts of capital to Regulation
Crowdfunding while providing a degree of independent verification of
accounting quality for larger crowdfunding offerings in a more cost-
[[Page 3579]]
effective manner than with an audit.\699\ Scaling disclosure
requirements under this alternative, however, would result in
information loss to investors, potentially contributing to less well
informed investment decisions, greater risk of investment losses, and
less efficient allocation of capital. Moreover, this alternative could
attract high-risk issuers to the lower crowdfunding tier, which could
undermine future capital raising in that market tier.
---------------------------------------------------------------------------
\698\ See, e.g., Wefunder Letter (recommending a $1 million
threshold for reviewed financial statements and a $5 million
threshold for audited financial statements); CCA Letter
(recommending increasing the reviewed financial statements threshold
to $500,000 and the audited financial statements threshold to $5
million for initial offerings).
\699\ See supra note 689.
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b. Investment Limits Under Regulation Crowdfunding
The final amendments revise Regulation Crowdfunding investment
limits.\700\ As proposed, the amended limits will be based on the
greater of, rather than the lower of, an investor's annual income or
net worth. Further, as proposed, the amended limits will only apply to
non-accredited investors.
---------------------------------------------------------------------------
\700\ See supra Section II.E.3.
---------------------------------------------------------------------------
i. Benefits
The amendments will increase the maximum amount that can be
invested across all Regulation Crowdfunding offerings by the subset of
non-accredited investors whose net worth and annual income diverge.
This may benefit issuers by increasing the amount of capital formation
and/or by lowering the overall costs of soliciting non-accredited
investors. Relaxing the investment limitation may also benefit the
affected subset of non-accredited investors by enabling them to achieve
more efficient portfolio allocations and enhanced upside from investing
in early-stage companies. Because crowdfunding issuers commonly set
investment minimums, relaxing the investment limitation may allow the
affected investors to invest in a larger number of crowdfunding
issuers, holding invested amounts constant, which may result in greater
diversification within the crowdfunding category of the investor's
portfolio. However, a larger aggregate investment in the crowdfunding
category may reduce the diversification of the investor's overall
portfolio, holding portfolio size constant. The effect of the
amendments on portfolio diversification will also depend on how much
investors allocate to different crowdfunding securities, out of the
allowable limit, relative to non-crowdfunding securities, and on the
correlations between crowdfunding and non-crowdfunding securities
chosen by investors for their portfolios.
The amendments will also remove the investment limitation for
accredited investors in Regulation Crowdfunding, harmonizing the
treatment of accredited investors across Regulation Crowdfunding,
Regulation A, Regulation D, and private placements not reliant on
Regulation D.\701\ Accredited investors are expected to possess the
capability to evaluate larger crowdfunding investments and the
resulting financial risk. Removing the investment constraint may
benefit such investors by allowing them to allocate their capital more
efficiently within their overall investment portfolio. It may also
create stronger incentives to perform due diligence, screen, and
monitor crowdfunding issuers, which may have positive spillovers for
non-accredited investors in Regulation Crowdfunding. It is possible
that accredited investors will simply reallocate capital between
exemptions (e.g., in cases of side-by-side Regulation Crowdfunding/Rule
506(c) offerings). Accredited investors may also continue to favor
private placements, which do not cap offering size and allow them to
capitalize more fully on their due diligence, with fewer spillovers to
the rest of the market (because information about investments is
private, there is less free riding on large investors' due diligence)
and more bargaining power to negotiate offering terms.
---------------------------------------------------------------------------
\701\ See also supra note 431 (discussing commenters that
supported the amendments).
---------------------------------------------------------------------------
We lack the data to assess how many investors may be affected by
the described amendments to investment limits because investor
information generally is not available and is not required to be
disclosed. Based on a subset of data made available by one crowdfunding
intermediary,\702\ among non-accredited investors with available
information on annual income and net worth, revising the investment
limits as described can increase the investment limit by 98 percent for
the median non-accredited investor in that subset. In addition,
approximately nine percent of investors in the examined subset of data
were accredited and thus will no longer be subject to investment limits
under the amendments. The economic effects of the amendments will be
mitigated to the extent that investors may invest amounts below the
investment limits.\703\ We cannot determine whether these results are
representative of the distribution of investors on other funding
portals or during other time periods, or how that distribution may
change under the amendments if new investors and issuers are drawn to
Regulation Crowdfunding.
---------------------------------------------------------------------------
\702\ See 2019 Regulation Crowdfunding Report, at notes 91-93
and accompanying text. Information on amounts invested by an average
investor or the number of investors per offering is not available
for the full sample of Regulation Crowdfunding offerings.
Information on offerings from one intermediary from May 2016 through
September 2018 provides some insight into the typical investment
size, investor composition, and number of investors in crowdfunding
offerings. For purposes of these estimates, we exclude investments
redirected to a Rule 506(c) offering; offerings that were not funded
(i.e., were either canceled or ongoing) or had missing data;
observations where an investor made but subsequently withdrew the
commitments, yielding a cumulative investment of zero; and investor
observations with missing accredited investor status.
\703\ See 2019 Regulation Crowdfunding Report, at 40 (``For most
investors with available data on annual income and net worth
(approximately 30% of investors in offerings funded on the
platform), cumulative amounts invested during the entire considered
period (almost 2.5 years) through this intermediary's platform did
not reach the investment limit, with fewer than 10% of investors on
the platform investing amounts exceeding their 12-month investment
limit over the entire 2.5-year period. According to information
provided by another intermediary respondent to the lookback survey,
the median (average) crowdfunding investment through its platform
was $1,335 ($500), with investors making an average of 2.7
investments and approximately 40% of investors making two or more
investments. According to information provided by a different
intermediary respondent, the average investment was approximately
$992, and investors made an average of 1.5 investments. Based on
available data, we are unable to determine whether these investors
also invested in crowdfunding offerings through other crowdfunding
platforms; thus, these estimates are likely to represent a lower
bound on average investment amounts.'').
---------------------------------------------------------------------------
ii. Costs
The final amendments to Regulation Crowdfunding investment limits
may increase the magnitude of investor losses, particularly if some
investors inefficiently under-diversify their portfolios and take on
too much risk from crowdfunding investments.\704\ For example, relaxing
investment limits may enable some non-accredited investors to make
larger investments in crowdfunding offerings based on an incomplete
assessment of information about the securities offered, with the
resulting potential for increased investor losses that they may be less
able to bear. However, other investor protection provisions of
Regulation Crowdfunding, such as issuer disclosure requirements and
investor education and other intermediary requirements, may partly
mitigate these risks. The potential costs of the amendments should be
considered in the context of the baseline, under which non-accredited
investors are permitted to invest unlimited amounts in both listed and
unlisted registered securities and in
[[Page 3580]]
Regulation A Tier 1 securities,\705\ as well as up to ten percent of
the higher of income or net worth in each offering of Regulation A Tier
2 securities, and thus they already may be in a position of making
investments which also may result in considerable risk to investor
portfolios.
---------------------------------------------------------------------------
\704\ See, e.g., CII Letter (opposing increasing investment
limits for non-accredited investors); Morningstar Letter (opposing
increasing investment limits for non-accredited investors due to a
lack of investment advice and the difficulty of detected scams);
NASAA Letter; and CFA Letter.
\705\ In contrast to Regulation Crowdfunding securities, sales
and offers of unlisted registered securities and Regulation A Tier 1
securities are subject to State registration requirements,
including, in some states, merit review.
---------------------------------------------------------------------------
The final amendments removing investment limits for accredited
investors in Regulation Crowdfunding offerings are not expected to
result in a negative effect on investor protection given that
accredited investors generally have the capacity to fend for themselves
and greater ability to withstand financial losses. Because accredited
investors are not subject to investment limitations in offerings under
Regulation A, in offerings under Regulation D, in other private
placements, or in registered offerings, they may simply reallocate
capital between holdings of securities issued under other exemptions.
It is also possible that accredited investors investing large amounts
may continue to prefer private placements, as discussed above.
iii. Effects on Efficiency, Competition, and Capital Formation
The described amendments to Regulation Crowdfunding investment
limits may incrementally promote capital formation through Regulation
Crowdfunding, particularly for issuers that may attract accredited
investors or non-accredited investors who have a greater disparity
between income and net worth. The revised investment limits may allow
some investors that were constrained by existing investment limits to
attain a more efficient portfolio allocation. For other investors,
relaxing investment limits may enable an inefficiently high exposure to
crowdfunding investments, resulting in under-diversification. If the
amendments increase accredited investor participation in Regulation
Crowdfunding offerings, the average intensity of monitoring and
screening of issuers by investors may increase, with potential positive
spillovers for small investors that lack the expertise and incentives
to engage in comparable monitoring and screening. This may lead to
greater efficiency of capital allocation in the Regulation Crowdfunding
market. Removing accredited investor investment limits may lead to a
reallocation of investment opportunities in that market segment from
non-accredited investors to accredited investors, as indicated by one
commenter.\706\
---------------------------------------------------------------------------
\706\ See J. Pampena Letter (suggesting the change may eliminate
investment opportunities for non-accredited investors). According to
the commenter, if accredited investors are permitted to invest under
Regulation Crowdfunding without an investment limit, investment from
accredited investors will rapidly satisfy the offering limits of
these mostly small offerings.
---------------------------------------------------------------------------
Depending on how the additional investor capital drawn to
Regulation Crowdfunding compares to the amount of additional financing
sought by issuers in these markets after the amendments, the amendments
may affect competition among issuers for investor capital.
The net impacts of the amendments may be attenuated if the
additional capital is reallocated from other offerings that either do
not have investment limits or that have less stringent investment
limits (e.g., Rule 506, other private placements, or Regulation A).
iv. Reasonable Alternatives
As an alternative, we could align Regulation Crowdfunding
investment limits with those of Regulation A Tier 2--apply the ten-
percent limit on a per-offering basis to all non-accredited investors--
rather than apply a two-tier limit (five percent for non-accredited
investors with a lower income and net worth and ten percent for other
non-accredited investors) across all Regulation Crowdfunding offerings
in a twelve-month period. Compared to the final amendments, this
alternative would have expanded investment limits, particularly for
non-accredited investors with lower income and net worth and for
investors that participate in multiple Regulation Crowdfunding
offerings, yielding potential increases in capital formation benefits
and non-accredited investor access to startup investment opportunities.
However, this alternative also might have increased investor losses per
investor and decreased diversification for some non-accredited
investors, compared to the final amendments.
As another alternative, we could have increased or lowered the
numerical thresholds in investment limits under Regulation
Crowdfunding. For example, we could scale up the $2,200 numerical
threshold in the investment limit in proportion to the increase in the
offering limit (from $2,200 to $11,000). This alternative would
increase (decrease) capital formation benefits while increasing
(decreasing) the magnitude of potential investor losses per non-
accredited investor, particularly for non-accredited investors with
lower income and net worth, compared to the final amendments.
As another alternative, we could require verification of accredited
investor status under Regulation Crowdfunding, similar to Rule
506(c).\707\ Under this alternative, the likelihood of non-accredited
investors that could have been mistakenly identified as accredited
investors without verification incurring losses from a large investment
under Regulation Crowdfunding would be decreased compared to the
amendments. However, issuers would incur additional costs of
verification of investor status under this alternative (whether in the
form of the cost passed along to the issuer by an intermediary, or the
cost incurred by the issuer directly). While such additional costs
would be smaller for issuers with a prior or concurrent Rule 506(c)
offering, for the typical Regulation Crowdfunding issuer that is small,
with limited internal cash flows and no prior offering experience, such
costs may serve as a significant barrier to accepting accredited
investors in a Regulation Crowdfunding offering.
---------------------------------------------------------------------------
\707\ See, e.g., J. Clarke Letter; Raise Green & New Haven Comm.
Solar Letter; and Honeycomb Letter (supporting self-verifications).
---------------------------------------------------------------------------
6. Eligibility Requirements in Regulation Crowdfunding and Regulation A
a. Eligibility Requirements Under Regulation Crowdfunding
The final rules will allow crowdfunding issuers to raise capital
through a crowdfunding vehicle, substantially as proposed. Such
crowdfunding vehicles will be formed by or on behalf of the underlying
crowdfunding issuer to serve merely as a conduit for investors to
invest in the crowdfunding issuer and will not have a separate business
purpose. This approach is designed to allow investors in the
crowdfunding vehicle to achieve the same economic exposure, voting
power, and ability to assert State and Federal law rights, and receive
the same disclosures under Regulation Crowdfunding, as if they had
invested directly in the underlying crowdfunding issuer in an offering
made under Regulation Crowdfunding. As discussed in Section II.F.2
above, after considering public comment, we are not adopting the
proposal to limit the types of securities that may be offered and sold
in reliance on Regulation Crowdfunding.
i. Benefits
The final rules will benefit issuers by allowing them to reduce the
[[Page 3581]]
administrative complexities associated with a large and diffuse
shareholder base.\708\ Commenters generally supported permitting
crowdfunding issuers to use crowdfunding vehicles.\709\ As discussed in
Section II.F.1.c above, under the final rules, natural person investors
in the crowdfunding vehicle will be excluded from the number of holders
of record for purposes of Section 12(g). We expect this provision to
significantly increase the utility of the crowdfunding vehicle
structure to issuers, especially in offerings that attract small
investors, and potentially make it easier for Regulation Crowdfunding
issuers to raise capital from venture capitalists and other large
investors in the future. However, the effect on all except the largest
crowdfunding issuers may be limited due to the availability of the
conditional exemption in Exchange Act Rule 12g-6.
---------------------------------------------------------------------------
\708\ See also Proposing Release, at note 420.
\709\ See supra note 480. But see CFA Letter and CII Letter.
---------------------------------------------------------------------------
Currently, some early-stage issuers with high growth potential that
have a chance of attracting VC funding in the future may avoid
conducting an offering under Regulation Crowdfunding due to concerns
about a large and unwieldy capitalization table. By potentially
alleviating some of these concerns, the final rule may encourage
additional issuers with high growth potential to consider pursuing an
offering under Regulation Crowdfunding. Because these issuers might
presently offer securities only to accredited investors or a few non-
accredited investors through offerings under Rule 506 or through other
private placement offerings, the final rule may benefit non-accredited
investors by expanding their access to investment opportunities in
startups with high growth potential that are early in their lifecycle.
As discussed in Section II.F.1 above, the use of a crowdfunding
vehicle will be subject to certain conditions designed to ensure that
investors achieve the same economic exposure, voting power, and ability
to assert State and Federal law rights, and receive the same
disclosures under Regulation Crowdfunding, as if they had invested
directly in the crowdfunding issuer in an offering made under
Regulation Crowdfunding, thereby minimizing any potential adverse
effects for investors of investing in a crowdfunding issuer through
such an offering structure. The crowdfunding vehicle and the
crowdfunding issuer also will be co-issuers in the offering, with the
resulting joint liability for offers and sales, and the offering must
comply with Section 4(a)(6) of the Securities Act and Regulation
Crowdfunding.
The required transparency and single-purpose nature of the
crowdfunding vehicle, combined with the continued application of the
substantive and disclosure requirements of Regulation Crowdfunding and
the antifraud provisions of the Federal and State securities laws, are
expected to provide significant investor protections for crowdfunding
vehicle investors under the final rules.
ii. Costs
The use of crowdfunding vehicles may result in additional offering
costs. The costs of forming and operating the crowdfunding vehicle will
be incurred by the crowdfunding issuer, which may decrease the overall
economic benefits of the offering for all investors in the crowdfunding
issuer, including investors in the crowdfunding vehicle. However, to
the extent that the crowdfunding vehicle yields benefits for the
crowdfunding issuer, including expanded potential for future funding
rounds due to the treatment of the crowdfunding vehicle under Section
12(g), reduced capitalization table concerns and greater efficiency of
administration of a large and diffuse investor base, these economic
benefits of a crowdfunding vehicle may offset the additional costs. The
balance of these tradeoffs is likely to vary depending on the issuer's
offering experience, potential for raising follow-on financing from a
large investor, costs associated with the formation and operation of
the crowdfunding vehicle, and the number of investors participating in
the crowdfunding offering. Because the use of the crowdfunding vehicle
structure will be voluntary, we expect issuers to use a crowdfunding
vehicle only when the issuers determine that the benefits justify the
costs.
If the crowdfunding vehicle is administered by an external entity
on behalf of the issuer, the associated fees may depend on other
business between the external administrator and the issuer. On the one
hand, administration fees may be reduced in instances where an issuer
obtains a bundle of other services related to the offering from the
external administrator or where an administrator seeks future business
of the issuer related to other offerings. On the other hand,
administration fees may be increased to compensate for discounted fees
for other services related to this or other offerings. Several factors
are expected to mitigate concerns about administration fees.
Competition among external service providers is expected to put
downward pressure on such fees. The requirement that crowdfunding
vehicle costs be incurred by the crowdfunding issuer rather than the
crowdfunding vehicle will ensure a degree of alignment of interests of
crowdfunding vehicle investors and the crowdfunding issuer with respect
to crowdfunding vehicle costs. The highly limited scope of permissible
activities of the crowdfunding vehicle will further limit potential
discretion related to fees.
As discussed above, the conditions for the use of crowdfunding
vehicles are expected to minimize any potential conflicts of interest
incremental to a crowdfunding vehicle.\710\ The crowdfunding vehicle
structure is not expected to significantly affect information
processing costs for investors, compared to a direct crowdfunding
offering, because of the transparency and single-purpose nature of the
crowdfunding vehicle, as well as the provisions designed to ensure that
crowdfunding vehicle investors receive the same disclosures under
Regulation Crowdfunding, as if they had invested directly in the
crowdfunding issuer.
---------------------------------------------------------------------------
\710\ Small investors in a direct crowdfunding offering might
face agency conflicts today. However, we do not expect the
amendments to result in significant additional agency conflicts for
investors in direct crowdfunding vehicle offerings.
---------------------------------------------------------------------------
iii. Effects on Efficiency, Competition, and Capital Formation
The final rules are expected to enhance capital formation by making
Regulation Crowdfunding more attractive to issuers. If the incremental
financing is largely due to issuers switching from other offering
methods to Regulation Crowdfunding, the net impact on capital formation
may be minimal. However, if that is the case, the final rules may
reduce the cost of capital. By giving crowdfunding issuers the
flexibility to conduct a crowdfunding offering via a crowdfunding
vehicle, the final rules may make crowdfunding offerings more
attractive to a broader range of issuers, enabling such issuers to
diversify their financing strategy at an early stage of their operation
and in some cases potentially obtain a lower cost of capital or greater
amounts of capital than they would otherwise. The final rules may be
especially beneficial for crowdfunding issuers with high growth
potential by helping them attract institutional investors or other
large investors in the future, thus enabling a potentially more
efficient financing and growth strategy.
Further, the ability to use a crowdfunding vehicle may expand
investment opportunities available to non-accredited investors and, as
a
[[Page 3582]]
result, potentially affect the efficiency of their capital allocation.
If the final rules draw additional issuers to Regulation Crowdfunding,
broader access to those investment opportunities may enable non-
accredited investors to allocate their capital more efficiently.
The final rules may promote competition. By making Regulation
Crowdfunding attractive to a broader subset of small issuers, they may
incrementally broaden access to funding for small and early stage
issuers, many of which have not participated in other securities
offerings and are otherwise highly financially constrained. Expanding
access to capital for small and early stage issuers may, on the margin,
encourage new entry and promote competition between small issuers and
more established competitors. The aggregate effects on competition for
investor capital are difficult to predict and will depend on the
relative effects of the final rules on issuer and investor willingness
to participate in Regulation Crowdfunding.
iv. Reasonable Alternatives
As an alternative, we could require that a registered investment
adviser or ERA manage the crowdfunding vehicle, as suggested by some
commenters and the 2017 Treasury Report.\711\ Under this alternative,
investors in crowdfunding vehicles could benefit because an investment
adviser is a fiduciary subject to the requirements of the Advisers Act
and regulations thereunder. The final rule's conditions, however, are
designed to limit the crowdfunding vehicle's activities to that of
acting as a conduit to directly hold the securities of the crowdfunding
issuer without the ability for independent investment decisions to be
made on behalf of the crowdfunding vehicle. Moreover, investors in the
crowdfunding vehicles remain protected by the provisions of Regulation
Crowdfunding as well as the antifraud protections of the Federal
securities laws more broadly. Any incremental benefits of this
alternative to investors therefore could be limited. In addition, such
a requirement would likely deter issuers, particularly small issuers,
from using the crowdfunding vehicle structure. Given the relatively
small amount of capital that can be raised through Regulation
Crowdfunding, particularly in offerings by smaller issuers, it may not
be economically feasible to require a registered investment adviser or
an ERA to manage the crowdfunding vehicle.\712\ Further, small issuers
may lack access to investment advisory expertise.
---------------------------------------------------------------------------
\711\ See supra note 489. See also 2017 Treasury Report.
\712\ See also supra notes 528, 530 and accompanying text.
---------------------------------------------------------------------------
As another alternative, we could remove some of the requirements in
the final rule,\713\ such as the restrictions on the permissible
activities and other provisions intended to provide the investor with
the same economic exposure, rights, and disclosures as they would have
if they invested in a direct Regulation Crowdfunding offering or the
requirement that crowdfunding vehicle costs be borne by the
crowdfunding issuer. Removing these restrictions would increase the
flexibility for issuers in structuring their crowdfunding offering and
potentially make Regulation Crowdfunding more attractive as a capital
raising option. However, it also could lead to agency conflicts and
weaken investor protections for crowdfunding vehicle investors,
compared to the final rule's conditions. Some of these additional costs
to investors might be partly mitigated by the substantive and
disclosure requirements of Regulation Crowdfunding.
---------------------------------------------------------------------------
\713\ See supra note 484 and accompanying text (discussing
commenters in favor of a less restrictive crowdfunding vehicle
structure).
---------------------------------------------------------------------------
Similarly, we could modify some of the conditions in the final rule
so that an investor in a crowdfunding vehicle would still achieve the
same economic exposure, and receive the same disclosures, as if he or
she had invested in the crowdfunding issuer directly, while providing
greater flexibility for crowdfunding vehicles and their investors to
determine other aspects of the crowdfunding vehicle's operations. For
example, rather than requiring a crowdfunding vehicle to vote and
participate in tender or exchange offers or similar transactions only
in accordance with the instructions it receives from its investors, we
could allow a crowdfunding vehicle and its investors to determine these
matters. A crowdfunding vehicle, for example, could disclose to its
investors at the time of its initial offering that the vehicle will
vote automatically with the majority of its security holders. Another
example would be to permit a crowdfunding vehicle and its investors to
determine how the crowdfunding vehicle will exercise any rights under
State or Federal law, rather than providing each investor the ability
to assert those rights.
These and similar modifications would provide additional
flexibility for crowdfunding vehicles and the crowdfunding issuers
using the vehicles to raise capital. If this greater flexibility would
result in additional offerings under Regulation Crowdfunding, this
could provide capital formation benefits to issuers and benefit
investors by providing additional investment options. These and similar
modifications could, however, result in offering terms that may be less
advantageous for investors. The net benefits and costs to investors
would therefore depend on the extent to which a more flexible approach
would result in additional Regulation Crowdfunding offerings relative
to the final rule and the terms of those offerings. However, these
alternatives would go against the purpose of the crowdfunding vehicle,
which is to act solely as a conduit.
As discussed above, under the final rules, natural persons
investing in the crowdfunding vehicle will be excluded from the number
of holders of record for purposes of Section 12(g). As an alternative,
the final rules could treat all investors in the crowdfunding vehicle
and investors in the crowdfunding issuer similarly for purposes of
Section 12(g) by requiring all investors to be included in the number
of holders of record. This alternative would increase the risk to
Regulation Crowdfunding issuers of having to incur registration and
Exchange Act reporting costs before they are ready to enter public
markets. This alternative could make it harder for Regulation
Crowdfunding issuers to raise capital from venture capitalists and
other large investors in the future, compared to the final rules. This
alternative would significantly decrease the utility of the
crowdfunding vehicle structure to issuers, especially in offerings that
attract small individual investors, compared to the final rules.
However, this alternative could decrease the risk that crowdfunding
issuers with a substantial number of individual investors through the
crowdfunding vehicle structure would not exceed the thresholds in
Section 12(g)(1) of the Exchange Act and become subject to the more
extensive periodic reporting requirements under the Exchange Act,
compared to the final rules. Nevertheless, the discussed effects could
be mitigated for all except the largest Regulation Crowdfunding
issuers, to the extent that such issuers may already avail themselves
of the existing conditional exemption under Exchange Act Rule 12g-6.
We are not adopting the proposed changes to the types of securities
eligible under Regulation Crowdfunding. As an alternative, we could
narrow the eligible security types to those eligible under Regulation A
[[Page 3583]]
(debt, equity, and debt convertible or exchangeable into equity,
including guarantees of such securities), as proposed,\714\ which was
supported by several commenters.\715\ This alternative could strengthen
investor protection in some instances, to the extent that Regulation
Crowdfunding investors may lack resources to analyze novel security
types with complex payoff structures.\716\ This alternative could also
make it easier for investors to compare different offerings under
Regulation Crowdfunding and Regulation A, potentially facilitating
better informed investment decisions. Such benefits would be limited to
the extent that Regulation Crowdfunding disclosures already require a
description of the terms of securities and the valuation method used,
along with the continued application of other Regulation Crowdfunding
investor protections (including other offering circular and periodic
disclosure requirements, investment limits, investor education, and
other crowdfunding intermediary requirements). At the same time, the
alternative could impose costs on issuers by limiting the flexibility
to offer the types of securities that are most compatible with their
desired capital structure, financing needs, and assessment of market
conditions.\717\ A significant share of Regulation Crowdfunding issuers
rely on security types other than debt and equity. From inception of
Regulation Crowdfunding in May 2016 through December 2019,\718\ we
estimate that equity and debt accounted for 77 percent of the number of
offerings and 74 percent of the aggregate target amount sought. The
alternative could also impose costs on some investors that found
securities with payoff structures other than equity or debt optimal for
their investment strategy and relied on existing disclosures to
accurately value such securities.
---------------------------------------------------------------------------
\714\ For a discussion of the costs and benefits of other
alternative security type eligibility criteria, see Proposing
Release, at 18032.
\715\ See supra notes 548 and 549.
\716\ See supra note 549; U.S. Securities and Exchange
Commission Office of the Investor Advocate, Report on Activities for
Fiscal Year 2016, available at https://www.sec.gov/advocate/reportspubs/annual-reports/sec-investor-advocate-report-on-activities-2016.pdf; Jamie Ostrow, Buyer Beware: Securities Are Not
Always What They Seem . . . , CrowdCheck Blog (Aug. 27, 2018),
available at https://www.crowdcheck.com/blog/buyer-beware-securities-are-not-always-what-they-seem; and Joseph M. Green & John
F. Coyle, Crowdfunding and the Not-So-Safe SAFE, 102 Va. L. Rev. 168
(2016). See also U.S Securities and Exchange Commission, Investor
Bulletin: Be Cautious of SAFEs in Crowdfunding, available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes; Andrew
Stephenson, Compliance with Reg CF: When Failure Becomes Fraud,
CrowdCheck Blog (Apr. 23, 2018), available at https://www.crowdcheck.com/blog/compliance-reg-cf-when-failure-becomes-fraud; and FINRA, Be Safe--5 Things You Need to Know About SAFE
Securities and Crowdfunding, available at http://www.finra.org/investors/highlights/5-things-you-need-know-about-safe-securities-and-crowdfunding. But see Jack Wroldsen, Crowdfunding Investment
Contracts, 11 Va. L. & Bus. Rev. 543 (2017).
\717\ See supra notes 551 and 553 (opposing the restriction on
security types eligible under Regulation Crowdfunding).
\718\ These estimates are based on data from Form C or the
latest amendment to it, excluding withdrawn offerings. Equity is
comprised of common and preferred equity (including partnership/
membership units and interests). Approximately a third of Regulation
Crowdfunding offerings were by issuers organized as limited
liability companies or as partnerships. Debt is comprised of
straight and convertible debt. Analysis of XML data from Form C does
not allow a granular breakdown of debt security types. Other
security types include SAFEs and securities not elsewhere classified
(e.g., revenue participation agreements and miscellaneous tokens.
Some of the revenue share agreements remaining in the ``other
security type'' category may have quasi-debt features. SAFEs are
identified by keyword from ``other security type description.''
Anecdotal review suggests that some equity and debt offerings were
denoted as ``other'' in the form. Where detected, such instances
were re-classified manually based on the ``other security type
description'' field. Examples of ``other'' are, for instance,
tokens, simple agreement for future tokens (``SAFTs''), and revenue
participation agreements.
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b. Excluding Delinquent Reporting Companies From Eligibility Under
Regulation A
The final amendments exclude reporting companies that are not
current in periodic reports required under Section 13 or 15(d) of the
Exchange Act from using Regulation A, consistent with the existing
exclusion of issuers that are not subject to Exchange Act reporting and
that have not filed required Regulation A periodic reports for the last
two years.
i. Benefits
The amendments are expected to promote investor protection and
benefit investors by ensuring the availability of information about
issuers required in periodic Exchange Act reports to Regulation A
investors and thus enabling better informed investment decisions, which
was supported by several commenters.\719\ Excluding issuers that are
subject to, but not current in, Exchange Act reporting obligations from
eligibility under Regulation A may reduce the average level of
information asymmetry about Regulation A issuers and to the extent
investors did not already consider a reporting company's failure to
remain current in its reporting obligations in assessing a Regulation A
offering may incrementally increase investor confidence and interest in
securities offered in this market.
---------------------------------------------------------------------------
\719\ See supra note 560. But see J. Clarke Letter.
---------------------------------------------------------------------------
As a caveat, the use of Regulation A by reporting companies has
been modest to date,\720\ which may attenuate the effects of changes to
reporting company eligibility under Regulation A. By extending similar
requirements regarding being current in periodic reports that presently
apply in follow-on Regulation A offerings to reporting companies in
initial Regulation A offerings, the amendments will increase uniformity
in eligibility requirements across different categories of Regulation A
issuers and may reduce potential for investor confusion.
---------------------------------------------------------------------------
\720\ See supra note 667.
---------------------------------------------------------------------------
ii. Costs
The amendments may lead to higher financing costs or reduced
ability to raise the required financing under Regulation A for issuers
that are not current in periodic reports required under Section 13 or
15(d) of the Exchange Act.
iii. Effects on Efficiency, Competition, and Capital Formation
The amendments may, on the margin, limit capital formation by
affected issuers. At the same time, by ensuring more timely
availability of information in periodic reports to prospective
Regulation A investors, the amendments are expected to facilitate
better informed decisions and more efficient allocation of investor
capital in Regulation A offerings, and, for Regulation A securities
with a secondary market, more informationally efficient security
prices. In turn, if the amendments help alleviate investor concerns
about adverse selection in the Regulation A market, they may promote
greater investor interest in Regulation A securities, increasing
aggregate capital formation in the Regulation A market. These effects
on capital formation and efficiency of capital allocation may be modest
if the amendments mainly result in a reallocation of delinquent
reporting company issuers between Regulation A and other offering
methods. We lack the ability to quantify the extent of such potential
switching between offering methods as a result of the amendments.
iv. Reasonable Alternatives
As an alternative, we could have required filers to have filed in a
timely manner all reports required to be filed during the prior 12
months, consistent with Form S-3 and F-3 requirements.\721\ This
alternative may
[[Page 3584]]
benefit investors by incentivizing reporting companies that use
Regulation A to provide timely periodic disclosures. However, we
continue to believe that this alternative might increase costs and
decrease the ability of reporting companies that have failed to timely
file Exchange Act reports during the lookback period to raise follow-on
Regulation A Tier 2 financing.\722\ Further, such conditions are not
imposed on issuers that are not subject to Exchange Act reporting
obligations and that seek to offer Regulation A securities. Overall,
relative to the final amendments, we do not expect the effects of this
alternative to be significant given the other incentives that reporting
companies have to remain current in their Exchange Act reports (e.g.,
greater secondary market liquidity, not being delisted from an exchange
or losing quote eligibility in the OTC market, future eligibility for a
streamlined registration process, reduced legal liability, and a
reputation for transparency).
---------------------------------------------------------------------------
\721\ See General Instruction I.A.3 to Form S-3; and General
Instruction I.A.2 to Form F-3.
\722\ See 2018 Regulation A Release, at Section IV.B.c.2.
---------------------------------------------------------------------------
7. Bad Actor Disqualification Provisions
The disqualification provisions of Regulation A and Regulation
Crowdfunding currently differ from the disqualification provisions in
Rule 506(d) in defining the lookback period for the disqualification
event through the time of the filing, rather than through the time of
sale. As a result, in certain circumstances, periods of time may exist
during Regulation A and Regulation Crowdfunding offerings where an
offering continues despite an event that would have constituted a
disqualifying event at the time of filing.\723\ In order to harmonize
the disqualification provisions of Regulation A and Regulation
Crowdfunding with those of Rule 506(d) of Regulation D, the amendments
specify that a disqualifying event that occurs at any time during an
offering, not only prior to the filing, would disqualify the bad actor
from further involvement in the offering. However, to reduce the cost
for issuers of monitoring disqualification events that may affect
beneficial owners during an ongoing offering, differently from the
disqualification provision of Rule 506(d), we are retaining the
disqualification lookback period through the time of filing, rather
than through the time of sale, for disqualification events affecting
beneficial owners.
---------------------------------------------------------------------------
\723\ As discussed in Section II.G above, under Regulation A, if
a covered person triggers one of the disqualifying events in Rule
262, the Commission is able to suspend reliance on the Regulation A
exemption through Rule 258, which requires a notice and hearing
opportunity for the covered person. Furthermore, if a covered person
triggers one of the disqualifying events, the issuer may need to
consider whether it must suspend the offering until it files a post-
qualification amendment to reflect a fundamental change in the
information set forth in the most recent offering statement or post-
qualification amendment. Regulation Crowdfunding, which similarly
measures the lookback from the time of filing of the offering
statement, does not have a suspension provision, similar to
Regulation A, but similarly requires an issuer to amend the offering
statement to disclose material changes, additions, or updates to
information that it provides to investors for offerings that have
not been completed or terminated.
---------------------------------------------------------------------------
a. Benefits
By providing greater uniformity in the bad actor disqualification
provisions across Rule 506(d), Rule 262(a), and Rule 503(a), the
amendments may facilitate compliance for issuers, particularly issuers
that undertake different types of exempt offerings over time. The
amendments may further benefit issuers by reducing or even eliminating
the need to undergo a potentially lengthy and costly Rule 258
suspension process in the event of a disqualifying event occurring
after the filing. By preserving the existing ``through date of filing''
lookback period provision with respect to disqualifying events
involving beneficial owners, the amendments are expected to give
issuers leeway to raise capital while managing disqualification
monitoring costs.
The amendments are expected to strengthen investor protection in
cases of disqualifying events occurring after the initiation of an
offering.\724\ This benefit is expected to be most salient for issuers
in continuous offerings, which may span multiple months and years. For
example, from June 2015 (when the 2015 Regulation A amendments raising
the offering limit to $50 million took effect) through December 2019,
based on the analysis of Form 1-A data, we estimate that approximately
80 percent of qualified Regulation A offerings were conducted on a
continuous basis. Based on the analysis of Form C data from inception
of Regulation Crowdfunding through December 2019, we estimate that the
average (median) duration of a Regulation Crowdfunding offering was
approximately four months (three months).
---------------------------------------------------------------------------
\724\ See supra note 570.
---------------------------------------------------------------------------
b. Costs
The amended disqualification provisions may impose costs on issuers
and covered persons. The amendments may lead issuers to incur
additional due diligence and monitoring costs and potentially modify
their policies and procedures to reduce the odds of a disqualifying
event during an ongoing offering (e.g., replacing personnel or avoiding
the participation of covered persons, other than beneficial owners, who
are subject, or might become subject, to disqualifying events after
filing).\725\ These additional costs of monitoring disqualification
events in ongoing offerings are expected to be somewhat mitigated by
the carve-out for events affecting the beneficial owner category of
covered persons, which will remain subject to the existing lookback
period (defined based on the date of filing). In addition, issuers
might incur costs related to seeking disqualification waivers from the
Commission. Alternatively, issuers that are disqualified from an
ongoing Regulation A or Regulation Crowdfunding offering as a result of
a disqualification event occurring after filing might experience an
increased cost of capital or a reduced availability of capital. By
subjecting additional issuers to the potential for disqualification in
the event of a disqualification event affecting a covered person (other
than a beneficial owner) after the offering has commenced, the
amendments may cause some issuers to discontinue an offering, resulting
in a failure to raise the required capital after some costs of
preparing an offering statement or marketing an offering have already
been incurred.
---------------------------------------------------------------------------
\725\ See NextSeed Letter (stating that the additional
monitoring cost will prevent issuers from relying on Regulation
Crowdfunding) and CrowdCheck Letter (acknowledging the potential for
significant monitoring costs, especially in Regulation Crowdfunding
offerings).
---------------------------------------------------------------------------
c. Effects on Efficiency, Competition, and Capital Formation
As discussed above, the amendments may cause some issuers whose
covered persons (other than beneficial owners) become subject to a
disqualification event after filing to discontinue an offering,
resulting in decreased capital formation for such issuers. Additional
costs of monitoring disqualification events might incrementally
increase the compliance costs associated with conducting an offering
under Regulation A or Regulation Crowdfunding. For Regulation
Crowdfunding issuers, intermediaries might incur incrementally higher
due diligence costs as well, insofar as the monitoring of
disqualification triggers is not already a part of the intermediary's
measures to reduce the risk of fraud.
We expect the incrementally more stringent bad actor
disqualification
[[Page 3585]]
provisions to lead most issuers to take additional steps to monitor
disqualification events after filing and restrict the participation of
covered persons (other than beneficial owners) in ongoing Regulation A
and Regulation Crowdfunding offerings, which could incrementally help
reduce the potential for fraud in these types of offerings and thus
strengthen investor protection. To the extent that more stringent bad
actor disqualification requirements increase investor interest in these
offerings, on the margin, overall capital formation in the Regulation A
and Regulation Crowdfunding markets may increase. If the amendments to
the disqualification lookback period alleviate some of the concerns
about adverse selection in the Regulation A and Regulation Crowdfunding
markets and thus lower the risk premium associated with the risk of
fraud due to the presence of bad actors in these markets, they may also
reduce the cost of capital for issuers that rely on these offering
exemptions.
d. Reasonable Alternatives
As an alternative, instead of disqualifying Regulation A or
Regulation Crowdfunding issuers affected by disqualifying events during
an ongoing offering, we could allow such issuers to continue the
offering but require the disclosure of a disqualifying event and the
option for investors to cancel their investment commitments and obtain
a refund of invested funds.\726\ This alternative might reduce costs
for some issuers affected by a disqualification trigger in the course
of an ongoing offering. However, it also might result in costs to
investors if investors fail to review the disclosure of a disqualifying
event occurring after commencement of an offering. This alternative
also would not be consistent with the disqualification provisions in
Rule 506(d), which might introduce confusion for issuers and investors
that participate in multiple offerings conducted pursuant to different
securities exemptions.
---------------------------------------------------------------------------
\726\ See supra note 573.
---------------------------------------------------------------------------
The amendments preserve the definition of the lookback period
(using the time of filing as a basis) with respect to disqualification
events affecting covered persons that are beneficial owners. As an
alternative, we could extend the amended lookback period definition
(continuing through the time of sale) with respect to disqualification
events affecting all covered persons, including beneficial owners.
Compared to the final amendments, this alternative might incrementally
strengthen investor protection to the extent that the types of
disqualification events that affect beneficial owners after filing in
continuous Regulation A or Regulation Crowdfunding offerings pose
conflicts of interest or other significant risks to investors. However,
compared to the proposal, this alternative might result in the
exclusion of some issuers whose beneficial owners become subject to a
disqualification trigger after filing from eligibility to conduct an
offering. To minimize this risk, issuers might incur increased costs of
monitoring potential disqualification events affecting beneficial
owners under this alternative. Issuers also might incur costs to
restructure their share ownership to avoid beneficial ownership of 20
percent or more of the issuer's outstanding voting equity securities,
calculated on the basis of voting power, by individuals that may become
subject to disqualifying events after filing.
V. Paperwork Reduction Act
A. Summary of the Collection of Information
Certain provisions of our rules and forms affected by the
amendments contain ``collection of information'' requirements within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\727\ The
Commission is submitting the amendments to the Office of Management and
Budget (``OMB'') for review in accordance with the PRA.\728\ The hours
and costs associated with preparing and filing the forms constitute
reporting and cost burdens imposed by each collection of information.
An agency may not conduct or sponsor, and a person is not required to
comply with, a collection of information unless it displays a currently
valid OMB control number. Compliance with the information collections
is mandatory. Responses to the information collections are not kept
confidential and there is no mandatory retention period for the
information disclosed. The titles for the affected collections of
information are: \729\
---------------------------------------------------------------------------
\727\ See 44 U.S.C. 3501 et seq.
\728\ 44 U.S.C. 3507(d); and 5 CFR 1320.11.
\729\ As discussed in Section II.D.3 above, we are revising the
confidential information standard used in our exhibit filing
requirements to provide that information may be redacted if it is
both not material and the type that the registrant treats as private
or confidential. A number of collections of information could be
affected by this amendment, including 17 CFR 249.310 (OMB Control
No. 3235-0063), 17 CFR 249.308a (OMB Control No. 3235-0070), Form 8-
K (OMB Control No. 3235-0060), Form S-1 (OMB Control No. 3235-0065),
and 17 CFR 249.210 (OMB Control No. 3235-0064); as well as Form S-6
(OMB Control No. 3235-0184); Form N-14 (OMB Control No. 3235-0336);
Form 20-F (OMB Control No. 3235-0288); 17 CFR 239.31 (OMB Control
No. 3235-0258); Form N-1A (OMB Control No. 3235-0307); Form N-2 (OMB
Control No. 3235-0026); Form N-3 (OMB Control No. 3235-0316); Form
N-4 (OMB Control No. 3235-0318); Form N-5 (OMB Control. No. 3235-
0169); Form N-6 (OMB Control No. 3235-0503); and Form N-8B-2 (OMB
Control No. 3235-0186). We believe that the standard will not change
the paperwork burden associated with these collections of
information because the revised standard will be applied in similar
circumstances and in a similar way as the current standard.
---------------------------------------------------------------------------
``Regulation A (Form 1-A)'' (OMB Control No. 3235-0286);
``Regulation D'' (a new collection of information);
``Regulation D Rule 504(b)(3)--Felons and Other Bad Actors
Disclosure Statement'' (OMB Control No. 3235-0746);
``Regulation D Rule 506(e) Felons and Other Bad Actors
Disclosure Statement'' (OMB Control No. 3235-0704);
``Form D'' (OMB Control No. 3235-0076); and
``Form C'' (OMB Control No. 3235-0716).
We are combining the existing collections of information for 17 CFR
230.504(b)(3) (``Rule 504(b)(3)''), 17 CFR 230.506(e) (``Rule
506(e)''), and Form D in a new collection of information that covers
all of the PRA compliance burdens for Regulation D. \730\ The
regulations and forms listed above were adopted under the Securities
Act and set forth filing and disclosure requirements associated with
exempt offerings. A description of the amendments, including the need
for the information and its use, as well as a description of the likely
respondents, can be found in Section II above, and a discussion of the
economic effects of the amendments can be found in Section IV above.
---------------------------------------------------------------------------
\730\ Since the new collection of information for Regulation D
will cover the existing compliance burdens, we are eliminating the
separate collections of information for Rule 504(b)(3), Rule 506(e),
and Form D.
---------------------------------------------------------------------------
B. Summary of the Effects on the Collections of Information
PRA Table 1 \731\ summarizes the estimated effects of the
amendments on
[[Page 3586]]
the paperwork burdens associated with the affected collections of
information listed in Section V.A.
---------------------------------------------------------------------------
\731\ We do not believe that the amendments with respect to the
use of general solicitation in exempt offerings, the integration
framework, harmonization of bad actor disqualification provisions in
Regulation A and Regulation Crowdfunding with those in Regulation D,
excluding Exchange Act registrants that are delinquent filers from
relying on Regulation A, revising the non-exclusive list of methods
for verifying accredited investor status, permitting the use of
crowdfunding vehicles (other than Form C disclosure when a
crowdfunding vehicle is used), increasing the Rule 504 offering
limit, or increasing the investment limits under Regulation
Crowdfunding will substantially or materially modify the number of
new filings or the burdens for those filings. In addition, as
discussed in Section II.E.3 above, we are extending certain
provisions of the Commission's temporary relief from certain
financial information requirements of Regulation Crowdfunding. The
temporary relief also requires issuers relying on the temporary
relief to provide certain additional disclosures, the burden of
which is expected to be minimal. As discussed in the Temporary
Amendments Adopting Release, we believe that the net change in
paperwork burden as a result of the temporary relief will be minimal
and are not adjusting the burden or cost estimates for Form C.
PRA Table 1--Estimated Paperwork Burden Effects of the Amendments
------------------------------------------------------------------------
Affected
Final amendments and effects collections of Estimated net
information effect
------------------------------------------------------------------------
Regulation D:
Provide a new collection 5 hour
of information to encompass Regulation D compliance
disclosure required by Regulation (including Form burden per
D, including the following: D, Rule 502(b), response to the
[cir] Financial statement and non- Rule 504(b)(3), new collection
financial statement information and Rule 506(e)). of information.
and delivery requirements,
including the proposed requirement
to provide the purchaser with
generic solicitation of interest
materials (Rule 502(b)); and
[cir] Felon and bad actor
disclosure requirements (Rules
504(b)(3)) and 506(e).
Regulation A:
Requiring the filing of Form 1-A 2 hour
generic solicitation of interest net decrease in
materials. Estimated burden compliance
increase: 0.5 hours per form. burden per
Simplifying compliance form.
with Regulation A by conforming 25
certain requirements with similar additional
requirements for registered responses.
offerings (including permitting
the redaction of confidential
information in certain exhibits;
permitting incorporation by
reference of financial statements
in the offering circular; and
simplifying the requirements for
making non-public documents
available to the public on EDGAR).
Estimated burden decrease: 2.5
hours per form.
We estimate that the
increase in offering limit would
increase the number of filings on
Form 1-A by 25.
Regulation Crowdfunding:
Requiring the filing of Form C.. 1 hour
generic solicitation of interest net increase in
materials and solicitations of compliance
interest under Rule 206; and burden per
requiring disclosure about a co- form.
issuer on Form C when an SPV is 55
used. Estimated burden increase: 1 additional
hour per form. responses.
We believe that increasing
the offering limits under
Regulation Crowdfunding would not
affect the burden estimate per
form, but we estimate that the
increase in the offering limit
would increase the number of
filings on Form C by 55.
------------------------------------------------------------------------
Although we estimate that the amendments to Regulation D that we
are adopting will not have a net effect on the current burdens relating
to Regulation D, we are changing how we allocate those burdens to an
information collection for PRA purposes. In particular, as discussed
above, we are establishing a new, single collection of information for
Regulation D to encompass all of the associated paperwork burdens. The
estimates for this new collection of information include the existing
burdens associated with Form D, Rule 504(b)(3), and Rule 506(e), as
well as other burdens resulting from the implementation of Regulation
D. As a result, the new collection of information for Regulation D
reflects an increase from the aggregated burdens for the existing Form
D, Rule 504(b)(3) and Rule 506(e) collections of information. See PRA
Table 6 below.
Although it is not possible to predict with certainty the increase
in the number of Regulation A and Regulation Crowdfunding offerings
following the amendments, we estimate for purposes of the PRA an
approximate 20 percent increase in the number of new Regulation A
offerings resulting in 25 additional respondents, and an approximate 10
percent increase in the number of new Regulation Crowdfunding offerings
resulting in 55 additional respondents.\732\ It is possible that the
increase in the offering limit may also increase the number of Form 1-
K, 17 CFR 239.92 (Form 1-SA), 17 CFR 239.93 (Form 1-U), and Form 1-Z
filings. However, due to uncertainties regarding whether any increase
in Tier 2 offerings would be conducted by Exchange Act reporting
companies, we are not increasing in the number of responses for the
associated collections of information at this time.
---------------------------------------------------------------------------
\732\ We derived these estimates based on 125 Regulation A
offerings filed in 2019 and 552 Regulation Crowdfunding offerings
conducted in the second full year since effectiveness of those
rules.
---------------------------------------------------------------------------
C. Incremental and Aggregate Burden and Cost Estimates
Below we estimate the incremental and aggregate changes in
paperwork burden as a result of the amendments. These estimates
represent the average burden for all issuers, both large and small. In
deriving our estimates, we recognize that the burdens will likely vary
among individual issuers based on a number of factors, including the
nature of their business. We believe that the amendments will change
the frequency of responses to the existing collections of information
and the burden per response.
The burden estimates were calculated by adding the estimated
additional responses to the existing estimated responses and
multiplying the estimated number of responses by the estimated average
amount of time it takes an issuer to prepare and review disclosure
required under the amendments. For purposes of the PRA, the burden is
to be allocated between internal burden
[[Page 3587]]
hours and outside professional costs. PRA Table 2 \733\ sets forth the
percentage estimates we typically use for the burden allocation for
each collection of information and the estimated burden allocation for
the new collection of information for Regulation D. We also estimate
that the average cost of retaining outside professionals is $400 per
hour.\734\
---------------------------------------------------------------------------
\733\ Here and in the tables below, we derived current estimated
burdens and burden allocations for Regulation D using the estimates
for Form D, Rule 504(b)(3), and Rule 506(e).
\734\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several registrants, law firms, and
other persons who regularly assist registrants in preparing and
filing reports with the Commission.
PRA Table 2--Estimated Burden Allocation for Specified Collections of
Information
------------------------------------------------------------------------
Outside
Collection of information Internal professionals
(percent) (percent)
------------------------------------------------------------------------
Forms 1-A, C................................ 75 25
Regulation D................................ 25 75
------------------------------------------------------------------------
PRA Table 3 \735\ below illustrates the incremental change to the
total annual compliance burden of affected forms, in hours and in
costs, as a result of the amendments' estimated effect on the paperwork
burden per response. The number of estimated affected responses shown
in PRA Table 3 is based on the number of responses in the Commission's
current OMB PRA filing inventory plus the number of additional
responses we estimate as a result of the amendments (25 responses for
Form 1-A, and 55 responses for Form C).\736\
---------------------------------------------------------------------------
\735\ The estimated reductions in Columns (C), (D), and (E) are
rounded to the nearest whole number.
\736\ The OMB PRA filing inventory represents a three-year
average.
PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Burden hour Change in Change in Change in Change in
Number of affect per burden hours company hours professional professional
Collection of information estimated current for current for current hours for costs for
affected affected affected affected current affected current affected
responses response responses responses responses responses
(A) (B) (C) = (A) x (D) = (C) x 0.75 (E) = (C) x 0.25 (F) = (E) x $400
(B)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A.......................................... 204 (2) (408) (306) (102) ($40,800)
Form C............................................ 5,907 1 5907 4,430 1,477 $590,800
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table below illustrates the incremental change to the total
annual compliance burden of affected forms, in hours and in costs, as a
result of the amendments' estimated effect on the number of responses.
PRA Table 4--Calculation of the Change in Burden Estimates as a Result of Change in Number of Responses Resulting From the Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change
-------------------------------------------------------------------------------------------------------
Collection of information Estimated
Current annual Current burden Current cost additional Change in company Change in
responses hours burden responses hours professional costs
(A) (B) (C) (D) (E) = ((B)/(A)) x (F) = ((C)/(A)) x
(D) (D)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A........................................ 179 98,396 $13,111,912 25 13,742 $1,932,390
Form C.......................................... 5,852 214,928 28,500,000 55 2,020 267,857
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following tables summarize the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
amendments. To estimate the new burdens for Form 1-A and Form C
resulting from the amendments, we add the estimated burden and cost
changes in PRA Table 3 and PRA Table 4 and have incorporated them into
PRA Table 5. For example, Column (E) of PRA Table 5 represents the sum
of column (D) in PRA Table 3 and column (E) in PRA Table 4.
PRA Table 5--Requested Paperwork Burden Under the Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Revised burden
-----------------------------------------------------------------------------------------------------------------------------------------------
Collection of information Number of Change in
Current annual Current burden Current cost affected Change in professional Annual Burden hours Cost burden
responses hours burden responses company hours costs responses
(A) (B) (C) (D) (E) (F) (G) (H) = (B) + (I) = (C) +
(E) (F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A........................................ 179 98,396 $13,111,912 204 13,436 $1,891,590 204 111,832 $15,003,502
Form C.......................................... 5,852 214,928 28,500,000 5,907 6,450 858,657 5,907 221,378 29,358,657
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PRA Table 6 summarizes the requested paperwork burden for the new
Regulation D collection of information, including the estimated total
reporting burdens and costs, under the amendments. The estimates for
this
[[Page 3588]]
new collection of information include the existing burden estimated for
Form D, Rule 504(b)(3), and Rule 506(e), as well as other burdens
resulting from the implementation of Regulation D. For purposes of the
PRA, we estimate that the new Regulation D collection of information
will entail a 5 hour compliance burden per response with 26,000 annual
responses (derived from the current 26,000 annual responses for Form
D).\737\
---------------------------------------------------------------------------
\737\ We expect the amendments providing an additional method to
verify an investor's accredited investor status and increasing the
offering limit under Rule 504 could lead to additional Rule 506(c)
or Rule 504 offerings. However, as discussed in Section IV above,
some of these offerings may be conducted by issuers switching from
other Regulation D exemptions. Additionally, some of the issuers
conducting the additional Regulation A or Regulation Crowdfunding
offerings may be switching from Regulation D offerings. Because it
is difficult to predict the net impact of the proposed amendments on
the overall number of Regulation D responses, we are not adjusting
the current estimate of 26,000 responses at this time.
PRA Table 6--Requested Paperwork Burden for the New Collection of Information
----------------------------------------------------------------------------------------------------------------
Requested paperwork burden
Collection of information -------------------------------------------------------------------
Annual responses Burden hours Cost burden
(A) (A) x 5 x (0.25) (A) x 5 x (0.75) x $400
----------------------------------------------------------------------------------------------------------------
Regulation D................................ 26,000 32,500 $39,000,000
----------------------------------------------------------------------------------------------------------------
VI. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') \738\ requires the
Commission, in promulgating rules under Section 553 of the
Administrative Procedure Act,\739\ to consider the impact of those
rules on small entities. We have prepared this Final Regulatory
Flexibility Act Analysis (``FRFA'') in accordance with Section 604 of
the RFA.\740\ An Initial Regulatory Flexibility Analysis (``IRFA'') was
prepared in accordance with the RFA and was included in the Proposing
Release. This FRFA relates to the amendments or additions to the rules
and forms described in Section II above.
---------------------------------------------------------------------------
\738\ 5 U.S.C. 601 et seq.
\739\ 5 U.S.C. 553.
\740\ 5 U.S.C. 604.
---------------------------------------------------------------------------
A. Need for, and Objectives of, the Final Amendments
The amendments to the exempt offering framework are intended to
close gaps and reduce complexities that may impede access to capital
for issuers and thereby limit investment opportunities, while
preserving or enhancing important investor protections. The need for,
and objectives of, the amendments are discussed in more detail in
Sections II and IV above.
B. Significant Issues Raised by Public Comment
In the Proposing Release, we requested comment on all aspects of
the IRFA, including how the proposed amendments could further lower the
burden on small entities, 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. However,
we received a number of comments on the proposed amendments
generally,\741\ and have considered these comments in developing the
FRFA.
---------------------------------------------------------------------------
\741\ See Section II above.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Amendments
The final amendments will affect issuers that are small entities.
The RFA defines ``small entity'' to mean ``small business,'' ``small
organization,'' or ``small governmental jurisdiction.'' \742\ For
purposes of the RFA, under 17 CFR 230.157, an issuer, other than an
investment company, is a ``small business'' or ``small organization''
if it had total assets of $5 million or less on the last day of its
most recent fiscal year and is engaged or proposing to engage in an
offering of securities not exceeding $5 million. Under 17 CFR 270.0-10,
an investment company, including a business development company, is
considered to be 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.
---------------------------------------------------------------------------
\742\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------
The amendments are expected to promote capital formation through
exempt offerings and create additional flexibility for issuers. Because
the amendments will affect all issuers conducting offerings exempt from
registration under the Securities Act, which includes companies not
subject to ongoing reporting obligations under the Exchange Act,
Regulation A, or Regulation Crowdfunding, it is difficult to estimate
the number of issuers that qualify as small entities that would be
eligible to rely on the amendments.\743\
---------------------------------------------------------------------------
\743\ In particular, as discussed in Section IV above, due to
the large number of offerings in reliance on the offering exemptions
in Regulation D relative to other offering exemptions affected by
the amendments, most of which are conducted by issuers that are not
subject to Exchange Act, Regulation A, or Regulation Crowdfunding
reporting requirements, Regulation D issuers are likely to continue
to comprise a significant share of the small entities affected by
the amendments. However, we do not have information on the assets of
such issuers, which is required for an estimate of small entities
for purposes of the RFA definition, because this information is not
required by Form D and because such issuers may not be subject to
ongoing reporting requirements.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
As noted above, the amendments to the exempt offering framework are
intended to close gaps and reduce complexities that may impede access
to capital for issuers. The final amendments apply to small entities to
the same extent as other entities, irrespective of size, and we expect
that the nature of any associated benefits and costs to be similar.
Accordingly, we refer to the discussion of the economic effects on all
affected parties, including small entities, in Section IV above.\744\
Consistent with that discussion, we anticipate that the economic
benefits and costs likely could vary widely among small entities based
on a number of factors, such as the nature and conduct of their
businesses, including their capital raising decisions, which makes it
difficult to project the economic impact on small entities with
precision. Compliance with the final amendments may require the use of
professional skills, including accounting and legal skills.
---------------------------------------------------------------------------
\744\ We also discuss the estimated compliance burden associated
with the proposed amendments for purposes of the PRA in Section V
above.
---------------------------------------------------------------------------
Many of the final amendments are expected to be of greatest benefit
to the
[[Page 3589]]
capital raising efforts of small entities that may lack an existing
network of angel and VC funders and appear to face the greatest
constraints in obtaining external financing. Examples of this include:
Amendments to integration principles that are intended to facilitate
multiple offerings, including offerings with general solicitation;
amendments expanding investment limits and issuer eligibility under
Regulation Crowdfunding; amendments tailoring the requirements for non-
accredited investor sales under Rule 506(b); and amendments expanding
the offering limits for Regulation Crowdfunding, Rule 504, and
Regulation A. In addition, certain of the rules that we are amending,
such as Regulation Crowdfunding and Rule 504, have eligibility
requirements and other restrictions that increase the likelihood that
such rules will be relied on by small businesses that are seeking to
raise relatively small amounts of capital without incurring the costs
of conducting a registered offering.
Although many of the final amendments are expected to be of
greatest benefit to the capital raising efforts of small entities, we
acknowledge that any costs of the amendments borne by the affected
entities, such as those related to compliance with the amendments, or
the implementation or restructuring of internal systems needed to
adjust to the amendments, could have a proportionally greater effect on
small entities, as they may be less able to bear such costs relative to
larger entities. For example, the final amendments to the bad actor
disqualification provisions \745\ could cause some small entities to
incur additional due diligence costs or modify their offerings to
reduce the possibility of a disqualifying event (e.g., replacing
personnel or avoiding the participation of covered persons, other than
beneficial owners, who are subject, or might become subject, to
disqualifying events after filing). Similarly, small entities electing
to use the generic or Regulation Crowdfunding testing-the-waters
provisions \746\ might incur costs, such as those related to preparing
the testing-the-waters materials. These potential costs would be borne
equally by all issuers, regardless of size.
---------------------------------------------------------------------------
\745\ See supra Section II.G.
\746\ See supra Section II.B.
---------------------------------------------------------------------------
F. Agency Action To Minimize Effect on Small Entities
The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse impact
on small entities. Accordingly, we considered the following
alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
The final amendments generally simplify, harmonize, and improve
certain aspects of the exempt offering framework to promote capital
formation, including for offering exemptions used by and designed
primarily for small entities. Thus, we do not think it is necessary to
exempt small entities from all or part of these requirements. As
discussed in more detail in Sections II and IV above, commenters
offered, and we considered, various alternatives to the final
amendments.
Several of the offering exemptions that we are amending (e.g.,
Regulation A and Regulation Crowdfunding) already contain different
compliance or reporting requirements that take into account the
resources of the smaller entities that are likely to use these
exemptions. In addition, certain amendments clarify, consolidate, or
simplify compliance and reporting requirements under our rules, which
should benefit small entities in particular. For example, we are
amending the financial statement information requirements in Regulation
D to align them with the disclosure requirements in Regulation A. We
are also amending Regulation A to simplify compliance, such as by
providing for the redaction of confidential information in certain
exhibits, harmonizing the procedures for publicly filing draft
Regulation A offering statements with those for draft Securities Act
registration statements, and permitting issuers to incorporate
previously-filed financial statements by reference into a Regulation A
offering statement. Finally, we are amending Regulation Crowdfunding
and rules under the Investment Company Act to help reduce
administrative complexities that some issuers may encounter under
Regulation Crowdfunding.
With respect to using performance rather than design standards, we
note that several of the amendments concern rules that use principles-
based approaches that are more akin to performance standards. For
example, we are adopting a general principle of integration that
requires an issuer to consider the particular facts and circumstances
of each offering, including whether the issuer can establish that each
offering either complies with the registration requirements of the
Securities Act, or that an exemption from registration is available for
the particular offering.
VII. Statutory Authority
The final amendments contained in this release are being adopted
under the authority set forth in the Securities Act (15 U.S.C. 77a et
seq.), particularly, Sections 3, 4, 4A, 19, and 28 thereof; the
Exchange Act (15 U.S.C. 78a et seq.), particularly, Sections 3, 10(b),
12, 15, 17, 23(a), and 36 thereof; the Investment Company Act (15
U.S.C. 80a-1 et seq.), particularly Sections 6(c), 8, 24, 30, 38, and
45; and Pub. L. 112-106, secs. 301-305, 126 Stat. 306 (2012).
List of Subjects
17 CFR Part 227
Crowdfunding, Reporting and recordkeeping requirements, Securities.
17 CFR Part 229
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 230
Advertising, Administrative practice and procedure, Confidential
business information, Investment companies, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 240
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 249
Administrative practice and procedure, Brokers, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 270
Administrative practice and procedure, Confidential business
information, Fraud, Investment companies, Life insurance, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 274
Administrative practice and procedure, Electronic funds transfer,
Investment companies, Reporting and recordkeeping requirements,
Securities.
[[Page 3590]]
Text of Rule Amendments
In accordance with the foregoing, the Commission amends title 17,
chapter II, of the Code of Federal Regulations as follows:
PART 227--REGULATION CROWDFUNDING, GENERAL RULES AND REGULATIONS
0
1. The authority citation for part 227 continues to read as follows:
Authority: 15 U.S.C. 77d, 77d-1, 77s, 77z-3, 78c, 78o, 78q,
78w, 78mm, and Pub. L. 112-106, secs. 301-305, 126 Stat. 306 (2012).
0
2. Effective January 14, 2021, to March 1, 2023, amend Sec. 227.201 by
revising paragraph (b)(7) to read as follows:
Sec. 227.100 Crowdfunding exemption and requirements.
* * * * *
(b) * * *
(7) Seeks to rely on Sec. 227.201(aa) to conduct an offering on an
expedited basis due to circumstances relating to coronavirus disease
2019 (COVID-19), where such offering is initiated between May 4, 2020,
and February 28, 2021, or seeks to rely on Sec. 227.201(bb), where
such offering is initiated between March 1, 2021, and August 28, 2022,
and:
(i) Was organized and had operations less than six months prior to
the commencement of the offering; or
(ii) Sold securities in reliance on section 4(a)(6) of the
Securities Act and has not complied with the requirements in section
4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) and the related
requirements in this part.
* * * * *
0
3. Effective March 15, 2021, further amend Sec. 227.100 by:
0
a. Revising paragraphs (a)(1), (a)(2) introductory text, and paragraphs
(a)(2)(i) and (ii);
0
b. Revising paragraph (d); and
0
c. Adding paragraph (e).
The revisions and additions read as follows:
Sec. 227.100 Crowdfunding exemption and requirements.
(a) * * *
(1) The aggregate amount of securities sold to all investors by the
issuer in reliance on section 4(a)(6) of the Securities Act (15 U.S.C.
77d(a)(6)) during the 12-month period preceding the date of such offer
or sale, including the securities offered in such transaction, shall
not exceed $5,000,000;
(2) Where the purchaser is not an accredited investor (as defined
in Rule 501 (Sec. 230.501 of this chapter)), the aggregate amount of
securities sold to such an investor across all issuers in reliance on
section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) during the
12-month period preceding the date of such transaction, including the
securities sold to such investor in such transaction, shall not exceed:
(i) The greater of $2,200, or 5 percent of the greater of the
investor's annual income or net worth, if either the investor's annual
income or net worth is less than $107,000; or
(ii) Ten percent of the greater of the investor's annual income or
net worth, not to exceed an amount sold of $107,000, if both the
investor's annual income and net worth are equal to or more than
$107,000;
* * * * *
(d) Investor. For purposes of this part, investor means any
investor or any potential investor, as the context requires. A
crowdfunding vehicle (as defined in Sec. 270.3a-9 of this chapter) is
not considered an investor for the purposes of this part.
(e) Integration with other offerings. To determine whether offers
and sales should be integrated, see Sec. 230.152 of this chapter.
0
4. Effective January 14, 2021, to September 1, 2021, amend Sec.
227.201 by:
0
a. Redesignating paragraph (z) as paragraph (aa) and revising it; and
0
b. Adding new reserved paragraph (z).
The revision reads as follows:
Sec. 227.201 Disclosure requirements.
* * * * *
(aa) Between May 4, 2020, and February 28, 2021, an issuer may
initiate an offering intended to be conducted on an expedited basis due
to circumstances relating to COVID-19. Such issuer:
(1) Must prominently provide the following information:
(i) A statement that the offering is being conducted on an
expedited basis due to circumstances relating to COVID-19 and pursuant
to the Commission's temporary regulatory COVID-19 relief set out in
this part;
(ii) If the issuer is relying on paragraph (aa)(2) of this section
to omit the information required by paragraph (t) of this section in
the initial Form C: Offering Statement (Form C) (Sec. 239.900 of this
chapter) filed with the Commission and provided to investors and the
relevant intermediary in accordance with Sec. 227.203(a)(1), a
statement that:
(A) The financial information that has been omitted is not
currently available and will be provided by an amendment to the
offering materials;
(B) The investor should review the complete set of offering
materials, including previously omitted financial information, prior to
making an investment decision; and
(C) No investment commitments will be accepted until after such
financial information has been provided; and
(iii) If the issuer is relying on paragraph (aa)(3) of this section
to provide financial statement information required by paragraph (t)(1)
of this section, a statement that financial information certified by
the principal executive officer of the issuer has been provided instead
of financial statements reviewed by a public accountant that is
independent of the issuer; and
(iv) In lieu of the information required by paragraph (j) of this
section, a description of the process to complete the transaction or
cancel an investment commitment, including a statement that:
(A) Investors may cancel an investment commitment for any reason
within 48 hours from the time of his or her investment commitment (or
such later period as the issuer may designate);
(B) The intermediary will notify investors when the target offering
amount has been met;
(C) The issuer may close the offering at any time after it has
aggregate investment commitments for which the right to cancel pursuant
to paragraph (aa)(1)(iv)(A) of this section has lapsed that equal or
exceed the target offering amount (absent a material change that would
require an extension of the offering and reconfirmation of the
investment commitment); and
(D) If an investor does not cancel an investment commitment within
48 hours from the time of the initial investment commitment, the funds
will be released to the issuer upon closing of the offering and the
investor will receive securities in exchange for his or her investment;
(2) May omit the information required by paragraph (t) of this
section in the initial Form C: Offering Statement (Form C) (Sec.
239.900 of this chapter) filed with the Commission and provided to
investors and the relevant intermediary in accordance with Sec.
227.203(a)(1) if such information is unavailable at the time of filing,
but the intermediary may not accept any investment commitments until
complete information required under paragraph (t) of this section is
provided through an amendment to the Form C in accordance with Sec.
227.203(a)(2); and
(3) May comply with the requirements of paragraph (t)(1) of this
section instead of paragraph (t)(2) of this section for an offering or
offerings that, together with all other amounts sold under section
4(a)(6) of the Securities Act (15 U.S.C.
[[Page 3591]]
77d(a)(6)) within the preceding 12-month period, have, in the
aggregate, a target offering amount of more than $107,000, but not more
than $250,000, and financial statements of the issuer that have either
been reviewed or audited by a public accountant that is independent of
the issuer are unavailable at the time of filing.
* * * * *
0
5. Effective January 14, 2021, to March 1, 2023, further amend Sec.
227.201 by adding paragraph (bb) to read as follows:
Sec. 227.201 Disclosure requirements.
* * * * *
(bb) Between March 1, 2021, and August 28, 2022, an issuer may
comply with the requirements of paragraph (t)(1) of this section
instead of paragraph (t)(2) of this section for an offering or
offerings that, together with all other amounts sold under section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) within the
preceding 12-month period, have, in the aggregate, a target offering
amount of more than $107,000, but not more than $250,000, and financial
statements of the issuer that have either been reviewed or audited by a
public accountant that is independent of the issuer are unavailable at
the time of filing. Such issuer must prominently provide a statement
that financial information certified by the principal executive officer
of the issuer has been provided instead of financial statements
reviewed by a public accountant that is independent of the issuer.
* * * * *
0
6. Effective March 15, 2021, further amend Sec. 227.201 by:
0
a. Revising the introductory text;
0
b. Removing the word ``and'' from the end of paragraph (x);
0
c. Removing the period from the end of paragraph (y) and adding in its
place ``; and'';
0
d. Removing the ``Instruction to Sec. 227.201'' from where it appears
after paragraph (y) and adding it to the end of the section; and
0
e. Adding paragraph (z).
The revisions and addition read as follows:
Sec. 227.201 Disclosure requirements.
An issuer offering or selling securities in reliance on section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) and in accordance
with section 4A of the Securities Act (15 U.S.C. 77d-1) and this part,
and any co-issuer jointly offering or selling securities with such an
issuer in reliance on the same, must file with the Commission and
provide to investors and the relevant intermediary the following
information:
* * * * *
(z) Any written communication or broadcast script provided in
accordance with Sec. 227.206 or, if within 30 days of the initial
filing of the offering statement, Sec. 230.241 of this chapter.
(aa) Between May 4, 2020, and February 28, 2021, an issuer may
initiate an offering intended to be conducted on an expedited basis due
to circumstances relating to COVID-19. Such issuer:
(1) Must prominently provide the following information:
(i) A statement that the offering is being conducted on an
expedited basis due to circumstances relating to COVID-19 and pursuant
to the Commission's temporary regulatory COVID-19 relief set out in
this part;
(ii) If the issuer is relying on paragraph (aa)(2) of this section
to omit the information required by paragraph (t) of this section in
the initial Form C: Offering Statement (Form C) (Sec. 239.900 of this
chapter) filed with the Commission and provided to investors and the
relevant intermediary in accordance with Sec. 227.203(a)(1), a
statement that:
(A) The financial information that has been omitted is not
currently available and will be provided by an amendment to the
offering materials;
(B) The investor should review the complete set of offering
materials, including previously omitted financial information, prior to
making an investment decision; and
(C) No investment commitments will be accepted until after such
financial information has been provided; and
(iii) If the issuer is relying on paragraph (aa)(3) of this section
to provide financial statement information required by paragraph (t)(1)
of this section, a statement that financial information certified by
the principal executive officer of the issuer has been provided instead
of financial statements reviewed by a public accountant that is
independent of the issuer; and
(iv) In lieu of the information required by paragraph (j) of this
section, a description of the process to complete the transaction or
cancel an investment commitment, including a statement that:
(A) Investors may cancel an investment commitment for any reason
within 48 hours from the time of his or her investment commitment (or
such later period as the issuer may designate);
(B) The intermediary will notify investors when the target offering
amount has been met;
(C) The issuer may close the offering at any time after it has
aggregate investment commitments for which the right to cancel pursuant
to paragraph (aa)(1)(iv)(A) of this section has lapsed that equal or
exceed the target offering amount (absent a material change that would
require an extension of the offering and reconfirmation of the
investment commitment); and
(D) If an investor does not cancel an investment commitment within
48 hours from the time of the initial investment commitment, the funds
will be released to the issuer upon closing of the offering and the
investor will receive securities in exchange for his or her investment;
(2) May omit the information required by paragraph (t) of this
section in the initial Form C: Offering Statement (Form C) (Sec.
239.900 of this chapter) filed with the Commission and provided to
investors and the relevant intermediary in accordance with Sec.
227.203(a)(1) if such information is unavailable at the time of filing,
but the intermediary may not accept any investment commitments until
complete information required under paragraph (t) of this section is
provided through an amendment to the Form C in accordance with Sec.
227.203(a)(2); and
(3) May comply with the requirements of paragraph (t)(1) of this
section instead of paragraph (t)(2) of this section for an offering or
offerings that, together with all other amounts sold under section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) within the
preceding 12-month period, have, in the aggregate, a target offering
amount of more than $107,000, but not more than $250,000, and financial
statements of the issuer that have either been reviewed or audited by a
public accountant that is independent of the issuer are unavailable at
the time of filing.
* * * * *
0
7. Effective March 15, 2021, amend Sec. 227.203 by revising paragraph
(a)(1) to read as follows:
Sec. 227.203 Filing requirements and form.
(a) * * *
(1) Offering statement. Except as allowed by Sec. 227.206, an
issuer offering or selling securities in reliance on section 4(a)(6) of
the Securities Act (15 U.S.C. 77d(a)(6)) and in accordance with section
4A of the Securities Act (15 U.S.C. 77d-1) and this part, and any co-
issuer jointly offering or selling securities with such an issuer in
reliance on the same, must file with the Commission and provide to
investors and the relevant intermediary a Form C: Offering Statement
(Form C) (Sec. 239.900
[[Page 3592]]
of this chapter) prior to the commencement of the offering of
securities. An issuer that is both offering or selling securities with
a co-issuer and separately offering or selling securities on its own
must file with the Commission and provide to investors and the relevant
intermediary a separate Form C for such offering. Every Form C must
include the information required by Sec. 227.201.
* * * * *
0
8. Effective March 15, 2021, amend Sec. 227.204 by:
0
a. Revising paragraphs (a) and (b)(1);
0
b. Adding paragraph (d); and
0
c. Redesignating the Instruction to Sec. 227.204 as paragraph (e) and
revising it.
The revisions and addition read as follows:
Sec. 227.204 Advertising.
(a)(1) An issuer may not, directly or indirectly, advertise the
terms of an offering made in reliance on section 4(a)(6) of the
Securities Act (15 U.S.C. 77d(a)(6)), except for oral or written
communications that meet the requirements of paragraph (b) of this
section or of Sec. 227.206.
(2) Instruction to paragraph (a). For purposes of this paragraph
(a), issuer includes persons acting on behalf of the issuer.
(b) * * *
(1) A statement that the issuer is conducting an offering pursuant
to section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), the
name of the intermediary through which the offering is being conducted,
and information (including a link in any written communications)
directing the potential investor to the intermediary's platform;
* * * * *
(d) Notwithstanding the requirement that a notice advertising any
of the terms of an issuer's offering made in reliance on section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) include no more
than the information specified in paragraph (b) of this section, an
issuer conducting an offering in reliance on Regulation Crowdfunding
concurrently with another offering that discloses the terms of the
Regulation Crowdfunding offering in the disclosure document for the
other offering will not be deemed to have exceeded these disclosure
limitations if the disclosure document for the other offering satisfies
all the other requirements of this section. If the disclosure document
for the other offering is filed on the Commission's Electronic Data
Gathering and Retrieval System (EDGAR), the link required by paragraph
(b)(1) may not be a live hyperlink.
(e) Instruction to Sec. 227.204. For purposes of this section,
terms of the offering means the amount of securities offered, the
nature of the securities, the price of the securities, the closing date
of the offering period, the planned use of proceeds and the issuer's
progress toward meeting its funding target.
0
9. Effective March 15, 2021, add Sec. 227.206 to subpart B to read as
follows:
Sec. 227.206 Solicitations of interest and other communications.
(a) Solicitation of interest. At any time before the filing of an
offering statement, an issuer may communicate orally or in writing to
determine whether there is any interest in a contemplated securities
offering. Such communications are deemed to be an offer of a security
for sale for purposes of the antifraud provisions of the Federal
securities laws. No solicitation or acceptance of money or other
consideration, nor of any commitment, binding or otherwise, from any
person is permitted until the offering statement is filed.
(b) Conditions. The communications must:
(1) State that no money or other consideration is being solicited,
and if sent in response, will not be accepted;
(2) State that no offer to buy the securities can be accepted and
no part of the purchase price can be received until the offering
statement is filed and only through an intermediary's platform; and
(3) State that a person's indication of interest involves no
obligation or commitment of any kind.
(c) Indications of interest. Any written communication under this
section may include a means by which a person may indicate to the
issuer that such person is interested in a potential offering. This
issuer may require the name, address, telephone number, and/or email
address in any response form included pursuant to this paragraph (c).
0
10. Effective January 14, 2021, to March 1, 2023, add paragraph (e) to
Sec. 227.301 to read as follows:
Sec. 227.301 Measures to reduce risk of fraud.
* * * * *
(e) Have a reasonable basis for believing that an issuer seeking to
initiate an offering of securities between March 1, 2021, and August
28, 2022, in reliance on section 4(a)(6) of the Securities Act through
the intermediary's platform that is relying on Sec. 227.201(bb) and
that has previously sold securities in reliance on section 4(a)(6) of
the Securities Act has complied with the requirements in section 4A(b)
of the Act (15 U.S.C. 77d1(b)) and the related requirements in this
part. In satisfying the requirement in this paragraph (e), an
intermediary may rely on the representations of the issuer concerning
compliance with the requirements in this paragraph (e) unless the
intermediary has reason to question the reliability of those
representations.
Sec. 227.303 [Amended]
0
11. Effective January 14, 2021, until September 1, 2021, amend Sec.
227.303 by:
0
a. Removing ``Sec. 227.201(z)(1)'' from paragraph (g)(1)(i) and adding
in its place ``Sec. 227.201(aa)(1)''; and
0
b. Removing ``Sec. 227.201(z)(3)'' from paragraph (g)(1)(iii) and
adding in its place ``Sec. 227.201(aa)(3)''.
Sec. 227.304 [Amended]
0
12. Effective January 14, 2021, until September 1, 2021, amend Sec.
227.304 by removing ``Sec. 227.201(z)'' from paragraph (e)(2)(i) and
adding in its place ``Sec. 227.201(aa)''.
0
13. Effective March 15, 2021, amend Sec. 227.503 by revising
paragraphs (a), adding an Instruction to paragraph (a), and revising
paragraph (b)(3) to read as follows:
Sec. 227.503 Disqualification provisions.
(a) Disqualification events. No exemption under section 4(a)(6) of
the Securities Act (15 U.S.C. 77d(a)(6)) shall be available for a sale
of securities if the issuer; any predecessor of the issuer; any
affiliated issuer; any director, officer, general partner or managing
member of the issuer; any beneficial owner of 20 percent or more of the
issuer's outstanding voting equity securities, calculated on the basis
of voting power; any promoter connected with the issuer in any capacity
at the time of filing, any offer after filing, or such sale; any person
that has been or will be paid (directly or indirectly) remuneration for
solicitation of purchasers in connection with such sale of securities;
or any general partner, director, officer or managing member of any
such solicitor:
(1) Has been convicted, within 10 years before the filing of the
offering statement or such sale (or five years, in the case of issuers,
their predecessors and affiliated issuers), of any felony or
misdemeanor:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer,
[[Page 3593]]
investment adviser, funding portal or paid solicitor of purchasers of
securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the information required by section 4A(b) of the Securities Act (15
U.S.C. 77d-1(b)) or such sale that, at the time of such filing or sale,
restrains or enjoins such person from engaging or continuing to engage
in any conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser,
funding portal or paid solicitor of purchasers of securities;
(3) Is subject to a final order of a State securities commission
(or an agency or officer of a State performing like functions); a State
authority that supervises or examines banks, savings associations or
credit unions; a State insurance commission (or an agency or officer of
a state performing like functions); an appropriate Federal banking
agency; the U.S. Commodity Futures Trading Commission; or the National
Credit Union Administration that:
(i) At the time of the filing of the information required by
section 4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) or such sale,
bars the person from:
(A) Association with an entity regulated by such commission,
authority, agency or officer;
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative or deceptive conduct
entered within ten years before such filing of the offering statement
or such sale;
(iii) Instruction to paragraph (a)(3). Final order shall mean a
written directive or declaratory statement issued by a Federal or State
agency, described in this paragraph (a)(3), under applicable statutory
authority that provides for notice and an opportunity for hearing,
which constitutes a final disposition or action by that Federal or
State agency.
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Exchange Act (15 U.S.C. 78o(b) or 78o-
4(c)) or section 203(e) or (f) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-3(e) or (f)) that, at the time of the filing of the
information required by section 4A(b) of the Securities Act (15 U.S.C.
77d-1(b)) or such sale:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer, investment adviser or funding
portal;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the information required by section 4A(b) of
the Securities Act (15 U.S.C. 77d-1(b)) or such sale that, at the time
of such filing or sale, orders the person to cease and desist from
committing or causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the Federal
securities laws, including without limitation section 17(a)(1) of the
Securities Act (15 U.S.C. 77q(a)(1)), section 10(b) of the Exchange Act
(15 U.S.C. 78j(b)) and 17 CFR 240.10b-5, section 15(c)(1) of the
Exchange Act (15 U.S.C. 78o(c)(1)) and section 206(1) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-6(1)) or any other rule or
regulation thereunder; or
(ii) Section 5 of the Securities Act (15 U.S.C. 77e);
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or Regulation A (17 CFR
230.251 through 230.263) offering statement filed with the Commission
that, within five years before the filing of the information required
by section 4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) or such
sale, was the subject of a refusal order, stop order, or order
suspending the Regulation A exemption, or is, at the time of such
filing or sale, the subject of an investigation or proceeding to
determine whether a stop order or suspension order should be issued; or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
information required by section 4A(b) of the Securities Act (15 U.S.C.
77d-1(b)) or such sale, or is, at the time of such filing or sale,
subject to a temporary restraining order or preliminary injunction with
respect to conduct alleged by the United States Postal Service to
constitute a scheme or device for obtaining money or property through
the mail by means of false representations.
Instruction to paragraph (a): With respect to any beneficial owner
of 20 percent or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power, the issuer is
required to determine whether a disqualifying event has occurred only
as of the time of filing of the offering statement and not from the
time of such sale.
(b) * * *
(3) If, before the filing of the information required by section
4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) or such sale, the
court or regulatory authority that entered the relevant order, judgment
or decree advises in writing (whether contained in the relevant
judgment, order or decree or separately to the Commission or its staff)
that disqualification under paragraph (a) of this section should not
arise as a consequence of such order, judgment or decree; or
* * * * *
0
14. Effective March 15, 2021, add Sec. 227.504 to read as follows:
Sec. 227.504 Definition of ``qualified purchaser''.
For purposes of section 18(b)(3) of the Securities Act [15 U.S.C.
77r(b)(3)], a ``qualified purchaser'' means any person to whom
securities are offered or sold pursuant to an offering under Sec. Sec.
227.100 through 227.504 (Regulation Crowdfunding).
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
15. The authority citation for part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c),
80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350;
sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
* * * * *
0
16. Effective March 15, 2021, amend Sec. 229.601 by revising paragraph
(b)(2)(ii)
[[Page 3594]]
and paragraph (b)(10)(iv), to read as follows:
Sec. 229.601 (Item 601) Exhibits.
* * * * *
(b) * * *
(2) * * *
(ii) The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (b)(2) of this section if
the registrant customarily and actually treats that information as
private or confidential and if the omitted information is not material.
If it does so, the registrant should mark the exhibit index to indicate
that portions of the exhibit or exhibits have been omitted and include
a prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and is the type that the registrant
treats as private or confidential. The registrant also must include
brackets indicating where the information is omitted from the filed
version of the exhibit. If requested by the Commission or its staff,
the registrant must promptly provide on a supplemental basis an
unredacted copy of the exhibit and its materiality and privacy or
confidentiality analyses. Upon evaluation of the registrant's
supplemental materials, the Commission or its staff may require the
registrant to amend its filing to include in the exhibit any previously
redacted information that is not adequately supported by the
registrant's analyses. The registrant may request confidential
treatment of the supplemental material submitted under this paragraph
(b)(2)(ii) pursuant to Sec. 200.83 of this chapter while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it if the registrant complies with the procedures
outlined in Sec. 230.418 or 240.12b-4 of this chapter.
* * * * *
(10) * * *
(iv) The registrant may redact specific provisions or terms of
exhibits required to be filed by this paragraph (b)(10) if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit or exhibits have been omitted and include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and is the type that the registrant
treats as private or confidential. The registrant also must include
brackets indicating where the information is omitted from the filed
version of the exhibit. If requested by the Commission or its staff,
the registrant must promptly provide on a supplemental basis an
unredacted copy of the exhibit and its materiality and privacy or
confidentiality analyses. Upon evaluation of the registrant's
supplemental materials, the Commission or its staff may require the
registrant to amend its filing to include in the exhibit any previously
redacted information that is not adequately supported by the
registrant's analyses. The registrant may request confidential
treatment of the supplemental material submitted under this paragraph
(b)(10)(iv) pursuant to Sec. 200.83 of this chapter while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it if the registrant complies with the procedures
outlined in Sec. 230.418 or 240.12b-4 of this chapter.
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
17. 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 Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
Section 230.502 is also issued under 15 U.S.C. 80a-8, 80a-29,
80a-30.
* * * * *
0
18. Effective March 15, 2021, amend Sec. 230.147 by revising paragraph
(g), removing the Instruction to paragraph (g), and removing paragraph
(h).
The revisions read as follows:
Sec. 230.147 Intrastate offers and sales.
* * * * *
(g) Integration with other offerings. To determine whether offers
and sales should be integrated, refer to Sec. 230.152.
0
19. Effective March 15, 2021, amend Sec. 230.147A by revising
paragraph (g), removing the Instruction to paragraph (g), and removing
paragraph (h).
The revisions read as follows:
Sec. 230.147A Intrastate sale exemption.
* * * * *
(g) Integration with other offerings. To determine whether offers
and sales should be integrated, refer to Sec. 230.152.
0
20. Effective March 15, 2021, add Sec. 230.148 to read as follows:
Sec. 230.148 Exemption from general solicitation or general
advertising.
(a) A communication will not be deemed to constitute general
solicitation or general advertising if made in connection with a
seminar or meeting in which more than one issuer participates that is
sponsored by a college, university, or other institution of higher
education, State or local government or instrumentality thereof,
nonprofit organization, or angel investor group, incubator, or
accelerator, provided that:
(1) No advertising for the seminar or meeting references a specific
offering of securities by the issuer;
(2) The sponsor of the seminar or meeting does not:
(i) Make investment recommendations or provide investment advice to
attendees of the event;
(ii) Engage in any investment negotiations between the issuer and
investors attending the event;
(iii) Charge attendees of the event any fees, other than reasonable
administrative fees;
(iv) Receive any compensation for making introductions between
event attendees and issuers or for investment negotiations between such
parties; and
(v) Receive any compensation with respect to the event that would
require registration of the sponsor as a broker or a dealer under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or an
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C.
80b-1 et seq.);
(3) The type of information regarding an offering of securities by
the issuer that is communicated or distributed by or on behalf of the
issuer in connection with the event is limited to a notification that
the issuer is in the process of offering or planning to offer
securities, the type and amount of securities being offered, the
intended use of proceeds of the offering, and the unsubscribed amount
in an offering; and
(4) If the event allows attendees to participate virtually, rather
than in person, online participation in the event is limited to:
(i) Individuals who are members of, or otherwise associated with
the sponsor organization;
(ii) Individuals that the sponsor reasonably believes are
accredited investors; or
(iii) Individuals who have been invited to the event by the sponsor
based on industry or investment-related experience reasonably selected
by the sponsor in good faith and disclosed in the public communications
about the event.
[[Page 3595]]
(5) For purposes of this paragraph, the term ``angel investor
group'' means a group of accredited investors that holds regular
meetings and has defined processes and procedures for making investment
decisions, either individually or among the membership of the group as
a whole, and is neither associated nor affiliated with brokers,
dealers, or investment advisers.
(b) [Reserved]
0
21. Effective March 15, 2021, revise Sec. 230.152 to read as follows:
Sec. 230.152 Integration.
This section provides a general principle of integration and non-
exclusive safe harbors from integration of registered and exempt
offerings. Because of the objectives of this section and the policies
underlying the Act, the provisions of this section will not have the
effect of avoiding integration for any transaction or series of
transactions that, although in technical compliance with the section,
is part of a plan or scheme to evade the registration requirements of
the Act.
(a) General principle of integration. If the safe harbors in
paragraph (b) of this section do not apply, in determining whether two
or more offerings are to be treated as one for the purpose of
registration or qualifying for an exemption from registration under the
Act, offers and sales will not be integrated if, based on the
particular facts and circumstances, the issuer can establish that each
offering either complies with the registration requirements of the Act,
or that an exemption from registration is available for the particular
offering. In making this determination:
(1) For an exempt offering prohibiting general solicitation, the
issuer must have a reasonable belief, based on the facts and
circumstances, with respect to each purchaser in the exempt offering
prohibiting general solicitation, that the issuer (or any person acting
on the issuer's behalf) either:
(i) Did not solicit such purchaser through the use of general
solicitation; or
(ii) Established a substantive relationship with such purchaser
prior to the commencement of the exempt offering prohibiting general
solicitation; and
(2) For two or more concurrent exempt offerings permitting general
solicitation, in addition to satisfying the requirements of the
particular exemption relied on, general solicitation offering materials
for one offering that includes information about the material terms of
a concurrent offering under another exemption may constitute an offer
of securities in such other offering, and therefore the offer must
comply with all the requirements for, and restrictions on, offers under
the exemption being relied on for such other offering, including any
legend requirements and communications restrictions.
(b) Safe harbors. No integration analysis under paragraph (a) of
this section is required, if any of the following non-exclusive safe
harbors apply:
(1) Any offering made more than 30 calendar days before the
commencement of any other offering, or more than 30 calendar days after
the termination or completion of any other offering, will not be
integrated with such other offering, provided that for an exempt
offering for which general solicitation is not permitted that follows
by 30 calendar days or more an offering that allows general
solicitation, the provisions of Sec. 230.152(a)(1) shall apply.
(2) Offers and sales made in compliance with Sec. 230.701,
pursuant to an employee benefit plan, or in compliance with Sec. Sec.
230.901 through 230.905 (Regulation S) will not be integrated with
other offerings;
(3) An offering for which a registration statement under the Act
has been filed will not be integrated if it is made subsequent to:
(i) A terminated or completed offering for which general
solicitation is not permitted;
(ii) A terminated or completed offering for which general
solicitation is permitted made only to qualified institutional buyers
and institutional accredited investors; or
(iii) An offering for which general solicitation is permitted that
terminated or completed more than 30 calendar days prior to the
commencement of the registered offering; or
(4) Offers and sales made in reliance on an exemption for which
general solicitation is permitted will not be integrated if made
subsequent to any terminated or completed offering.
(c) Commencement of an offering. For purposes of this section, an
offering of securities will be deemed to be commenced at the time of
the first offer of securities in the offering by the issuer or its
agents. The following non-exclusive list of factors should be
considered in determining when an offering is deemed to be commenced.
Pursuant to the requirements for registered and exempt offerings, an
issuer or its agents may commence an offering in reliance on:
(1) Section 230.241, on the date the issuer first made a generic
offer soliciting interest in a contemplated securities offering for
which the issuer had not yet determined the exemption under the Act
under which the offering of securities would be conducted;
(2) Section 15 U.S.C. 77d(a)(2) (Section 4(a)(2)), Sec. Sec.
230.501 through 230.508 (Regulation D), or Sec. 230.147, or Sec.
230.147A (Rules 147 or 147A), on the date the issuer first made an
offer of its securities in reliance on these exemptions;
(3) Sections 230.251 through 230.263 (Regulation A), on the earlier
of the date the issuer first made an offer soliciting interest in a
contemplated securities offering in reliance on Sec. 230.255, or the
public filing of a Form 1-A offering statement;
(4) Sections 227.100 through 227.503 of this chapter (Regulation
Crowdfunding), on the earlier of the date the issuer first made an
offer soliciting interest in a contemplated securities offering in
reliance on Sec. 227.206 of this chapter, or the public filing of a
Form C offering statement; and
(5) A registration statement filed under the Act, in the case of:
(i) A continuous offering that will commence promptly on the date
of initial effectiveness, on the date the issuer first filed its
registration statement for the offering with the Commission; or
(ii) A delayed offering, on the earliest date on which the issuer
or its agents commenced public efforts to offer and sell the
securities, which could be evidenced by the earlier of:
(A) The first filing of a prospectus supplement with the Commission
describing the delayed offering; or
(B) The issuance of a widely disseminated public disclosure, such
as a press release, confirming the commencement of the delayed
offering.
Note 1 to paragraph (c)(5): Offers by the issuer, or persons
acting on behalf of the issuer, limited exclusively to qualified
institutional buyers and institutional accredited investors,
including those that would qualify for the safe harbor in Sec.
230.163B, will not be considered the commencement of a registered
offering for purposes of this section.
(d) Termination or completion of an offering. For purposes of this
section, the termination or completion of an offering is deemed to have
occurred when the issuer and its agents cease efforts to make further
offers to sell the issuer's securities under such offering. The
following non-exclusive list of factors should be considered in
determining when an offering is deemed to be terminated or completed
including for offerings made in reliance on:
[[Page 3596]]
(1) Section 4(a)(2), Regulation D, or Rules 147 or 147A, on the
later of the date:
(i) The issuer entered into a binding commitment to sell all
securities to be sold under the offering (subject only to conditions
outside of the investor's control); or
(ii) The issuer and its agents ceased efforts to make further
offers to sell the issuer's securities under such offering;
(2) Regulation A, on:
(i) The withdrawal of an offering statement under Sec. 230.259(a);
(ii) The filing of a Sec. 239.94 of this chapter (Form 1-Z) with
respect to a Tier I offering under Sec. 230.257(a);
(iii) The declaration by the Commission that the offering statement
has been abandoned under Sec. 230.259(b); or
(iv) The date, after the third anniversary of the date the offering
statement was initially qualified, on which Sec. 230.251(d)(3)(i)(F)
prohibits the issuer from continuing to sell securities using the
offering statement, or any earlier date on which the offering
terminates by its terms;
(3) Regulation Crowdfunding, on the deadline of the offering
identified in the offering materials pursuant to Sec. 227.201(g) of
this chapter, or indicated by the Regulation Crowdfunding intermediary
in any notice to investors delivered under Sec. 227.304(b) of this
chapter; and
(4) A registration statement filed under the Act:
(i) On the withdrawal of the registration statement after an
application is granted or deemed granted under Sec. 230.477;
(ii) On the filing of a prospectus supplement or amendment to the
registration statement indicating that the offering, or particular
delayed offering in the case of a shelf registration statement, has
been terminated or completed;
(iii) On the entry of an order of the Commission declaring that the
registration statement has been abandoned under Sec. 230.479;
(iv) On the date, after the third anniversary of the initial
effective date of the registration statement, on which Sec.
230.415(a)(5) prohibits the issuer from continuing to sell securities
using the registration statement, or any earlier date on which the
offering terminates by its terms; or
(v) Any other factors that indicate that the issuer has abandoned
or ceased its public selling efforts in furtherance of the offering, or
particular delayed offering in the case of a shelf registration
statement, which could be evidenced by:
(A) The filing of a Current Report on Form 8-K; or
(B) The issuance of a widely disseminated public disclosure by the
issuer, or its agents, informing the market that the offering, or
particular delayed offering, in the case of a shelf registration
statement, has been terminated or completed.
Note 2 to paragraph (d)(4): A particular delayed offering may be
deemed terminated or completed, even though the issuer's shelf
registration statement may still have an aggregate amount of
securities available to offer and sell in a later delayed offering.
Sec. 230.155 [Removed and reserved]
0
22. Effective March 15, 2021, remove and reserve Sec. 230.155.
0
23. Effective March 15, 2021, add Sec. 230.241 before the undesignated
center heading ``Regulation A--Conditional Small Issues Exemption'' to
read as follows:
Sec. 230.241 Solicitations of interest.
(a) Solicitation of interest. At any time before making a
determination as to the exemption from registration under the Act under
which an offering of securities will be conducted, an issuer or any
person authorized to act on behalf of an issuer may communicate orally
or in writing to determine whether there is any interest in a
contemplated offering of securities exempt from registration under the
Act. Such communications are deemed to be an offer of a security for
sale for purposes of the antifraud provisions of the Federal securities
laws. No solicitation or acceptance of money or other consideration,
nor of any commitment, binding or otherwise, from any person is
permitted until the issuer makes a determination as to the exemption to
be relied on and the offering, meeting the requirements of the
exemption, is commenced.
(b) Conditions. The communications must state that:
(1) The issuer is considering an offering of securities exempt from
registration under the Act, but has not determined a specific exemption
from registration the issuer intends to rely on for the subsequent
offer and sale of the securities;
(2) No money or other consideration is being solicited, and if sent
in response, will not be accepted;
(3) No offer to buy the securities can be accepted and no part of
the purchase price can be received until the issuer determines the
exemption under which the offering is intended to be conducted and,
where applicable, the filing, disclosure, or qualification requirements
of such exemption are met; and
(4) A person's indication of interest involves no obligation or
commitment of any kind.
(c) Indications of interest. Any written communication under this
section may include a means by which a person may indicate to the
issuer that such person is interested in a potential offering. The
issuer may require the name, address, telephone number, and/or email
address in any response form included pursuant to this paragraph (c).
0
24. Effective March 15, 2021, amend Sec. 230.251 by revising
paragraphs (a)(2), (b)(7), and (c), and removing the Instruction to
paragraph (c) to read as follows:
Sec. 230.251 Scope of exemption.
* * * * *
(a) * * *
(2) Tier 2. Offerings pursuant to Sec. Sec. 230.251 through
230.263 (Regulation A) in which the sum of the aggregate offering price
and aggregate sales does not exceed $75,000,000, including not more
than $22,500,000 offered by all selling securityholders that are
affiliates of the issuer (``Tier 2 offerings'').
* * * * *
(b) * * *
(7) Has filed with the Commission all reports required to be filed,
if any, pursuant to Sec. 230.257 or pursuant to section 13 or 15(d) of
the Exchange Act (15 U.S.C. 78m or 15 U.S.C. 78o) during the two years
before the filing of the offering statement (or for such shorter period
that the issuer was required to file such reports); and
* * * * *
(c) Integration with other offerings. To determine whether offers
and sales should be integrated, see Sec. 230.152.
* * * * *
Sec. 230.255 [Amended]
0
25. Effective March 15, 2021, amend Sec. 230.255 by removing paragraph
(e).
0
26. Effective March 15, 2021, amend Sec. 230.259 by revising paragraph
(b) to read as follows:
Sec. 230.259 Withdrawal or abandonment of offering statements.
* * * * *
(b) Abandonment. When an offering statement, or a post-
qualification amendment to such statement, has been on file with the
Commission for nine months without amendment and has not become
qualified, the Commission may, in its discretion, declare the offering
statement or post-qualification amendment abandoned. If the offering
statement has been amended, or if the post-qualification amendment has
been amended, the nine-month period shall
[[Page 3597]]
be computed from the date of the latest amendment.
0
27. Effective March 15, 2021, amend Sec. 230.262 by revising paragraph
(a), adding an Instruction to paragraph (a), and revising paragraph
(b)(3) to read as follows:
Sec. 230.262 Disqualification provisions.
(a) Disqualification events. No exemption under Sec. Sec. 230.251
through 230.263 (Regulation A) shall be available for a sale of
securities if the issuer; any predecessor of the issuer; any affiliated
issuer; any director, executive officer, other officer participating in
the offering, general partner or managing member of the issuer; any
beneficial owner of 20 percent or more of the issuer's outstanding
voting equity securities, calculated on the basis of voting power; any
promoter connected with the issuer in any capacity at the time of
filing, any offer after qualification, or such sale; any person that
has been or will be paid (directly or indirectly) remuneration for
solicitation of purchasers in connection with such sale of securities;
any general partner or managing member of any such solicitor; or any
director, executive officer or other officer participating in the
offering of any such solicitor or general partner or managing member of
such solicitor:
(1) Has been convicted, within 10 years before the filing of the
offering statement or such sale (or five years, in the case of issuers,
their predecessors and affiliated issuers), of any felony or
misdemeanor:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the offering statement or such sale that, at the time of such filing or
such sale, restrains or enjoins such person from engaging or continuing
to engage in any conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(3) Is subject to a final order (as defined in Sec. 230.261) of a
State securities commission (or an agency or officer of a State
performing like functions); a State authority that supervises or
examines banks, savings associations, or credit unions; a State
insurance commission (or an agency or officer of a State performing
like functions); an appropriate Federal banking agency; the U.S.
Commodity Futures Trading Commission; or the National Credit Union
Administration that:
(i) At the time of the filing of the offering statement or such
sale, bars the person from:
(A) Association with an entity regulated by such commission,
authority, agency, or officer;
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative, or deceptive
conduct entered within ten years before such filing of the offering
statement or such sale;
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15
U.S.C. 78o(b) or 78o-4(c)) or section 203(e) or (f) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at the time of
the filing of the offering statement or such sale:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer or investment adviser;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the offering statement or such sale that, at
the time of such filing or sale, orders the person to cease and desist
from committing or causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the Federal
securities laws, including without limitation section 17(a)(1) of the
Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-
5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(c)(1)) and section 206(1) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
(ii) Section 5 of the Securities Act of 1933 (15 U.S.C. 77e).
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or offering statement
filed with the Commission that, within five years before the filing of
the offering statement or such sale, was the subject of a refusal
order, stop order, or order suspending the Regulation A exemption, or
is, at the time of such filing or such sale, the subject of an
investigation or proceeding to determine whether a stop order or
suspension order should be issued; or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
offering statement or such sale, or is, at the time of such filing or
such sale, subject to a temporary restraining order or preliminary
injunction with respect to conduct alleged by the United States Postal
Service to constitute a scheme or device for obtaining money or
property through the mail by means of false representations.
Instruction to paragraph (a): With respect to any beneficial owner
of 20 percent or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power, the issuer is
required to determine whether a disqualifying event has occurred only
as of the time of filing of the offering statement and not from the
time of such sale.
(b) * * *
(3) If, before the filing of the offering statement or the relevant
sale, the court or regulatory authority that entered the relevant
order, judgment or decree advises in writing (whether contained in the
relevant judgment, order or decree or separately to the Commission or
its staff) that disqualification under paragraph (a) of this section
should not arise as a consequence of such order, judgment or decree; or
* * * * *
0
28. Effective March 15, 2021, amend Sec. 230.500 by revising paragraph
(g) to read as follows:
Sec. 230.500 Use of Regulation D.
* * * * *
[[Page 3598]]
(g) Securities offered and sold outside the United States in
accordance with Sec. Sec. 230.901 through 230.905 (Regulation S) need
not be registered under the Act. See Release No. 33-6863. Regulation S
may be relied on for such offers and sales even if coincident offers
and sales are made in accordance with Regulation D inside the United
States. See Sec. 230.152(b)(2). Thus, for example, persons who are
offered and sold securities in accordance with Regulation S would not
be counted in the calculation of the number of purchasers under
Regulation D. Similarly, proceeds from such sales would not be included
in the aggregate offering price. The provisions of this paragraph (g),
however, do not apply if the issuer elects to rely solely on Regulation
D for offers or sales to persons made outside the United States. See
Sec. Sec. 230.502(a) and 230.152.
0
29. Effective March 15, 2021, amend Sec. 230.502 by:
0
a. Revising paragraph (a);
0
b. Removing the Note following paragraph (a);
0
c. Revising paragraph (b)(2)(i)(B); and
0
d. Adding paragraph (b)(2)(viii).
The revisions and addition read as follows:
Sec. 230.502 General conditions to be met.
* * * * *
(a) Integration. To determine whether offers and sales should be
integrated, see Sec. 230.152.
(b) * * *
(2) * * *
(i) * * *
(B) Financial statement information--(1) Offerings up to
$20,000,000. The financial statement information required by paragraph
(b) of Part F/S of Form 1-A. Such financial statement information must
be prepared in accordance with generally accepted accounting principles
in the United States (US GAAP). If the issuer is a foreign private
issuer, such financial statements must be prepared in accordance with
either US GAAP or International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB). If the
financial statements comply with IFRS, such compliance must be
explicitly and unreservedly stated in the notes to the financial
statements and if the financial statements are audited, the auditor's
report must include an opinion on whether the financial statements
comply with IFRS as issued by the IASB.
(2) Offerings over $20,000,000. The financial statement information
required by paragraph (c) of Part F/S of Form 1-A (referenced in Sec.
239.90 of this chapter). If the issuer is a foreign private issuer,
such financial statements must be prepared in accordance with either US
GAAP or IFRS as issued by the IASB. If the financial statements comply
with IFRS, such compliance must be explicitly and unreservedly stated
in the notes to the financial statements and the auditor's report must
include an opinion on whether the financial statements comply with IFRS
as issued by the IASB.
* * * * *
(viii) At a reasonable time prior to the sale of securities to any
purchaser that is not an accredited investor in a transaction under
Sec. 230.506(b), the issuer shall provide the purchaser with any
written communication or broadcast script used under the authorization
of Sec. 230.241 within 30 days prior to such sale.
* * * * *
0
30. Effective March 15, 2021, amend Sec. 230.504 by:
0
a. Revising the section heading;
0
b. Revising paragraph (b)(2); and
0
c. Revising Instruction to paragraph (b)(2).
The revisions read as follows:
Sec. 230.504 Exemption for limited offerings and sales of securities
not exceeding $10,000,000.
* * * * *
(b) * * *
(2) Offering limit. The aggregate offering price for an offering of
securities under this Sec. 230.504, as defined in Sec. 230.501(c),
shall not exceed $10,000,000, less the aggregate offering price for all
securities sold within the 12 months before the start of and during the
offering of securities under this Sec. 230.504 or 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 $10,000,000 of its securities on June 1, 2021, under this
Sec. 230.504 and an additional $500,000 of its securities on December
1, 2021, this Sec. 230.504 would not be available for the later sale,
but would still be applicable to the June 1, 2021, sale.
* * * * *
0
31. Effective March 15, 2021, amend Sec. 230.506 by:
0
a. Revising paragraph (b)(2)(i) and republishing the note to paragraph
(b)(2)(i);
0
b. Amending paragraph (c)(2)(ii)(B)(2) by removing the word ``or'' from
the end of the paragraph;
0
c. Revising paragraph (c)(2)(ii)(C)(4) by removing the period from the
end of paragraph and adding in its place a semicolon;
0
d. Revising paragraph (c)(2)(ii)(D) by removing the period from the end
of the paragraph and adding ``; or'' in its place;
0
e. Adding paragraph (c)(2)(ii)(E) before the Instructions to paragraph
(c)(2)(ii)(A) through (D) of this section; and
0
f. Removing the text ``(A) through (D) of this section'' from the
heading to Instructions to paragraph (c)(2)(ii)(A) through (D) of this
section, and republishing it.
The revisions and addition read as follows:
Sec. 230.506 Exemption for limited offers and sales without regard
to dollar amount of offering.
* * * * *
(b) * * *
(2) * * *
(i) Limitation on number of purchasers. There are no more than, or
the issuer reasonably believes that there are no more than, 35
purchasers of securities from the issuer in offerings under this
section in any 90-calendar-day period.
Note 1 to paragraph (b)(2)(i): See Sec. 230.501(e) for the
calculation of the number of purchasers and Sec. 230.502(a) for
what may or may not constitute an offering under paragraph (b) of
this section.
* * * * *
(c) * * *
(2) * * *
(ii) * * *
(E) In regard to any person that the issuer previously took
reasonable steps to verify as an accredited investor in accordance with
this paragraph (c)(2)(ii), so long as the issuer is not aware of
information to the contrary, obtaining a written representation from
such person at the time of sale that he or she qualifies as an
accredited investor. A written representation under this method of
verification will satisfy the issuer's obligation to verify the
person's accredited investor status for a period of five years from the
date the person was previously verified as an accredited investor.
Instructions to paragraph (c)(2)(ii): * * *
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
32. 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,
[[Page 3599]]
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat.
312, unless otherwise noted.
* * * * *
0
33. Amend Form S-6 (referenced in Sec. 239.16) by revising Additional
Instruction 3 of ``Instructions as to Exhibits'' to read as follows:
Note: The text of Form S-6 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-6
* * * * *
Instructions as to Exhibits
* * * * *
Additional Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (9) of section IX of Form N-
8B-2 (Exhibits) if the registrant customarily and actually treats that
information as private or confidential and if the omitted information
is not material. If it does so, the registrant should mark the exhibit
index to indicate that portions of the exhibit have been omitted and
include a prominent statement on the first page of the redacted exhibit
that certain identified information has been excluded from the exhibit
because it is both not material and the type that the registrant treats
as private or confidential. The registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the registrant's supplemental materials,
the Commission or its staff may require the registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the registrant's analyses. The
registrant may request confidential treatment of the supplemental
material submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
34. Amend Form N-14 (referenced in Sec. 239.23) by revising
Instruction 3 to Item 16 to read as follows:
Note: The text of Form N-14 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-14
* * * * *
Item 16. Exhibits
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (13) of this Item if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the registrant treats as private or
confidential. The registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the registrant's analyses. The registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
35. Amend Form 1-A (referenced in Sec. 239.90) by:
0
a. Revising General Instruction I;
0
b. Revising General Instruction III(a);
0
c. Revising paragraph 13 of Part III, Item 17;
0
d. Removing and reserving paragraph 16 of Part III, Item 17;
0
e. Adding paragraph 99 of Part III, Item 17; and
0
f. Adding an instruction at the end of Part III, Item 17.
The revisions and additions read as follows:
Note: The text of Form 1-A does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 1-A
Regulation A Offering Statement Under the Securities Act of 1933
General Instructions
I. Eligibility Requirements for Use of Form 1-A.
This Form is to be used for securities offerings made pursuant to
Regulation A (17 CFR 230.251 et seq.). Careful attention should be
directed to the terms, conditions and requirements of Regulation A,
especially Rule 251, because the exemption is not available to all
issuers or for every type of securities transaction. Further, the
aggregate offering price and aggregate sales of securities in any 12-
month period is strictly limited to $20 million for Tier 1 offerings
and $75 million for Tier 2 offerings, including no more than $6 million
offered by all selling securityholders that are affiliates of the
issuer for Tier 1 offerings and $22.5 million by all selling
securityholders that are affiliates of the issuer for Tier 2 offerings.
Please refer to Rule 251 of Regulation A for more details.
* * * * *
III. Incorporation by Reference and Cross-Referencing
* * * * *
(a) The use of incorporation by reference and cross-referencing in
Part II of this Form:
(1) Is limited to the following items:
(A) Items 2-14 of Part II and Part F/S if following the Offering
Circular format;
(B) Items 3-11 of Form S-1 if following the Part I of Form S-1
format; or
(C) Items 3-28, and 30 of Form S-11 if following the Part I of Form
S-11 format;
(2) May only incorporate by reference previously submitted or filed
financial statements if the issuer meets the following requirements:
(A) the issuer has filed with the Commission all reports and other
materials required to be filed, if any, pursuant to Rule 257 (Sec.
230.257) or by Sections 13(a), 14 or 15(d) of the Securities Exchange
Act of 1934 during
[[Page 3600]]
the preceding 12 months (or for such shorter period that the issuer was
required to file such reports and other materials);
(B) the issuer makes the financial statement information that is
incorporated by reference pursuant to this item readily available and
accessible on a website maintained by or for the issuer; and
(C) the issuer must state that it will provide to each holder of
securities, including any beneficial owner, a copy of the financial
statement information that have been incorporated by reference in the
offering statement upon written or oral request, at no cost to the
requester, and provide the issuer's website address, including the
uniform resource locator (URL) where the incorporated financial
statements may be accessed.
* * * * *
Part III--Exhibits
* * * * *
Item 17. Description of Exhibits
* * * * *
13. ``Testing-the-waters'' materials--Any written communication or
broadcast script used under the authorization of Rule 241 within 30
days of the initial filing of the offering statement, and any written
communication or broadcast script used under the authorization of Rule
255. Materials used under the authorization of Rule 255 need not be
filed if they are substantively the same as materials previously filed
with the offering statement.
* * * * *
16. RESERVED
* * * * *
99. Additional exhibits--Any additional exhibits which the issuer
may wish to file, which must be so marked as to indicate clearly the
subject matters to which they refer.
* * * * *
Instruction to Item 17:
The issuer may redact information from exhibits required to be
filed by this Item if disclosure of such information would constitute a
clearly unwarranted invasion of personal privacy (e.g., disclosure of
bank account numbers, social security numbers, home addresses, and
similar information). In addition, the issuer may redact specific
provisions or terms of exhibits required to be filed by paragraph 6 or
7 of this Item, if the issuer customarily and actually treats that
information as private or confidential and if the omitted information
is not material. If it does so, the issuer should mark the exhibit
index to indicate that portions of the exhibit have been omitted and
include a prominent statement on the first page of the redacted exhibit
that certain identified information has been excluded from the exhibit
because it is both not material and is the type that the registrant
treats as private or confidential. The issuer also must include
brackets indicating where the information is omitted from the filed
version of the exhibit. If requested by the Commission or its staff,
the issuer must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the issuer's supplemental materials, the
Commission or its staff may require the issuer to amend its filing to
include in the exhibit any previously redacted information that is not
adequately supported by the issuer's analyses. The issuer may request
confidential treatment of the supplemental material submitted under
paragraphs 6 or 7 pursuant to Rule 83 (Sec. 200.83 of this chapter)
while it is in the possession of the Commission or its staff. After
completing its review of the supplemental information, the Commission
or its staff will return or destroy it if the registrant complies with
the procedures outlined in Rule 418 (Sec. 230.418 of this chapter).
* * * * *
0
36. Amend Form C (referenced in Sec. 239.900) by:
0
a. Adding items to the Cover Page after ``website of the Issuer,''
0
b. Revising General Instruction I;
0
c. Revising Instruction 1 to the Signature;
0
d. Revising the introductory paragraphs in the Optional Question and
Answer Format for an Offering Statement; and
0
e. Revising Question 11 in the Optional Question and Answer Format for
an Offering Statement.
The addition and revisions read as follows:
Note: The text of Form C does not, and this amendment will not,
appear in the Code of Federal Regulations.
Form C
Under the Securities Act of 1933
* * * * *
Is there a co-issuer? __ yes __ no. If yes,
Name of co-issuer:-----------------------------------------------------
Legal status of co-issuer:
Form:------------------------------------------------------------------
Jurisdiction of Incorporation/Organization:----------------------------
Date of organization:--------------------------------------------------
Physical address of co-issuer:-----------------------------------------
Website of co-issuer:--------------------------------------------------
* * * * *
General Instructions
I. Eligibility Requirements for Use of Form C
This Form shall be used for the offering statement, and any related
amendments and progress reports, required to be filed by any issuer
offering or selling securities in reliance on the exemption in
Securities Act Section 4(a)(6) and in accordance with Section 4A and
Regulation Crowdfunding (Sec. 227.100 et seq.). The term ``issuer''
includes any co-issuer jointly offering or selling securities with an
issuer in reliance on the exemption in Securities Act Section 4(a)(6)
and in accordance with Securities Act Section 4A and Regulation
Crowdfunding (Sec. 227.100 et seq.). This Form also shall be used for
an annual report required pursuant to Rule 202 of Regulation
Crowdfunding (Sec. 227.202) and for the termination of reporting
required pursuant to Rule 203(b)(2) of Regulation Crowdfunding (Sec.
227.203(b)(2)). Careful attention should be directed to the terms,
conditions and requirements of the exemption.
* * * * *
Signatures
* * * * *
Instructions. The form shall be signed by the issuer, its principal
executive officer or officers, its principal financial officer, its
controller or principal accounting officer and at least a majority of
the board of directors or persons performing similar functions. If
there is a co-issuer, the form shall also be signed by the co-issuer,
its principal executive officer or officers, its principal financial
officer, its controller or principal accounting officer and at least a
majority of the board of directors or persons performing similar
functions.
* * * * *
Optional Question and Answer Format for an Offering Statement
Respond to each question in each paragraph of this part. Set forth
each question and any notes, but not any instructions thereto, in their
entirety. If disclosure in response to any question is responsive to
one or more other questions, it is not necessary to repeat the
disclosure. If a question or series of questions is inapplicable or the
response is available elsewhere in the Form, either State that it is
inapplicable, include a cross-reference to the responsive disclosure,
or omit the question or series of questions. The term ``issuer'' in
these questions and answers includes any ``co-issuer'' jointly offering
or selling securities with the issuer in reliance on the exemption in
Securities
[[Page 3601]]
Act Section 4(a)(6) and in accordance with Securities Act Section 4A
and Regulation Crowdfunding (Sec. 227.100 et seq.). Any information
provided with respect to the issuer should also be separately provided
with respect to any co-issuer. If you are seeking to rely on the
Commission's temporary rules to initiate an offering between May 4,
2020, and February 28, 2021, intended to be conducted on an expedited
basis due to circumstances relating to coronavirus disease 2019 (COVID-
19), you will likely need to provide additional or different
information than described in questions 2, 12, and 29. If you are
seeking to rely on the Commission's temporary Rule 201(bb) for an
offering initiated between March 1, 2021, and August 28, 2022, you will
likely need to provide additional or different information than
described in questions 2 and 29. When preparing responses to such
questions, please carefully review temporary Rules 100(b)(7), 201(aa),
201(bb), and 304(e) and tailor your responses to those requirements as
applicable.
Be very careful and precise in answering all questions. Give full
and complete answers so that they are not misleading under the
circumstances involved. Do not discuss any future performance or other
anticipated event unless you have a reasonable basis to believe that it
will actually occur within the foreseeable future. If any answer
requiring significant information is materially inaccurate, incomplete
or misleading, the Company, its management and principal shareholders
may be liable to investors based on that information.
* * * * *
11. (a) Did the issuer make use of any written communication or
broadcast script for testing the waters either (i) under the
authorization of Rule 241 within 30 days of the initial filing of the
offering statement, or (ii) under the authorization of Rule 206? If so,
provide copies of the materials used.
(b) How will the issuer complete the transaction and deliver
securities to the investors?
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
37. 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); and Pub. L. 112-106,
secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
38. Effective March 15, 2021, amend Sec. 240.12g-6 by
0
a. Revising the section heading; and
0
b. Revising paragraph (a) introductory text.
The revisions read as follows:
Sec. 240.12g-6 Exemption for securities issued pursuant to section
4(a)(6) of the Securities Act of 1933 or Regulation Crowdfunding.
(a) For purposes of determining whether an issuer is required to
register a security with the Commission pursuant to section 12(g)(1) of
the Act (15 U.S.C. 78l(g)(1)), the definition of held of record shall
not include securities issued pursuant to the offering exemption under
section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) or
Sec. Sec. 227.100 through 227.504 (Regulation Crowdfunding) by an
issuer that:
* * * * *
0
39. Effective March 15, 2021, amend Sec. 240.12g5-1 by
0
a. Revising paragraph (a)(2); and
0
b. Adding paragraph (a)(9).
The revision and addition read as follows:
Sec. 240.12g5-1 Definition of securities ``held of record''.
(a) * * *
(2) Except as specified in paragraph (a)(9) of this section,
securities identified as held of record by a corporation, a
partnership, a trust whether or not the trustees are named, or other
organization shall be included as so held by one person.
* * * * *
(9) For purposes of determining whether a crowdfunding issuer, as
defined in Sec. 270.3a-9(b)(1) of this chapter, or a crowdfunding
vehicle, as defined in Sec. 270.3a-9(b)(2) of this chapter, is
required to register a class of equity securities with the Commission
pursuant to section 12(g)(1) of the Act, both the crowdfunding issuer
and the crowdfunding vehicle:
(i) May exclude securities issued by a crowdfunding vehicle, as
defined in Sec. 270.3a-9(b)(2) of this chapter, in an offering under
Sec. Sec. 227.100 through 227.504 (Regulation Crowdfunding) in which
the crowdfunding vehicle and the crowdfunding issuer are deemed to be
co-issuers under the Securities Act (15 U.S.C. 77a et seq.) and that
are held by natural persons; and
(ii) Shall include securities issued by a crowdfunding vehicle, as
defined in Sec. 270.3a-9(b)(2) of this chapter, in an offering under
Regulation Crowdfunding in which the crowdfunding vehicle and the
crowdfunding issuer are deemed to be co-issuers under the Securities
Act and that are held by investors that are not natural persons.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
40. 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), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
Section 240.220f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *
Section 249.308 is also issued under 15 U.S.C. 80a-29 and 80a-
37.
* * * * *
0
41. Amend Form 20-F (referenced in Sec. 249.220f) by revising the
second, third, and fourth paragraphs following instruction 4.(a)(ii)
under ``Instructions as to Exhibits,'' and prior to the note, to read
as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 20-F
* * * * *
Instructions as to Exhibits
* * * * *
4. (a) * * *
(ii) completes a transaction that had the effect of causing it to
cease being a public shell company.
The only contracts that must be filed are those to which the
registrant or a subsidiary of the registrant is a party or has
succeeded to a party by assumption or assignment or in which the
registrant or such subsidiary has a beneficial interest.
The registrant may redact specific provisions or terms of exhibits
required to be filed by this Form 20-F if the registrant customarily
and actually treats that information as private or confidential and if
the omitted information is not material. If it does so, the registrant
should mark the exhibit index to indicate that portions of the exhibit
or exhibits have been omitted and include a prominent statement on
[[Page 3602]]
the first page of the redacted exhibit that certain identified
information has been excluded from the exhibit because it is both not
material and is the type that the registrant treats as private or
confidential. The registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the registrant's analyses. The registrant
may request confidential treatment of the supplemental material
submitted under this instruction pursuant to Rule 83 (Sec. 200.83 of
this chapter) while it is in the possession of the Commission or its
staff. After completing its review of the supplemental information, the
Commission or its staff will return or destroy it if the registrant
complies with the procedures outlined in Rules 418 or 12b-4 (Sec.
230.418 or Sec. 240.12b-4).
* * * * *
0
42. Amend Form 8-K (referenced in Sec. 249.308) by revising
Instruction 6 under Item 1.01 to read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
Information To Be Included in the Report
Section 1--Registrant's Business and Operations
Item 1.01 Entry Into a Material Definitive Agreement
* * * * *
Instructions.
* * * * *
6. To the extent a material definitive agreement is filed as an
exhibit under this Item 1.01, the registrant may redact specific
provisions or terms of the exhibit if the registrant customarily and
actually treats that information as private or confidential and if the
omitted information is not material, provided that the registrant
intends to incorporate by reference this filing into its future
periodic reports or registration statements, as applicable, in
satisfaction of Item 601(b)(10) of Regulation S-K. If it does so, the
registrant should mark the exhibit index to indicate that portions of
the exhibit have been omitted and include a prominent statement on the
first page of the redacted exhibit that certain identified information
has been excluded from the exhibit because it is both not material and
is the type that the registrant treats as private or confidential. The
registrant also must include brackets indicating where the information
is omitted from the filed version of the exhibit. If requested by the
Commission or its staff, the registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its
materiality and privacy or confidentiality analyses. Upon evaluation of
the registrant's supplemental materials, the Commission or its staff
may require the registrant to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the registrant's analyses. The registrant may request
confidential treatment of the supplemental material submitted under
this instruction pursuant to Rule 83 (Sec. 200.83) while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it if the registrant complies with the procedures
outlined in Rules 418 or 12b-4 (Sec. 230.418 or Sec. 240.12b-4).
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
43. 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, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2020), unless
otherwise noted.
* * * * *
0
44. Effective March 15, 2021, add Sec. 270.3a-9 to read as follows:
Sec. 270.3a-9 Crowdfunding vehicle.
(a) Notwithstanding section 3(a) of the Act, a crowdfunding vehicle
will be deemed not to be an investment company if the vehicle:
(1) Is organized and operated for the sole purpose of directly
acquiring, holding, and disposing of securities issued by a single
crowdfunding issuer and raising capital in one or more offerings made
in compliance with Sec. Sec. 227.100 through 227.504 (Regulation
Crowdfunding);
(2) Does not borrow money and uses the proceeds from the sale of
its securities solely to purchase a single class of securities of a
single crowdfunding issuer;
(3) Issues only one class of securities in one or more offerings
under Regulation Crowdfunding in which the crowdfunding vehicle and the
crowdfunding issuer are deemed to be co-issuers under the Securities
Act (15 U.S.C. 77a et seq.);
(4) Receives a written undertaking from the crowdfunding issuer to
fund or reimburse the expenses associated with its formation,
operation, or winding up, receives no other compensation, and any
compensation paid to any person operating the vehicle is paid solely by
the crowdfunding issuer;
(5) Maintains the same fiscal year-end as the crowdfunding issuer;
(6) Maintains a one-to-one relationship between the number,
denomination, type and rights of crowdfunding issuer securities it owns
and the number, denomination, type and rights of its securities
outstanding;
(7) Seeks instructions from the holders of its securities with
regard to:
(i) The voting of the crowdfunding issuer securities it holds and
votes the crowdfunding issuer securities only in accordance with such
instructions; and
(ii) Participating in tender or exchange offers or similar
transactions conducted by the crowdfunding issuer and participates in
such transactions only in accordance with such instructions;
(8) Receives, from the crowdfunding issuer, all disclosures and
other information required under Regulation Crowdfunding and the
crowdfunding vehicle promptly provides such disclosures and other
information to the investors and potential investors in the
crowdfunding vehicle's securities and to the relevant intermediary; and
(9) Provides to each investor the right to direct the crowdfunding
vehicle to assert the rights under State and Federal law that the
investor would have if he or she had invested directly in the
crowdfunding issuer and provides to each investor any information that
it receives from the crowdfunding issuer as a shareholder of record of
the crowdfunding issuer.
(b) For purposes of this section:
(1) Crowdfunding issuer means a company that seeks to raise capital
as a co-issuer with a crowdfunding vehicle in an offering that complies
with all of the requirements under section 4(a)(6) of the Securities
Act (15 U.S.C. 77d(a)(6)) and Regulation Crowdfunding.
(2) Crowdfunding vehicle means an issuer formed by or on behalf of
a crowdfunding issuer for the purpose of conducting an offering under
section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) as a co-
issuer with the
[[Page 3603]]
crowdfunding issuer, which offering is controlled by the crowdfunding
issuer.
(3) Regulation Crowdfunding means the regulations set forth in
Sec. Sec. 227.100 through 227.504 of this chapter.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1934
0
45. The authority citation for part 274 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
46. Amend Form N-5 (referenced in Sec. Sec. 239.24 and 274.5) by
revising Instruction 3 in ``Instructions as to Exhibits'' to read as
follows:
Note: The text of Form N-5 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-5
Registration Statement of Small Business Investment Company Under the
Securities Act of 1933 and the Investment Company Act of 1940 *
* * * * *
Instructions as to Exhibits
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph 9 of this Item if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the registrant treats as private or
confidential. The registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the registrant's analyses. The registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act of 1933 [17 CFR 230.418].
* * * * *
0
47. Amend Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) by:
0
a. Amending the last sentence of Instruction 2 to Item 28 by removing
``registrant'' and adding in its place ``Registrant'';
0
b. Amending Instruction 3 to Item 28 by removing ``registrant'' and
adding in its place ``Registrant''; and
0
c. Revising Instruction 4 to Item 28.
The revision reads as follows:
Note: The text of Form N-1A does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-1A
* * * * *
Item 28. Exhibits
* * * * *
Instructions
* * * * *
4. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (h) of this Item if the
Registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the Registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the Registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the Registrant's analyses. The Registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 4 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
48. Amend Form N-2 (referenced in Sec. Sec. 239.14 and 274.11a-1) by:
0
a. Amending the last sentence of Instruction 4 to Item 25.2 by removing
``registrant'' and adding in its place ``Registrant'';
0
b. Amending Instruction 5 to Item 25.2 by removing ``registrant'' and
adding in its place ``Registrant''; and
0
c. Revising Instruction 6 to Item 25.2.
The revision reads as follows:
Note: The text of Form N-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-2
* * * * *
Item 25. Financial Statements and Exhibits
* * * * *
2. Exhibits:
* * * * *
Instructions
* * * * *
6. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph k. of this Item if the
Registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the Registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and
[[Page 3604]]
privacy or confidentiality analyses. Upon evaluation of the
Registrant's supplemental materials, the Commission or its staff may
require the Registrant to amend its filing to include in the exhibit
any previously redacted information that is not adequately supported by
the Registrant's analyses. The Registrant may request confidential
treatment of the supplemental material submitted under this Instruction
6 pursuant to Rule 83 of the Commission's Organizational Rules [17 CFR
200.83] while it is in the possession of the Commission or its staff.
After completing its review of the supplemental information, the
Commission or its staff will return or destroy it, if the Registrant
complies with the procedures outlined in Rule 418 under the Securities
Act [17 CFR 230.418].
* * * * *
0
49. Amend Form N-3 (referenced in Sec. Sec. 239.17a and 274.11b) by
revising Instruction 5 to Item 29(b) to read as follows:
Note: The text of Form N-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-3
* * * * *
Item 29. Financial Statements and Exhibits
* * * * *
(b) Exhibits:
* * * * *
Instructions
* * * * *
5. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (9) and (11) of this Item
if the Registrant customarily and actually treats that information as
private or confidential and if the omitted information is not material.
If it does so, the Registrant should mark the exhibit index to indicate
that portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the Registrant's supplemental materials, the
Commission or its staff may require the Registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the Registrant's analyses. The Registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 5 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
50. Amend Form N-4 (referenced in Sec. Sec. 239.17b and 274.11c) by
revising Instruction 5 to Item 24(b) to read as follows:
Note: The text of Form N-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-4
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
(b) Exhibits:
* * * * *
Instructions
* * * * *
5. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (7) and (8) of this Item if
the Registrant customarily and actually treats that information as
private or confidential and if the omitted information is not material.
If it does so, the Registrant should mark the exhibit index to indicate
that portions of the exhibit or exhibits have been omitted and include
a prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and the type that the Registrant treats
as private or confidential. The Registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
Registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the Registrant's supplemental materials,
the Commission or its staff may require the Registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the Registrant's analyses. The
Registrant may request confidential treatment of the supplemental
material submitted under this Instruction 5 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
51. Amend Form N-6 (referenced in Sec. Sec. 239.17c and 274.11d) by
revising Instruction 3 to Item 26 to read as follows:
Note: The text of Form N-6 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-6
* * * * *
Item 26. Exhibits
* * * * *
Instructions:
* * * * *
3. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (g) and (j) of this Item if
the Registrant customarily and actually treats that information as
private. If it does so, the Registrant should mark the exhibit index to
indicate that portions of the exhibit have been omitted and include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and the type that the Registrant treats
as private or confidential. The Registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
Registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the Registrant's supplemental materials,
the Commission or its staff may require the Registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the Registrant's analyses. The
Registrant may request confidential treatment of the supplemental
material submitted under this Instruction 3 pursuant to rule 83 of the
Commission's
[[Page 3605]]
Organizational Rules [17 CFR 200.83] while it is in the possession of
the Commission or its staff. After completing its review of the
supplemental information, the Commission or its staff will return or
destroy it, if the Registrant complies with the procedures outlined in
rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
52. Amend Form N-8B-2 (referenced in Sec. 274.12) by revising
Instruction 3 to ``IX Exhibits'' to read as follows:
Note: The text of Form N-8B-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-8B-2
Registration Statement of Unit Investment Trusts Which Are Currently
Issuing Securities
* * * * *
IX
Exhibits
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by A(9) if the registrant customarily and
actually treats that information as private. If it does so, the
registrant should mark the exhibit index to indicate that portions of
the exhibit have been omitted and include a prominent statement on the
first page of the redacted exhibit that certain identified information
has been excluded from the exhibit because it is both not material and
the type that the registrant treats as private or confidential. The
registrant also must include brackets indicating where the information
is omitted from the filed version of the exhibit. If requested by the
Commission or its staff, the registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its
materiality and privacy or confidentiality analyses. Upon evaluation of
the registrant's supplemental materials, the Commission or its staff
may require the registrant to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the registrant's analyses. The registrant may request
confidential treatment of the supplemental material submitted under
this Instruction 3 pursuant to rule 83 of the Commission's
Organizational Rules [17 CFR 200.83] while it is in the possession of
the Commission or its staff. After completing its review of the
supplemental information, the Commission or its staff will return or
destroy it, if the registrant complies with the procedures outlined in
rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
By the Commission.
Dated: November 2, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-24749 Filed 1-13-21; 8:45 am]
BILLING CODE 8011-01-P