usca case #15-1150 document #1553850 filed: 05/22/2015 ...€¦ · galvin, secretary of the...

___

ORIGINALUNITED STATES COURT OF APPEALS

‘ FOR THE DISTRICT OF COLUMBIA CIRCUH

V

UNITED STATES SECURITIES ANDCase No.

15-11FO

EXCHANGE COMMISSION,

Respondent.

PETITION FOR REVIEW

Pursuant to Rule 15(a) of the Federal Rules of Appellate Procedure; Section

9 of the Securities Act of 1933, 15 U.S.C. § 771; and Section 706 of the

Administrative Procedure Act, 5 U.S.C. § 701 et seq., petitioner William F.

Galvin, Secretary of the Commonwealth of Massachusetts, by his attorney Maura

Healey, Attorney General of the Commonwealth of Massachusetts, hereby

petitions this Court for review of a rule of respondent the United States Securities

and Exchange Commission relating to the preemption of state securities law

registration and qualification requirements for certain Regulation A securities. The

Commission adopted this rule on March 25, 2015. The final rule release, a copy of

— VtTIA1Sf. C3ALVIN, SECRETARY OFTHE COMMONWEALTH OFMASSACHUSETTS,

Petitioner,

MAY222rj_I

RECL!i aDMai!1&.rn

United Cotrt of AoøejlgDistrict ot ugi*bia çircui

which is attached to this petition, was published in the Federal Register on April

USCA Case #15-1150 Document #1553850 Filed: 05/22/2015 of 125

20, 2015. Amendments for Small andAdditional Issues Exemptions Under the

Securities Act (Regulation A), 80 Fed. Reg. 21,806 (Apr. 20, 2015) (to be codified

at 17 C.F.R. parts 200, 230, 232, 239, 240, 249, & 260).

Petitioner submitted written comments on the proposed rule on December

18, 2013 and March 24, 2014. Petitioner now asks this Court to hold the

Commission’s rule arbitrary, capricious, and otherwise not in accordance with the

Administrative Procedure Act, the Securities Act of 1933, and other law.

Petitioner requests vacatur of the rule and its requirements, issuance of a

permanent injunction prohibiting the Commission from implementing and

enforcing the rule, and such other relief as the Court deems appropriate.

Respectfully submitted,

MAURA HEALEY

Attorney General of Massachusetts

(‘) ,

/

By:Seth Schofield /

D.C. Circuit Bar Roll No. 55725Robert E. TooneSookyoung ShinAssistant Attorneys GeneralOne Ashburton PlaceBoston, MA 02108-1598(617) 727-2200seth. [email protected]

Counselfor William F. Galvin, Secretaryofthe Commonwealth ofMassachusetts

Date: May21, 2015

2


ATTACHMENT

United States Securities and Exchange Commission

Amendments for Small and Additional Issues ExemptionsUnder the Securities Act (Regulation A), Final Rule

80 Fed. Reg. 21,806(Published April 20, 2015; Effective June 29, 2015)


FEDERAL REGISTERVol. 80 Monday,

No. 75 April 20, 2015

Part II

SecurWes and Exchange Commission17CFR Parts 200, 230, 232, et al.Amendments for Small and Additional Issues Exemptions Under theSecurities Act (Regulation A); Final Rule


21806 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 200, 230, 232, 239, 240,249, and 260

[Release Nos. 33—9741; 34—74578; 39—2501;File No. S7—1 1—1 3]

RIN 3235—AL39

Amendments for Small and AdditionalIssues Exemptions Under theSecurities Act (Regulation A)

AGENCY: Securities and ExchangeCommission.ACTION: Final rules.

SUMMARY: We are adopting amendmentsto Regulation A and other rules andforms to implement Section 401 of theJumpstart Our Business Startups (JOBS)Act. Section 401 of the JOBS Act addedSection 3(b)(2) to the Securities Act of1933, which directs the Commission toadopt rules exempting from theregistration requirements of theSecurities Act offerings of up to $50million of securities annually. The finalrules include issuer eligibilityrequirements, content and filingrequirements for offering statements,and ongoing reporting requirements forissuers in Regulation A offerings.DATES; The final rules and formamendments are effective on June 19,2015.

FOR FURTHER INFORMATION CONTACT:Zachary 0. Faflon, Special Counsel;Office of Small Business Policy,Division of Corporation Finance, at(202) 551—3460; or Shehzad K. Niazi,Special Counsel; Office of Rulemaking,Division of Corporation Finance, at(202) 551—3430, U.S. Securities andExchange Commission, 100 F Street NE.,Washington, DC 20549—3628.SUPPLEMENTARY INFORMATION: We areamending Rules 251 through 263 ofRegulation A under the Securities Act of1933 (the “Securities Act”).2

We are revising Form 1—A,3rescinding Form 2—A,4 and adoptingfour new forms, Form 1—K (annualreport), Form 1—SA (semiannual report),Form 1—U (current report), and Form1—Z (exit report).

Further, we are revising Rule 4a—1under the Trust Indenture Act of 1939(the “Trust Indenture Act”) 6 to increasethe dollar ceiling of the exemption fromthe requirement to issue securities

‘17 CFR 230.251 through 230.263.215 U.S.C. 77a et seq.17 CFR 239.90.17 CFR 239.91.17 CVR 260.4a—1.615 u.S.c. 77aaa et seq.

pursuant to an indenture. We are alsoamending Rule 12g5—1 of theSecurities Exchange Act of 1934 (the“Exchange Act”) to permit issuers torely on a conditional exemption frommandatory registration of a class ofsecurities under Section 12(g) of theExchange Act, Rule 15c2—11 of theExchange Act to permit an issuer’songoing reports filed under RegulationA to satisfy a broker-dealer’s obligationsto review and maintain certaininformation about an issuer’s quotedsecurities, and Rule 30—1 10 of theCommission’s organizational rules andprovisions for delegated authority topermit the Division of CorporationFinance to issue notices of qualificationand deny Form i—Z filings. In addition,we are adopting a technical amendmentto Exchange Act Rule 15c2—11 to updatethe outdated reference to “Schedule Hof the By-Laws of the NationalAssociation of Securities Dealers, Inc.,”which is now known as the “FinancialIndustry Regulatory Authority, Inc.”and to reflect the correct rule reference.

As a result of the revisions toRegulation A, we are adoptingconforming and technical amendmentsto Securities Act Rules 157(a),h1505(b)(2)(iii),12 and Form 8—A.Additionally, we are revising Item101(a) 13 of Regulation S—T’ to reflectthe mandatory electronic filing of allissuer initial filing and ongoingreporting requirements underRegulation A. We are also revising Item101(c)(6) ‘ of Regulation S—T to removethe reference to paper filings in aRegulation A offering, and removingand reserving Item ioi(b)(8) 16 ofRegulation S—T dealing with theoptional electronic filing of Form F—Xby Canadian issuers.

Table of Contents

I. IntroductionII. Final Rules and Amendments to

Regulation AA. OverviewB. Scope of Exemption1. Eligible Issuers2. Eligible Securities3. Offering Limitations and Secondary

Sales4. Investment Limitation5. Integration6. Treatment Under Section 12(g)C. Offering Statement

17 CFR 240.12g5—1.815 U.S.C. 78a et seq.17 CFR 240.15c2—11.‘° 17 CFR 200.30—1.1117 CFR 230.157(a).1217 CFR 230.505(b)(2)(iii).1317 CFR 232.101(a).1417 CFR 232.10 et seq.15 17 CFR 232.101(c)(6).1617 CFR 232.101(b)(8).

1. Electronic filing; Delivery Requirements2. Non-Public Submission of Draft Offering

Statements3. Form and Content4. Continuous or Delayed Offerings and

Offering Circular Supplements5. QualificationD. Solicitation of Interest (Testing the

Waters)1. Proposed Rules2. Comments on Proposed Rules3. Final RulesE. Ongoing Reporting1. Continuing Disclosure Obligations2. Exchange Act Rule 15c2—11 and Other

Implications of Ongoing ReportingUnder Regulation A

3. Exchange Act Registration of RegulationA Securities

4. Exit Report on Form 1—ZF. Insignificant Deviations From a Term,

Condition or RequirementG. Bad Actor Disqualification1. Proposed Rules2. Comments on Proposed Rules3. Final Ru)esH. Relationship With State Securities Law1. Proposed Rules2. Comments on Proposed Rules3. Final RulesI. Additional Considerations Related to

Smaller OfferingsJ. Transitional Guidance for Issuers

Currently Conducting Regulation AOfferings

K. Technical and Conforming AmendmentsIll. Economic Analysis

A. Broad Economic ConsiderationsB. Baseline1. Current Methods of Raising Up to $50

Million of Capital2. Investors3. Financial IntermediariesC. Scope of Exemption1. Eligible Issuers2. Eligible Securities3. Offering Limitations and Secondary

Sales4. Investment Limitation5. Integration6. Treatment Under Section 12(g)D. Offering Statement1. Electronic Filing and Delivery2. Disclosure Format and Content3. Audited Financial Statements4. Other Accounting Requirements5. Continuous and Delayed Offerings6. Nonpublic Review of Draft Offering

StatementsE. Solicitation of Interest (“Testing the

Waters”)F. Ongoing Reporting1. Periodic and Current Event Reporting

Requirements2. Termination and Suspension of

Reporting and Exit Reports3. Exchange Act RegistrationG. Insignificant DeviationsH. Bad Actor DisqualificationI. Relationship With State Securities Law

IV. Paperwork Reduction ActA. BackgroundB. Estimated Number of Regulation A

OfferingsC. PRA Reporting and Cost Burden

Estimates


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations 21807

1. Regulation A (Form 1—A and Form 2—A)2. Form 1—K: Annual Report3. Form 1—SA: Semiannual Report4. Form 1—U: Current Reporting5. Form 1—Z: Exit Report6. Form 8—A: Short Form Registration

Under the Exchange Act7. Form ID Filings8. Form F—XB. Collections of Information Are

MandatoryV. Final Regulatory Flexibility Act Analysis

A. Need for the RulesB. Significant Issues Raised by Public

CommentsC. Small Entities Subject to the RulesD. Reporting, Recordkeeping, and Other

Compliance RequirementsE. Agency Action To Minimize Effect on

Small EntitiesVI. Statutory Basis and Text of Amendments

I. Introduction

On December 18, 2013, we proposedrule and form amendments 17 toimplement Section 401 of the JumpstartOur Business Startups Act (the “JOBSAct”).’8 Section 401 of the JOBS Actamended Section 3(b) of the SecuritiesAct by designating existing Section 3(b)as Section 3(b)(1), and creating newSections 3(b)(2)—(5). Section 3(b)(2)directs the Commission to adopt rulesadding a class of securities exempt fromthe registration requirements of theSecurities Act for offerings of up to $50million of securities within a 12-monthperiod. Sections 3(b)(2)—(5) specifymandatory terms and conditions forsuch exempt offerings and alsoauthorize the Commission to adoptother terms, conditions, or requirementsas necessary in the public interest andfor the protection of investors.’9 Inaddition, Section 3(b)(5) directs theCommission to review the $50 millionoffering limit specified in Section3(b)(2) not later than two years after theenactment of the JOBS Act and everytwo years thereafter, and authorizes theCommission to increase the annualoffering limit if it determines that itwould be appropriate to do so.Accordingly, we are revising RegulationA under the Securities Act to requireissuers conducting offerings in relianceon Section 3(b)(2) to comply with termsand conditions established by the

17 See Rel. No. 33—9497 [79 FR 3925] (Dec. 18,2013) (the “Proposing Release”), available at:http://www.sec.gov/rules/prapased/2013/33-9497.pdf

15 Public Law 112—106, 126 Stat. 306.are adopting a number of terms and

conditions for Regulation A offerings pursuant toour discretionary authority under Sections 3(b)(2)—(5). Where we have done so, as discussed in detailin Section II. below, it is because we find suchterms and conditions to be necessary in the publicinterest and for the protection of investors.

Commission’s rules, and, whereapplicable, to make ongoing disclosure.

II. Final Rules aird Amendments toRegulation A

A. Overview

We are adopting final rules toimplement the JOBS Act mandate byexpanding Regulation A into two tiers:Tier 1, for securities offerings of up to$20 million; and Tier 2, for offerings ofup to $50 million.20 The final rules forofferings under Tier 1 and Tier 2 buildon current Regulation A and preserve,with some modifications, existingprovisions regarding issuer eligibility,offering circular contents, testing thewaters, and “bad actor” disqualification.As proposed, and with themodifications described below, the finalrules modernize the Regulation A filingprocess for all offerings, align practicein certain areas with prevailing practicefor registered offerings, create additionalflexibility for issuers in the offeringprocess, and establish an ongoingreporting regime for Regulation Aissuers. Under the final rules, Tier 2issuers are required to include auditedfinancial statements in their offeringdocuments and to file annual,semiannual, and current reports withthe Commission. With the exception ofsecurities that will he listed on anational securities exchange uponqualification, purchasers in Tier 2offerings must either be accreditedinvestors, as that term is defined in Rule501(a) of Regulation D, or be subject tocertain limitations on their investment.The differences between Tier 1 and Tier2 offerings are described more fullybelow.

In developing the final rules, weconsidered the statutory language ofJOBS Act Section 401, the JOBS Actlegislative history, recentrecommendations of the Commission’sGovernment-Business Forum on SmallBusiness Capital Formation,2’ theAdvisory Committee on Small andEmerging Companies,22 the EquityCapital Formation Task Force,23comment letters received on Title IV of

20An issuer of $20 million or less of securitiescould elect to proceed under either Tier I orTier 2.

2 of the commission’sGovernment-Business Forum on Small BusinessCapital Formation are available at: http://www.sec.gav/infa/smallbus/sbfarum.shtml.

22 Recommendations of the Advisory Committeeon Small and Emerging Companies are available at:http://www.sec.gov/infa/smallbus/acsec.shtml.

23Equity Capital Task Force, Fram the On-Rampta the Freeway: Refueling Jab creation and Grawthby Recannecting Investors with Small-CapCompanies, presentation to the US. Dept. ofTreasury (November 11, 2013), available at:http://www.equitycapitalfarmatiantaskforce.cam/.

the JOBS Act before the Commission’sproposed rules were issued in Decemberof 2013,24 and comment letters receivedto date on the Commission’s proposedrules to implement Section 401 of theJOBS Act.25

The key provisions of the final rulesand amendments to Regulation Afollow: Scope of the exemption—thefinal rules:• Establish two tiers of offerings:• Tier 1: Annual offering limit of $20

million, including no more than $6million on behalf of sellingsecurityholders that are affiliates ofthe issuer.

• Tier 2: Annual offering limit of $50million, including no more than $15million on behalf of sellingsecurityholders that are affiliates ofthe issuer.

• Limit sales by selling securityholdersin an issuer’s initial Regulation Aoffering and any subsequentlyqualified Regulation A offering withinthe first 12-month period followingthe date of qualification of the initialRegulation A offering to no more than30% of the aggregate offering price.

• Preserve the existing issuer eligibilityrequirements of Regulation A, andalso exclude issuers that are, or havebeen, subject to any order of theCommission pursuant to Section 12(j)of the Exchange Act entered withinfive years before the filing of theoffering statement and issuers that arerequired to, but that have not, filedwith the Conimission the ongoingreports required by the final rulesduring the two years immediatelypreceding the filing of an offeringstatement.

• Limit the amount of securities that aninvestor who is not an accreditedinvestor under Rule 501(a) ofRegulation B can purchase in a Tier2 offering to no more than: (a) 10% ofthe greater of annual income or networth (for natural persons); or (b)10% of the greater of annual revenueor net assets at fiscal year end (fornon-natural persons). This limit willnot apply to purchases of securitiesthat will be listed on a national

24 facilitate public input on JOBS Actrulemaking before the issuance of rule proposals,the Commission invited members of the public tomake their views known on various JOBS Actinitiatives in advance of any rulemaking bysubmitting comment letters to the Commission’sWeb site at hup://wwwsecgov/spathght/jobsactcamments.shtml. Comment letters received to dateon Title IV of the JOBS Act are available at: http://www.sec.gav/comments/jabs-title-i v/jabs-titleiv.shtml.

25 The comment letters received to date inresponse to the Proposing Release are available at:http://wwwsecgav/camments/s7-1 1-13/s71 I l3shtmL


21808 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules and Regulations

securities exchange uponqualification.

• Exclude asset-backed securities, asdefined in Regulation AB, from thelist of eligible securities.

• Update the safe harbor fromintegration and provide guidance onthe potential integration of offeringsconducted concurrently with, or closein time after, a Regulation A offering.Solicitation materials:• Permit issuers to “test the waters”

with, or solicit interest in a potentialoffering from, the general public eitherbefore or after the filing of the offeringstatement, so long as any solicitationmaterials used after publicly filing theoffering statement are preceded oraccompanied by a preliminary offeringcircular or contain a notice informingpotential investors where and how themost current preliminary offeringcircular can be obtained.

Qualification, communications, andoffering process:• Require issuers and intermediaries in

the prequalification period to delivera preliminary offering circular toprospective purchasers at least 48hours in advance of sale unless theissuer is subject to, and current in,Tier 2 ongoing reporting obligations.Where the issuer is subject to, andcurrent in, a Tier 2 ongoing reportingobligation, issuers and intermediarieswill only be required to comply withthe general delivery requirements foroffers.

• Modernize the qualification,communications, and offeringprocesses in Regulation A to reflectanalogous provisions of the SecuritiesAct registration process: 26

• Permit issuers and intermediaries tosatisfy their delivery requirementsas to the final offering circularunder an “access equals delivery”model when sales are made on thebasis of offers conducted during theprequalification period and thefinal offering circular is filed andavailable on the Commission’sElectronic Data Gathering, Analysisand Retrieval system (EDGAR);

• Require issuers and intermediaries,not later than two business daysafter completion of a sale, toprovide purchasers with a copy ofthe final offering circular or a noticewith the uniform resource locator(URL) where the final offeringcircular may be obtained on EDGARand contact information sufficientto notify a purchaser where arequest for a final offering circular

26 See, e.g., Securities Offering Reform, Rel. No.33—8591 (July 19, 2005) [70 FR 447221.

can be sent and received inresponse; and

• Permit issuers to file offeringcircular updates and supplementsafter qualification of the offeringstatement in lieu of post-qualification amendments in certaincircumstances, including to providethe types of information that may beexcluded from a prospectus underRule 430A.

• Permit continuous or delayedofferings, but require issuers incontinuous or delayed Tier 2 offeringsto be current in their annual andsemiannual reporting obligations inorder to do so.

• Permit issuers to qualify additionalsecurities in reliance on Regulation Aby filing a post-qualificationamendment to a qualified offeringstatement.

Offering statement:• Require issuers to file offering

statements with the Commissionelectronically on EDGAR.

• Permit the non-public submission ofoffering statements and amendmentsfor review by Commission staff beforefiling such documents with theCommission, so long as all suchdocuments are publicly filed not laterthan 21 calendar days beforequalification.

• Eliminate the Model A (Question-andAnswer) disclosure format under PartII of Form 1—A.

• Update and clarify Model B(Narrative) disclosure format underPart II of Form 1—A (renamed,“Offering Circular”), while continuingto permit Part I of Form S—i narrativedisclosure as an alternative.

• Permit real estate investment trusts(REITs) and similarly eligiblecompanies to provide the narrativedisclosure required by Part I of FormS—li in Part II of Form 1—A.

• Require that offering statements bequalified by the Commission beforesales may be made pursuant toRegulation A.

• Require Tier 1 and Tier 2 issuers tofile balance sheets and relatedfinancial statements for the twoprevious fiscal year ends (or for suchshorter time that they have been inexistence).

• Require Tier 2 issuers to includefinancial statements in their offeringcirculars that are audited inaccordance with either the auditingstandards of the American Institute ofCertified Public Accountants (MCPA)(referred to as U.S. GenerallyAccepted Auditing Standards orGAAS) or the standards of the PublicCompany Accounting OversightBoard (PCAOB).

• Require Tier 1 and Tier 2 issuers toinclude financial statements in Form1—A that are dated not more than ninemonths before the date of non-publicsubmission, filing, or qualification,with the most recent annual orinterim balance sheet not older thannine months. If interim financialstatements are required, they mustcover a period of at least six months.Ongoing reporting:

• Require Tier I issuers to provideinformation about sales in suchofferings and to update certain issuerinformation by electronically filing aForm i—Z exit report with theCoimnission not later than 30calendar days after termination orcompletion of an offering.

• Require Tier 2 issuers to fileelectronically with the Commissionon EDGAR annual and semiannualreports, as well as current eventreports.

• Require Tier 2 issuers to fileelectronically a special financialreport to cover financial periodsbetween the most recent periodincluded in a qualified offeringstatement and the issuer’s firstrequired periodic report.

• Permit the ongoing reports filed by anissuer conducting a Tier 2 offering tosatisfy a broker-dealer’s obligationsunder Exchange Act Rule 15c2—ll.

• Provide that Tier 2 issuers’ reportingobligations under Regulation A wouldsuspend when they are subject to theongoing reporting requirements ofSection 13 of the Exchange Act, andmay also be suspended underRegulation A at any time by filing aForm 1—Z exit report after completingreporting for the fiscal year in whichan offering statement was qualified, solong as the securities of each class towhich the offering statement relatesare held of record by fewer than 300persons, or fewer than 1,200 personsfor banks or bank holding companies,and offers or sales made in reliance ona qualified Tier 2 Regulation Aoffering statement are not ongoing. Incertain circumstances, Tier 2Regulation A reporting obligationsmay terminate when issuers are nolonger subject to the ongoingreporting requirements of Section 13of the Exchange Act.

• Require Tier 2 issuers to include intheir first annual report aftertermination or completion of aqualified Regulation A offering, or intheir Form 1—Z exit report,information about sales in theterminated or completed offering andto update certain issuer information.

• Eliminate the requirement that issuersfile a Form 2—A with the Commission



to report sales arid the termination ofsales made under Regulation A everysix months after qualification andwithin 30 calendar days after thetermination, completion, or final saleof securities in the offering.Exchange Act registration:

• Conditionally exempt securitiesissued in a Tier 2 offering from themandatory registration requirementsof Section 12(g) of the Exchange Act,for so long as the issuer engages theservices of a transfer agent that isregistered with the Commission underSection 17A of the Exchange Act,remains subject to a Tier 2 reportingobligation, is current in its annual andsemiannual reporting at fiscal yearend, and had a public float of lessthan $75 million as of the lastbusiness day of its most recentlycompleted semiannual period, or, inthe absence of a public float, hadannual revenues of less than $50million as of its most recentlycompleted fiscal year.

• Permit Tier 2 issuers to use a Form 8—A short form registration statementconcurrentiy with the qualification ofa Regulation A offering statement thatincludes Part I of Form S—i or FormS—il narrative disclosure in Form 1—A in order to register a class ofsecurities under Sections 12(g) or12(b) of the Exchange Act.“Bad actor” disqualification

provisions:• Substantially conform the “bad actor”

disqualification provisions of Rule262 to Rule 5 06(d) and add adisclosure requirement similar to Rule506(e).

Application af state securities laws:• Provide for the preemption of state

securities law registration andqualification requirements forsecurities offered or sold to “qualifiedpurchasers,” in light of the totalpackage of investor protectionsincluded in the final rules. Aqualified purchaser will be defined tobe any person to whom securities areoffered or sold in a Tier 2 offering.The Commission is required by

Section 3(b)(5) of the Securities Act toreview the Tier 2 offering limitationevery two years. In addition to revisitingthe Tier 2 offering limitation, the staffwill also undertake to review the Tier 1offering limitation at the same time. Thestaff also will undertake to study andsubmit a report to the Commission nolater than 5 years following the adoptionof the amendments to Regulation A, onthe impact of both the Tier 1 and Tier2 offerings on capital formation andinvestor protection. The report will

include, but not be limited to, a reviewof: (1) The amount of capital raisedunder the amendments; (2) the numberof issuances and amount raised by bothTier 1 and Tier 2 offerings; (3) thenumber of placement agents and brokersfacilitating the Regulation A offerings;(4) the number of Federal, State, or anyother actions taken against issuers,placement agents, or brokers withrespect to both Tier 1 and Tier 2offerings; and (5) whether anyadditional investor protections arenecessary for either Tier 1 or Tier 2.Based on the information contained inthe report, the Commission may proposeto either decrease or increase theoffering limit for Tier 1, as appropriate.

B. Scope of Exemption

1. Eligible Issuers

a. Proposed Rules

Section 401 of the JOBS Act does notinclude any express issuer eligibilityrequirements. The proposed ruleswould have maintained Regulation A’sexisting issuer eligibility requirementsand added two new categories ofineligible issuers.27 The two newcategories would exclude issuers thatare or have been subject to any order ofthe Commission pursuant to Section12(j) of the Exchange Act entered withinfive years before the filing of the offeringstatement and issuers that are requiredto, but that have not, filed with theCommission the ongoing reportsrequired by the final rules during thetwo years immediately preceding thefiling of an offering statement.Additionally, we requested comment onother potential changes to the existingissuer eligibility requirements,including whether the exemptionshould be limited to “operatingcompanies,” United States domesticissuers, or issuers that use a certainamount of the proceeds raised in aRegulation A offering in the UnitedStates. We also solicited comment onwhether we should extend issuereligibility to non-Canadian foreignissuers, business developmentcompanies as defined in Section 2(a)(48)of the Investment Company Act of 1940

“Existing Regulation A limits issuer eligibility toissuers organized, and with a principal place ofbusiness, in the United States or Canada, whileexcluding Exchange Act reporting companies,investment companies, including businessdevelopment companies, development stagecompanies that bave no specific business plan orpurpose or have indicated that their business planis to engage In a merger or acquisition with anunidentified company or companies, issuers offractional undivided interests in oil or gas rights ora similar interest In other mineral rights, andissuers disqualified because of Rule 262, 17 CFR230.262 (2014). See 17 CFR 230.251(al (2014).

(BDC5),le blank check companies,2e orExchange Act reporting companies, or,alternatively, eliminate shell companiesor REITs from the exemptive regime.

b. Comments on the Proposed RulesCommenters expressed a wide range

of views on the proposed issuereligibility requirements. A number ofcommenters expressed general supportfor the proposed issuer eligibilityrequirements.3° Many commentersexpressly supported the new proposedissuer eligibility criterion relating to therequirement to be current in Tier 2ongoing reporting obligations.31 Onecommenter also expressly supported theproposed exclusion of issuers subject toan order of the Commission enteredpursuant to Section 12(j) of theExchange Act from the list of eligibleissuers.32 Other commenters suggestedadditional limitations on issuereligibility, including: a requirement thatissuers be “operating companies,”

28 5 U.S.C. 80a—2(a)(48).“Blank check companies” are development

stage companies that have no specific business planor purpose or have indicated that their businessplan is to engage in a merger or acquisition withen unidentified company or companies. SeeSecurities Act Rule 419(a)(2)(i), 17 CFR230.419(a)(2)(i); see olao SEC Rel. No. 33—6949 [57FR 36442] (July 30, 1992), at In. so (clarifying thatblank check companies regardless of whether theyare issuing penny stock are precluded from relyingon Regulation Al.

ae Letter from Catherine T. Dixon, Chair, FederalRegulation of Securities Committee, Business LawSection, American Bar Association, April 3, 2014(“ABA BLS Letter”); Letter from Cabrielle Buckley,Chair, Section of International Law, American BarAssociation, May 14, 2014 (“ABA SIL Leuer”);Letter from Andrew F. viles, Canaccord LetterCenuity Inc., March 27, 2014 (“Canaccord Letter”);Letter from Pw Carey, March 24, 2014 (“CareyLetter”); Letter from Kurt N. Schacht, CFA,Managing Director, Standards and Financial MarketIntegrity, and Linda L. Rittenhuuae, Director,Capital Markets, CFA Institute, March 24, 2014(“CFA Institute Letter”); Letter from Kim Wales,Executive Board Member, Crowdfund IntermediaryRegulatory Advocates (cFIRA), May 14, 2014(“CFIRA Letter 1”]; Letter from Christopher Tyrrell,chair, Crowdfunding Intermediary RegulatoryAdvocates, February 23, 2015 (“CFIRA Letter 2”];Robert R. Kaplan, Jr. and T. Rhye James, Kaplanvoekier Cunningham & Frank PLC, March 23, 2014(“KvCF Letter”); Letter from William F. Calvin,Secretary, Commonwealth of Massachusetts, March24, 2014 (“Massachusetts Letter 2”); Letter fromMorrison & Foerster LLP, March 26, 2014 (“MoFoLetter”); Letter from Andrea Seidt, President, NorthAmerican Securities Administrators Association(NASAA) and Ohio Securities Commissioner,March 24, 2014 (“NASAA Letter 2”); Letter fromWilliam M. Beatty, Securities Administrator,Washington Department of Financial Institutions,March 24, 2014 (“WDFI Letter”); Letter fromWilliam R. Hambrecht, Chairman, WR Hambrecht÷Co, March 4, 2014 (“WR Hambrecht ÷ Co Letter”),

31 ABA BLS Leuer; CFA Institute Letter;Massachuseus Letter 2; NASAA Letter 2; WDFILetter.

12CFA Institute Letter.13CFIRA Letter 1; WR Hambrecht ÷ Co Letter

(suggesting that limiting the availability of thecontinued



excluding shell companies and issuersof penny stock,34 and excluding othertypes of investment vehicles, such ascommodity pools and investment fundsthat invest in gold or virtualcurrencies.35

A few commenters recommendedallowing blank check companies andspecial purpose acquisition companies(SPACs) to rely on Regulation A.36 Oneof these commenters recommendedallowing blank check companiesseeking to raise at least $10 million touse Regulation A in the same manner asany other eligible issuer, but suggestedthat, if a company is raising less than$10 million in a Tier 2 offering, theCommission should implement certainadditional requirements.37 Anothercommenter recommended allowingissuers of fractional interests in oil andgas or other mineral rights to rely onRegulation A based on a “reasonable”eligibility test to be developed by theCommission.38 Several commentersopposed any change to the proposedissuer eligibility requirements thatwould exclude PElTs from participatingin Regulation A offerings.39 Othercommenters advocated expanding thecurrent categories of eligible issuers,and specifically supported thecontinued inclusion of Canadian

exemption to, among other things, operatingcompanies would provide investors with moreconfidence in the offerings conducted pursuani toRegulation Al. But aee KVCF Letter (suggesting thatlimiting availability of the exemption to operatingcompanies would unnecessarily limit the utility ofthe exemption).

BLS Letter; MoFo Letter.Massachusetts Letter 2.

35Gilmsn Law Letter; Letter from Mark Goldberg,Chairman, Investment Program Association, March24, 2014 (“WA Letter”); Letter from David N.Feldman, Partner, Richardson Patel LLP, January15, 2014 (“Richardson Patel Letter”). A SPAG is atype of blank check company created specifically topool funds in order to finance a merger oracquisition opportunity within a set timefrsme.

Richardson Patel Leuer (recommending that forofferings of less than $10 million under Tier 2, therules should require that: (a) Monies raised beplaced into escrow, minus underwriterscompensation and 10% for offering expenses, untila reverse merger is completed; (hI a combinationwith an operating business be completed withinthree years; (c) full Form 10 information bedisclosed regarding a pending reverse merger toinvestors who will have 15—20 days to reconfirmtheir investment or receive their money back; (dlthere be no requirement that a certain percentageof investors reconfirm; and (e) accredited investorshave no limit on the investment they make in theoffering).

35Letter from Mark Kosanke, President, RealEstate Investment Securities Association, March 24,2014 (“REISA Letter”) (suggesting that thecommission base the eligibility test on the issuerhaving en “established track record” or someminimum emount of assets).

ABA BLS Letter; Letter from Gilman Law LLG,March 24, 2014 (“Gilmsn Law Letter”); MoFoLetter; Letter from Serenity Storage, January 5, 2014(“Serenity Storage Letter”).

companies and shell companies aseligible issuers, as proposed.4°

(1) Non-Canadian Foreign Issuers

Many commenters recommendedmaking non-Canadian foreigncompanies eligible issuers underRegulation A.4’ Several commenterssuggested that the proposed approach tonon-Canadian foreign companies isinconsistent with the treatment offoreign private issuers in registeredofferings.42 Additionally, commentersnoted a variety of benefits arising fromallowing foreign companies to accessthe U.S. capital markets thoughRegulation A offerings, including jobcreation,43 increasing the amount ofdisclosure available for investors inforeign companies,44 encouragingdomestic exchange listings, expandinginvestment opportunities for U.S.investors,46 and general economicbenefits.47 One commenterrecommended making all foreign privateissuers eligible if they maintained aprincipal place of business in theUnited States.4e Two commenters alsorecommended permitting companies

Letter from Jonathan G. Guest, McGarter &English, LLP, February 19, 2014 (“McGarter &English Letter”) (also opposing any limitation onissuer eligibility on the bssis of wbether most of theoffering proceeds were being used in connectionwith the issuer’s operations in the United States,noting that many Gansdian issuers would beexcluded as a result); OTC Markets Letter.

41ABA SIL Letter; Letter from Scott Kupor,Managing Partner, Andreessen Horowitz, andJeffrey M. Solomon, Ghief Executive Officer, Gowenand company, February 26, 2014 (“Andreessen!Gowen Letter”): Letter from BOO USA, LLP, March20, 2104 (“BOO Letter”); Ganaccord Letter(suggesting expanding issuer eligibility tocompanies organized in )urisdictions with “robustsecurities regulation systems” such as the UnitedKingdom and other countries in the EuropeanUnion, Australia, and Asian markets such asSingapore and Hong Kong); McGarter & EnglishLeuer; OTC Markets Letter; Richardson Pstel Letter;Letter frons Michael T. Lempres, Assistant GeneralCounsel, SVB Financial Group, March 21, 2014(‘SVB Financial Letter”); Letter from Bill Soby,Managing Director, Silicon Valley Global Shares,March 24, 2014 (“SVGS Letter”).

42Antheessen/Gowen Letter; BOO Letter;Richardson Patel Letter. In the context of registeredofferings, foreign private issuers may provide scaleddisclosure if it qualifies as a “smaller reportingcompany,” which is defined in Item 10(11(1) ofReguletion S—K, 17 CFR 229.10(f](1), Securities ActRule 405, 17 CFR 230.405, and Exchange Act Rule12b—2, 17 GFR 240.12b—2, and rely on otherdisclosure accommodations.

43ABA SR. Leuer; SVGS Letter (noting that high-paying jobs would be crested by expanding globaltech companies).

44SVB Financial Letter.Andreessen/Gowen Letter; SVB Financial

Letter.46 Andreessen/Gowen Letter; OTC Markets Letter.47ABA SIL Letter; Andreessen/Gowen Letter;

McCarter & English Letter; SVB Financial Letter.46ABA SW Letter.

relying on Exchange Act Rule 12g3—2(b)to make offerings under Regulation A.4°

(2) BDCs

A number of commenters supportedmaking BDCs eligible issuers underRegulation A.5° Most of thesecommenters noted that BDCs serve animportant function in facilitating smallor emerging business capital formationor in providing a bridge from the privateto public markets.5’ Several of thesecommenters recommended at leastallowing small business investmentcompany (SBIC) licensed BDCs to usethe exemption given the review processsuch entities are required to undergowith the U.S. Small BusinessAdministration.52 One of thesecommenters noted that if BDCs becomeeligible to use Regulation A, theCommission should consider requiringthem to provide quarterly financialdisclosure so as to enhancetransparency and provide the marketwith critical investment information.3

(3) Potential Limits on Issuer SizeSeveral commenters opposed using

the issuer’s size to limit eligibility.54Two of these commenters thought thatthe $50 million offering limit for Tier 2would already limit the utility of the

49 McGarter & English Letter; OTG Markets Letter.Rule 12g3—2W) generally provides foreign privateissuers with an automatic exemption fromregistration under Section 12(g) if the issuer (i) isnot required to file reports under Exchange ActSections 13(e) or 15(d); (ii) maintains a listing of thesubject class of securities on one or two exchangesin non-U.S. )urisdictions that comprise more then55% of its worldwide trading volume; and (iii)publishes in English on its Web site certain materialitems of information. See 17 GFR 240.12g3—2(h).

59ABA BLS Letter; CFII{A Letter 1; Letter fromMichael Sauvante, Executive Director,commonwealth Fund LLG, March 21, 2014(“Gommonweslth Fund Letter 1”); Letter fromMichael Sauvante, Executive Director,Gommnnwealth Fund LLc, March 22, 2014(“Gommonwealth Fund Letter 2”); KVGF Letter;Letter from Daniel Gorfine, Director, FinancialMarkets Policy, end Steci Warden, ExecutiveDirector, Genter for Financial Markets, MilkenInstitute, March 19, 2014 (“Milken InstituteLetter”); MoFo Letter; REISA Letter; SBIA Letter;WR Hembrecht ÷ co Letter.

ABA BLS Letter; GFIRA Letter 1;Commonwealth Fund Letter 1; GommonwealthFund Letter 2; KVGF Letter; Milken Institute Letter;MoFo Letter; REISA Letter; SBIA Letter; WRHambrecht + Go Letter.

52 Milken Institute Letter; SBIA Letter. A SBIGlicensed BDG is a company that is licensed by theSmall Business Administration (SBA) to operate assuch under the Small Business Investment Act of1958.

Milken Institute Letter.54 from E. Gartier Eshsrn, Executive Vice

President, Emerging Companies, BiotechnologyIndustry Organization (BID), March 11, 2014 (“BIDLetter”); IPA Letter; Letter from Tom Quaadman,Vice President, Center for Capital MarketsCompetitiveness, U.S. Chamber of Coimnerce,March 24, 2014 (“U.S. Chamber of CommerceLetter”).



exemption for issuers on the basis ofissuer size—with smaller issuers likelybenefitting most from the exemption—and recommended against size-basedeligibility criteria that may be difficultto define.55 One commenter suggestedthat most issuers with a large publicfloat would likely be subject toExchange Act reporting requirementsand therefore would be ineligible to useRegulation A.56 Another commenternoted that a size restriction based onpublic float would be particularlyharmful to biotechnology companies,because they often have a public floatthat is disproportionately high inrelation to their corporate structure,number of employees, or revenues.57

(4) Exchange Act Reporting CompaniesA number of commenters supported

allowing Exchange Act reportingcompanies to conduct offerings underRegulation A.58 Several of thesecommenters recommended allowingExchange Act reporting companies thatare current in their reporting obligationsto conduct Tier 2 offerings,59 with onecommenter limiting its recommendationto companies with a non-affiliate float ofless than $250 million.60 Threecommenters further suggested that, ifExchange Act reporting companies arepermitted to conduct offerings pursuantto Regulation A, Exchange Act reportingshould satisfy any Regulation Areporting obligation.61 One suchcommenter further suggested thatExchange Act reporting companiesshould be required to be current in theirExchange Act reporting obligations inorder to be eligible to rely on theexemption, in a manner that isconsistent with Regulation A as itexisted before 1992.62

c. Final Rules

We are adopting the issuer eligibilitycriteria as proposed. Under the finalrules, Regulation A will be limited tocompanies organized in and with their

BI0 Letter; U.S. Chamber of commerce Letter.561PA Letter.31O Letter.58Anr3jeessen/Cowen Letter; 310 Letter; OTC

Markets Letter; Letter from U.S. Senator Pat Roberts,May 27, 2014 (“Sen. Roberts Letter”); Letter fromJack H. Brier, President and Founder, US AllianceCorporation, March 19, 2014 (“US Alliance Corp.Letter”).

59Andreessen/Cowen Letter; 310 Letter; OTCMarkets Letter.

60010 Letter.6lAntheessen/Cowen Letter; CFIRA Letter 1; OTC

Markets Letter.62 CFIRA Letter 1. Before amendments to

Regulation A were adopted in 1992, Exchange Actreporting companies were permitted to conductofferings in reliance on Regulation A, provided theywere current in their public reporting. See 17 CFR230.252(f) (1992).

principal place of business in theUnited States or Canada. It will beunavailable to:

• Companies subject to the ongoingreporting requirements of Section 13 or15(d) of the Exchange Act;

• companies registered or required tobe registered under the InvestmentCompany Act of 1940 and BDCs;

• blank check companies;• issuers of fractional undivided

interests in oil or gas rights, or similarinterests in other mineral rights;

• issuers that are required to, but thathave not, filed with the Commission theongoing reports required by the rulesunder Regulation A during the twoyears immediately preceding the filingof a new offering statement (or for suchshorter period that the issuer wasrequired to file such reports);

• issuers that are or have been subjectto an order by the Commission denying,suspending, or revoking the registrationof a class of securities pursuant toSection 12(j) of the Exchange Act thatwas entered within five years before thefiling of the offering statement; 63 and

• issuers subject to “bad actor”disqualification under Rule 262.64

We expect that the amendments weare adopting will significantly expandthe utility of the Regulation A offeringexemption.

Our approach in the final rules isgenerally to maintain the issuereligibility requirements of existingRegulation A with the limited additionof two new categories of ineligibleissuers. We believe this approach willprovide important continuity in theRegulation A regime as it expands in theway Congress mandated. For thisreason, we do not believe it is necessaryto adopt final rules to exclude issuersthat are currently eligible to conductRegulation A offerings. Additionally, werecognize that expanding the categoriesof eligible issuers, as suggested by anumber of commenters, could providecertain benefits, including increasedinvestment opportunities for investorsand avenues for capital formation forcertain issuers. We are concerned,however, about the implications ofextending issuer eligibility before theCommission has the ability to assess theimpact of the changes to Regulation Abeing adopted today. In light of thesechanges, we believe it prudent to deferexpanding the categories of eligibleissuers (for example, by including non-Canadian foreign issuers, BDCs, orExchange Act reporting companies)until the Commission has had theopportunity to observe the use of the

63 See Rule 251(b).64 See Rule 262.

amended Regulation A exemption andassess any new market practices as theydevelop.

Additionally, we are not adoptingfurther restrictions on eligibility at thistime. In light of the disclosurerequirements contained in the finalrules, we do not believe that it isnecessary to exclude additional types ofissuers, such as shell companies, issuersof penny stock, or other types ofinvestment vehicles, from relying on theexemption in Regulation A. At the sametime, we are concerned aboutpotentially increased risks to investorsthat could result from extending issuereligibility to other types of entities, suchas blank check companies, before theCommission has the opportunity toobserve developing market practices.We therefore believe the prudentapproach with respect to any potentialexpansion of issuer eligibility is to givethe Regulation A market time to developunder rules that we are adopting today.We also do not believe it is necessary tolimit availability of the exemption toissuers of a certain size, as we agreewith commenters that suggested that theannual offering limit will serve to limitthe utility of the exemption for largerissuers in need of greater amounts ofcapital. We further do not believe thatit is appropriate to limit the availabilityof the exemption to “operatingcompanies,” as that term would restrictavailability of the exemption to fewerissuers than are currently eligible underRegulation A, such as by excluding shellcompanies.

As proposed, the final rules includetwo new issuer eligibility requirementsthat add important investor protectionsto Regulation A. First, potential issuersmust have filed all required ongoingreports under Regulation A during thetwo years immediately preceding thefiling of a new offering statement (or forsuch shorter period that the issuer wasrequired to file such reports) to remaineligible to conduct offerings pursuant tothe rules. This requirement will benefitinvestors by providing them with moreinformation, with respect to issuers thathave previously made a Regulation Aoffering, to consider when making aninvestment decision, facilitate thedevelopment of an efficient secondarymarket in such securities, and enhanceour ability to analyze and observe theRegulation A market. Second, issuerssubject to orders by the Commissionentered pursuant to Section 12(j) of theExchange Act within a five-year periodimmediately preceding the filing of theoffering statement will not be eligible toconduct an offering pursuant toRegulation A. This requirement willincrease investor protection and



compliment the exclusion of delinquentRegulation A filers discussedimmediately above by excluding issuerswith a demonstrated history ofdelinquent filings under the ExchangeAct from the pooi of eligible issuersunder Regulation A.

2. Eligible Securities

a. Proposed Rules

Section 3(b)(3) of the Securities Actlimits the availability of any exemptionenacted under Section 3(b)(2) to “equitysecurities, debt securities, and debtsecurities convertible or exchangeableinto equity interests, including anyguarantees of such securities.” 65 Theproposed rules would have limited thetypes of securities eligible for sale underboth Tier 1 and Tier 2 of Regulation Ato the specifically enumerated list ofsecurities in Section 3(b)(3) and alsowould have excluded asset-backedsecurities, as defined in Regulation AB,from the list of eligible securities.

b. Comments on the Proposed Rules

Several commenters supported theexclusion of asset-backed securitiesfrom the list of eligible securities.66 Onecommenter recommended clarifyingthat warrants exercisable for equity ordebt securities are eligible securities.67

c. final Rules

We are adopting final rules that limitthe types of securities eligible for saleunder Regulation A to the specificallyenumerated list in Section 3(b)(3),which includes warrants andconvertible equity securities, amongother equity and debt securities.68 Thefinal rules exclude asset-backedsecurities from the list of eligiblesecurities. Asset-backed securities aresubject to the provisions of RegulationAB and other rules specifically tailoredto the offering process, disclosure, andreporting requirements for suchsecurities. These rules were not in effectwhen Regulation A was last updated in1992.69 We do not believe that Section

6515 U.S.C. 77c(b)(3).66 BLS Letter; Carey Letter; Massachusetts

Letter 2; NASAA Letter 2; WDFI Letter.67ABA BLS Letter.68 See Rule 261(c); see also Rule 405 (defining

“equity security” to include, among other things,warrants and certain convertible securities). Wehave also revised the proposed definition in Rule261(c) to clarify that all securities, rather than justequity securities, that are convertible orexchangeable into equity interests are eligible,subject to the other terms of Regulation A.

66 Regulation AB, 17 CFR 229.1100 et seq., wentinto effect in 2005. See Rel. No. 33—8518 (Dec. 22,20041. Asset-backed securities are defined in Rule1101(c)(1) to generally mean a security that isprimarily serviced by the cash flows of a discretepool of receivables or other financial asset, either

401 of the JOBS Act was enacted tofacilitate the issuance of asset-backedsecurities.

3. Offering Limitations and SecondarySales

a. Proposed Rules

We proposed to amend Regulation Ato create two tiers of requirements: Tier1, for offerings of up to $5 million ofsecurities in a 12-month period; andTier 2, for offerings of up to $50 millionof securities in a 12-month period.° Asproposed, issuers could conductofferings of up to $5 million undereither Tier 1 or Tier 2. Consistent withthe existing provisions of Regulation A,we also proposed to permit sales byselling securityholders of up to 30% ofthe maximum offering amountpermitted under the applicable tier ($1.5million in any 12-month period for Tier1 and $15 million in any 12-monthperiod for Tier 2). Sales by sellingsecurityholders under either tier wouldbe aggregated with sales by the issuerfor purposes of calculating themaximum permissible amount ofsecurities that may be sold during any12-month period. In addition, weproposed to eliminate the last sentenceof Rule 25 1(b), which prohibits affiliateresales unless the issuer has had netincome from continuing operations in atleast one of its last two fiscal years.


Commenters were generallysupportive of the proposed offeringlimitations on primary and secondaryofferings. Many commenters, however,suggested changes to the proposedoffering limits for both tiers, as well asto the proposed limits on secondarysales.

(1) Offering Limitation

Several commenters recommendedthat the Commission increase the $50million offering limitation for Tier 2.71

fixed or revolving, that by its terms converts intocash within a finite time period.

70 As proposed, if the offering included securitiesthat were convertible, exercisable, or exchangeablefor other securities, the offer and sale of theunderlying securities would also be required to bequalified and the aggregate offering price wouldinclude the aggregate conversion, exercise, orexchange price of such securities, regardless ofwhen they become convertible, exercisable, orexchangeable.

71 from Salomon Kamalodine, Director,Investment Banking, B. Riley & Co., March 24, 2014(“B. Riley Letter”); Letter from William Klehm,Chairman and CEO, Fallbrook Technologies, March22, 2014 (“Fallbrook Technologies Letter”)(recommended raising the limit to $75 million);OTC Markets Letter (recommended raising the limitto $80 million); Jason Coombs, Co-founder andCEO, Public Startup Company, Inc., March 24, 2014(“Public Startup Co. Letter 1”) (recommended

As an alternative, one commenterrecommended applying the $50 millionlimit on a per offering basis rather thanon a 12-month basis, and suggested thatthe Commission consider eliminatingthe offering limits for certain types ofissuers, such as those that have yet togenerate revenue. 72 Additionally, twocommenters recommended that theCommission do more to increase theutility of Tier 1 offerings by raising theTier 1 offering limitation to $10 millionor more in a 12-month period.73Another commenter suggested that theCommission create a third tier inbetween Tier I and Tier 2 that wouldhave a $15 million offering limitation.7

With respect to offering limitcalculations, one commenterrecommended that the aggregate offeringprice of the underlying security only beincluded in the $50 million offeringlimitation during the 12-month periodin which such security is firstconvertible, exercisable, orexchangeab)e.75 This commentersuggested that its recommendedapproach would accommodate commonsmall business offering structures thatinvolve warrants exercisable at apremium over several years.

(2) Secondary Sales Offering LimitationSeveral commenters specifically

supported the proposed limitations onsecondary sales.76 While somecommenters indicated their support forresale limitations, they expressed apreference for either proscribing resalesentirely78 or requiring the approval ofthe resale offering by a majority of theissuer’s independent directors upon afinding that the offering is in the bestinterests of both the sellingsecurityholders and the issuer.7° Onecommenter recommended prohibiting

raising the limit to $75 million); Richardson PatelLetter (recommended raising the limit to $100million).

72 Richardson Patel Letter.73Letter from Samuel S Guzik, Guzik and

Associates, March 24, 2014 (“Guzik Letter 1”)(recommended raising the limit to “at least $10million”); Letter from Christopher Cole, Senior VicePresident and Senior Regulatory Counsel,Independent Community Bankers of America,March 25, 2014 (“ICBA Letter”) (encouragedincreasing the limit “from $5 million to $10million”).

74Public Startup Co. Letter 1.Andreessen/Cowen Letter; cf. Proposing

Release, In. 112.76 Massachusetts Letter 2; NASAA Letter 2;

Richardson Patel Letter; WDfI Letter.77 Massachusetts Letter 2; NASAA Letter 2; WDFI

Letter.78 Massachusetts Letter 2; NASAA Letter 2.79NASAA Letter 2 (supporting the proposed

limits coupled with a board approval requirementin lieu of prohibiting resales entirely); V’DFI Letter(not expressing a preference for prohibiting resalesentirely).


Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 21813

resales under Regulation A entirely.80Another commenter recommendedrequiring selling securityholders to holdthe issuer’s securities for 12 monthsbefore being eligible to sell pursuant toRegulation A, in order to distinguishbetween investors seeking to invest in abusiness and investors simply seekingto sell to the public for a gain.8’

Many other commentersrecommended raising the resale limitsor eliminating them entirely.82 One suchcommenter recommended alternativelyremoving non-affiliate securityholdersfrom the resale limitation sinceconcerns over investor informationasymmetries would be reduced whendealing with non-affiliatesecurityholders •83 This commenter alsorecommended that the Commissionreevaluate the need for resale limitswithin a year of implementing the rules.Another commenter also recommendedallowing for unlimited sales by non-affiliate selling securityholders andfurther suggested that the rules notaggregate such sales with issuer sales.84Two commenters suggested thatlimitations on resales are contrary to theCongressional intent behind theenactment of Title IV of the JOBS Act.85

(3) Rule 251(b)

Many commenters specificallysupported the proposed elimination ofthe requirement that issuers must havehad net income from continuingoperations in at least one of its last twofiscal years in order for affiliate resalesto be permitted, generally noting thatmany companies have net losses formany years, including, for example, dueto high research and developmentcosts.86

c. Final RulesWe are adopting the proposed

amendments to Regulation A withmodifications to the Tier 1 offeringlimitation and the secondary salesoffering limitation. We discuss theseamendments in detail below. We arealso making a technical change to clarify

80carey Letter.81 Letter from Andrew M. Hartnett, Missouri

Commissioner of Securities, March 24, 2014 (“MSLetter”).

82ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter I; Milken Institute Letter;MoFo Letter; Richardson Patel Letter; WRHambrecht + Co Letter.

Milken Institute Letter.84 B. Riley Letter.85CF5?,,4 Letter 1; WR Hambrecht + Co Letter

(noting that the JOBS Act contemplated an increasein the offering threshold to $50 million, but did notlimit the percentage that could be sold by sellingsecurityholders).

86ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter 1; Milken Institute Letter;MoFo Letter; WR Hambreclit + Co Letter.

the description of how compliance withthe offering limitations is calculated inRule 251(a).87

Tier 1

As discussed more fully in the“Additional Considerations for SmallerOfferings” section below, we are makingchanges to the proposed rules inresponse to comments and to increasethe utility of Tier 1 of the Regulation Aexemption.88 Several conimenters8° anda report on the impact of state securitieslaw requirements on offeringsconducted under Regulation A by theU.S Government Accountability Office(GAO), as required by Section 402 of theJOBS Act,9° highlighted the $5 millionoffering limitation in existingRegulation A as one of the main factorslimiting the utility of the exemption. Incertain circumstances, fixed costsassociated with conducting RegulationA offerings, such as legal andaccounting fees, may serve as adisincentive to use the exemption forlower offering amounts. We aretherefore increasing the offeringlimitation in the final rules for Tier 1offerings in a 12-month period from theproposed $5 million limitation to $20million.°’ We believe that raising theoffering limitation for Tier 1 offerings,in addition to other changes discussedin Section 11.1. below, will increase theutility of the exemption for smallerissuers by providing them withadditional options for capital formationand potentially increasing the proceedsreceived by the issuer. Consistent withthe proportionate limitation onsecondary sales in the proposed rules,we are also increasing the limitation onsecondary sales in Tier 1 offerings in a12-month period from the proposed $1.5million limitation to $6 million.

87 proposed rules used the phrase “aggregateoffering price for all securities sold” whendiscussing the gross proceeds resulting from prioror anticipated sales of securities i.mder RegulationA. We have clarified Rule 257(a)(1) to define as“aggregate sales” gross proceeds within the prior 12month time frame contemplated by Regulation A.We have also made conforming changes elsewherein the final rules and forms.

8 Section fl.1. below,895ee, e.g., Guzik Letter 1; ICBA Letter; Public

Startup Co. Letter 1.

90Factors that May Affect Trends in RegulationA Offerings, GAO—12—839 (July 2012) (the “GAOReport”) (available at: http://www.gao.gov/assets/600/5921 13.pdl). The GAO Report concludes that itis unclear whether increasing the Regulation Aoffering ceiling from $5 million to $50 million willimprove the utility of the exemption.

9’ Rule 251(a)(1). We intend to revisit the Tier 1offering limitation at the same time that we arerequired by Section 3(b)(5) of the Securities Act toreview the Tier 2 offering limitation and willconsider whether additional investor protectionswould be necessary if the Tier 1 offering limitationis increased.

Tier 2

We are adopting the proposed $50million Tier 2 offering limitation.92Some commenters suggested that weraise the offering limitation to anamount above the statutory limitationset forth in Section 3(b](2), but we donot believe an increase is warranted atthis time. While Regulation A hasexisted as an exemption fromregistration for some time, today’schanges are significant. We believe thatthe final rules for Regulation A willprovide for a meaningful addition to theexisting capital formation options ofsmaller companies while maintainingimportant investor protections. We areconcerned, however, about expandingthe offering limitation of the exemptionbeyond the level directly contemplatedin Section 3(b](2) at the outset of theadoption of final rules. As noted abovein Section II.B.1., the final rules do notlimit issuer eligibility on the basis ofissuer size, as we believe that the $50million annual offering limitation willserve to limit the utility of theexemption for larger issuers in need ofgreater amounts of capital. Similarly, webelieve that the more extensivedisclosure requirements associated withExchange Act reporting are moreappropriate for larger and generallymore complex issuers that raise moneyin the public capital markets.3 We aretherefore concerned that an increase inthe offering limitation at this time mayincrease risks to investors byencouraging larger issuers to conductofferings pursuant to Regulation A ininstances where disclosure pursuant toa registered offering under the SecuritiesAct would be more appropriate.

The Commission is required bySection 401 of the JOBS Act to reviewthe Section 3(b)(2) offering limitationevery two years, and we will considerthe use of the final rules by marketparticipants as part of that review. Wewill therefore revisit the offeringlimitation by April 2016, as required bythe statute, with a view to consideringwhether to increase the $50 millionoffering limitation. We also are adoptingthe proposed $15 million limitation onsecondary sales for Tier 2 as proposed,with a change in the application of thelimitation for secondary sales underboth Tier 1 and Tier 2 discussed in thefollowing section.

Application of the Limitation onSecondary Sales

As noted in the Proposing Release,secondary sales are an important part ofRegulation A. We believe that allowing

82Rule 251(a)(2).° See discussion in Section Ill.C.3. below.


21814 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations

selling securityholders access toavenues for liquidity will encouragethem to invest in companies, althoughwe acknowledge that providing forsecondary sales in any amount may giverise to certain concerns. As highlightedby at least one commenter at the preproposing stage, permitting somesecondary sales pursuant to RegulationA could place investors at aninformational disadvantage to sellingsecurityholders who have potentiallygreater access to inside informationabout the issuer and does notnecessarily provide capital to theissuer.94 Other commenters stated thatsuch concerns are misplaced in thecontext of secondary sales by non-affiliates, who generally do not haveaccess to inside information.9

We do not believe that a wholesaleprohibition on secondary sales, assuggested by some commenters, isappropriate or necessary for either Tier1 or Tier 2 of Regulation A. However,in order to strike an appropriate balancebetween allowing sellingsecurityholders continued access toavenues for liquidity in Regulation Aand the concern that secondary offeringsdo not directly provide new capital tocompanies and could pose the potentialrisks to investors discussed above, thefinal rules continue to permit secondarysales but provide additional limitationson secondary sales in the first year. Thefinal rules limit the amount of securitiesthat selling securityholders can sell atthe time of an issuer’s first RegulationA offering and within the following 12months to no more than 30% of theaggregate offering price of a particularoffering.96 While the final rulescontinue to provide sellingsecurityholders with the flexibility tosell securities during this period, webelieve that this approach to the finalrules will help to ensure that secondarysales at the time of such offerings willbe made in conjunction with capitalraising events by the issuer.

Further, we are providing differentrequirements for secondary sales byaffiliates and by non-affiliates. The finalrules limit secondary sales by affiliatesthat occur following the expiration ofthe first year after an issuer’s initialqualification of an offering statement tono more than $6 million, in the case ofTier 1 offerings, or no more than $15million, in the case of Tier 2 offerings,over a 12-month period. Secondary salesby non-affiliates that are made pursuant

94Letter from A. Heath Abshure, President,NASAA, April 10, 2013 (“NASAA (pre-proposal)Letter”).

See, eg., MiLken Institute Letter.96Rule 251(a)(3) (Additional limitation on

secondary sales in first year).

to a qualified offering statementfollowing the expiration of the first yearafter an issuer’s initial qualification ofan offering statement will not be limitedexcept by the maximum offering amountpermitted by either Tier 1 or TierAlthough the secondary sales offeringamount limitation will only apply toaffiliates during this period, consistentwith the proposal, non-affiliatesecondary sales will be aggregated withsales by the issuer and sales by affiliatesfor purposes of calculating compliancewith the maximum offering amountpermissible under the respective tiers.98

We do not believe that the concernsexpressed by one commenter aboutinformational disadvantages that mayexist with affiliate sales are present withrespect to resales by non-affiliates. Onthe contrary, in comparison torequirements for non-affiliate resales ofrestricted securities after the expirationof Securities Act Rule 144 holdingperiods,’°° we believe that Regulation Aprovides purchasers of such securitieswith the benefit of, among other things,narrative and financial disclosure that isreviewed and qualified by theCommission in transactions that aresubject to Section 12(a)(2) liability andthe antifraud provisions of Section 17 ofthe Securities Act. 101

We also disagree with the commenterswho suggested limitations on secondarysales are contrary to the legislativeintent behind the enactment of Title IVof the JOBS Act. We note that Section3(b)(2) expressly provides that theCommission may impose additionalterms, conditions, or requirements as itdeems necessary in the public interestand for the protection of investors.’02For the reasons discussed above, webelieve that limiting secondary sales byaffiliates is not only consistent with thelanguage and purpose of the statute butalso necessary in the public interest andfor the protection of investors.

Offering Limit Calculation

Under the proposal, if the offeringincluded securities that are convertible

97Rule 251(a).98Secondary sales of shares acquired in a

Regulation A offering—which are freely tradable—are not subject to limitations on secondary sales,but must be resold under an exemption fromSecurities Act registration (e.g., Section 4(a)(1), 15U.S.C. 77d(a)(1)).

99NASAA (pre-proposal) Letter.100 Rule 144, non-affiliates of an issuer are,

among other things, permitted to resell restrictedsecurities after the expiration of a one-year holdingperiod without limitations or requirements as to: (i)The availability of current public information aboutthe issuer or its securities, (ii) the volume of resales,(iii) the manner of sale, or (iv) disclosure. See 17CFR 230.144.

101 15 U.S.C. 77](ak2), 77q.102 See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).

into, or exercisable or exchangeable for,other securities (rights to acquirel, theoffer and sale of the underlyingsecurities also would generally berequired to be qualified,bOa and theaggregate offering price would includethe aggregate conversion, exercise, orexchange price of such securities,regardless of when they becomeconvertible, exercisable, orexchangeable.’°4 Consistent with theviews of at least one commenter,’°5 weare concerned that the proposedrequirement could have a greater impacton smaller issuers than larger issuersbecause smaller issuers frequently issuerights to acquire other securities incapital raising events. The proposedmethod of calculating the offering limitwould presume the exercise price ofunderlying securities that, by theirterms, may occur at a date in the distantfuture or only upon the occurrence ofkey events. By including all securitiesunderlying any rights to acquire othersecurities in the offering limitcalculation, the proposed rules couldeffectively limit the proceeds of anoffering available to an issuer byrequiring such issuers to include in theaggregate offering price at the time ofqualification the securities underlyingrights to acquire that may or may notbecome exercisable or exchangeable inthe future. We are adopting final rulesthat will require issuers to aggregate theprice of all securities for whichqualification is currently being sought,including the securities underlying anyrights to acquire that are convertible,exercisable, or exchangeable within thefirst year after qualification or at thediscretion of the issuer. As such, andconsistent with the treatment of rights toacquire in the context of registeredofferings, if an offering includes rightsto acquire other securities at a timemore than one year after qualificationand the issuer does not otherwise seekto qualify such underlying securities,the aggregate offering price would notinclude the aggregate conversion,exercise, or exchange price of theunderlying securities.106 For purposes

103 Qualification would not be required forsecurities transactions exempt from registrationpursuant to Securities Act Section 3(a)(9l, 15 U.S.C.77c(a)(9). Section 3(a)(9) exempts from registrationany security exchanged by the issuer with itsexisting security holders exclusively where nocommission or other remuneration is paid or givendirectly or indirectly for soliciting such exchange.

104 See note to proposed Rule 251(a).105 Andreessen/Cowen Letter.106 See note to Rule 25 1(a). In these

circumstances, the securities underlying the rightsto acquire would need to be separately qualifiedunder Regulation A or, depending on thecircumstances, registered, exempt from registration,or otherwise offered in an appropriate manner atthe time of issuance.


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules and Regulations 21815

of calculating the price of underlyingsecurities that use a pricing formula, asopposed to a known conversion price,the issuer will be required to use themaximum estimated price for whichsuch securities may be converted,exercised, or exchanged.107

Rule 251(b)

We are adopting as proposed finalrules that eliminate the last sentence ofRule 251(b),b08 which prohibitedaffiliate resales unless the issuer had netincome from continuing operations in atleast one of its last two fiscal years. Weagree with the views expressed bycommenters that the absence of netincome, by itself, is not a sufficientindicator of an enhanced risk thatexisting shareholders will useinformational advantages to transfertheir holdings to the investing publicthat would necessitate the continuedapplication of the prohibition in thefinal rules. Further, as noted in theProposing Release, the Commission’scurrent disclosure review andqualification processes and enforcementprograms are significantly moresophisticated and robust than they werewhen this provision was added toRegulation A in its original form.109 Inaddition, the final rules being adoptedtoday include revised “bad actor”disqualification provisions andadditional issuer eligibilityrequirements aimed at limiting access tothe exemption for market participantswith demonstrated track records of noncompliance or abuse.”°

4. Investment Limitation

a. Proposed Rules

Regulation A does not currently limitthe amount of securities an investor canpurchase in a qualified Regulation Aoffering. As we noted in the ProposingRelease, however, we recognize thatwith the increased annual offeringlimitation provided in Section 3(b)(2)comes a risk of commensurately greaterinvestor losses.hhl To address that riskwe proposed, among other things, tolimit the amount of securities investorscan purchase in a Tier 2 offering to nomore than 10% of the greater of theirannual income or their net worth. Forthis purpose, annual income and networth would be calculated as providedin the accredited investor definition

17 CFR 230.251(b) (2014).109 Proposing Release, at Section 11.3.3.‘10See discussions in Section lI.G (Bad Actor

Disqualification) below and Section II.B.1 (EligibleIssuers) above.

111 See Proposing Release, at Section 11.B.4.

under Rule 501 of Regulation D.”2Under the proposal, issuers would berequired to make investors aware of theinvestment limitations,h13 but wouldotherwise be able to rely on aninvestor’s representation of compliancewith the proposed investment limitationunless the issuer knew, at the time ofsale, that any such representation wasuntrue.

b. Comments on Proposed Rules

A number of commenters generallysupported investment limitations forTier 2 offerings.” These commentersbelieved that an investment limitationwould serve as an important investorprotection. Several commentersrecommended revisiting the necessity ofthe limitations after a one- to three- yeartrial period,”5 and anothercommenter”6 recommended extendingthe investment limitation to Tier Iofferings to make them more consistentwith our proposed rules for securities-based crowdfunding transactionsconducted pursuant to Section 4(a)(6) ofthe Securities Act.117 Somecommenters’ support for the proposedinvestment limitations was conditionedon suggested changes to the proposedrules that would require issuers to domore to ensure compliance with thelimitations and that would imposeadverse consequences on issuers for thefailure to do so”8 One commenterbelieved that the 10% limitation is“significantly higher” than isappropriate for “all but the wealthiest,least risk averse” investors.”9 Twocommenters suggested that the 10%limitation should be aggregated acrossall Regulation A offerings instead ofbeing applied on a per offering basis,’2°while one commenter specificallyargued against such an aggregatedlimit.121

11217 CFR 230.501.113 See paragraph (a)(5) to Part H of proposed

Form 1—A.“4CFA Institute Letter; EPA Letter; Letter from

Robert Kisel, Small Business Owner, March 18,2014 (“Kisel Letter”) (erroneously referring to the10% limit as a 5% limit); MCS Letter; REISA Letter;Richardson Patel Letter; WDFI Letter.

‘15CFIRA Letter 1; Kisel Letter; Milken InstituteLetter.

“6CfA Institute Letter.117 See Crowdftriiding, Rel. No. 33—9470 [78 FR

66427] (Nov. 5, 2013).“5CFA Institute Letter; MCS Letter; WDFI Letter.119 Letter from Barbara Roper, Director of Investor

Protection, consumer Federation of America, March24, 2014 (“CFA Letter”).

‘20CFA Letter (not recommending thisspecifically, but noting this as one reason why theinvestment limit was not an adequate substitute forstate review of Tier 2 offerings); William A.Jacobson, clinic Professor of Law, cornell LawSchool, and Director, Cornell Securities Law Clinic,March 24, 2014 (“Cornell Clinic Letter”).

‘21KVCF Letter.

Numerous commenters recommendedeliminating the investment limitationfor Tier 2 offerings.’22 Several of thesecommenters alternatively recommendedat least doubling the limit if theprovision is not eliminated entirely.123Other commenters thought that theinvestment limitation is unnecessary inlight of the other investor protections forTier 2 offerings, such as the expandeddisclosure requirements.’24 Severalcommenters noted that the limit doesnot have a statutory basis and suggestedthat it may be contrary to Congressionalintent,’25 or contrary to the principlesunderlying federal securities law, whichfocus on fraud prevention and fulldisclosure.126 One commenterrecommended eliminating theinvestment limitations only if the finalrules do not preempt state lawregistration requirements for Tier 2offerings, arguing that the limitationsmay conflict with state investorsuitability standards,’27 while anothercommenter indicated that investmentlimitations would be unnecessary withappropriate state oversight, butsupported limits for retail investors instartup companies and high-riskofferings.’28 Another commenterrecommended creating variouscategories of investor sophisticationwith corresponding requirements andlimitations for each.’29

Many commenters, including thoseboth for and against the investmentlimit, recommended providingexceptions to the limit for certain typesof investors, such as accreditedinvestors, or altering the application of

122 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter; CFIRA Letter 1; CFIRA Letter 2;Falibrook Technologies Letter; Letter fromGroundfloor Finance, Inc., Nov. 18, 2014(“Groundfloor Letter”); Heritage Letter; ICBA Letter;PA Letter; Letter from Ford C. Ladd, Esq., May 19,2014 (“Ladd Letter 2”); Letter from John Rodenrys,Executive Director R&D, Leading Biosciences, Inc.,March 24, 2014 (Leading Biosciences Letter”);Milken Institute Letter; MoFo Letter; NASAA Letter2; Letter from Michael L. Zuppone, Paul HastingsLLP, March 24, 2014 (“Paul Hastings Letter”); Letterfrom Jason Coombs, Co-Founder and CEO, PublicStartup Company, Inc., April 2, 2014 (“PublicStartup Co. Letter 7”); SVB Financial Letter.

‘23Fallbrook Technologies Letter; LeadingBiosciences Letter; ICBA Letter.

124 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter; MoFo Letter; Paul Hastings Letter; SVBFinancial Letter.

‘25ABA BLS Letter; Andreessen/Cowen Letter;CFIRA Letter 1; Heritage Letter; MoFo Letter; WRHambrecht + Co Letter.

126 ABA BLS Letter; B. Riley Letter; HeritageLetter; Milken Institute Letter.

127 Groimdfioor Letter.128 NASAA Letter 2.129 Cornell Clinic Letter (recommending the tiered

investment limits in our proposed rules forsecurities-based crowdffinding as an example).


21816 federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations

the limit to such types of investors.130These commenters believed that theinvestor protections afforded by theinvestment limit would not be necessaryfor all types of investors or in all typesof Regulation A offerings. Someconimenters recommended eliminatingthe investment limit for accreditedinvestors131 One such commenterrecommended eliminating theinvestment limit generally and, if not, atleast for institutional investors andofferings of securities listed onsecurities exchanges.’32 Severalcommenters recommended eliminatingthe investment limit for non-naturalpersons or institutional investors.’33Other commenters recommendedeliminating the investment limits forother types of investors or offerings.13Two commenters noted that it would bedifficult to apply the investment limitsto non-natural persons (such as smallbusinesses and TEAs) if the rules use anincome or net worth test.’35 One ofthese commenters recommended that, ifthe test applies to such investors, itshould be based on assets or revenue.’36

Many commenters explicitlysupported allowing issuers to rely on aninvestor’s representation of compliance

‘3° ABA BLS Letter; Andreessen/Cowen Letter;canaccord Letter; cornell clinic Letter; FalibrookTechnologies Letter; Heritage Letter; Ladd Letter 2;Leading Biosciences Letter; Mccarter & EnglishLetter; MCS Letter; Milken Institute Letter; MoFoLetter; Paul Hastings Letter; Richardson Patel Letter;SVB Financial Letter; WR Hambrecht + co Letter.

‘‘ ABA BLS Letter; Andreessen/Cowen Letter;Canaccord Letter; Falibrook Technologies Letter;Heritage Letter; Ladd Letter 2; Leading BiosciencesLetter; McCarter & English Letter; MCS Letter; MoFoLetter; Paul Hastings Letter; Richardson Patel Letter;SVB Financisi Letter; cf cornell Clinic Letter(recommending an unspecified higher limit foraccredited investors]; Milken Institute Letter; WRHambrecht + Co Letter (supporting eliminating theinvestment limit generally).

‘32Milken Institute Letter.133 BLS Letter; Canaccord Letter; Milken

Institute Letter; Mofo Letter; WR Hamhrecht ÷ CoLetter. Several of these commenters believed that,as proposed, the investment limitations would notapply to non-natural persons and asked theCommission to confirm or clarify this point.

134 Cornell Clinic Letter (creating a separate,higher limit for institutional investors and othertypes of non-retail investors included in the“accredited investor” definition]; Heritage Letter(eliminating the investment limit for “any currentor former investor, employee or officer of theissuer”); Ladd Letter 2 (eliminating the investmentlimit for any non-accredited affiliates, founders,employees, agents, independent contractors andowners]; Milken Institute Letter (eliminating theinvestment limit for investors that purchase Tier 2securities on an exchange); Paul Hastings Letter(eliminating the investment limit for offeringsconducted by registered broker-dealers); RichardsonPatel Letter (eliminating the investment limit forany non-individual investor with at least $100,000in assets or $100,000 in revenue in the previousfiscal year).

‘35McCarter & English Letter; Richardson PatelLetter.

‘36Richardson Patel Letter.

with the 10% investment limit.’3 Mostof these commenters stated that anymore rigorous verification processwould cause the compliance costs to betoo high. One commenter recommendedeliminating any obligation for the issuerto monitor the 10% investment limitand allowing the issuer to rely on arepresentation by the investor that he orshe will notify the issuer uponexceeding the 10% limit.’38 Anothercommenter recommended permitting anissuer to rely on representations from itsunderwriters or broker-dealers as to the10% investment limit, rather thanhaving to seek this directly frominvestors.’39 This commenter believedthat the issuers in most Tier 2 offeringswould have little direct contact with theinvestors and that the intermediarieswould be better positioned to assesscompliance (possibly already havinginformation about the investor’sfinances).

Several commenters disagreed withallowing investors to representcompliance with the investmentlimitation and recommended a standardthat would require an issuer to do moreto ensure compliance.140 Twocommenters recommended adopting astandard requiring issuers to takereasonable steps to verify that thepurchasers are in compliance with the10% investment limit.141 Twocommenters recommended requiring anissuer to have a “reasonable belief’ or“reasonable basis” that it can rely on aninvestor’s representation of compliancewith the 10% investment limit.142 Onesuch commenter also suggestedallowing accredited investors to exceedthe 10% investment limit, but requiringthat the issuer take reasonable steps toverify accredited investor status.’43 Onecommenter recommended requiring a“duty of inquiry” so that the issuerwould have to follow-up on any “redflags.” ‘ Additionally, this commenterrecommended that the Commissioncreate an independent and secure meansof verifying investor income or torequire a mandatory questionnaire forindividual investors to complete before

‘37Fallbrook Technologies Letter; Heritage Letter;IPA Letter; KVCF Letter; Leading Biosciences Letter;REISA Letter.

138RE1SA Letter.‘39KVCF Letter.140 from Paul Sigelman, President & CEO,

Accredited Assurance, March 24, 2014 (“AccreditedAssurance Letter”); CFA Letter; CFA InstituteLetter; Cornell Clinic Letter; MCS Letter; WDFILetter.

141 Accredited Assurance Letter; WDFI Letter.142 CFA Institute Letter; MCS Letter.

MCS Letter.144 Cornell Clinic Letter.

buying a security issued underRegulation A.

c. Final RulesWe are adopting an investment

limitation for Tier 2 offerings in thefinal rules, with minor modificationsfrom the proposed rules. We believe thatthe investment limitation serves as animportant investor protection and mayhelp to mitigate the risk that with theincreased annual offering limitationprovided in Section 3(b)(2) comes a riskof commensurately greater investorlosses. We do not believe that thelimitation is needed for accreditedinvestors because investors that qualifyas accredited under our rules satisfycertain criteria that suggest they arecapable of protecting themselves intransactions that are exempt fromregistration under the Securities Act.145We also do not believe that thelimitation is necessary for investmentsin securities that will be listed on anational securities exchange uponqualification because of the issuerlisting requirements and the potentialliquidity that exchanges provide toinvestors that seek to reduce theirholdings. These both are importantinvestor protections that help tomitigate concerns about the magnitudeof loss that could potentially result froman investor purchasing a large amountof securities in a sinale offering.

Under the final rules, the investmentlimitations for purchasers in Tier 2offerings will not apply to purchaserswho qualify as accredited investorsunder Rule 501 of Regulation D.’46further, investment limitations in a Tier2 offering will not apply to the sale ofsecurities that will be listed on anational securities exchange uponqualification since such issuers will berequired to meet the listing standards of

‘45See Rule 501(a) of Regulation 0, 17 CFR230.501(a); see also SECv. Ralston Purina Co., 346U.S. 119 (1953).

‘46See Rule 252(c)(2). Under Rule 501, naturalpersons are accredited investors if: (1) Their incomeexceeds $200,000 in each of the two most recentyears (or $300,000 in joint income with a person’sspouse), and they reasonably expect to reach thesame income level in the current year; (ii] theyserve as executives or directors of the issuer; or (iii)their net worth exceeds $1,000,000 (individual orjointly with a spouse), excluding the value of theirprimary residence. Certain enumerated entities thatsatisfy an asset-based test also qualify as accreditedinvestors, while others, including regulated entitiessuch as banks and registered investment companies,are not subject to the asset test. See 17 CFR 230.501.The accredited investor definition is intended toencompass those individuals and entities “whosefinancial sophistication and ability to sustain therisk of loss of investment or ability to fend forthemselves render the protections of the SecuritiesAct’s registration process unnecessary.” See, e.g.,Rel. No. 33—6683 (Jan. 16, 1987) [52 FR 3015](Regulation 0 Revisions; Exemption for CertainEmployee Benefit Plans).



a national securities exchange 147 andbecome subject to ongoing Exchange Actreporting, resulting in additionalinvestor protections.

In response to questions raised bycommenters, we are clarifying that non-accredited, non-natural persons aresubject to the investment limitation andshould calculate the limitation based onno more than 10% of the greater of thepurchaser’s revenue or net assets (as ofthe purchaser’s most recent fiscal yearend).148 Non-accredited, natural personsmust calculate the investmentlimitations on the basis of 10% of thegreater of the purchaser’s annual incomeor net worth (determined as provided inRule 501 of Regulation D).’4°

If the investor is purchasing securitiesthat are convertible into, or exercisableor exchangeable for, other securities, ifsuch securities are exercisable within ayear or otherwise are being qualified,the investment limitation will includethe aggregate conversion, exercise, orexchange price of such securities, inaddition to the purchase price.’50 Webelieve this is an appropriatecalculation because it is consistent withthe offering limit calculation for therespective tiers 151 and because itapplies investment limitations toreasonably foreseeable investmentdecisions (i.e., those involving securitiesexercisable within a year or otherwisequalified by the issuer) while reducingthe risk that issuers may seek to selllarge amounts of securities that areconvertible, exercisable or exchangeableinto other securities in the near term ata low cost in an effort to avoid the 10%limitation.

As proposed, we are adopting finalrules that require issuers to notifyinvestors of the investmentlimitations.152 Issuers may rely on arepresentation of compliance with theinvestment limitation from the investor,unless the issuer knew at the time ofsale that any such representation wasuntrue.153 As we noted in the Proposing

147 National securities exchanges impose certainrequirements on issuers, in addition to thosegenerally required by the Commission, in order foran issuer’s securities to be approved for listing. Seediscussion of listing requirements for, andadditional investor protections associated with,national securities exchanges in Section II.E.3.c.below; see also fns. 721, 722 below.

‘8Rule 251(d)(2)(fl(C)(1).‘9Rule 251(d)(2)(i)(C)(2). See Securities Act Rule

501(a)(5) [17 CFR 230.501(a)(5)] (net worth).Consistent with this rule, the calculation of anatural person’s net worth for purposes of theinvestment limit excludes the value of the primaryresidence of such person.

150 See note to Rule 251(d)(2)(i).151 See discussion in Section II.B.3.c. above.152 See paragraph (a)(5) to Part II of Form 1—A.15 251 (d)(2)(i)(D). Similarly, issuers may

also rely on representations of investor compliance

Release, we are cognizant of the privacyissues and practical difficultiesassociated with verifying individualincome and net worth and, therefore,are not requiring investors to disclosepersonal information to issuers in orderto verify compliance.154

Some coinrnenters suggested requiringan issuer to have a reasonable belief thatit can rely on an investor’srepresentation of compliance with theinvestment limitations or to takereasonable steps to verify compliance,while other comrnenters suggested weestablish consequences for issuers (andintermediaries, when applicable) if aninvestor failed to comply with thelimitations.’55 At the same time, manycommenters supported the proposedapproach, noting the low compliancecosts and the certainty it would provideissuers and their intermediaries.156 Webelieve that the rules, as adopted, willlimit potential losses for non-accreditedinvestors with respect to individualofferings, while providing certainty to,and lower compliance costs for, issuersand intermediaries.

We do not believe that additionalrequirements for issuers and theirintermediaries, such as requiring issuersto take reasonable steps to verify aninvestors’ compliance with theinvestment limitations, are necessary toprotect investors in light of the totalpackage of investor protections includedin the final rules for Tier 2 offerings.’57We believe that additionalrequirements, like the ones suggested bysome commenters, may have anunintended consequence of dissuadingissuers from selling to non-accreditedinvestors in Tier 2 offerings byincreasing compliance uncertainties andobligations. We are therefore notadopting any additional compliancerequirements with respect to investmentlimitations in the final rules.

While many commenters urged theCommission to eliminate or provide lessrestrictive investment limitations in thefinal rules,158 we believe that theserequirements, as proposed and adopted,usefully augment other requirements

with the investment limitations from participatingbroker-dealers, tmless the issuer knew at the timeof sale that any such representation was untrue.

‘14See Proposing Release, at Section II.B4.‘555ee fn. 140—144 above.‘565ee fn. 137 above.157 example, the final rules include

limitations on issuer eligibility, bad actordisqualification provisions, a requirement thatoffering statements must be qualified by theCommission, narrative and financial disclosurerequirements, which for Tier 2 offerings mustinclude audited financial statements on an initialand annual basis, as well as annual, semiannual,and current event reporting.

158 See fn. 122 above.

for, and investor protections applicableto, Tier 2 offerings. As we noted in theProposing Release, Title IV of the JOBSAct mandates certain investorprotections 159 and suggests that theCommission consider others as part ofits Section 3(b)(2) rulemaking.’6°Congress recognized in Section 3(b)(2)that investor protections beyond thoseexpressly provided in Title IV of theJOBS Act may be necessary in therevised regulation. To that end, Section3(b)(2)(G) indicates that the Commissionmay include in the expanded exemption“such other terms, conditions, orrequirements. . . necessary in thepublic interest and for the protection ofinvestors Limiting the amount ofsecurities that a non-accredited investorcan purchase in a particular Tier 2offering (other than a Tier 2 offering ofsecurities listed on a national securitiesexchange) should help to mitigateconcerns that such investors may not beable to absorb the potential loss of theinvestment and is consistent with theauthority granted to the Commission inSection 3(b)(2).161 We further believethat setting the investment limitation at10% of the greater of such investor’s networth/net assets and annual income!revenue, as opposed to some otherpercentage (e.g., 5% or 20%), isgenerally consistent with similarmaximum investment limitations placedon investors in Title III of the JOBS Actand will help to set a loss limitationstandard in such offerings.’62

Despite the suggestions of somecommenters,’63 we do not believe thatfurther distinctions as to theapplicability of investment limitationsare appropriate among investors that donot qualify as accredited investors. Onthe contrary, we believe that theregulatory distinctions amongaccredited and non-accredited investorsand the familiarity many marketparticipants have with such terms willhelp to ease compliance with, and

159 See Section 3(b)(2)(Dl (expressly providing forSection 12(a)(2) liability for any person offering orselling Section 3(b)(2] securitiesl; Section 3(b)f2)(F)(requiring issuers to file audited financialstatements with the Commission annually).

160 See Section 3(b)(2)(C) (inviting theCommission to consider, among other things,requiring audited financial statements in theoffering statement and implementing bad actordisqualification provisions); Section 3(b)(4)(inviting the Commission to consider implementingongoing reporting requirements).

161As proposed and adopted, an underwriter ina firm commitment underwritten Regulation Aoffering, or participating broker-dealer that isinvolved in stabilization activities with respect toan offering of Regulation A securities will not beconsidered an investor that is subject to theinvestment limitations.

162 Section 301 of the JOBS Act; see alsoSecurities Act Section 4(a)(6), 15 U.S.C. 77d(a)(6).

163 See In. 134 above.


21818 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules arid Regulations

determinations about the applicabilityof, the investment limitations and willavoid unnecessary complexityassociated with other, additionaldistinctions.

5. Integration

a. Proposed Rules

We proposed amending Rule 251(c) ofRegulation A, which governs theintegration of Regulation A offeringswith other offerings, to provide thatofferings under Regulation A would notto be integrated with any of thefollowing: 164

• Prior offers or sales of securities; or• certain specified subsequent offers

and sales of securities.’65The proposed safe harbor was

substantially the same as the existingintegration safe harbor in Rule 251(c),with the addition of a separate provisionfor securities-based crowdfundingtransactions conducted pursuant toSection 4(a)(6) of the Securities Act.’66

We further proposed to amend Rule254(d) to provide that, where an issuerdecides to register an offering aftersoliciting interest in a contemplated, butabandoned, Regulation A offering, anyoffers made pursuant to Regulation Awould not be subject to integration withthe registered offering, unless the issuerengaged in solicitations of interest inreliance on Regulation A to personsother than qualified institutional buyers(QIBs) 167 and institutional accreditedinvestors permitted by Section 5(d) 168

of the Securities Act.’69 As proposed, anissuer (and any underwriter, broker,dealer, or agent that is acting on behalfof the issuer in connection with theproposed offering) soliciting interest ina Regulation A offering to persons otherthan QIBs and institutional accreditedinvestors would need to wait at least 30calendar days between the last suchsolicitation of interest in the Regulation

164 The integration doctrine seeks to prevent anissuer from improperly avoiding registration byartificially dividing a single offering into multipleofferings such that Securities Act exemptionswould apply to multiple offerings that would notbe available for the combined offering.

165 See proposed Rule 251(c), which included inthe safe harbor subsequent offers or sales that areregistered under the Securities Act, or madepursuant to Securities Act Rule 701, an employeebenefit plan, Regulation 5, proposed RegulationCrowdfunding (see Rel. No. 33—9470), or more thansix months after completion of the Regulation Aoffering.

166 Section 4(a)(6) was added to the Securities Actby Section 302 of the JOBS Act.

167 QIBs are large institutions meeting specificrequirements outlined in Rule 144A, or entities theseller (or a person acting on its behalf) reasonablybelieves to be QIBs. See Rule 144A, 17 CFR230. 144A.

168 15 U.S.C. 77e(d); see also ffi. 537 below.‘G9Proposed Rule 255(e).

A offering and the filing of theregistration statement with theCommission.’7° The Proposing Releasealso provided guidance on theapplicability of the integration doctrinefor offerings conducted outside thescope of the safe harbor.’7’


One commenter specificallysupported the proposed changes to theintegration provisions of RegulationA.’72 Another commenter objected tothe proposed changes to the integrationprovisions and related guidance.’ Thiscommenter cautioned that it would bevery difficult to police compliance withthese provisions and suggested that theywould be used to evade regulatoryrequirements.

c. Final Rules

We are adopting, as proposed, anintegration safe harbor, with oneclarifying change. Under the final rules,offerings pursuant to Regulation A willnot be integrated with:

• Prior offers or sales of securities; or• subsequent offers and sales of

securities that are:• Registered under the Securities Act,

except as provided in Rule 25 5(c);• made pursuant to Rule 701 under

the Securities Act;• made pursuant to an employee

benefit plan;• made pursuant to Regulation S;• made pursuant to Section 4(a)(6) of

the Securities Act; or• made more than six months after

completion of the Regulation Aoffering. ‘74

We believe that the integration safeharbor has historically provided and, asamended, will continue to provide,issuers, particularly smaller issuerswhose capital needs often change, withvaluable certainty as to the contours ofa given offering and their eligibility foran exemption from Securities Actregistration. The addition of subsequentoffers or sales made pursuant to Section4(a)(6), which is the only substantivechange to the existing safe harbor beingadopted today, should not significantlyalter the application of the doctrine inpractice. Given the unique capitalformation method available to issuersand investors through Section 4(a)(6) ofthe Securities Act and the small dollaramounts involved, we believe that theaddition to the safe harbor list ofsubsequent crowdfunding offers and

l7eld171 See Proposing Release, Section 11.5.5.‘72ABA BLS Letter.

CFA Letter.‘74Rule 251(c).

sales conducted pursuant to suchsection is appropriate and will notunduly increase risks to investors.’75 Aswith any exemption from registration,the burden of proof of compliance witha claimed exemption rests with theparty claiming it.’76 In our view, thebenefits of providing issuers withcertainty as to the scope of theintegration doctrine, particularly forRegulation A, outweighs the concernexpressed by one commenter thatcompliance with the doctrine may bedifficult to enforce.’ In light of thebroad permissible target audience ofRegulation A solicitations, the potentialfor expanded use of solicitationmaterials in Regulation A discussedmore fully in Section 11.0. below, andthe addition of similar provisions forregistered offerings under Section 5(d),we believe the integration provisions inthe final rule are necessary to ensurethat amended Regulation A functions asa viable capital raising option forissuers.

We are also clarifying in the finalrules the scope of the proposed safeharbor from integration in instanceswhere an issuer abandons acontemplated Regulation A offeringbefore qualification, but after solicitinginterest in such offering to persons otherthan QIBs and institutional accreditedinvestors. The proposed language couldbe read to imply that issuers must waitat least 30 calendar days to avoidintegration with a subsequent registeredoffering or else be subject to integration.The final rules clarify that waiting lessthan 30 calendar days before asubsequent registered offering wouldnot necessarily result in integration andwould instead depend on the particularfacts and circumstances.’78

We are also reaffirming the integrationguidance provided in the ProposingRelease, which is consistent withguidance provided by the Commissionin a 2007 rule proposal on Regulation

As noted in the Proposing Release,

175 See 15 U.S.C.77d(a)(6); see also Rel. No. 33—9470.

‘76 See Ralston Purina Co., 346 U.S. 119.‘77CFA Letter.178 See Note to Rule 251(c) and Rule 255(e); see

also Section fiB. below for a discussion onsolicitation materials.

‘76See Revision of Limited Offering Exemptionsin Regulation B, Release No. 33—8828 (Aug. 3, 2007)(expressing the view that the determination as towhether the filing of the registration statementshould be considered to be a general solicitation orgeneral advertising that would affect the availabilityof an exemption under Securities Act Section4(a)(2) for such a concurrent unregistered offeringshould be based on a consideration of whether theinvestors in the private placement were solicited bythe registration statement or through some othermeans that would otherwise not foreclose theavailability of the Section 4(a)(2) exemption).


Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 I Rules and Regulations 21819

we believe that an offering made inreliance on Regulation A should not beintegrated with another exempt offeringmade by the issuer, provided that eachoffering complies with the requirementsof the exemption that is being reliedupon for the particular offering. Forexample, an issuer conducting aconcurrent exempt offering for whichgeneral solicitation is not permitted willneed to be satisfied that purchasers inthat offering were not solicited bymeans of the offering made in relianceon Regulation A, including withoutlimitation any “testing the waters”communications.’6° Alternatively, anissuer conducting a concurrent exemptoffering for which general solicitation ispermitted, for example, under Rule506(c), could not include in any suchgeneral solicitation an advertisement ofthe terms of a Regulation A offering,unless that advertisement also includedthe necessary legends for, and otherwisecomplied with, Regulation A.’8’

6. Treatment Under Section 12(g)

a. Proposed RulesExchange Act Section 12(g) requires,

among other things, that an issuer withtotal assets exceeding $10,000,000 and aclass of equity securities held of recordby either 2,000 persons, or 500 personswho are not accredited investors,register such class of securities with theCommission.’62 We did not propose toexempt Regulation A securities frommandatory registration under Section12(g), but we solicited comment onwhether Regulation A securities shouldbe granted such an exemption, eitherconditionally or otherwise.

b. Comments on Proposed RulesConunenters generally expressed

support for some form of exemptionfrom the registration requirementsunder Section 12(g). Numerouscommenters recommended exemptingRegulation A securities from Section12(g).’63 Several of these commenters

180 For a concurrent offering under Rule 506(b),an issuer will have to conclude that purchasers inthe Rule 506(b) offering were not solicited by meansof a Regulation A general solicitation. For example,the issuer may have had a preexisting substantiverelationship with such purchasers. Otherwise, thesolicitation conducted in connection with theRegulation A offering may preclude reliance onRule 506(b). See 0180 Rel. No. 33—8828 (Aug. 3,2007) [72 FR 451161.

181 See discussion in Section lID, below.18215 U.S.C. 781(g).1833, Riley Letter; CFIRA Letter 1; CFIRA Letter

2; Fallbrook Technologies Letter; Letter fromJonathan Frufldn, Principal, The Frutldn Law firm,PLC, March 24, 2014 (‘Frutkin Law Letter”); GuzikLetter 1; Letter from Samuel S Guzik, October 25,2014 (“Guzik Letter 2”); Heritage Letter; PA Letter;Ladd Letter 2; Millcen institute Letter; MoFo Letter;SBIA Letter (recommending that the trigger be

expressed concern that the Section 12(g)record holder count would decrease theutility of the Regulation A exemption byincentivizing issuers to sell toaccredited investors over non-accreditedinvestors, likely resulting in issuerselecting to rely oi a potentially lesscostly exemption, such as Rule 506 ofRegulation D.’64 These cominenters alsoexpressed concern that Section 12(g)would decrease the utility of theexemption because secondary trading inotherwise unrestricted Regulation Asecurities might result in issuersinadvertently crossing the Section 12(g)registration threshold.’65 Othercommenters questioned the extent towhich Regulation A securities would beheld in street name through brokers,which the proposal mentions as a factorthat could potentially limit the impactof not proposing an exemption fromSection 12(g).’86 Some commenterssuggested that the reporting regimeunder Tier 2 would be a sufficientmeans by which issuers could provideinvestors with current information andthat therefore Exchange Act reportingwould be unnecessary.’87 Twocommenters believed that the legislativehistory of the JOBS Act supported anexemption from Section 12(g).’86

Several commenters recommendedchanging, delaying, or conditioning theapplication of Section 12(g)’sregistration requirements, especially thecorresponding Section 13 reportingobligations that come withregistration.’89 One of these commentersrecommended delaying the applicationof Exchange Act reporting requirementsfor Tier 2 issuers until the issuer’s non-affiliate market capitalization reached$250 million, so long as the issuer filed

“raised or remedied,” but not explicitly calling forelimination); US Alliance Corp. Letter; U.S.Chamber of Commerce Letter; WR Hambrecht + CoLetter.

184 CFIFtA Letter 1; fallbrook Technologies Letter;Frutkin Law Letter; Heritage Letter; EPA Letter;Milken institute Letter; MoFo Letter; SBIA Letter;U.S. Chamber of Commerce Letter.

185 Id186Guzik Letter I (noting the statements of other

commenters); Heritage Letter; Ladd Letter 2 (citingdiscussions with various brokers); MoFo Letter;SBIA Letter; WR Hambrecht ÷ Co Letter; see alsoOTC Markets Letter (highlighting difficultiesassociated with issuer securities becoming eligiblefor Depository Trust Company (DTCI services,which services typically limit the number of anissuer’s record holders thereby minimizing theimpact of the Section 12(g) mandatory registrationprovisions; further suggesting that companiesissuing Regulation A securities be required to useregistered transfer agents).

‘87B. Riley Letter; Falibrook Technologies Letter;Milken institute Letter; MoFo Letter.

‘88Ladd Letter 2; WR Hambrecht + Co Letter.189 Heritage Letter; KVCF Letter; McCarter &

English Letter; Milken Institute Letter; MoFo Letter;Paul Hastings Letter; SBIA Letter.

reports under Regulation A.’9° Thiscommenter believed that non-affiliatemarket capitalization was a superiorproxy for market interest than thethresholds under Section 12(g) andnoted that the Commission uses themeasure in establishing primary S—3eligibility. Another commenterrecommended exempting initial Tier 2issuers from all or part of Exchange Actreporting obligations until the earliest ofthe occurrence of several events.’9’ Yetanother commenter suggestedexempting Tier 2 issuers from ExchangeAct reporting until they reach a certainunspecified level of revenue or marketcapitalization.’92 Two commentersrecommended deeming Tier 2 issuers’ongoing reports under Regulation A tosatisfy the issuer’s Exchange Actreporting obligations for a phase-inperiod.’93 One commenterrecommended at least allowing for 2,000holders of record (whether accredited ornot) without being subject to ExchangeAct registration requirements,’°4 whiletwo other commenters suggestedeliminating the cap of 500 non-accredited investors.’95 One commenterconditioned its support for a conditionalexemption from Section 12(g) on theCommission requiring Tier 2 issuers toremain current in their ongoingRegulation A reporting requirements.’96

c. Final Rules

We are adopting today final rules thatexempt securities issued in a Tier 2offering from the provisions of Section12(g) for so long as the issuer remainssubject to, and is current in (as of itsfiscal year end),197 its Regulation A

190 Paul Hastings Letter.191 McCarter & English Letter (suggesting the

earliest of: (1) The last day of any fiscal year of theissuer during which it had annual gross revenuesof $250 million; (2) the last day of any fiscal yearfollowing the fifth anniversary of the date of thefirst sale of equity securities under Regulation A;and (3) the date on which the issuer has anaggregate worldwide market value of voting andnon-voting equity held by its non-affiliates of atleast $75 million computed as of the last businessday of the issuer’s most recently completed secondquarter).

192Milken Institute Letter.193 ABA BLS Letter (a 24 month phase-in period

that could expire earlier if the company triggeredExchange Act reporting in some other manner);MoFo Letter.

194 Heritage Letter.195 KVCF Letter; SBIA Letter.‘98MoFo Letter,197 determination as to “current” reporting

status is determined at the time of fiscal year endin reference to the filing of all periodic reports,including special financial reports, required to befiled during such fiscal year. for these purposes, anewly qualified issuer that at fiscal year end has notyet been obligated to file a periodic report,including, if applicable, a special financial report,would be considered “current” for these purposes.



periodic reporting obligations.198Additionally, in order for theconditional exemption to apply, issuersare required to engage the services of atransfer agent registered with theCommission pursuant to Section 17A ofthe Exchange Act. The final rules alsoprovide that the exemption from Section12(g) is only available to companies thatmeet requirements similar to those inthe “smaller reporting company”definition under Securities Act andExchange Act rules.’ As such, theconditional exemption in the final rulesis limited to issuers that have a publicfloat of less than $75 million,determined as of the last business dayof its most recently completedsemiannual period,200 or, in the absenceof a public float, annual revenues of lessthan $50 million, as of the most recentlycompleted fiscal year.20’ An issuer thatexceeds either of the thresholds, inaddition to exceeding the threshold inSection 12(g) of the Exchange Act,would be granted a two-year transitionperiod before it would be required toregister its class of securities pursuant toSection 12(g), provided it timely files allongoing reports due pursuant to Rule257 during such period.202 Section 12(g)

‘98Rule 12g5—1(a)(7).199 “Smaller reporting company” is defined in

Securities Act Rule 405, 17 CFR 230.405, ExchangeAct Rule 12b—2, 17 CFR 240.12h—2, and Item10(0(1) of Regulation S—K, 17 CFR 229.10(0(1). Theprovision of the smaller reporting companydefinition relating to initial registration statementsuoder the Securities Act is not applicable to exemptoffering pursuant to Regulation A. See ItemlOftl(1)(a)(ii) of Regulation S—K, 17 CFR229.10(fl(a)(ii). The final rules do not thereforeincorporate this concept for purposes of Rule 12g5—1(a)(7). See Rule 12g5—1(a)(7).

200 Consistent with the smaller reportingcompany definition, an issuer will calculate “publicfloat” by multiplying the aggregate worldwidenumber of shsres of its common equity securitiesheld by non-affiliates by the price at which suchsecurities were last sold (or the average hid andasked prices of such securities) in the principalmarket for such securities. Rule 12g5—1(a)(7). Seealso, e.g., Item 10(f)(1)(i) of Regulation S—K.

201 12g5—1(a)(7). The Commission adoptedthe smaller reporting company regime in 2007. SeeSEC Rel. No. 33—8876 (Dec. 19, 2007) [73 FR 9341.Some commentators, such as the Commission’sAdvisory Committee on Small and EmergingCompanies, have suggested that the Commissionrevisit the smaller reporting company regime,including the definitional thresholds.Recommendations Regarding Disclosure and OtherRequirements for Smaller Public Companies,Securities and Exchange Commission, AdvisoryCommittee on Small and Emerging Companies(February 1, 2013), at 2—3, available at: http://www.sec.go v/info/smallbus/acsec/acsecrecommendatian-0321 13-smaller-public-co-]tr.pdfAlthough the Commission has nat yet responded tothis recommendation, in considering any potentialchanges to the smaller reporting company regime,we would expect to consider whethercorresponding changes to the thresholds includedin Rule 12g5—1(a](7) should also be made, takinginto account how the Regulation A regime isworking.

202 Id

registration will only be required if, onthe last day of the fiscal year in whichthe company exceeded the public floator annual revenue threshold, thecompany has total assets of more than$10 million and the class of equitysecurities is held by more than 2,000persons or 500 persons who are notaccredited investors.203 In suchcircumstances, an issuer that exceedsthe thresholds in Section 12(g) and Rule12g5—1(a)(7) would be required to beginreporting under the Exchange Act thefiscal year immediately following theend of the two-year transition period.204An issuer entering Exchange Actreporting will be considered an“emerging growth company” to theextent the issuer otherwise qualifies forsuch status.205

In determining to provide aconditional exemption from theprovisions of Section 12(g), we haveconsidered a number of factors. First,we believe the conditional exemptionwe are adopting today is consistent withthe intent behind the original enactmentof Section 12(g) to the extent it ensuresthat relevant information about issuerswill be made routinely available toinvestors and the marketplace •206

Second, we believe the additionalrequirement that Regulation A issuersuse a registered transfer agent willprovide an important investorprotection in this context. The use of atransfer agent registered under theExchange Act, which, in the absence ofa conditional exemption from theprovisions of Section 12(g), would berequired of issuers when they registerunder the Exchange ACt, will provideadded comfort that securityholderrecords and secondary trades will behandled accurately. Third, we believethat phasing out the exemption oncecompanies grow and expand theirshareholder base is consistent with theintent behind Title IV of the JOBS Act,which was enacted to facilitate smallercompany capital formation.207 Finally,

203 15 U.S.C. 78](g).204 Id. See Section II.E.4.h(2). below for a

discussion on suspension or termination of the dutyto file ongoing reports pursuant to Rule 257.

205 See fn. 726 below and accompanying text.206 Section 12(g) was originally enacted by

Congress as a way to ensure that investors in over-the-counter securities about which there was littleor no information, but which had a significantshareholder base, were provided with ongoinginformation about their investment. See, generally,Report of the Special Study of Securities Marketsof the Securities and Exchange Commission, HouseDocument No. 95, House Committee on Interstateand Foreign Commerce, 88th Cong., 1st Seas.(1963), at 60—62.

207 See, e.g., HR. Rep. No. 112—206 (2011), at 4(“Small companies are critical to economic growthin the United States. Amending Regulation A tomake it viable for small companies to access capital

we are concerned that, as commenterssuggested, the lack of an exemptionfrom mandatory registration under theExchange Act may undermine the utilityof amended Regulation A either bydiscouraging use of the exemptionaltogether or by dissuading issuers frommaking sales to non-accredited investorsin Regulation A offerings in an effort toavoid the application of Section 12(g).

While we believe, as we noted in theProposing Release, that the Section 12(g)record holder threshold continues toprovide an important baseline abovewhich issuers should generally besubject to the disclosure obligations ofthe Exchange Act, we are persuaded thatthis need not be the case where anissuer is a smaller company that issubject to, and current in, its periodicreporting obligations under Tier 2 ofRegulation A and engages the services ofa transfer agent that is registered withthe Commission under the ExchangeAct. Regulation A, as amended in thefinal rules, requires issuers that conductTier 2 offerings to provide periodicdisclosure to their investors and updatesfor certain important corporateevents.208 While such reports provideless information than is required of anExchange Act reporting company, webelieve a conditional exemption fromregistration under Section 12(g) iswarranted for smaller Tier 2 issuerssince such companies are required toprovide investors with ongoinginformation about themselves and thesecurities offered, and the ongoingreporting regime we are adopting todayis more appropriately tailored for suchcompanies. Additionally, in order toaddress situations where an issuer thatconducts a Tier 2 offering could remainsubject to its ongoing reportingrequirements indefinitely and therebyavoid having to comply with ExchangeAct reporting requirements regardless ofthe size of its shareholder base, we notethat the exemption from Section 12(g) isconditional and that an issuer that doesnot meet its conditions, including thelimitation on public float and annualrevenues, will be required to registerunder the Exchange Act.

C. Offering Statement

Section 3(b)(2)(G)(i) gives theCommission discretion to require anoffering statement in such form andwith such content as it determinesnecessary in the public interest and forthe protection of investors.209 Theprovision permits electronic filing of

will permit greater investment in these companies,resulting in economic growth and jobs.”).

208 See Rule 257.209 15 U.S.C. 77c(b)(2)(Gl(i).


federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules and Regulations 21821

offering statements, and provides a non-exhaustive list of potential content thatmay be required in the offeringstatement, including audited financialstatements, a description of the issuer’sbusiness operations, financial condition,corporate governance principles, use ofinvestor funds, and other appropriatematters.

1. Electronic Filing; DeliveryRequirements

a. Proposed Rules

Consistent with the language ofSection 3(b)(2)(G)(i), we proposed torequire Regulation A offering statementsto be ified with the Commissionelectronically on EDGAR21° We furtherproposed to amend Form 1—A, but tocontinue to have the form consist ofthree parts:

• Part I: An eXtensible MarkupLanguage (XML) based fihlable form;

• Fart II: A text file attachmentcontaining the body of the disclosuredocument and financial statements; and

• Fart III: Text file attachments,containing the signatures, exhibitsindex, and the exhibits to the offeringStatement.21’

We further proposed to require allother documents required to besubmitted or filed with the Commissionin conjunction with a Regulation Aoffering, such as ongoing reports, to besubmitted or filed electronically onEDGAR.212

Additionally, we proposed an accessequals delivery model for Regulation Afinal offering circulars.213 Under theproposed rules, issuers would berequired to include a notice in anypreliminary offering circular used thatwould inform potential investors thatthe issuer may satisfy its deliveryobligations for the final offering circularelectronically.214 As with registeredofferings, we also proposed aftermarketdelivery obligations for dealers thatwould be satisfied if the final offeringcircular is filed and available on EDGARand the appropriate notice was given bythe dealer.215

210 See proposed Rule 252(e).211 See Proposing Release, at Section llC.i.212

213 Id2’5ee proposed Rule 254(a).219As proposed, a dealer would generally be

required to deliver a copy of the current offeringcircular to purchasers for all sales that occur within90 calendar days after qualification, although thisrequirement would be satisfied when the finaloffering circular is filed and available on EDGARand the dealer has otherwise complied with theobligation to deliver a notice of sales to thepurchaser not later than two business days aftercompletion of such sale. See proposed Rules251(d)(2)(ii)—(iii).

Consistent with prior Commissionreleases on the use of electronic mediafor delivery purposes, we proposed that“electronic-only” offerings ofRegulation A securities would not beprohibited, but an issuer and itsparticipating intermediaries would haveto obtain the consent of investors to theelectronic delivery of:

The preliminary offering circularand other information, but not the finaloffering circular, in instances where,upon qualification, the issuer plans tosell Regulation A securities based onoffers made using a preliminary offeringcircular; and

a all documents and information,including the final offering circular,when the issuer sells Regulation Asecurities based on offers conductedduring the post-qualification periodusing a final offering circular.216

We further proposed to maintain theexisting requirements in Regulation A,which require dealers to deliver a copyof the current offering circular topurchasers for sales that take placewithin 90 calendar days afterqualification.217 We proposed to updateand amend Rule 251(d)(2)(i) 218 torequire issuers and participating broker-dealers to deliver only a preliminaryoffering circular to prospectivepurchasers 219 at least 48 hours inadvance of sale when a preliminaryoffering circular is used during theprequalificafion period to offer suchsecurities to potential investors. We alsoproposed to continue to require a finaloffering circular to accompany orprecede any written communicationthat constitutes an offer in the post-qualification period.220

In addition to the revised deliveryrequirements discussed above, weproposed to add a provision analogousto Rule 173,221 which would requireissuers, underwriters, and dealers, notlater than two business days aftercompletion of a sale, to providepurchasers with a copy of the finaloffering circular or a notice stating thatthe sale occurred pursuant to a qualifiedoffering statement.222 As proposed, thenotice must include the Web siteaddress223 where the final offeringcircular, or the offering statement ofwhich such final offering circular is

216 See Proposing Release, at Section II.C.1.217 See proposed Rule 251(d)(2)(iii).21817 CFR 230.251(d)(2)(i) (2014).219 See proposed Rule 251(d)(2)(i).220 See proposed Rule 251fd)(1)(iii).22117 CFR 230.173.222 See proposed Rule 251(d)f2)(ii).223h3 the case of an electronic-only offering, the

notice must include an active hyperlink to the finaloffering circular or to the offeriiig statement ofwhich such final offering circular is part.

part, may be obtained on EDGAR andcontact information sufficient to notifya purchaser how it may request andreceive a final offering circular from theissuer.224

We further proposed to allow anissuer to withdraw an offeringstatement, with the Commission’sconsent, if none of the securities that arethe subject of such offering statementhas been sold and such offeringstatement is not the subject of aCommission order temporarilysuspending a Regulation A exemption.Under the proposed rules, theCommission also would be able todeclare an offering statement abandonedif the offering statement has been on filewith the Commission for nine monthswithout amendment and has notbecome qualified. These withdrawaland abandonment procedures aresimilar to the ones that apply toregistration statements under theSecurities Act.225

b. Comments on the Proposed RulesNo commenters opposed the proposed

requirement that issuers be required tofile offering statements and relatedmaterial electronically with theCommission on EDGAR, while twocommenters expressly supported such arequirement.226 One commenterrecommended only requiringpreliminary or final offering circulardelivery 48 hours in advance of sale forinitial public offerings and not forofferings by issuers that are alreadysubject to Tier 2 ongoing reportingrequirements •227 This commenter alsorecommended eliminating dealeroffering circular delivery requirementsfor Tier 2 issuers that are subject toongoing reporting.

A few commenters opposed an accessequals delivery model of final offeringcircular delivery.228 These commentersraised concerns about the perceivedchallenge of finding these materials onEDGAR and not requiring delivery 48hours in advance of sale in allcircumstances.

One commenter recommended, inaddition to requiring electronic filing onEDGAR, requiring issuers to maintain acorporate Web site where the publicmay access copies of all non-confidential filings in a thnely mannerso that investors not familiar withEDGAR may access the most completeinformation provided to the

224 See proposed Rule 251(d)f2)(ii).225 See Securities Act Rule 477, 17 CFR 230.477,

and Rule 479, 17 CFR 230.479.226 See MCS Letter; OTC Markets Letter.227 Paul Hastings Letter.228 Massachusetts Letter 2; NASAA Letter 2;

WDFI Letter.


21822 Federal Register! Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations

Commission.229 In addition to suggestedchanges to the filing process itself,several comrnenters encouraged theCommission to find ways to reduce thestaff’s review time for offeringstatements.23°

c. final Rules

(1) filing RequirementsWe are adopting provisions for

electronic filing and deliveryrequirements in the final rules forRegulation A substantially asproposed.231 We agree with commentersthat support requiring electronic filingof offering and related materials andbelieve that this requirement willultimately benefit issuers and investorsby streamlining the offering process. Asadopted, issuers must file theirRegulation A offering statements withthe Commission electronically onEDGAR.232 Further, as proposed, we areamending Form 1—A to consist of thefollowing three parts:

Fart I: An eXtensible MarkupLanguage (XML) based fihlable form,which captures key information aboutthe issuer and its offering using an easyto complete online form, similar toForm D, with drop-down menus,indicator boxes or buttons, and textboxes, and assists issuers in determiningtheir ability to rely on the exemption.The XML-based fihlable form willprovide a convenient means ofassembling and transmittinginformation to EDGAR, withoutrequiring the issuer to purchase ormaintain additional software ortechnology; 233

• Part II: A text file attachmentcontaining the body of the disclosuredocument and financial statements,

formatted in HyperText MarkupLanguage (HTML) or AmericanStandard Code for InformationInterchange (ASCII) to be compatiblewith the EDGAR filing system;234 and

• Part III: Text file attachments,containing the signatures, exhibitsindex, and the exhibits to the offeringstatement, formatted in HTML or ASCIIto be compatible with the EDGAR filingsystem.235As proposed and adopted, all otherdocuments required to be submitted orfiled with the Commission inconjunction with a Regulation Aoffering, such as ongoing reports, mustgenerally be submitted or filedelectronically on EDGAR.236 Asmaterials will be available on EDGAR,we do not see a need to separatelyrequire issuers to maintain a corporateWeb site where the public may accessall non-confidential filings. Issuers may,however, elect to provide the filings ontheir Web site or to their EDGAR filingpage. Consistent with currentRegulation A, there are no filing feesassociated with the Regulation A filingand qualification process.

We believe the approach to electronicfiling adopted today will be bothpractical and useful for issuers ofRegulation A securities, investors insuch securities, and other marketparticipants. Issuers will be able tomaintain better control over their filingprocess, reduce the printing costsassociated with filings, obtainimmediate confirmation of acceptanceof an offering statement, and ultimatelysave time in the qualification process.Investors will gain real-time access tothe information contained in RegulationA filings.237 We anticipate that theefficiency of the Regulation A marketshould improve with the increasedaccessibility of information aboutRegulation A issuers and offerings.Additionally, as with registeredofferings, electronic filing on EDGARwill allow for more efficient storing,processing, and disseminating ofRegulation A filings than paper filings,which should improve the efficiency ofthe staff review and qualificationprocesses.

Electronic filing also will facilitate thecapture of important financial and otherinformation about Regulation A issuersand offerings that will enable the

Z34 Part II (Offering Circular) of Form 1—A. Seediscussion in Section II.C.3.b. below.

235 Part III (Exhibits) of Form 1—A. See discussionin Section II.C3.c. below.

a discussion on the ongoing reportingrequirements, see Section ll.E. below.

237 Investors would not, however, have immediateaccess to non-public submissions of draft offeringstatements. See thscussion in Section II.C.2. below.

Commission and market participants toanalyze any market that develops inRegulation A securities, including, forexample, information about issuer size,issuer location, key financial metrics,summary information about securitiesoffered and offering amounts, thejurisdictions in which offerings takeplace, and expenses associated withRegulation A offerings.238

We appreciate that requiring EDGARfiling will impose some new costs onissuers, as addressed more fully in theEconomic Analysis section of therelease.239 We do not, however, believethat the incremental cost associatedwith the EDGAR filing requirementsjustifies maintaining a paper-only filingrequirement. On the contrary, webelieve that the potential additional costto issuers associated with the EDGARfiling requirement should be minimaland electronic filing on EDGAR wouldeliminate any processing delays andcosts otherwise associated with thecurrent paper filing system, such asprinting or mailing costs.

(2) Delivery RequirementsWe are adopting, as proposed, an

access equals delivery model forRegulation A final offering circularswhen sales are made on the basis ofoffers conducted during theprequalification period and the finaloffering circular is filed and available onEDGAR. The expanded use of theInternet and continuing technologicaldevelopments suggest that we shouldupdate the final offering circulardelivery method for Regulation A in amanner that is consistent with similarupdates to delivery requirements forregistered offerings.240 Contrary to theviews of some commenters,24’ we donot believe that access to EDGARgenerally has proven to be a challengefor investors in registered offerings sincethe adoption of the Securities OfferingReform Release in 2005. We also do notbelieve that it will be a challenge forinvestors under Regulation A or raiseinvestor protection concerns,particularly in light of our final deliveryrequirements (including, whereapplicable, the inclusion of hyperlinksto offering materials on EDGAR thatmust be provided to investors by issuersand intermediaries) 242 Therefore, wheresales of Regulation A securities occur

238 The specific disclosure requirements includedin the XML-based fillable form are discussed morefully in Section II.C.3.a. below.

239 See Section [II. below.240 See Securities Offering Reform, Rel. No. 33—

8591.241 See fn. 228 above.242 See Rule 251(d)(2), Rule 254(a), and Rule

255(b) and (d).

229 Ladd Letter 2.2°Frutkin Law Letter; Heritage Letter (suggesting

that the review time needs to be reduced by two-thirds); Letter from Gregory S. Fryer, Esq., Partner,Verrill Dana LLP, February 28, 2014 (“Verrill DanaLetter 1”) (recommending providing guidance toissuers, staff training, and more discretion to thestaff to make materiality determinations and towork informally with issuers); Letter from Ted I.Coombs, Chief Technology Officer, Workers OnCall, March 24, 2014 (“WOC Letter”).

231 conjunction with the adoption of final rulesfor electronic filing and delivery, we are makingclarifying revisions to the proposed rules thatrenumber some of the proposed provisions in thefinal rules. See, e.g., Rule 251(e), (f’) (originallyproposed Rules 252(c), (e), respectively).

232 See Rule 1O1(a)(vii), (xvii) of Regulation S—T,17 CFR 232.lol(a)(xvll); see also Rule 251(f). Asproposed, and in conjunction with this change,Item 101(c)(6) of Regulation S—T (17 CFR232.101(c)(6)) is revised so that it no longerprohibits electronic submission of filings related toRegulation A offerings.

233 Part I (Notification) of Form 1—A. As discussedmore fully in Section II.C.3.a. below, the cover pageand Part I of current Form 1—A would be convertedinto, and form the basis of, the XML-based fillableform.



after qualification on the basis of offersmade using a preliminary offeringcircular, issuers and intermediaries canpresume that investors have access tothe Internet and may satisfy theirdelivery requirements for the finaloffering circular by filing it onEDGAR.23 Issuers are, however,required to include a notice in anypreliminary offering circular that willinform potential investors that theissuer may satisfy its deliveryobligations for the final offering circularelectronically.244

Further, as proposed, “electroniconly” offerings of Regulation Asecurities will be permitted under thefinal rules, provided that issuers andintermediaries comply with relevantCommission guidance.245 Specifically,in such offerings, an issuer and itsparticipating intermediaries must obtainthe consent of investors to, or otherwisebe able to evidence the receipt of, theelectronic delivery of:

• The preliminary offering circularand information other than the finaloffering circular, in instances where theissuer sells Regulation A securitiesbased on offers made using apreliminary offering circular; and

• all documents and information,including the final offering circular,when the issuer sells Regulation Asecurities based on offers made duringthe post-qualification period using afinal offering circular.

As we noted in the Proposing Release,in light of the proposed requirements forelectronic delivery and in order to beconsistent with requirements forregistered offerings, we believe itappropriate to permit dealers, duringthe aftermarket delivery period, to bedeemed to satisfy their final offeringcircular delivery requirements if suchdocument is filed and available onEDGAR.246 We are amending Rule251(d)(2)(ii) of existing Regulation A tomake clear that dealers, like issuers andintermediaries, can also rely on theprovisions for access equals delivery.27

243 Cf Rel. No. 33—8591. at 244.244 See Rule 254(a).245An electronic-only offering is an offering in

which investors are permitted to participate only ifthey agree to accept the electronic delivery of alldocuments and other information in connectionwith the offering. See Rel. No. 34—37182 (May 9,1996) [61 FR 24644] (Use of Electronic Media byBroker-Dealers, Transfer Agents and InvestmentAdvisers for Delivery of Information), Rel. No. 34—42728 (Apr. 28, 20001 [65 FR 25843] (Use ofElectronic Media), and Rel. No. 33—7233 (Oct. 6,1995) [60 FR 53458] (Use of Electronic Media forDelivery Purposes).

246 See Proposing Release, at Section fl.C.i.247 See Rule 251(d)(2)(ii). Notwithstanding the

final delivery requirements, broker-dealers remainsubject to the anti-fraud provisions of Section 15 ofthe Exchange Act.

Additionally, the amendment clarifiesthat a dealer can rely on access equalsdelivery for a final offering circularprovided it complies with therequirements of Rule 251(d)(2)(ii). Thisclarifying amendment is necessary toavoid any confusion that the final rulescould be read to impose a doubledelivery requirement on dealers duringthe aftermarket delivery period.

Separately, we are modifying theterms of Rule 251(d)(2)(ii) to make itmore consistent with the dealer deliveryrequirements for registered offeringsunder Securities Act Rule 174.248 Asproposed, the rules would have requireddealers in all circumstances to deliver acopy of the current offering circular topurchasers for sales that take placewithin 90 calendar days afterqualification.240 Consistent with thesuggestion of one commenter,25° we arerevising the proposed rules to moreclosely align the Regulation A deliveryrequirements with those required inSecurities Act Rules 174(b) and (d).251We, therefore, are adopting theproposed 90 calendar day dealerdelivery requirement, but eliminatingthe dealer delivery requirement whenthe issuer is subject immediately priorto filing the offering statement to Tier 2ongoing reporting252 and reducing thelength of the delivery requirement to 25calendar days after the later of thequalification date of the offeringstatement or the first bona fide offeringof securities if the securities will belisted on a national securitiesexchange.253 As adopted, the final rulesreduce dealer aftermarket deliveryrequirements, which should aid dealersin compliance with the final rules.

The final rules also update and amendRule 251(d)(2)(i) to align with changesin the prospectus delivery requirementsfor registered offerings that haveoccurred since these requirements werelast updated in Regulation A.254 Webelieve the delivery of the preliminaryoffering circular to potential investorsbefore they make an investmentdecision on the basis of information

248 While we have made clarifying revisions toproposed Rule 251(d)(2)(iii) and renumbered it asRule 251(d)(2j(ifl, the final rule is consistent withRule 174, as there is no need for an analog to Rule174(g), which covers the dealer delivery obligationsin registered offerings by blank check companiesunder Rule 174(g). Blank check companies areineligible issuers under Regulation A. See Rule251(b).

249 See proposed Rule 251(d)(2)(iii).250 Paul Hastings Letter.251 See 17 CFR 230.174(b), (d).252 Rule 251(d)(2)(ii)(D); see also Securities Act

Rule 174(b).253 Rule 251(d)(2)fii)(C); see also Securities Act

Rule 174(d).254 See Proposing Release, at Section II.c.i.

provided during the prequalificationperiod remains an important investorprotection that the final rules shouldpreserve, particularly in light of theproposed expanded use of “testing thewaters” solicitation materials to includethe period of time after non-publicsubmission or filing of the offeringstatement, as discussed further inSection II.D. below.255 We alsorecognize that updating and amendingRegulation A’s offering circular deliveryrequirements will likely benefit marketparticipants by minimizingdiscrepancies between the requirementsof broker-dealers in Regulation A andregistered offerings.

We therefore are amending, asproposed, Rule 251(d)(2)(i) to requireissuers and participating broker-dealersto deliver only a preliminary offeringcircular to prospective purchasers 256 atleast 48 hours in advance of sale onlywhen a preliminary offering circular isused during the prequalification periodto offer such securities to potentialinvestors.257 To make the final rulesmore consistent with the requirementsof Exchange Act Rule 15c2—8(b) forissuers who already provide continuous,ongoing information to investors andthe market, the final rules do not requirean issuer or its intermediaries to delivera preliminary offering circular at least48 hours in advance of sale where theissuer is already subject to a Tier 2reporting obligation. In such instances,however, the issuer and itsintermediaries will otherwise remainsubject to the general deliveryrequirements of the rules, includingcompliance with the requirements forma.king offers pursuant to Rule 251(d)(1)and for including a preliminary offeringcircular in any solicitation materialsused after filing the offering statementwith the Commission pursuant to Rule255. As proposed and adopted, thedelivery requirements under the finalrules apply to both issuers and

255 See Securities Offering Reform, Rd. No. 33—8591, at 245 (noting that access equals delivery isnot appropriate for preliminary prospectus deliveryobligations in IPOs because it is important forpotential investors to be sent the preliminaryprospectus).

256 Prospective purchasers include any personthat has indicated an interest in purchasing theRegulation A securities before qualification,including, but not limited to, those investors thatrespond to an issuer’s solicitation materials. SeeRule 251(d)(2)(i).

hi accordance with time of sale provisionsdiscussed in Securities Offering Reform, see Rel.No. 33—8591, at p. 173 et seq., the final rulesprovide that the 48-hour delivery obligation mustbe made in advance of “sale” rather than the“mailing of the confirmation of sale.’ See alsoSection 11.0. below for a discussion of the deliveryrequirements for solicitation materials used afterpublicly filing the offering statement.



participating broker-dealers.258 Webelieve these delivery requirements arean important investor protection thatshould apply to issuers in advance ofsale, in addition to their intermediaries,and is consistent with currentRegulation A.25° We are also adopting,as proposed, the requirement that a finaloffering circular must accompany orprecede any written communicationsthat constitute offers in the post-qualification period.260

In addition to the revised deliveryrequirements discussed above, we areadopting, as proposed, final rulesanalogous to Securities Act Rule 173.261

Rule 251(d)(2)(ii) requires issuers andparticipating broker-dealers, not laterthan two business days after completionof the sale, to provide the purchaserwith a copy of the final offering circularor a notice stating that the sale occurredpursuant to a qualified offeringstatement.262 The notice must includethe URL 263 where the final offeringcircular, or the offering statement ofwhich such final offering circular ispart, may be obtained on EDGAR andcontact information sufficient to notifya purchaser where a request for a finaloffering circular can be sent andreceived in response.

(3) Withdrawal of an Offering StatementThe final rules will, as proposed,

permit an issuer to withdraw an offeringstatement, with the Commission’sconsent, if none of the securities that arethe subject of such offering statementhave been sold and such offeringstatement is not the subject of aCommission order temporarily

258 Issuers may rely on reasonable assurances ofdelivery from participating broker-dealers to satisfytheir delivery obligations.

259 See also 17 CFR 230.460 (Distiibution ofPreliminary Prospectus in Registered Offerings).Additionally, with continued improvements ininformation and communication teclmologies, webelieve direct public offerings (i.e., offeringsconducted by an issuer without the involvement ofan underwriter) may become a more attractiveoption for certain issuers. For that reason, it isimportant that the advance preliminary offeringcircular delivery requirements for participatingbroker-dealers apply equally to issuers.

2O See Rule 251(d)(1)(iii). For writtenconfirmations and notices of allocation in the post-qualification period, issuers and intermediaries mayrely on the EDGAR filing of the final offeringcircular to satisfy any delivery requirements thatmay apply under Rule 251(d)(1)(iii). This approachis consistent with Rule 172(a) in the context ofregistered offerings. For a discussion of Rule 172(a),see Securities Offering Reform, Rel. No. 33—8591, at251.

26117 CFR 230.173.262 See Ride 251(d)(2)(ii).263As proposed, the final rules make clear that,

hs the case of an electronic-only offering, the noticemust include an active hyperlink to the finaloffering circular or to the offering statement ofwhich such final offering circular is part. See Rule251(d)(2)(ll)(E).

suspending a Regulation Aexemption. 264 The final rules alsopermit, as proposed, the Commission todeclare an offering statement abandonedif the offering statement has been on filewith the Commission for nine monthswithout amendment and has notbecome qualified.265 These withdrawaland abandonment procedures aresimilar to the ones that apply to issuersin registered offerings.

2. Non-Public Submission of DraftOffering Statements

a. Proposed RulesWe proposed to allow the non-public

submission of draft offering statementsby issuers of Regulation A securities. Aswe noted in the Proposing Release, suchsubmissions would not be subject to thestatutorily-mandated confidentiality ofdraft initial public offering (IPO)registration statements confidentiallysubmitted by “emerging growthcompanies” 266 under Title I of the JOBSAct. 267 Instead, where an issuer seeks tonon-publicly submit a draft offeringstatement, the proposal indicated itcould do so in compliance with theCommission’s Rule 83.268 We alsosought comment on whether we shouldinstead adopt a new rule relating toconfidential treatment of draft offeringstatements in Regulation A.

Under the proposed rules, issuerswhose securities have not beenpreviously sold pursuant to a qualifiedoffering statement under Regulation Aor an effective registration statementunder the Securities Act would bepermitted to submit to the Conunissiona draft offering statement for non-publicreview. As with the confidentialsubmission of draft registrationstatements by emerging growthcompanies, all non-public submissionsof draft offering statements would be

264 See Rule 259(a). As discussed in SectionII.C.5. below in the context of qualification, we areamending the delegated authority of the director ofthe Division of corporation Finance to permit theDivision to consent to the withdrawal of an offeringstatement or to declare an offering statementabandoned, as opposed to requiring thecommission to issue an order. Rule 30—lfh)(3), 17CFR 200.30—1(b)(3).

265 See Rule 259(b).266 Under Section 2(a)(19) of the Securities Act,

an “emerging growth company” is defined as,among other things, an issuer that had total annualgross revenues of less than $1 billion during itsmost recently completed fiscal year. 15 U.S.C.77b(a)(19).

267 Under Section 6(e)(2) of the Securities Act,confidential submissions of draft registrationstatements by emerging growth companies areprotected from compelled disclosure under theFreedom of Information Act (FOLk) (5 U.S.C. 552).There is no similar provision under Section 3(b) ofthe Securities Act.

266 proposed Rule 252(1); see also ProposingRelease, at fu. 212.

submitted via EDGAR. The initial nonpublic submission, all non-publicamendments thereto, andcorrespondence with Commission staffregarding such submissions would berequired to be publicly filed andavailable on EDGAR as exhibits to theoffering statement not less than 21calendar days before qualification of theoffering statement.269 Unlike emerginggrowth companies in registeredofferings, which must publicly file anyconfidential submissions not later than21 calendar days before a road show, thetiming requirements for filing by issuersseeking qualification under RegulationA would not depend on whether or notthe issuer conducts a road show.

b. Comments on Proposed RulesCommenters were generally

supportive of the proposed non-publicsubmission process for Regulation Aofferings.270 One commenterrecommended keeping all filingsconfidential other than the finalqualified version and possibly anyinterim version actually used inconjunction with solicitationmaterials.271 Another commenterrecommended requiring the inclusion ofa legend on non-public offeringstatements so that the confidentiality ofsuch submissions would be automatic,without the need for a separateconfidentiality request,272 while anothercommenter recommended treating theproposed non-public submissions thesame way that draft registrationstatements are treated under Title I ofthe JOBS Act.273

c. Final Rules

We are adopting rules that will, asproposed, provide for the submission ofnon-public draft offering statementsunder Regulation A.274 In a change fromthe proposal, however, the final rules donot require an issuer seeking non-publicstaff review of its draft offeringstatement to submit such draft pursuantto the Commission’s Rule 83. Instead,all such draft offering statements underRule 252(a) shall receive non-publicreview. The final rules only permit

260 See proposed Rule 252(1].270310 Letter; McCarter & English Letter; Paul

Hastings Letter; Richardson Patel Letter.271 Verrill Dana Letter 1.

272McCarter & English Letter. The ProposingRelease indicated that issuers seeking to non-publicly submit offering statements should submitsuch statements under cover of the Commission’sRule 83, 17 CFR 200.83, which deals withconfidential treatment requests.

273 Milken Institute Letter (recommending thatthe Commission seek Congressional authority, ifnecessary, to protect these submissions fromrequests under the FOIA.

274 See Rule 252(d).



issuers whose securities have not beenpreviously sold pursuant to a qualifiedoffering statement under Regulation Aor an effective registration statementunder the Securities Act to submit to theCommission a draft offering statementfor non-public review. Consistent withthe treatment of draft registrationstatements in registered offerings byemerging growth companies, a non-publicly submitted offering statementmust be substantially complete uponsubmission in order for staff of theDivision of Corporation Finance tobegin its review. All non-publicsubmissions of draft offering statementsmust be submitted via EDGAR, and theinitial non-public submission, all nonpublic amendments thereto, andcorrespondence submitted by or onbehalf of the issuer to the Commissionstaff regarding such submissions mustbe publicly filed and available onEDGAR as exhibits to the offeringstatement not less than 21 calendar daysbefore qualification of the offeringstatement.

We do not believe, as was suggestedby at least one commenter,275 thatrequiring issuers to file only thequalified version of the offeringstatement and any earlier versions usedin conjunction with solicitationmaterials would provide investors withsufficient disclosure to make informedinvestment decisions. Further, in lightof the preemption of state securitieslaws registration requirements for Tier 2offerings in the final rules,276 the 21calendar day filing requirement willinsure that state securities regulators areable to require first-time issuers thatnon-publicly submit draft offeringstatements to file such material withthem for a minimum of 21 calendar daysbefore any potential sales to investors intheir respective states 277 Unlikeemerging growth companies, the timingrequirement for filing by issuers seekingqualification under Regulation A doesnot depend on whether or not the issuerconducts a road show or tests the watersin a contemplated offering beforequalification.278

275 Verrill Dana Letter 1.276 discussion in Section n.H. below.277 Notwithstanding the final rules that provide

for the preemption of state securities laws’registration and qualification requirements of Tier2 offerings, state securities regulators retain, amongother things their authority to require the filingwith them of any documents filed with theCommission. See, e.g., Section 18(c)(2) of theSecurities Act. The timing of filing requirements atthe state level, however, may reduce the timeperiod in which an offering statement and relatedmaterials are on file with the state beforeCommission qualification.

278 See Section ll.D. below for a discussion on thetiming and requirements for the use of solicitation

Unlike Title I of the JOBS Act, TitleIV does not provide for confidentialsubmissions of offering statementsunder Regulation A.27° Consequently,the requirements of the FOIA arecontrolling on the scope of theCommission’s ability to adoptconfidentiality rules for non-publiclysubmitted offering statements. We aretherefore not adopting any specificadditional rule or requirement for nonpublic submissions that would deemsuch submissions “confidential.”However, where an issuer seeksconfidential treatment for non-publiclysubmitted offering materials, or anyportion thereof, for which it believes anexemption from the FOIA exists, itshould continue to do so in compliancewith the Commission’s Rule 83.280

While non-publicly submittedoffering statements must be submittedelectronically on EDGAR, theCommission and its staff will not makesuch offering statements publiclyavailable on EDGAR as a matter ofcourse.28’ The treatment of non-publicsubmissions in this regard is consistentwith the Commission staffs approach tothe public availability of draftregistration statements submitted byforeign private issuers for registeredofferings.282 As there is no statutorybasis for withholding non-publicsubmissions from production, absent anexemption from the FOIA,283 issuersthat rely on our provisions for nonpublic submission should be aware thatthe Commission may, under certaincircumstances, be compelled to providesuch materials to a requesting party (orto otherwise make them publiclyavailable) before the date on which anissuer would otherwise have beenrequired to publicly file on EDGAR.

3. Form and Content

Section 3(b)(2)(G)(i) of the SecuritiesAct identifies certain disclosurerequirements that the Commission mayrequire for offerings relying on the

materials under Rule 255. Regulation A’s testing tiewaters provisions encompass a variety of activities,including, but not limited to, activities that couldconstitute a traditional road show.

279 See fn. 267 above.280 See 17 CFR 200.83. Where an issuer seeks

confidential treatment of any information includedin a publicly filed offering statement or relatedmaterials, it should do so in compliance withSecurities Act Rule 406. See 17 CFR 230.406. SeeRule 251(e) (confidential treatment).

281 is in contrast to publicly filed draft andfinal offering statements that will be madeautomatically available on EDGAR at the time offiling.

282 See Non-Public Submissions from foreignPrivate Issuers, available at: http://www.sec.gov/divisions/corpfin/internall!nonpublicsubmissions.htm.

283 See 5 U.S.C. 552.

Regulation A exemption. Therequirements largely coincide with theexisting offering statement disclosurerequirements of Form 1—A, such asfinancial statements,284 a description ofthe issuer’s business operations,285financial condition,286 and use ofinvestor funds.287 The proposed rules,comments received on the proposedrules, and the final rules being adoptedtoday for each of Part I, U, and III ofForm 1—A are discussed in detail below.

a. Part I (Notification)

(1) Proposed RulesPart I of Form 1—A serves as a notice

of certain basic information about theissuer and its proposed offering, whichalso helps to confirm the availability ofthe exemption.288 As proposed, Part I ofForm 1—A would be converted into anonline XML-based fillable form withindicator boxes or buttons and textboxes and would be filed online withthe Commission.289 The informationwould be publicly available on EDGAR,as an online data cover sheet, but nototherwise required to be distributed toinvestors.290

(2) Comments on Proposed RulesWe received several comments with

recommendations specific to certainitems on Part I of form 1—A. Withrespect to Item 1 of Part I, onecommenter recommended defining theterm “publicly traded,” eliminating the“Financial Statements” section of ItemI of Part I or conforming it to theexisting disclosures required by Item301 of Regulation S—K, or conformingthe line item descriptions in Item 1 tothose in Regulation S_X.291 Othercommenters recommended clarifyingthat an auditor and related fees need not

284 See Form 1—A, Part II, Part F/S (2014). Section3(bl(2)(G)(i) also contemplates that the Commissionmay require issuers to submit audited financialstatements. Currently, the financial statementsrequired under Regulation A need to be auditedonly if the issuer has them otherwise available.

285 Id., Part II, e.g., Model B, Item 6 (Descriptionof Business).

2861d., e.g., Part F/S.287 Id., e.g., Item S (Use of Proceeds to Issuer).288Rel. No. 33—6275 [46 FR 2637], at 2638.289 proposed, the cover page to current Form

1—A would be eliminated as a standalonerequirement, while portions of the informationrequired on the cover page would be combined withItem I of Part I of Form 1—A in the XML fillableform.

290 Commission would make the informationavailable on EDGAR in a format that providesnormal text for reading and XML-tagged data foranalysis. With the exception of the items that focusissuers on eligibility to use Regulation A, much ofthe information called for in the XML-based fillableform is also required to be disclosed to investors inPart II of Form 1—A.

291 Letter from Ernst & Young LLP, March 24,2014 (“E&Y Letter”).



he listed in Part I if audited financialstatements are not included.292 .AJjthrespect to Item 5 of Part I, anothercommenter supported the proposal’sinclusion of checkboxes specifying thejurisdictions in which the securities areintended to be offered,293 while adifferent commenter recommendedexpanding the list of jurisdictions sothat issuers could indicate the Canadianprovinces in which they intended toconduct their offerings.29 With respectto Item 6 of Part I, one commenterrecommended defining the term“affiliated issuer.” 295 This commenterrecommended defining the term to referto entities controlled by the issuer,noting that otherwise it may requiredisclosure by parent and sister entities,which is information unrelated to thecapitalization of the issuer.

Other commenters recommendedincluding additional disclosure in Part I.Two of these commenters recommendedrequiring issuers to include their Website address and the jurisdiction of theirprincipal place of business.296 Thesecommenters also objected to removingthe disclosure and contact informationfor persons that are covered by the badactor rules.297

(3) Final RulesWith the exception of technical

clarifications, we are adoptingprovisions for Part I as proposed. Thenotification in Part I of Form 1—A willrequire disclosure in response to thefollowing items:

• Item 1. (Issuer Information) willrequire information about the issuer’sidentity, industry, number ofemployees, financial statements andcapital structure, as well as contactinformation. 298

• Item 2. (Issuer Eligibility) willrequire the issuer to certify that it meetsvarious issuer eligibility criteria.

292 Letter from Cynthia M. Fornelli, ExecutiveDirector, Center for Audit Quality, March 24, 2014(“CAQ Letter”); Letter from Deloitte & Touche LLP,March 24, 2014 (‘Deloitte Letter”); E&Y Letter;Letter from PricewaterhouseCoopers LLP, March 24,2014 (‘PwC Letter”).

293 NASAA Letter 2.Letter from Mike Liles, Jr., Attorney, Karr

Tuttle Campbell, January 17, 2014 (“Karr TuttleLetter”).

295 Paul Hastings Letter.296NASAJ Letter 2; WDFI Letter. These

commenters requested that this information beincluded in XBRL format, rather than XML. Wenote that XBRL is a form of XML, and generallyrequires labeling information with data “tags”rather than providing the information throughfillable forms.

297NASA5 Letter 2; WDFI Letter.298 Some of the information in Item 1, such as the

name of the issuer, jurisdiction of incorporation,contact information, primary Standard IndustrialClassification Code Number, and IRS, EmployerIdentification Number is already required to beincluded on the cover page of Form 1—A.

• Item 3. (Application of Rule 262(“bad actor” disqualification anddisclosure)) will require the issuer tocertify that no disqualifying events haveoccurred and to indicate whetherrelated disclosure will be included inthe offering circular (i.e., events thatwould have been disqualifying, butoccurred before the effective date of theamendments to Regulation A).299

• Item 4. (Summary InformationRegarding the Offering and otherCurrent or Proposed Offerings) willinclude indicator boxes or buttons andtext boxes eliciting information aboutthe offering (including whether theissuer is conducting a Tier 1 or Tier 2offering, amount and type of securitiesoffered, proposed sales by sellingsecurityholders and affiliates, type ofoffering, estimated aggregate sales of anyconcurrent offerings pursuant toRegulation A, anticipated fees inconnection with the offering, and thenames of audit and legal serviceproviders, underwriters, and certainothers providing services in connectionwith the offering).

• Item 5. (Jurisdictions in WhichSecurities are to be Offered) will includeinformation about the jurisdiction(s) inwhich the securities will be offered.

• Item 6. (Unregistered SecuritiesIssued or Sold Within One Year) willrequire disclosure about unregisteredissuances or sales of securities withinthe last year, but will not include arequirement to provide the names andidentities of the persons to whomunregistered securities were issued.

We are adopting, as proposed, furtherchanges to Part I of Form 1—A. We areeliminating Item 1 (Significant Parties)of current Part I, which requiresdisclosure of the names, businessaddress, and residential address of allthe persons covered by current Rule262. Instead, we are requiring onlynarrative disclosure in Part II of Form 1—A when the issuer has determined thata relevant party has a disclosable, butnot disqualifying, “bad actor” event.300We also are eliminating Item 3 ofcurrent Part I relating to affiliate sales,because we are eliminating the currentrestrictions on affiliate resales underRule 251(b).°’ Information about theamount of expected secondary sales andthe existence of affiliate sales in theoffering, however, will continue to bedisclosed in Item 4. Item 6 (Other

299 See discussion of Rule 262(a)(3) and (a)(5) inSection 11G. below.

300 See discussion in Section 11G. below.301 The primary purpose of Item 3 (Affiliate Sales)

in Part I of Form 1—A (2014) is to ensurecompliance with certain restrictions on affiliateresales under Rule 251(b). See discussion in SectionII.B.3. above.

Present or Proposed Offerings) and Item9 (Use of a Solicitation of InterestDocument) of current Part I will beincorporated into Item 4 (SummaryInformation Regarding the Offering andOther Current or Proposed Offerings).We also are eliminating Item 7(Marketing Arrangements) and Item 8(Relationship with Issuer of ExpertsNamed in Offering Statement) of currentPart I, as disclosure of this informationis required in Part II (Offering Circular).

Some of the technical changes fromthe proposed rules are non-substantiveprocedural revisions to the form that areneeded to conform the form with thetechnical requirements of EDGAR, whilethe others will, as suggested bycommenters, provide clarifications tothe terms and requirements of Part I.

We do not, however, believe that theadditional disclosure items suggested bysome commenters,302 such as theissuer’s Web site address and thejurisdiction of the issuer’s principalplace of business, are necessaryadditional disclosures in Part I of Form1—A. As proposed and adopted, Item 1(Issuer Information) of Part I requiresissuers to disclose the location of theirprincipal executive offices, while Item 1(Cover Page of Offering Circular) of PartII requires issuers to provide investorswith their Web site address, if the issuerhas a Web site. In light of these requireddisclosures, we do not believe that theadditional suggested disclosure itemsfor Part I are necessary or would provideinvestors with any additional relevantinformation about the issuer.Additionally, notwithstanding the viewof some commenters,303 we do notbelieve that the disclosure requirementsfor the application of Rule 262(Disqualification Provisions) in Item 3 toPart I of Form 1—A need to includedescriptions and addresses of personsthat trigger disqualification for severalreasons. An issuer that has adisqualified person involved in itsoffering will not be eligible to conducta Regulation A offering, issuers willhave to certify their compliance withRule 262, and, with the exception of theaddresses of covered persons, much ofthe requested disclosure, as it applies topersons that would have beenthsqualified but whose conductoccurred before effectiveness of the finalrules or have received a waiver fromdisqualification,304 will be required inPart II of the offering statement.305

302 NASAA Letter 2; WDFI Letter.°Id.304 Rule 262(b)(Il—(2).301 See paragraph (a)(2l to Part 11 of Form 1—A.

Additionally, underwriters, those receiving salescommissions and finders’ fees, promoters, counsel,



Therefore, as proposed and adopted, thefinal rules for Part I of Form 1—A nolonger require the disclosure of suchinformation.

Consistent with a commentreceived,306 we are making technicalamendments to the financial statementrequirements of Item 1 (IssuerInformation) of Part Ito clarify andrequire the use of certain industry-specific terminology and, whereverpossible, to use terminology that isconsistent with Regulation S—X andGAAP. These changes are designed tominimize potential confusion on thepart of issuers in the banking andinsurance industries that could resultfrom the use of more general financialaccounting terminology. We disagree,however, with the suggestion that weeliminate the financial statementsection.307 As we noted in the ProposingRelease, the disclosure of this type ofinformation will provide theCommission (and market participants)with more information about theRegulation A market as it develops touse as it considers potential changes tothe regulation in the future. We alsobelieve that the disclosure of thisinformation will provide relevant anduseful information about issuers andtheir offerings to investors and marketparticipants that will help to facilitateinformed investment decisions. We donot anticipate that the disclosure offinancial information in response toItem 1 to Part I of Form 1—A willmaterially alter the complianceobligations of issuers given that therequirements draw from disclosurealready required in the financialstatements included in the offeringcircular. Additionally, we are revisingItem 1 to require issuers to provide upto two email addresses to which theCommission’s staff may send commentletters relating to an offering statement,rather than making this optional asproposed. The email addresses,however, will no longer be disseminatedwith the filings. We believe this changewill result in faster reviews of offeringstatements by the Commission’s staff.308Finally, consistent with the concernsunderlying a comment we received, werecognize that the use of the term“publicly traded” in the outstanding

executive officers, directors, and significantsecurityholders, among others, must be identified inthe offering statement in most instances. See, e.g..Item 4 of Part I and Items 1, 10, and 11 of theOffering Circular, Part II of Form 1—A.

3°E&Y Letter.°Id.308 In the review of registered offerings the

Commission’s staff will call filers to obtain emailaddresses so as to issue comment letterselectronically. Depending on the responsiveness ofthe filer, this can be a time consuming process.

securities table of Item I may beconfusing in the context of a RegulationA offering.30 Accordingly, we haverevised Item 1 to only request the nameof the trading center or quotationmedium, if any, for outstandingsecurities.

Consistent with the views of severalcommenters,31° we are clarifying that inthe fee table included in Item 4 of PartI (Summary Information Regarding theOffering and Other Current or ProposedOfferings), auditor fees only need to bedisclosed when the issuer is providingaudited financial statements because,for example, an auditor might Dot beused for a Tier 1 offering.31’ This andsimilar items in the fee table could beleft blank if not applicable andresponses could be clarified in the textbox following the table.

As suggested by one commenter,312we are expanding the list ofjurisdictions in Item 5 (Jurisdiction inWhich Securities are to be Offered) sothat issuers can indicate the Canadianprovinces in which they intend toconduct their offerings.313

finally, in response to onecomment,314 we are clarifying, in thisrelease, that the scope of the term“affiliated issuer” in proposed Item 6 ofPart I is only meant to include affiliatesof the issuer that are issuing securitiesin the same offering for whichqualification is currently being soughtunder Regulation A. We believe thisclarification is necessary in the finalrules in order to avoid potentialconfusion among issuers as to the scopeof the definition, in light of the broaderdefinition of “affiliate” as it appears inSecurities Act Rule 405.315

b. Part II (Offering Circular)(1) Narrative Disclosure(a) Proposed Rules for NarrativeDisclosure

Part II (Offering Circular) in existingForm i—A provides issuers with threeoptions for their narrative disclosure:Model A, Model B, and Part I of FormS_1.316 We proposed to eliminate the

309 See E&Y Letter.310 See fri. 292 above.

Disclosure is only required in the fee table tothe extent applicable fees were incurred by theissuer in connection with the offering.

312Kap Tuttle Letter.313 Item 5 of Part I of proposed form 1—A did not

include Canadian provinces, despite Canadianissuers being eligible issuers. Item 5, as adopted,corrects the form for Canadian issuers or forofferings that contemplate offers or sales in Canada.

Paul Hastings Letter.315 Rule 405 defines ‘affiliate” to include, among

other things, persons controlling the issuer or undercommon control with the issuer. 17 CFR 230.405.

316 Non-corporate issuers are not permitted to useModel A.

Model A question-and-answer format asa disclosure option, to update and retainModel B as a disclosure option(renaming it “Offering Circular”), and tocontinue to permit issuers to rely onPart I of Form S—i to satisfy thedisclosure obligations of Part II of Form1—A.317

We further proposed to create newrequirements for audited financialstatements and for a section containingmanagement’s discussion and analysis(MD&A) of the issuer’s liquidity, capitalresources, and results of operations.318As proposed, issuers that have notgenerated revenue from operationsduring each of the three fiscal yearsimmediately before the filing of theoffering statement would be required todescribe their plan of operations for the12 months following qualification of theoffering statement, including astatement about whether, in the issuer’sopinion, it will be necessary to raiseadditional funds within the next sixmonths to implement the plan ofoperations.31°

Consistent with the treatment ofissuers in registered offerings, wefurther proposed to permit issuers toincorporate by reference into Part II ofForm 1—A certain items previouslysubmitted or filed on EDGAR, regardlessof whether they were provided pursuantto Regulation A disclosurerequirements. As proposed,incorporation by reference would belimited to documents publiclysubmitted or filed under Regulation Aand issuers would have to be subject tothe ongoing reporting obligations forTier 2 offerings.320 Issuers would berequired to describe the informationincorporated by reference, and includea separate hyperlink to the relevantdocument on EDGAR, which need notremain active after the filing of therelated offering statement.

(b) Comments on Proposed RulesSeveral commenters recommended

against the proposed elimination of theModel A disclosure format, and insteadrecommended that the Commissionretain an updated version of the

317 See Proposing Release, at Section II.C.3.See Proposing Release, at Section fl.C.3(b)(1).

319 See Item 9(c) of Offering Circular, Part II ofproposed Form 1—A.

320 Issuers following the Offering Circulardisclosure model would be permitted to incorporateby reference Items 2 through 14, whereas issuersfollowing the narrative disclosure in Part I of FormS—i would be permitted to incorporate by referenceItems 3 through 11 (other than Item life)) of PartI of Form S—i. See General instruction III toproposed Form 1—A. As with Model B, the itemnumbers in the Offering Circular format of proposedPart II of Form i—A and Part I of Form S—i do notalign.



format.321 Two of these commentersrecommended including a Model Adisclosure format that reflects the mostrecent version of NASAA’s Form U—7322 One commenter recommendedretaining existing Form 1—A with minorchanges until such time as theCommission and NASAA could developan improved form.323 Six commenters,however, suggested that theCommission eliminate Model A and theproposed Offering Circular disclosureformats and instead recommendedrequiring disclosure by reference toRegulation S—K (with reduceddisclosure requirements in someinstances).324 These commentersbelieved that such a change wouldincrease efficiency and comparability.One of these commenters wasconcerned that differences betweenItems 303 and 402 of Regulation S—Kand the comparable disclosurerequirements of the Offering Circularformat might cause confusion.325 Twocommenters recommended requiringREITs to incorporate certain of the itemscontained in Industry Guide 5 and FormS_11.326

Several commenters had specificrecommendations on disclosurerequirements. Four commentersrecommended that the Commission finda way to require more concise risk factordisclosure.32? One of these commentersrecommended possibly imposing a limiton the number of risk factors orguidance to avoid repetition andemphasizing that disclosure should notbe repeated throughout the offeringcircular.328 Two commentersrecommended expanding the dilutiondisclosure requirement in the OfferingCircular format’s Item 4,329 Asproposed, Item 4 only requiresdisclosure of any material disparitybetween the public offering price andthe effective cash cost to insiders overthe past year. These commentersrecommended removing the one yearrestriction. One commenterrecommended focusing the disclosurerequirements in the offering statementon valuation assessments and adiscussion of management’s

321 LetteT; Karr Tuttle Letter; NASAA Letter2; Verrill Dana Letter 1; WDFI Letter.

322 Kerr Tuttle Letter; Verrill Dana Letter 1.323NASA4 Letter 2.2Canaccord Letter; CFIRA Letter 1; E&Y Letter;

Ladd Letter 2 (recommending the change only tothe extent that the Commission believed it wouldincrease the speed of staff reviews); McCarter &English Letter; WR Hambrecht ÷ Co Letter.

325 E&Y Letter.26ABA BLS Letter; MoFo Letter.

327CfI Letter 1; MoFo Letter; SVB FinancialLetter; WR Hambrecht + Co Letter.

328WR Hsmbrecht + Co Letter.329NASP Letter 2; WDFI Letter.

expectations about the company’s futureperformance, including projections.330Another commenter recommendedrequiring disclosure of the names of“those holding more than 20% ofshares” and a description of theownership and capital structure,including descriptions of how theexercise of rights by principalshareowners could negatively affect thepurchasers of shares being offered.33’Two commenters recommendedreducing and clarifying the disclosureobligations for executive compensationand management’s discussion andanalysis for smaller offerings.332 Onecommenter recommended requiringdisclosure regarding the existence of acode of ethics and corporate governanceprinciples in a manner that wouldencourage issuers to adopt internalcontrols.333

(c) final Rules for Narrative DisclosureWith the exception of clarifying

changes, certain additional scaleddisclosure items applicable to Tier 1offerings, and additional guidance toissuers designed to streamlinedisclosure, we are adopting final rulesfor narrative disclosure in Form 1—Asubstantially as proposed. As adopted,Offering Circular disclosure in Part II ofform 1—A will cover:

• Basic information about the issuerand the offering, includingidentification of any underwriters anddisclosure of any underwritingdiscounts and commissions (Item 1:Cover Page of Offering Circular);

• Table of Contents (Item 2);• The most significant factors that

make the offering speculative orsubstantially risky (Item 3: Summaryand Risk Factors);

• Material disparities between thepublic offering price and the effectivecash costs for shares acquired byinsiders during the past year (Item 4:Dilution);

30WR Hamhrecht ÷ Co Letter (indicating that,absent this requirement, such information would beshared orally by management or research analystswith only the biggest investors).

CFA Institute Letter.332 Letter from Rutheford B. Campbell, Jr., Spears-

Gilbert Professor of Law, University of Kentucky,March 5, 2014 (“Campbell Letter”); MoFo Letter(recommending that the Commission reduce andclarify the disclosure obligations for executivecompensation and management’s discussion andanalysis by eliminating the need to repeatinformation already required to be included in thefinancial statements, reducing the number of yearsof business experience disclosure required to beincluded and clarifying the instructions of theexecutive compensation section).

Ladd Letter 2 (referring to PCAOB AU 325 and9325).

3 financial statements disclosure requirementsfor Part F/S of Form 1—A are discussed in SectionlI.C.3.b(2)fc). below.

• Plan of distribution for the offeringand disclosure regarding sellingsecurityholders (Item 5: Plan ofDistribution and SellingSecurityholders);

• Use of proceeds (Item 6: Use ofProceeds to Issuer);

• Business operations of the issuer forthe prior three fiscal years (or, if inexistence for less than three years, sinceinception) (Item 7: Description ofBusiness);

• Material physical properties (Item8: Description of Property);

• Discussion and analysis of theissuer’s liquidity and capital resourcesand results of operations through theeyes of management covering the twomost recently completed fiscal yearsand interim periods, if required; and, forissuers that have not received revenuefrom operations during each of the threefiscal years immediately before thefiling of the offering statement (or sinceinception, whichever is shorter), theplan of operations for the 12 monthsfollowing qualification of the offeringstatement, including a statement aboutwhether the issuer anticipates that itwill be necessary to raise additionalfunds within the next six months (Item9: Management’s Discussion andAnalysis of Financial Condition andResults of Operations);

• Identification of directors, executiveofficers and significant employees witha discussion of any family relationshipswithin that group, business experienceduring the past five years, andinvolvement in certain legalproceedings during the past five years(Item 10: Directors, Executive Officersand Significant Employees);

• Group-level executivecompensation disclosure for the mostrecent fiscal year for the three highestpaid executive officers or directors withTier 2 requiring individual disclosure ofthe three highest paid executive officersor directors (Item 11: Compensation ofDirectors and Executive Officers);

• Beneficial ownership of votingsecurities by executive officers,directors, and 10% owners (Item 12:Security Ownership of Management andCertain Securityholders);

• Transactions with related persons,promoters and certain control persons(Item 13: Interest of Management andOthers in Certain Transactions);

• The material terms of the securitiesbeing offered (Item 14: Securities BeingOffered); and

• Any events that would havetriggered disqualification of the offeringunder Rule 262 if the issuer could not



rely on the provisions in Rule262(b)(1).

The final rules eliminate Model A asa disclosure format for Regulation Aofferings, as proposed. While somecommenters suggested that theCommission should preserve Model Aas an additional disclosure format forPart II of Form 1—A or update existingModel A with NASAA’s more recentForm U—7, we are not persuaded that aquestion-and-answer format should beretained in the final rules. As we notedin the Proposing Release, the Model Adisclosure format has historically beenused less frequently, and resulted inless-uniform disclosure and a longertime to qualification than the Model Bdisclosure format.336 We do not believethat the use of Form U—7, which islargely similar to Model A and is alsoin a question-and-answer format, willalter this result. While the question-and-answer disclosure format does provideissuers with additional flexibility, webelieve that the Offering Circulardisclosure format (formerly calledModel B) and Part I of Forms S—i or S—11 provide issuers with sufficientflexibility in choosing their disclosureformat without any of the potentialdelays or uniform disclosure issuesassociated with Model A, eithercurrently or even if it is updated withForm U—7. We are further concernedthat a question-and-answer format maynot best serve the interests of investorsin Regulation A offerings by providingthem with less-uniform disclosure in apotentially unfamiliar format.Additionally, we are concerned that aquestion-and-answer format mayincorrectly lead issuers to believe that,despite the guidance contained in theform itself, less complete disclosure isrequired under this format, therebycausing unnecessary delays in thequalification process. Lastly, andparticularly with respect to Tier 2offerings, we do not believe that aquestion-and-answer format isappropriate for issuers and investors inlarger-sized offerings that generallybenefit from disclosure that iscomparable between offerings in formatand information disclosed. For similarreasons, we do not believe that thisformat is appropriate in offerings of anysize by issuers that seek to fosterpotential trading in the secondarymarkets.337

335 See discussion of the final disqualificationprovisions in Section fiG, below. The final rulesrequire issuers to provide this “had actor”disclosure even if it elects to follow the Part I ofForm S—i disclosure format.

336 See Proposing Release, at Section fl.C.3.337 See Section fi.E. below for a discussion of the

final rules for ongoing reporting.

As proposed, the final rules willrequire issuers to provide disclosure inPart II of Form 1—A that follows theOffering Circular or Part I of Form S—idisclosure format. Additionally, weagree with commenters that certainadditional disclosure requirements maybe appropriate for offerings by REITsand similar issuers. The final rules,therefore, also permit issuers to follow,in addition to the Offering Circular andPart I of Form S—i formats, the formdisclosure requirements of Part I ofForm An issuer may, however,only use Part I of Form S—li if thesecurities are eligible to be registered onthat form. As proposed and adoptedwith respect to disclosure under Part Iof form S—i, issuers following Part I ofForm S—il may follow smaller reportingcompany narrative disclosurerequirements if they meet the definitionof that term in Securities Act Rule405.°

Contrary to the suggestions of somecommenters, we are not adopting rulesthat would limit the number of riskfactors disclosed. While we appreciatethe concern that certain issuers andtheir advisors may take an overlycautious approach to the application ofour disclosure requirements resulting innumerous risk disclosures, the decisionas to the appropriate mix of informationthat should be disclosed to investorsmust be based on the particular factsand circumstances of each company. Wedo not believe that a limit on risk factordisclosure is an appropriate substitutefor the judgments of issuers and theiradvisors. A form-based limitation on thenumber of risk factors, beyond theguidance in Item 3 of Part II, could leadto incomplete disclosure that may placeinvestors at a higher risk of potentialloss and issuers at a higher risk forpotential litigation if it results inappropriate risk factors being excluded.

Further, we believe that certain othercommenter concerns and suggestions asto specific narrative disclosures arealready appropriately addressed by thefinal rules. For example, one commentersuggested that we require disclosure ofthe names of those holding more than20% beneficial ownership of the issuerand a description of the issuer’sownership and capital structure,including descriptions of the exercise of

338As proposed, issuers must choose one formatto follow for the offering circular and may notcombine items from different formats. See GeneralInstruction II to proposed and final Form 1—A. Inorder to avoid confusion and to facilitate the reviewof offering circulars by investors and theCommission’s staff, the final rules will also requireissuers to irtdicate on the offering circular coverpage which format they are following. See PartII(a)(1) of Form 1—A.

17 CFR 230.405.

rights of principal shareholders.3° Thefinal rules substantially address thesetopics. Item 12 of the Offering Circular,as proposed and adopted, requiresdisclosure relating to more than 10%beneficial ownership and Item 14,which is adopted as proposed, requiresdisclosure of the terms of all classes ofoutstanding capital stock.

As adopted, the Offering Circularincludes disclosure based on disclosureguidelines set forth in the Securities ActIndustry Guides as well as guidanceapplicable to limited partnerships andlimited liability companies.34’ Assuggested by commenters,342 in order tocreate more flexibility in disclosurematters for smaller issuers, we areadding a materiality threshold fordisclosure as it relates to time and dollarexpenditures on research anddevelopment.343 Additionally, the finalrules require issuers to provide financialstatements, which in the case of Tier 2offerings must be authted,34 as well asa section on management’s discussionand analysis (MI)&A) of the issuer’sliquidity, capital resources, and resultsof operations.345 We are amending theMD&A disclosure requirements in Item9 to align more closely with thelanguage in Regulation S—K that appliesto domestic registrants 346 and smallerreporting companies.347 Consistencywith Regulation S—K in this regard mayassist companies with compliance withthe rules for registered offerings to theextent Tier 2 issuers eventually becomeExchange Act reporting companies,while also making sure that RegulationA issuers do not have a greaterdisclosure obligation than registered

340CFA Institute Letter.341 See Item 7(c)—(d) of Offering Circular, Part II

of Form 1—A; see also Rel. No. 33—6900 (June 17,1991) [56 FR 28979] (setting forth the Commission’sview on the disclosure requirements for limitedpartnerships).

342CFIF Letter 1; MoFo Letter; WR Hambrecht+ Co Letter.

‘1 Item 7(a)(1)(iii) of Offering Circular, Part II ofForm 1—A.

344 See discussion in Section fl.C.3.bf2)(c). below.See Item 9 of Offering Circular, Part II of form

1-A.346 Item 9(b)(i) of Offering Circular. Part II of

proposed Form 1—A is amended to track moreclosely the language and requirements of domesticissuers, as opposed to foreign private issuers. Asproposed, the language more closely followed therequirements contained in Form 20—F for foreignprivate issuers.

347We are eliminating proposed Item 9(b)(2)—(3)of Offering Circular, Part II of Form 1—A. Asproposed, these disclosures would have increasedthe disclosure obligations of Regulation A issuers incomparison to those required of smaller reportingcompanies under Item 305 of Regulation S—K. 17CFR 229.305.



domestic issuers 348 Further, consistentwith the proposed rules, issuers thathave not generated revenue fromoperations during each of the threefiscal years immediately before thefiling of the offering statement (or sinceinception, whichever is shorter) will berequired to describe their plan ofoperations for the 12 months followingqualification of the offeringstatement.349 For companies that havebeen in existence for less than threeyears, the final rules clarify that thisdisclosure requirement applies to themsince inception.350

The changes to the Offering Circularformat adopted today will result inOffering Circular disclosure,particularly for Tier 2 offerings, moreakin to what is required of smallerreporting companies in a prospectus fora registered offering. For example, thefinal rules require issuers in both Tier1 and Tier 2 offerings to disclosebeneficial ownership of their votingsecurities, as opposed to recordownership of voting and non-votingsecurities.35’ With respect totransactions with related persons,promoters, and certain control personsin Tier 2 offerings, issuers will no longerbe required to disclose transactions inexcess of $50,000 in the prior two years(or similar transactions currentlycontemplated), but rather must followthe requirements for smaller reportingcompany disclosure of transactionsduring the prior two fiscal years thatexceed the lesser of $120,000 or 1% ofthe average total assets at year end forthe last two completed fiscal years.352We originally proposed to apply thisthreshold to Tier 1 offerings also, butbelieve that the 1% of average totalassets threshold could result in a lowerdisclosure threshold for smaller issuersthan was otherwise required of suchissuers under the existing rules. Thefinal rules therefore preserve the relatedparty transaction disclosurerequirements of Regulation A, as theyexisted before the adoption of final rulestoday, for Tier 1 offerings so that issuersin such offerings are only required to

348 See also discussion of the final rules forsimplifying Exchange Act registration of Tier 2issuers in Section I1.E.3.c. below.

Item 9(c) of Offering Circular, Part II of Form1—A.

°Id.Item 12 of Offering Circular, Part II of Form

1-A.352 Item 13 of Offering Circular, Part II of Form

1—A. As adopted, Tier 2 issuers that have more than$5 million in average total assets at year end for thelast two completed fiscal years would be requiredto disclose related party transactions at a higherthreshold (i.e., 1% or more) than was previouslyrequired under Regulation A, which required thedisclosure of transactions in excess of $50,000 inthe prior two years.

disclose such transactions in excess of$50,000 in the prior two years (orsimilar transactions currentlycontemplated).353

In adaition to preserving the relatedparty transaction disclosure thresholdfor Tier 1 offerings, we are adopting achange applicable to Tier 1 that willprovide an additional scaled disclosureoption for issuers in the OfferingCircular. This change is consistent withthe general views of a number ofcommenters that urged the Commissionto consider additional potential scalingfor smaller issuers generally and Tier 1offerings in particular.34 The final rulesalter the format of, but not the ultimateaggregate amount of informationrequired to be disclosed in, theproposed executive compensationdisclosure requirements for Tier 1offerings. Instead of providing executivecompensation data on an individualbasis for the three highest paid officersor directors and on a group basis for alldirectors, as was proposed for both Tier1 and Tier 2, issuers in Tier I offeringswill instead be required to disclose onlygroup-level compensation data as itapplies to the three highest paidexecutives or directors and all directorsas a collective group, including thenumber of persons comprising suchgroup, covering the period of theissuer’s last completed fiscal year.355 Inthis regard, the final rules for Tier 1offerings will continue to require thedisclosure of important compensationdata to investors, but on an aggregate,rather than individual, basis. The group-level disclosure format for the highestpaid executives and all directors shouldhelp smaller issuers avoid some of theharm that could follow compensationdisclosure of mdlvidual executives ordirectors to the market and competitors,especially when disclosure of suchinformation would not necessarily berequired in the context of a privateplacement or other exempt offering.356Further, the additional requirement todisclose the total number of personscomprising any group for which group

354 See, e.g., Campbell Letter; MoFo Letter.355 See Item 11 of Offering Circular, Part II of

Form 1—A. The number of persons comprising thedirector-level group data is also required of issuersproviding compensation data under Tier 2.

356 For example, there are no rule-baseddisclosure requirements for private placementspursuant to Rule 506 of Regulation 0, 17 CFR230.500 et seq., when the issuer only sells toaccredited investors. Contrary to the requirementsof Regulation 0, we believe mandatedcompensation (and other) disclosure is appropriatein the context of a public offering under RegulationA. Additionally, however, we believe that the finaldisclosure rules for such information areappropriately tailored to provide information toinvestors.

level data is required to be disclosedwill preserve the ability of investors inTier 1 offerings to determine the averagecompensation paid to all persons withinthe group.357 Consistent with thesuggestions of some commenters,358 webelieve that this change to the final ruleswill assist smaller issuers with moreappropriately tailored executivecompensation disclosure requirementsand will provide investors with usefulinformation.

We do not, however, believe thatfurther scaling of smaller issuers’ MD&Ais necessary under the final rules. As wenoted in the Proposing Release, whilethe final rules provide issuers with moredetailed instructions on MD&Adisclosure, similar disclosure is alreadycalled for under existingrequirements.359 The final MD&Arequirements clarify existingrequirements and will likely saveissuers time by providing more expressguidance regarding the type ofinformation and analysis that should beincluded. We believe the clearerrequirements will lead to improvedMD&A disclosure, which will provideinvestors with better visibility intomanagement’s perspective on theissuer’s financial condition andoperations. The final provisions forMD&A disclosure in the OfferingCircular, however, are not as extensiveas those required under Item 303 ofRegulation S—K.36° As proposed, thefinal Offering Circular format includesdetailed guidance and requirementssimilar to Item 303 with respect toliquidity, capital resources, and resultsof operations, including the mostsignificant trend information,36’ butdoes not separately call for disclosure ofoff-balance sheet arrangements or a tableof contractual obligations.362 Similar to

This requirement is a change to the disclosurerequirements of group-level data in both Tiers.Although this information would have beenascertainable under Tier 2 by comparing the group-level disclosure of director compensation to thenumber of directors disclosed pursuant to Item 10of the Offering Circular, we believe the change willfacilitate investors’ calculations of average directorcompensation without significantly increasing theburden on Tier 2 issuers.

Campbell Letter; Mofo Letter.359MD&A disclosure is specifically required by

Model A. Model B calls for similar information inItem 6, which requires disclosure of thecharacteristics of the issuer’s operations or industrythat may have a material impact upon the issuer’sfuture financial performance. Item 6 also requiresdisclosure of the issuer’s plan of operations andshort-term liquidity if the issuer has not receivedrevenue from operations during each of the threefiscal years immediately prior to filing the offeringstatement.

36017 CFR 229.303.361 17 CFR 303(a)(1)—(3l. Cf Form 20—F, at Item

5.

362An issuer may, however, be required todisclose such information during the course of the



smaller reporting companies inregistered offerings, Regulation Aissuers are required to discloseinformation about the issuer’s results ofoperations for the two most recentlycompleted fiscal years and interimperiods, when applicable.363

Except as noted above, the updates tothe Offering Circular disclosurerequirements will not result in anoverall increase in an issuer’s disclosureobligations. For example, as mentionedabove, certain issuers will have a higherthreshold for reporting related partytransactions than would havepreviously been required underRegulation A. Additionally, Tier 1issuers (which will likely be smallercompanies) will, in comparison to theproposed rules, benefit from furtherscaling of related party transactions andcompensation-related disclosures.Further, as proposed, all issuers will bepermitted to provide more streamlineddisclosure of dilutive transactions withinsiders by no longer being required topresent a dilution table based on the nettangible book value per share of theissuer’s securities.364 While we disagreewith commenters that suggested weshould expand disclosure provisionsrelated to dilution,365 the final rules,which reduce the disclosure time periodfrom three years to one year, areconsistent with their view that thedisclosure of this information shouldnot depend on when such shares wereacquired. We do not believe thatinformation regarding dilution coveringmore than the prior year is necessary forthe smaller issuers likely to conductRegulation A offerings, nor do webelieve that a reduction in the requireddisclosure from three years to one year,as proposed and adopted, willnegatively affect investor protection.Additionally, the final provisions forMD&A disclosure clarify existingrequirements and should benefit issuersby providing more express guidanceregarding the type of information andanalysis that should be included,

qualification process, if material to anunderstanding of the issuer’s financial condition.

363 When management’s discussion and analysisof the financial condition and results of operationsis provided for interim period financial statements,any material change in financial condition from theend of the preceding fiscal year to the date of themost recent interim balance sheet should bediscussed. Also, any material changes in results ofoperations with respect to the most recent fiscalyear-to-date period for which an income statementis provided and the corresponding year-to-dateperiod of the preceding fiscal year shall bediscussed. See Instruction 3 to Item 9(a) of theOffering Circular, Part II of Form 1—A.

364 See Item 4 (Dilution) of the Offering Circular,Part II of Form 1—A.

365 See NASAA Letter 2, at fn. 50; WOFI Letter,at 9.

including instructions about disclosureof operating results. We believe thatthese clarifications should also lead toimproved MD&A disclosure, which willprovide investors with better visibilityinto management’s perspective on theissuer’s financial condition and resultsof operations. Investors, particularly inTier 2 offerings, will also benefit fromdisclosure that is more consistent acrossissuers in both registered offerings andRegulation A offerings.

We are making one change to thedisclosure requirements of Item 6 (Useof Proceeds) in the final rules. Asproposed, issuers were required todisclose if any material amount of otherfunds are to be used in conjunction withthe proceeds raised in the offering. If so,an issuer would be required to state theamounts and sources of such otherfluids. The final rules include theseproposed provisions, but add arequirement that the issuer furtherprovide disclosure about whether suchother funds are firm or contingent.While we did not receive any commentspecifically addressing this issue, whereapplicable, this type of informationwould generally be required to bedisclosed as part of the staff review andcomment process before qualification.We believe an express requirement inthe final rules will ultimately saveissuers time in the qualification processand therefore are including languageaddressing this issue in the finalrules.366

For clarity, we are moving therequirements to furnish certainsupplemental information found in Item7 (Business Description) of Part II toForm 1—A to General Instruction IV(Supplemental Information) to Form 1—A, where similar requirements arefound. We believe that providing theseinstructions in one place will helpissuers understand and comply with theprocess for furnishing supplementalinformation to the Commission. Theprocess for furnishing supplementalinformation to the Commissionpursuant to Form 1—A is similar to thetreatment of such information inregistered offerings.367 Additionally,since we believe it is important for theConunission to be aware of theexistence—rather than the nonexistence—of such reports, the finalrules no longer require an issuer to

366 See Instruction 5 to Item 6 (Use of Proceeds)of Part II of Form 1—A.

367fu this regard, we have also clarified inGeneral Instruction W that supplementalinformation provided to the Commission may bereturned in certain circumstances and will behandled by the Commission in a shnilar manner tosupplemental information provided in connectionwith registered offerings.

inform the Commission if no suchreport has been prepared. Item 7 isfurther revised to clarify that issuersmust only disclose distinctive or specialcharacteristics of the issuer’s operationor industry that are reasonably likely tohave a material impact on its futurefinancial performance.368

The final rules also clarify in Item 5(Plan of Distribution and SellingSecurityholders) the calculation ofselling securityholder ownership priorto an offering, which we believe willfacilitate compliance with, andcalculations pursuant to, thisrequirement. Additionally, in order toavoid potential confusion as to thescope of Items 11 and 13 to Part II ofForm 1—A, the final rules make clearthat issuers are required to providedisclosure for “executive officers”rather than “officers.” 369 Contrary tothe suggestion of one commenter,37° wedo not believe that requiring disclosureregarding the existence of a code ofethics and corporate governanceprinciples should be a requireddisclosure item for the types of issuerslikely to conduct Regulation A offerings.While nothing in Part II of Form 1—Awould prevent an issuer from providingmore disclosure than is otherwiserequired in the form itself, we do notbelieve it would be appropriate tomandate this type of disclosure for allissuers because we anticipate thatissuers of Regulation A securities willgenerally be smaller companies withless complex organizationalstructures.37’ We further believe that thedisclosure requirements of Part II ofForm 1—A will provide investors withthe information they need to adequatelyevaluate an issuer’s business andsecurities.

As proposed, the final rules permitissuers to incorporate by reference intoPart II of Form 1—A certain itemspreviously submitted or filed onEDGAR. In a change from the proposedrules, issuers will be permitted toincorporate by reference any documentspublicly submitted or filed on EDGAR,as opposed to being limited todocuments submitted or filed pursuantto Regulation A. We believe that this

365 The language in proposed Item 7 to Part U ofForm 1—A indicated that issuers had to disclosecharacteristics that “may” have a material impacton its future financial performance. We believe thisclarifying change in the final rules will helpfacilitate compliance by smaller issuers.

366 The language in proposed Items 11 and 13 toPart II of Form 1—A indicated that issuers had todisclose information regarding directors andofficers. We believe the clarifying language willhelp smaller issuers comply with the final rules.

37eLadd Letter 2 (referring to PCAOB AU 325 and9325).

See fn. 93 above and Section fflC.3. below.



change will continue to facilitate theprovision of required information toinvestors, while taking a consistentapproach to information previouslyprovided to the Commission andpublicly available on EDGAR. Issuersfollowing the Offering Circulardisclosure model will be permitted toincorporate by reference into Items 2through 14; issilers following thenarrative disclosure in Part I of Form 5—1 will be permitted to incorporate byreference into Items 3 through 11 (otherthan Item 11(e)) of Part I of Form S—i;issuers following the narrativedisclosure in Part I of Form S—il willbe permitted to incorporate by referenceinto Items 3 through 26, Item 28, andItem 30 of Part I of Form S_11.372 Thefinal rules require issuers to describe theinformation incorporated by reference,and include a separate hyperlink to therelevant document on EDGAR, whichneed not remain active after the filing ofthe related offering statement.Additionally, Form 1—A encouragesissuers to cross-reference items withinthe form, where applicable.3 Further,in order to avoid incorporation byreference to stale information withoutrequiring the latest version of thedocument to be filed, Form 1—Aindicates that, if any substantivemodification has occurred in the text ofany document incorporated by referencesince such document was filed, theissuer must file with the reference astatement containing the text and dateof such modification.374

372 See General Instruction HI to Form 1—A. Since,as proposed, the financial statements required byPart F/S would apply to those following the FormS—i format, rather than Item 11(e), we haveremoved the reference to that item in GeneralInstruction III for clarity. Although, as proposed,ttems 11(f) and (g) are also not required for thosefollowing the Form S—i format, we continue tospecifically allow for cross-referencing andincorporation by reference in those items for thosevoluntarily choosing to provide such disclosure. Aswith Model B, the item numbers in the OfferingCircular format of Part II of Form 1—A and Part Iof Form S—i do not align.

Id. Issuers may, for example, add a cross-reference to disclosure found in the financialstatements. However, they may not incorporate byreference or add a cross-reference within thefinancial statements to disclosures found elsewhere.See General Instruction HI to Form i—A, which doesnot allow for incorporation by reference in Part F!S.

374Cf. Securities Act Rule 411(c) and ExchangeAct Rule 12b—32 (providing a similar requirementwhen incorporating exhibits by reference in filingsunder the Securities Act and Exchange Act).

(2) Financial Statements

(a) Proposed Rules for FinancialStatements

Part F/S of Form 1—A currentlyrequires issuers in Regulation Aofferings to provide the followingfinancial statements prepared inaccordance with U.S. GAAP:37°

A balance sheet as of a date within90 days before filing the offeringstatement (or as of an earlier date, notmore than six months before filing, ifthe Commission approves upon ashowing of good cause) but, for filingsmade more than 90 days after the endof the issuer’s most recent fiscal year,the balance sheet must be dated as ofthe end of the fiscal year;

• statements of income, cash flows,and stockholders’ equity for each of thetwo fiscal years preceding the date ofthe most recent balance sheet, and forany interim period between the end ofthe most recent fiscal year and the dateof the most recent balance sheet;

• financial statements of significantacquired or to be acquired businesses;and

• pro forma information relating tosignificant business combinations.The required financial statements maybe unaudited unless the issuer hasalready obtained an audit for anotherpurpose.377

We proposed to generally maintainthe existing financial statementrequirements of current Part F/S ofForm i—A for Tier 1 offerings, whilerequiring Tier 2 issuers to file auditedfinancial statements.378 We proposed torequire all issuers to file balance sheetsas of the two most recently completedfiscal year ends (or for such shorter timethat they have been in existence),instead of the current requirement to filea balance sheet as of only the mostrecently completed fiscal year end. Asproposed, financial statements for U.S.-domiciled issuers would be required tobe prepared in accordance with U.S.GAAP. Additionally, however, weproposed to permit Canadian issuers toprepare financial statements inaccordance with either U.S. GAAP orInternational Financial Reporting

The requirements also apply to the issuer’spredecessors or any business to which the issuer isa successor.

376 See Form 1—A, Part F/S (2014).377 The issuer would be considered to have

audited financial statements if the qualificationsand reports of the auditor meet the requirements ofArticle 2 of Regulation S—X (17 CFR 210.1 et seq.)and the audit was conducted in accordance withU.S. GAAS or the standards of the PCAOB. Theauditor is not required to be registered with thePCAOB.

37 paragraph (c) of Part F/S of proposed Form1-A.

Standards (IfRS) as issued by theInternational Accounting StandardsBoard (IASB).37°

As proposed, issuers conducting Tier1 offerings would be required to followthe requirements for the form andcontent of their financial statements setout in Part f/S, rather than therequirements in Regulation S—X. Incertain less common circumstances,however, such as for an acquiredbusiness or subsidiary guarantors, PartF/S would direct issuers conductingTier 1 offerings to comply with certainportions of Regulation S—X, whichprovides guidance on the financialstatements required for entities otherthan the issuer.38°

For all Tier 2 offerings, the proposedrules would require issuers to follow thefinancial statement requirements ofArticle 8 of Regulation S—X, as if theissuer conducting a Tier 2 offering werea smaller reporting company, unlessotherwise noted in Part F/S. Thisrequirement would include anyfinancial information with respect toacquired businesses required by Rule 8—04 and 8—05 of Regulation S_X.381

As proposed, issuers conducting Tier2 offerings would be required to havetheir financial statements audited. Aswith Tier I offerings, the auditor offinancial statements would need to beindependent under Rule 2—01 ofRegulation S—X and must comply withthe other requirements of Article 2 ofRegulation S—X, but need not bePCAOB-registered.382 Unlike Tier I

If the proposed financial statements complywith IFRS as issued by the IASB, such compliancemust be unreservedly and explicitly stated in thenotes to the financial statements and the auditor’sreport must include an opinion on whether thefinancial statements comply with IFRS as issued bythe IASB. See General Rule (aK2) to Part F/S ofproposed Form i—A. Cf. Item 17(c) of Form 20—F.

380We proposed to update the requirements forfinancial statements of businesses acquired or to beacquired in Part F/S to refer to the requirements ofRule 8—04 of Regulation S—X. We also proposed toprovide specific references to the relevantprovisions of Regulation S—X regarding therequirements for financial statements of guarantorsand the issuers of guaranteed securities (Rule 3—10of Regulation S—Xl, financial statements of affiliateswhose securities collateralize an issuance ofsecurities (Rule 3—16 of Regulation S—X), andfinancial statements provided in connection withoil and gas producing activities (Rule 4—10 ofRegulation S—X). As proposed, the financialstatements provided in these circumstances wouldonly be required to be audited to the extent theissuer had already obtained an audit of its financialstatements for other purposes.

3’ Tier 2 issuers would, however, followparagraph (a)(3) of Part F/S of proposed Form 1—A with respect to the age of the financial statementsand the periods to be presented. In Tier 2 offerings,the form and contents of financial statements forother entities follow the requirements of Article 8of Regulation S—X.

382 See Part F/S of proposed Form 1—A(referencing Article 2 of Regulation S—X, 17 CFR210.2—01 et seq.).



issuers, issuers conducting Tier 2offerings would be required to providefinancial statements that are audited inaccordance with the standards issued bythe PCAOB.

Additionally, we proposed to updatethe form 1—A financial statementrequirements to be consistent with theproposed timetable for ongoingreporting.383 Under existing RegulationA, issuers are required to prepare abalance sheet as of a date not more than90 days before filing the offeringstatement, or not more than six monthsbefore filing if approved by theCommission upon a showing of goodcause.384 In practice, issuers oftenreceive a six-month accommodation. Ifthe financial statements are filed morethan 90 days after the end of the issuer’smost recently completed fiscal year, thefinancial statements must include thatfiscal year.385

We proposed to extend thepermissible age of financial statementsin Form 1—A to nine months, in orderto permit the provision of financialstatements that are updated on atimetable consistent with our proposedrequirement for semiannual interimreporting.386 We also proposed to add anew limitation on the age of financialstatements at qualification, under whichan offering statement could not bequalified if the date of the balance sheetincluded under Part F/S were more thannine months before the date ofqualification.387 For filings made morethan three months after the end of theissuer’s most recent fiscal year, thebalance sheet would be required to bedated as of the end of the most recentfiscal year.388 For filings made morethan nine months after the end of theissuer’s most recent fiscal year, thebalance sheet would be required to bedated no earlier than as of six monthsafter the end of the most recent fiscalyear.389 If interim financial statementsare required, they would be required to

383 The rules for ongoing reporting are discussedin Section lIE, below.

form 1—A, Part F/S (2014].3851d386 This age of financial statements requirement is

also consistent with the treatment of foreign privateissuers in the context of registered offerings. SeeDivision of Corporation Finance’s FinancialReporting Manual, at 6620, availoble ot: http://www.sec.gov/divisions/corpfin/cffinonciolreportingmanual.pdf#topic6.

387 Form 1—A currently does not expressly limitthe age of financial statements at qualification. Inpractice, however, Commission staff requiresissuers to update financial statements beforequalification to the extent such financial statementsno longer satisfy Form 1—A’s requirements for theage of financial statements at the time of filing.

388 See paragraph (a)(3)(i) to Part F/S of proposedForm 1—A.

cover a period of at least six months.39°In the Proposing Release, we noted thatrequiring issuers to file interim financialstatements no older than nine monthsand covering a minimum of six monthswould have the beneficial effect ofeliminating what could otherwise be arequirement for certain issuers toprovide quarterly interim financialstatements during the qualificationprocess and would be consistent withthe timing of our proposed ongoingreporting requirements.39’ We proposedto generally maintain the timingrequirement of existing Form 1—Aconcerning the date after which anissuer must provide financial statementsdated as of the most recently completedfiscal year, but to change the intervalfrom 90 calendar days to threemonths.392 While not proposed, weadditionally solicited comment onwhether Tier 2 issuers should berequired to submit financial statementsin interactive data format using theeXtensible Business Reporting Language(XBRL).

(b) Comments on Proposed Rules

We received numerous detailedsuggestions from commenters on ourproposed financial statementrequirements for Part F/S of Form 1—A.Commenters were generally supportiveof the proposed rules, but also raisedconcerns as to the effect some of theproposed requirements for audits in Tier2 offerings could have on issuers andrecommended clarifying revisions thatwould help to make the financialstatements more consistent in somerespects with those required inregistered offerings, while alsoeliminating potentially confusing orinconsistent terminology.

Commenters generally supported theproposed increase to two years ofbalance sheets. One commenter notedthat the Commission’s proposal torequire two years of balance sheets wasappropriate, particularly in light of theexisting requirement to providestatements of income, cash flows andstockholders’ equity for two years.394Another commeilter, however, arguedagainst two years of balance sheets forTier 1 issuers instead of the one yearrequired under existing Regulation A.395

390 See paragraph (a)f3)(iv) to Part F/S ofproposed Form 1—A.

See discussion in Section lIE.;, below.See paragraph (a)(3)(i) to Part F/S of proposed

Form 1—A.393 See, e.g., CFA Institute Letter; ABA BLS Letter.3ABA BLS Letter (noting that in light of the

existing requirements, the proposed change did notseem unduly burdensome].

Campbell Letter.

While commenters generallyapproved of the proposed rules notrequiring audits for Tier 1 issuers,396many recommended making changes tothe proposed auditing requirements forthe financial statements included in anoffering.397 One commenterrecommended not requiring auditedfinancial statements until after the firstyear of operations as a “public startupcompany” or not at all for companiesthat are pre-revenue or that have paid-in capital, assets and revenues below aspecified threshold.398 Manycommenters recommended allowingTier 1 issuers to designate financialstatements as “audited” if the auditorwas only independent in accordancewith the rules of the MCPA and not inaccordance with the Commission’sauditor independence rules.° Thesecommenters noted that the proposedrequirements for financial statementsonly to qualify as “audited” if theauditor complies with the independencestandards of Article 2 of Regulation 5—X, as opposed to the independencestandards of the AICPA, may increasecosts to smaller issuers due to theincreased likelihood that an issuerwould need to have their financialstatements audited a second time by anauditor who was independent underRule 2—01 of Regulation S—X. Onecommenter requested clarification ofwhether a Tier 1 issuer couldvoluntarily provide an audit opinion onits financial statements that wasobtained for other purposes if theauditor complied with U.S. GAAS,including AICPA independencestandards, but not with theCommission’s independence rules.400Several commenters recommendedrequiring Tier 1 issuers that provideunaudited financial statements to labelthem as unaudited.40’

Many commenters recommendedallowing financial statements in Tier 2offerings to be audited in accordance

396 See, e.g., CFA Institute Letter; ABA BLS Letter;Campbell Letter.

ABA BLS Letter; BOO Letter; CanaccordLetter; CAQ Letter; CFA Letter; CFIRA Letter 2;Deloitte Letter; E&Y Letter; Letter from KPMG LLP,March 24, 2014 (“KPMG Letter”); Letter fromMcGladrey LLP (“McGladrey Letter”); MoFo Letter;WOC Letter; WR Hambrecht + Co Letter.

398 Letter from Jason Coombs, Co-Founder andCEO, Public Startup Company, Inc., March 25, 2014(“Public Startup Co. Letter 3”) (suggesthig threetiers, where at least the first two would not requireaudited financial statements); Public Startup Co.Letter 6.

Letter; CAQ Letter; Deloitte Letter; E&YLetter; KPMG Letter; Mcflladrey Letter.

4°°CAQ Letter.401 CAQ Letter (recommending that such issuers

disclose that the financial statements have not beensubject to an audit or review by an independentaccountant); E&Y Letter; KPMG Letter.



with either PCAOB standards or U.S.GAAS.402 One commenter limited itsrecommendation to smaller Tier 2issuers and conditioned thisrecommendation on the Commissionnot altering the requirement thatauditors be independent under Rule 2—01 of Regulation S—X.403 Thiscommenter also recommendedconditioning the ability to follow U.S.GAAS under Tier 2 on the issuer’sshowing of undue cost andimpracticability in the offeringstatement and also limiting this relief tothe issuer’s initial Tier 2 offering. Onecommenter noted that becauseRegulation A issuers are not “issuers”(as defined in Section 2(a)(7) of theSarbanes-Oxley Act of 2002),° whenthe audit is performed in accordancewith PCAOB standards, AICPA ruleswould require the audit to be compliantwith both AICPA and PCAOB standardsand the auditor’s report would have toreference both AICPA and PCAOBstandards. This commenter also noted,however, that given recent changes tothe auditor’s report under AICPAstandards, it may not be possible for theauditor to be in compliance with bothAICPA and PCAOB standards from areporting perspective.405

Additionally, two commentersexpressed concern about potentialconfusion that could result fromrequiring PCAOB standards in Tier 2offerings, but not requiring PCAOBregistration.40° One of these commentersrecommended avoiding any potentialconfusion by allowing for audits underU.S. GAAS in Tier 2 offerings.°7Another commenter stated that the issuecould be resolved by requiring either theuse of PCAOB-registered auditors forTier 2 offerings or appropriatedisclosure of the auditor’s PCAOBregistration status, noting that thedisclosure option would result in lowercosts to the issuer and fewer instancesin which an issuer would need to haveits financial statements audited a secondtime under PCAOB standards.408

One commenter asked theCommission to clarify issues relating totransition reporting for Tier 1 issuersthat have previously conducted anoffering pursuant to the exemptionunder Section 4(a)(6) and were requiredto file reviewed annual financial

402 ABA BLS Letter; BDO Letter; CanaccordLetter; Deloitte Letter; E&Y Letter; KPMG Letter;McGladrey Letter; MoFo Letter; WR Hambrecht ÷Co Letter.

403 BLS Letter.°15 U.S.C. 7201(a) et seq.405 KPMG Letter.406BD0 Letter; Deloitte Letter.°7De1oitte Letter.4083D0 Letter.

statements.40° Another commenterasked the Commission to clarify theapplication of the audit requirementsapplicable to Tier 1 issuers that haveaudited financial statements preparedfor other purposes, in light ofpotentially contradictory references inproposed Form 1—A to the “standards ofthe PCAOB” and the PCAOB auditingstandards.41° One commenterrecommended not requiring auditedfinancials under either Tier 1 or Tier 2for “small companies with limitedrevenues and assets.” 411 Anothercommenter raised concerns aboutallowing Tier 1 issuers to includefinancial statements audited using U.S.GAAS and not requiring that all auditsbe conducted by PCAOB-registeredauditors.’2

Many commenters recommendmaking other changes to the financialstatement requirements not directlyrelated to audit requirements.413 Anumber of connnenters suggestedallowing companies to use alternativesunder U.S. GAAP for non-publicbusiness entities when preparing theirfinancial statements, since Regulation Aissuers would otherwise be considered“public business entities” under FASBstandards.4’ These commenters wereconcerned about the need for issuers tohave their financial statements preparedand audited a second time under U.S.GAAP applicable to public businessentities, as discussed in greater detailbelow. One commenter did not addressthis issue with respect to Tier 1, butrecommended allowing the smallestTier 2 issuers to follow alternativesunder U.S. GAAP applicable to nonpublic business entities.415 Onecommenter recommended allowingcompanies to include financialstatements prepared in accordance withalternatives under U.S. GAAP for nonpublic business entities in offerings upto a specified minimum, suggesting $10million or $20 million.416 Anothercommenter recommended explicitlystating that Regulation A issuers aresubject to “public business entity”

409E&Y Letter.410CAQ Letter.411 WOC Letter.412 CFA Letter.413 BLS Letter; BDO Letter; Letter from

Frederick D. Lipman, Blank Rome LLP, March 17,2014 (“Blank Rome Letter”); Canaccord Letter; CAQLetter; CFIRA Letter 1; Deloitte Letter; E&Y Letter;KPMG Letter; Karr Tuttle Letter; McGladrey Letter;Mofo Letter; PwC Letter; WR Hambrecht + CoLetter.

41 BLS Letter; Canaccord Letter; CAQLetter; CFLRA Letter 1; Deloitte Letter; E&Y Letter;KPMG Letter; McGladrey Letter; Mofo Letter; WRHambrecht + Co Letter.

BLS Letter.416McGladrey Letter.

requirements if the final rules do notprovide for the use of, or a non-costlytransition from, financial statementsbased on alternatives under U.S. GAAPfor non-public business entities.417 Onecommenter limited its recommendationwith respect to the applicability ofalternatives under U.S. GAAP for nonpublic business entities to Tier 1 issuersand to entities whose financialstatements are required to be includedin offering statements relying on Tier1.418 Another commenter noted thatsignificant acquired businesses willqualify as “public business entities”because their financial statements arefiled with the Commission.419 As aresult, financial statements of thosebusinesses would also need to berevised, and an issuer would potentiallyneed to have their financial statementsprepared and audited a second timeunder U.S. GAAP applicable to publicbusiness entities.

Several commenters recommendedallowing issuers under Regulation A todefer adopting new or revisedaccounting standards effective forpublic companies if non-public businessentities have a delayed effective date(similar to accommodations foremerging growth companies underSection 102(b) of the JOBS Act).42° Twocommenters recommended eitherclarifying how the disclosurerequirements for pro forma financialinformation in Part f/S for Tier 1 issuersdiffer from Rule 8—05 of Regulation 5—X or requiring such Tier 1 issuers tofollow Rule 8_05.421 One commenterrecommended allowing companiesformed within nine months of the filingdate of the offering statement to provideonly a discussion of their financialcondition and operations sinceinception, rather than financialstatements as of a date within ninemonths of the date of fihing.22 Thiscommenter further recommendedaligning the financial statementupdating requirements with the timingof periodic reports (e.g., allowing for120 days before year end financialstatements are required in the offeringstatement, rather than 90 days).423 Thiscommenter also recommended that theCommission consider additional scalingfor Regulation A offerings in therequirements concerning the financialstatements of: Acquired or to-be-

417 I(PMG Letter.418E&Y Letter,‘Deloitte Letter.420CPSQ Letter; Deloitte Letter; E&Y Letter; KPMG

Letter.421 CAQ Letter; PwC Letter.422E&Y Letter.423



acquired businesses; guarantors ofissuers of guaranteed securities; and,affiliates that collateralize anissuance.424

Another commenter recommendedthat Tier 2 issuers not be subject to Rule8—04(b)(3) of Regulation S—X when theto-be-acquired business has significantloss operations.425 This commenterrecommended at least not applying Rule8—04(b)(3) in situations wherecompanies intend to eliminate thelosses by dropping certain products orservice lines of business that producedthe loss. Another commenterrecommended clarifying whetherfinancial statements should also bedated within nine months of thequalification date of the offeringstatement.426

One cornmenter made a number ofspecific recommendations that weclarify language in particular paragraphsof the proposed requirements forfinancial statements in Part f/S of Form1—A.427 A different commenterindicated that proposed form 1—Aseemed to require issuers to disclose“selected financial information” andobjected to any such requirement asbeing more onerous than therequirements otherwise applicable tosmaller reporting companies.428

Several commenters specificallysupported allowing Canadian issuers toprepare their financial statements inaccordance with IFRS as issued by theIASB, as proposed.429 More generally,many commenters recommendedallowing foreign issuers to use IfRS asissued by the IASB to prepare theirfinancial statements P430 One commenterrecommended allowing U.S. companiesto use IFRS when conducting offeringsin Canada.3 This comment was madewithin the context of providing U.S.companies the ability to list on aCanadian exchange without beingsubject to resale restrictions imposed byRegulation S. Three commentersspecifically opposed adding an XBRLrequirement.432

424 Id425 Blank Rome Letter.26E&Y Letter (referring to paragraphs (a)(3)(i)

and (h)(2) of Part f/S of proposed Form 1—A).427 E&Y Letter, Appendix B.428 CAQ Letter. See Section II.C.3.a. above.429 ABA BLS Letter; Canaccord Letter; MoFo

Letter; NASAA Letter 2; PwC Letter.ABA IlLS Letter (although supporting

excluding non-canadian foreign companies);Andreessen/Cowen Letter; Canaccord Letter (statinggenerally that the Commission should clarify thatcompanies may use IFRS); CAQ Letter; DeloitteLetter; PwC Letter.

431 Karr Tuttle Letter.32BIO Letter; MoFo Letter; U.S. Chamber of

Commerce Letter.

(c) Final Rules for Financial StatementsAs discussed more fully below, we are

adopting requirements for financialstatements in Part F/S of form 1—A withchanges from the proposed rules that aredesigned to simplify and lower the costof compliance for issuers, whilemaintaining important investorprotections. As proposed, the final rulesrequire Tier 1 and Tier 2 issuers to filebalance sheets and other requiredfinancial statements as of the two mostrecently completed fiscal year ends (orfor such shorter time that they havebeen in existence). With the exceptionof the requirement to file two years ofbalance sheets, the final rules largelymaintain the existing financialstatement requirements of current PartF/S for Tier 1 offerings, while requiringTier 2 issuers to file audited financialstatements in Part F/S.

Financial statements for U.S.-domiciled issuers will be required to beprepared in accordance with U.S.GAAP, as is currently the case.Canadian issuers, however, may preparefinancial statements in accordance witheither U.S. GAAP or InternationalFinancial Reporting Standards (IFRS) asissued by the International AccountingStandards Board (IASB).433

Additionally, consistent with thesuggestions of commenters and in orderto be consistent with the treatment ofemerging growth companies underSection 102(b)(1) of the JOBS Act, thefinal rules permit issuers, whereapplicable, to delay the implementationof new accounting standards to theextent such standards provide fordelayed implementation by non-publicbusiness entities.434 In this regard, withrespect to the delayed implementationof new or revised financial accountingstandards, if the issuer chooses to takeadvantage of the extended transitionperiod to the same extent that a “non-issuer” company is permitted to, theissuer:

• Must disclose such choice at thetime the issuer files the offeringstatement; and

• May not take advantage of theextended transition period with respectto some standards and not others, butmust apply the same choice to allstandards.35

If the financial statements comply with LFRSas issued by the IASB, such compliance must beunreservedly and explicitly stated in the notes tothe financial statements and the auditor’s reportmust include an opinion on whether the financialstatements comply with IFRS as issued by the IASB.See General Rule (a)(2) to Part F/S of Form 1—A.

CAQ Letter; Deloitte Letter; E&Y Letter; KPMGLetter. See else Section 7(a)(2)(B) of the SecuritiesAct, 15 U.S.C. 77g(a)(2)tB), and Section 13(a) of theExchange Act, 15 U.S.C. 78m(a).

435 paragraph (a)(3) of Part F/S of Form 1—A.

However, issuers electing not to usethis accommodation must forgo thisaccommodation for all financialaccounting standards and may not electto rely on this accommodation in anyfuture filings.436

As proposed, the final rules requireissuers conducting Tier 1 offerings tofollow the requirements for the formand content of their financial statementsset out in Part F/S, rather than followingthe requirements in Regulation S—X.7However, consistent with a commentreceived ,438 in certain less commoncircumstances, such as for an acquiredbusiness or subsidiary guarantors, PartF/S directs issuers conducting Tier 1offerings to certain portions ofRegulation S—X that provide guidanceon when financial statements forentities other than the issuer arerequired. In Tier 1 offerings the formand content of the financial statementsfor those other entities also follow therequirements set out in Part F/S. Webelieve this guidance will assist issuerswith compliance with the generalrequirements for financial statementdisclosure in these less commoncircumstances and is an appropriatechange in the final rules. In an effort toreduce confusion, as suggested bycommenters,44° the final rules alsodirect issuers to Rule 8—05 of RegulationS—X for pro forma informationdisclosure requirements. Additionally,the final rules require compliance withRule 8—06 of Regulation S—X for realestate operations acquired because realestate companies and REITs are eligibleissuers.

The final rules require Tier 2 issuersto follow the financial statementrequirements of Article 8 of RegulationS—X, as if the issuer were a smallerreporting company, unless otherwise

436 IdSee paragraph (b) of Part F/S of Form 1—A.

8E&Y Letter.439We are updating the requirements for financial

statements of businesses acquired or to be acquiredin Part F/S to refer to the requirements of Rule8—04 of Regulation S—X. We are also providingspecific references to the relevant provisions ofRegulation S—X regarding the requirements forfinancial statements of guarantors and the issuers ofguaranteed securities (Rule 3—10 of RegulationS—X), financial statements of affiliates whosesecurities collateralize an issuance of securities(Rule 3—16 of Regulation S—X), financial statementsprovided in connection with oil and gas producingactivities (Rule 4—10 of RegulationS—X), pro forma financial information (Rule 8—05 ofRegulation S—X) and income statements for realestate operations acquired or to be acquired (Rule8—06 of Regulation S—X). The financial statementsprovided in these circumstances would only berequired to be audited to the extent the issuer hadalready obtained an audit of those financialstatements for other purposes.

44OCAQ Letter; PwC Letter.



noted in Part F/S.’ This requirementalso includes any financial informationrequired for Tier 1 offerings, asdiscussed above, such as acquiredbusinesses required by Rule 8—04 and8—05 of Regulation S_X.442

As adopted, financial statements in aTier I offering are not required to beaudited. Consistent with the suggestionsof commenters,443 and in order to avoidpotential confusion as to thepresentation of financial statements,issuers in Tier 1 offerings that do notprovide audited financial statementsmust label their financial statements asunaudited. However, the final rulesclarify that, if an issuer conducting aTier 1 offering has already obtained anaudit of its financial statements for otherpurposes, and that audit was performedin accordance with U.S. GAAS or thestandards of the PCAOB, and theauditor followed the independencestandards of either Rule 2—01 ofRegulation S—X or the independencestandards of the AICPA, then thoseaudited financial statements must befi1ed. We believe the requirement tofile already available audited financialstatements will benefit investors. Theauditor need not be registered with thePCAOB. While audited financialstatements are not generally required tobe filed for Tier 1 offerings, allowingauditors to follow the independencestandards of the AICPA or Rule 2—01 ofRegulation S—X is consistent with thesuggestions of most commenters andwill provide smaller issuers that seek tosubmit “audited” financial statementsin Tier 1 offerings with greaterflexibility in satisfying the financialstatement requirements.445 We agreethat, when available, financialstatements that satisfy the financialstatement requirements and that havebeen audited by an auditor that meetsthe independence standards of theAICPA should be deemed “audited” forpurposes of Tier 1 offerings.

Issuers conducting Tier 2 offeringsare, by contrast, required to have theirfinancial statements audited. Theauditor of financial statements beingfiled as part of a Tier 2 offering must be

441 See paragraph (c) of Part F/S of Form 1—A.442 Tier 2 issuers would, however, follow

paragraphs (c)(1) of Part F/S of Form 1—A withrespect to the age of the financial statements andthe periods to be presented. In Tier 2 offerings, theform and content of financial statements for otherentities follow the requirement of Article 8 ofRegulation S—X.

443 CAQ Letter; E&Y Letter; KPMG Letter.444 See CAQ Letter (requesting clarification on

this issue).While not a requirement, issuers in Tier 1

offerings may have independent business reasonswhy they seek to provide, or investors that mayotherwise demand, audited financial statements.

independent under Rule 2—01 ofRegulation S—X and must comply withthe other requirements of Article 2 ofRegulation S—X, but need not bePCAOB-registered.446 In a change fromthe proposed rules, and consistent withthe suggestions of commenters,447 thefinal rules require issuers conductingTier 2 offerings to provide financialstatements that are audited inaccordance with either U.S. GAAS orthe standards issued by the PCAOB.

As noted above, one commenterindicated that, because Regulation Aissuers are not “issuers,” as defined bySection 2(a)(7) of the Sarbanes-OxleyAct of 2002, AICPA rules would requirethe audit to be compliant with U.S.GAAS even if the auditor has conductedthe audit in accordance with PCAOBstandards. Staff of the Commissionconsulted with the AICPA on this issueand has been advised that an auditperformed by its members of an issuerconducting an offering pursuant toRegulation A would be required tocomply with U.S. GAAS in accordancewith the AICPA’s Code of ProfessionalConduct.448 As a result, an auditor fora Regulation A issuer who is conductingits audit in accordance with PCAOBstandards would also be required tocomply with U.S. GAAS, and theauditor would need to comply with thereporting requirements of both theMCPA standards and the PCAOBstandards. As further noted by thiscommenter,44° there may be somequestion as to whether an auditor cancurrently comply with both sets ofstandards when issuing its auditor’sreport. Commission staff also consultedwith the AICPA on this issue and hasbeen informed that the AICPA willconsider taking action to address thispotential conflict so that an auditor’sreport would be able to comply withboth sets of auditing standards.

Thus, requiring issuers in Tier 2offerings to have their financialstatements audited in accordance withPCAOB standards would have the effectof requiring issuers to comply with twosets of auditing standards andpotentially result in audits for Tier 2issuers being subject to additionalincremental costs than would berequired for registered offerings (whichare only subject to PCAOB auditing

446 See paragraph (c)(1)(iil) of Part F/S ofForm 1—A.

447 ABA BLS Letter; BDO Letter; CanaccordLetter; Deloitte Letter; E&Y Letter; KPMG Letter;McGladrey Letter; MoFo Letter; WR Hambrecht ÷co Letter.

448 The AICPA Code of Professional Conduct isavailable at: hup://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.

449 See KPMG Letter.

standards). To avoid such a result, thefinal rules permit Tier 2 issuers theoption of following U.S. GAAS or thestandards of the PCAOB.45°

We believe that providing issuerswith this option could help reduce thecost of required audits in Tier 2offerings while maintaining appropriatesafeguards for investors. We believeaudits conducted in accordance withU.S. GAAS provide sufficient protectionfor investors in Regulation A offerings,especially in light of the requirementthat auditors for Tier 2 offerings must beindependent under Rule 2—01 ofRegulation S—X. Moreover, we believethat the flexibility adopted in the finalrules is more appropriately tailored forthe different types of issuers likely toconduct Tier 2 offerings because it willnot only eliminate the potential thatexisted under the proposed rules thatsome issuers would need to have theirfinancial statements audited a secondtime under PCAOB standards, but alsocontinue to permit issuers, such as thosethat may seek concurrent registration ofa class of securities under the ExchangeAct, to comply with the PCAOBstandards if they so choose.451

An issuer that includes financialstatements audited in accordance withU.S. GAAS and PCAOB standards willlikely incur additional incremental costscompared with an issuer that includesfinancial statements audited only inaccordance with U.S. GAAS. However,we assume that an issuer would onlyelect to comply with both sets ofauditing standards because it hasconcluded that the benefit of doing so(for example, to facilitate Exchange Actregistration) justify these additionalincremental costs. Commission staffunderstands that many firms thatconduct audits using PCAOB standardshave developed their methodology in amanner that would comply with bothsets of standards, which could helpcontain the costs related to complyingwith both U.S. GAAS and PCAOBauditing standards.

An issuer conducting a Regulation Aoffering that seeks to concurrentlyregister its securities under theExchange Act would be required to fileaudited financial statements that areprepared in accordance with thestandards of the PCAOB by an auditorthat is PCAOB-registered.452 The finalrules therefore provide Regulation A

450As discussed above, however, compliancewith PCAOB standards could also requirecompliance with U.S. GAAS.

451 See, e.g., Section II.E.3.c (Exchange ActRegistration of Regulation A Securities) below.

452 See Section 12 of the Exchange Act, Section102 of the Sarbanes Oxley Act of 2002 and Article2 of Regulation S—X.



issuers with the option to providefinancial statements in Part F/S of Form1—A that comply with correlatingrequirements under the ExchangeAct.453

The Form 1—A financial statementrequirements are being further updatedto be consistent with the timetable forongoing reporting.454 The final rulesextend the permissible age of financialstatements in form 1—A to nine months,in order to permit the provision offinancial statements that are updated ona timetable consistent with ourrequirement for semiannual interimreporting.455 As proposed, the finalrules add a new limitation on the age offinancial statements at qualification,under which an offering statementcannot be qualified if the date of themost recent balance sheet includedunder Part F/S is more than ninemonths before the date ofqua1ification.56 For filings made morethan three months but no more thannine months after the end of the issuer’smost recently completed fiscal year end,issuers are required to include a balancesheet as of the two most recentlycompleted fiscal year ends.457 Forfilings made more than nine monthsafter the end of the issuer’s mostrecently completed fiscal year end, thebalance sheet is required to be dated asof the two most recently completedfiscal year ends and an interim balancesheet must be included as of a date noearlier than six months after the end ofthe most recently completed fiscalyear.458 If interim financial statementsare required, they are required to covera period of at least six months.°Requiring issuers to file interimfinancial statements no older than ninemonths and covering a minimum of sixmonths has the beneficial effect ofeliminating what would otherwise be arequirement for certain issuers toprovide quarterly interim financialstatements during the qualification

If the final rules did not permit issuers toprepare audited financial statements in accordancewith the standards of the PcAOB, Regulation Aissuers that rely on the amendments to Form 8—Aadopted today in order to register a class ofsecurities pursuant to Section 12 of the ExchangeAct would have to have their financial statementsaudited a second time under PCAOB standards bya PCAOB registered auditor.

454 Our final rules for ongoing reporting arediscussed in Section II.E.1. below.

See paragraph(s) (b)(3)—(4) of Part F/S of Form1—A for Tier I issuers, which also apply to Tier 2issuers by virtue of paragraph (c)(1) of Part F/S ofForm 1—A.

4seId457 paragraph (b)(3)(A) of Part F/S of

Form 1—A.458 See paragraph (b)(3)(B) of Part F/S of

Form 1-A.459 paragraph (b)(4) of Part F/S of Form 1—A.

process and is consistent with thetiming of the ongoing reportingrequirements adopted today.46° We aregenerally maintaining the requirementof existing Form 1—A concerning thedate after which an issuer must providefinancial statements dated as of the mostrecently completed fiscal year, but arechanging the interval from 90 calendardays to three months, which we believewill simplify compliance by allowingissuers to follow full months. In orderto further simplify compliance with thefinal rules, we also revised Part F/S ofForm 1—A to streamline the applicationof, and simplify the language in, therules without substantively changingthe required content.

Although we solicited comment onwhether issuers conducting Tier 2offerings should be required to providetheir financial statements to theCommission and on their corporate Websites in interactive data format usingXBRL, we are not adopting any suchrequirement in the final rules.461Commenters that addressed this issueopposed requiring the use of XBRL inRegulation A filings.462 We agree and donot believe that requiring the use ofXBRL in Regulation A filings would bean appropriately tailored requirementfor smaller issuers at this time.463

On December 23, 2013, after weproposed rules for Regulation A, theFinancial Accounting Standards Board(FASB) and Private Company Council(PCC) issued a guide for evaluatingfinancial accounting and reporting fornon-public business entities.464 ThePCC was created in 2012 by the FASBand the Financial AccountingFoundation (FAF) to improve thestandard-setting process, and providefor accounting and reportingalternatives, for non-public businessentities under U.S. GAAP.46 As the

460 See, e.g., discussion in Section II.E.1. below.461 Data becomes interactive when it is labeled or

“tagged” using a computer markup language suchas XBRL that software can process for analysis. Fora discussion of current financial statementinteractive data requirements, see Rel. No. 33—9002(Jan. 30, 2009) [74 FR 6776].

462010 Letter; MoFo Letter; US Chamber ofCommerce Letter.

463We recognize, however, that futuretechnological developments may lessen the burdento smaller issuers associated currently with XBRL,at which time we may revisit this initialdetermination.

5The Private Company Decision-MakingFramework: A Guide for Evaluating FinancialAccounting and Reporting for Private Companies(the “PCC Guide”), available at: http://www.fasb.org/cs/ContentServer?c—Document_C&pagename=FASB%2fDocumentC%2FDocumentPage&cid=1176163703583.

465 For a brief history behind the creation of thePCC, see: http://www.fasb.org/cs/ContentServer?c=Page&pagename=fASB%2FPage%2FSectionPage&cid= 1351027243391.

standards for non-public businessentities are new, there are currently veryfew distinctions between U.S. GAAP forpublic and non-public business entities.Over time, however, more distinctionsbetween non-public business entity andpublic company accounting standardscould develop.

Issuers that offer securities pursuantto Regulation A will be considered“public business entities” as defined bythe FASB and, therefore, ineligible torely on any alternative accounting orreporting standards for non-publicbusiness entities.466 Even though issuersof securities in a Regulation A offeringfit within the definition of “publicbusiness entity,” the Commissionretains the authority to determinewhether or not such issuers would bepermitted to rely on the developing nonpublic business entity standards.467

The distinction between public andnon-public business entity standardswas not directly contemplated in theProposing Release, as the FASB/PCCGuide was issued after the Regulation Aproposal was approved by theCommission.468 Commenters, however,generally expressed concern about thecosts associated with requiring nonpublic business entities (e.g., non-Exchange Act reporting companies) tofollow public company U.S. GAAPaccounting standards, particularly on agoing forward basis.69 Commenters alsoexpressed concern about the potentialthat an issuer would need to have itsfinancial statements prepared andaudited a second time, which wouldlikely increase the costs associated withany previously obtained financialstatements by a non-public businessentity that would not comply with thefinancial statement requirements of anexemption that requires such issuer tofollow the standards applicable topublic business entities.47°

The final rules do not allowRegulation A issuers to use thealternatives available to non-publicbusiness entities under U.S. GAAP inthe preparation of their financialstatements. One of the significant factorsconsidered by the FASB in developingits definition of “public business entity”was the number of primary users of thefinancial statements and their access to

466 See numbered paragraph 12 of the PCC Guide,p.3.

467 Id.468 The Commission approved the proposed rules

on December 18, 2013, while the PCC Guide wasissued on December 23, 2013.

69 ABA BLS Letter; Canaccord Letter; CAQLetter; CFIRA Letter 1; Deloitte Letter; E&Y Letter;KPMG Letter; McGladrey Letter; MoFo Letter; WRHambrecht + Co Letter.

°Id.



management.47’ As the FASB noted,“users of private company financialstatements have continuous access tomanagement and the ability to obtainfinancial information throughout the

ar472 As the number of investorsincreases and the ability to influencemanagement decreases, it is importantthat all investors receive or have timelyaccess to comprehensive financialinformation. As a result, theCommission believes that investorprotection is enhanced by Regulation Aissuers providing financial statementsprepared in the same manner as otherentities meeting the FASB’s definitionof “public business entity.”

c. Part III (Exhibits)We proposed to maintain the existing

exhibit requirements in Part III of Form1—A. Additionally, we proposed tocontinue to permit issuers toincorporate by reference certaininformation in documents filed underRegulation A that is already available onEDGAR, but also require issuers todescribe the information incorporatedby reference and include a hyperlink tosuch exhibit on EDGAR.473 Asproposed, issuers also would have to besubject to the ongoing reportingobligations for Tier 2 offerings in orderto avail themselves of thisaccommodation.

We did not receive any comments onthe proposed exhibit requirements forPart III of form 1—A, and are adoptingthe proposed exhibit requirementssubstantially as proposed. As adopted,issuers will be required to file thefollowing exhibits with the offeringstatement: Underwriting agreement;charter and by-laws; instrumentdefining the rights of securityholders;subscription agreement; voting trustagreement; material contracts; plan ofacquisition, reorganization,arrangement, liquidation, or succession;escrow agreements; consents; opinionregarding legality; “testing the waters”materials; appointment of agent forservice of process; and any additionalexhibits the issuer may wish to file.474In a change from the proposedrequirements, however, the final rulesno longer require issuers to fileschedules (or similar attachments) tomaterial contracts in all instances. Asadopted, issuers are permitted toexclude schedules (or similar

471 PCC Guide, p. 6.472 Id

See General Instruction ill to proposed Form1—A and discussion in Section fl.C.3.b(1). aboveregarding incorporation by reference in Part II ofForm 1—A. The hyperlink must be active at the timeof filing, but need not remain active after filing.

474 See Part III (Exhibits) of Form 1—A.

attachments) to material contracts if notmaterial to an investment decision or ifthe material information contained insuch schedules is otherwise disclosed inthe agreement or the offering statement.Any material contract filed in responseto Item 17, however, must contain a listbriefly identifying the contents of allomitted schedules, together with anagreement to furnish supplementally acopy of any omitted schedule to theCommission upon request.

We are adopting final rules thatpermit issuers to incorporate byreference certain information that isalready available on EDGAR. In achange from the proposed rules,incorporation by reference will not belimited to documents previously filedpursuant to Regulation A and will notbe limited to issuers subject to Tier 2ongoing reporting obligations. Webelieve that this change will continue tofacilitate the provision of requiredinformation to investors, while taking aconsistent approach to informationpreviously provided to the Commissionand publicly available on EDGAR.Issuers that seek to incorporate byreference are further required todescribe the information incorporatedby reference and include a hyperlink tosuch exhibit on EDGAR.475 Asproposed, such issuers must be subjectto the ongoing reporting obligations forTier 2 offerings. Additionally, asproposed, to the extent post-qualification amendments to offeringstatements must include auditedfinancial statements, the final rulesrequire the consent of the certifyingaccountant to the use of suchaccountant’s report in connection withamended financial statements to beincluded as an exhibit.476 The final rule,however, clarifies that the requirementto file the consent of the certifyingaccountant only applies where thefinancial statements required to be filedare amended.477

d. Signature RequirementsSimilar to the requirement for issuers

in registered offerings, we proposed torequire issuers to manually sign a copyof the offering statement before or at thetime of filing and retain it for a periodof five years.478 Issuers would berequired to produce the manually

See General Instruction Ill to form 1—A. Thehyperlink must be active at the time of filing, butneed not remain active after filing.

476 This is consistent with current practice underRegulation A, but will be made an expressrequirement under the final rules. See Rule252(f)(1)(ii).

‘i’’ See id.478 See Instructions 2 and 3 to Signatures in

proposed form 1—A; cf Rule 402(e), 17 CFR230.402(e).

signed copy to the Commission, uponrequest.479 Additionally, we proposed toeliminate the requirement that, wherean issuer filing a Form 1—A is aCanadian issuer, its authorizedrepresentative in the United States isrequired to sign the offeringstatement.48° Also, we proposed tomaintain the requirement that Canadianissuers file a Form F—X481 to provide anexpress consent to service of process inconnection with offerings qualifiedunder Form 1—A. This treatment issimilar to requirements for Canadiancompanies making filings under themultijurisdictional disclosuresystem.482

We did not receive any comments onthis aspect of the proposal, and areadopting these provisions, as proposed,in the final rules.483

4. Continuous or Delayed Offerings andOffering Circular Supplementsa. Proposed Rules

Rule 251(d)(3) currently allows forcontinuous or delayed offerings underRegulation A if permitted by Rule415.484 By reference to the undertakingsof Item 512(a) of Regulation S—K,485Rule 415 does not necessarily requireevery change in the informationcontained in a prospectus to aregistration statement in a continuousoffering to be reflected in a post-effective amendment.6 On the otherhand, currently Regulation A requiresevery revised or updated offeringcircular in a continuous offering to befiled as an amendment to the offeringstatement to which it relates and to bequalified in a process similar to theCommission staff review, comment andqualification process for initial offeringstatements.487 The requalification

°Id.480 See 17 CFR 230.252(0 (2014) and Instruction

1 to Signatures of Form 1-.A (2014).48117 CFR 239.42.482 See Rel. No. 33—6902 (lime 21, 1991) [56 FR

300361 (adopting the multijurisdictional disclosuresystem).

483 See Instructions to Signatures, Form 1—A.484 17 CFR 230.415. certain shelf offerings,

however, are only permissible in offerings on FormS—3, which Regulation A issuers are ineligible touse. See, e.g., Rule 415(a)(1)(x).

485j7 GFR 230.415(a)(3).486 See 17 GFR 229.512(a)(1) (requiring issuers to

file a post-effective amendment for purposes of anupdate under Section 10(a)(3) of the Securities Act,to reflect any facts or events arising aftereffectiveness that, individually or in the aggregate,represent a fundamental change in the informationset forth in the registration statement, or to include,subject to certain exceptions, any materialinformation with respect to the plan of distributionnot previously disclosed (or material changes toinformation previously disclosed) in the registrationstatement).

487 See 17 CFR 230.253(e) (2014); 17 CFR230.252(h)(1) (2014).



process can be costly and timeconsuming for smaller issuersconducting continuous offerings ofsecurities pursuant to Regulation A. Weproposed to clarify in the rules forRegulation A the scope of permissiblecontinuous or delayed offerings and therelated concept of offering circularsupplements.

Rule 415 attempts to promoteefficiency and cost savings in thesecurities markets by allowing for theregistration of certain traditional andother shelf offerings.488 Prior to theadoption of final rules today, Rule251(d)(3) of Regulation A allowed forcontinuous or delayed offerings underRegulation A if permitted by Rule415.489 When Rule 415 was adopted, theCommission recognized that certaintraditional shelf offerings have beenallowed by administrative practice formany years despite the absence of sucha rule.49° Since Rule 415 only addressesregistered offerings, however, theprecise scope of continuous or delayedofferings under Regulation A has beenunclear.

The proposed rules would clarify thescope of permissible continuous ordelayed offerings under Regulation Aand the related concept of offeringcircular supplements, and otherwisecontinue to allow for certain traditionalshelf offerings to promote flexibility,efficiency, and to reduce unnecessaryofferings costs.49’ Further, as proposed,an issuer’s ability to sell securities in acontinuous or delayed offering would beconditioned on being current with theTier 2 ongoing reporting requirements atthe time of sale.492

To provide clarity regarding theapplication of Rule 415 concepts toRegulation A offerings, we proposed toadd a provision to Regulation A similarto Rule 415, but with limitations that webelieved would be appropriate forRegulation A. The provision wouldestablish time limits similar to those inRule 415 and make conforming changesas necessary.493

In the Proposing Release we proposedexcluding types of shelf offerings thatcannot be conducted under existing

486 See Rel. No. 33—6499 [48 FR 52889) (Nov. 23,1983) (noting the efficiency and cost savings issuersexperienced during the eighteen month trial periodfor a previous temporary version of the rule).

CFR 230.415.490 Certain ‘traditional shelf offerings” have been

allowed since at least 1968 by the Commission’sguides for the preparation and filing of registrationstatements, such as Guide 4, and relatedadministrative practice. See Id.; see also Rel. No.33—4936 [33 FR 18617] (Dec. 9, 1968) (adoptingGuide 4 and other Commission guides).‘ See Proposing Release, at Section ll.C.4.492 Proposed Rule 251 (d)(3)(i)(F).

Proposed Rule 251(d)(3).

Regulation A, such as offeringsrequiring registration on Form F—6,offerings requiring primary eligibility touse Forms S—3 or F—3 offeringsconducted by issuers ineligible to useRegulation A,495 as well as certainofferings that we do not currentlybelieve would be appropriate to includein the Regulation A framework. Further,we proposed prohibiting all “at themarket” offerings under RegulationA.496

Additionally, as proposed, changes inthe information contained in theoffering statement would no longernecessarily trigger an obligation toamend.497 Offering circulars forcontinuous Regulation A offeringswould, however, continue to berequired to be updated annually throughthe filing of a post-qualificationamendment. These annual post-qualification amendments wouldinclude updated financial statementsand post-qualification amendmentswould also be required when updatingthe offering circular to reflect facts orevents arising after qualification which,in the aggregate, represent afundamental change in the informationset forth in the offering statement.498

In addition to these post-qualificationamendments to the offering statementthat must be qualified, we also proposedto allow issuers to use offering circularsupplements in certain situations.499Further, we proposed to permit issuersin continuous offerings to qualifyadditional securities in reliance onRegulation A by a post-qualificationamendment. 500

We also proposed provisions similarto Rule 424 that would require issuersomitting certain information from anoffering statement at the time ofqualification, in reliance on proposedRule 253(b), to file such information asan offering circular supplement no laterthan two business days following theearlier of the date of determination ofsuch pricing information or the date offirst use of the offering circular afterqualification.501 Further, these proposedprovisions would require offeringcirculars that contain substantivechanges in information previouslyprovided in the last offering circular(other than information omitted inreliance on proposed Rule 253(h)) to be

See also fn. 484 above.Rule 415(a)(1)(xi) discusses investment

companies and BDCs.496 See proposed Rule 251(d)(3)(ii).497 See proposed Rule 252(h)(2).

499 See proposed Rule 253(g).See proposed Rule 251(d)(3](i)(F) and note to

proposed Rule 253(b).501 See proposed Rule 253(g).

filed within five business days after thedate such offering circular is first usedafter qualification.502 Offering circularsupplements that are not filed withinthe required time frames provided bythe proposed rules would be required tobe filed as soon as practicable after thediscovery of the failure to file.503


Commenters were generallysupportive of the proposedmodernization of Regulation A’soffering process, in general, and theprovisions for continuous or delayedofferings, in particular.° Twocommenters, however, recommendedallowing for at the market offeringsunder Regulation A.505 Additionally,one commenter recommended allowingfor at the market offerings in non-pennystocks on established tradingmarkets.506 Another commenterrecommended allowing for at tle marketofferings in securities that qualify forthe actively-traded securities exceptionsin Rules 101 and 102 of RegulationM.507 This commenter suggested thatthe offering amount could bedetermined by using the calculation setforth in Securities Act Rule 45 7(c) 508 asof a specified date within five businessdays of qualification of the offeringstatement.

c. Final Rules

We believe the proposed rulessufficiently update existing rules, whileproviding issuers with adequateflexibility with respect to, andadditional guidance on, the permissiblescope of continuous or delayedRegulation A offerings and offering

502 See proposed Rule 253(g)(2).See proposed Rule 253(g)(4).

5e4 See, e.g., ABA BLS Letter; KVCF Letter; OTCMarkets Letter; Paul l-Iastings Letter.

OTC Markets Letter; Paul Hastings Letter.506 OTC Markets Letter. This commenter also

recommended that securities offered underRegulation A that are not penny stocks and thattrade on an established public market should betreated as having a “ready market” and thus beconsidered eligible for margin purposes, which thecommeoter believed would increase the value ofsecurities and their liquidity.

Paul Hastings Letter. Regulation M wasadopted by the Commission in 1996 and is intendedto prevent potentially manipulative practices byunderwriters, issuers, selling securityholders, andother participants in a securities offering. See Rel.No. 38067 (December 20, 1996) [62 FR 520].

508 Rule 457(c) specifies that Securities Actregistration fees for securities offered on the basisof fluctuating market prices shall be calculated asfollows: Either the average of the high and lowprices reported in the consolidated reporting system(for last sale reported over-the-counter securities) orthe average of the bid and asked price (for otherover-the-counter securities) as of a specified datewithin 5 business days prior to the date of filing theoffering statement.



circular supplements. We are adoptingthese rules as proposed.

The final rules add Rule 251(d)(3) toRegulation A, without changes from theproposed rule. This provision is similarto Rule 415, but its scope is limited topermissible Regulation A offerings.509 Inthis regard, the final rules for RegulationA will continue to allow for certaintraditional shelf offerings to promoteflexibility, efficiency, and to reduceunnecessary offerings costs.510 The finalrules will condition the ability of anissuer to sell securities in a continuousoffering on being current in its annualand semiannual report filing, if requiredunder Rule 257(b), at the time of sale.51

As we indicated in the ProposingRelease, we believe this additionalcondition will not impose incrementalcosts on issuers, which are in any caserequired to update their offeringstatement and to file such ongoingreports, and will promote parity ofinformation in the secondary markets.

As proposed, the final rules providefor the following types of continuous ordelayed offerings:

• Securities offered or sold by or onbehalf of a person other than the issueror its subsidiary or a person of whichthe issuer is a subsidiary;

• securities offered and sold pursuantto a dividend or interest reinvestmentplan or an employee benefit plan of theissuer;

• securities issued upon the exerciseof outstanding options, warrants, orrights;

• securities issued upon conversionof other outstanding securities;

• securities pledged as collateral; or• securities that are part of an offering

which commences within two calendardays after the qualification date, will beoffered on a continuous basis, maycontinue to be offered for a period inexcess of 30 days from the date of initialqualification, and will be offered in anamount that, at the time the offeringstatement is qualified, is reasonablyexpected to be offered and sold withintwo years from the initial qualificationdate.512

Notwithstanding the suggestions ofcommenters regarding at the marketofferings, we continue to believe thatsuch offerings are not appropriate for

°9 Rule 251(d)(3).510 See Rel. No. 33—6499, at IV.A. (“[Tihe

procedural flexibility afforded by the Rule enablesa registrant to time its offering to avail itself of themost advantageous market conditions.registrants are able to obtain lower interest rates ondebt and lower dividend rates on preferred stock,thereby benefiting their existing shareholders.”).

511 This condition only applies to continuousofferings under Rule 251fd)(3)(i)(F).

512

Regulation A offerings, particularly atthe outset of the adoption of today’samendments to the existing rules. Whileit is possible that a market in RegulationA securities may develop that is capableof supporting primary and secondary atthe market offerings, rather than permitsuch offerings at the outset, we believethat any determination as to whether theexemption would be an appropriatemethod for such offerings should occurin the future. further, an offering soldat fluctuating market prices may not beappropriate within the context of anexemption that is contingent upon notexceeding a maximum offering size.

Under the final rules, as proposed,changes in the information contained inthe offering statement will no longernecessarily trigger an obligation toamend.513 Offering circulars forcontinuous or delayed Regulation Aofferings will continue to be required tobe updated, and the offering statementsto which they relate requalifiedannually to include updated financialstatements, and otherwise as necessaryto reflect facts or events arising afterqualification which, in the aggregate,represent a fundamental change in theinformation set forth in the offeringstatement.514 In addition to post-qualification amendments to theoffering statement that must bequalified, the final rules also will allowissuers to use offering circularsupplements in certain situations •515

Further, issuers in continuous offeringswill be permitted to qualify additionalsecurities in reliance on Regulation A bya post-qualification amendment.516

The final rules will, as proposed,permit offering circular supplements tobe used for final pricing information,where the offering statement is qualifiedon the basis of a bona fide price rangeestimate.517 Additionally, the final rulespermit offering circulars to omitinformation with respect to theunderwriting syndicate analogous to theprovisions for registered offerings underRule 430A.518 However, the final rulesdo not allow an issuer to omit thevolume of securities (the number ofequity securities or aggregate principal

513 Rule 252ffl(2).

515 Rule 253(g).516 Rule 251(d)(3)(i)(F) arid note to Rule 253(b).517 Rule 253(b)(2). The bona ftde price range

estimate may not exceed $2 for offerings where theupper end of the range is $10 or less and 20% ifthe upper end of the price range is over $10.

‘5Rule 253(b) (also permitting the omission ofunderwriting discounts or commissions, discountsor commissions to dealers, amount of proceeds,conversion rates, call prices and other itemsdependent upon the offering price, delivery dates,and terms of the securities dependent upon theoffering date, so long as certain conditions are met).

amount of debt securities) to beoffered.51° The final rules also permit,as proposed, offering circularsupplements to reflect a decrease in thevolume of, or to change the price rangeof, the securities offered in reliance ona qualified offering statement underRegulation A, so long as the decrease inthe volume of securities offered orchange in the price range would notmaterially change the disclosurecontained in the offering statement atqualification.520 Notwithstanding thisprovision, any decrease in the volume ofsecurities offered and any deviationfrom the low or high end of the pricerange may be reflected in the offeringcircular supplement filed with theCommission if, in the aggregate, thedecrease in volume and/or change inprice represent no more than a 20%change from the maximum aggregateoffering price calculable using theinformation in the qualified offeringstatement.52’ Under no circumstances,however, would an issuer be able toamend its offering statement or rely onthe provisions for offering circularsupplements where the maximumaggregate offering price resulting fromany changes in the price of thesecurities would exceed the offeringamount limitation set forth in Rule25 1(a) or if the increase in aggregateoffering price would result in a Tier 1offering becoming a Tier 2 offering.522

We are also adopting as proposedprovisions similar to Rule 424 thatrequire issuers omitting certain pricingand price-related information from anoffering statement at the time ofqualification, in reliance on Rule 253(b),to file such information as an offeringcircular supplement no later than twobusiness days following the earlier ofthe date of determination of suchpricing information or the date of firstuse of the offering circular afterqualification.523 These provisionsrequire offering circulars that containsubstantive changes (other thaninformation omitted in reliance on Rule253(b)) in information previouslyprovided in the last offering circular tobe filed within five business days afterthe date such offering circular is firstused after qualification.524 Offeringcircular supplements that are not filedwithin the required time framesprovided by the rules are required to be

519 Rule 253(h)(4l.520 See note to Rule 253(b).5211d

522

523 Rule 253tg)(i).524 Rule 253(g)(2).



filed as soon as practicable after thediscovery of the failure to file.525

5. QualificationUnder existing Regulation A, an

offering statement is generally onlyqualified by order of the Commission ina manner similar to a registrationstatement being declared effective.526 Insuch instances, the issuer includes adelaying notation on the cover of theForm 1—A stating that the offeringstatement shall only be qualified byorder of the Commission.527 In order toremove a delaying notation, an issuermust file an amendment to the offeringstatement indicating that the offeringstatement will become qualified on the20th calendar day after filing.523 Anoffering statement that does not includea delaying notation will be qualifiedwithout Commission action on the 20thcalendar day after filing.29

We proposed to alter the qualificationprocess of existing Regulation A. Asproposed, an offering statement couldonly be qualified by order of theCommission, and the process associatedwith the delaying notation would beeliminated. A few commenters generallysupported the proposed elimination ofqualification without Commissionaction.530 No commenters opposed thisaspect of the proposal.

We are adopting, substantially asproposed, final rules that requireCommission action before a RegulationA offering statement may be qualified.The final rules modify the proposedrules by permitting the offeringstatements to be declared qualified by a“notice of qualification” issued by theDivision of Corporation Finance,pursuant to delegated authority, ratherthan requiring the Commission itself toissue an order.5’ The notice ofqualification is analogous to a notice ofeffectiveness in registered offerings 532

We are therefore amending theCommission’s organization rules, asthey relate to the delegated authority ofthe Director of the Division ofCorporation finance, to permit theDivision to issue qualification orderspursuant to Regulation A.533 The finalrules also eliminate the risk that an

s25Rule 253(g)(4).52617 CFR 230.252(g)(2] (2014).5271d52817 CFR 230.252(g)(3) (2014).52917 CFR23O.252(g)tl) (2014).530CFA Letter; CFA Institute Letter; MCS Letter.

See Rule 252(e).532 See 17 CFR 200.30—1(a)(5) (The Director of the

Division of Corporation Finance has the delegatedauthority to declare registration statements to beeffective within shorter periods of time than 20days after filing, consistent with Section 8(a) of theSecurities Act (15 U.S.C. 77h).

Rule 30—1(bl(2)—(4).

issuer may exclude a delaying notationeither in error or in an effort to becomequalified automatically without reviewand comment by the Commission staff.Given the electronic filing processes weare adopting,534 the scaled disclosurerequirements for Tier 1 and Tier 2offerings,535 and the preemption of statesecurities law registration andqualification requirements for Tier 2offerings,536 we believe it is appropriateto ensure that the Commission staff hasthe opportunity to review and commenton an offering statement before itbecomes qualified.

D. Solicitation of Interest (Testing theWaters)

1. Proposed RulesUnder Securities Act Section

3(b)(2)(E), issuers may test the waters forinterest in an offering—withoutrestriction as to the types of investorssolicited—before filing an offeringstatement on such terms and conditionsas the Commission prescribes. Weproposed to permit issuers to use testingthe waters solicitation materials bothbefore and after the offering statement isfiled, subject to issuer compliance withthe rules on filing of solicitationmaterials and disclaimers. As wenoted in the Proposing Release, theinvestor protections with respect tosolicitation materials in existingRegulation A would remain in place asthese materials remain subject to theantifraud and other civil liabilityprovisions of the federal securitieslaws.538 As proposed, testing the watersmaterials used by an issuer or itsintermediaries after publicly filing anoffering statement would be required toinclude a current preliminary offeringcircular or contain a notice informingpotential investors where and how themost current preliminary offeringcircular can be obtained. We furtherproposed to require issuers to publiclyfile their offering statements not later

534 See discussion in Section II.C.i. above.u See discussion in Section II.C.3.b. above.536 discussion in Section II.H.3. below.

This timing is similar to the “testing thewaters” permitted for emerging growth companiesunder new Section 5(d) of the Securities Act, addedby the JOBS Act, which can also be conducted bothbefore and after filing of a registration statement.Under Section 5(d), no legending or disclaimers arerequired, but testing the waters is limited topotential investors that are “qualified institutionalbuyers” or institutional “accredited investors.”

538 The Commission’s antifraud liabilityprovisions in Section 17 of the Securities Act, 15U.S.C. 77q, apply to any person who commits fraudin connection with the offer or sale of securities,Section 3(b)(2)(D) of the Securities Act, 15 U.S.C.77c(b)(2)(D), states that the civil liability provisionsof Section 12(a)(2) apply to any person offering orselling securities under Regulation A. See also Rel.No, 33—6924, at ffi. 48.

than 21 calendar days beforequalification so that any solicitationmade in the 21 calendar days before theearliest date of potential sales ofsecurities would be conducted using themost recent version of the preliminaryoffering circular. The proposed ruleswould amend the requirements forsubmission or filing of solicitationmaterials, so that such material wouldbe submitted or filed as an exhibit whenthe offering statement is eithersubmitted for non-public review or filed(and updated for substantive changes insuch material after the initial non-publicsubmission or filing) but would nolonger be required to be submitted at orbefore the time of first use.

As proposed, Rule 255(b) wouldrequire all soliciting materials to bearcertain legends or disclaimers.39further, we did not propose to limittesting the waters to QIBs andinstitutional accredited investors (as iscurrently the case with testing thewaters by emerging growth companiesunder Securities Act Section 5(d)).

2. Comments on Proposed Rules

Most commenters generally supportedthe proposed amendments to the testingthe waters provisions.540 Severalcommenters, however, recommendedrequiring the filing of testing the watersmaterials prior to first use.541 Thesecommenters suggested that the antifraudand other civil liability provisions of thefederal securities laws are not anadequate substitute for the investorprotections afforded by an advancefiling requirement for solicitationmaterials. They further suggested thattheir concerns about the proposedtesting the waters provisions arecompounded by an access equalsdelivery model of final offering circulardelivery. One commenter recommendedallowing states to have immediateaccess to all testing the waters materialsfiled with the Commission.542 Anothercommenter recommended making thefiling of testing the waters materials acondition to the exemption,543 while athird commenter specifically opposedthat recommendation.544

Proposed Rule 255(b). As proposed, Rule255(b) would largely follow similar provisions inthe context of registered offerings. See Rule 134(dl,17 CFR 230.134(d) (requiring a disclaimer forsolicitations of interest in registered offerings).

540 310 Letter; Letter from Daniel McElroy,DuMoulin Black LLP, April 1, 2014 (‘DuMoulinLetter”); Ladd Letter 2; Paul Hastings Letter;Richardson Patel Letter.‘Massachusetts Letter 2; NASAA Letter 2;

WDFI Letter,542 Ladd Letter 2.

MCS Letter.BID Letter,



Two commenters recommendedensuring that any testing the watersmaterials that are filed with theCommission be kept confidential, atleast until the offering statement isqualified.545 One commenterrecommended removing anyrequirement to file testing the watersmaterials publicly,56 while anothercommenter recommended not requiringtesting the waters materials to be filedfor Tier 2 offerings.547 One commentersupported the use of legends on testingthe waters materials or, in lieu oflegends, restricting testing the waters tocertain types of investors, such as QIBsand accredited investors.548

Several commenters suggested thatthe Commission provide marketparticipants with communication safeharbors from Section 12(a)(2) liabilityfor regular business communications bya Regulation A issuer.549

3. Final RulesWe are adopting testing the waters

provisions in the final rules asproposed. Under the final rules, issuerswill be permitted to test the waters withall potential investors and usesolicitation materials both before andafter the offering statement is filed,subject to issuer compliance with therules on filing and disclaimers.550

The final rules require, as proposed,that testing the waters materials used byan issuer or its intermediaries after theissuer publicly files an offeringstatement be accompanied by a currentpreliminary offering circular or containa notice informing potential investorswhere and how the most currentpreliminary offering circular can beobtained.551 This requirement may besatisfied by providing the URL wherethe preliminary offering circular or theoffering statement may be obtained.Solicitation materials will remainsubject to the antifraud and other civilliability provisions of the federalsecurities laws.52 Further, the finalrules require issuers and intermediariesthat use testing the waters materialsafter publicly filing the offering

Heritage Letter: Ladd Letter 2.BIO Letter.547MoFo Letter.

CFA Institute Letter.549 ABA BLS Letter; Canaccord Letter: CFIRA

Letter 1; CFIRA Letter 2; MoFo Letter; PublicStartup Co. Letter 6; WR Hajnbrecht + Co Letter. Seealso discussion of Section 12(a)(2) liability inProposing Release, Section II.B. 7.

550 Rule 255. For a discussion of the use ofsolicitation materials as it relates to (i) the doctrineof integration, see Section ll.B.5.c. above and Rule255(e), and (ii) the application of state securitieslaws, see Section fl.H.3. below.

55’ Rule 255(b)(4).552 See fn. 538 above.

statement to update and redistributesuch material in a substantially similarmanner as such materials wereoriginally distributed to the extent thateither the material itself or thepreliminary offering circular attachedthereafter becomes inadequate orinaccurate in any material respect.553

As discussed in Section II.C.2. above,first-time issuers that are eligible for,and elect to, non-publicly submit draftoffering statements are required topublicly file their offering statementsnot later than 21 calendar days beforequalification so that any solicitation ofinterest made in the 21 calendar daysbefore the earliest date of potential salesof securities by such issuers will beconducted while potential investorshave access to the most recent versionof the preliminary offering circular.Additionally, in light of the preemptionof state securities laws registrationrequirements in the final rules for Tier2 offerings, the 21 calendar dayrequirement will enable state securitiesregulators to require such issuers to filesuch materials with them for aminimum of 21 calendar days beforeany potential sales to investors in theirrespective states.554

As proposed, the final rules requirethat issuers submit or file solicitationmaterials as an exhibit when theoffering statement is either submittedfor non-public review or filed (andupdate for substantive changes in suchmaterial after the initial non-publicsubmission or filing). However, issuersare no longer required to submitsolicitation materials at or before thetime of first use.555 The treatment ofsolicitation materials in Regulation Aofferings is generally consistent with theCommission staff’s treatment ofsolicitation materials used by emerginggrowth companies under Securities ActSection 5(d), with two exceptions thatwe believe will provide investors inRegulation A offerings with additionalprotections:

Solicitation materials used inRegulation A offerings are required to beincluded with the offering statement; 556

and

Issuers would not, however, be required toupdate and redistribute solicitation materials to theextent that: (1) Any such changes occur only withrespect to the preliminary offering circular, (ii) nosimilar changes are required in the solicitationmaterials previously relied upon, and (iii) suchmaterials included (when originally distributed) aURL where the preliminary offering circular or theoffering statement may be obtained and that URLcontinues to link to the most recent version of thepreliminary offering circular. See Rule 255(d).

554 See fri. 277 above.Rule 255.

556 See Item 17 (Exhibits), Part Ill of Form 1—A.

• solicitation materials used byRegulation A issuers that file an offeringstatement with the Commission will bepublicly available as a matter of course.

Contrary to the views of commentersthat suggested we keep solicitationmaterials confidential, or not requiresuch materials to be filed (eitherpublicly or at all), we believe thesubmission and filing requirements forsolicitation materials are importantelements of the final rules for the use ofsolicitation materials.557 We believe thatissuers should be accountable for thecontent of solicitation materials and thatsuch information must be consistentwith the information contained in theoffering circular. We believe thatmaking these materials publiclyavailable as an exhibit to the offeringstatement, and thereby subjecting themto staff review and comment andscrutiny by the public, will help ensurethat issuers use solicitation materialswith appropriate caution. However, forthe reasons discussed in Section lI.F.below, we do not believe that the filingof such materials should be a conditionto relying on the Regulation Aexemption.

We are adopting as proposed therequired legends for solicitationmaterials. The legends provide thatsales made pursuant to Regulation A arecontingent upon the qualification of theoffering statement.55e Additionally, toprovide greater flexibility when usingsolicitation materials, the final ruleseliminate, as proposed, the requirementin existing Regulation A for testing thewaters materials to identify the issuer’schief executive officer, business, andproducts. Solicitation materials usedbefore qualification will, therefore, berequired to bear a legend or disclaimerindicating that: (1) No money or otherconsideration is being solicited, and ifsent, will not be accepted; (2) no saleswill be made or commitments topurchase accepted until the offeringstatement is qualified; and (3) aprospective purchaser’s indication ofinterest is non-binding.559 While theexpansion of use of solicitationmaterials after filing may result ininvestors receiving more sales literaturein marketed offerings, in suchcircumstances, potential investors willalso be afforded more time with thepreliminary offering circular beforemaking an investment decision because,as noted above, testing the watersmaterials used by an issuer or itsintermediaries after the issuer publicly

‘BIO Letter; Heritage Letter; Ladd Letter 2;MoFo Letter.

See Rule 255(a).559 See Rule 255(bl.



files an offering statement must beaccompanied by a current preliminaryoffering circular or contain a noticeinforming potential investors where andhow the most current preliminaryoffering circular can be obtained.560

We believe the approach tosolicitation materials that we areadopting today is consistent withexisting Regulation A that allows issuersto test the waters and will make the useof solicitation materials more beneficialfor issuers and investors. For issuers,the final rules will generally reducecompliance burdens and entirelyeliminate the filing requirement forissuers that, after testing the waters,decide not to proceed with an offering.With respect to investors, we note thatthe final rules contain significantsafeguards that should help mitigate theconcerns expressed by somecommenters that not requiring testingthe waters materials to he submitted orfiled with the Commission before firstuse will result in a reduction in investorprotections.56’ These include therequirements to make the most recentpreliminary offering circular availablewith solicitation materials after filing, toredistribute solicitation materials afterfiling to the extent that either thematerial itself or the preliminaryoffering circular attached thereafterbecomes inadequate or inaccurate inany material respect, to deliver thepreliminary offering circular at least 48hours in advance of sale if the issuer isnot subject to a Tier 2 reportingobligation, to deliver the final offeringcircular (or a notice of the final offeringcircular) no later than two business daysafter sale in all instances, and theminimum 21 calendar day filingrequirement for issuers that non-publicly submit draft offeringstatements as well as the continuedapplication of the antifraud provisionsof the federal securities laws.Additionally, state securities regulatorshave the ability under the final rules torequire issuers to file with them anymaterials required to be filed with theCommission.562 From an investorprotection standpoint, we also note thatsales under Regulation A may occur

560 Cf. The Regulation of Securities Offerings, Rel.No. 33—7606A, at 78 (Nov. 17, 1998) [63 FR 671741(discussing the importance of providing apreliminary prospectus in conjunction with thedistribution of sales materials).

561 See fri. 541 above.562 See also fri. 277 above and discussion in

Section lI.H. below. Where states elect to requireissuers to file such information with them, theirrespective securities regulators will, for example,have access to solicitation materials relied upon byfirst-time issuers that non-publicly submit draftoffering statements for a minimum of 21 calendardays before the first date of any potential sales.

only in connection with a qualifiedoffering statement that is filed with theCommission and that is subject toreview by the staff.

Lastly, to address the concerns ofcommenters regarding an issuers’ abilityto conduct routine communicationswith customers and suppliers at or nearthe time of a contemplated Regulation Aoffering,563 we are confirming,consistent with Rule 169’s existingexemption from Sections 2(a)(10) and5(c) of the Securities Act for regularlyreleased factual businesscommunications,564 that we do notbelieve such communications constitutesolicitation of interest materials underRegulation A. Ultimately, whether ornot a communication is limited tofactual business information depends onthe facts and circumstances, but issuersmay generally look to the provisions ofRule 169 for guidance in making thisdetermination in the Regulation Acontext. More generally, we note thatfactual business information meansinformation about the issuer, itsbusiness, financial condition, products,services, or advertisement of suchproducts or services.565 Factual businessinformation generally does not includesuch things as predictions, projections,forecasts, or opinions with respect tovaluation of a security.566 The approachwe are taking today with respect tofactual business information isconsistent with the Commission’s statedposition on such communications forregistered offerings and clarifies itsapplication to Regulation A solicitationof interest materials.

F. Ongoing Reporting

Section 3(b)(2) of the Securities Actrequires issuers to provide annualaudited financial information on anongoing basis and expressly providesthat the Commission may considerwhether additional ongoing reportingshould be required. Specifically, Section3(b)(4) grants the Commission authorityto require issuers “to make available toinvestors and file with the Commissionperiodic disclosures regarding theissuer, its business operations, itsfinancial condition, its corporategovernance principles, its use ofinvestor funds, and other appropriatematters, and also may provide for thesuspension and termination of such arequirement with respect to that issuer.”

As we noted in the Proposing Release,we are mindful that a one-size-fits-all

563 See fri. 549 above564 17 CFR 230.169.565 See Rel. No. 33—5180 (Aug. 20, 1971)

(Guidelines for Release of Information by IssuersWhose Securities are in Registration).

5661d

ongoing reporting regime may not besuitable for all types of entities andinvestors.567 In the final rules forRegulation A, we have endeavored toachieve an appropriate balance betweenthe costs and benefits associated withthe provision of ongoing informationabout issuers of Regulation A securitiesto investors in such securities and anymarket that develops.

1. Continuing Disclosure Obligationsa. Proposed Rules for ContinuingDisclosure Obligations

Regulation A currently requiresissuers to file a Form 2—A with theCommission to report sales and thetermination of sales made underRegulation A every six months afterqualification and within 30 calendardays after the termination, completion,or final sale of securities in theoffering.568 We proposed to rescindForm 2—A, but to continue to requireRegulation A issuers to file with theCommission electronically on EDGARafter the termination or completion ofthe offering the information generallydisclosed in Form 2—A.569 As proposed,issuers conducting Tier 1 offeringswould be required to provide thisinformation on Part I of proposed Form1—Z not later than 30 calendar days aftertermination or completion of theoffering,570 while issuers conductingTier 2 offerings have the flexibility toprovide this information on either PartI of Form 1—Z at the time of filing an exitreport or proposed Form 1—K as part oftheir annual report, whichever is filedfirst.57’

As proposed, Tier 2 issuers would besubject to a Regulation A ongoingreporting regime that would require, inaddition to annual reports and summaryinformation about a recently completedoffering, semiannual reports onproposed Form i—SA, current eventreports on proposed Form 1—U, and,when eligible and electing to do so,notice to the Commission of thesuspension of ongoing reporting

567 See Proposing Release, at Section HE.568 See 17 CFR 230.257 (2014); see also 17 CFR

239.91 (Form 2—A).569We did not propose to continue to require

issuers to disclose the use of proceeds currentlydisclosed in Form 2—A, as issuers would alreadyhave to disclose this information in Part II ofproposed Form 1—A and changes in the use ofproceeds after qualification not previouslydisclosed may require issuers to file a post-qualification amendment or offering circularsupplement to update such disclosure. Seediscussion of continuous or delayed offerings andoffering circular supplements in Section Il.E.4.above.

57° Proposed Form 1—Z (exit report) is discussedin Section U.E.4. below.

571 Proposed Rule 257(a), (b)(1).



obligations on Part II of proposed Form1—Z. All of these reports would be filedelectronically on EDGAR


We received both general commentsand specific comments on the proposedforms. These comments are discussed inturn below.

General Comments

Commenters generally approved ofthe continuing disclosure obligations forTier 2 offerings.572 One commenternoted favorably that professional fees,other costs, and the time buidenassociated with the proposed ruleswould likely be substantially lower forRegulation A issuers than for issuerssubject to Exchange Act reporting.573Another commenter remarked that theproposed ongoing reporting regimestrikes an appropriate balance betweenthe benefits of disclosure and costs toissuers.574

Other commenters expressed generalsupport, but also recommended changesto the semiannual reporting requirementor the content of Form 1—U.575 Onecommenter supported the general policythat it should not be easier or harder toexit the Regulation A reporting systemthan it would be to exit the ExchangeAct reporting system.576 Severalcommenters recommended including anongoing disclosure requirement for Tier1 issuers, including disclosure at a levellower than what was proposed for Tier

ongoing disclosure with yearlyaudited financials,78 or someunspecified continuous disclosureob1igation.9 Another commenterrecommended extending continuingdisclosure obligations into Tier 1, butfurther suggested that the Commissionreplace any requirement to provideaudited financial statements with anaffidavit from management attesting tothe accuracy of the financialstatements.58° A few commentersgenerally recommended reducing the

572 BLS Letter; Campbell Letter; CanaccordLetter; CFA Letter; McCarter & English Letter;NASA}k Letter 2; Letter from Jason Coombs, Cofounder and CEO, Public Startup Company, Inc.,March 26, 2014 (“Public Startup Co. Letter 5”l; USAlliance Corp. Letter; WDFI Letter.

US Alliance Corp. Letter.574McCarter & English Letter.

BLS Letter; Canaccord Letter; NASAALetter 2; WDFI Letter.

576 ABA BLS Letter (raising the issue particularlywith respect to “very small issuers” under Tier 2).

577Guzik Letter I (suggesting that Tier I ongoing

disclosure requirements could parallel Tier 2’srequirements but without the requirement forsemiannual reports).

578Ladd Letter 2.SVB Financial Letter.

580 Public Startup Co. Letter 5.

disclosure burden on Tier 2 issuers.58’One of these commenters recommendedmaking continuing disclosurerequirements contingent upon factorsother than offering size, such as whetherthe issuer has taken steps to foster amarket in its securities.582 Thiscommenter also recommended allowingissuers to either avoid ongoing reportingor to file only financial statements anda management letter regardingoperations and results if, shortly aftercommencing the offering uponqualification, issuers have less than 300record holders. Another commenterrecommended allowing Canadiancompanies to rely on Rule 12g3—2(b) toavoid having to file ongoing reportsunder Regulation A.583 As analternative, this commenterrecommended allowing Canadiancompanies to furnish reports undercover of Form 6—K rather than using theRegulation A reports. One commenterrecommended that, to the extent that thefinal rules allow foreign private issuersto use Regulation A, such issuers shouldbe permitted to follow tire ongoingreporting rules applicable to them in theExchange Act context in lieu ofRegulation A ongoing reportingrequirements,584 while anothercommenter specifically opposed thissuggestion.585 Another commenterrecommended requiring officers,directors, and controlling shareholdersof companies that offer securities underRegulation A to make ongoingdisclosure of transactions in companysecurities, similar to reporting on Forms3, 4, and 5 and Schedules 131), 13G, and13F in the registered context.586

Comments on Form 1—K

One commenter recommendedrevising proposed Form i—K toexpressly not require the disclosure ofan issuer’s plan of operations, asdescribed in Item 9(c) of Part U of Formi—A.587 This commenter furtherrecommended clarifying whether a Tier2 issuer is required to comply withRules 3—10, 3—16, and 8—04 ofRegulation S—X in Form 1—K, in light ofthe reference to segmented data in Item7(b) to Part F/S of proposed Form 1—

581 Heritage Letter; IPA Letter (providingestimated costs of compliance for offering statementand periodic reports).

582 Heritage Letter.583 DuMoulin Letter.584McCarter & English Letter (noting Exchange

Act Form 20—F, 40—F, Form 6—K, and ongoing homecountry reports).

585 .4.ndreessen/Cowen Letter.586 OTC Markets Letter.587E&Y Letter (noting the Commission’s intent to

follow this approach, as mentioned in theProposing Release at fn. 397).

A.588 This same commenterrecommended that the Commissionclarify whether a Tier 2 issuer isrequired to comply with Rule 8—04 ofRegulation S—X in proposed Form 1—K,particularly with respect to probableacquisitions.58°

Comments on Form 1—SASeveral commenters recommended

requiring or permitting quarterlyreporting rather than semiannualreporting on proposed Form 1—SA.59°One of these commenters stated thatquarterly reporting is standard in theUnited States and is not overlyburdensome.’ Two other commentersstated that quarterly reporting wasnecessary for investor protection and toreduce the risk of insider trading.92Other commenters noted that quarterlyreporting might be preferred by marketparticipants but supported a semiannualrequirement.

One commenter agreed with ourproposal not to require Tier 2 issuers tohave their Form 1—SA financialstatements reviewed by an independentaccountant, particularly with respect tosmaller issuers.594 Another commenterrecommended either requiring thefinancial statements in form 1—SA to bereviewed by an independent accountantor requiring issuers to disclose on form1—SA that the financial statements werenot subject to review.595 Yet anothercommenter recommended that there beno requirement to provide Rule 3—16 ofRegulation S—X financial statements orsummarized financial information insemiannual reports (to align withrequirements for existing registrants thatare not required to include this in Form10—QJ.596 This commenter alsorecommended clarifying if the financialstatements in Form 1—SA can bepresented using a condensed formatconsistent with Rule 8—03(a) ofRegulation S—X and if additionaldisclosure requirements of Rule 8—03(b)are applicable.597 This same commenterrecommended removing Item 3(d) ofform 1—SA, because neither thisstatement nor a statement of changes instockholders’ equity is an existingrequirement on Form i0—Q.598

5881d

590E&Y Letter; Massachusetts Letter 2; NASAALetter 2; OTC Markets Letter; WDFI Letter.

591 OTC Markets Letter.592 Massachusetts Letter 2; WDFI Letter.

B. Riley Letter; Milken Institute Letter.594 BLS Letter. As proposed, such reviews

would not be required for any Form 1—SA filing.KPMG Letter.

596E&Y Letter.

598 Id


federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations 21845

Comments on Form 1—UCommenters made a number of

suggestions regarding the current reportrequirements. Some commentersrecommended eliminating therequirement to file Form 1—U for thesmallest issuers, based on a measuresuch as asset size or marketcapita1ization.° Other commentersrecommended extending the proposedfiling requirement from four businessdays after the triggering event to fifteenbusiness days after such event.600Several commenters recommendedchanging or clarifying the “fundamentalchange” standard in Item 1 of proposedForm 1_U.601 One of these commentersexpressed concerns about whether thisitem will be consistently interpretedand whether the use of the term“fundamental change,” in light of theuse of the same term in Item 512 ofRegulation S—K, would cause additionalconfusion.6°2 This commenter furtherrecommended that, for contractsinvolving business acquisitions, themeasurement of significance in this itemshould be limited to the investment testand the numerical threshold should beincreased to at least 50% to be moreconsistent with the stated disclosureobjective. Three commentersrecommended moving to a materialitystandard so as to be consistent with thestandards in the anti-fraud provisions offederal securities laws, suggesting thatthis would help avoid confusion.603 Onecommenter recommended allowing (butnot requiring) Tier 1 issuers to reportmaterial information on Form 1—U,including the financial statements ofsignificant acquired businesses.604

Other commenters suggested changesto the substance of what would need tobe reported on Form i—U. Onecommenter generally recommendedcross-referencing existing disclosurerequirements when a proposeddisclosure standard is meant to be thesame.605 For example, this commentersuggested that form i—U include across-reference to Form 8—K whendisclosure requirements are meant to bethe same. One commenterrecommended permitting companies to

‘°9ABA BLS Letter; Milken Institute Letter.600 ABA BLS Letter; E&Y Letter; Millcen Institute

Letter.601E&Y Letter; Massachusetts Letter 2; NASAA

Letter 2; WDFI Letter.602E&Y Letter. For description of Item 512, see fn.

486 above.603 Massachusetts Letter 2; NASAA Letter 2;

WDFI Letter.604E&Y Letter. Two commenters made a similar

recommendation without specifying which formshould be used for that purpose. See ABA BLSLetter; Canaccord Letter.

605 PwC Letter.

disclose: (1) A change in accountants inthe next periodic filing instead ofreporting it on Form 1—U if the changedoes not involve a disagreement orreportable event (as defined in Item 304of Regulation S—K); and (2) sales ofequity securities in the next periodicfiling if the price was not below that ofprevious primary offerings.606 Two ofthese commenters recommendedeliminating the requirement to reportunregistered sales of securities on Formi—U, or to raise the reporting thresholdto only cover offerings that represent atleast 10% of the issuer’s pre-transactionoutstanding shares.607

c. Final Rules for Continuing DisclosureObligations

We are adopting rules for continuingdisclosure obligations under RegulationA generally as proposed, with certaintechnical modifications andclarifications. The final rules eliminateForm 2—A and in its place require thedisclosure of similar informationpursuant to Part I of Form i—Z for Tier1 issuers and, depending on when theissuer’s offering is terminated orcompleted, in either form 1—K or PartI of Form 1—Z for Tier 2 issuers. Asproposed, the respective disclosurerequirements in Part I of Forms 1—K andi—Z will include the date the offeringwas qualified and commenced, theamount of securities qilalified, theamount of securities sold in the offering,the price of the securities, the portionsof the offering that were sold on behalfof the issuer and any sellingsecurityholders, any fees associatedwith the offering, and the net proceedsto the issuer.608 We believe thatsummary information and data about anissuer and its Regulation A offering ismost valuable when obtained after theoffering is completed or terminated.609Therefore, as proposed, issuers will onlybe required to disclose such informationafter the termination or completion ofthe offering.

As noted in the Proposing Release, weare concerned that uniform ongoingreporting requirements for all issuers ofRegulation A securities could

6065&Y Letter.607 ABA BLS Letter; MoFo Letter.60 Part I of Form 1—K and Part I of Form 1—

Z. For clarification purposes, we have changed thereferences in Part I in these forms from ‘number ofsecurities” to ‘amount of securities.” Thesechanges should avoid confusion when reportingdebt offerings where a quantifiable number ofsecurities is not being offered. In such cases, issuerswill he able to report the aggregate sales ofsecurities in the offering.

Additionally, in continuous offerings, issuersare required to file post-qualification amendmentswith the Commission every twelve months to theextent that sales are ongoing at that time. See Rule252ffl(2)(i).

disproportionately affect issuers insmaller offerings. For that reason, thefinal rules do not require any ongoingreporting for issuers conducting Tier 1offerings, other than the disclosure ofthe summary information discussedabove.dbo Issuers in smaller offeringswill, however, have the option toconduct a Tier 2 offering and subjectthemselves to ongoing reporting andother Tier 2 requirements.61’

The final rules for ongoing reportingfor Tier 2 issuers are being adopted asproposed, except where noted below,and will require issuers to file annualreports on Form 1—K,612 file semiannualreports on Form i—SA,613 file currentevent reports on Form 1_U,614 andprovide notice to the Commission of thesuspension of their ongoing reportingobligations on Part II of Form 1_Z.615

All reports for Tier 1 and Tier 2offerings are required to be filedelectronically on EDGAR.616

As discussed above, commenterssuggested that the Commission considervarious potential changes to theproposed ongoing reportingrequirements for Tier 2 issuers,including: Extending ongoing reportingto Tier 1 offerings with somemodifications; increasing the ongoingreporting requirements for Tier 2 issuersto include analogs to Exchange ActForms 3, 4, and 5 and beneficialownership reporting on Schedules 13D,13G and 13F; basing the ongoingreporting requirements oncharacteristics of the issuer, such aswhether the issuer has taken steps tofoster a secondary market; or providingdifferent requirements for Canadiancompanies or foreign private issuers.Another commenter suggested that weallow issuers to either avoid ongoingreporting or to file only financialstatements and a management letterregarding operations and results if,shortly after commencing the offeringupon qualification, issuers have lessthan 300 record holders.6’7

We do not, however, believe that thechanges suggested by commenters

610 See Rule 257(a).611 An issuer offering up to $20 million in a Tier

2 offering would, in addition to providing ongoingreports to the Commission on an annual andsemiannual basis, with interim current eventupdates, be required to file audited financialstatements in the offering statement, just as issuersin larger Tier 2 offerings are required to do. SeeSection II.C.3.b(2)(c). above.

6”Rule 257(b)(1).6’3Rule 257(b)(3).614 Rule 257(b)(4).615 Rule 257(d)(2).616 Subject, in certain cases, to the hardship

exemptions set forth in Rules 201 and 202 ofRegulation S—T. 17 CFR 232.201—202.

617 Heritage Letter.



described above are advisable at thistime. Instead, we believe the approachto ongoing reporting adopted in the finalrules is preferable and will support aregular flow of information aboutissuers conducting Tier 2 offerings,which will benefit investors in theselarger offerings and also help foster thedevelopment of a secondary market insuch securities, while balancing thecompliance burden that would beimposed on smaller issuers. We do notbelieve that requiring ongoing reportingfor Tier 1 issuers, other than therequirement to file a Form 1—Z uponcompletion or termination of theoffering, is necessary for Tier 1offerings. We believe issuers in Tier 1offerings will be small companies whosebusinesses revolve around products,services, and a customer base that willlikely be more local in nature thanissuers in Tier 2 offerings.ele Further,we believe Tier 1 offerings will beconducted by issuers that are unlikely toseek the creation of a secondary tradingmarket in their securities.619 In light ofthis, we do not believe that it isnecessary to require ongoing reportingfor Tier 1 issuers. Consistent with ourexperience under existing Regulation A,we do not believe that a lack of ongoingreporting for issuers in Tier 1 offeringswill adversely affect investors that basepurchasing decisions on the narrativeand financial statement disclosurerequirements included in the offeringstatement and, with respect tocontinuous offerings lasting for morethan one year, updated annually bypost-qualification amendmentthereafter. Further, notwithstanding thesuggestions of some commenters,62° webelieve that adopting different ongoingreporting requirements for Canadianissuers62’ would not be consistent withour goal to adopt a uniform reportingstandard for Tier 2 issuers that providesinvestors with certainty as to theamount of information they can expectto receive from an issuer in a Tier 2offering on an ongoing basis. We believethat the final rules will provideinvestors and potential investors withthe information they need to makeinvestment decisions and facilitatecapital formation for smaller companies.

618 See fn. 830 in Section II.H.3. below.619 discussion of the nature of offerings in

Section II.H.3. below.620DuMoulin Letter; see also McCarter & English

Letter.621Commenters also suggested that their

proposed ongoing reporting for Canadian issuersapply to foreign private issuers. As noted above inSection lI.B.1.c., however, non-Canadian foreignissuers are not eligible under Regulation A.

We are therefore adopting thefollowing ongoing reportingrequirements for Tier 2 offerings:

(1) Annual Reports on Form 1—KAs proposed and adopted, Form 1—K

will consist of two parts: Part I(Notification) and Part II (Information tobe included in the report). The contentsof and requirements for Part I and PartII are, with the exception of technicalamendments to the forms, amendmentsthat are necessary to reflectcorresponding changes to the requiredaudit standards of financial statementsfiled under Part F/S of Form 1—A, andadditional guidance designed tostreamline disclosure, adopted withoutchanges from the proposed rules.

(a) Part I (Notification)As adopted, Part I of Form 1—K will

be an online XML-based fillable formthat will include certain basicinformation about the issuer,prepopulated on the basis ofinformation previously disclosed in PartI of Form 1—A, which can be updated bythe issuer at the time of filing.Additionally, if at the time of filing theForm 1—K an issuer has terminated orcompleted a qualified Regulation Aoffering, the issuer will be required toprovide certain updated summaryinformation about itself and suchoffering in Part I, including the date theoffering was qualified and commenced,the amount of securities qualified, theamount of securities sold in the offering,the price of the securities, the portionsof the offering that were sold on behalfof the issuer and any sellingsecurityholders, any fees associatedwith the offering, and the net proceedsto the issuer.

As proposed and adopted, issuers willonly be required to fill out the XML-based portion of Part I of Form 1—K thatrelates to the summary informationabout a terminated or completedoffering once per offering. An issuer thatelects to terminate its ongoing reportingobligation under Tier 2 of Regulation Aafter terminating or completing anoffering, in a fiscal year other than thefiscal year in which the offeringstatement was qualified, but beforereporting the required summaryinformation on Form 1—K, will berequired to file the summary offeringinformation in Part I of Form 1—K byfiling a Form 1—Z (exit report) thatincludes such information.622

The summary information disclosedwill facilitate analysis of Regulation Aofferings by the Commission, otherregulators, third-party data providers,

622 General Instruction (3) to Form 1—Z.

and market participants and therebyenable the Commission and others toevaluate the use and effectiveness ofRegulation A as a capital formationtool.623 The fillable form will enableissuers to provide the requiredinformation in a convenient mediumand capture relevant data about therecently terminated or completedRegulation A offering. The requireddisclosure will be publicly available onEDGAR. Consistent with Part I of Form1—A, the issuer will not be required toobtain specialty software to file Part I ofForm 1-K on EDGAR.

(b) Part II (Information To Be Includedin the Report)

As with Part II of Form 1—A, the finalrules require that the issuer submit PartII of Form 1—K electronically as a textfile attachment containing the body ofthe disclosure document and financialstatements, formatted to be compatiblewith the EDGAR filing system. Part IIwill require issuers to discloseinformation about themselves and theirbusiness based on the financialstatement and narrative disclosurerequirements of Form 1—A.624

As adopted, Item 2 to Part II of Form1—K (Management’s Discussion andAnalysis of Financial Condition andResults of Operation) requires issuers,by cross-reference to the requirements ofForm 1—A, to provide information forthe two most recently completed fiscalyears. As suggested by onecommenter,625 we are clarifying that theForm 1—K cross-reference to therequirements of Item 9 to Part II of Form1—A does not require issuers to includethe additional MD&A disclosurerequired in Item 9(c) for issuers thathave not received revenue fromoperations during each of the threefiscal years immediately before thefiling of the offering statement (or sinceinception, whichever is shorter).626

Additionally, we are revising thefinancial statement requirements in Item7 to Part II of Form 1—K. As proposed,Form 1—K directed issuers to thefinancial statement requirements of PartF/S of Form 1—A. We are revising thisportion of the form so as to include thefinancial statement requirementsdirectly in Item 7 to Part II of Form 1—K. We believe this change to Item 7 willmake it easier for issuers to comply byclarifying, as one commenterrecommended,627 the specific portionsof Regulation S—X relating to financial

623 See also discussion in Section II.E.4. below.624 Part II of Form 1—K.625 E&Y Letter.626 See Item 2 to Part II of Form 1—K.627E&Y Letter.



statements for entities other than theissuer that are required in Form 1—K.Additionally, since Tier 2 issuers arenow permitted to file financialstatements that are audited inaccordance with either U.S. GAAS orthe standards of the PCAOB, acorresponding change has been made tothe financial statement requirements ofItem 7 of Form 1—K.628 As proposed, theauditor of financial statements wouldneed to be independent under Rule 2—01 of Regulation S—X and must complywith the other requirements of Article 2of Regulation S—X, but need not bePCAOB-registered. Further, incomparison to the proposed rules, Item7(a) no longer requires issuers toprovide a list of the financial statementsincluded in Form 1—K at the beginningof the financial statement section. Weeliminated this requirement in the finalrules because we do not believe thatthere is a need for a separate list of thefinancial statements at the beginning ofthis section, when the financialstatements themselves will be labeled.

Form 1—K will permit issuers toincorporate by reference certaininformation previously filed on EDGAR,but will require issuers to include ahyperlink to such material onEDGAR.62° In a change from theproposed rules, the final rules do notlimit the availability of incorporation byreference to information previously filedpursuant to Regulation A. We believethat this change will facilitate theprovision of required information toinvestors, while taking a consistentapproach to information previouslyprovided to the Commission andpublicly available on EDGAR.Additionally, to avoid unnecessaryrepetition of disclosure items, Form 1—K encourages issuers to cross-referenceitems within the form, whereapplicable.630 Further, in order to avoidincorporation by reference to staleinformation without requiring the latestversion of the document to he filed,Form 1—K indicates that, if anysubstantive modification has occurredin the text of any documentincorporated by reference since suchdocument was filed, the issuer must filewith the reference a statement

628 See discussion in Section II.C.3.b(2)(c). above.629 General Instruction 0. to Form 1—K. The

hyperlink to EDGAR need only be active at the timeof filing of the Form 1—K. Cf. Securities Act Rule411(c) and Exchange Act Rule 12b—32.

63a1d. Issuers may, for example, add a cross-reference to disclosure in the financial statements.We have clarified, however, that like with Form 1—A, they may not add a cross-reference within thefinancial statements themselves to disclosureselsewhere.

containing the text and date of suchmodification.63’ Form 1—K will cover:

a Business operations of the issuer forthe prior three fiscal years (or, if inexistence for less than three years, sinceinception);

a Transactions with related persons,promoters, and certain control persons;

• Beneficial ownership of votingsecurities by executive officers,directors, and 10% owners;

• Identities of directors, executiveofficers, and significant employees, witha description of their businessexperience and involvement in certainlegal proceedings;

• Executive compensation data forthe most recent fiscal year for the threehighest paid executive officers ordirectors;

• MD&A of the issuer’s liquidity,capital resources, and results ofoperations covering the two mostrecently completed fiscal years; and

• Two years of audited financialstatements.632

We anticipate that issuers willgenerally be able to use the offeringmaterials as a basis to prepare theirongoing disclosure.

As adopted in the final rules, Form 1—K includes requirements for financialstatements prepared on the same basis,and subject to the same requirements asto audit standards and auditorindependence, as the financialstatements required in the Regulation Aoffering circular for Tier 2 offerings.633Form 1—K must be filed within 120calendar days after the issuer’s fiscalyear end.634 A manually signed copy ofthe Form 1—K must be executed by theissuer and related signatories before orat the time of filing and retained by theissuer for a period of five years.635Issuers will be required to produce themanually signed copy to theCommission, upon request.636 Anyamendments to the form must complywith the requirements of the applicableitems and be filed under cover of Form1—K/A.637

(2) Semiannual Reports on Form 1—SA

We are adopting final rules forsemiannual interim reporting forRegulation A issuers generally asproposed, with technical amendments

631 Id.632 Part II of Form 1—K.633 See Item 7 (Financial Statements), Part II of

Form 1—K.634 See General Instruction A.(2), Form 1—K.635 See General Instruction C., Form 1—K.636 Id637 See Rule 257(c) (also requiring the signature

on behalf of an authorized representative of theissuer and the inclusion of any specifiedcertifications).

and additional guidance designed tostreamline the disclosure requirementsfor Tier 2 issuers and harmonize themwith the requirements of issuers subjectto an ongoing reporting obligation underthe Exchange Act.638 As proposed, wecontinue to believe that a semiannual,rather than a quarterly, reportingrequirement strikes an appropriatebalance between the need to provideinformation to the market and the costof compliance for smaller issuers,especially given the further flexibilityprovided to issuers in form 1—U toprovide quarterly information if theyelect to do so.63° Issuers will be requiredto provide semiannual reports on Form1—SA that, much like reports on Form10—Q, consist primarily of financialstatements and MD&A.64° Unlike Form10—Q, however, Form 1—SA does notrequire disclosure about quantitativeand qualitative market risk, controls andprocedures, updates to risk factors, ordefaults on senior securities.64’ We donot believe such disclosure is necessaryfor ongoing reports under Regulation A,as we believe such disclosure is notapplicable to, or appropriately tailoredfor, the types of issuers likely to conductRegulation A offerings.

Consistent with the technical,specialized suggestions of severalcommenters,642 we are includingprovisions in Form 1—SA that will helpissuers comply with the formrequirements, eliminate potentialconfusion over such requirements, andstreamline and harmonize disclosure tomake the requirements for Tier 2 issuersno more onerous than, and consistentwith, the ongoing disclosures requiredof smaller reporting companies underthe Exchange Act. Specifically, the finalrules:

Add clarifying language to Item 1(Management Discussion and Analysisof Financial Condition and Results ofOperations) of Form 1—SA to indicatethat compliance with this disclosurerequirement only applies to the interimfinancial statements required by Item 3to Form 1—SA and that, similar to ourclarification of Form 1—K’srequirements, issuers are not required to

638 Rule 257(b)(3); Form 1—SA.639 Consistent with the suggestions of

commenters, we are clarifying that issuers seekingto voluntarily report information to the market ona more frequent basis may do so under the fInalrules for current reporting on Form i—U. Seediscussion in Section II.E.1.c(3). below; see alsodiscussion in Section II.E.2.c. below regarding theprovision of ongoing reports as it applies toSecurities Act Rule 144.

640 See Part I (Financial Information) of Form 10—Q, 17 CFR 249.308a.

641 See Item 3 and Item 4 of Part I of Form 10—Q.

642 See, e.g., E&Y Letter; KPMG letter.



include the additional MD&A disclosurerequired by Item 9(c) of Form 1—A;643

Update the financial statementdisclosure requirements of Form 1—SAto more clearly delineate therequirements for compliance with Item3 of Form 1—SA;

• Provide that the financialstatements that must be includedpursuant to Item 3 may be condensed,in addition to being unaudited, and thatthe financial statements are not requiredto be reviewed;

• Amend the final form to note thatadditional guidance on the presentationof financial statements arid footnotesand other disclosures can be found inRule 8—03 of Regulation S_X; 644

• Revise the requirements of Item 3(e)of Form 1—SA to match the disclosurelanguage contained in Rule 3—10 ofRegulation S—X for smaller reportingcompanies;

• Delete the requirement in Item 3(d)of proposed form 1—SA to presentinterim statements of changes infinancial position for the periodbetween the end of the preceding fiscalyear and the end of the interim periodcovered by this report, and for thecorresponding period of the precedingfiscal year, as this is not required ofissuers under Rule 8—03 of RegulationS—X; and

• Make the ongoing reportingrequirements under Item 3 of Form 1—SA more consistent with what isrequired of issuers subject to an ongoingreporting obligation under the ExchangeAct, consistent with the suggestion ofone commenter,645 by eliminating theline item requirements of Item 3(f) and(g), as Rule 3—16 and Rule 4—10 ofRegulation S—X generally do not requirethe disclosure of such information otherthan in registration statements andannual reports.

As adopted, Form 1—SA will requiredisclosure of updates otherwisereportable on Form 1—U. The final rulespermit issuers to incorporate byreference in Form 1—SA certaininformation previously filed on EDGAR,but must include a hyperlink to suchmaterial on EDGAR.646 In a change fromthe proposed rules, the final rules donot limit the availability ofincorporation by reference toinformation previously filed pursuant to

643 See Section fl.F.1.c.(1)(b) above for adiscussion of this clarification hi Form 1—K.

644 Tier 2 issuers are required under Part F/S ofForm 1—A to provide financial statements thatcomply with Article 8 of Regulation S—X.

645 E&Y Letter.66 General Instruction D. to Form 1—SA. The

hvperlink to EDGAR need only be active at the timeof filing of the Form 1—SA. Cf. Securities Act Rule411(c) and Exchange Act Rule 12b—32.

Regulation A. We believe that thischange will continue to facilitate theprovision of required information toinvestors, while taking a consistentapproach to information previouslyprovided to the Commission andpublicly available on EDGAR.Additionally, in a change from theproposed form that seeks to avoidunnecessary repetition of disclosureitems, Form 1—SA encourages issuers tocross-reference items within the form,where applicable.647 Further, in order toavoid incorporation by reference to staleinformation without requiring the latestversion of the document to be filed,Form 1—SA indicates that, if anysubstantive modification has occurredin the text of any documentincorporated by reference since suchdocument was filed, the issuer must filewith the reference a statementcontaining the text and date of suchmodfflcation.68

Form 1—SA must be filed within 90calendar days after the end of the firstsix months of the issuer’s fiscal year.649The first such obligation to file willcommence immediately following themost recent fiscal year for which fullfinancial statements were included inthe offering statement, or, if the offeringstatement included financial statementsfor the first six months of the fiscal yearfollowing the most recent full fiscalyear, for the first six months of thefollowing fiscal year.65° As proposed, amanually signed copy of the Form 1—SAmust be executed by the issuer andrelated signatories before or at the timeof filing, retained by the issuer for aperiod of five years, and produced bythe issuer to the Commission, uponrequest.65’ The final rules require, asproposed, any amendments to the formto comply with the requirements of the

647 Id. Issuers may, for example, add a cross-reference to disclosure in the financial statements.We have clarified, however, that like with Form 1—A, they may not add a cross-reference within thefinancial statements themselves to disclosureselsewhere.

648 Id649 See General Instruction A.(2l, Form 1—SA.

For example, where an offering statement isfiled in October 2015 and includes full financialstatements for the fiscal years ended December 31,2014 and December 31, 2013 and interim financialstatements for the six months ended June 30, 2015and June 30, 2014 and is qualified in December2015, the form i—SA will not be required untilwithin 90 days following the first six months of thefollowing fiscal year (i.e., within 90 days followingJune 30, 2016).

If, however, the offering statement is filed inMarch 2015 and qualified in June of 2015 than thefirst Form i—SA would cover the six months endedJune 30, 2015 and June 30, 2014 and would not berequired to be filed until within 90 days followingJune 30, 2015.

651 See General Instruction C. to Form 1—SA.

applicable items and be filed undercover of Form i—SA/A.62

(3) Current Reports on Form i—UIn addition to the annual report on

Form 1—K and semiannual report onForm 1—SA, the final rules requireissuers to submit current reports onForm 1—U. The final rules are beingadopted largely as proposed with onechange and some technical amendmentsand additional guidance designed toease compliance with the final rules andeliminate potential confusion as to thescope and applicability of the disclosurerequirements. The final rules requireissuers to submit a report on form 1—U when it experiences one (or more) ofthe following events:

• Fundamental changes; 653

• Bankruptcy or receivership;• Material modification to the rights

of securityholders;• Changes in the issuer’s certifying

accountant;• Non-reliance on previous financial

statements or a related audit report orcompleted interim review;

• Changes in control of the issuer;• Departure of the principal executive

officer, principal financial officer, orprincipal accounting officer; and

• Unregistered sales of 10% or moreof outstanding equity securities.

Additionally, as proposed, Item 9 offinal form 1—U contains provisions fordisclosing other events not directlyrequired of issuers in the form. As notedabove in the context of suggestions bycommenters to require or permitquarterly reporting by issuers,654 issuersthat elect to provide relevantinformation to the market on, forexample, a quarterly basis may do sopursuant to Item 9 (Other Events) ofForm 1—U.655

Notwithstanding the view of somecommenters,656 we believe that Form 1—U should be required of all Tier 2

652 See Rule 257(c).653As discussed below, disclosure pursuant to

this requirement is limited to the entry into ortermination of material definitive agreementsresulting in fundamental changes in the nature ofan issuer’s business. More generally, a fundamentalchange in the nature of an issuer’s businessincludes major and substantial changes in theissuer’s business or plan of operations or changesreasonably expected to result in such changes, suchas significant acquisitions or dispositions, or theentry into, or termination of, a material definitiveagreement that has or will result in major andsubstantial changes to the nature of an issuer’sbusiness or plan of operations.

654 See fn. 639 and 604 above.655 An issuer seeking to, for example, report

information that satisfies, arid on a frequency thataccords with, the requirements of Exchange ActRule 15c2—11(aj(5) and (g) or Securities Act Rule144A(d)(4] may do so pursuant to Item 9 of Form1-u.

656 ABA BLS Letter; Milken institute Letter.



issuers, including smaller issuers. Webelieve that, on balance, the benefit ofrequiring a uniform base level ofdisclosure to investors of current eventreporting for all issuers in Tier 2offerings outweighs any potentialadditional compliance cost to smallerissuers. Additionally, given theinclusion of only the most significantevents in the list of disciosable currentevents on Form 1—U, re do notanticipate that issuers, particularlysmaller issuers, will on average berequired to file many reports in thisregard.

In a change from the proposed rules,and consistent with the suggestions ofcommenters,657 the final rules increasethe threshold below which an issuerneed not report unregistered sales ofequity securities pursuant to Item 8 ofForm 1—U from 5% to 10% of thenumber of shares outstanding of theclass of equity securities sold. Webelieve that this increase in thethreshold below which an issuer wouldnot be required to report such salesremains consistent with our generalapproach to the final rules for Form 1—U—namely, that Form 1—U shouldreflect the most significant orsubstantial events that an issuer mayexperience in the interim periodbetween the filing of the requiredperiodic reports.

We are not amending Item 1 of Form1—U to alter the use of the term“fundamental change,” as suggested bysome commenters.658 We are, however,revising Instruction 2 to Item 1 to makeclear that the transactions describedtherein are deemed to be “fundamentalchanges” solely for purposes of Item 1of form i—U and should not be read toinfluence the definition of that term inother contexts.ean Item 1 of Form i—U ismeant to require issuers to disclosematerial definitive agreements,including agreements to acquire otherentities, which result or wouldreasonably be expected to result infundamental changes to the nature ofthe issuer’s business or plan ofoperations. As Instruction 2 to Item 1indicates, certain transactions aredeemed to involve fundamentalchanges, and disclosure of thesetransactions, as prescribed by Item 1 isrequired. Consistent with the suggestionof one commenter,66° we are narrowingfrom the proposed rules theapplicability of Instruction 2(a) so thatan acquisition transaction will only

657 Letter; MoFo Letter.658 See E&Y Letter; see also ABA BLS Letter;

Canaccord Letter.659 Item 1(d) to Form 1—U.660E&Y Letter.

result in a fundamental change for thesepurposes if the purchase price, asdefined by U.S. GAAP and IFRS,exceeds 50% of the total consolidatedassets of the issuer as of the end of themost recently completed fiscal year.66’We believe that this is consistent withour general goal of only requiringdisclosure of significant and substantialmatters that may affect an issuer’sbusiness or plan of operations. Webelieve that this requirement isappropriately tailored for the types ofissuers likely to conduct Tier 2 offeringsby providing them with importantflexibility as to the determination of a“fundamental change,” while providingclear guidance that certain transactionswill always trigger disclosure underItem 1.

On a related point, we continue tobelieve, despite the suggestions of somecommenters,662 that a fundamentalchange standard for some of thedisclosure requirements in Form 1—U isa more appropriately tailored standardfor Tier 2 issuers than a broadermateriality standard. A fundamental (asopposed to a material) change to thenature of an issuer’s business includesmajor and substantial changes to theissuer’s business or plan of operationsor changes reasonably expected to resultin such changes.663 The final rulesreflect our belief that, on balance, Tier2 issuers should only be required makedisclosures in Form i—U that reflectmajor and substantial changes tobusiness plans or operations, asopposed to material events that areotherwise reportable in their periodicreports. Moreover, we do not believethat a fundamental change standard willcause confusion or raise concerns as tothe applicability of other standardsapplicable in the anti-fraud provisionsof the federal securities laws.

Additionally, we note that Item 6 ofForm 1—K and Item 2 of Form 1—SApermit issuers to disclose anyinformation required to be disclosedunder Form i—U, but not so reported.For example, if an event occurs thatwould, under normal circumstances,require an issuer to file a Form 1—Uwithin four business days, but suchissuer is due to file either its annual orsemiannual report within that period,then the issuer may instead report suchinformation in its periodic report.

663 Instruction(s) 2(b)—(c) to Item 1 of Form 1—Uare adopted, as proposed.

62E&Y Letter; Massachusetts Letter 2; NASAALetter 2; WDFI Letter.

663 See Instruction 2(a) to Item 1 for thecircumstances when an acquisition transactionwould be deemed to trigger a fundamental changefor purposes of Form 1—U.

Finally, contrary to the suggestions ofsome commenters,°64 we continue tobelieve that the requirement to reportunregistered sales of securities in Item8 of Form i—U will provide investorswith valuable current information as tosignificant capital raising events by theissuer and should be disclosed in atimely manner to the market. Wetherefore retain this disclosurerequirement in the final rules.665

As adopted, Form 1—U must be filedwithin four business days after theoccurrence of any of the triggeringevents, and, where applicable, willpermit issuers to incorporate byreference certain information previouslyfiled on EDGAR.666 Notwithstanding thesuggestions of some commenters,667 webelieve that requiring issuers to file theform within four business days, asopposed to fifteen business days, isappropriate in an ongoing reportingregime that otherwise only requiresissuers to provide annual andsemiannual reports. Further, we areconcerned that extending the filingdeadline for Form 1—U reports wouldmake the reporting of disciosable eventsno longer “current” We are thereforeadopting the timing requirements, asproposed. Additionally, in a changefrom the proposed rules, the final rulesdo not limit the availability ofincorporation by reference toinformation previously filed pursuant toRegulation A. We believe that thischange will continue to facilitate theprovision of required information toinvestors, while taking a consistentapproach to information previouslyprovided to the Commission andpublicly available on EDGAR.

Additionally, consistent with thechanges made to Form 1—K and Form 1—SA and suggestions of at least onecommenter,668 Form 1—U encouragesissuers to cross-reference items withinthe form, where applicable.669 Further,in order to avoid incorporation byreference to stale information withoutrequiring the latest version of the

664 ABA BLS Letter; MoFo Letter.665 Item B to Form 1—U. We have also clarified in

Item 8(b) that only periodic reports that containdisclosure regarding unregistered sales of equitysecurities will reset the five percent reportingthreshold for unregistered sales of securities, ratherthan any periodic report.

666 General Instruction 0. to Form 1—U. Thehyperlink to EDGAR need only be active at the timeof filing of the Form 1—U. Cf. Securities Act Rule411(c) and Exchange Act Rule 12b—32.

667 ABA BLS Letter; E&Y Letter; Milken InstituteLetter.

668 Pwc Letter.669 General Instruction 0. to Form 1—U. We have

clarified, however, that like with Form 1—A, theymay not add a cross-reference within any financialstatements that may be included to disclosureselsewhere.



document to be flied, form i—Uindicates that, if any substantivemodification has occurred in the text ofany document incorporated by referencesince such document was filed, theissuer must file with the reference astatement containing the text and dateof such modification.670 A manuallysigned copy of the Form 1—U must beexecuted by the issuer and relatedsignatories before or at the time of filingand retained by the issuer for a periodof five years.67’ Issuers are required toproduce the manually signed copy tothe Commission, upon request.672 Anyamendments to the Form 1—U mustcomply with the requirements of theapplicable items, and be filed undercover of Form 1—U/A.673

(4) Special Financial Reports on Form1—K and form 1—SA

We did not receive any comment onthe proposed provisions for specialfinancial reports and are adopting themas proposed with one minor clarifyingchange. This report serves to closelengthy gaps in financial reportingbetween the financial statementsincluded in Form 1—A and the issuer’sfirst periodic report due afterqualification of the offering statement.Where applicable, issuers conductingTier 2 offerings must provide specialfinancial reports analogous to thoserequired under Exchange Act Rule 15d—2.674 The special financial reportrequires audited financial statements forthe issuer’s most recent fiscal year (orfor the life of the issuer if less than a fullfiscal year) to be filed not later than 120calendar days after qualification of theoffering statement if the offeringstatement does not include suchfinancial statements.675 The specialfinancial report requires semiannualfinancial statements for the first sixmonths of the issuer’s fiscal year, whichmay be unaudited, to be filed 90calendar days after qualification of theoffering statement if the offeringstatement does not include suchfinancial statements and the offeringstatement was qualified in the secondhalf of the issuer’s current fiscal year.676The special financial report must befiled under cover of Form 1—K if it

6701d671 See General Instruction C to proposed Form 1—

U.672 Id673 Rule 257(c).67417 CFR 240.15d—2.675 Rule 257(b)(2)(ii). As adopted, we are revising

Rule 257(b)(2)(ii) to reference the fiscal year orother period specified in Rule 257(b)(2)(i)(A), inorder to avoid potential confusion about whichmost recent fiscal year is covered.

676 Id

includes audited year end financialstatements and under cover of Form 1—SA if it includes semiannual financialstatements for the first six months of theissuer’s fiscal year.677 The financialstatement and auditing requirementsmust follow the requirements of thoseforms, and the issuer must indicate onthe front page of the applicable formthat only financial statements areincluded. 678

(5) Reporting by Successor IssuersWe did not receive any comment on

reporting by successor issuers, and weare adopting the proposed rules withoutchange. Where in connection with asuccession by merger, consolidation,exchange of securities, acquisition ofassets, or otherwise, securities of anissuer that is not subject to the reportingrequirements of Regulation A are issuedto the holders of any class of securitiesof an issuer that is subject to ongoingreporting under Tier 2, the issuersucceeding to that class of securitiesmust continue to file the reportsrequired for Tier 2 offerings on the samebasis as would have been required of theoriginal Tier 2 issuer.679 The successorissuer may suspend or terminate itsreporting obligations on the same basisas the original issuer under Rule257(d).660

2. Exchange Act Rule 15c2—11 andOther Implications of OngoingReporting Under Regulation A

Exchange Act Rule 15c2—1i governsbroker-dealers’ publication of quotationsfor securities in a quotation mediumother than a national securitiesexchange.681 The Commission adoptedRule 15c2—11 in 1971 to preventfraudulent and manipulative tradingschemes that had arisen in connectionwith the distribution and trading ofcertain unregistered securities.682 Therule prohibits broker-dealers frompublishing quotations (or submittingquotations for publication) in a

6?7 Id678 See General Instruction A.(3) to Form 1—K and

General Instruction A.(3) to Form 1—SA.676 See Rule 257(b)(5).680 See Section II.E.4. below for a discussion of

the suspension or termination of disclosureobligations.

681 17 CFR 240.15c2—11.682 See Rel. No. 34—39670 (Feb. 17, 1998)

(Publication or Submission of Quotations WithoutSpecified Information) (describing Rel. No. 34—9310(Sept. 13, 1971) [36 FR 18641]). See 17 CFR240. 15c2—1 1 (e)(1) (defining quotation medium asany ‘interdealer quotation system” or anypublication or electronic communications networkor other device which is used by brokers or dealersto make known to others their interest intransactions in any security, including offers to buyor sell at a stated price or otherwise, or invitationsof offers to buy or sell).

“quotation medium” for covered over-the-counter securities without firstreviewing basic information about theissuer, subject to certain exceptions.°83A broker-dealer also must have areasonable basis for believing that theissuer information is accurate in allmaterial respects and that it wasobtained from a reliable source.684

A broker-dealer can satisfy itsobligations under Rule 15c2—l1 if it hasreviewed and maintained in its recordscertain specified information. Theparticular information that is requiredby the rule varies depending on thenature of the issuer and includes, amongother things:

• For an issuer that has filed aregistration statement under theSecurities Act, a copy of the prospectus;

• for an issuer that has filed anoffering statement under the SecuritiesAct pursuant to Regulation A, a copy ofthe offering circular; or

• for an issuer subject to ongoingreporting under Sections 13 or 15(d) ofthe Exchange Act, the issuer’s mostrecent annual report and any quarterlyor current reports filed thereafter.685

a. Proposed Rules

As proposed, the ongoing reports forTier 2 offerings under Regulation A,which would update the narrative andfinancial statement disclosurespreviously provided in form 1—A on anannual and semiannual basis, withadditional provisions for currentreporting, would satisfy a broker-dealer’s obligations under Rule 15c2—11to review and maintain records of basicinformation about an issuer and itssecurities. In this regard, we proposed toamend Rule 15c2—11 to permit anissuer’s ongoing reports filed in a Tier2 offering under Regulation A to satisfya broker-dealer’s obligations to reviewspecified information about an issuerand its security before publishing aquotation for a security (or submitting aquotation for publication) in a quotationmedium.686

68317 CFR 240.15c2—11(a); See o]so Rel. No. 34—29094 (April 17, 1991) [56 FR 19148].

684 See 17 CFR 240.15c2—11 (Preliminary Note).685 A broker-dealer can also satisfy its review

requirements under Rule 15c2—l1 by reviewingcertain information published pursuant to a Rule12g3—2(b) exemption for foreign private issuers thatclaim the registration exemption or informationspecified in Rule 15c2—11(a)(5) for non-reportingissuers.

686fu addition, we proposed a technicalamendment to Rule 15c2—11 to amend subsection(d)(2)(i) of the rule to update the outdated referenceto ‘Schedule H of the By-Laws of the NationalAssociation of Securities Dealers, Inc.” which isnow known as the “Financial Industry RegulatoryAuthority, Inc.” and to reflect the correct rulereference.


Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 I Rules and Regulations 21851

We also solicited comment on otherpotential effects that Tier 2 ongoingreporting under Regulation A couldhave under other provisions of thefederal securities laws, such as whethertimely ongoing Regulation A reportingunder Tier 2 should constitute“adequate current public information”for purposes of paragraph Cc) of Rule144.687 Under this provision, issuers arerequired to make available adequatecurrent public information aboutthemselves, which, for issuers notsubject to Exchange Act reporting, mustinclude certain information described inExchange Act Rule 15c2—11(a)(5).688 Wealso solicited comment on whetherongoing Regulation A reporting for Tier2 offerings should satisfy theinformation requirements of paragraph(d)(4) of Rule 144A.689 Under thatprovision, holders of Rule 144Asecurities must have the right to obtainfrom the issuer, upon request, a verybrief statement of the nature of theissuer’s business and the products andservices it offers, the issuer’s mostrecent balance sheet and profit and lossand retained earnings statements, andsimilar financial statements for each ofthe two preceding fiscal years, whichinformation must be “reasonablycurrent.” 690

b. Comments on Proposed RulesAll commenters that addressed Rule

15c2—11 supported amending the rule inthe manner proposed.691 Somecommenters recommended furtheramending Rule 15c2—11(g) to providethat an issuer that is current in its Tier2 obligations would be deemed to have“reasonably current” financialinformation, even if its most currentbalance sheet is as of a date up to ninemonths old and it has not providedother updated information.692 Mostcommenters also recommendedamending Rule 144(c) to allow forongoing reporting under Tier 2 toconstitute “adequate current publicinformation.” 693 Other commentersrecommended amending Rule144A(d)(4) to allow for ongoing

687;7 CFR 230.144(c).68817 CFR 230.144(c)(2); see also 17 CFR

230.15c2—11(a), (g).68917 CFR 230.144A(d)(4).6901d691 ABA BLS Letter; Canaccord Letter; CFIRA

Letter 1; KVCF Letter; Milken Institute Letter; MoFoLetter; Paul Hastings Letter; Public Startup Co.Letter 1; REISA Letter; A1R Hambrecht + Co Letter.

692 ABA BLS Letter; Canaccord Letter; Milkentnstitute Letter; MoFo Letter.

69 BLS Letter; Canaccord Letter; CFtRALetter 1; McCarter & English Letter; Paul HastingsLetter; KVCF Letter; Milken Institute Letter;Richardson Patel Letter; REISA Letter; WRHambrecht ÷ Co Letter.

reporting under Tier 2 to satisfy the“reasonably current information”requirements of that rule.694 Althoughthe proposal did not solicit comment onRule 144(1), one commenterrecommended amending this rule toallow former shell companies to rely onRule 144 if they have been current intheir ongoing reporting underRegulation A for a certain period of timeand without having to file a Form 1O.6mOne commenter also supported allowinguse of the Rule 144 safe harbor forformer shell Companies that were notpreviously registered under theExchange Act and that are now sellingsecurities under Regulation A.696Another commenter requested that theCommission limit the prohibitions onreliance on Rule 144 only to ExchangeAct registered issuers.697

c. Final Rules

We are adopting final rules forRegulation A that, as proposed, amendExchange Act Rule 15c2—11(a) so that anissuer’s ongoing reports filed under Tier2 will satisfy the specified informationabout an issuer and its security that abroker-dealer must review beforepublishing a quotation for a security (orsubmitting a quotation for publication)in a quotation medium. In addition, weare adopting, as proposed, a technicalamendment to Rule 15c2—11 to amendsubsection (d)(2)(i) of the rule to updatethe outdated reference to “Schedule Hof the By-Laws of the NationalAssociation of Securities Dealers, Inc.”which is now known as the “financialIndustry Regulatory Authority, Inc.”and to reflect the correct rule reference.

We are not following the suggestionsof some commenters that we adoptprovisions in the final rules so that Tier2 ongoing reports will satisfy the currentinformation requirements of Rule 144and Rule 144A for the entirety of anissuer’s fiscal year. While commenterswere generally supportive, we do notbelieve that the frequency of therequired Tier 2 ongoing reporting meritsa broad determination that such reportswill constitute “adequate publicinformation” or “reasonably currentinformation” on a year-round basis. Onthe contrary, quarterly reporting is anintegral part of the resale safe harborsprovided for in Rule 144 and Rule 144Athat contemplate the provision of

694 ABA BLS Letter; Canaccord Letter; MilkenInstitute Letter; MoFo Letter.

695 McCarter & English Letter.696 Public Startup Co. Letter 1.697 Letter from Jason Coombs, Co-Founder and

CEO, Public Startup Company, Inc., March 24, 2014(“Public Startup Co. Letter 2”).

ongoing and continuous information.698While the semiannual reportingrequired under the final rules for Tier 2offerings will result in issuers onlyhaving “reasonably currentinformation” and “adequate currentpublic information” for the portions ofthe year during which the financialstatements of such issuers continue tosatisfy the respective rules ,699 we notethat issuers may voluntarily submit onForm 1—U quarterly financial statementsor other information necessary to satisfythe respective rule requirements.70° Insuch instances, and provided that thefinancial statements otherwise meet thefinancial statement requirements ofForm 1—SA, such voluntarily providedquarterly information could satisfy the“reasonably current information” and“adequate current public information”requirements of Rule 144 and Rule144A. An issuer that is therefore currentin its semiannual reporting requiredunder the rules and voluntarily providesquarterly financial statements on Form1—U will have provided reasonablycurrent and adequate current publicinformation for the entirety of such yearunder Rule 144 and Rule 144A.

3. Exchange Act Registration ofRegulation A Securities

Under Section 15(d) of the ExchangeAct, an issuer that has had a SecuritiesAct registration statement declaredeffective must comply with the periodicreporting requirements of the ExchangeAct. 701 Qualification of a Regulation Aoffering statement does not have thesame effect. An issuer of Regulation Asecurities would not take on ExchangeAct reporting obligations unless itseparately registered a class of securitiesunder Section 12 of the Exchange Act,or conducted a registered publicoffering. 702

An issuer registering a class ofsecurities under Section 12 of theExchange Act must file either a form

698 See, e.g., ReI. No. 33—6099 (Aug. 2, 1979)(Question 20). See also Section 1 3(a) of theExchange Act, which contemplates, but does notprescribe, reasonably current information in thecontext of annual and quarterly reporting. 15 U.S.C.78m(a).

699 See Securities Act Rule 144(c)(2); SecuritiesAct Rule 144A(d)(4)(ii); Exchange Act Rule 15c2—11(a) and Rule 15c2—11(g).

700 See Item 9 of Form 1—U; see olso SectionlI.E.1.cf 3). and fn. 655 above.

issuers with a Section 15(d) reportingobligation are required to file the same periodicreports as issuers that have registered a class ofsecurities under Section 12, Section 15(d) reportingissuers are not subject to additional Exchange Actobligations (e.g., proxy rules, short-swing profitrules, and beneficial ownership reporting) thatapply to Exchange Act registrants.

702 See also Section II.B.6. above for a discussionof the conditional exemption from Section 12(g)adopted in the final rules today.


21852 federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules arid Regulations

10703 or Form 8704 with theCommission. Form 10 is the generalform for Exchange Act registration,while form 8—A is a short-formregistration statement. An issuer mustuse a Form 10 if, at the time it files itsregistration statement, it is not alreadysubject to a Section 13 or Section 15(d)reporting obligation. An issuer may useForm 8—A if it is already subject to theprovisions of either Section 13 orSection 15(d). Additionally, when anissuer that is not already subject to theprovisions of either Section 13 or 15(d)plans to list its securities on a nationalsecurities exchange contemporaneouslywith the effectiveness of a Securities Actregistration statement, the Commissionstaff will not object if that issuer files aForm 8—A in lieu of a Form 10 in orderto avoid having the issuer restate thecontents of its Securities Act registrationstatement in its Exchange Actregistration statement. 705

a. Proposed Rules

As proposed, issuers conductingofferings under Regulation A that seekto list their securities on a nationalsecurities exchange or otherwise registera class of securities under the ExchangeAct would be required to file aregistration statement on form 10. Wesolicited comment, however, onwhether we should provide a simplifiedmeans for Regulation A issuers toregister a class of securities under theExchange Act, for example, bypermitting such issuers to file a Form 8—A rather than a Form 10 in conjunctionwith, or following, the qualification of aRegulation A offering statement onform 1—A.

We also invited comment on ways tofacilitate secondary market trading inthe securities of Regulation A issuers,such as by encouraging the developmentof “venture exchanges” or other tradingvenues that are focused on attractingsuch issuers.


Many commenters recommended thatRegulation A issuers be allowed to useForm 8—A to register a class of securitiesunder the Exchange Act in Tier 2offerings.706 Some of these commenters

70317 CFR 249.210. Foreign private issuers mustfile a Form 20—F, 17 CFR 249.220f, or, whereavailable, a Form 8—A.

70417 CFR 249.208a.705 See Rel. No. 34—38850 (Sept. 2, 1997) [62 FR

39755], at 39757 (“[Am issuer registering an initialpublic offering will be permitted to use Form 8—Aeven though it will not be subject to reporting untilafter the effectiveness of that Securities Actregistration statement.”).

70 BLS Letter; Canaccord Letter; CFIRALetter 1; CF1RA Letter 2; Fallbrook TechnologiesLetter; Frutldn Law Letter; McCarter & English

limited their recommendation to whenthe issuer follows the requirements ofPart I of Form S—i in its offeringcircu1ar.° Separately, threecommenters recommended allowingissuers to use a “super” Form 8—A thatwould require issuers to include anydisclosure that is required in a Form 10,but is not included in the chosenoffering circular format under Form 1—A.708 Several commenters suggestedallowing issuers to use a Form 10 thatwould go effective immediately as analternative to filing a Form 8—A.70° Thisprocess could be used to registersecurities under the Exchange Act whena simultaneous exchange listing was notcontemplated. Other commentersrecommended limiting the use of Form8—A to situations contemporaneous withqualification of an offering statement,71°within 12 months of qualification,711 orafter a brief time period after an offeringstatement is qualified.712 Separately,two commenters recommended thatRegulation A issuers that becomeExchange Act reporting companies beconsidered “emerging growthcompanies.” 713 One commenterrecommended allowing issuers to useForm 8—A but to continue usingRegulation A reports until its non-affiliate market capitalization reached$250 million.’

Two commenters encouraged theCommission to foster the developmentof venture exchanges on whichRegulation A securities could betraded,715 while another commenterlargely opposed the creation of ventureexchanges. 716

c. final Rules

In the final rules, and consistent withthe views of many commenters,717 weare simplifying Exchange Actregistration in connection withRegulation A offerings conductedpursuant to Tier 2 so that issuerswishing to register a class of RegulationA securities under the Exchange Actmay do so by filing a Form 8—A inconjunction with the qualification of a

Letter; Milken Institute Letter; Mofo Letter; OTCMarkets Letter; Paul Hastings Letter; RichardsonPatel Letter; WR Hambrecht + Co Letter,

707 ABA BLS Letter; CFIRA Letter 1; WRHambrecht + Co Letter.

°8Canaccord Letter; Milken Institute Letter;MoFo Letter.

709 ABA BLS Letter; Canaccord Letter; MoFoLetter,

710 Milken institute Letter.711Fruthn Law Letter; Richardson Patel Letter.712 McCarter & English Letter.13 ABA BLS Letter; MoFo Letter.714 Paul Hastings Letter.

Heritage Letter; 581A Letter.716 OTC Markets Letter.717 See fn. 706 above.

Form 1—A. Only issuers that follow PartI of Form S—i or the Form S—lidisclosure model in the offering circularwill be permitted to use Form 8—A. 718

An issuer registering a class of securitiesunder the Exchange Act concurrentlywith the qualification of a Regulation Aoffering statement will become anExchange Act reporting company uponeffectiveness of the form 8—A and, ifapplicable, its obligation to file ongoingreports under Regulation A will besuspended for the duration of theresulting reporting obligation underSection 13 of the Exchange Act.719While some cornmenters suggested thatwe permit issuers to rely on the Form8—A to register a class of securities forup to 12 months following thequalification of an offering statement,we believe limiting short formregistration to situations in which anoffering statement is being concurrentlyqualified will help ensure that thedisclosures incorporated by referenceinto the Form 8—A, including financialstatements contained in the offeringstatement are current.72° The final ruleswould not, however, prevent an issuerfrom registering a class of securitiesunder the Exchange Act on Form 8—Aconcurrent with the re-qualification of apreviously qualified offering statement.

We recognize that Exchange Actreporting requires more comprehensiveongoing reporting than the Regulation Adisclosure regime, which is whyfacilitating issuers’ entrance into theExchange Act reporting system on Form8—A concurrent with the qualification ofa Regulation A offering statement willbenefit investors. At a minimum, issuerspursuing this route to exchange listingmust meet listing standards of, and becertified by, the exchange before theForm 8—A will be declared effective. Inorder to be approved for listing on anexchange, issuers generally must meetcertain size, financial, minimumsecurities distribution (or liquidity), andcorporate governance criteria.721

718 See Form 8—A, General Instructions Afc).719As discussed more fully in in Section II.E.4.

below, a Tier 2 issuer may terminate its RegulationA ongoing disclosure obligation when it is nolonger subject to the ongoing reportingrequirements of Section 13 of the Exchange Act. Seealso Rule 257(e).

720In order to ensure that registration on Form 8—A is limited to a concurrently qualified RegulationA offering statement, the amendments to Form 8—A expressly limit the use of the form to instanceswhere the filing of the Form 8—A and, whereapplicable, the receipt by the Commission ofcertification from the national securities exchangelisted on the form occur within five calendar daysafter the qualification of the Regulation A offeringstatement.

721 See, e.g., Initial Listing Guide for theNASDQAQ Stock Market, available at: https://listingcenter.nasdaq.com/ossets/initialguide.pdfi



Additionally, in order to maintainlisting on an exchange, issuers mustmaintain certain qualitative andquantitative continued listingstandards.22 Therefore, in addition tothe provision of ongoing Exchange Actreports, investors will benefit from theissuer’s satisfaction of the exchange’sinitial and ongoing listing standards,and may benefit from greater liquidityfor their shares as a result.

As suggested by commenters, webelieve that our accommodation shouldbe limited to instances where an issuerprovides disclosure in Part II of Form 1—A that follows Part I of Form S—i orForm S—li, instead of the OfferingCircular format. While all formatsrequire extensive disclosure that, withthe exception of item numbering, issimilar in many respects, we believethat an issuer entering Exchange Actreporting should provide disclosure in amanner that is generally consistent withthe requirements of issuers entering theExchange Act reporting regime throughregistered offerings.723 In this regard, wenote that issuers qualifying an offeringstatement that follows Part I of Form 5—1 or Form S—il will, however, berequired to follow the financialstatement requirements of Part F/S ofForm 1—A. For purposes of concurrentExchange Act registration, the financialstatements included in Form 1—A mustbe audited in accordance with thestandards of the PCAOB by a PCAOBregistered auditor that is independentpursuant to Article 2 of Regulation S—X.724 After effectiveness of the Form 8—A, they will be subject to Exchange Actreporting and compliance with thefinancial statement requirements ofExchange Act reporting companies.

Consistent with the suggestion ofcommenters,725 we agree that issuersentering Exchange Act reporting undera qualified Regulation A offeringstatement and Form 8—A will beconsidered “emerging growthcompanies” to the extent the issuersotherwise qualify for such status. Issuersshould base status determinations onthe definition of an emerging growth

U.S. Listing Standards for the New York StockExchange (NYSE), available ot: https://www.nyse.com/pub1icdocs/nyse/1isting/NYSE%2O_InitialListing_Standards_Summaiy.pdf

722 See, e.g., Continued Listing Guide for theNASDQAQ Stock Market, available at: https://listingcenter.nasdaq.cam/assets/cantinuedguide.pdf, Continued Listing Standardsfor the New York Stock Exchange (NYSE), availableat: https://wv.nyse.com/get-started/reference.

723 See Section ll.C.3.b(2)(c). above for adescription of the financial statement requirements.

724 See General Instruction A.(a) to Form 8—A.725 ABA BLS Letter; MoFo Letter.

company as it appears in the SecuritiesAct and the Exchange Act.726

As noted above, the Proposing Releasesought comment on whether we shouldconsider encouraging the developmentof venture exchanges or other tradingvenues to facilitate the secondarymarket f.rading of Regulation Asecurities. We are considering ventureexchanges as a way to provide liquidityfor smaller issuers, and arecontemplating their use for RegulationA securities as part of thatconsideration.

4. Exit Report on form 1—Z

a. Proposed Rules

(1) Summary Information onTerminated or Completed Offerings

As discussed in Section II.E.l. above,we proposed to rescind Form 2—A butto continue to require Regulation Aissuers to file the information generallydisclosed in form 2—A with theCommission electronically on EDGAR.Consistent with the related portion ofproposed Form 1—K,727 we proposed toconvert the form 2—A information intoan online XML-based fillable form withindicator boxes or buttons and textboxes to be filed electronically with theCommission as Part I of proposed Forml—Z (exit report). Issuers conductingTier 1 offerings would be required toprovide this information on Form l—Znot later 30 calendar days aftertermination or completion of theoffering, while issuers conducting Tier 2offerings would be required to providethis information on Form 1—Z at thetime of filing the exit report, if notpreviously provided on Form 1—K aspart of their annual report. 728 Asproposed, the summary offeringinformation disclosed on Form 1—Zwould be publicly available on EDGAR(hut not otherwise required to bedistributed to investors) and wouldinclude the date the offering wasqualified and commenced, the numberof securities qualified, the number ofsecurities sold in the offering, the priceof the securities, any fees associatedwith the offering, and the net proceedsto the issuer.

726 Under Section 2(a)(19) of the Securities Act,an “emerging growth company” is defined as,among other things, an issuer that had total annualgross revenues of less than $1 billion during itsmost recently completed fiscal year. 15 U.S.C.77b(a)(19). See also Section 3(a)(80) of the ExchangeAct (which repeats the same definition). 15 U.S.C.78c(a)(80).

727 See also discussion in Section II.C.i.(Electronic filing; Delivery Requirements) andSection II.C.3.a. (Part I (Notification)) above.

72 Section fl.E.1. above for a discussion ofthe requirements for proposed Form 1—K.

(2) Termination or Suspension of Tier 2Disclosure Obligations

We further proposed to permit a Tier2 issuer that has filed all ongoingreports required by Regulation A for theshorter of (1) the period since the issuerbecame subject to such reportingobligation or (2) its most recent threefiscal years and the portion of thecurrent year preceding the date of filingForm 1—Z to immediately suspend itsongoing reporting obligation underRegulation A at any time aftercompleting reporting for the fiscal yearin which the offering statement wasqualified, if the securities of each classto which the offering statement relatesare held of record by fewer than 300persons and offers or sales made inreliance on a qualified offeringstatement are not ongoing.72° In suchcircumstances, an issuer’s obligation tocontinue to file ongoing reports in a Tier2 offering under Regulation A would besuspended immediately upon the filingof a notice with the Commission on PartII of proposed Form 1—Z. A manuallysigned copy of the Form l—Z wouldhave to be executed by the issuer andrelated signatories before or at the timeof filing and retained by the issuer fora period of five years.73° Issuers wouldbe required to produce the manuallysigned copy to the Commission, uponrequest.731

We further proposed that issuers’obligations to file ongoing reports in aTier 2 offering under Regulation Awould be automatically suspendedupon registration of a class of securitiesunder Section 12 of the Exchange Act oreffectiveness of a registration statementunder the Securities Act, such thatExchange Act reporting obligationswould always supersede ongoingreporting obligations under RegulationA. If an issuer terminates or suspends itsreporting obligations under theExchange Act and the issiler is eligibleto suspend its Regulation A reportingobligation by filing a Form 1—Z at thattime, the ongoing reporting obligationswould terminate automatically and noForm 1—Z filing would be required toterminate the issuer’s Regulation Areporting obligation. If the issuer is noteligible to file a Form 1—Z at that time,it would need to recommence itsRegulation A reporting with a reportcovering any financial period notcompletely covered by an effectiveregistration statement or filed ExchangeAct report.732

729 See proposed Rule 257(d)(2).730 Instruction to proposed Form l—Z.‘Id.732 See proposed Rule 257(dHl) and (e).



b. final Rules

(1) Summary Information onTerminated or Completed Offerings

The single commenter on this issueapproved of the proposed requirementto file summary information after thetermination or completion of aRegulation A offering under bothtiers.733 We are adopting thisrequirement without changes.

(2) Termination or Suspension of Tier 2Disclosure Obligations

We are adopting, with a change fromthe proposal, final rules that will permitissuers that conduct a Tier 2 offering toterminate or suspend their ongoingreporting obligations on a basis similarto the provisions that allow issuers tosuspend their ongoing reportingobligations under Section 13 andSection 15(d) of the Exchange Act.734 Asproposed, the final rules permit a Tier2 issuer that has filed all reportsrequired by Regulation A for the shorterof: (1) The period since the issuerbecame sublect to such reportingobligation, or (2) its most recent threefiscal years and the portion of thecurrent year preceding the date of filingForm 1—Z to immediately suspend itsongoing reporting obligation underRegulation A at any time aftercompleting reporting for the fiscal yearin which the offering statement wasqualified, if the securities of each classto which the offering statement relatesare held of record by fewer than 300persons and offers or sales made inreliance on a qualified Tier 2 offeringstatement are not ongoing.735 In achange from the proposal, in order to beconsistent with Title VI of the JOBS Act,the final rules permit banks or bankholding companies 736 to immediatelysuspend their ongoing reportingobligation under Regulation A at anytime after completing reporting for thefiscal year in which the offeringstatement was qualified, if the securitiesof each class to which the offeringstatement relates are held of record byfewer than 1,200 persons, instead of 300

CFA Institute Letter.734 See Exchange Act Section 15(d), 15 u.s.c.

78o(d); Exchange Act Rule 12h-3, 17 CFR 240.12h—3.

73 Rule 257(d)12).736 The Commission recently proposed changes to

its rules regarding Exchange Act registration toimplement Title V and Title VI of the JOBS Act. SeeRel. No. 33—9693 (Dec. 18, 2014) [79 FR 78343].These proposed changes would, among otherthings, apply the registration thresholds applicableto banks and bank holding companies, as set forthin Section 12(g) of the Exchange Act, to savings andloan holding companies. Should we adopt thisprovision in the final rules for Section 12(g), wewould anticipate making a corresponding change tothe termination provisions of Rule 257(d).

persons, and offers or sales made inreliance on a qualified Tier 2 offeringstatement are not ongoing.737 Asproposed, an issuer’s obligation tocontinue to file ongoing reports in a Tier2 offering under Regulation A will besuspended immediately upon the filingof a notice to the Commission on PartIT of proposed Form 1_Z.738 Asproposed, a manually signed copy of theForm 1—Z must be executed by theissuer and related signatories before orat the time of filing and retained by theissuer for a period of five years.739Issuers must produce the manuallysigned copy to the Commission, uponrequest. 740

We otherwise adopt the proposedrules for the termination or suspensionof a Tier 2 ongoing reporting obligationas proposed and without changes.

F. Insignificant Deviations From a Term,Condition or Requirement

We did not propose any changes tothe existing insignificant deviationprovisions of Rule 260. Rule 260provides that certain insignificantdeviations from a term, condition orrequirement of Regulation A will notresult in the issuer’s loss of theexemption from registration underSection 5 of the Securities Act. 741 Theprovisions of Regulation A regardingissuer eligibility, offering limits, offers,and continuous or delayed offerings ofRegulation A are deemed to besignificant to the offering as a whole,and any deviations from theseprovisions result in the issuer’s loss ofthe exemption.

One commenter generally supportedthe concept of allowing for insignificantdeviations from the rules without theloss of the exemption.742 Thiscommenter recommended that theCommission give notice of violationsand allow companies to have anopportunity to cure any such violation.The commenter also recommendedimposing lesser sanctions, such as fines,if less significant violations could not becured. Another commenter

Rule 257(d)(2). The final rules, as they applyto the number of record holders of other types ofissuers, are adopted without changes from theproposal. Although Rule 257(d)(2) relies on thedefinition of “held of record” in Rule 12g5—1,issuers seeking to terminate or suspend their Tier2 ongoing disclosure obligations are specificallyexcluded from relying on the amendment to suchdefinition, which exclude securities issued in Tier2 offerings. See Rule 12g5—1(a)(7) and Section 11.5.6above.

In this regard, we have clarified that theCommission may only deny a Form 1—Z filing if theissuer is ineligible to use the form. See Rule 257(d).

73 Instruction to Form 1—Z.°Id.

17 CFR 230.260.742 Heritage Letter.

recommended including deviationsfrom the prohibitions on the timing ofsales and the amounts sold to investorson the list of matters deemed significantin proposed Rule 260, noting that, in itsview, it would be difficult for issuers toshow a good faith and reasonableattempt was made to comply with therequirements of Rule 251(d)(2).743 Thiscommenter noted that issuers, investorsand state regulators need clearboundaries to know what actions willdisqualify an offering from exemptionand thus, with respect to the proposedprovisions for Tier 2 offerings, wouldresult in a loss of state preemption.

The final rules maintain the existingprovisions for insignificant deviations,as proposed. Under the final rules, afailure to comply with a term, conditionor requirement of Regulation A will notresult in the loss of the exemption forany offer or sale to a particularindividual or entity, if the personrelying on the exemption establishesthat:

(1) The failure to comply did notpertain to a term, condition orrequirement directly intended to protectthat particular individual or entity;

(2) The failure to comply wasinsignificant with respect to the offeringas a whole, provided that any failure tocomply with the offering limitations,issuer eligibility criteria, orrequirements for offers or continuous ordelayed offerings will he deemed to besignificant to the offering as a whole;and

(3) A good faith and reasonableattempt was made to comply with allapplicable terms, conditions andrequirements of Regulation A.744

We believe that provisions forinsignificant deviations serve animportant function by allowing forcertain errors that can occur in theoffering process, while clearlydelineating those provisions from whichan issuer may not deviate. We believethe current provisions provideassurances to investors that issuers willnot be able to deviate from certainfundamental requirements in the rulesand avoid undue hardship that couldbefall issuers for inadvertent errors,such as loss of the exemption and, withrespect to Tier 2 offerings, the loss ofpreemption of state securities lawregistration and qualificationrequirements. We are not expanding thelist of provisions from which an issuermay not deviate. We note that whethera deviation from the requirementswould be significant to the offering as awhole would depend on the facts and

MCS Letter.Rule 260.



circumstances related to the offeringand the deviation. We also note that incertain situations, such as in the eventof pre-qualification sales, it may bedifficult for issuers to establish a goodfaith attempt at compliance. In suchcircumstances, an issuer would not beable to rely on the provision.

G. Bad Actor Disqualification

1. Proposed RulesUnder Securities Act Section

3(b)(2)(G)(ii), the Commission hasdiscretion to issue rules disqualifyingcertain felons and other ‘bad actors’from using amended Regulation A. Suchrules, if adopted, must be “substantiallysimilar” to those adopted to implementSection 926 of the Dodd-Frank Act,which requires the Commission to adoptdisqualification rules for securitiesofferings under Rule 506 of RegulationD. The Commission adopted thedisqualification provisions required bySection 926 in Rule 506(d) together witha related disclosure requirement in Rule506(e) on July 10, 2013.

We proposed amendments toRegulation A’s bad actordisqualification provisions that wouldmake those provisions substantiallysimilar to those adopted under Rule 506of Regulation D. We also soughtcomment on the proposeddisqualification rules and the categoriesof persons and types of events coveredby the proposed rules. Additionally, wesought comment more broadly on theinterpretation of the phrase “votingequity securities,” as it appears in “anybeneficial owner of 20% or more of theissuer’s outstanding voting equitysecurities, calculated on the basis ofvoting power,” a category of coveredpersons in Rule 506(d) and the proposeddisqualification provisions forRegulation A as well as our proposedrules for securities-based crowdfundingtransactions.

2. Comments on Proposed RulesIn general, commenters did not

oppose the proposed amendments toRegulation A’s bad actordisqualification rules. Somecommenters expressly supported theproposed rules.746 Some commenters,however, recommended changes toparticular provisions of the proposal.One commenter recommended revisingthe look-back periods for disqualifying

No. 33—9414 (July 10, 2013) [78 FR44729]. The Commission proposed rulessubstantially similar to those adopted pursuant toSection 926 of the Dodd-frank Act in the ProposingRelease for securities-based crowdfundingtransactions under Title III of the JOBS Act. See Rel.No. 33—9470, at 284.

746 See, e.g., KVCF Letter; MCS Letter;

events to run from the time of sale, notfrom the time of filing of the offeringstatement as proposed.747 Anothercommenter recommended adding finalorders of Canadian provincial regulatorsto the list of disqualifying events.748This commenter noted that someCanadian provinces have informationpublicly posted on their Web sites thatwould facilitate the bad actor diligenceprocess. One commenter recommendedthat the Commission develop an onlinebad actor database.7 Anothercommenter supported bad actorprovisions as extensive as those underRule 506(d).5° finally, one commenterrecommended defining voting equitysecurities for purposes of the bad actordisqualifications provisions using thedefinition in Rule 12b-2 of the ExchangeAct.751

3. Final RulesWe are adopting bad actor

disqualification provisions forRegulation A, substantially as proposedwith the exception of one change tofurther align the final rules forRegulation A with similar provisions inRule 506(d). The covered persons andtriggering events in the final rules forRegulation A are substantially the sameas the covered persons and triggeringevents included in Rule 506(d).752 Thecovered persons include managingmembers of limited liability companies;compensated solicitors of investors;underwriters; executive officers andother officers participating in theoffering; and beneficial owners of 20%or more of the issuer’s outstandingvoting equity securities, calculated onthe basis of voting power.753 Consistentwith the bad actor disqualification rulesunder Rule 5 06(d), the final rules alsoinclude two new disqualificationtriggers not previously present inRegulation A: (1) Final orders and barsof certain state and other federalregulators,54 and (2) Commission cease-and-desist orders relating to violationsof scienter-based anti-fraud provisionsof the federal securities laws or Section5 of the Securities Act.755 In order toclarify the scope of the term “finalorder” as it appears in Rule 262, we areincluding a definition of that term in

747KVCF Letter.Karr Tuttle Letter.

9Ladd Letter 2.750 MCS Letter.‘ABA BLS Letter (suggesting “voting

securities” be deemed securities the holders ofwhich are presently entitled to vote for the electionof directors (or the equivalent]).

75217 CFR 230.506(dl.53 Rule 262(a).Ru1e 262(a)f3).55Rii1e 262(a)(5).

Regulation A that is consistent with theterm as it appears in Rule 501(g) ofRegulation D. As adopted, a “finalorder” shall mean a written directive ordeclaratory statement issued by afederal or state agency described in Rule262(a)(3) under applicable statutoryauthority that provides for notice and anopportunity for hearing, whichconstitutes a final disposition or actionby that federal or state agency.756 Webelieve that creating a uniform set ofbad actor triggering events shouldsimplify due diligence, particularly forissuers that may engage in differenttypes of exempt offerings. For thisreason, consistent with thedisqualification provisions of Rule506(d), the final rules do not includefinal orders of Canadian provincialregulators in the list of disqualifyingevents.

The final disqualification rules inRegulation A also specify that an ordermust bar the covered person at the timeof filing of the offering statement, asopposed to the requirement in Rule506(d) that the order must bar thecovered person at the time of therelevant sale.757 This clarificationaccords with the current provisions ofRule 262 and is appropriate forRegulation A because there is no filingrequirement before the time of first salein Rule 506.758 We are further adoptinga reasonable care exception to thedisqualification provisions on a basisconsistent with Rule 506(d).° Underthe final rules, an issuer will not losethe benefit of the Regulation Aexemption if it is able to show that it didnot know, and in the exercise ofreasonable care could not have known,of the existence of a thsqualification.6°As proposed, and consistent with theprovisions of existing Regulation A, thefinal rules permit issuers that aredisqualified from relying on theexemption to request a waiver ofdisqualification from theCommission. 761

In the Proposing Release, we solicitedcomment on the interpretation of thephrase “voting equity securities,” as itappears in “any beneficial owner of20% or more of the issuer’s outstandingvoting equity securities, calculated onthe basis of voting power,” a category ofcovered persons in Rule 506(d) andproposed Rule 262 as well as our

756 Rule 261(d).Rule 506(d), 17 CFR 230.506(d).78 Under Rule 503 of Regulation D, issuers must

file a notice of sales on Form D no later than 15calendar days after the first sale of securities. 17CFR 230.503(a).

See Rule 262(b)(4).7601d761 Rule 262(b)(2).



proposed rules for securities-basedcrowdfunding transactions. Consistentwith the views of at least onecommenter,762 we have reconsideredour initial views on the interpretation of“voting equity securities.” We believethat it is appropriate to refine our initialinterpretation,763 as it applies to our badactor disqualification rules,764 andcreate a “bright-line” standard that isconsistent with the definition of theterm “voting securities” in Rule 405 ofthe Securities Act.765 In this regard, webelieve that such a term should includeonly those voting equity securitieswhich, by their terms, currently entitlethe holder to vote for the election ofdirectors. In other words, we believe theterm should be read to denote securitieshaving a right to vote that are presentlyexercisable. Additionally, while theability to control or significantlyinfluence the management or policies ofthe issuer may be derived in part fromthe power to vote for the election ofdirectors, in order to dispel anyuncertainty as to the scope of ourinterpretation, we believe the term“voting equity securities” should beinterpreted based on the present right tovote for the election of directors,irrespective of the existence of controlor significant influence.

Under the final rules, offerings thatwould have been disqualified fromreliance on Regulation A under Rule262 as in effect before today’samendments will continue to bedisqualified. Triggering events that werenot previously included in the bad actorrules for Regulation A and that pre-dateeffectiveness of the final rules will notcause disqualification, but instead mustbe disclosed on a basis consistent withRule 506(e). Specifically, issuers will berequired to indicate in Part I of Form 1—A that none of the persons described inRule 262 are disqualified and, where

76 BLS Letter.763 When we adopted Rule 506(d), we did not

define “voting equity securities,” but ratherindicated that our initial intention would be toconsider securities as voting equity securities if“securityholders have or share the ability, eithercurrently or on a contingent basis, to control orsignificantly influence the management andpolicies of the issuer through the exercise of avoting right.” See SEC Rel. No. 33—9414 (July 10,2013) [78 FR 447291, text accompanying fn. 62. Inlight of concerns that our initial interpretation maybe overbroad and that a “bright line” test may bemore workable and would facilitate compliance, aswe indicated in the Proposing Release, we arereconsidering our initial views. See ProposingRelease, at Section 11G.

764 addition to Regulation A, this interpretiveposition would apply to Rule 505 and Rule 506 ofRegulation]].

765]n Securities Act Rule 405, the term votingsecurities means securities the holders of which arepresently entitled to vote for the election ofdirectors. 17 CFR 230.405.

applicable, that disclosure of triggeringevents that would have triggereddisqualification, but occurred before theeffective date of the Regulation Aamendments, will be provided in Part Uof Form 1—A.766

We believe that the final rules areappropriate in light of the Section3(b)(2)(G)(ii) mandate, the benefits ofcreating a more uniform set of standardsfor all exemptions that include bad actordisqualification, and the requireddisclosure in the offering circular ofpersons subject to events that wouldhave triggered disqualification, butoccurred before the effective date of thefinal rules.

H. Relationship With State SecuritiesLaw

1. Proposed Rules

Although Section 401(b) of the JOBSAct does not exempt offerings madeunder Section 3(b)(2) and the relatedrules from state law registration andqualification requirements, it addedSection 18(b)(4](D) to the SecuritiesAct.767 That provision states thatSection 3(b)(2) securities are coveredsecurities for purposes of Section 18 ifthey are “offered or sold on a nationalsecurities exchange” or “offered or soldto a qualified purchaser, as defined bythe Commission pursuant to [Section18(b)(3)j with respect to that purchaseor sale.” Section 18(b)(3) provides that“the Commission may define the term‘qualified purchaser’ differently withrespect to different categories ofsecurities, consistent with the publicinterest and the protection of investors.”

Commenters in the pre-proposal stagesuggested that the cost of state securitieslaw compliance, which they identifiedas an obstacle to the use of RegulationA, would discourage marketparticipants from using the newexemption. In addition, the GAO, asrequired by Section 402 of the JOBS Act,conducted a study on the impact of statesecurities laws registration andqualification requirements on offeringsconducted under Regulation A andfound that state securities laws wereamong several central factors that may

766As discussed in Section [I.C.3.a. above, Part Iof Form 1—A focuses, in part, on issuer eligibility,and requires issuers to make an eligibilitydetermination at the outset of filling outForm 1—A.

767 Section 18 of the Securities Act generallyprovides for exemption from state law registrationand qualification requirements for certain categoriesof securities, defined as “covered securities.” SeeSection 18(c), 15 U.S.C. 77r(c). State securitiesregulators retain authority to impose certain filingand fee requirements and general antifraudenforcement authority with respect to coveredsecurities. See Section 18(c), 15 U.S.C. 77rfcl.

have contributed to the lack of use ofRegulation A.768

In light of the issues raised bycommenters and in the GAO Report, aswell the substantial investor protectionsincluded in the proposed rules toamend Regulation A and implementTitle IV of the JOBS Act, we proposedto define the term “qualified purchaser”in a Regulation A offering to consist of:(1) All offerees in a Regulation Aoffering and (2) all purchasers in a Tier2 offering.769 We indicated in theProposing Release that we believed thisapproach would protect offerees andpurchasers in Regulation A securities,while streamlining compliance andreducing transaction costs.

We proposed to preempt statesecurities laws registration andqualification requirements with respectto all offerees in a Regulation A offering,in order to allow issuers relying onRegulation A to communicate withpotential investors about their offeringsusing the internet, social media, andother means of widespreadcommunication, without concern thatsuch communications might triggerregistration requirements under statelaw.° We further proposed to preemptstate securities laws registration andqualification requirements with respectto all purchasers in a Tier 2 offering tohelp make Regulation A a moreworkable means of capital formation.We also noted our belief that thesubstantial investor protectionsembedded in the proposed rules,including issuer eligibility conditions,limitations on investment, disclosurerequirements, qualification process, andongoing reporting requirements of Tier2, in combination, could addresspotential concerns that may arise as aresult of preemption.

Under the proposed rules, statesecurities regulators would retain theirauthority to:

• Require the filing of any documentfiled with the Commission and thepayment of filing fees;

• investigate and bring enforcementactions against fraudulent securitiestransactions and unlawful conduct bybroker-dealers in such offerings; and

768 See fn. 90 above.69 Proposed Rule 256.770We understand that some state securities

regulators do not require the registration of broadlyadvertised offerings such as internet offerings, if theadvertisement indicates, directly or indirectly, thatthe offering is not available to residents of that state.See, e.g., Washington State Dept of financialInstitutions, Securities Act Policy Statement—16,available at: http://dfi. wa.gov/sd!securitiespolicy.htm#ps- 16; see also NASAAReports ¶ 7,040 (regarding NASAA resolution,dated January 7, 1996, which encourages states totake appropriate steps to exempt from securitiesregistration offers of securities over the Internet).



• enforce the filing and feerequirements by suspending the offer orsale of securities within a given state forthe failure to file or pay the appropriatefee.771

As noted in the Proposing Release, itwas our preliminary view that theadditional requirements for Tier 2offerings would meaningfully bolsterthe protections otherwise embedded inRegulation A and therefore a differenttreatment than Tier 1 offerings isappropriate.

2. Comments on Proposed Rules

The preemption of state securities lawregistration and qualificationrequirements contemplated in theproposed “qualified purchaser”definition received an extensive amountof public commentary. Commenterswere sharply divided on the need forstate securities law preemption inRegulation A.

Many commenters objected to thepreemption of state securities lawregistration and qualificationrequirements.772 The views of thesecommenters were based on thefollowing arguments:

Section 18(c) (Preservation of Authority) of theSecurities Act, 15 U.S.C. 77r(c).

772 Letter from A. Heath Abahure, ArkansasSecurities commiasioner, February 20, 2014 (‘ASDLetter”); CFA Letter; CFA Institute Letter; Letterfrom Rep. Stephen F. Lynch, et al, U.S. House ofRepresentatives, June 3, 2014 (“congressional Letter2”); Letter from Sen. Barbara Boxer, et al, U.S.Senate, Aug. 1, 2014 (“Congressional Letter 4”);cornell clinic Letter; Groundfloor Letter (suggestingthat the commission should at least evaluateNASAA’s coordinated review program for 12months); Kerr Tuttle Letter (acknowledging thatstate preemption may still be necessary for statesnot participating in NASAA’s new coordinatedreview program); Letter from William F. Calvin,Secretary, commonwealth of Massachusetts,December 18, 2013 (“Massachusetts Letter 1”);

Massachusetts Letter 2; MCS Letter; Letter fromAndrea Seidt, President, et at, North AmericanSecurities Administrators Association (NASAA),February 19, 2014 (“NASAA Letter 1”); NASAALetter 2; Letter from William Beatty, President,North American Securities AdministratorsAssociation (NASAA), February 11, 2015 (“NASAALetter 3”); Letter from Jack B. Herstein, AssistantDirector, Nebraska Department of Banking andFinance, February 10, 2014 (“NIJBF Letter”); Letterfrom chad Johnson, Bureau chief, InvestorProtection Bureau, New York State AttorneyGeneral’s Office, New York, May 7, 2014 (“NYIPBLetter”); Letter from Irving L. Faught,Administrator, Oklahnma Department of Securities,March 24, 2014 (“ODS Letter”); Letter from DamarisMendnza-RnmIn, Assistant commissioner, Office ofthe commissioner of Financial Institutions, PuertoRico, March 5, 2014 (“PRcFI Letter”); Letter fromHon. Jesse White, Illinois Secretary of State, et al.,March 4, 2014 (“Secretaries of State Letter”); Letterfrom Lindsay M. Scherher, May 8, 2014 (“ScherberLetter”); Letter from Janet M. Tavaknli, President,Tavakoli Structured Finance, Inc., February 24,2014 (“Tavakoli Letter”); Letter from John Morgan,Securities Commissioner, Texas State SecuritiesBoard, March 21, 2014 (“TSSB Letter”); WDFILetter.

• A “qualified purchaser” means apurchaser with specialized skill,experience or knowledge.773

• The qualifications of the purchaserare key, not the nature of the issuer orthe offering. Thus, the proposeddefinition of “qualified purchaser” iscontrary to the plain meaning of thisterm. 774

• The legislative history of theNational Securities MarketsImprovement Act of 1996 (NSMIA)suggests that definitions of “qualifiedpurchaser” must include an investorsophistication test.77e The Commissionmade similar statements on the“qualified purchaser” definition in a2001 Proposing Release.

• Congress considered preemption inthe context of a provision to preemptofferings conducted through a broker-dealer in an early draft of Title IV of theJOBS Act, but then purposefullyexcluded such broad preemption fromthe final statute.778

• The Conunission’s cost-benefitanalysis of preemption was inadequatebecause it largely ignored investorprotections, the benefits of stateregulation, perceived resourceconstraints at the Commission, andpreemption’s impact on investorconfidence in the markets.

• Although the CAO Reportconducted under Section 402 of theJOBS Act cited compliance with statesecurities law review and qualificationrequirements as a factor in the lack ofuse of Regulation A, it also notedlengthy Commission reviews of Form1—A filings.750

• States play a unique role inregulating securities offerings due totheir localized knowledge and

See, e.g., ASD Letter; CPA Letter;congressional Letter 4; cornell clinic Letter;Massachusetts Letter 1; NASAA Letter 2; ODSLetter; PRCFI Letter; WDFI Letter.“ See, e.g., cFA Letter; Massachusetts Letter 1;

NASAA Letter 2; PRCFI Letter; Tavakoli Letter;WDFI Letter.

775Puh. L. 104—290, 110 Stat. 3416 (Oct. 11,1996).

776 See, e.g., ASD Letter; Kerr Tuttle Letter;congressional Letter 4; Massachusetts Letter 1;Massachusetts Letter 2; NASAA Letter 1; NASAALetter 2; NDBF Letter; NYIPB Letter; ODS Letter;PRCFI Letter; Secretaries of State Letter; TavaknliLetter; WDFI Letter.

777Rel. No. 33—8041 (Dec. 27, 2001) (the “2001Proposing Release”).

778 See, e.g., ASD Letter; CFA Letter;congressional Letter 2; congressional Letter 4;Grnundflnor Letter; Massachusetts Letter 1;Massachusetts Letter 2; NASAA Letter 2; NDBFLetter; NYIPB Letter; Secretaries of State Letter;Tavakoli Letter; WDFI Letter,

779 See, e.g., CFA Letter; Grnundflnnr Letter;Massachusetts Letter 2; NASAA Letter 2; ScherberLetter; WOFI Letter.

See, e.g., CFA Letter; Massachusetts Letter 2;NASAA Letter 2; WDFI Letter.

resources, which aid in detecting fraudand facilitating issuer compliance.7e1

• The investor protections includedin the proposal do not act as anadequate substitute for state review andconunent on offering statements.782

• The states have adopted andimplemented a new coordinated reviewprogram, designed to address many ofthe perceived inefficiencies associatedwith state registration.

Many other commenters expressedtheir support for preemption, asproposed.754 These commenters madethe following arguments:

781 See, e.g., NASAA Letter 1; ODS Letter; PRCFILetter; WOFI Letter.

782 See, e.g., CFA Letter; CFA Institute Letter;MCS Letter; NASAA Letter 2; Scherher Letter; TSSBLetter; WDFI Letter.

783 See, e.g., ASD Letter; CFA Institute Letter;Cornell Clinic Letter; Grnundflnnr Letter; KerrTuttle Letter; Massachusetts Letter 1; MassachusettsLetter 2; NASAA Letter 1; NASAA Letter 2; NASAALetter 3; NYWB Letter; PRCFI Letter; Secretaries ofState Letter; Tavakoli Letter; TSSB Letter; WDFILetter.

784 ABA BLS Letter; Letter from KendallAlmerico, Crnwdfunding Expert, Attorney and CEO,Fund Hub and ClickStartMe, February 11, 2014(“Almerico Letter”); Andreessen/Cowen Letter; B.Riley Letter; BID Letter; Campbell Letter; CanaccordLetter; CFIRA Letter 1; CFIRA Letter 2; Letter frnmRep. David Schweikert, et al, U.S. House ofRepresentatives, Sept. 25, 2014 (“CongressionalLetter 3”); DuMnulin Letter (noting that Canadianissuers conducting simultaneous offerings inCanada would otherwise be subject to three levelsof review); Letter from Stanley Keller, EdwardsWildman Palmer LLP, April 3, 2014 (“EdwardsWildman Letter”) (recnmmending defining“qualified purchasers” as “accredited investors” ifthe proposed preemption is not adopted); Letterfrnm Daniel Eng, CEO, March 20, 2014 (“EngLetter”); Fallbrnnk Technologies Letter; Gilman LawLetter; McCarter & English Letter; Guzik Letter 1(see nlsn Guzik Letter 2 (suggesting that if theproposed preemption is not adopted to consideradopting an accredited investor style definition for“qualified purchaser,” but with a lower income nrnet worth test)); Letter from Todd Hart, Aug. 20,2014 (“Hart Letter”); Heritage Letter; Letter fromCharles Huynh, February 24, 2014 (“HuynhLetter”); WA Letter; Kisel Letter; Letter from AkbertP. Kretz, Ph.D., Founder/Manager, Mentor, March11, 2014 (“Kretz Letter”); KVCF Letter; LaddLetters; Leading Biosciences Letter; Letter fromBruce E. Methven, Securities Law Attorney, March23, 2014 (“Methven Letter”); Milken InstituteLetter; MnFn Letter; Letter from Dnneld R. Hancock,CEO, Moloney Securities Co., Inc., February 20,2014 (“Molnney Letter”); Letter from Jason Mcel,President, New Fnnd Ventures LLC, March 12, 2014(“New Fond Letter”); OTC Markets Letter; Letterfrom Jesse). Palomino, February 25, 2014(“Palomino Letter”); Paul Hastings Letter; PublicStartup Co. Letters; REISA Letter; Richardson PatelLetter; SBIA Letter; Letter from Bradley L. Staples,MBA, University of Utah, February 21, 2014(“Staples Letter”); Letter from Chris Sugai, February21, 2014 (“Sugai Letter”); SVB Financial I,etter;SVGS Letter; Letter from Ryan Hawxhurat, Founderand CEO of Unorthndncs Printing LLC, February 21,2014 (“Unorthndnca Letter”); U.S. Chamber ofCommerce Letter; Letter from Gregory S. Fryer. Esq.,Partner, Verrill Dana LLP, July 15, 2014 (“VerrillDana Letter 2”); Letter from John Warren, Esq.,February 24, 2014 (“Warren Letter”); WRHambrecht + Co Letter.


21858 Federal Register/Vol. 80, No. 75/Monday1 April 20, 2015 /Rules and Regulations

• The proposed rules providesubstantial investor protections toinvestors. 785

• State securities law review ofoffering statements is a significantimpediment to the use of RegulationA.786

• The Commission has the authorityto preempt state qualification andreview requirements.787

• States continue to have theauthority to, among other things, bringanti-fraud enforcement actions and toreview the publicly filed disclosuredocuments before sales occur.788

• NASAA’s coordinated reviewprogram as implemented will remaininefficient due to internal conflict, theapplication of merit review standardsand the program’s inability to bindparticipants in the event ofdisagreements among the states.789

Many commenters that expressedgeneral support for preemption, asproposed, also recommended applyingit on an expanded basis.79° Somecommenters recommended preemptingstate regulation of secondary trading inRegulation A securities,791 and some

785 See, e.g., ABA BLS Letter; Almerico Letter; B.Riley Letter; Campbell Letter; Cenaccord Letter;CFIRA Letter 1; Congressional Letter 3; EdwardsWildman Letter; Fallbrook Technologies Letter;Cilman Law Letter; Guzik Letter 1; Cuzik Letter 2;KVCF Letter; Leading Biosciences Letter; MilkenInstitute Letter; MoFo Letter; OTC Msrkets Letter;Paul Hastings Letter; Richardson Patel Letter;Verrill Dana Letter 2; WR Hambrecht + Co Letter.

756 See, e.g., ABA BLS Letter; Almerico Letter;BID Letter; Campbell Letter; Canaccord Letter;Congressional Letter 3; DuMoulin Letter; EdwardsWildman Letter; Falibrook Technologies Letter;Gilman Law Letter; Guzik Letter 1; Cuzik Letter 2;Kisel Letter; Kretz Letter; KVCF Letter; Ladd Letters;Leading Biosciences Letter; McCarter & EnglishLetter; Milken Institute Letter; Moloney Letter; OTCMarkets Letter; Paul Hastings Letter; REISA Letter;Richardson Patel Letter; SBIA Letter; staples Letter;Sva Financial Letter; U.S. Chamber of CommerceLetter; Verrill Dana Letter 2.

757 See, e.g., ABA BLS Letter; BlO Letter;Campbell Letter; Edwards Wildman Letter; CuzikLetter 1; Heritage Letter; IPA Letter; KVCF Letter;Public Startup Co. Letters; Richardson Patel Letter;U.S. Chamber of Commerce Letter; Verrill DanaLetter 2.

788 See, e.g., Congressional Letter 3; HeritageLetter; KVCF Letter; Methven Letter; REISA Letter.

789 See, e.g., ABA BLS Letter; BIO Letter;Canaccord Letter; Congressional Letter 3; EdwardsWildman Letter; Gunk Letter 2; KVCF Letter; LaddLetters; Milken Inatitute Letter; Paul HastingsLetter; REISA Letter; Richardson Patel Letter; SVBFinancial Letter; Verrill Dana Letter 2.

79 ABA BLS Letter; Campbell Letter;Congressional Letter 3; Cuzik Letter 1; Hart Letter;Heritage Letter; IPA Letter; KVCF Letter; LaddLetter 2; Milken Institute Letter; OTC MarketsLetter; Paul Hastings Letter; Public Startup Co.Letter 1; SVB Financial Letter.

BLS Letter; IPA Letter (recommendingpreempting for reaales of all securities of a Tier 2issuer that is current in Regulation A reportingl;KVCF Letter; OTC Markets Letter (recommendingpreemption for at least Regulation A securities thatare not penny atocksl; Paul Hastings Letter; SVBFinancial LeRer.

recommended preempting stateregulation of Tier 1 offerings.792

Alternatively, several commentersrecommended possibly eliminating theCommission’s review of Regulation Aofferings to varying extents.793 Twocommenters reconunended eliminatingthe Commission’s review of Tier 1offerings.7 One of these comrnentersrecommended only doing this forofferings that are “local” in nature.795One commenter recommended having asingle state review, in lieu of a reviewand qualification by the Commission, ifthe Commission’s staff is unwilling toreview Regulation A offerings“promptly with content-appropriatestandards.” 796 One commenterrecommended completely eliminatingthe Commission’s review if NASAA’scoordinated review program promotes a“robust” Regulation A market. 797

3. Final Rules

For the reasons discussed below, weare adopting the “qualified purchaser”definition in Regulation A, substantiallyas proposed. In the final rules, a“qualified purchaser” for purposes ofSection 18(b)(4)(D)(ii) of the SecuritiesAct includes any person to whomsecurities are offered or sold in a Tier2 offering. Because of the requirementsfor all Tier 2 offerings, all purchasers inTier 2 offerings persons must be eitheraccredited investors or persons wholimit their investment amount to nomore than 10% of the greater of annualincome or net worth (for naturalpersons), or 10% of the greater of annualrevenue or net assets at fiscal year end(for non-natural persons).

To address commenter concerns andavoid potential confusion as to theapplication of the preemptionprovisions in Tier 1 offerings, the finaldefinition of “qualified purchaser” doesnot include offerees in Tier 1 offerings.While the final rules permit RegulationA issuers to test the waters and make

92Andreessen/cnwen Letter; Campbell Letter;Congressional Letter 3; Guzik Letter 1(recommending preemption with audited financialstatements and a substantially lighter disclosureregime compared to Tier 2); Heritage Letter; LaddLetter 2 (recommending preemption if companyadopts internal controls and meets continuingdisclosure requirements, including yearly auditedfinancials); Milken Institute Letter (recommendingpreemption if audited financial statements areincluded in the “initial filing”); Public Startup Co.Letter 1; SVB Financial Letter (recommendingpreemption with additional, unspecified disclosureobligations). See Section 11.1. below for additionalrecommended changes to Tier 1.

Groundfioor Letter; Ladd Letter 2; PublicStartup Co. Letter 5; Verrill Dana Letter 2.

74Ladd Letter 2; Public Startup Co. Letter 5.795 Public Startup Co. Letter 5.verrill Dana Letter 2.

97Creundfioor Letter.

offers in the pre-qualification period atthe federal level, in light of the concernsraised by state regulators about theproposed rule’s expanded use ofsolicitation materials 798 and what weanticipate to be the generally more localnature of Tier 1 offerings,799 we believeit is appropriate, in this context, for thestates to retain oversight over how theseofferings are conducted. Although weacknowledge that this could potentiallyinhibit the use of solicitation materialsin certain Tier 1 offerings, for thesesmaller, more localized offerings, wethink the states should be permitted toregulate the use of solicitation materials.

Given the sharply divided views ofcommenters on the “qualifiedpurchaser” definition included in theProposing Release, we want to clarifythe scope of the Commission’s authorityunder the Securities Act to define sucha term and the effect the final qualifiedpurchaser definition will have on thecontinued ability of the states toregulate offers and sales within theirjurisdiction. We continue to believe thatthe substantial investor protectionsembedded in the final rules for Tier 2offerings, including the requisitequalifications of the issuer, offering, andeventual purchasers, as well as theparticular characteristics associatedwith this category of securities, supportthe limited preemption of statesecurities laws registration andqualification requirements adopted inthe final rules.

a. NSMIA and the JOBS Act

As noted above, some commentersquestioned the ability of theCommission to adopt a “qualifiedpurchaser” definition that includes anyperson to whom securities are offered orsold in a Tier 2 offering.800 Thesecommenters suggested that a qualifiedpurchaser definition under Section18(b)(3) of the Securities Act must bebased on attributes of the purchaser, notthe nature of the issuer or offering.These commenters stated that broadpreemption was contemplated in thelegislative history of Title IV of the JOBSAct and expressly rejected by Congress.

795 Massachusetts Letter 2; NASAA Letter 2;WDFI Letter. These commenters suggested that theCommission require the filing of solicitationmaterials before the time of first use, as, in theirview, the antifraud and other civil liabilityprevisions of the federal securities laws are not anadequate substitute for the investor protectionsafforded by an advance filing requirement forsolicitation materials, while also noting thatproblems with the use of solicitation materials arecompounded by the provisions for access equalsdelivery of final offering circulars.

Section II.H.3.d. below; see else fn. 830below.

°55 See in. 772 above.



Title I of the NSMIA, referred to as the“Capital Markets Efficiency Act of1996” (the “Efficiency Act”),80’ was, asits name suggests, enacted to promoteefficiency and capital formation in thefinancial markets.802 The Efficiency Actrealigned the respective responsibilitiesof federal and state securities regulatorsin the context of the dual system ofsecurities offering registration thatexisted before enactment of thestatute.803 The Efficiency Act achievedthis regulatory realignment by amendingSection 18 of the Securities Act toprovide for exemption from state lawregistration and qualificationrequirements for certain categories ofsecurities, defined as “coveredsecurities.”

Section 18(b)(3) provides that “[alsecurity is a covered security withrespect to the offer or sale of the securityto qualified purchasers, as defined bythe Commission by rule.” Congressstated in Section 18(b)(3) that theCommission may “define the term‘qualified purchaser’ differently withrespect to different categories ofsecurities, consistent with the publicinterest and the protection of investors.”The JOBS 804 amended Section 18by adding to its list of “coveredsecurities” transactions involvingsecurities that are exempt fromregistration pursuant to a rule orregulation adopted pursuant to Section3(b)(2) and that are “offered or sold toa qualified purchaser, as defined by theCommission pursuant to [Section18(b)(3)] with respect to that purchaseor sale.” 805

By its terms, Section 18(b)(3) providesthe Commission with the expressauthority to adopt rules that define a“qualified purchaser.” The provisiondoes not prescribe specific criteria thatthe Commission must consider indetermining, or the manner in which itmust determine, a purchaser to be“qualified.” Furthermore, Section

801 NSMJA section 101 (Short Title).802H.R. Rep. No. 622, 104th Cong. 2d Sess. at I

(1996) (House Report).803As enacted, NSMIA included five separate

titles, each of which served a different purpose inthe overarching statutory goal of improving nationalsecurities markets. See preamble and Section 1 toNSMIA.

504 stated purpose of the JOBS Act is to“increase American job creation and economicgrowth by improving access to the public capitalmarkets See JOBS Act (Preamble).

805 JOBS Act section 401(b) (adding Section18(b)f4)(D)(ii) to the Securities Act). Section 401(b)also included in the list of “covered securities”transactions involving Section 3(b)(2) securities thatare offered or sold on a national securitiesexchange, see Section 18(b)f4)(D)(i). See also Titleifi of the JOBS Act, which added to the list of“covered securities” in Section 18(b)(4)(C)transactions involving securities issued pursuant toSection 4(a)(6).

18(b)(3) states that the definition ofqualified purchaser may be different fordifferent categories of securities. Thismeans that, rather than considering thecharacteristics of the purchaser inisolation, the Commission may adopt aqualified purchaser definition that isalso tailored to reflect the characteristicsof the particular type of issuer ortransaction. Further, Section 18(b)(3)does not proscribe any particular termsor characteristics that the Commissionmust include in any rules definingqualified purchaser with respect to agiven category of securities. What itdoes instead is require that any rules soadopted be consistent with the publicinterest and the protection of investors.

Unlike Section 18(b)(3), whichprovides for preemption with respect tooffers or sales to qualified purchasers inany context, Section 18(b)(4)(D)(ii)provides for preemption specificallywith respect to transactions exemptfrom registration pursuant to Section3(b)(2). As such, the preemptionafforded under Section 18(b)(4)(D)(ii)necessarily encompasses the mandatoryrequirements for conducting an exemptoffering pursuant to Section 3(b)(2).These include, among other things, thatthe civil liability provisions of Section12(a)(2) must apply and that an issuermust file audited financial statementswith the Commission annually.806 Otherpotential requirements left to thediscretion of the Commission includeprovisions for ongoing reporting, badactor disqualification, and requirementsfor electronic filing of offeringmaterials. 807

We believe that the terms of Section18(b)(3) and Section 18(b)(4)(D)(ii)—read in conjunction—provide theCommission with discretionaryauthority to adopt a “qualifiedpurchaser” definition that reflects theparticular characteristics of transactionsexempt from registration pursuant toSection 3(b)(2). Thus, in determiningwho should be considered a qualifiedpurchaser for purposes of theamendments to Regulation A, we haveconsidered not only the mandatoryfeatures of Section 3(b)(2), but alsomany of the discretionary featurescontained in our final rules, such as therequirement that purchasers in Tier 2offerings be limited to accreditedinvestors or persons otherwise subject tospecified investment limitations.

We recognize that a number ofcommenters disagreed with thisapproach.8o8 Some stated that a“qualified purchaser” definition

80615 U.S.C. 77c(b)(2)(D), (F).807 See 15 U.S.C. 77c(b)(2)(G); 15 U.S.C. 77c(b)(4).808 See In. 772 above.

adopted by the Commission must at aminimum be based on attributes of thepurchaser, such as a person’s wealth,income, or sophistication,8°9 and notedthat the Commission had highlightedsuch factors in a 2001 Proposing Releaseto define a “qualified purchaser”pursuant to Section 18(b)(3).810 The2001 Proposing Release, however,contemplated that state securitiesreview and qualification requirementswould be preempted in all categories oftransactions to the extent that sales weremade to “accredited investors.” Bycontrast, our rules to implement Title IVof the JOBS Act provide for preemptionin the more limited circumstances inwhich the requirements of Section3(b)(2) and the rules adopted thereunderare satisfied.

In the 2001 Proposing Release, wenoted that certain aspects of NSMIA’slegislative history suggest that aqualified purchaser definition shouldinclude investors that are sophisticatedand capable of protecting themselves. Inaddition, we asked questions about theproposed approach to the definition andwhether other potential factorsmentioned in the legislative history,such as the national character of anoffering, could or should bear onpotential qualified purchaser definitionsadopted pursuant to Section 18(b)(3).811

We do not believe that the 2001Proposing Release is inconsistent withthe qualified purchaser definition forRegulation A that we are adoptingtoday. The 2001 Proposing Release wasnot a Commission statement on thescope of all permissible definitions fora qualified purchaser adopted pursuantto Section 18(b)(3). Rather, it expresseda preliminary interpretive view ofcertain aspects of the legislative historyof NSMIA in the context of a proposedrulemaking that would have equated“qualified purchaser” with thedefinition of an “accredited investor”for sales by any category of issuer in anytype of transaction.612 While it mayhave been appropriate to focus onattributes of the purchaser when craftinga “qualified purchaser” definition thatwould have applied in a broad set ofpossible transactions, as in the 2001

809 See, e.g., NASAA Letter 2.810 2001 Proposing Release. In this release, the

Commission proposed to define a “qualifiedpurchaser” to be an “accredited investor,” as thatterm is defined under Rule 501(a) of Regulation D.

811 See 2001 Proposing Release, Section 11.3. (forexample, asking questions about the nationalcharacter of offerings and the potential foreliminating redundancies and inefficiencies in theapplication of disparate state standards); see alsoHouse Report, at 31.

812 See 2001 Proposing Release, Section IC., II.B.The Commission did not adopt final rules based onthe 2001 Proposing Release.



Proposing Release, the definition beingadopted today serves a different purposebecause it applies only in Regulation Aofferings. Indeed, Section 18(b)(3)contemplates that the term “qualifiedpurchaser” can be defined “differentlywith respect to different categories ofsecurities.”

The enactment of the JOBS Act in2012, and in particular its addition ofSection 18(b)(4)(D)(ii) to the SecuritiesAct has caused us to consider thedefinition of qualified purchaserspecifically within the context oftransactions under the new Section3(b)(2) exemption. This is a new anddifferent context in which to considerthe definition of qualified purchaserthan existed at the time of the 2001Proposing Release. In this new context,we believe that the definition ofqualified purchaser that we are adoptingis appropriately tailored to thesetransactions because, as explainedabove, the requirements applicable toTier 2 offerings include numerousprovisions designed to protect investors,including, among other things, arequirement that all purchasers in theseofferings be either accredited investorsor persons who are subject toinvestment limitations.

We do not agree with the commenterswho assert that broad state securitieslaw preemption was expressly rejectedby Congress in Title IV of the JOBS Act.The legislative record indicates that theonly form of state securities lawpreemption directly contemplated, butnot adopted, in the drafting of Title IVof the JOBS Act was for offers and salesthrough a broker or dealer.8’3

b. Section 18 of the Securities Act andthe Effect of Preemption on StateSecurities Laws

As discussed above, somecommenters expressed concern aboutthe effect preemption would have on theability of state securities regulators toremain actively involved in RegulationA offerings.814 We believe it isimportant to clarify the effectpreemption will have on the ability ofstate securities regulators to continue toplay a vital role in the supervision ofRegulation A securities.

813 See, e.g., Congressional Record Volume 157,Number 166 (Wednesday. Nov. 2, 2011), P. 7231(Statement of Rep. Peters: “Finally, the gentleman[Rep. Schweikert (AZ)) has also worked withDemocrats on the remaining issue of contention,and that was the preemption of State law. [Rep.Schweikert’s] substitute amendment to HR. 1070removes the exemption from State level review thatwas previously provided to an issuer using abroker-dealer to distribute and [sic] issue.”) Cf. HR.Rep. No. 1 12—206, at 2 (2011).

514 See, e.g., NASAA Letter 2, at 10.

Under Section 18(a) of the SecuritiesAct, no law, rule or regulation of anystate requiring the registration orqualification of securities applies to acovered security or to a security thatwill be a covered security uponcompletion of the transaction.615Further, with respect to a coveredsecurity, no state law, rule or regulationshall prohibit, limit, or impose, amongother things, any conditions upon theuse of any offering document8’6 that isprepared by or on behalf of the issuer,or, based on the merits of such offeringor issuer, upon the offer or sale of anycovered security.817

While covered security status underSection 18 prohibits the states fromrequiring the registration orqualification of such securities, Section18(c) preserves the power of the statesin several important areas.816 UnderSection 18(c), the states retain:

• The jurisdiction to investigate andbring enforcement actions with respectto fraudulent securities transactions andunlawful conduct by broker-dealers; 819

• the ability to require issuers to filewith the states any document filed withthe Commission, solely for noticepurposes and the assessment of fees,together with a consent to service ofprocess and any required fee;82° and

• the power to enforce the filing andfee requirements by suspending theoffer or sale of securities within a givenstate for the failure to file or pay theappropriate fee.82’

As the name of the statute that addedSection 18 to the Securities Actsuggests, the preemption of statesecurities laws is about improving the“efficiency” of our capital markets byeliminating unnecessary, duplicativeregulation of securities offerings at boththe federal and state level.822 It is notabout eliminating investor protectionsor otherwise limiting the continued

81515 U.S.C. 77r(a)(1).810 Under Section 18(d), the term “offering

document” has the same meaning given the term“prospectus” in first portion of section 2(a)(10) andincludes a communication that is not deemed tooffer a security pursuant to a rule of theCommission. For these purposes, the term“prospectus” means any prospectus, notice,circular, advertisement, letter, or communication,written or by radio or television, which offers anysecurity for sale or confirms the sale of any security.

81715 U.S.C. 77r(a)(2)—(3).818 5 5c 77r(c).81915 U.S.C. 77r(c)(1).820 15 U.S.C. 77r(c)(2]. For example, even though

state securities law registration requirements arepreempted in offerings pursuant to Rule 506 ofRegulation 0, 17 CFR 230.506, many states continueto require the filing of Form 0 notices andamendments, and most of them charge a filing fee.See, e.g., https://www.efdnasaa.org; cf. 15 U.S.C.77r(b)(4)(E).

821 15 U.S.C. 77r(c)(3).822 House Report, at 1.

involvement of the states in suchofferings.823

c. State Coordinated Review Program forSection 3(b)(2) Securities

Since the proposed rules toimplement Title IV of the JOBS Actwere issued in December 2013, NASAAhas implemented a multi-statecoordinated review program forRegulation A offerings, the goal ofwhich is to reduce the state lawdisclosure and compliance obligationsof Regulation A issuers.824 Under thecoordinated review program, issuers arerequired to file Regulation A offeringmaterials with the states via electronicmail. The administrator of thecoordinated review program must thenselect a lead disclosure examiner and,where applicable, a lead meritexaminer, which are responsible fordrafting and circulating comment lettersto the participating jurisdictions, and forseeking resolution of those commentswith the issuer and its counsel. Asenacted, the program contemplates atwenty-one business day turnaroundfrom the time of filing of an offeringstatement until the issuer receivescomments from the states.825 Thecoordinated review program’s reviewprotocol also modifies (or disappliesaltogether) certain of NASAA statementsof policy for offerings undergoingcoordinated review. Where, however, anissuer elects to offer or sell RegulationA securities in at least one merit state,the coordinated review program mayrequire the issuer to apply NASAA’sstatements of policy to the offering as awhole (i.e., not solely for purposes ofoffers or sales within such merit reviewstate(s)).

At the proposing stage, we indicatedthat a number of open questionsremained about the then-proposedmulti-state review program. In theintervening time, many questions havebeen answered, largely relating to thefinal adoption and implementation of

823 Id., at 16 (Noting the reason behind thelegislation that eventually became NSMIA was aclear need for modernization and that “therecontinues to be a substantial degree of duplicationbetween Federal and State securities regulation, andthat this duplication tends to raise the cost ofcapital to American issuers of securities withoutproviding commensurate protection to investors orour markets.”).

°24A description of NASAA’s coordinated reviewprogram can be found at: http://www.nasao.org/industry-resources/corporation-finance/coordinated-review/regu]ation-a-offerings/. The ProposingRelease also discusses this program, as it wascontemplated and proposed at that time. SeeProposing Release, at Section II.H.

825An illustrated timeline for NASAA’s multistate coordinated review program is available at:http://www.nasaa.org/wp-contant/up)oads/201 5/03/Coordinated-Review-Chart.pdf.



the program by a vast majority of thestates.826 Other crucial questions,however, remain, such as whether theprogram will be able to address theconcerns related to state securities lawcompliance identified by the GAOReport and commenters,827 and whetherthe program can continue, ascontemplated, in the face of numerousfilings by issuers that seek to participatein the streamlined process. As of thedate of this release, we are aware ofthree issuers that have elected to seekqualification at the state level pursuantto the protocols of the multi-statecoordinated review program.828 Whilethe program, as contemplated in itsenactment, could potentially reduce thestate law disclosure and complianceobligations of issuers,829 the limitedexperience of issuers with the programprevents us from being able to fullyevaluate it at this time. We note thatTier 1 issuers may well benefit from thecoordinated review program as itcontinues to develop. We remainconcerned, however, that, even underthe coordinated review program, statesecurities law registration andqualification requirements would beunnecessarily duplicative for, andimpose unnecessary costs on, securitiesissued in Tier 2 offerings. In light of therecent efforts of state securitiesregulators to address concerns about thecosts associated with state qualificationof Regulation A offering statements,however, the ongoing implementationand development of the coordinatedreview program, particularly as it mayoperate within Tier 1 offerings, mayprovide additional data that will aid anyfuture evaluation of whether such aprogram could effectively operatewithin the context of larger, morenational Tier 2 offerings as analternative to preemption.

d. Application of State Securities Law inTier 1 and Tier 2 Offerings

As we noted in the Proposing Release,in light of the issues raised bycommenters and in the GAO report, weremain concerned that costs associated

826At this time, it is our understanding that 49of NASAA’s 53 constituent members have agreed toparticipate in the coordinated review program.

827 See, e.g., GAO—12—839, at 14 (discussing thevarying standards and degrees of stringency appliedduring the qualification and review process in merit

review states); see also, e.g., ABA BLS Letter, at 14.828 See, e.g., Groundfioor Letter (the first issuer to

rely on NASAA’s coordinate review program, withthe exception of having to seek qualification outsideof the coordinated review program in the state ofGeorgia).

829 (suggesting that in its experience thebenefits of NASAA’s coordinated review programoutweighed the approximately $50,000 cost of theaverage Regulation A offering); see also NASAALetter 3.

with state securities law compliance,even under a coordinated review

program, may deter issuers from usingamended Regulation A, which couldsignificantly limit the impact of theexemption as a tool for capitalformation. In considering our approachto preemption in the final rules,particularly as we evaluate what isconsistent with the public interest andthe protection of investors, we havetaken into account the amendedRegulation A regime, including thedistinctions between the two tiers andin particular the additional protectionsprovided in Tier 2 beyond therequirements of Tier 1.

In addition to certain basicrequirements that are applicable to bothtiers, Tier 2 issuers will be subject tosignificant additional requirements,some arising directly from Section3fb)(2) and others that we have imposedthrough our discretionary authorityunder that section. for example, thefinancial statements that Tier 2 issuersinclude in their offering circulars arerequired to be audited, and Tier 2issuers must file audited financialstatements with the Commissionannually. Tier 2 issuers also mustprovide ongoing reports on an annualand semiannual basis with additionalrequirements for interim current event

updates, assuring a continuous flow of

information to investors and the market.In addition, purchasers in Tier 2offerings must be either accreditedinvestors or subject to limitations in theamount they may invest in a singleoffering. finally, as with Tier 1offerings, Tier 2 offering statements willbe filed electronically, reviewed andqualified by Commission staff, and theofferings are subject to both limitationson eligible issuers and “bad actor”disqualification provisions. Inconsideration of these requirements, aswell as our view, as discussed in greaterdetail below, that Tier 2 offerings aremore likely to be national rather thanlocal in nature, we believe thatpreemption of state securities lawregistration and qualificationrequirements is appropriate forpurchasers in these offerings.

We believe that the final rules forRegulation A create two differentcategories of securities for purposes ofSection 18(b)(3). The requirements forTier 1 issuers create a category ofsecurities that is more local in character,while Tier 2 offerings involve a categoryof securities that is more national incharacter. In this regard, to the extent anissuer seeks to raise money through apublic offering pursuant to RegulationA, the distinctions between therequirements for Tier 1 and Tier 2 will

provide issuers with a meaningfulchoice at the outset between initial andongoing offering costs and requirements.

Tier I issuers are not required toinclude audited financial statements intheir offering statements, nor are theyrequired—as contemplated by Section3(b)(2)—to file audited financialstatements with the Commissionannually. They are further not subject toany ongoing reporting, beyond therequirements contained in Part I ofForm l—Z. While the final rules raise theoffering limitation in Tier 1 to $20million in a 12-month period, which webelieve should increase the generalutility of the tier, such offerings byvirtue of the lower dollar amounts thatcan be raised in comparison to Tier 2offerings, as well as the form filingrequirements and the lack of ongoingreporting, will likely be conducted by adifferent set of issuers than those thatconduct offerings pursuant to Tier 2.Specifically, we think that issuersconducting Tier 1 offerings are likely tobe smaller companies whose businessesrevolve around products, services, and acustomer base that will more likely belocated within a single state, region, ora small number of geographicallydispersed states.83° We believe thatthese issuers will typically not seek or,on the basis of their business models, beable to: (1) Raise capital on a nationalscale; or (ii) create a secondary tradingmarket in their Regulation A securities.

By contrast, we believe that the higheroffering limitation for Tier 2 offerings,the higher costs associated withcomplying with the audited financialstatement and ongoing reportingrequirements, as well as the requirementto sell to “accredited investors” orotherwise limit the amount of securitiessold to non-accredited investors, willnecessitate that such offerings be offeredand sold on a larger and more nationalscale. Additionally, an issuer electing toconduct a Tier 2 offering would likelydo so, or be required by its investors todo so, in order to provide ongoingreports in a manner that will facilitate,or otherwise result in, secondary tradingon a national level. While issuersconducting Regulation A offerings forless than $20 million are free to choosebetween the requirements of either tier,we believe that the initial and ongoingcosts and limitations associated with

830 For example, issuers of securities in the sevenoffering statements qualified by the Commissionpursuant to Regulation A in 2014 indicated, onaverage, that they were seeking qualification inapproximately five states per offering. The financialstatements provided by these issuers furtherindicated, on average, that issuers hadapproximately $1.2 million in assets. No issuerindicated assets greater than $3.6 million, whiletwo issuers indicated assets of less than $20,000.



complying with Tier 2 will provide forthe natural separation of offerings intothe respective tiers with issuers in morelocal offerings electing to comply withthe less onerous requirements of Tier 1.

As noted above, some of the basicrequirements of the offering statementare applicable to both tiers, and issuersof securities pursuant to either tier willremain subject to the same review andcomment process by the staff of theDivision of Corporation Finance beforequalification. On this basis, somecommenters argued that the samereasons supporting the preemption ofstate securities law registrationrequirements for Tier 2 offeringssuggests that the Commission shouldalso extend preemption to Tier 1offerings.831

The distinctions between the tiers inthe final rules for purposes of thepreemption of state securities lawregistration requirements are based onlyin part on the form distinctions andprocess requirements for issuers at thetime of qualification at the federal level.The preemption of state securities lawregistration requirements in the finalrules for Tier 2 offerings is additionallyrelated to the inefficiencies ofqualification at the state and federallevel, the differing characteristics of Tier1 and Tier 2 offerings, and the statutorypurposes behind the enactment of theEfficiency Act that are served bydeeming Tier 2 offerings to involve acovered class of securities.

While, as some commenters suggest,the review and qualification of Tier 1offerings at the state level will involveinefficiencies to which Tier 2 issuerswill not be subject, we believe thatcontinued state involvement in Tier 1offerings is consistent with the policyunderlying the enactment of NSMIAthat suggests that states should“generally retain their authority toregulate small, regional, or intrastatesecurities offerings.” 832 As noted above,we believe that the implementation ofNASAA’s multi-state coordinatedreview program has the potential toameliorate some of these inefficiencies.We will observe issuers’ experience

8’Andreessen/Cowen Letter; Campbell Letter;Guzik Letter 1; Heritage Letter; Ladd Letter 2;Milken Institute Letter; Public Startup Co. Letter 1;SVB Letter.

832 House Report, at 16. See also WDFI Letter, at3 (“Given the relatively small size of these offeringsand the low probability of attracting the attentionof national broker-dealers to distribute them, theseofferings are likely to be local in nature.”). TheCommission is exploring the possibility ofestablishing a program whereby a representative ofNASAA, or of a state securities regulator, would beassigned to work at the Commission in the Divisionof Corporation Finance to assist the staff as itimplements the final rules.

under the coordinated review programand amended Regulation A, andwhether changes to the rule could bebeneficial. We also believe that therequirements for Tier 2 offerings willadvance “the development of nationalsecurities markets and eliminate thecosts and burdens of duplicative andunnecessary regulation.” 833 Theabsence of preemption in Tier 2offerings would unnecessarily subjectissuers in such offerings to a substantialdegree of duplication between federaland state securities regulation in thequalification of offering statements,which would raise the cost of capital toissuers without providingcommensurate additional protection toinvestors or our markets.834

As noted above, under Section 18(c),the states retain authority to (1)investigate and bring enforcementactions with respect to fraudulenttransactions, (2) require the filing of anydocuments filed with the Commission“solely for notice purposes and theassessment of any fee,” and (3) enforcefiling and fee requirements bysuspending offerings within a givenstate. We see no reason why statesecurities regulators could not continueto rely on the multi-state coordinatedreview program as a mechanism toallow Tier 2 issuers to make noticefilings of their offering statements withthe states consistent with Section 18(c).In this regard, notice filings of offeringstatements of Tier 2 issuers would beavailable to the states for a period oftime prior to the qualification of theoffering.835 For example, the final rules

833 House Report, at 16. While further preemptionof state securities law regulation of the secondarytrading of Regulation A securities issued in a Tier2 offerings could, as some commenters suggest,further advance the development of a nationalsecurities market by easing the complianceobligations of investors that trade in the secondarymarkets, we believe that the approach topreemption of state securities laws adopted todayis more appropriate at the outset and will afford theCommission time to subsequently review thedevelopment of, and consider potential changes to,the final rules for primary and secondaryRegulation A markets.

834 See Id.; see also, e.g., ABA BLS Letter, at 13(noting the challenges posed to smaller companiesthat arise when having to respond to both federaland state reviews and coordinating overlapping orpotentially inconsistent comments and approvals);Groundfloor Letter (noting the existence of, andadditional costs associated with, duplicativequalification requirements at the state and federallevel, as well as potential complications betweeninvestment limitations at the federal level and statesuitability standards).

835 See, e.g., comment letters cited in fri. 788above; see also Letter from A. Heath Alishure,President, NASAA, September 27, 2013 (commentson SEC. Rel. No. 33—9416 (Proposed Amendmentsto Regulation B, Form B and Rule 156 under theSecurities Act)) (indicating that although “states arepreempted from requiring registration of securitiesthat are sold in compliance with Rule 506.. . state

for Regulation A require an issuer thatnon-publicly submits its offeringstatement for review to the Commissionto publicly file its offering statementand related documents with theCommission not less than 21 calendardays before qualification. At that time,the states would be permitted to requireissuers to also make notice filings ofsuch materials with them and to assessany filing fees under Section 18(c)(2).

I. Additional Considerations Related toSmaller Offerings

As we noted in the Proposing Release,a number of factors have influenced theuse of Regulation A in the form it hastaken since its last substantive update in1992, including the process of filing theoffering statement with the Commission,state securities law compliance, thetypes of investors businesses seek toattract, and the cost-effectiveness ofRegulation A relative to otherexemptions.836 In developing the finalrules we are adopting, we haveattempted to create a more efficient andeffective method to raise capital underRegulation A that incorporatesimportant investor protections. We arealso cognizant of how issuers seeking toraise relatively smaller amounts ofcapital could consider a range ofpossible approaches to capitalraising.837

Unaer our proposal, offerings for upto $5 million conducted under Tier 1would benefit from the proposedupdates to Regulation A’s filing andqualification processes, but theproposed amendments did nototherwise substantially alter the existingexemption for such offerings.838 Wewere mindful of the possibility thatadditional changes to Tier 1 couldexpand its use by, and thus potentiallybenefit, issuers conducting smallerofferings. We therefore solicited

regulators routinely review Form D filings to ensurethat the offerings actually qualify for an exemption

and to took for “red flags” that may indicatea fraudulent offering. The absence of a Form Bfiling complicates our efforts to protect theinvesting public.”). The concerns of the states, asthey relate to Form D filings, would be addressedin the final rules for Regulation A that require thefiling with the Commission of substantive offeringmaterials, thereby triggering any notice filingrequirements with the states, before sales can bemade.

836 See, e.g., Proposing Release, at Section I.C.; seealso GAO Report.

837 These methods include, for example, Rules504, 505 and 506 under Regulation B sod Section4(a)(6) of the Securities Act and any rules adoptedthereunder. See also Proposing Release, at SectionII.’.

838 Some commenters at the pre-proposal stagesuggested that the Commission should largelypreserve the requirements of the then-existingRegulation A in the final rules. See ProposingRelease, at In. 505.


federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 21863

comment on additional considerationswith respect to Tier 1 and a potentialintermediate tier for offeringsincrementally larger than Tier 1offerings and how such offerings wouldaffect investor protection and capitalformation.

Many commenters recommendedmaking changes to proposed Tier 1 tomake it a more viable option for smallbusiness capital formation.839 Some ofthese commenters recommendedpreempting state regulation of Tier 1offerings, as mentioned above.840 Twocommenters recommended raising theoffering limit of Tier 1 to $10 million ormore.°41 Several commentersrecommended including an ongoingdisclosure requirement for Tier 1issuers, including disclosure at a levellower than what is required for Tier2,842 ongoing disclosure with yearlyaudited financials,843 or someunspecified continuous disclosureobligation.844 One commenterrecommended lowering the Tier 1disclosure obligations from the currentproposed requirements, particularly forofferings of $2 million or less.845 Onecommenter recommended expandingthe offering limit for Tier 1 to $15million and creating a new tier belowTier 1 with fewer disclosurerequirements.846 Many commentersrecommended changes to proposed Tier1, but did not address preemption.847

839 Andreessen/Cowen Letter; BDO Letter; Letterfrom Kevin Bernard, Sept. 3, 2014 (“BernardLetter”); Campbell Letter; CAQ Letter; DeloitteLetter; E&Y Letter; Guzik Letter 1; Heritage Letter;ICBA Letter; KPMG Letter; Ladd Letter 2;McGladrey Letter; Milken Institute Letter; PublicStartup Co. Letter 1; SVB Financial Letter; VerrillDana Letter 1; WR Hambrecht + Co Letter.

e4oAndreessen/Cowen Letter; Bernard Letter;Campbell Letter; Guzik Letter 1; Heritage Letter;Ladd Letter 2; Milken Institute Letter; PublicStartup Co. Letter 1; SVB Financial Letter.

841 Guzik Letter 1; ICBA Letter.842Guzik Letter 1 (suggesting that Tier 1 ongoing

disclosure requirements could parallel Tier 2’srequirements, but without the requirement forsemiannual reports).

843 Ladd Letter 2.8SVB Financial Letter.845 Campbell Letter.86 Public Startup Co. Letter 1. As mentioned in

the relevant sections above, this commenterrecommended three tiers based on offering size. Thefirst tier could potentially only require state reviewand would be “local” in nature. This tier wouldinclude some form of ongoing reporting with thestates, but not audited financials. Instead directorsand officers would have to certify under penalty ofperjury that the financial statements were accurate.The second tier would only require auditedfinancial statements if they were otherwiseavailable, would preempt state review and wouldrequire periodic reporting. This tier might allow formore flexibility with respect to auditorindependence. The third tier would require morereporting than currently proposed for Tier 2 andwould appear to require PCAOB-registered auditors.

847 BDO Letter; CAQ Letter; Deloitte Letter; E&YLetter; ICBA Letter; KPMG Letter; McGladrey Letter.

Several of these commenters maderecommendations with respect to thefinancial statement and auditingrequirements in Form 1—A.848

The final rules for Regulation A takeinto account some of the suggestions bycommenters on ways to improve therequirements for smaller offerings,particularly in Tier 1. The comments wereceived did not reflect any consensuson the particular provisions in Tier 1that were most in need of amendment.As noted above, we do not agree thatpreemption of state securities lawsregistration and qualificationrequirements is appropriate for Tier 1offerings.849 Further, while somecommenters suggested that preemptionof state securities laws may improve theattractiveness of Tier 1 offerings, theydid so on the condition that otheraspects of the tier should changeaccordingly, such as by requiring Tier Iissuers to provide audited financialstatements in the offering statement andpossibly on an ongoing basis. For thereasons dIscussed in Sectionll.C.3.b(2)(c) above, however, we havenot adopted such changes in Tier 1.Alternatively, some commenterssuggested that the Commission adopt athird tier either expressly or through theflexible applicability of the proposedtier requirements. While a thIrd tier mayprovide issuers with some additionalflexibility for capital formation underRegulation A, this additional flexibilitywould also have potential costs. Forexample, a third tier may unnecessarilycomplicate compliance with RegulationA for smaller issuers, and couldpotentially confuse investors as to thetype of Regulation A offering an issuerwas undertaking and the type ofinformation such investor could expectto receive as a result, thereby lesseningthe viability of the exemption as awhole. For this reason, we are notadopting a third or intermediate tier inRegulation A.

We are adopting certain changes inthe final rules that are intended to makeTier 1 more useful for small businesscapital formation. As discussed above,in line with the suggestions ofcommenters, we have raised the offeringlimitation in Tier 1 to $20 million in a12-month period, including no morethan $6 million on behalf of sellingsecurityholders that are affiliates of theissuer.85° With respect to the offeringcircular narrative disclosurerequirements,851 we have adopted

8BDO Letter; CAQ Letter; Deloitte Letter; E&YLetter; KPMG Letter; McGladrey Letter.

849 See Section II.H.3. above.Section H.B.3.c. above.

851 See Section II.C.3.b(ll. above.

certain additional scaled disclosurerequirements for Tier 1 that areintended to lessen the complianceobligations for issuers. For example,Tier 1 issuers will be required todisclose related party transactions at thethresholds in current Regulation A, asopposed to the lower thresholds in theproposed rules, and simplifiedexecutive compensation data. We arefurther providing issuers under bothTiers with the accommodation providedto emerging growth companies inSecurities Act Section 7(a) to delay theimplementation of new accountingstandards to the extent such standardsprovide for delayed implementation bynon-public business entities. Lastly, wehave provided Tier 1 issuers withadditional flexibility with respect toauditor independence standards. Asoriginally proposed, an issuer electingto provide audited financial statementsin a Tier 1 offering—even thoughaudited financial statements would notgenerally be required—would have hadto engage the services of an auditor thatfollowed the independence standardsoutlined in Article 2 of Regulation S—X.Commenters suggested that we shouldpermit auditors of the financialstatements of Tier 1 issuers toalternatively follow the independencestandards of the AICPA or Article 2 ofRegulation S_X.852 In the view of thesecomments, allowing auditors of Tier Iissuer financial statements the option tofollow the independence standards ofthe AICPA would permit more issuers toinclude financial statements that wouldbe deemed audited under therequirements for Tier 1 in the firstinstance, thereby avoiding any feesassociated with an issuer having theirexisting financial statements audited asecond time under PCAOB standards.As noted above,83 we agree withcommenters that this accommodationmay benefit smaller issuers in Tier 1offerings who wish to file audited finalstatements for purposes of the offeringstatement and thus are adopting thissuggestion.

In the light of the changes discussedabove, we believe that the final rules weare adopting will provide Tier 1 issuerswith a meaningful choice withinRegulation A between the costs andbenefits associated with compliancewith the requirements for Tier 1 andTier 2 and therefore do not believe thatan intermediate or other tier isnecessary at this time.

852 BDO Letter; CAQ Letter; Deloitte Letter; E&YLetter; KPMG Letter; McGladrey Letter.

See Section II.C.3.b(2)(c). above.



J. Transitional Guidance for IssuersCurrently Conducting Regulation AOfferings

While Regulation A has been usedinfrequently in recent years, there areissuers that are currently conducting, orthat have ified offering statements,under the preexisting Regulation Arules. By way of transitional guidance,we are clarifying that issuers currentlyconducting sales of securities pursuantto a qualified Regulation A offeringstatement may continue to do so. Suchofferings will be considered Tier 1offerings after the effectiveness of thefinal rules. Qualified offering statementsunder the preexisting rules forRegulation A are, however,incompatible with the finalrequirements for Tier 2 offerings and, asdiscussed below, issuers that wish totransition to a Tier 2 offering will needto file a post-qualification amendmentthat satisfies the requirements for Tier 2.

Upon effectiveness of the final rules,issuers currently conducting RegulationA offerings under the preexisting rulesmust begin to comply with the finalrules for Tier 1 offerings, including, forexample, the requirement of electronicfiling and the rules for post-qualificationamendments, at the time of their nextfiling under Regulation A. Additionally,after effectiveness of the final rules, tothe extent that issuers provided offeringstatements that were qualified using theModel A disclosure format of Part II ofthe Form 1—A, any subsequentlyrequired filing or amendment to suchoffering statement must be filed using adisclosure format that is permissibleunder the final rules for Tier 1 offerings.Model A will no longer be appropriateor permitted for post-qualificationamendments of qualified offerings thatpre-date effectiveness of the final rules.Lastly, an issuer that is offeringsecurities pursuant to a qualifiedoffering statement under the preexistingrules will, upon effectiveness of thefinal rules, no longer be required to filea Form 2—A, but instead be required tofile a Form i—Z with the Commissionelectronically upon completion ortermination of the offering.

Issuers that are currently in thereview process for the qualification of aRegulation A offering statement maycontinue to follow the preexisting rulesfor Regulation A until the effective dateof the final rules. On or after theeffective date, such an issuer will berequired to comply with the final rules,including the requirements forelectronic filing and, where applicable,transitioning to a disclosure format thatis approved for Regulation A offerings.The issuer may also elect to proceed at

that time with its offering under thefinal requirements for either Tier 1 orTier 2 offerings, provided it follows therequirements for the respective tiers.

Issuers in ongoing offerings that werequalified before effectiveness of the finalrules that wish to transition to a Tier 2offering may do so by filing a post-qualification amendment that satisfiesall of the requirements for Tier 2. Suchissuers will transition to therequirements for Tier 2 uponqualification of the post-qualificationamendment. For purposes of calculatingthe maximum offering amountpermissible under Rule 251(a), an issuermust reduce the maximum offeringamount sought to be qualified under thefinal rules for the respective tiers by theamount which such issuer has soldduring the previous 12-month periodpursuant to the preexisting rules forRegulation A.

K. Technical and ConformingAmendments

The final rules for Regulation Aamend existing Rules 251_263.854 Theamendments take into account changesto Regulation A associated with theaddition of Section 3(b)(2) to theSecurities Act, and the items detailed inthis release.

As a result of the revisions toRegulation A, we are adoptingconforming and technical amendmentsto Securities Act Rules 157(a),8505(b)(2](iii),856 and Form 8—A.Additionally, we are revising Item101(a) 857 of Regulation S—T 856 to reflectthe mandatory electronic filing of allissuer initial filing and ongoingreporting requirements underRegulation A. We are also revising Item101(c)(6) of Regulation S—T toremove the reference to paper filings ina Regulation A offering, and removingand reserving Item 101(b)(8) 660 ofRegulation S—T dealing with theoptional electronic filing of Form F—Xby Canadian issuers.

III. Economic AnalysisIn this section, we analyze the

expected economic effects of the finalrules relative to the current baseline,which is the market situation inexistence today, including currentmethods of raising up to 50 million incapital available to potential issuers.Our analysis considers the anticipatedcosts and benefits for market

17 FR 230.251 through 230.263.85517 CFR 230.157(a).85617 CFR 230.505(h)(2)(iii).85717 CFR 232.101(a).85817 CFR 232.10 et seq.85917 CFR 232.101(cl(6).°17 CFR 232.lol(b)(8).

participants affected by the final rules aswell as the impact of the final rules onefficiency, competition, and capitalformation relative to the baseline. Thisincludes the likely economic effects ofthe specific provisions of the final rulesrelated to the scope of the exemption,the format and contents of the offeringstatement, solicitation of interest,ongoing reporting, insignificantdeviations, bad actor disqualification,and relationship with state securitieslaw.

The final rules to implement Section401 of the JOBS Act and amendRegulation A seek to promote capitalformation, efficiency and competitionfor small companies, and provide formeaningful investor protection. We aremindful of the costs imposed by, andthe benefits to be obtained from, ourrules. Securities Act Section 2(b) 661 andExchange Act Section 3(f) 862 require us,when engaging in rulemaking thatrequires us to consider or determinewhether an action is necessary orappropriate in the public interest, toconsider, in addition to the protection ofinvestors, whether the action willpromote efficiency, competition, andcapital formation. Exchange Act Section23(a)(2) 863 requires us, when adoptingrules under the Exchange Act, toconsider the impact that any new rulewould have on competition and not toadopt any rule that would impose aburden on competition that is notnecessary or appropriate in furtheranceof the purposes of the Exchange Act.

The final rules include provisionsmandated by the statute as well asprovisions that rely on our discretionaryauthority. As a result, while many of thecosts and benefits of the final rules stemfrom the statutory mandate of Title IVof the JOBS Act, certain benefits andcosts are affected by the discretion weexercise in connection withimplementing this mandate. Forpurposes of this economic analysis, weaddress the benefits and costs resultingfrom the mandatory statutory provisionsand our exercise of discretion togetherbecause the two types of benefits andcosts are not readily separable. We alsoanalyze the benefits and costs ofsignificant alternatives to the final rulesthat were suggested by commenters andthat we considered. Many of the benefitsand costs discussed below are difficultto quantify when analyzing the likelyeffects of the final rules on efficiency,competition, and capital formation. Forexample, the extent to which theamendments to Regulation A will

861 15 U.S.C. 77b(b).862 15 U.S.C. 78c(fl.863 15 u.s.c. 78w(a)(2).



promote future reliance by issuers onthis offering method, and the extent towhich future use of Regulation A willaffect the use of other offering methods,is difficult to precisely estimate.Similarly, there is some uncertainty asto the effect of some of the provisionsin the final rules on investor protection.Therefore, much of the discussion isqualitative in nature but, wherepossible, we attempted to quantify thepotential costs and benefits of the finalrules.

A. Broad Economic ConsiderationsOne of the primary objectives of

Section 401 was to expand the capitalraising options available to smaller andemerging companies and thereby topromote capital formation within thelarger economy.664 With this objectivein mind, and as background to ouranalysis of the likely costs and benefitsof the final rule provisions, we considerthe broader impact of amendedRegulation A on capital formation. Asdiscussed below, this will depend onwhether issuers that currently raisecapital elect to rely on amendedRegulation A in place of other offeringmethods and whether issuers that havebeen unable to raise capital, or raiseenough capital, avail themselves ofamended Regulation A because it ispreferable over other capital risingmethods otherwise available to them. Tothe extent that amended Regulation Aprovides a method of raising capital forissuers that currently have no method ofdoing so, it could enhance the overalllevel of capital formation in theeconomy in addition to anyredistributive effect that could arisefrom issuers changing their capitalraising methods.

The impact of the final rules on anissuer’s ability to raise capital will alsodepend on whether new investor capitalis attracted to the Regulation A market,and on whether investors reallocateexisting capital among various types ofofferings. Investor demand for securities

864 Congress enacted Section 3(b)(2) against abackground of public commentary suggesting thatRegulation A, an exemption for small offeringsoriginally adopted by the Commission in 1936under the authority of Section 3(b) of the SecuritiesAct, should be expanded and updated to make itmore useful to small issuers. HR. 1070 (SmallCompany Capital Formation Act of 2011) wasintroduced in April 2011. In its September 2011report, the Committee on Financial Services noted:“HR. 1070, the Small Company Capital FormationAct, raises the offering threshold for companiesexempted from registration with the U.S. Securitiesand Exchange Commission (SEC) under RegulationA from $5 million—the threshold set in the early1990s—to $50 million. Raising the offeringthreshold helps small companies gain access tocapital markets without the costs and delaysassociated with the full-scale securities registrationprocess See HR. Rep. No. 112—206 (2011).

offered under amended Regulation Awill depend on the expected risk, returnand liquidity of the offered securities,and in particular, how thesecharacteristics compare to whatinvestors can obtain from securities inother exempt offerings and in registeredofferings. Investor demand also willdepend on whether Regulation Adisclosure requirements are sufficient toenable investors to evaluate theaforementioned characteristics ofRegulation A offerings.

To assess the likely impact of the finalrules on capital formation, we considerthe features of amended Regulation Athat potentially could increase the useof Regulation A by new issuers and byissuers that already rely on private andregistered offerings.

The amendments to Regulation A weare adopting remove certain burdensidentified by commenters and others inexisting Regulation A. Offerings relyingon existing Regulation A must bequalified by the states and theCommission, which also requires areview and qualification process forissuers to access capital.865 AmendedRegulation A removes the requirementof state qualification for Tier 2 offerings,thereby eliminating the cost and otherburdens of the duplicative review underexisting Regulation A. Issuance costsmay also be reduced, as a percentage ofproceeds, by increasing the maximumoffering size from $5 million annuallyunder existing Regulation A, to $20million for Tier 1 offerings and to $50million for Tier 2 offerings relying onamended Regulation A.

We believe that the potential use ofamended Regulation A for Tier 2offerings depends largely on howissuers perceive, the trade-off betweenthe costs of qualification and ongoingdisclosure requirements and the benefitsto issuers from access to a broadinvestor base, expansion of the offeringsize, the preemption of state securitieslaw registration requirements and thepotential for enhanced secondarymarket liquidity.

With respect to Tier 1 offerings, thepotential use of amended Regulation A

See GAO Report. According to the GAOReport, the limited use of Regulation A appears tohave been influenced by multiple factors, including“the type of investors businesses sought to attract,the process of Sling the offering with SEC, statesecurities laws, and the cost-effectiveness ofRegulation A relative to other SEC exemptions. Forexample, identifying and addressing individualstate’s securities registration requirements can beboth costly and time-consuming for smallbusinesses, according to research, an organizationthat advocates for small businesses, and securitiesattorneys that GAO interviewed. Additionally,another SEC exemption [Regulation Dl is viewed bysecurities attorneys that GAO met with as morecost-effective for small businesses

depends largely on how issuers perceivethe trade-off between state review andqualification requirements, limiteddisclosure requirements (withpotentially greater informationasymmetry between issuers andinvestors) and the $20 millionmaximum offering size.

We also recognize that the level ofinvestor protection resulting from thefinal rules is an important considerationthat could affect the ultimate use andsuccess of amended Regulation A. Forexample, if preempting state review ofTier 2 offerings, or not requiring auditedfinancials or ongoing disclosures in Tier1 offerings, leads to undisclosed risks ormisconduct in the offering process, theninvestors may be unwilling toparticipate in those types of RegulationA offerings. On the other hand,Commission staff review of the offeringsand investment limitations for Tier 2offerings may mitigate some of theseconcerns for certain investors.

Many of the potential issuers ofsecurities under amended Regulation Amay be small companies, particularlyearly-stage and high-growth companies,seeking capital through equity-basedfinancing because they do not havesufficient collateral or the cash flowsnecessary to support the fixedrepayment schedule of debtfinancing.866 Currently, thesecompanies often seek capital frominstitutional or accredited investorsthrough offerings that are exempt fromregistration under the Securities Act orthrough registered public offerings. Inthe future, whether issuers opt to relyinstead on Regulation A will depend onthe perceived utility of the amendedRegulation A exemption compared to:(i) Other available exemptions fromregistration, and (ii) registered publicofferings. Below we discuss each ofthese considerations in turn.

Some issuers may prefer to offersecurities under amended Regulation Arelative to using other offering methodsexempt from registration because ofpotentially limiting features associatedwith the other exemptions. In particular,securities sold pursuant to theexemptions from registration underRegulation D,867 which account for asignificant amount of exemptofferings,868 are generally subject to

666 See Berger, Allen N., and Gregory F. Udell,1998, The economics of small business finance: Theroles of private equity and debt markets in thefinancial growth cycle, Journal of Banking andFinance 22(6), pp. 613—673.

86717 CFR 230.500 through 230.506.868 See V. Ivanov, and S. Baugness, 2013, Capital

Raising in the U.S.: An Analysis of UnregisteredOfferings Using the Regulation D Exemption, 2009—

Continued



restrictions on resale or limits onparticipation by non-accreditedinvestors in ways that can limit theability to raise capital. In contrast toRule 506 of Regulation D, companiesrelying on amended Regulation A cansell securities to an unlimited number ofnon-accredited investors,869 and thesecurities will not be restrictedsecurities for purposes of the federalsecurities laws, which will allow for amore diffuse investor base and potentialliquidity benefits.

The use of amended Regulation Amay also depend on whether companiesconsidering seeking capital through anexempt offering believe that the benefitsfrom access to a broader investor baseunder amended Regulation A offset thecosts of qualification and, with respectto Tier 2 offerings, ongoing disclosurerequirements. Other offering exemptionscould remain attractive relative toamended Regulation A. For example,general solicitation is now permissibleunder Rule 506(c) of Regulation D.Issuers relying on Rule 5 06(c) to solicitofferings may now more easily reachinstitutional and accredited investors,making it less necessary for them to seekcapital from a broader non-accreditedinvestor base, especially if tradingplatforms aimed at accredited investorsin privately placed securities continueto develop.870

Finally, the conditional exemptionfrom registration of a class of securitiesunder Section 12(g) available to someTier 2 issuers may encourage them topursue a Regulation A offering as ameans to avoid the associated costs andrequirements of Exchange Actregistration and reporting.87’ This effectmay be limited by the imposition of theconditions on the Section 12(g)exemption, in particular, the conditionlimiting the availability of theexemption to smaller companies that donot exceed certain thresholds for publicfloat or, in the absence of float,revenues. Larger issuers of Regulation Asecurities or issuers using Regulation Ato raise capital as part of a growthstrategy, or seeking to increase liquidity

2012, available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-regd.pdf.

869 Non-accredited investors in Tier 2 offeringswill be subject to an investment limitation.

870 example, “NASDAQ Private Market’saffiliated marketplace is an electronic network ofMember Broker-Dealers who provide accreditedinstitutions and individual clients with access tothe market. companies use a private portal toenable approved parties to access certaininformation and transact in its securities.” SeeNASDAQ Private Market overview, available at:https://wwtv.nasdaqprivatemarket.com/market/overviel1’.

871 See Section fl.B.6.c.

through a broader investor base, maystill be subject to a Section 12(g)registration requirement in the future.

The trade-offs between amendedRegulation A and a registered offeringare somewhat different. In a registeredoffering, issuers can offer the securitiesdirectly to all potential investors,without a limitation on the aggregateoffering amount and with no resalerestrictions. Moreover, securities issuedthrough registered offerings often tradeon national securities exchanges andcan offer a degree of liquidity toinvestors that is generally not availablefor securities issued in private offerings.However, the issuance costs associatedwith small registered public offeringsare generally a significant percentage ofproceeds and issuers in registeredofferings must bear the costs arisingfrom ongoing disclosure requirementsunder the Exchange Act. These costs areperceived to be one of the determinantsof the relatively low incidence of initialpublic offerings (“IPOs”) over the pastdecade and may be a motivating factorfor potential issuers to prefer offeringsecurities under amended RegulationA.872 Relative to registered publicofferings, offerings under amendedRegulation A will provide smallerissuers with access to sources of capitalwithout necessarily imposing the fullongoing reporting requirements of theExchange Act.

The use of amended Regulation Amay depend on the extent to whichcompanies considering a traditional IPObelieve that amended Regulation A is aviable alternative. These potentialissuers will need to assess whether thecost savings from reduced reportingrequirements under amendedRegulation A offset the potentialreduction in secondary market liquiditycompared to registered offerings thatmeet the listing requirements of nationalsecurities exchanges. In particular,securities listed on a national securitiesexchange are likely to benefit fromincreased liquidity as a result of greateraccess to potential investors and a lowerlevel of information asymmetry due tomore extensive reporting requirements.

872 See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20, 2011), available at: http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_an-ramp.pdf(”IPO Task Force”).

There are other possible explanations for thedecline in IPOs, for example, macro-economiceffects on investment opportunities in the economyand the cost of capital. See Lowry, M., 2003, Whydoes IPO volume fluctuate so much? journal ofFinancial Economics 67(1), pp. 3—40. Anotherpossible explanation is an increase in the benefitsof being acquired by a larger entity relative to thebenefits of operating as an independent firm. SeeGao, X., J. Ritter, and Z. Zhu, 2013, Where have allthe IPOs gone? Journal of Financial andQuantitative Analysis 48(61, pp. 1663—1692.

At present, only some securities issuedunder existing Regulation A trade over-the-counter, with the majority notimown to trade in any secondarymarket.

The liquidity trade-off faced byissuers considering amended RegulationA relative to other exempt or registeredoffering methods may ultimately centeron whether the ongoing reportingrequirements of Tier 2 offerings cangenerate sufficient information forsecondary markets to provide theintended liquidity benefits. Academicstudies have found a close relationshipbetween disclosure requirements andliquidity.873 The disclosurerequirements in the final rules seek tobalance the burden of disclosurerequirements on issuers and the demandof investors for information by offeringissuers a capital raising option withlower compliance costs while stillmandating relevant information aboutthe issuer and the securities for themarket.

Overall, amended Regulation A couldincrease the aggregate amount of capitalraised in the economy if used by privateissuers that have until now been limitedin their ability to raise capital throughother types of exempt offerings or bysmaller private issuers that seek a publicmarket for their securities but that arenot sufficiently large to bear the fixedcosts of being an Exchange Act reportingcompany. The impact of amendedRegulation A on capital formation couldalso be redistributive in nature byencouraging issuers to shift from onemethod of capital raising to another.This potential outcome may havesignificant net positive effects on capitalformation and allocative efficiency byproviding issuers with access to capitalat a lower cost than alternative capitalraising methods and by providing

For example, one study found improvedliquidity at companies that chose to comply withExchange Act reporting requirements in order toremain eligible for quotation on OTCBB. SeeBushee, B., and C. Leus, 2005, Economicconsequences of SEC disclosure regulation:Evidence from the OTC bulletin board, Journal ofAccounting and Economics 39(2), pp. 233—264.

Another study found significant decreases inliquidity for issuers that deregistered theirsecurities, with the subsequent loss of liquidityattributed to decreased disclosure separate from theeffect of delisting from a major exchange. Thisstudy also shows that some companies choose toderegister under Section 12(b) and trade on lessliquid OTC markets instead of trading on nationalsecurities exchanges, indicating that, for suchcompanies, the expected costs of reporting underthe Exchange Act outweigh the expected liquiditybenefits. See Leux, C., A. Triantis, and T. Wang,2008, Why do firms go dark? Causes and economicconsequences of voluntary SEC deregistrations,Journal of Accounting and Economics 45(2—3), pp.181—208.



investors with additional investmentopportunities.

The net effect of the final rules oncapital formation will depend onwhether issuers that rely on amendedRegulation A do so in addition to orinstead of other methods of raisingcapital. The effect will also depend onwhether investors find Regulation Adisclosure requirements and investorprotections to be sufficient to evaluatethe expected return and risk of suchofferings and to choose betweenofferings reliant on Regulation A, otherexempt offerings and registeredofferings. Due to a lack of data, we arenot able to estimate the effects of thefinal rules on the potential rate ofsubstitution between alternativemethods of raising capital and amendedRegulation A and the overall expansion,if any, in capital raising by potentialissuers eligible for amended RegulationA.

B. Baseline

As we described in the ProposingRelease, the baseline for our economicanalysis of amended Regulation A ismarket conditions as they exist today, inwhich issuers seeking to raise capitalthrough securities offerings mustregister the offer and sale of securities

under the Securities Act unless they canrely on an exemption from registrationunder the federal securities laws.874 Thebaseline discussion below also includesa description of investors in offerings ofsimilar amounts and a discussion of therole of intermediaries that may beaffected by the final rules.

1. Current Methods of Raising up to $50Million of Capital

Issuers seeking to raise up to $50million over a twelve-month period areexpected to be affected directly byamended Regulation A. As we describedin the Proposing Release, while thereare a number of factors that companiesconsider when determining how to raisecapital, one of the primaryconsiderations is whether to issuesecurities through a registered publicoffering or through an offering that isexempt from Securities Act registrationand ongoing Exchange Act reportingrequirements. The choice of offeringmethod may depend on the size of theissuer, the type of investors the issuerseeks to attract and the amount of newcapital sought. Registered offeringsentail considerable initial and ongoingcosts that can weigh more heavily onsmaller issuers, providing incentives toremain private and to raise capital

outside of public markets.875 To theextent that these issuance costsconstrain small firms’ access to capital,they may result in underinvestment insome value-generating projects and thuspotentially less efficient allocation ofcapital to investment projects. Thissection describes the various currentlyavailable offering methods and theprevalence of their use.

a. Exempt Offerings

Currently, small issuers can raisecapital by relying on an exemption fromregistration under the Securities Act,such as Section 3(a)(11),876 Section4(a)(2),677 Regulation D,878 andRegulation A. Each of these exemptions,however, has requirements that maylimit its utility for issuers. For example,the exemption under Securities ActSection 3(a)(11) is limited to intrastateofferings, and Regulation D offeringsmay limit or prohibit participation bynon-accredited investors. Additionally,offerings relying on existing RegulationA require preparation of offeringmaterials and qualification of anoffering statement by the Commissionand may require qualification orregistration in multiple states.679 Thetable below summarizes the mainfeatures of each exemption.

874 Other rules mandated by the JOBS Act havebeen proposed but not adopted by the Commission.The baseline does not account for potential changesthat may result from future adoption of proposedrules.

675 See IPO Task Force.876 Under Securities Act Section 3(a)(11), except

as expressly provided, the provisions of theSecurities Act (including Section 5 registrationrequirement) do not apply to a security that is “partof an issue offered and sold only to persons residentwithin a single State or Territory, where the issuerof such security is a person resident and doingbusiness within, or, if a corporation, incorporatedby and doing business within, such State orTerritory.” 15 U.S.C 77c(a)(3)(a)(11).

877 Securities Act Section 4(a)(2) provides that theprovisions of Section 5 shall not apply to

‘transactions by an issuer not involving a publicoffering.” 15 U.S.C. 77dt4l(a)(2l.

878 Regulation 0 contains rules providingexemptions and safe harbors from the SecuritiesAct’s registration requirements, allowing somecompanies to offer and sell their securities withouthaving to register the offering with the Commission.17 CFR 230.504, 505, 506.

879 Campbell, R., 2005, Regulation A: Smallbusiness’ search for a moderate capital, DelawareJournal of Corporate Law 31(1), pp. 77—123. Seealso GAO Report.

Aggregate offering limit on securities soldwithin a twelve-month period.

881 Resale restrictions are determined by statesecurities laws, which typically restrict in-stateresales for a one-year period.

882 Section 4(a)(2) of the Securities Act providesa statutory exemption for ‘transactions by an issuer

not involving any public offering.” See SEC v.Ralston Purina Co., 346 U.S. 119 (1953) (holdingthat an offering to those who are shown to be ableto fend for themselves is a transaction “notinvolving any public offering.”)

This description is based on Regulation Abefore the adoption of the final rules today.

884 No general solicitation or advertising ispermitted unless the offering is registered in a staterequiring the use of a substantive disclosuredocument or sold under a state exemption for salesto accredited investors with general solicitation.

885 Filing is not a condition of the exemption.886 Restricted unless the offering is registered in

a state requiring the use of a substantive disclosuredocument or sold under a state exemption for saleto accredited investors.

Issuer and investor Filing Resale Blue skylawType of offering Offenng limit880 Soliotation requirements requirement restrictions preemption

Section 3(a)(1 1) None No limitations All issuers and investors must be resi- None Restricted in some No.dent in state cases. 681

Section 4(a)(2) None No general solicita- Transactions by an issuer not involving None Restricted secun- No.tion. any public offering.882 ties.

Regulation A883 $5 million with $1.5 Testing the waters U.S. or Canadian issuers, excluding in- File testing the No No.million limit on permifled before vestment companies, blank-check waters materials,secondary sales filing, companies, reporting companies, Form 1—A, Form

and issuers of fractional undivided in- 2—A.terests in oil or gas rights, or similarinterests in other mineral rights.

Rule 504 Regulation $1 million General solicitation Excludes investment companies, blank- File Form 0885 Restricted in some No.0 permitted in check companies, and Exchange Act cases. 886

some cases. 884 reporting companies.



Issuer and inveator Filing Resale Blue 1wlawType of offering Offering limit887 Solicitation

requirements requirement restrictions preemption

Rule 505 Regulation $5 million No general solicita- Unlimited accredited investors and up File Form D888 Restricted securi- No.D. tion. to 35 non-accredited investors, ties.

Rule 506 Regulation None General solicitation Unlimited accredited investors. Limita- File Form D891 Restricted secud- Yes.D. permitted in tions on non-accredited investors, 890 ties.

some cases. 889

While we do not have data onofferings relying on an exemption underSection 3(a)(11) or Section 4(a)(2),available data related to Regulation Dand Regulation A filings allow us togauge how frequently issuers currently

use these exemptions when raisingcapital.

i. Regulation A Offerings

As we described in the ProposingRelease, issuers rarely rely on existing

Regulation A to raise capital. The chartbelow, from the GAO Report shows thenumber of filed and qualifiedRegulation A offerings in fiscal years1992 to 2011.892

Data from GAO Report: Regulation A offerings filed and qualified, 1992-2011

In calendar years 2012 to 2014, 26Regulation A offerings, excludingamendments, were qualified by theCommission.893

Section 402 of the JOBS Act requiredthe GAO to study the impact of statesecurities laws on Regulation Aofferings. The GAO examined: (1)Trends in Regulation A filings, (2)differences in state registration ofRegulation A filings, and (3) factors thatmay have affected the number ofRegulation A filings. In its July 2012report on Regulation A, the GAO citedfour factors affecting the use ofRegulation A offerings: (1) Costsassociated with compliance with state

887 Aggregate offering limit on securities soldwithin a twelve-month period.

888 Filing is not a condition of the exemption.°89No general solicitation or advertising is

permitted under Rule SOfi(bl. General solicitattonand general advertising permitted under RuleSofilcl, provided all purchasers are accreditedinvestors and the issuer takes reasonable steps toverify accredited investor status.

Under Rule 506(b), offerings may involve anunlimited number of accredited investors and up to35 non-accredited investors. Under Rule SOfilcl, allpurchasers must be accredited investors.

securities regulations, or blue sky laws;(2) the availability of alternative offeringmethods exempt from registration, suchas Regulation D offerings; (3) costsassociated with the Commission’s filingand qualification process; and (4) thetype of investors businesses sought toattract.

As identified by the GAO, compliancewith state securities laws is one of thefactors that impacts the use of existingRegulation A. The GAO did not providean estimate of the compliance costs. Forissuers seeking to offer securities inmultiple states, differences in securitieslaws and applicable procedures acrossstates may result in significant legal

Filing is not a condition of the exemption.892 For the purposes of this chart, a Regulation A

offering is considered “filed” when the Commissionreceives a potential issuer’s offering materialsthough Form 1—A. A Regulation A offering isconsidered qualified after the Commission staff hasreviewed the offering materials and determined thatall conditions have been met. Therefore, offeringsthat are filed and not qualified are either pending,withdrawn, or abandoned.

in cases in which an issuer made multipleForm 1—A filings over this time period, only thefirst qualified offering by that issuer was included

costs 894 and a time consuming processfor issuers, which could adversely affecttheir efforts to raise capital in a timelyand cost-effective manner. NASAA hasrecently initiated a Coordinated ReviewProgram for Regulation A offerings.895Only a limited number of issuers haveundergone state review through thisprocess to date, so we are unable toconclude whether it may result in lowercosts or a shorter amount of review timethan was the case prior to its inception.

The GAO also identified costsassociated with the Commission’s filingand qualification process for RegulationA offerings as another factorcontributing to its limited current use.

in the number of qualified Regulation A offerings.The estimate also excludes amendments filed onForm i—A/A, including post-qualificationamendments to earlier Form i—A filings, as well asabandoned and withdrawn filings.

894 See discussion in Section tII.l below.°98A description of NASAA’s coordinated review

program can be found at: http://wrvw.nosoo.org/industiy-resources/corporotion-finonce/coordinnted-rewew/regu]otion-o-offerings/. Seediscussion in Section 111.1 below.

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While existing Regulation A permitsofferings to an unlimited number ofnon-accredited investors, the totaloffering amount must not exceed $5million in a twelve-month period,limiting the opportunity to scale thefixed component of these costs as apercentage of proceeds.

As described above, a business thatrelies on Regulation A must file anoffering statement with the Commissionthat must be qualified by Commissionstaff before the offering can proceed.From 2002 through 2011, Regulation Afilings took an average of 228 days toqualify.896 Average time to qualificationexceeded 300 days in 2012_2014.897Factors that affect the time toqualification include the paper filingmethod, quality of the initial filing, timetaken by the Commission staff, and timetaken by the issuer to provide requiredinformation or address questions from

previous correspondence with theCommission staff.

Our analysis of the Regulation Afilings qualified between 2002 and 2014shows that approximately half of theissuers operated in the financialindustry and the majority of offeringsinvolved equity securities. Offeringswith affiliate sales were rare, likely duenot only to the requirement of theexisting Regulation A that the issuerhave net income from continuingoperations in the prior two years butalso due to the perceptions that adverseselection concerns may limit investordemand in securities offerings withaffiliate sales.898

ii. Regulation D Offerings

Based on the information available tous, it appears that the most commonway to issue up to $50 million ofsecurities is pursuant to an offeringunder a Regulation D exemption.

Eligible issuers can rely on Rule 504 toraise up to $1 million within a twelve-month period, on Rule 505 to raise upto $5 million within a twelve-monthperiod, and on Rule 506 to raise anunlimited amount of capital. In total,based on the analysis of offeringamounts reported on Form D incalendar year 2014, Regulation Dofferings accounted for over one trilliondollars. Most issuers choose to raisecapital by relying on Rule 506, evenwhen their offering size would havepotentially permitted reliance on Rule504 or Rule 505.899 For example, in2014, we identified 11,228 Regulation Dofferings that would have beenpotentially eligible to be conductedunder amended Regulation A. Of those,10,671 offerings relied on Rule 506, 376on Rule 504, and 181 on Rule 505. Wesummarize their characteristics in thetable below.

REGULATION D OFFERINGS IN 2074 BY ISSUERS THAT WOULD BE ELIGIBLE To RELY ON AMENDED REGULATION A90°

Rule 504 Rule 505 Rule 506Offering size

$1 M $5M $20M $20—50M

Current Reg A Eligible Yes Yes Up to $5M NoAmended Reg A Eligible Yes Yes Yes YesNumber of filings 376 781 70,071 600Average offering amount ($ million) 0.4 1.4 3.2 31.6Offerings with non-accredited investors 58% 31% 6% 2%Median number of investors 3 7 6 9

As shown in the table above,approximately 95% of Regulation Dofferings that would be eligible foramended Regulation A relied on Rule506. A comparison of Rule 506 offeringsover $20 million to those below $20million shows that larger offeringsgenerally had a higher number of

investors and were less likely to havenon-accredited investors.

Additional data on Regulation Dofferings that would have been eligiblefor amended Regulation A exemption isprovided in the graph below, whichdisplays the offering size distribution ofRule 506 offerings and other Regulation

D offerings that would have beenpotentially eligible for the amendedRegulation A exemption in calendaryear 2014. Approximately 95% ofRegulation D offerings that would havebeen potentially eligible for amendedRegulation A had offering amountsbelow $20 million.

896 GAO Report.estimate is generated by staff from the

Commission’s Division of Economic and RiskAnalysis using Form 1—A filings and is determinedas the difference between the filing date for theinitial Form 1—A filing and the final dispositiondate for the final Form 1—A or 1—A/A filing throughwhich the offering was qualified.

98 See Bettis, J., J. Coles, and M. Lemmon, 2000,Corporate policies restricting trading by insiders,Journal of Financial Economics 57, pp. 191—220(discussing adverse selection issues and corporatepolicies restricting trading by insiders. See also

Michaely, R., and W. Shaw, 1994, The pricing ofinitial public offerings: Tests of adverse-selectionand signaling theories, Review of Financial Studies7(2), pp. 279—319 (analyzing the role of adverseselection and the possibility of informed trading inIPOs).

This tendency could, in part, be attributed totwo features of Rule 506: State securities lawpreemption and unlimited offering amount. Seealso GAO Report.

eoe Based on an analysis performed by staff in theDivision of Economic and Risk Analysis of Form Dfilings submitted for calendar year 2014. The

numbers exclude offerings by reporting companies,non-Canadian foreign issuers and pooledinvestment funds, as well as offerings of interestsin claims on natural resources, which are noteligible for amended Regulation A. We do not havea scalable way of excluding blank check companies,which are also not eligible for amended RegulationA, from this sample, which leads to a higherestimate of the number of issuers that would beeligible to rely on amended Regulation A.

901 Based on an analysis performed by staff in theDivision of Economic and Risk Analysis of Form 0filings submitted for calendar year 2014.



Distribution of offering size of Rule 506 offerings and other Regulation D offeringsin 2014 by issuers that would be eligible to rely on amended Regulation A901

8

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[_ Regulation D Rule 506

901 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of FonnD filings submitted for calendar year 2014.

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0 5 10 15 20 25 30 35 40 45 50Offering size



Approximately seventy percent ofRegulation D issuers that would beeligible for amended Regulation Adeclined to disclose their revenue rangein their Form D filings for 2014. Of theremaining 30%, 13% reported “norevenues.” The portion of issuers withno revenues is noteworthy because itmay be more difficult for issuerswithout regular cash flows to obtaindebt financing (without collateral or aguarantee).

b. Registered Offerings

Issuers may seek to raise capital byregistering the offer and sale ofsecurities under the Securities Act. Incalendar year 2014, using data from

Thomson Reuters, we identified 75 IPOsand 246 seasoned equity offerings

(SEOs) of up to $50 million by issuersthat would have been potentiallyeligible for amended Regulation A.902

There has been a general decline inthe number of IPOs, particularly thoseundertaken by small firms, since the late1990s.903 One possible reason behindthe relatively low number of IPOs under$50 million is that public offerings maybe too costly to be a viable capitalraising option for smaller issuers.904Fees paid to underwriters average 7%for WOs, 5% for SEOs, and 1% for bondissuances.°°5 Issuers conductingregistered public offerings also incurCommission registration fees andFINRA filing fees, legal and accountingfees and expenses, transfer agent andregistrar fees, costs associated with

periodic reporting requirements andother regulatory requirements andvarious other fees.°°6 Two surveys citedin the IPO Task force report concludedthat regulatory compliance costs of IPOsaverage $2.5 million initially, followedby an average ongoing cost of $1.5million per year. 907

Because of the fixed-cost nature ofsome of the compliance-related feesassociated with public offerings,compliance-related fees as a percentageof offering proceeds tend to decline as

offering size increases, as illustrated inthe table below. Offerings below $50million, and especially offerings below$20 million, incur significantly higherregistration, legal and accounting-related fees, as a percentage of proceeds.

CERTAIN NON-UNDERWRITER IPO-RELATED FEES AS A PERCENTAGE OF OFFERING PROCEEDS FROM 1992—2014 908

Offering Offering Offering$20M $20—$50M >$50M

% % ¾

SEC Registration Fees 0.11 0.04 0.03Blue Sky Fees 0.35 0.05 0.02Accounting Fees 1.38 0.84 0.56Legal Fees 2.32 1.18 0.81

In addition to compliance costs, thereare other possible explanations for thetrends in IPOs. A decline in publicofferings also could result from macroeconomic effects on investmentopportunities and the cost of capital 909

or an increase in the economies of scopefrom being acquired by a larger entityrelative to the benefits of operating as anindependent firm.9bo

Several other trade-offs may affect anissuer’s willingness to pursue an IPO.According to the IPO Task force survey,

The sample excludes offerings from non-Canadian foreign issuers, blank check companies,and investment companies, which would not beeligible to rely on amended Regulation A. Offeringswith gross proceeds below $1,000 are excluded tominimize measurement error. Issuers of interests inclaims on natural resources, which also would notbe eligible for amended Regulation A, were notseparately eliminated due to data constraints.

903 See IPO Task Force. However, a recent studynotes that the decline in IPOs has been partlyreversed in 2012—2014. See Dambra, M., L. Field,and M. Gustafson, 2014, The JOBS Act and IPOvolume: Evidence that disclosure costs affect the[P0 decision, Journal of Financial Economics(forthcoming), available at: http://papers.ssrn .com!sol3/papers.cfm?obstract_id—2459591.

Other potential reasons, such as macroeconomic conditions, are discussed below.

See Chen, H., and J. Ritter, 2000, The sevenpercent solution, Journal of Finance 55(3), pp.1105—1131; Abrahamson, M., T. Jenldnson, and H.Jones, 2011, Why don’t U.S. issuers demandEuropean fees for lPOs? Journal of Finance 66(6],

pp. 2055—2082; Corwin, S., 2000, The determinantsof underpricing for seasoned equity offers, Journalof Finance 58(5), pp. 2249—2279; Huang, R., and D.

88% of CEOs that had completed an IPOlisted “Managing PublicCommunications Restrictions” as one ofthe most significant challenges broughton by becoming a reporting company.91’Additionally, issuers in certainindustries, such as high-technologysectors, may be sensitive to the costs ofdisclosure of proprietary informationand may find private capital sourcesmore attractive.912 Access to capital maybe especially time-sensitive for the typesof issuers most likely to conduct small

Zhang, 2011, Managing underwriters and themarketing of Seasoned Equity Offerings, Journal ofFinancial and Quantitative Analysis 46(1), pp. 141—170; Fang, L., 2005, Investment bank reputation andthe price and quality of underwriting services,Journal of Finance 60f 6), pp. 2729—2761.

906 According to the survey cited in the [P0 TaskForce report, 92% of the surveyed CEOs listed the“Administrative Burden of Public Reporting” asbeing one of the most significant challenges of an[P0. See P0 Task Force.

907 See IPO Task Force. However, some studiesconclude that the decline in U.S. small-firm IPOspredated the adoption of the Sarbanes-Oxley Act.See Gao, X., J. Ritter, and Z. Zhu, 2013, Where haveall the POs gone? Journal of Financial andQuantitative Analysis 48(6), pp. 1663—1692. Seealso Doidge, C., A. Ksrolyi, and R. Stulz, 2013, TheU.S. left behind? Financial globalization and therise of [POs outside the U.S., Journal of FinancialEconomics 110(3), pp. 546—573.

908 fee information is compiled from ThomsonReuters SDC data on [POs for 1992—2014. Thesample excludes offerings from non-Canadianforeign issuers, blank-check companies, andinvestment companies. Averages are computedbased on observations with non-missing data

offerings, such as startups and smallbusinesses, rendering these issuersunwilling to go through a potentiallylengthy registration process. Directorsand officers of small issuers also maynot want to subject themselves to theincreased liability and takeover threatsthat come with dispersed ownership.913

The cost and disclosure requirementsof IPOs have been affected by the recentadoption of scaled reportingrequirements for emerging growthcompanies (EGCs) under Title I of the

(where a particular type of fees is separatelyreported). Offerings with gross proceeds below$1,000 are excluded to minimize measurementerror.

The analysis includes legal, accounting, blue sky,and registration fees, to which we collectively referas “compliance fees”. Blue Sky Fees denotes feesand expenses related to compliance with statesecurities regulations. We note that Blue Sky feesassociated with small registered offerings may over-or under-estimate similar expenses for Regulation Aofferings of the same size.

909 See Lowry, M., 2003, Why does IPO volumefluctuate so much? Journal of Financial Economics67(1), pp. 3—40.

910 See Gao, X., J. Ritter, and Z. Zhu, 2013, Wherehave all the [POs gone? Journal of Financial andQuantitative Analysis 48(6), pp. 1663—1692.

See P0 Task Force.912 See Verrecchia, R., 2001, Essays on disclosure,

Journal of Accounting and Economics 32, pp. 97—180.

Burkart, M., 0. Gromb, and F. Panunzi,2000, Agency conflicts in public and negotiatedtransfers of corporate control, Journal of Finance55(2), pp. 647—677.



JOBS Act, which can ease thecompliance obligations of certainissuers in registered offerings. There issome evidence that Title I hascontributed to an increase in IPOvolume in 2012—2014, particularly inindustries with high proprietarydisclosure costs, such as biotechnologyand pharmaceuticals.’4 Some recentstudies, however, suggest that theoverall cost of going public for EGCs hasnot decreased whereas the indirect cost(e.g., IPO underpricing) hasincreased.915

c. Private Debt FinancingEquity, including principal owner

equity, accounts for a significantproportion of the total capital of atypical small business. Other sources ofcapital for small businesses includeloans from commercial banks, financecompanies and other financialinstitutions, and trade credit.916

Borrowing is relatively costly formany early-stage issuers as they mayhave low revenues, irregular cash-flowprojections, insufficient assets to offer ascollateral and high external monitoringcosts.917 For example, a small growthcompany, such as a technology or lifesciences startup, without steadyrevenues or substantial tangible assets islikely to have trouble obtaining a loanor a line of credit from a bank because

914 Dambra, M., L. Field, and M. Gustafson,2014, The JOBS Act and IPO volume: Evidence thatdisclosure costs affect the IPO decision, Journal ofFinancial Economics (forthcoming), available at:http://papersssrn.com/sol3/papers.cfm?abstract_id=245959;.

915 See chaplinsky, S., K. Hanley, and S. K.Moon, 2014, The JOBS Act and the costs of goingpublic, Working paper, available at: http://papersssrn.com/so13/popers.cfm?abstractid=2492241; Barth, M., W. Landsman, and D.Taylor, 2014, The JOBS Act and informationuncertainty in ITO firms, Working paper, availableat: http://papers.ssrn.com/sol3/papers.cfm?abstractid=2465927; Westfall, T.J., andT,C. Omer, 2014, The impact of emerging growthcompany status on initial public offering valuationand the associated auditor risk and effort, Workingpaper, available at: http://papers.ssrn.com/sal3/papers.cfm ?abstract_id=25l2605.

16 Berger, A., and G. Udell, 2006, Smallbusiness credit availability and relationshiplending: The importance of bank organisationalstructure, Economic Journal 112(477), pp. 32—53. Inthis study, equity accounted for approximately halfof the total capital, including approximately 31%(45% for the smallest firms—that is, those, with lessthan $1 million in revenues or less than twentyemployees) attributed to the principal owner. Theremainder came from debt financing, with aboutone quarter accounted for by loans from commercialbanks, finance companies and other financialinstitutions, and another 16% comprised of tradecredit. The study was conducted based on the 1993edition of the Federal Reserve Board’s Survey ofSmall Business Finances, which collectsinformation on small businesses in the UnitedStates.

917 See Robb, A., and D. Robinson, 2014, Thecapital structure decisions of new firms, Review ofFinancial Studies 27(1), pp. 153—179.

it would have difficulty proving itsability to repay. financial institutionsgenerally require such small businessborrowers to provide collateral or aguarantee by owners,918 which someissuers may be unable or reluctant toprovide.

2. Investors

There are currently no limitations onwho can invest in existing Regulation Aofferings. In considering the baseline forthe amendments to Regulation A, wealso examine the investors in otherexisting methods of raising up to $50million in capital because the final ruleswe are adopting may impact an issuer’schoice of offering method and thepotential investor base of the offering.For example, as discussed above, whilethere are no limitations on the numberof non-accredited irtvestors that caninvest in offerings made pursuant toRule 504 of Regulation D and inregistered public offerings, offeringsmade pursuant to Rule 505 and Rule506(b) of Regulation D are limited to amaximum of 35 non-accreditedinvestors. Issuers making offeringspursuant to Rule 506(c) of Regulation Dmust take reasonable steps to verify thatinvestors are accredited investors.

While non-accredited investors canparticipate in Regulation D offerings,subject to limitations described above,data from Form D filings suggests thatnon-accredited investors are notsignificantly involved in Regulation Dofferings of up to $50 million. Offeringsinvolving non-accredited investors aretypically smaller than those that do notinvolve non-accredited investors. In2014, we estimate that approximately152,641 investors participated inRegulation D offerings of less than $50million by issuers that would be eligiblefor amended Regulation A.919 Suchofferings had an average of 13.6investors per offering. Approximately8% of such offerings involved one ormore non-accredited investors.

918 Approximately 92% of all small business debtto financial institutions is secured, and owners ofthe firm guarantee about 52% of that debt. SeeBerger, A., and C. Udell, 1995, Relationship lendingand lines of credit in small firm finance, Journal ofBusiness 68(3), pp. 351—381. Some studies of smallbusiness lending also document the creation oflocal captive markets with higher borrowing costsfor small, opaque firms as a result of strategic useof soft information by local lenders. See Agarwal,Sumit, and Robert Hauswald, 2010, Distance andprivate information in lending, Review of FinancialStudies 13(7), pp. 2757—2788.

on an analysis by staff from theCommission’s Division of Economic and RiskAnalysis of initial Form D filings submitted duringcalendar year 2014. The estimated number ofinvestors likely exceeds the actual number ofRegulation ID investors because investors couldhave participated in more than one offering.

The total number of householdsestimated to qualify as accreditedinvestors is substantially larger than thetotal number of investors reported tohave participated in an unregisteredoffering. As of 2013, we estimated thatover 9 million U.S. households qualifiedas accredited investors based on the networth standard alone, approximately 8million U.S. households qualified asaccredited investors based on theincome standard alone, andapproximately 12.4 million U.S.households qualified based on either theincome standard or the net worthstandard. 920

3. Financial IntermediariesRegulation A amendments may also

affect financial intermediaries that maybecome involved in the placement andquotation of Regulation A securities.Currently, there is limited involvementof intermediaries in a Regulation Aoffering. However, financialintermediaries are used in certain of theother types of offerings, includingregistered offerings and certain exemptofferings. To the extent that theamendments to Regulation A that we areadopting today impact the number andthe overall amount of capital raised inother types of offerings, financialintermediaries may be affected. Forexample, in registered offerings,underwriters are frequently used toidentify potential investors and areprimarily responsible for facilitating asuccessful distribution of the offeredsecurities. While intermediaries areused less frequently in Regulation Dofferings, they play a role in someofferings. We estimate that fewer than10% of Regulation D offerings thatwould have been potentially eligibleunder amended Regulation A involvedan intermediary (the estimate is basedon information about salescompensation or sales compensationrecipients reported in cormection withthe offering).92’

C. Scope of Exemption

1. Eligible IssuersConsistent with the restrictions in

existing Regulation A, the final rulesexclude non-Canadian foreign issuers,investment companies (includingBDCs), Exchange Act reportingcompanies, blank check companies, andissuers of fractional undivided interestsin oil or gas rights, or similar interests

920 These estimates are based on an analysis bystaff from the Commission’s Division of Economicand Risk Analysis, using the Federal ReserveBoard’s 2013 Survey of Consumer finances.

Based on an analysis performed by staff in theDivision of Economic and Risk Analysis of Form IDfilings for calendar year 2014.


Federal Register/Vol. 80, No. 75 /Monday, April 20, 2015 /Rules and Regulations 21873

in other mineral rights, from relying onthe exemption.

The final rules also exclude twoadditional categories of issuers: (i)issuers that are or have been subject toa denial, suspension, or revocationorder by the Commission pursuant toSection 12(j) of the Exchange Act withinthe five years immediately precedingthe filing of the offering statement, and(ii) issuers that are required to, but thathave not, filed with the Commission theongoing reports required by the finalrules during the two years immediatelypreceding the filing of an offeringstatement.

Excluding issuers that have notcomplied with Regulation A’s ongoingreporting requirements in the two-yearperiod immediately preceding the filingof a new offering statement willincentivize issuers that intend to rely onamended Regulation A exemption in thefuture to comply with its ongoingreporting requirements. Similarly,excluding issuers that were subject to adenial, suspension, or revocation orderby the Commission pursuant to Section12(j) of the Exchange Act within the fiveyears immediately preceding the filingof the offering statement will incentivizeregistrants to comply with theirobligations under the Exchange Act,including their ongoing reportingobligations, and will prevent issuerswith a history of non-compliance fromrelying on Regulation A after theyterminate or suspend their ExchangeAct reporting obligations. At the sametime, neither of these exclusions shouldresult in additional compliance costs forissuers because they do not impose anyreporting or other requirements onissuers beyond those already mandatedby existing regulations.

We recognize that excluding theseadditional categories of issuers wouldhave an effect on capital formation as itcould prevent Regulation A offerings byissuers who otherwise might haveutilized the Regulation A exemptionrather than other methods of capitalraising. However, to the extent that theinformation contained in required pastreports provides investors in follow-onofferings of Regulation A securities witha more complete picture of the issuer’sbusiness and financial condition and isrelevant for current investmentdecisions, the exclusion of issuers thatare not compliant with Regulation A’sreporting requirements and issuerssubject to an order by the Commissionpursuant to Section 12(j) shouldtherefore enhance investor protectionand the informational efficiency ofprices of Regulation A securities byallowing investors to make betterinformed investment decisions.

Moreover, we believe that theseadditional issuer eligibilityrequirements will complement eachother in facilitating compliance with ourrules.

To the extent that more issuers usethe amended Regulation A exemption,the final rules may promote competitionamong eligible issuers in the market forinvestor capital and in the market forgoods and services. The final rules mayalso promote competition in the productmarket between small issuers and largerissuers.

As suggested by some commenters,we could have expanded the categoriesof eligible Regulation A issuers toinclude non-Canadian foreignissuers,922 blank check companies ,923

BDCs,924 and issuers of fractionalundivided interests in oil or gas rights,or similar interests in other mineralrights.925 These alternatives couldpotentially enhance capital formationand competition.926

However, it may be potentiallydifficult and costly for investors,especially less sophisticated investors,to determine the valuation and risk ofsecurities of non-Canadian foreignissuers, blank check companies andissuers of fractional undivided interestsin oil or gas rights, or similar interestsin other mineral rights, so extendingeligibility to such issuers may alsodecrease investor protection. To theextent that such informationasymmetries are not fuliy mitigated byinitial and ongoing Regulation Adisclosure requirements, which aregenerally less extensive than thedisclosure requirements for registeredofferings, the prices of Regulation Asecurities of these issuers could be lessinformationally efficient. Along thesame lines, we believe the specializednature of capital formation andinvestment strategies at BDCs warrantsdisclosures that are more specializedthan what is required by existing or

922 ABA SIL Letter; Andreessen/cowenLetter; BDO Letter; Mccarter & English Letter; OTCMarkets Letter; Richardson Patel Letter; SVB Letter;SVGS Letter.

923 See Gilman Law Letter; IPA Letter; RichardsonPatel Letter.

924 See ABA BLS Letter; CFIRA Letter 1;Commonwealth Fund Letters I and 2; KVCF Letter;Mi&en Institute Letter; Mofo Letter; REISA Letter;SBIA Letter; WR Hambrecht + Co Letter. Most ofthese commenters noted that BDCs serve animportant function in facilitating small or emergingbusiness capital formation or in providing a bridgefrom private to public markets.

925 See REISA Letter.926 If eligibility under amended Regulation A had

been extended to investment companies and BDCs,and such companies obtained a lower cost of capitaland passed savings through to the companies inwhich they invest, the latter could also realizeindirect capital formation benefits.

amended Regulation A for a properunderstanding of an investment in thesecurities of these types of issuers.

We also could have expanded thecategories of eligible Regulation Aissuers to include issuers that aresubject to the ongoing reportingrequirements of Section 13 or 15(d) ofthe Exchange Act (“reportingcompanies”), as suggested by somecommenters.°27 Although reportingcompanies sometimes conduct offeringsexempt from registration, we are unableto estimate the number of reportingcompanies that would use the amendedRegulation A exemption if it were madeavailable to them. We recognize thatsome reporting companies may havebenefited from this alternative due to,for example, the lower costs ofpreparation of a Regulation A offeringstatement than a registrationstatement.928 Additionally, somereporting companies whose securitiesare not listed on a national securitiesexchange could potentially benefit fromsavings of time and dollar expendituresthat may result from the state securitieslaw preemption in Tier 2 offerings.However, because Exchange Actdisclosure requirements for reportingcompanies are more extensive thanthose under amended Regulation A,reporting companies would not be ableto derive the benefit of reduced ongoingreporting costs under amendedRegulation A. Other commenterssuggested imposing more restrictiveissuer eligibility criteria, by excludingissuers that are not “operatingcompanies” 929 or excluding shellcompanies and issuers of pennystock.°3° While these additionalexclusions may create some investorprotection benefits, such additionalexclusions would be likely to limitcapital formation and competitionamong small issuers, which are morelikely to fall into the penny stock

927 Three commenters recommended allowingExchange Act reporting companies that are currentin their reporting obligations to conduct Tier 2offerings. See Andreessen/Cowen Letter; BlO Letter;OTC Markets Letter. One of these three commenterslimited its recommendation to companies with anon-affiliate float of less than $250 million. See BlOLetter. The other two commenters furthercommented that Exchange Act reporting shouldsatisfy Regulation A reporting obligations if theCommission adopted their recommendation. SeeAndreessen/Cowen Letter and OTC Markets Letter.

929 According to one commenter, Form S—iregistration may be too costly for micro-capcompanies, and the eligibility requirements of FormS—3 limit primary capital raising for issuers with asmall public float. See Andreessen/Cowen Letter.But see earlier discussion of indirect costs ofissuance for issuers using scaled disclosures inSection llI.B.i.b.

929 CFIRA Letter; and WR Hambrecht + CoLetter.

930 See ABA ELS Letter and MoFo Letter.



category, or some early-stage companies,which may not meet the definition of an“operating company.” Overall, due tothe implications of extending issuereligibility before the Commission hasthe ability to assess the impact of thechanges to Regulation A being adoptedtoday, we believe that it is prudent todefer consideration of potential changesto the categories of eligible issuers untilwe have the opportunity to observe theuse of the amended Regulation Aexemption and assess any new marketpractices as they develop.

2. Eligible SecuritiesConsistent with the statute, the final

rules apply to offerings of equitysecurities, debt securities, and securitiesconvertible or exchangeable to equityinterests, for example, warrants,including any guarantees of suchsecurities.93’

Similar to the proposal, the final rulesexclude offerings of asset-backedsecurities (“ABS”) from eligibility forRegulation A. As discussed above, webelieve that ABS issuers are not theintended beneficiaries of the mandatedexpansion of Regulation A. ABS aresubject to the provisions of RegulationAB and other rules specifically tailoredto the offering process, disclosure andreporting requirements for suchsecurities, and we do not believe thatRegulation A’s requirements are suitablefor offerings of such securities. ABS aredesigned to pooi the risk of alreadyissued loans and other financial assetsand, in this respect, do not constitutenew capital formation. We recognizethat, in certain cases, permitting ABSofferings to be conducted underRegulation A could lower the cost ofcapital for underlying borrowers whoseloans are eventually securitized by ABSissuers and therefore indirectly facilitatecapital formation.°2 In practice,however, the vast majority of ABSofferings are much larger than themaximum allowable offering size underamended Regulation A.933 As a result,

931 See discussion in Section 11.0.2 above.932 This indirect effect may result because, due to

bank accounting standards and capitalrequirements, securitization allows originators tomove assets off the balance sheet, freeing up capitalfor additional loans. The resulting increase incapital available for lending could lead to lowerborrowing costs for all borrowers down the capitalsupply chain. See Pennacchi, G., 1995, Loan salesand the cost of bank capital, Journal of Finance43(2), pp. 375—396; Caristrom, C., and K. Samolyk,1995, Loan sales as a response to market-basedcapital constraints, Journal of Banking and finance19(3), pp. 627—646.

Our analysis indicates that from 2011—2013,approximately 2.9% of ABS issuances were below$50 million. This estimate uses the AB Alert andCM Alert databases and includes only private labelABS deals.

we believe that excluding ABS offeringsfrom eligibility for Regulation A likelywill not have a significant adverse effecton capital formation.

3. Offering Limitations and SecondarySales

a. Offering LimitationsAs explained above, the final rules

introduce two tiers of offeringscompared with the baseline of one tierin existing Regulation A. The tieredapproach in the final rules allows us toscale regulatory requirements based onoffering size, to give issuers moreflexibility in raising capital underRegulation A, and to provideappropriately tailored protections forinvestors in each tier. Issuers seeking toraise a larger amount of capital are,among other things, required to providemore extensive initial and ongoingdisclosures, but are also able to takeadvantage of the larger maximumoffering size in Tier 2 (up to $50 millionin a twelve-month period). In light ofthis larger maximum offering size, thefinal rules impose additional disclosurerequirements and other provisions toprovide protection to investors in Tier 2offerings. Issuers seeking a smalleramount of capital retain the advantageof more scaled disclosures required inTier 1 offerings but must comply witha lower offering size limit.

We recognize that the cost associatedwith greater disclosure requirements forofferings made under Tier 2 in amountsup to $20 million may place Tier 2issuers at a relative competitivedisadvantage as compared to issuersseeking to raise an amount below $20million in a Tier 1 offering. Suchpotential competitive effects are likelyto be mitigated by the ability of issuersto evaluate the trade-off between thecosts associated with more extensivedisclosure requirements for Tier 2offerings and the benefit of a potentiallyhigher securities valuation stemmingfrom a reduction in informationasymmetry between issuers andinvestors due to the more extensivedisclosure requirements for Tier 2offerings.

In a change from the proposal, and inline with the suggestions of somecommenters, the final rules raise theTier 1 maximum offering size from $5million to $20 million irs a twelve-month period in order to providesmaller issuers with additionalflexibility to meet their financingneeds.° We expect the higher Tier 1maximum offering size will facilitate

°34 Some commenters recommended raising theTier 1 offering limitation to $10 million or more.See Guzik Letter 1 and ICBA Letter.

capital formation under Regulation Afor those issuers seeking to raisebetween $5 and $20 million in a twelve-month period. We expect the resultingcapital formation benefits to be greaterfor smaller issuers for which theincremental costs of the Tier 2disclosure regime—relative to the costsof complying with state registration—exceed the benefits of more extensivedisclosure.

Compared to the baseline, theincrease in the maximum offering sizeto $20 million for Tier 1 offerings andthe creation of Tier 2 with the maximumoffering size of $50 million will provideissuers with increased flexibility withregard to their offering size and shouldlower the burden of fixed costsassociated with conducting RegulationA offerings as a percentage ofproceeds.°35 This could make amendedRegulation A more cost effective andattractive to issuers than existingRegulation A, resulting in potentialfavorable effects on capital formationand competition. The increase in themaximum offering size could also makeRegulation A attractive to a broaderrange of issuers, including largerissuers. This could provide investorswith a broader range of investmentopportunities in the Regulation Amarket and potentially result in a moreefficient allocation of investor capital.

The increased maximum offering sizecould also contribute to improvedliquidity for Regulation A securities, tothe extent that larger issues mayencourage greater breadth of equityownership, assuming sufficientsecondary market demand develops.936Improved liquidity would enableinvestors in Regulation A offerings tounwind their investments more easilyand at a lower cost, thus making suchinvestments more attractive to potentialinvestors. On the other hand, if investordemand for securities offered underamended Regulation A is low, thiscould negatively affect security pricesand liquidity.

935To the extent that issuers in Tier 2 offeringsface additional costs due to revised disclosurerequirements under amended Regulation A,issuance costs as a percentage of proceeds mayremain unchanged or may increase.

936 recognize the possibility that, despite theabsence of resale restrictions, even large RegulationA offerings with heavy investor participation mayfail to attain sufficient liquidity due to a lack ofsecondary trading and a lack of breadth ofinstitutional ownership, and thus may be associatedwith a higher cost of capital due to the illiquiditypremium. In such a scenario, some issuers andinvestors may still benefit from having access to atype of offering that provides greater liquidity thanRegulation 0 securities offerings although lessliquidity than registered offerings of securitieslisted on major national exchanges.



If investor demand for Regulation Asecurities and information about issuersis sufficient, the increase in maximumoffering size could also contribute to thedevelopment of intermediation services,such as market making, and to thecoverage of Regulation A securities byanalysts.937 It is possible that anunderwriting market may develop toprovide Regulation A offering services,especially in larger Tier 2 offerings. Thepresence of these services could have apositive impact on investorparticipation and aftermarket liquidityof Regulation A securities, furtherincreasing demand for such services. Itis also possible, however, that investordemand for Regulation A securities willnot expand sufficiently to make suchservices economically feasible.

Finally, the increase in the maximumoffering size could result in increasedcompetition among Regulation A issuersfor investor capital. If the number ofissuers seeking to raise larger amountsof capital pursuant to Regulation Aincreases more than the size of theaccredited and non-accredited investorbase, investors considering Regulation Asecurities will have more choice ofinvestment opportunities in theRegulation A market, resulting in greatercompetition among issuers forprospective investors. Increasedcompetition, in turn, could result inmore efficient allocation of capital byinvestors. The intensity of competitionamong issuers for investor capital maynot change, however, if issuers are ableto attract additional numbers ofaccredited and non-accredited investorsas the Regulation A market develops.

Alternatively, as suggested by somecommenters, we could have increasedthe Tier 2 maximum offering size above$50 million, for example, to $75 or $100million.95e This alternative could resultin benefits that are similar to thebenefits of the increase in the maximumoffering size contained in the final rulesbut of a potentially larger magnitude.However, there is reason to believe thatthe magnitude of the increase in suchbenefits may be limited. In particular,although Rule 506 does not limitmaximum offering size, few RegulationD offerings by issuers that would beeligible for amended Regulation A

Academic studies show that firm size is animportant predictor of analyst coverage, so if largerissuers are attracted to the Regulation A market,they may be more likely to be covered by analyststhao smaller issuers, all else equal. See Barth, M.,R. Kasznik, and M. McNichols, 2001, Analystcoverage and intangible assets, Journal ofAccounting Research 39(11, pp. 1—34.

See B. Riley Letter; Fallbrook TechnologiesLetter; OTC Markets Letter; Public Startup Co.Letter 1; Richardson Fatel Letter.

exceeded $50 million.939 To the extentthat the current use of other types ofexempt offerings is indicative of futureRegulation A offerings, the alternative ofraising the Tier 2 offering size above $50million may not lead to a significantincrease in the number of issuers.

However, we recognize that historicaluse of Regulation D may not fullyrepresent future potential use ofRegulation A, particularly to the extentthat the amended rules facilitateofferings by issuers that do not currentlyrely on other private offeringexemptions and that are seeking abroader investor base and enhancedliquidity for their issued securities. Inparticular, amended Regulation A mayattract issuers seeking a publicownership status, and for whom a likelyalternative is a registered offering. Anincrease in the Tier 2 offering size above$50 million could result in some issuersshifting from conducting a registeredoffering to conducting a Tier 2 offering.As discussed earlier, amendedRegulation A may facilitate offeringsthat would not otherwise be conductedgiven the cost of registered offerings.However, it is also possible that anincrease in the Tier 2 offering size above$50 million will not result in asignificant number of issuers shiftingfrom conducting a registered offering toconducting a Tier 2 offering given thatthe relative cost savings from a Tier 2offering compared to a registeredoffering may be lower for offerings inthe $50 million to $75 million rangethan for those below $50 million.940

Based on an analysis of Form D filings for2014 by staff from Commission’s Division ofEconomic sod Risk Analysis, less than 3% ofRegulation D offerings by issuers that would heeligible for amended Regulation A had offering sizegreater than $50 million.

We also considered the overall distribution ofregistered offerings (initial public offerings andseasoned equity offeringal. The overall number ofRegulation B offerings significantly exceeded thenumber of registered equity offerings, thus thecombined distribution of registered and RegulationD offerings closely resembles the distribution ofRegulation 0 offerings. In 2014, most (92.2%) of theofferings conducted in the form of registered equityofferings or Regulation 0 offerings had offer sizesup to $50 million. In 2014, offerings in the $50475million range accounted for 1.0% of Regulation 0offerings and approximately 10% of registeredequity offerings. Data on registered offerings wasobtained from Thomson Reuters, as described inSection lll.B.i.b.

940 fixed costs of registered offeringsrepresent a significantly higher portion of offeringproceeds as offering sizes decrease. For instance,compliance related costs (registration, legal andaccounting expenses and feesl increase from anaverage of an average of 1.7% for IPOs and 0.5%for SEOs in the $50—$75 milhon range to an averageof 2.9% for IPOs and 1.6% for SEOs in the below$50 million range. Fee information is compiledfrom Thomson Reuters SOC data for 1992—2014,excluding offerings from non-Canadian foreignissuers, blank-check companies. and investment

An increased maximum offering sizefor Tier 1 offerings could increase theoverall amount of securities beingoffered to the general public that aresubject to less extensive initialdisclosure requirements and not subjectto ongoing disclosure requirements,which may reduce the ability ofinvestors to make informed investmentdecisions. However, some issuers thatconduct offerings that are eligible forTier 1 may instead choose a Tier 2offering, for example, to take advantageof the benefits of more extensivedisclosure, such as potentially greatersecondary market liquidity, and thebenefits of a single level of regulatoryreview.

An increased maximum offering sizefor Tier 2 Regulation A offerings couldincrease the overall amount of securitiesbeing offered to the general public thatare subject to initial and ongoingdisclosure requirements that are lessextensive than the requirements forregistered offerings being offered to thegeneral public, which may result in lessinformed decisions by investors, thuspotentially impacting investorprotection. This may be partly mitigatedby the investment limitations imposedon non-accredited investors in Tier 2offerings. Further, larger issuers aremore likely to conduct registeredofferings, associated with the moreextensive disclosure requirements of theExchange Act.94’ We believe that the

companies. Average compliance fees and expensesfor this calculation are based on observations withnon-missing data (where all four types of fees—legal, accounting, blue sky, and registration fees, towhich we collectively refer as compliance fees—areseparately reported). Offerings with gross proceedsbelow $1,000 are excluded to minimizemeasurement error.

941 Early in the firm’s life cycle, it may be optimalfor a firm to rematn private, but as it grows larger,it may become optimal to conduct a registered IPO.See Chemmanur, Thomas J., and Paolo Fulghieri,1999, A theory of the going-puhlic decision, Reviewof Financial Studies 12(21, pp. 249—279. Privatelyheld firms tend to be significantly smaller thanfirms with publicly traded securities. See Asker,John, Joan Farre-Mensa, and Alexander Ljungqvist,2014, Corporate investment and stock marketlisting: A puzzle? Review of Financial Studies28(2), pp. 342—390. Asker, John, Joan Farre-Mensa,and Alexander Ljungqvist, 2011. What do privatefirms look like? Data appendix, ovoi]ob]e ot:http://ssrn.com/obstroct id= 1659926. Other studiessupport the notion that larger firms are more likelyto conduct a registered P0. See Pagano, Marco,Fabio Panetta, and Luigi Zingales. 1998, Why docomputers go public? An empirical analysis,Journal of Finance 53, 27—64 (showing that sizepredicts going public using Italian data). See alsoChemmanur, Thomas J., Shan He, and Debarshi K.Nandy, 2010, The going-public decision and theproduct market, Review of Financial Studies 23(5),pp. 1855—1908 (showing that size predicts a higherlikelihood of conducting a registered IPO using USdata). In turn, smaller firms that have undertakenan P0 in the past are more likely to go private lateron. See Mehran, Hamid, and Stavros Periatiani,

continued



annual offering limitation for Tier 2 willserve to limit the utility of theRegulation A exemption for largerissuers and thus will make it morelikely that they will continue to raisemoney through registered offerings andprovide the corresponding disclosure.

b. Secondary SalesThe final rules continue to permit

secondary sales as part of a RegulationA offering, subject to the followingconditions. The amount of securitiesthat selling securityholders can sell atthe time of an issuer’s initial offeringand within the following 12-monthperiod may not exceed 30% of theaggregate offering price (offering size) ofa particular offering. following theexpiration of the first 12-month periodafter an issuer’s initial qualification ofan offering statement, the amount ofsecurities that affiliate securityholderscan sell in a Regulation A offering inany 12-month period will be limited to$6 million in Tier 1 offerings and $15million in Tier 2 offerings.942 After theinitial 12-month period, sales by non-affiliate securityholders made pursuantto the offering statement will not besubject to a limit on secondary sales butwill be aggregated with sales by theissuer and affiliates for the purposes ofcompliance with the maximum offeringlimitation for the respective tier. Thefinal rules also eliminate the provisionin the current Rule 251(b), whichprohibits resales by affiliates unless theissuer has had net income fromcontinuing operations in at least one ofthe last two years.943

Several commenters recommendedeliminating limits on sales by existingsecurityholders,944 including onecommenter that recommendedeliminating restrictions on sales by non-affiliate securityholders since concernsover information asymmetries betweenpotential investors and non-affiliatesecurityholders would be reduced.°Other commenters recommended eitherproscribing resales entirely 946 orrequiring the approval of the resale

2010, Financial visibility and the decision to goprivate, Review of Financial Studies, 23(2), pp.519—547.

542 The dollar limits are broadly consistent withexisting Regulation A, which limits sales byexisting securityholders to $1.5 million, or 30% ofthe $5 million maximum offering size, in a 12-month period.9 Tier 1 offerings may still be subject to state

law limitations on secondary sales and sales byaffiliates.

See ABA BLS Letter; B. Riley Letter;Canaccord Letter; CFWA Letter 1; CFWA Letter 2;Milken Institute Letter; MoFo Letter; WRHambrecht + Co Letter.

See Milken Institute Letter.See Massachusetts Letter 2; NASAA Letter 2;

Carey Letter.

offering by a majority of the issuer’sindependent directors upon a findingthat the offering is in the best interestsof both the selling securityholders andthe issuer.947 Another commenterrecommended requiring a twelve-monthholding period for selling shareholdersin order to distinguish betweeninvestors seeking to invest in a businessand investors simply seeking to sell tothe public for a gain or limitingsecurityholders not qualifying for thetwelve-month holding period to sellinga fraction of their shares, such as50%.948

Whether and to what extentsecurityholders should be permitted tosell in a Regulation A offering involvesa trade-off between enhancing liquidityfor selling securityholders and limitingthe potential harm to investors thatcould arise from such sales. The finalrules attempt to balance theseconsiderations. The trade-off betweenthese countervailing considerations willdepend in large part on whether theselling securityholder is an affiliate ofthe issuer. There are two concerns aboutsales by affiliates. One is that there is aninformation asymmetry between anaffiliate and outside investors. Inparticular, an affiliate sellingsecurityholder is likely to have aninformational advantage that it maypotentially utilize to the detriment ofoutside investors.949 The other concernis the alignment of incentives. Withrespect to affiliates, it is often arguedthat the incentives of companymanagement are better aligned withother shareholders when managers holda significant equity interest in thecompany.95° Thus, it can be importantthat insiders retain an ownership stakein the company to ensure that theirincentives are aligned.9’ A divestiture

947 See NASAA Letter 2 (supporting the proposedlimits coupled with a board approval requirementin lieu of prohibiting resales entirely) and WDFILetter (not expressing a preference for prohibitingresales entirely).

948 See MCS Letter.945 See Easley, D., and M. O’Hara, 2004,

Information and the cost of capital, Journal ofFinance 59(4), pp. 1553—1583. We note that thesepotential effects may be limited to the extent thatpurchasers are aware that they may be transactingwith better informed affiliates in the course ofofferings with affiliate securityholder saledisclosures, in which case these informationalasymmetries could be partially or fully reflected inlower security prices and lower proceeds at thetime of the offering.

950 See Jensen, M., and W. Meckling, 1976,Theory of the firm: Managerial behavior, agencycosts and ownership structure, Journal of FinancialEconomics 3(4), pp. 305—360.

951 See Core, J., R. Holthausen, and D. Larcker,1999, Corporate governance, chief executive officercompensation, and firm performance, Journal ofFinancial Economics 51(3), pp. 371—406; Mebran,H., 1995, Executive compensation structure,

of the ownership stake of an affiliateowner may therefore exacerbate agencyconflicts, thus suggesting that largeaffiliate sales can be detrimental tocurrent and future investors.

We recognize, however, that there arebenefits to be realized from permittingaffiliate securityholders, such ascompany founders and employees, tosell in a Regulation A offering. Becauseentrepreneurs and other affiliatesconsider available exit options beforeparticipating in a new venture,permitting secondary sales increasestheir incentives to make the originalinvestment, which may promoteinnovation and business formation.952Allowing exit could also facilitateefficient reallocation of capital andtalents of entrepreneurs to newventures.953 Additionally, exit of a largeaffiliate shareholder could potentiallyresult in a broader base of investors.

As noted above, the final rules relaxthe existing limitations on secondarysales by affiliates by eliminating the netincome test for affiliate resales inexisting Rule 251(b). We are concernedthat this criterion may not be the bestmeasure of financial health andinvestment opportunities for someissuers eligible for amended RegulationA and thus may inappropriatelydisadvantage those issuers, and theiraffiliates, with respect to secondarysales. In particular, this changeshould benefit growth and R&D-intensive issuers that may experiencelonger periods of negative revenues.Several commenters supported theelimination of the net income test foraffiliate resales, generally noting thatsome issuers may have net losses forseveral years, including due to highR&D costs.955 We recognize thateliminating this criterion could lead toreduced investor protection due to

ownership, and firm performance, Journal ofFinancial Economics 38(2), pp. 163—184.

652 See Cumming, D., and J. MacIntosh, 2003,Venture-capital exits in Canada and the UnitedStates, University of Toronto Law Journal 53(2), pp.101—199.

953 See Zhang, J., 2011, The advantage ofexperienced start-up founders in venture capitalacquisition: Evidence from serial entrepreneurs,Small Business Economics 36(2), pp. 187—208. Seeo)so Gompers, P., A. Kovner, J. Lerner, and B.Scharfstein, 2006, Skill vs. luck in entrepreneurshipand venture capital: Evidence from serialentrepreneurs, Working paper No. w12592,National Bureau of Economic Research.

954 See Davila, A., and G. Foster, 2005,Management accounting systems adoptiondecisions: Evidence and performance implicationsfrom early-stage/startup companies, AccountingReview 80(4), pp. 1039—1068 (suggesting thatstandard accounting measures are often poorindicators of financial health in small companies).

See ABA BLS Letter; B. Riley Letter;Canaccord Letter; CFIRA Letter 1; Milken InstituteLetter; MoFo Letter; WR Hambrecht + Co Letter.



insiders in Regulation A offerings beingable to sell securities in issuers thathave not reported net income. However,we note that the disclosures required forRegulation A offerings, as well as theoverall limits on secondary sales duringthe initial 12-month period andsubsequent limits on secondary sales byaffiliates, should partly mitigate thiscost.

The trade-off between enhancedliquidity and investor protection isdifferent with respect to sales by non-affiliates, because these securityholdersare less likely to have access to insideinformation, and their sales do not raisethe incentive alignment concernsdiscussed above in the context ofaffiliate securityholders. The option toexit through a Regulation A offeringprovides additional liquidity to existingnon-affiliate securityholders. During theinitial 12-month period, the final rulesenable selling securityholders to accessliquidity through a Regulation Aoffering while ensuring that secondarysales at the time of such offerings aremade in conjunction with new capitalraising by the issuer. After theexpiration of the initial 12-monthperiod, the ability of non-affiliatesecurityholders to sell securitiespursuant to a qualified Regulation Aoffering statement without limitation(except the maximum Regulation Aoffering size) should make Regulation Asecurities more attractive to prospectiveinvestors, which may encourage initialinvestment and increase capitalformation. Non-affiliate securityholderswho hold restricted securitiespurchased in reliance on anotherexemption will be able to sell themfreely after a one-year holding period.Purchasers of the securities from suchnon-affiliate securityholders would nothave the benefit of the more robustdisclosure provisions of a Regulation Aoffering, where the seller will be subjectto Section 12(a)(2) liability. Thus,allowing secondary sales in a RegulationA offering will provide an additionalmeasure of protection for purchasers ascompared to transactions in thesecondary market.6 Consequently, webelieve that removing restrictions onnon-affiliate securityholder sales inRegulation A offerings will not have anadverse effect on investor protection.

Although secondary sales increase theliquidity for existing securityholders,since secondary sales will be aggregatedwith issuer sales for purposes ofcompliance with the maximum offering

956 See Securities Act Section 31b)(2)(D)(expressly providing for Section 12(a)(2) liability forany person offering or selling Section 31b)(2)securities).

amount permissible under therespective tiers, secondary sales mayreduce the maximum amount of issuersales in a Regulation A offering. The30% limit on secondary sales imposedduring the initial 12-month periodpartly mitigates this potential effect.

4. Investment LimitationRegulation A currently does not place

limits on the amount of securities thatmay be purchased by an investor. Theproposed rules included a 10%investment limit for all investors in Tier2 offerings. Several commentersrecommended providing exceptions tothe limit, or altering the limit, forcertain types of investors, such asaccredited investors,957 and forsecurities that will be listed on anexchange upon qualification.958

We recognize that there are potentialinvestor protection benefits as well ascosts from imposing investment limitsin Regulation A offerings. To helpbalance those benefits and costs, thefinal rules seek to focus these limits onthose investors who may be less likelyto be able to fend for themselves andsustain losses. Accordingly, non-accredited investors in Tier 2 offeringswill be limited to purchases of no morethan 10% of the greater of annualincome or net worth (for naturalpersons) or the greater of annualrevenue or net assets (for non-naturalpersons), as proposed.5° In a changefrom the proposal, the final rules do notapply the investment limit to investorsin Tier 2 offerings that are accreditedinvestors as defined in Rule 501 ofRegulation D. We believe that accreditedinvestors, due to their level of incomeor net worth, are more likely to be ableto withstand losses from anundiversified exposure to an individualoffering.

We also recognize that there are costsassociated with investment limits. Inparticular, the investment limitationcould limit potential gains for non-accredited investors in Tier 2 offerings.The investment limitation could requiresome issuers to solicit a greater numberof investors or to solicit additionalaccredited investors, which couldimpose additional costs on those issuersor limit capital formation if they are

957 See ABA BLS Letter: Andreessen/CowenLetter; Canaccord Letter: Cornell Clinic Letter;fallbrook Technologies Letter; Heritage Letter; LaddLetter 2; Leading Biosciences Letter; McCarter &English Letter; MCS Letter; Milken institute Letter;MoFo Letter; Paul Hastings Letter; Richardson PatelLetter; SVB Letter; ATR Hambrecht + Co Letter.

958 See Milken Institute Letter.Annual income and net worth would be

calculated for individual purchasers as provided inthe accredited investor definition in Rule 501 ofRegulation D. See 17 CFR 230.501.

unable to attract additional investors.960Despite these costs, we believe that thislimitation, as tailored in the final rules,is an appropriate means of protectinginvestors while promoting efficiency,competition and capital formation.

The investment limitation could alsolead to a more dispersed non-accreditedinvestor base or a higher proportion ofaccredited investors in the investor baseto the extent that the 10% thresholdimpacts investor participation. Thiscould facilitate increased liquidity asthere would be more investors withwhich to trade. More diffuse ownershipcould also exacerbate the shareholdercollective action problem and weakenexternal monitoring by non-affiliatedshareholders to the extent thatcoordination costs with othershareholders increase. We do notbelieve, however, that either of theseoutcomes is a likely consequence of the10% investment limit.

In a change from the proposal, thefinal rules exclude sales of securitiesthat will be listed on a nationalsecurities exchange upon qualificationfrom Tier 2 investment limitations. Thisprovision may provide additionalinvestment opportunities for someinvestors and may enhance capitalformation for some issuers. We do notanticipate that this provision willreduce investor protection since suchissuers will be required to meet thelisting standards of a national securitiesexchange and become subject to ongoingExchange Act reporting, resulting in ahigh level of investor protection.

As an alternative to the final rules, weconsidered imposing more restrictiveinvestment limitations, as suggested byvarious comments, including extendinginvestment limitations to Tier Iofferings,96’ imposing a limit lower than10% on “all but the wealthiest, leastrisk averse” investors,962 or imposing a10% investment limitation acrossinvestments in all Regulation Aofferings rather than applying thelimitation on a per offering basis.963Applying the investment limitation inTier I offerings could marginallyenhance investor protection, especiallysince these offerings will be subject toless extensive disclosure andtransactional requirements. However,given that Tier 1 offerings will remain

960An issuer would, however, be able to conducta Tier I offering, which does not impose investmentlimitations.

961 See CfA Institute Letter.962 See CFA Letter.963 See CFA Letter (not recommending this

specifically, but noting this as one reason why theinvestment limit was not an adequate substitute forstate review of Tier 2 offerings] and Cornell ClinicLetter.



subject to state registrationrequirements, it is unclear whetherinvestment limits would significantlyenhance investor protection in theseofferings.964 Moreover, adding theinvestment limitation in Tier I offeringscould have an adverse effect on capitalformation for the smallest Regulation Aissuers, which may face greater hurdlesthan larger issuers in attracting a broadinvestor base.

The alternative of imposing a cap thatis lower than 10% on “all but thewealthiest, least risk averse” investorsmay confer additional investorprotection benefits on investors that areunable to withstand significantinvestment losses. However, thisalternative could also limit someinvestors from pursuing attractiveinvestment opportunities and limitcapital formation for some issuers.Further, since risk preferences varyconsiderably among investors,objectively identifying “risk averse”investors in a way that is broadlyapplicable is a challenge. In contrast,the 10% investment limitation in thefinal rules that applies to all investorsin a Tier 2 offering, except accreditedinvestors, defined pursuant to Rule 501of Regulation D, provides a standardthat market participants can easilyimplement.

The alternative of imposing the 10%investment limitation that is aggregatedacross investments in all Regulation Aofferings rather than applying thelimitation on a per offering basis maystrengthen investor protection. Becausethe risk profiles of different securitiesofferings by the same issuer are likely tobe correlated, and some issuers mayparticipate in multiple Regulation Aofferings over time, such an alternativedefinition of the limitation may preventa non-accredited investor from using asignificant share (potentially,significantly in excess of 10%) of theirnet worth or income to establish ahighly undiversified exposure to asingle issuer. However, this alternativecould also limit some investors frompursuing attractive investmentopportunities and limit capitalformation for issuers. Moreover,different offerings by the same issuerunder Regulation A may have differentrisk profiles, depending on security typeand class, thus for some investors,depending on their preferences,investing a larger aggregate amount inmultiple offerings by the same issuermay be optimal.

964 One commenter noted that the investmentlimitation is unnecessary with appropriate stateoversight. See NASAA Letter 2.

Overall, while such additionalrestrictions may strengthen investorprotection, their incrementalcontribution to investor protection maybe small in light of other provisions ofamended Regulation A. At the sametime, such additional restrictions mayprevent some investors from takingadvantage of potentially beneficialinvestment opportunities and may limitthe attractiveness of Regulation A toprospective issuers, reducing capitalformation and competition benefits.

The final rules permit issuers to relyon an investor’s representation that theinvestment represents no more than10% of the greater of the investor’s networth and annual income, unless theissuer has knowledge that suchrepresentation is untrue. The ability torely on investor representations shouldhelp mitigate potential costs that issuerscould incur to comply with theinvestment limitation provisions. At thesame time, we realize that investorsmight make inaccurate representations,whether intentionally or not, whichcould expose these investors toincreased losses.

As an alternative to investorrepresentations, we could have imposedadditional requirements on the issuer toverify that investors in Tier 2 offeringsare compliant with the 10% investmentlimit, as suggested by somecommenters.965 Such additionalprovisions could strengthen investorprotections. At the same time, theywould likely result in a disproportionateincrease in the cost of compliance,especially for smaller issuers in Tier 2offerings, and might deter someinvestors from participating in suchofferings due to the potential burdens ofthe verification process and privacyconcerns.

5. Integration

The final rules provide issuers with asafe harbor from integration that, withthe exception of the addition ofsecurity-based crowdfimdingtransactions conducted pursuant toSection 4(a)(6) of the Securities Act,preserves the provisions of existingRegulation A.

We believe that the final rules provideissuers with valuable certainty as to thecontours of offerings conducted before,or close in time with, Regulation Aofferings. This certainty may beparticularly beneficial for smallerissuers whose capital needs, and thuspreferred capital raising methods, maychange frequently.

965 See Accredited Assurance Letter; CFA Letter;CFA Institute Letter; Cornell Clinic Letter; MCSLetter; WDFI Letter.

As an alternative, we could haveeliminated the integration safe harbor.We believe that the elimination of thesafe harbor, however, would injectuncertainty into offerings conductedbefore, or close in time with, RegulationA offerings and would, in turn, decreasethe utility of the exemption. Uncertaintyas to the contours of offerings, as theyrelate to Regulation A, could possiblycause issuers to prefer other offeringmethods to Regulation A, which mayhave an effect on investor protection.For example, if issuers rely more onRegulation 0, this alternative couldresult in investors receiving lessinformation about an issuer beforemaking an investment, thereby reducinginvestor protection. Instead, if issuersrely more on registered offerings, thisalternative could potentially provideinvestors with the more extensivedisclosure required of, and liabilityprotections associated with, suchofferings, although it would causesmaller issuers to incur the higherinitial and ongoing costs associated withsuch offerings.

6. Treatment Under Section 12(g)

Existing rules currently do not exemptRegulation A securities from therequirements of Section 12(g), but theProposing Release requested commenton whether we should adopt such anexemption. A number of commentersrecommended exempting Regulation Asecurities from Section 12(g) of theExchange Act,966 and severalcommenters recommended changing ordelaying the application of Section12(g).967 In a change from the proposedrules, the final rules exempt securitiesissued in a Tier 2 offering from theprovisions of Section 12(g) for so longas the issuer remains subject to, and iscurrent in, its periodic Regulation Areporting obligations as of its fiscal yearend,968 engages the services of a transferagent registered with the Commissionpursuant to Section 17A of theExchange Act, and had a public float ofless than $75 million as of the lastbusiness day of its most recentlycompleted semiannual period, or, in theabsence of a public float, had annualrevenues of less than $50 million as of

966 See B. Riley Letter; CFIRA Letter 1; CFIRALetter 2; Falibrook Technologies Letter; Frut.kin LawLetter; Guzik Letter I and Letter 3; Heritage Letter;IPA Letter; Ladd Letter 2; Milken Institute Letter;MoFo Letter; SBIA Letter (recommending that thetrigger be “raised or remedied,” but not explicitlycalling for elimination); U.S. Chamber of CommerceLetter; WR Hambrecht + Co Letter.

967 See Heritage Letter; KVCf; McCarter & EnglishLetter; Milken Institute Letter; MoFo Letter; PaulHastings Letter; SBIA Letter.

968 See Rule 12g5—1(a)f 7).


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules arid Regulations 21879

its most recently completed fiscalyear.969

The final rules are intended toprovide sufficient disclosure to helpinvestors make informed decisionswhile limiting the costs imposed onissuers. We believe that the initial andongoing disclosures required for Tier 2offerings in the final rules accomplishthis objective and that the final rulesalso provide an appropriate balancebetween providing investor protectionand promoting capital formation. Thesize of Tier 2 offerings, combined withthe investment limitation and the abilityto offer Tier 2 securities to the generalpublic, may result in the number of anissuer’s shareholders of recordexceeding Section 12(g) thresholds. Aconditional Section 12(g) exemption forsmall issuers of Tier 2 securities in suchinstances is expected to reduce thecompliance cost for small issuers andfacilitate capital formation and thecreation of a broad investor base inofferings made pursuant to Regulation Aby small Tier 2 issuers. This will benefitthose small Regulation A issuers that arenot seeking to list on a nationalsecurities exchange and that mayfind the costs of Exchange Act reportingto be too high given their size.

Regulation A offerings may beparticularly attractive to small privatecompanies whose shareholder bases areapproaching the Section 12(g)registration threshold. The conditionalSection 12(g) exemption may enablesmall private issuers of Tier 2 securitiesunder amended Regulation A to expandtheir shareholder base over time, as aresult of secondary market trading, tothe extent that such a market develops,or through subsequent securityissuances, without incurring the costsassociated with reporting companystatus.97’

While the additional requirement touse a registered transfer agent willimpose costs on issuers,972 it should

970 Issuers seeking to list on a national secuiitiesexchange will be required to register with thecommission under Section 12(b).

97 See IPO Task Force. Based on two surveys,regulatory compliance costs of IPOs average $2.5million initially, followed by an ongoing cost of$1.5 million per year.

972 We lack the information to provide a precisequantitative estimate of transfer agent costs for Tier2 issuers. However, we have some sources ofinformation about transfer agent costs in analogouscontexts.

According to the Securities Transfer Association(STA), the registered transfer agent industry ishighly competitive and many of its members candevelop business models that will suit the needs ofsmall issuers and at the same time provide adequateprotection to investors. The STA further noted thatit did not anticipate most small issuers to requiresome of the services, such as the processing of

provide investor protection benefits byhelping to ensure that securityholderrecords and secondary trades will behandled accurately. As it is aconditional exemption from Section12(g), however, issuers that are notconcerned with registration under theExchange Act, perhaps because they donot believe that Exchange Actregistration will be required as a resultof a Regulation A offering, would not berequired to retain the services of aregistered transfer agent in order toconduct a Tier 2 offering.

The final rules also include an issuersize limit in the eligibility requirementsfor the Section 12(g) exemption for Tier2 offerings, consistent with providing aconditional exemption tailored tofacilitate small company capitalformation. The issuer size limit maymake Regulation A less attractive forlarger issuers and issuers anticipatinggrowth or capital appreciation thatexpect to reach Section 12(g) thresholdsafter conducting a Tier 2 offering orsubsequent secondary market trading.The two-year transition period beforereporting must begin may partlymitigate some of these costs to issuers.Due to the uncertainty about the futurecomposition of the issuer and investorbase in Tier 2 offerings, we cannotdetermine the proportion of Tier 2issuers whose number of shareholdersof record will exceed Section 12(g)thresholds or the proportion of thoseissuers that will not qualify for anexemption due to their size.973

dividends, that raise the cost of recordkeepingservices. See STA letter on JOBS Act regulatoryinitiatives, available ot: http://wwwsec.gou/camments/jobs-title-i/general/general-207.pdf STAestimated that monthly transfer agent fees would be$75-$300 for security-based crowdfunding issuers,which translates into annual fees of $900-$3600.See STA letter on proposed crowdfunding rules,available at: http://www.sec.gov/comments/s7-09-13/s70913-96.pdf In 2014, average transfer agentand registrar fees amounted to approximately$9,000 in registered IPOs with offering sizes below$50 million, based on Thomson Reuters SDC data,excluding offerings from non-Canadian foreignissuers, blank-check companies, and investmentcompanies. Offerings with proceeds below $1,000are excluded to minimize measurement error. Whileestimates for security-based crowdfunding issuersare likely to underestimate the cost for a typicalTier 2 issuer, estimates for IPOs are likely tooverestimate the cost of transfer agent services fora typical Tier 2 issuer. Costs of transfer agentservices for a typical Tier 2 issuer may be in therange between the two sets of estimates.

Based on the analysis by the staff of Divisionof Economic and Risk Analysis of 2013 data onregistrants under Section 12(g), excluding issuerswith a class of securities registered under Section12(b), approximately three-quarters of Section 12(g)registrants would have been below the issuer sizelimit (defined similarly to smaller reportingcompany (SRC) criteria). These figures may not berepresentative of the proportion of issuers thatwould be below the issuer size limit among futureRegulation A issuers that would potentially exceed

Some issuers may be able to limit thenumber of shareholders of record byadopting a minimum investment sizerequirement. This may potentially limitthe breadth of investor base and theavailability of investment opportunitiesto some investors. We are not able todetermine the extent to which the issuersize limit may affect overall capitalformation and whether large or growthissuers will proceed with a Tier 2offering or pursue a registered offering,a Regulation D offering or anothermethod of financing. In addition, theissuer size limit may place at acompetitive disadvantage thosepotential issuers that exceed the sizelimit but for which the costs ofregistration remain high, relative topotential issuers that are close to thesize limit but that qualify for the Section12(g) conditional exemption.

We recognize that there are costsassociated with the conditionalexemption adopted today. Under thisexemption, some issuers in Tier 2offerings with a large number ofshareholders could avoid—potentiallyindefinitely—the comprehensivedisclosure requirements of the ExchangeAct, which may decrease theinformational efficiency of prices andpotentially result in less informedinvestment decisions by a larger numberof investors than in the absence of aconditional Section 12(g) exemption.The issuer size limit partly mitigatesthis concern. For the same reasons,however, the inclusion of a conditionalexemption from Section 12(g) mayentice small issuers that would haveotherwise generally preferred to raisecapital in private offerings to enter thepublic markets through a Tier 2 offeringpursuant to Regulation A.974 In thisregard, the conditional exemption couldincrease the availability of informationabout companies that would otherwiseremain relatively obscure in the privatemarkets. On balance, we believe thatprovisions such as the initial andperiodic disclosure requirements andthe investment limit in Tier 2 offeringsappropriately balance investorprotections and issuer compliance costswhile facilitating the creation of a broadinvestor base in Tier 2 offerings forsmall issuers.

We have considered the alternative ofproviding a conditional exemption fromSection 12(g) registration that does not

Section 12(g) thresholds for the number ofshareholders of record.

974 example, issuers may be more willing toraise capital publicly and become subject to someongoing reporting requirements if suchrequirements are less costly to the issuer than thecosts generally associated with the ongoingreporting requirements of the Exchange Act.



incorporate an issuer size limitation.Such an alternative would enable abroader class of potential Tier 2 issuersto remain exempt from Exchange Actregistration. Larger Regulation A issuerscould generate a more vibrant OTCtrading market, providing enhancedliquidity to those issuers that may nototherwise be of sufficient size to makelisting on a national market exchangecost-effective. Providing an exemptionfrom Section 12(g) could provideincentive for these larger issuers tobroaden their investor base while stillproviding the ongoing disclosure of theTier 2 reporting regime. This couldresult in potentially beneficial effects oncapital formation, competition, andinformational efficiency of prices.However, such an alternative wouldpotentially create a class of securitiespermanently exempt from Exchange Actregistration regardless of issuer size andthus subject to less extensive disclosurerequirements than public reportingcompanies, which may affect investorprotection.

D. Offering Statement

1. Electronic Filing and DeliveryThe final rules preserve the current

three-part structure of Form 1—A butmake various revisions and updates tothe form to streamline the informationincluded in the form. Since most of thisinformation is already contained inother offering materials, the additionalreporting burden in Part I of the Form1—A should not entail significantlyhigher costs in terms of time or out-of-pocket expenses.975

Under existing Regulation A, offeringmaterials are submitted to theCommission in paper form. The finalrules require electronic submission ofoffering materials. Electronicsubmission is expected to offer benefitsto issuers and investors. Paperdocuments are difficult to process bothfor the Commission and for investors.Electronic filing is therefore expected toreduce processing delays and costsassociated with the current paper filingsystem, improve the overall efficiency ofthe filing process for issuers, benefitinvestors by providing them with fasteraccess to the offering statement, andallow offering materials to be more

97 the purposes of the Paperwork ReductionAct (“PRA”), we estimate that compliance with therequirements of amended Form 1—A will result ina burden of approximately 750 hours per response(compared to the current burden associated withForm 1—A of 608 hours per response). We estimatethat compliance with the requirements of amendedForm 1—A will result in an aggregate annual burdenof 140,625 hours of in-house personnel time and anaggregate annual cost of $18,750,000 for the servicesof outside professionals. See Section IV below.

easily accessed and analyzed byregulators and analysts.

We anticipate that electronic access tooffering materials may promote theinformational efficiency of prices ofRegulation A securities.976 Evidence,obtained from the adoption of EDGARfor 10—K filings by reporting companies,suggests that the use of EDGAR hasfavorably affected small investors.977Moreover, the adoption of XML formatfor Part I of Form 1—A, which captureskey information about the issuer and theoffering, should allow more efficientaccess to information and moresystematic tracking of offering details byinvestors, analysts, other marketparticipants and regulators. The XMLformat for Part I will provide aconvenient and efficient means ofgathering information from issuers andtransmitting it to EDGAR.78

At the same time, we recognize thatan electronic filing requirement mayimpose compliance costs on issuers,particularly, issuers that have notpreviously used the EDGAR system,which include filing Form ID (theapplication form for access codes topermit EDGAR filing) and convertingfilings into EDGAR format. Some ofthese compliance burdens will bemitigated by the savings of printing andmailing costs.

Some commenters have expressedinvestor protection concerns in relationto the access equals delivery model(discussed in Section II.C.1) arising fromthe perceived challenge of finding thesematerials on EDGAR and not requiringdelivery 48 hours in advance of sale inall circumstances.980 As discussedabove, we do not believe that access to

the case of reporting companies, one studyfound that EDGAR e-flhing was associated with anincrease in the speed with which information wasincorporated into share prices (thus, increasedinformational efficiency of prices) and presentedevidence of a larger market reaction to 10—K and10—Q filings in the EDGAR period relative to thepre-EDGAR period. See Griffin, P., 2003, Gotinformation? Investor response to Form 10—K andForm 10—Q EDGAR filings, Review of AccountingStudies 8(4), pp. 433—460.

One study has examined the effect of theswitch to EDGAR filing for annual reports on form10—K on small versus large investors. See Asthana,S., S. Balsam, and S. Sankaraguruswam, 2004,Differential response of small versus large investorsto 10—K filings on EDGAR, Accounting Review79(3), pp. 571—589.

Part I (Notification) of Form 1—A. Asdiscussed more fully in Section li.C.3.a., the coverpage and Part I of current Form 1—A would beconverted into, and form the basis of, the XML-based fillable form.

979 For purposes of the PRA, Form ID is estimatedto result in 0.15 burden hours per form, for anadditional aggregate annual burden due to the ruleamendments of 28.20 hours of in-house personneltime. See Section IV.° See Massachusetts Letter 2; NASAA Letter 2;

WDFI Letter.

EDGAR generally has proven to be achallenge for investors in registeredofferings since the adoption ofSecurities Offering Reform in 2005, nordo we believe that it will be a challengefor investors under Regulation A or raiseinvestor protection concerns,particularly in light of our final deliveryrequirements (including, whereapplicable, the inclusion of hyperlinksto offering materials on EDGAR thatmust be provided to investors by issuersand intermediaries). Additionally, giventhat the final offering circular deliveryobligations generally affect investorsonly after they have made theirinvestment decisions and that, takinginto account advancements intechnology and expanded use of theInternet, investors will have access tothe final offering circular upon its filing,we believe that using a means otherthan physical delivery to satisfy thefinal offering circular deliveryobligation will not have an adverseeffect on investor protection. Overall,we believe that there will be benefits toissuers of streamlining deliveryrequirements for the final offeringcircular, consistent with similar updatesto delivery requirements for registeredofferings.981

2. Disclosure Format and ContentUnder the existing Regulation A,

issuers can choose among three modelsfor providing narrative disclosure inPart II of the offering statement: ModelA, Model B, and Part I of Form S—i.Similar to the proposal, the final ruleseliminate Model A but preserve ModelB, with certain changes to the contents,and Part I of Form S_1.982

We believe that eliminating Model A,which uses a question-and-answerformat, may benefit investors byavoiding possible confusion that couldresult from the lack of uniformity ofinformation presented in the question-and-answer format. Several commentersdisagreed with the elimination of theModel A format, recommending that anupdated version of the Model Adisclosure format be retained.983 TheModel A format may be easier tounderstand for non-accredited investors,who may lack the sophistication toanalyze information presented inalternative disclosure formats.Compared to other formats, the Model Aformat might also result in lower costsof initial preparation of the offeringstatement, including, in some instances,

° See Securities Offering Reform, Rel. No. 33—8591.

982 See Section II.C.3.b for a more detaileddescription.

983 See 310 Letter; Karr Tuttle Letter; NASAALetter 2; Verrill Dana Letter 1; WDFI Letter.



lessen the need to retain outsidesecurities counsel.984 While a question-and-answer format may lower the costof initial preparation, it often requiresmore substantive revisions after filingand before qualification, in order for thedisclosure to sufficiently address theform requirements. We believe that mostof the benefits associated with the lowercost of initial preparation are negatedsubsequently during the qualificationprocess. Consequently, we are notpersuaded that there are sufficientbenefits to retaining the Model Aformat.

The changes to Model B includeupdated disclosure requirements,including a new section containingmanagement discussion and analysis ofthe issuer’s liquidity, capital resourcesand business operations. While theseupdates may impose costs on the issuer,they are expected to increase investorprotection and informational efficiencyof prices by providing importantinformation to investors. The updateddisclosure requirements are, however,generally designed to assist issuers withmore guidance as to the requireddisclosures that, while they mayincrease the cost to issuers associatedwith the initial preparation of theoffering circular, should lower theoverall cost of, and time to,qualification, when the process isconsidered in its entirety. Overall, webelieve that the availability of twoalternative disclosure formats—arevised Model B format and Part I ofForm S—i—provides sufficientflexibility to issuers in choosing theirdisclosure format while preserving thebenefits of disclosure of relevantinformation to prospective investors.

Some commenters suggestedeliminating all three disclosure formatsand instead creating a new disclosureformat similar to Part I of Form S—i thatwould reference Regulation S—Krequirements (with reduced disclosurerequirements in some instances).8Another commenter recommendedreducing the disclosure requirements forofferings of $2 million or less,986 whileanother suggested increasing disclosurerequirements as an issuer grows in sizeand complexity.987 We recognize thatscaling the disclosure requirements for

984 Karr Tuttle Letter and WDFI Letter. TheKarr Tuttle Letter also refers to the experience ofissuers in Rule 504 offerings, indicating thatNASAA’s Form U—7, upon which Model A is based,has proved convenient for issuers in Rule 504offerings qualified by states without the use ofsecurities counsel.

985 See Canaccord Letter; CFIRA Letter 1; E&YLetter; Ladd Letter 2; McCarter & English Letter; WRHambrecht + Co Letter.

986 See Campbell Letter.987 See SVB Letter.

Form 1—A, as suggested by commenters,could ease compliance costs forRegulation A issuers. However,additional scaling of disclosurerequirements within tiers may reducethe comparability of disclosures withinthe same tier and result in pricinginefficiencies.

3. Audited Financial StatementsThe final rules require issuers

conducting Tier 2 offerings to includeaudited financial statements in theiroffering materials. Audited financialstatements should provide investors inTier 2 offerings with greater confidencein the accuracy and quality of thefinancial statements of issuers seekingto raise larger amounts of capital. This,in turn, could benefit issuers bylowering the cost of capital or increasingthe amount of capital supplied byinvestors.

We recognize that audited financialstatements could also entail significantcosts to issuers, and that the costs of anaudit could discourage the use of Tier2 offerings. Based on data fromregistered [POs below $50 million in2014 by issuers that would have beenpotentially eligible for amendedRegulation A, average total accountingfees amounted to 1.65% of gross offeringproceeds, where reported separately.988

The final rules require issuers in Tier2 offerings to include audited financialstatements in their offering circularsthat are audited in accordance witheither the auditing standards of theAmerican Institute of Certified PublicAccountants (AICPA) (referred to asU.S. Generally Accepted AuditingStandards or GAAS) or the standards ofthe Public Company AccountingOversight Board (PCAOB), as suggestedby some commenters.989 We expect thisprovision in the final rules to provideissuers with flexibility that may helpcontain issuer compliance costs,compared to requiring financialstatements that are audited in

This estimate is based on Thomson ReutersSDC data on [POs with issue dates in 2014,excluding offerings from non-Canadian foreignissuers, blank check companies, and investmentcompanies. Offerings with proceeds below $1,000are excluded to minimize measurement error.Issuers of interests in claims on natural resources,which also would not be eligible for amendedRegulation A, were not separately eliminated dueto data constraints. Accounting fees include the costof preparing accounting statements, in addition tothe cost of an audit. We also note that costsincurred by issuers in registered IPOs may not berepresentative of costs incurred by issuers in Tier2 offerings. We lack the information to provide aquantitative estimate of audit costs that would beincurred by Regulation A issuers in Tier 2 offerings.

989 See ABA BLS Letter; BOO Letter; CanaccordLetter; Deloitte Letter; E&Y Letter; KPMG Letter;McGladrey Letter; MoFo Letter; WR Hambrecht ÷Co Letter.

accordance with the standards of thePCAOB. As noted above,990 becauseAICPA rules would require an audit ofa Regulation A issuer conducted inaccordance with PCAOB standards toalso comply with U.S. GAAS, an issuerwho includes financial statementsaudited in accordance with PCAOBstandards will likely incur additionalincremental costs compared with anissuer who includes financialstatements audited only in accordancewith U.S. GAAS. However, we assumethat an issuer would only elect tocomply with both sets of auditingstandards because it has concluded thatthe benefits of doing so (for example, tofacilitate Exchange Act registration)justify these additional incrementalcosts.

As an alternative, we could have notrequired the audited financialstatements until after the first year ofoperation as a “public startupcompany” or indefinitely for issuersthat are pre-revenue or that have paid-in capital, assets and revenues below amodest threshold, as suggested bycommenters.°91 While this alternativemay decrease issuer compliance costs, itmay also lower the accuracy ofinformation provided to investors inTier 2 offerings, resulting in reducedinvestor protection. The large offeringlimit in Tier 2 offerings may make someof the fixed costs of an audit relativelyless burdensome. In addition, we notethat smaller issuers may opt to forgo thecost of an audit and elect a Tier 1offering or a Regulation D offering,which does not require auditedfinancial statements.

On the other hand, other commentersadvised the Commission to requireaudited financial statements for Tier 1offerings.992 While we acknowledge thatrequiring audited statements is likely toresult in stronger investor protectionsdue to reduced likelihood of fraudulentfinancial statements being presented,this alternative would likely place arelatively greater burden on smallerissuers due to the fixed-Cost nature ofsome of the audit costs. Also, given therelatively low maximum offering sizefor Tier 1, this could result in Tier 1offerings becoming not cost-effective.

4. Other Accounting Requirements

The final rules permit Canadianissuers to prepare financial statementsin accordance with either U.S. GAAP orInternational Financial Reporting

990 See Section fl.C.3.See Public Startup Co. Letter 3 (also suggesting

three tiers, where at least the first two would notrequire this) and Public Startup Co. Letter 11.

992 See Guzik Letter 1 and Milken Instiftte Letter.



Standards (IFRS) as issued by theInternational Accounting StandardsBoard (IASB). This is expected tobenefit Canadian issuers that currentlyuse IFRS as issued by the IASB byhelping such issuers containcompliance costs associated withRegulation A offerings, compared torequiring Canadian issuers to preparefinancial statements in accordance withU.S. GAAP. Several commentersspecifically supported allowingCanadian issuers to prepare theirfinancial statements in accordance withIFRS as issued by the IASB.99

5. Continuous and Delayed OfferingsThe final rules explicitly allow for

continuous or delayed offerings.994 As aresult, it is now clear that eligibleissuers have greater flexibility to selectthe timing of their offerings. Suchflexibility is expected to benefit issuersby allowing them to adjust their capitalraising based on macro-economic factorsor company conditions. These factorsshould facilitate financing decisions andcapital market efficiency. For example,existing research on Rule 415 offeringsin the registered offering market showsthat costs of intermediation in shelfofferings, and consequently the cost ofraising equity through shelf registration,are lower than through traditionalregistration.996 The final rules conditionthe ability to sell securities in acontinuous or delayed Tier 2 offering onbeing current with ongoing reportingrequirements at the time of sale. Thisshould not impose incremental costs oneligible issuers as they already fileperiodic updates and amendments.

The final rules restrict all “at themarket” secondary offerings. ExistingRegulation A prohibited primary “at themarket” offerings, but did notnecessarily restrict such offerings byselling securityholders. Somecommenters suggested allowing suchofferings, including primary offerings bythe issuer.997 We recognize that not

See ABA BLS Letter; canaccord Letter;NASAA Letter 2; MoFo Letter; Pwc Letter.

Existing Regulation A allows for continuous ordelayed offerings to the extent permitted by Rule415. Since Rule 415 only discusses “registeredofferings,” the reference to it may have causedconfusion as to the scope of its application inRegulation A offerings.

ass See Bayless, M., and S. chaplinsky, 1996, Isthere a window of opportunity for seasoned equityissuance? Journal of Finance 51(1), pp. 253—278.

se Bethel, J., and L. Krigmsn, 2008, Managingthe cost of issuing common equity: The role ofregistration choice, Quarterly Journal of Financeand Accounting 47(4), pp. 57—85. We recognize thatthe evidence based on registered offerings may notbe indicative of the effects on Regulation Aofferings.

See OTC Markets Letter and Paul HastingsLetter.

allowing secondary “at the market”offerings may limit flexibility for thoseissuers that are uncertain about theoffering price that will attract sufficientinvestor demand. However, the benefitof the new restriction as it applies tosecondary sales is that it helps ensurethat issuers do not lose their RegulationA exemption due to unanticipatedmarket factors by inadvertently offeringsecurities in an amount that exceeds theoffering limitation. Future offeringsmade in reliance on the final rules mayprovide more information to determinewhether a robust market capable ofsupporting “at the market” offeringsdevelops and whether the Regulation Aexemption could be an appropriatemethod for such offerings in the future.

6. Nonpublic Review of Draft OfferingStatements

Under the final rules, issuers whosesecurities have not been previously soldpursuant to a qualified offeringstatement under Regulation A or aneffective registration statement underthe Securities Act will be permitted tosubmit to the Commission a draftoffering statement for non-publicreview, so long as all such documentsare publicly filed not later than 21calendar days before qualification. Theoption of non-public submission of adraft offering statement is expected toreduce the barriers to entry for issuersusing Regulation A. In this regard, apotential issuer could reduce theamount of time between disclosingpossibly sensitive information to itscompetitors in its offering statement aridthe related sale of its securities.Furthermore, companies that aretentative about conducting an offeringcould start the qualification process andthen abandon the offering any timebefore the initial public filing withoutreceiving the related stigma in themarket. To the extent that thisaccommodation lowers the barriers toentry, it may encourage capitalformation and competition. Moreover,we do not believe that the option ofdraft offering statement submission willsignificantly affect investor protection.Disclosure requirements are unchangedfor issuers that elect the option of nonpublic submission of draft offeringstatement. The initial non-publicstatement, all non-public statementamendments, and all correspondencewith Commission staff regarding suchsubmissions must be publicly filed andavailable on EDGAR as exhibits to theoffering statement not less than 21calendar days before qualification of theoffering statement.

E. So]icitation of Interest (“Testing theWaters”)

Under existing Regulation A, testingthe waters is permitted only until theoffering statement is filed with theCommission, and solicitation material isrequired to be filed prior to orconcurrent with first use. The final rulespermit issuers to test the waters and usesolicitation materials both before andafter the offering statement is filed,subject to issuer compliance with therules on filing information anddisclaimers.998 Under the final rules,testing the waters materials will berequired to be included as an exhibit tothe offering statement at the time ofinitial submission or filing with theCommission, and updated thereafter.

In general, allowing issuers to gaugeinterest through expanded testing thewaters will reduce uncertainty aboutwhether an offering could be completedsuccessfully. Allowing solicitation priorto filing enables issuers to determinemarket interest in their securities beforeincurring the costs of preparing andfiling an offering statement. If aftertesting the waters, the issuer is notconfident that it will attract sufficientinvestor interest, the issuer can consideralternate methods of raising capital andthereby avoid the costs of anunsubscribed or under-subscribedoffering. Allowing testing the waters atany time prior to qualification of theoffering statement, rather than onlyprior to filing of the offering statementwith the Commission, may increase thelikelihood that the issuer will raise thedesired amount of capital. This optionmay be useful for smaller issuers,especially early-stage issuers, first-timeissuers, issuers in lines of businesscharacterized by a considerable degreeof uncertainty, and other issuers with ahigh degree of information asymmetry.This provision may attract certainissuers—those that may be uncertainabout the prospects of raising investorcapital—to consider using amendedRegulation A when they might nototherwise, thus potentially promotingcompetition for investor capital as wellas capital formation in the Regulation Amarket.

Expanding the permissible use oftesting the waters communicationscould also increase the type and extentof information available to investors,which could lead to more efficientprices for the offered securities. Thefinal rules permit testing the waters foran expanded period of time compared tothe baseline. As a result, it may be easier

998As noted in Section II.H.3. above, some statesecurities laws may impose limitations on the useof testing the waters by Tier 1 issuers.



for investors to become aware of a largerand more diverse set of investmentopportunities in private offerings, whichmay allow these investors to moreefficiently allocate their capital. The neteffect could be to enhance both capitalformation and allocative efficiency.Further, requiring issuers using testingthe waters solicitations after the offeringstatement is publicly filed to providethe offering statement with the testingthe waters materials (or provideinformation about where it can beaccessed), and to update it andredistribute updates in the event ofmaterial changes, will allow investors tomake informed investment decisions.

We recognize that there may also bepotential costs associated withexpanding the use of testing the waterscommunications. If the contents of theoffering circular differ substantivelyfrom the material distributed throughtesting the waters communications, andif investors rely on testing the watersmaterials, this may lead investors tomake less informed investmentdecisions. Some commenters wereconcerned that the expanded use ofpermissible testing the waters mayfacilitate misleading statements toinvestors and may lead to a heightenedrisk of fraud.909 We believe, however,that this potential investor protectionconcern is mitigated by the applicationof Section 12(a)(2) liability to RegulationA offerings and the general anti-fraudprovisions of the federal securities laws.

We considered the alternative,suggested by some commenters,’°°° ofrequiring submission and review oftesting the waters materials before orconcurrent with first use, rather than atthe time the offering statement issubmitted for non-public review orfiled, which could aid regulators indetecting fraudulent solicitation ofinterest communications, potentiallyresulting in investor protection benefits.However, requiring initial submissionand review of testing the watersmaterials prior to their use coulddissuade issuers, particularly smaller orless experienced issuers, from engagingin testing the waters communications,thereby undermining many of thebenefits of permitting suchcommunications discussed above.

We also considered the views of othercommenters who suggested we relaxsome of the proposed requirements forthe use of testing the waters. Forexample, we could have treated thesolicitation materials as non-public

See Massachusetts Letter 2; NASAA Letter 2;WDFI Letter.

ieee See Massachusetts Letter 2; NASAA Letter 2;WDFI Letter.

when filed with the Commission, atleast until the offering statement isqualified,100’ or removed therequirement for public filing ofsolicitation materials for all RegulationA offerings or for Tier 2 offerings.’002Issuers that have elected to use testingthe waters communications havealready incurred the cost of preparingthe materials, so the incremental directcost of the requirement to file thematerials with the Commission will below. We recognize that permittingissuers to file the solicitation materialsnon-publicly with the Commissioncould reduce the indirect costs of someissuers by limiting the ability of theissuer’s competitors to discoverinformation about the issuer.

However, we note that thisinformation may become available tocompetitors in any event through thesolicitation process and removing therequirement to publicly file thematerials may result in adverse effectson the protection of investors to theextent that it may facilitate fraudulentstatements by issuers to all or a selectedgroup of investors that may fail tocompare the statements in thesolicitation materials against theoffering circular. On balance, we believethat the final rule’s requirementsgoverning the use of testing the waterscommunications appropriately balancethe goals of providing flexibility toissuers and protection to investors.

F. Ongoing ReportingCurrently, Regulation A issuers do not

have ongoing reporting obligations. Thefinal rules prescribe an ongoingreporting regime for issuers that conductTier 2 offerings that requires, inaddition to annual reports on Form 1—K, semiannual reports on Form 1—SA,current event reporting on Form 1—U,and notice to the Commission of thesuspension of ongoing reportingobligations on Form i—Z.

These reporting requirements willhave benefits and costs. These reportingrequirements should strengthen investorprotection and decrease the extent ofinformation asymmetries betweenissuers and investors in the RegulationA market, relative to existing RegulationA. Requiring ongoing disclosures forTier 2 offerings will provide investorswith periodically updated information,allowing them to identify investmentopportunities best suited for tl,eir levelof risk tolerance and re-evaluate theissuer’s prospects through time,resulting in better informed investmentdecisions and improved allocative

1001 See Heritage Letter and Ladd Letter 2.1002 See 610 Letter and MoFo Letter.

efficiency of capital. By standardizingthe content, timing, and format of thesedisclosures, the amendments toRegulation A will make it easier forinvestors to compare information acrossissuers, both within and outside of thenew Regulation A market.

The additional reporting requirementsfor Tier 2 offerings increase theavailability of public information thatcan be used for valuing securities. Areduction in information risk due toimprovements in disclosure can lowerthe issuer’s cost of capital.b003 Becausethere are no resale restrictions, somesecurities issued in amended RegulationA offerings are likely to be quoted onthe OTC market, and required ongoingdisclosure requirements will provideinvestors with updated informationabout their underlying value, and as aresult, lower the inherent asymmetricinformation risks associated withtrading in this market.moo4 Theenhanced information environmentshould facilitate more informationallyefficient pricing and better liquidity foramended Regulation A securities.’005Tier 2 ongoing disclosure requirementsshould also provide timely and relevantissuer information at a lower cost tobroker-dealers that initiate quotationsand make markets in these securities.Increased secondary market liquiditycan make securities more attractive toprospective investors, which canpromote capital formation. Hence, theremay be significant benefits for capitalformation from the ongoing reportingrequirements in the final rules.

Although reporting obligations forTier 2 issuers are less extensive than forreporting companies, we recognize thatthey will still result in a significantdirect cost of compliance. Onecommenter estimated the qualificationand reporting costs of a Tier 2 issuer tobe approximately $400,000 in the firstyear and $200,000 annually thereafter(per issuer).’°°6 For the purposes of thePRA, we estimate that compliance with

1003 See Diamond, D., and R. Verrecchia, 1991,Disclosure, liquidity, and the cost of capital, Journalof Finance 46(4), pp. 1325—1359; Easley. D., and M.O’Hara, 2004, Information and the cost of capital,Journal of Finance 59(4), 1553—1583; Easley, D., S.Hvidkjaer, and M. O’Hara, 2002, Is information riska determinant of asset returns? Journal of Finance57(5), pp. 2185—2221.

‘°°4 See Ang, A., A. Shtauber, and P. Tetlock,2013, Asset pricing in the dark: The cross sectionof 0T stocks, Review of Financial Studies 26(12),pp. 2985—3028.

1005 See Graham, I., c. Harvey, and S. Rajgopal,2005, The economic implications of corporatefinancial reporting, Journal of Accounting andEconomics 40(1—3), pp. 3—73; Durnev, A., R. Morck,and B. Young, 2003, Value enhancing capitalbudgeting and firm-specific stock return variation,Journal of Finance 59(1), Pp. 65—106.

°° See EPA Letter.



the requirements of Forms i—K, i—SA,and 1—U for issuers with an ongoingreporting obligation under Regulation Awill result in an aggregate annualburden of 115,351 hours of in-housepersonnel time and an aggregate annualcost of $13,450,272 for the services ofoutside professionals.1007

In addition to the direct costs ofpreparing the mandatory disclosures,issuers of securities in Tier 2 offeringswill he subject to indirect disclosurecosts of revealing to their competitorsand other market participantsinformation about their business notpreviously required to be disclosed.’008These disclosures can inform theissuer’s competitors about the issuer’sstrategic decisions regardinginvestment, financing, management andother aspects of business. For issuersseeking to reduce such costs ofdisclosure, Rule 506(c) of Regulation Iicould be more appealing. Based on thescope of disclosures required, anissuer’s combination of direct andindirect costs of disclosure is likely tobe lowest for a Regulation D Rule 506offering, followed by a Tier 1 offering,a Tier 2 offering and, finally, aregistered public offering.

We evaluate below the differentprovisions of the ongoing reportingrequirements and the alternatives wehave considered.

1. Periodic and Current Event ReportingRequirements

Currently, Regulation A issuers do nothave ongoing reporting obligations. Tier2 issuers in a Regulation A offering willhave periodic and current eventreporting obligations under the finalrules. As noted above, these ongoingreporting requirements will result inboth direct and indirect costs to Tier 2issuers.

Commenters made varioussuggestions for expanding the ongoingdisclosure requirements for Tier 2issuers. For example, severalcommenters suggested we requirequarterly reporting instead of semiannual reporting.1009 Anothercommenter suggested we requireofficers, directors and controllingshareholders of issuers that offersecurities under Regulation A to makeongoing disclosure of transactions incompany securities, similar to reportingon forms 3, 4 and 5 and Schedules 13D,13G and 13f in the registered securities

1007 See Section IV below.roes See Verrecchia, R., 2001, Essays on

disclosure, Journal of Accounting and Economics32, pp. 97—180.

1009 See Massachusetts Letter 2; NASAA Letter 2;OTC Markets Letter; WDFI Letter.

context.’°1° While additionalrequirements that would bring the Tier2 disclosure obligations closer to thereporting company disclosureobligations are likely to haveinformational efficiency and investorprotection benefits, they are also likelyto make Regulation A more costly andless attractive to prospective issuers andmay not promote capital formation asmuch as the final rules.

Other commenters recommendedreducing the continuing disclosureburden on Tier 2 issuers 1011 or makingcontinuing disclosure requirementscontingent upon factors other thanoffering tier, such as whether the issuerhas taken steps to foster a market in itssecurities.’0’2 These alternatives wouldlikely reduce compliance costs for Tier2 issuers; however, they also may causeinvestors to have less information uponwhich to make investment decisions,resulting in weaker investor protectionsand less informationally efficient prices.

Other commenters recommendedrequiring ongoing disclosures for issuersin Tier 1 offerings, including disclosuresat a level lower than is required for Tier2,1013 ongoing disclosure with yearlyaudited financials,’°’ or someunspecified continuous disclosureobligation.’°’5 Such alternatives,particularly if accompanied by therequirement of audited financialstatements, would increase theavailability and quality of financialinformation provided to investors inTier 1 offerings and strengthen investorprotection by enabling investors to makebetter informed decisions. However, dueto the fixed component of disclosurecosts, and the likely smaller size of Tier1 offerings relative to Tier 2 offerings,such requirements may limit capitalformation and place Tier 1 issuers at acompetitive disadvantage relative toTier 2 issuers. We note that smallissuers that value informationalefficiency gains from ongoingdisclosures above the cost of suchdisclosures have the option ofconducting a Tier 2 offering.

2. Termination and Suspension ofReporting and Exit Reports

The final rules permit issuers in Tier2 offerings that have filed all periodicand current reports required byRegulation A for a specified period to

1010 See OTC Markets Letter.1011 See Heritage Letter and WA Letter.1012 See Heritage Letter.

1013 See Guzik Letter 1 (suggesting that Tier 1ongoing disclosure requirements could parallel Tier2’s requirements, but without the requirement forsemiarmual reports).

1014 See Ladd Letter 2.1015 See SVB Letter.

suspend their ongoing reportingobligation under Regulation A at anytime after completing reporting for thefiscal year in which the offeringstatement was qualified, if the securitiesof each class to which the offeringstatement relates are held of record byfewer than 300 persons and offers orsales made in reliance on a qualifiedTier 2 offering statement are notongoing. for banks or bank holdingcompanies, the termination threshold isfewer than 1,200 persons, consistentwith Title VI of the JOBS Act. Theoption to cease reporting could bebeneficial, especially for issuers that donot seek secondary market liquidity andfor smaller issuers that find the costs ofcompliance with the ongoing disclosurerequirements to be a relatively greaterburden. At the same time, the optionmight be costly for investors because itwill decrease the amount of informationavailable about the issuer, making itmore difficult to monitor the issuer andaccurately price its securities or to finda trading venue that will allowliquidation of the investment. Thepublic availability of information inbank regulatory filings is expected tomitigate some of these effects for bankissuers undertaking Regulation Aofferings. Termination of reporting alsomight make it easier for insideshareholders to use an informationaladvantage to the detriment of minorityoutside investors.

The final rules require Tier 1 issuersto notify the Commission uponcompletion of their offerings by filingForm 1—Z (exit report). Issuers in Tier 2offerings will be required to provide thisinformation on Form i—Z at the time offiling the exit report, if they have notpreviously provided this information onForm i—K as part of their annual report.Form 1—Z contains limited summaryinformation about the issuer and thecompleted offering and, therefore,should not impose substantialadditional compliance costs on theissuer.1016 The enhanced availability ofForm 1—Z information is likely tobenefit investors and facilitateevaluation of Regulation A marketactivity. For example, this informationshould allow the Commission andothers to assess whether issuers havebeen able to raise the projected amountof capital in Regulation A offerings. Werecognize, however, that, sinceinformation about the completedoffering has value to an issuer’s

1016 For the purposes of the PRA, we estimate thatfiling the Form 1—Z exit report will result in anaggregate annual burden of 235.5 hours of in-housepersonnel time. See Section IV below.



competitors, its disclosure may alsoimpose an indirect cost on issuers.

3. Exchange Act RegistrationGenerally, an issuer of Regulation A

securities would not be subject toExchange Act reporting obligationsunless it separately registers a class ofsecurities under Section 12 of theExchange Act or conducts a registeredpublic offering. This results insignificantly lower costs of periodicreporting for Regulation A issuersrelative to reporting companies.’°’7

The final rules permit issuers seekingto register a class of Regulation Asecurities under the Exchange Act to doso by filing a Form 8—A in conjunctionwith the qualification of a Form 1—Athat follows Part I of Form S—i or theForm S—il disclosure model in theoffering circular. In some circumstancesthis option may provide moreflexibility, for instance, with respect totesting the waters, to issuers seeking toregister a class of securities. Theobligation to file ongoing reports in aTier 2 offering is automaticallysuspended upon registration of a classof securities under Section 12 of theExchange Act or registration of anoffering of securities under theSecurities Act. Given that Exchange Actreporting obligations are more extensivethan those of Regulation A, the entry ofsuch issuers into the Exchange Actreporting system upon qualification of aRegulation A offering statement isexpected to have a beneficial effect oninvestor protection and informationalefficiency of prices. While registrationpursuant to the Exchange Act is likelyto impose additional costs on issuers,only issuers that opt into suchregistration are affected. As a result, weanticipate that only those issuers forwhom the perceived benefits ofregistration justify the accompanyingcosts will elect to use this provision.

G. Insignificant DeviationsUnder the final rules, offerings with

“certain insignificant deviations from aterm, condition or requirement” ofRegulation A remain exempt fromregistration. This is the same as therules in existing Regulation A. As aresult, the only change from the baselineis that these rules will likely apply to agreater number of offerings due to theexpanded availability of amendedRegulation A. further, as in existingRegulation A, the final rules explicitlyclassify as significant those deviationsthat are related to issuer eligibility,

Ongoing compliance costs were estimated tobe $1.5 million per year, following an [P0,according to two surveys cited in the [P0 TaskForce report.

aggregate offering price, offers andcontinuous or delayed offerings. Thisprovision benefits investors byproviding certainty about the provisionsfrom which the issuer may not deviatewithout losing the exemption. At thesame time, it enables issuers to continueto rely on the exemption and obtain itscapital formation benefits even if theyhave an “insignificant deviation” fromthe final rules. This provision may beespecially beneficial for issuers withlimited experience with Regulation Aofferings as their limited experiencemay make them more susceptible to aninadvertent error. In this way, theprovision may encourage more issuersto engage in Regulation A transactionsand thereby facilitate capital formation.

H. Bad Actor DisqualificationThe final rules amend Rule 262 to

include bad actor disqualificationprovisions in substantially the sameform as adopted under Rule 506(d).b018

The final rules specify that the coveredperson’s status is tested at the time offiling of the offering statement.Consistent with the disqualificationprovisions of Rule 506(d), the final rulesadd two new disqualification triggers tothose in existing Regulation A:Commission cease-and-desist ordersrelating to violations of scienter-basedanti-fraud provisions of the federalsecurities laws or Section 5 of theSecurities Act and the final orders andbars of certain state and other federalregulators. While these provisions mayimpose an incremental cost on issuersand other covered persons relative tothe cost imposed by the disqualificationprovisions of existing Regulation A,they should strengthen investorprotection from potential fraud.

If one of these new triggering eventsoccurred prior to the effective date ofthe final rules, the event will not causedisqualification, but instead must bedisclosed on a basis consistent withRule 506(e). This approach will notpreclude the participation of bad actorswhose disqualifying events occurredprior to the effective date of the finalrules, which could expose investors tothe risks that arise when bad actors areassociated with an offering. These risksto investors may be partly mitigatedsince investors will have access torelevant information that could informtheir investment decisions. Disclosureof triggering events may also make itmore difficult for issuers to attractinvestors, and issuers may experiencesome or all of the impact ofdisqualification as a result. Some issuersmay, accordingly, choose to exclude

10 17 CFR 230.506(d).

involvement by prior bad actors to avoidsuch disclosures.

We expect that the bad actordisqualification provisions in the finalrules will lead most issuers to restrictbad actor participation in Regulation Aofferings, which could help reduce thepotential for fraud in these types ofofferings and thus strengthen investorprotection compared with an alternativeof not including bad actordisqualification provisions. Ifdisqualification standards lower the riskpremium associated with the risk offraud due to the presence of bad actorsin securities offerings, they could alsoreduce the cost of capital for issuers thatrely on amended Regulation A. Inaddition, the requirement that issuersdetermine whether any covered personsare subject to disqualification mightreduce the need for investors to do theirown investigations and could thereforeincrease efficiency.

The disqualification provisions alsoimpose costs on issuers and coveredpersons. Issuers that are disqualifiedfrom using amended Regulation A mayexperience an increased cost of capitalor a reduced availability of capital,which could have negative effects oncapital formation. In addition, issuersmay incur costs related to seekingdisqualification waivers from theCommission and replacing personnel oravoiding the participation of coveredpersons who are subject to disqualifyingevents. Issuers also might incur costs torestructure their share ownership toavoid beneficial ownership of 20% ormore of the issuer’s outstanding votingequity securities, calculated on the basisof voting power, by individuals subjectto disqualifying events.

As discussed above, the final rulesalso provide a reasonable care exceptionon a basis consistent with Rule506(d).10’9 We anticipate that thereasonable care exception would resultin benefits and costs, compared with analternative of not providing a reasonablecare exception. For example, areasonable care exception couldfacilitate capital formation byencouraging issuers to proceed withRegulation A offerings in situations inwhich issuers otherwise might havebeen deterred from relying onRegulation A if they risked potentialliability under Section 5 of theSecurities Act for unknowndisqualifying events. This exceptionalso could increase the potential forfraud, compared with an alternative ofnot providing a reasonable careexception, by limiting issuers’incentives to determine whether bad

1059 See Proposed Rule 262tb)(4).



actors are involved with their offerings.We also recognize that some issuersmight incur costs associated withconducting and documenting theirfactual inquiry into possibledisqualifications. The rule’s flexibilitywith respect to the nature and extent ofthe factual inquiry required could allowan issuer to tailor its factual inquiry asappropriate to its particularcircumstances, thereby potentiallylimiting costs.

One commenter recommendedrevising the look-back periods fordisqualifying events to run from thetime of sale rather than the time of filingof the offering statement.’°2° Thesechanges would relax the bad actordisqualification standard, by allowingbad actors to participate in Regulation Aofferings during the qualificationprocess. We believe that timingapplication of the bad actordisqualification rules to the time offiling of the offering statement, asopposed to the time of qualification, istherefore more appropriate under thefinal rules.

L Relationship With State SecuritiesLaw

The final rules preempt stateregistration and qualificationrequirements for Tier 2 offerings butpreserve these requirements for Tier 1offerings, consistent with stateregistration of Regulation A offerings ofup to $5 million under existingRegulation A.

The GAO Report found thatcompliance with state securities reviewand qualification requirements was oneof the factors that appeared to haveinfluenced the infrequent use ofRegulation A by small businesses.b021Various commenters supporting

1020 See KVCF Letter.See GAO Report. The GAO Report also cites

other fsctors thst may have discouraged issuer useof the Regulation A exemption, including scomparatively low $5 million offering limitation, aslow snd costly filing process sssociated withCommission quslification, snd the availability ofother exemptions under the federal securities laws.

A recent study performs a comparison of Rule506 offerings with Rule 505 snd Rule 504 offeringsthat “suggests that the Blue Sky law preemptionfeature unique to Rule 506 offerings has greatervalue to issuers than the unique features of Rule504 or Rule 505 offerings.” See lvanov, V., and S.Bauguess, 2013, Capital raising in the U.S.: Ananalysis of unregistered offerings using theRegulation 0 exemption, 2009—2012, ovoiloble of:http://www.sec.gov/divisions/riskfin/whitepopers/dero-unregistered-offerings-reg-d.pdf.

See also Leading Biosciences Letter referencingrecommendations supporting preemption from theSEC Government-Business Forum on SmallBusiness Capital Formation in 2011 and 2012.Similar recommendations were made in the finalreport of the SEC Forum on Small Business CspitslFormation in 2013, ovoiioble ot: http://www.sec.gov/info/smo]lbus/gbfor32.pdf.

preemption of state securities laws inthe final rules noted that state review ofoffering statements is a significantimpediment to the use of Regulation Aand that the process of qualification inmultiple states will remain inefficientdespite NASAA’s implementation of acoordinated review program.1022 Morebroadly, commenters as well as the GAOReport indicated that the existingregime of federal and state qualificationhas been a significant disincentive tothe use of Regulation A for capitalraising. With respect to time andcompliance costs associated with statequalification, we believe preemptionwill likely reduce issuers’ costs,although we lack comprehensive,independent data to estimate the preciseamount. Only a few commentersprovided specific monetary estimates ofcost components. One commenterindicated that a revenue-generatingbusiness seeking to conduct a debt orequity offering under existingRegulation A can produce a conformingoffering statement for state and federalreview for approximately $50,000.b023

According to another commenter, anissuer seeking state registration in 50states would incur $80,000 to $100,000in legal fees.1024

As one commenter noted, “[tjhechallenges posed by the necessity ofresponding to both federal and statereviews and coordinating overlappingbut potentially inconsistent commentsand approvals have helped to make theexisting Regulation A schemeunworkable for most smaller

1e22 See ABA BLS Letier; Andreessen/CowenLetter; Almerico Letter; B. Riley Letter; BI0 Letter;Campbell Letter; Canaccord Letter; CFIRA Letter 1;CFIRA Letter 2; Congressional Letter 3; DuMoulinLetter; Eng Letter; Fallbrook Technologies Letter;Gilman Law Letter; Gunk Letter 1; Hart Letter;Heritage Leuer; Huynh Letter; WA Letter; EdwardsWildmsn Letter; Kisel Letter; Kretz Letter; KVCFLetter; Ladd Letter 2; Leading Biosciences Letter;McCarter & English Letter; Methven Letter; MilkenInstitute Letter; MoFo Letter; Mnloney Letter; NewFood Letter; OTC Markets Leuer; Paul HastingsLetter; Palomino Letter; Public Startup Co. (severalletters); REISA Letter; Richardson Patel Letter; SBIALetter; Staples Letter; Sugai Letter; SVB Letter;SVCS Letter; Unorthndncs Letter; U.S. Chamber ofCommerce Letter; Verrill Dana Letter 2; WarrenLetter; WR Hambrecht + Co Letter.

1e23 See Crnundfioor Letter. Tins commenter doesnot separately estimate the component of the costdue to state registration.

leSS See Letter from Paul Hastings, LLP,November 26, 2013.

Another commenter referenced one issuer’soffering in the State of Washington in the amountof $750,000, with legal and accounting expensesestimated at $10,000 and the offering statementprepared without outaideaecuritiea counsel andreviewed by the state within less than three months.See WDFI Letter. We do not believe that this coatestimate would be representative of coats for issuersregistering in multiple states rather than a singlestate or for issuers involving outside securitiescounsel.

companies.” 1025 Preemption of statesecurities review and qualificationrequirements for Tier 2 offerings willeliminate the burdens of responding tomultiple reviews and thus provide for amore streamlined review process thanexists under existing Regulation A. Weexpect that this, in turn, will make Tier2 a more attractive capital raising optionfor issuers than existing Regulation A.Accordingly, we believe that byeliminating the requirement for statequalification, the final rules’ preemptionfor Tier 2 offerings will result in greateruse of amended Regulation A andthereby facilitate capital formation.

We recognize that conunenters weredivided on the issue of preemption, andthose who objected to preemption ofstate securities review and qualificationrequirements cited benefits of statereview.b02e These include additionalinvestor protection benefits arising fromthe localized knowledge and resourcesof state regulators that may aid indetecting fraud and facilitating issuercompliance.b027 Some of thesecommenters also noted that the launchof NASAA’s coordinated reviewprogram could streamline state reviewof offerings among participating states.

We acknowledge that the preemptionof state qualification for Tier 2 offeringsmay have an impact on investorprotection by eliminating one level ofgovernment review. In addition, merit-based review of offerings undertaken bysome states may, in some cases, providea level of investor protections differentfrom the disclosure-based review

le2a See ABA BLS Letter.iee See ASD Letter; Cornell Clinic Letter; CFA

Letter; CFA Institute Letter; Groundfioor Letter(arguing that the Commission should at leastevaluate NASAA’a coordinated review program for12 monthal; Karr Tuttie Letter (acknowledging thatstate preemption may still be necessary for statesnot participating in NASAA’a new coordinatedreview program); MCS Letter; Congressional Letter2; Congressional Leuer 4; NASAA Letier 1; NASAALeuer 2; NASAA Leuer 3; NDBF Letter; NYIPBLetter; OtIS Letter; PRCFI Letter; Scherber Letter;Secretaries of State Letter; Massachusetts Letter 1;Massachusetts Letter 2; Tavakoli Letter; TSSBLetter; WDFI Letter. One commenter stated ita viewthat the Commission’s proposal to preempt stateregulatory review contained little consideration ofthe adverse coats that come with preemption,particularly the potential harm to investors,including harm investors might incur in theabsence of state review in the area of small andthinly traded company offerings. See NASAA Letter2.

1027 According to the 2014 NASAA enforcementreport for 2013, securities violations related tounregistered securities sold by unlicensedindividuals, including fraudulent offeringsmarketed through the Internet, remain an importantenforcement concern. The report does not detail thenumber and category of violations by type ofexemption from registration. See NASAAEnforcement Report. available of: http://www.naaaa.org/ti’p-content/oploada/201 1/08/2014-Enforcement-Report-on-201 3-Data_i 1041 4.pdf.



undertaken by the Commission. Stateregulators may also have a betterknowledge of local issuers, which couldhelp in detecting fraud, especially inofferings by small, localized issuers. Ifinvestors require higher returns becauseof a perceived increase in the risk offraud as a result of preemption, issuersmay face a higher cost of capital. We areunable to predict how the amendmentsto Regulation A will affect the incidenceof fraud that may arise in Regulation Aofferings.

Several factors could mitigate thesepotential impacts. First, under Section18(c), the states retain the ability torequire the filing with them of anydocuments filed with the Commissionand to investigate and bringenforcement actions with respect tofraudulent transactions. Second, webelieve that amended Regulation Aprovides substantial protections topurchasers in Tier 2 offerings. Under thefinal rules, a Regulation A offeringstatement will continue to providesubstantive narrative and financialdisclosures about the issuer. Further,the final rules require offeringstatements to be qualified by theCommission before an issuer canconduct sales. Additional investorprotections would be afforded byRegulation A’s limitations on eligibleissuers and bad actor disqualificationprovisions. The final rules for Tier 2offerings provide further protection byrequiring audited financial statementsin the offering circular, ongoingreporting, and an investment limitationfor purchasers who do not qualify asaccredited investors.

The anticipated costs and benefits ofstate preemption will depend on keyoffering characteristics and issuerdisclosure requirements. In particular,smaller offerings with a narrow investorbase, such as those expected to beconducted under Tier 1, are more likelyto be concentrated in fewer states and tobenefit from geographicspecificinformation of state regulators as part ofthe review process.1028 In contrast,

‘°28We believe that issuers conducting Tier 1offerings are more likely to be smaller companieswhose businesses revolve around products,services, and a customer base that will more likelybe located within a single state or region or a smallnumber of geographically dispersed states. Forexample, based on our analysis, issuers of securitiesin the seven offering statements qualified by the

Commission pursuant to Regulation A in 2014indicated, on average, that they were seekingqualification in approximately five states peroffering. The financial statements provided by theseissuers further indicated, on average, that issueshad approximately $1.2 million in assets. No issuerindicated assets greater than $3.6 million, whiletwo issuers indicated assets of less than $20,000.We recognize, however, that the characteristics ofTier 1 issuers in Tier 1 offerings relying on

larger offerings that seek a broaderinvestor base, such as those expected tobe conducted under Tier 2, are morelikely to span multiple states. For Tier2 offerings, the additional disclosure,audited financial statements, andtransactional requirements relative toTier 1 offerings are expected to providean additional layer of investorprotection, thus reducing the need for,and the expected benefits of, statereview. State preemption for Tier 2offerings should lower the complianceburdens imposed on issuers, and partlyoffset the costs of the increaseddisclosure and transactionalrequirements.

In general, we expect that issuers inTier 1 offerings will face significantlylower offering costs as a result of notbeing subjected to the requirements ofaudited financial statements andongoing reporting in the final rules. Forthese offerings, the local knowledge ofstate regulators is anticipated to addvalue to the review process to the extentthat the issuer and the investor base aremore likely to be localized. Thus, statequalification is more likely to haveincremental investor protection benefitsin Tier 1 offerings relative to Tier 2offerings. Moreover, to the extent thatTier 1 offerings are more likely to beconcentrated in fewer states, the cost ofcomplying with state review proceduresis likely to be diminished for these typesof offerings.

Some commenters also pointed to theincreased burden on Commissionresources as a cost of statepreemption.’°2° Compared with thebaseline of the existing Regulation A,we anticipate a possible increase in theburden on Commission resources as aresult of the increase in the RegulationA maximum offering size and otherprovisions intended to make RegulationA more attractive to prospective issuers.However, we believe this increasewould also occur under the alternativeof no state preemption for Tier 2offerings. While state review of Tier 2offerings could potentially conferincremental investor protection benefitsto the extent a thorough Commissionstaff review is constrained by theincreased burden on agency resources,overall we do not believe this effect willbe substantial.

As an alternative to preemption forTier 2 offerings, we considered theoption of state qualification by one state

amended Regulation A in the future may differ fromthe characteristics of issuers that rely on existingRegulation A (for example, due to the highermaximum offering size for Tier I offerings in thefinal rules, compared with the maximum offeringsize in existing Regulation A).

‘°29 See WDFI Letter and NASAA Letter 2.

or a subset of states or the option of statereview under NASAA’s coordinatedreview program. 1030 According to onecommenter, the coordinated reviewprogram creates value by definingconcrete service standards regarding thetimeliness of various steps of thequalification process and by introducingmore legal certainty.’03’ According toanother commenter, the coordinatedreview program will eliminate costs ofidentifying and addressing individualstate requirements and will provide anexpedient registration process.’°32 Werecognize that the coordinated reviewprocess ultimately may reduceprocessing time and streamline certainstate requirements for issuers registeringin multiple states when compared toindependent review conducted byindividual states. To date, however, weare aware of only a few issuers that haveutilized the coordinated review process,so currently there is limited evidenceavailable to us to evaluate theeffectiveness and timeliness ofcoordinated review, especially in theevent that more potential Regulation Aissuers seek state qualification underthis process. While it is possible that thecoordinated review process may reducecosts for issuers as compared toindividual state review andqualification, it would add cost andcomplexity for issuers seeking anexemption under amended Regulation Awhen compared to Conunission reviewand qualification alone. To the extentthat disclosure or merit review (ifapplicable to one of the participatingjurisdictions in which the issuer isseeking to offer securities) standards ofparticipating jurisdictions impose moreextensive requirements on the issuerthan Commission rules, some issuersmay incur additional complianceexpense or require additional time toaddress comments. In light of the recentefforts of state securities regulators toaddress concerns about the cost of statereview and qualification of Regulation Aofferings, however, the ongoingimplementation and development of thecoordinated review program,particularly as it may operate withinTier 1 offerings, may, in the future,provide additional data that will aid ourfuture evaluation of whether such aprogram could effectively operatewithin the context of larger, morenational Tier 2 offerings.

‘°30A description of NASAAs coordinatedreview program can be found at: http://www.nasaa.org/industiy-resources/corporationfinance/coordinoted-review/regn]ation-a-offerings/.

1031 See Groimdfioor Letter.10325cc WDFI Letter.


21888 federal Register/Vol. 80, No. 75/Monday, April 20, 2015 IRules and Regulations

We believe the final rules strikeappropriate balance between mitigatingcost and time demands on issuers andproviding investor protections.

IV. Paperwork Reduction Act

A. Background

Certain provisions of the final rulescontain “collection of information”requirements within the meaning of thePaperwork Reduction Act of 1995(PRA).1033 We published a noticerequesting comment on the collection ofinformation requirements in theProposing Release, and we submittedthese requirements to the Office ofManagement and Budget (0MB) forreview in accordance with the PRA andits implementing regu1ations.’°3 Whileseveral commenters providedqualitative comments on the possiblecosts of the proposed rules andamendments, we did not receivecomments on our PRA analysis and thusare adopting our estimates substantiallyas proposed, except as otherwise notedherein. The titles for the collections ofinformation are:

(1) “Regulation A (form 1—A andForm 2—A)” (0MB Control Number3235—0286);

(2) “Form 1—K” (0MB ControlNumber 3235—0720);

(3) “Form 1—SA” (0MB ControlNumber 3235—0721);

(4) “Form 1—U” (0MB ControlNumber 3235—0722);

(5) “form 1—Z” (0MB ControlNumber 3235—0723);

(6) “Form 8—A” (0MB ControlNumber 3235—0056);

(7) “Form ID” (0MB Control Number3235—0328); and

(8) “Form f—X” (0MB ControlNumber 3235—0379).’°

An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless it displays a currently valid 0MBcontrol number. We applied for 0MBcontrol numbers for the new collectionsof information in accordance with 44U.S.C. 3507(j) and 5 CFR 1320.13, and0MB assigned a control number to eachnew collection, as specified above.Responses to these new collections ofinformation would be mandatory forissuers raising capital under RegulationA.

103344 u.s.c. 3501 et seq.103444 u.s.c. 3507(d) and 5 CFR 1320.11.1035 Although the final rules do not amend Form

F—X, the total burden hours associated with thatform may increase minimally as a result of theincreased number of issuers relying on RegulationA. The commission submitted the revised burdenestimate for Form F—X to 0MB for review inaccordance with the PRA, although the potentialminimal increase in burden hours was not noted inthe Proposing Release.

The hours and costs associated withpreparing disclosure, filing forms, andretaining records constitute reportingand cost burdens imposed by thecollections of information. In derivingestimates of these hours and costs, werecognize that the burdens likely willvary among individual issuers based ona number of factors, including the stageof development of the business, theamount of capital an issuer seeks toraise, and the number of years sinceinception of the business. We believethat some issuers will experience costsin excess of the average and someissuers may experience less than theaverage costs.

B. Estimated Number of Regulation AOfferings

Data regarding current marketpractices may help identify the potentialnumber of offerings that will beconducted in reliance on the finalrules.1o36 We estimate that there arecurrently approximately 26 RegulationA offering statements filed by issuersper year.’°37 While it is not possible topredict with certainty the ninnber ofoffering statements that will be filed byissuers relating to offerings made inreliance on amended Regulation A, forpurposes of this PRA analysis, weestimate that the number will be 250offerings statements per year. We basethis estimate on (i] the currentapproximate number of annual Form 1—A filings under the existing rules, plus(ii) 65 percent of the estimated numberof registered offering of securities thatwould have been eligible to beconducted under Regulation A,’°38 plus(iii) an additional 16 offerings thateither would not otherwise occur orwould have been conducted in relianceon another exemption from SecuritiesAct registration, such as RegulationD.10 For purposes of this PRAanalysis, we assume that each offeringstatement for a unique Regulation Aoffering that is filed represents a uniqueissuer, such that approximately 250issuers are estimated to conduct

1036 See Section III. above for a discussion of thedata regarding current market practices.

1037 From 2009 through 2014, there were 158Form 1—As filed with the commission.

See figures and graphs for registered offeringscited in Section fiI.B.b. above (citing approximately320 registered initial public offerings or follow-onofferings in calendar year 2014 that would havebeen potentially eligible to be conducted underamended Regulation A).

See figures and graphs for registered andexempt offerings under Regulation 0 cited inSection IIl.B.1.a.ii. above (citing 11,228 issuancesunder Regulation 0 in calendar year 2014 thatwould have been potentially eligible to beconducted under amended Regulation A).

Regulation A offerings each year underthe final rules.

C. FRA Reporting and Cost BurdenEstimates

1. Regulation A (form 1—A and Form 2—A)

Currently, Regulation A requiresissuers to file a Form 1—A: OfferingStatement and a Form 2—A: Report ofSales and Uses of Proceeds with theCommission. Regulation A has oneadministrative burden hour associatedwith it, while current Form 1—A isestimated to take approximately 60$hours to prepare and Form 2—A isestimated to take approximately 12hours to prepare.’°4° We do notanticipate that the one administrativeburden hour associated with RegulationA will change as a result of the finalrules. As discussed more fully below,we believe the burden hours associatedwith Form 1—A will change, while Form2—A and the associated burden hoursare eliminated as a result of today’sproposal.1041

Under the final rules, an issuerconducting a transaction in reliance onRegulation A will be able to conducteither a Tier 1 offering or a Tier 2offering.1042 In either case, a RegulationA issuer will continue to be required tofile with the Commission specifieddisclosures on a Form 1—A: OfferingStatement.’°43 An issuer will also berequired to file amendments to form 1—A to address comments fromCommission staff and to disclosematerial changes in the disclosurepreviously provided to the Commissionor investors.’044 In light of theelectronic filing requirements forRegulation A offering materialsdiscussed above,bo45 issuers are nolonger required to file a manually signedcopy of Form 1—A with theCommission.’°46 Issuers are, however,required to manually sign a copy of theoffering statement before or at the timeof non-public submission or filing thatmust be retained by the issuer for aperiod of five years and produced to theCommission, upon request.’°47 Asissuers are currently required tomanually sign the Form 1—A and file itwith the Commission, we do notanticipate that the Form 1—A retentionrequirement adopted in the final ruleswill alter an issuer’s compliance

1040 See Form 1—A at 1; Form 2—A at 1.1041 See discussion in Section lIE, above.1042 See discussion in Section 11.3.3. above.1043 See Rule 252.1044 See Rule 252(11.1045 See discussion in Section lIX.1. above.7046 See discussion in Section II.C.3.d. above.‘°47 See Instruction 2 to Signatures in form 1—A.



burden. As adopted, Form 1—A issimilar to existing Form 1—A. In someinstances, Form 1—A, contains fewerdisclosure items than existing Form 1—A (e.g., Part I (Notification) of Form 1—A does not require disclosure of“Affiliate Sales”; Part II (OfferingCircular) of Form 1—A requires adescription of the issuer’s business fora period of three years, rather than fiveyears). Part II of form 1—A no longerpermits disclosure in reliance on theModel A disclosure format, but directsissuers to follow the provisions ofModel B (renamed “Offering Circular”),Part I of Form S—I, or, where applicable,Part I of Form S_11.1048 In otherinstances, Form 1—A contains moredisclosure items than existing Form 1—A (e.g., Part I of Form 1—A requiresadditional disclosure of certainsummary information regarding theissuer and the offering; Part II of Form1—A requires more detailed managementdiscussion and analysis of the issuer’sliquidity and capital resources andresults of operations). Form 1—Arequires disclosure similar to thatrequired in a Form S—i registrationstatement for registered offerings underthe Securities Act, but with fewerdisclosure items (e.g., it requires lessdisclosure about the compensation ofofficers and directors, and less detailedmanagement discussion and analysis ofthe issuer’s liquidity and capitalresources and results of operations) and,under certain circumstances, Form 1—Adoes not require issuers to file auditedfinancial statements.1049

We expect that issuers relying onRegulation A for Tier 1 offerings of upto $20 million in a 12-month period willlargely be at a similar stage ofdevelopment to issuers relying onexisting Regulation A and will thereforenot experience an increased complianceburden with Form 1—A. Given theincreased annual offering amount limitof $50 million for Tier 2 offerings,however, we expect that issuersconducting such offerings pursuant toRegulation A may be at a moreadvanced stage of development thanissuers offering securities under Tier 1.In such cases, the complexity of therequired disclosure and, in turn, theburden of compliance with therequirements of Form 1—A may begreater for some issuers than for issuersrelying on existing Form 1—A. Webelieve that the burden hours associatedwith amended Form 1—A will be greaterthan the current estimated 608 burdenhours per response but will not be asgreat as the current estimated 972.32

‘°48 See discussion at Section II.C.3.b. above.‘°49 See discussion in Section II,C.3.b(2). above.

burden hours per response for Form S—1. We therefore estimate that the totalburden to prepare and file Form 1—A, asadopted today, including anyamendments to the form, will increaseon average across all issuers incomparison to existing Form 1—A toapproximately 750 hours.’°5° Weestimate that the issuer will internallycarry 75 percent of the burden ofpreparation and that outsideprofessionals retained by the issuer atan average cost of $400 per hour willcarry 25 percent.1051

We estimate that compliance with therequirements of a Form 1—A will require187,500 burden hours (250 offeringstatements x 750 hours/offeringstatement) in aggregate each year, whichcorresponds to 140,625 aggregated hourscarried by the issuer internally (250offering statements x 750 hours/offeringstatement x 0.75) and aggregated costs of$18,750,000 (250 offering statements x750 hours/offering statement x 0.25 x$400) for the services of outsideprofessionals. As stated above, weestimate that the proposed amendmentsto Regulation A will not change the oneadministrative burden hour associatedwith the review of Regulation A andwill require 250 burden hours (250offering statements x one hour/offeringstatement) in aggregate each year, whichcorresponds to 187 aggregated hourscarried by the issuer internally (250offering statements x 0.75) andaggregated costs of $25,000 (250 offeringstatements x one hour/offeringstatement x 0.25 x $400) for services ofoutside professionals. When combinedwith the estimates for Form 1—A, theadministrative burden hour results in anestimated total compliance burden of751 hours per offering statement and anestimated annual compliance burden of187,750 hours (250 offering statements x751 hours/offering statement) andaggregated costs of $18,775,000 (250offering statements x 751 hours/offeringstatement x 0.25 x $400).

2. Form 1—K: Annual Report

Under the final rules, any issuer thatconducts a Tier 2 offering pursuant toRegulation A is required to file anannual report with the Commission onForm 1—K: Annual Report.1052 A

manually signed copy of Form 1—K mustbe executed by the issuer and relatedsignatories before or at the time ofelectronic filing, retained by the issuerfor a period of five years and, ifrequested, produced to theCommission.1053 We do not anticipatethat the requirement to retain amanually signed copy of Form 1—K willaffect an issuer’s compliance burden.We believe the compliance burdenassociated with disclosure provided inForm 1—K will be less than thecompliance burden associated withreporting required under Exchange ActSections 13 or 15(d). We also believe theburden is more analogous to thecompliance burden attendant to Form1—A. Unlike the disclosure required inForm 1—A, however, offering-specificdisclosure in Form 1—K is not required.Additionally, under certaincircumstances, an issuer will berequired to disclose information similarto the information previously requiredof issuers on Form 2—A.’°54 Unlike thedisclosure previously required on Form2—A, however, an issuer is not requiredto provide disclosure about the use ofproceeds. We estimate that the burdento prepare and file a Form 1—K will beless than that required to prepare andfile a form 1—A. We estimate thatcompliance with Form 1—K will resultin a burden of 600 hours perresponse.’°55 We further estimate that75 percent of the burden of preparationwill be carried by the issuer internallyand that 25 percent will be carried byoutside professionals retained by theissuer at an average cost of $400 perhour. While we do not know the exactnumber of issuers that will conduct Tier2 offerings in reliance on amendedRegulation A, we estimate 75 percent ofall issuers filing a Form 1—A (or 188issuers, 250 issuers x .75) will conductTier 2 offerings, enter the Regulation Aongoing reporting regime and thereforebe required to file Form 1—K.’°56

We estimate that compliance with therequirements of Form 1—K for issuerswith an ongoing reporting obligationunder Regulation A will require 112,800burden hours (188 issuers x 600 hours/issuer) in the aggregate each year, whichcorresponds to 84,600 hours carried bythe issuer internally (188 issuers x 600

lo5eBy comparison, we estimate the burden perresponse for preparing Form S—i to be 072.32hours. See Form S—i, at 1.

1051 The costs of retaining outside professionalsmay vary depending on the nature of theprofessional services. For purposes of this PRAanalysis, however, we estimate that such costs willbe an average of $400/hour, which is consistentwith the rate we typically estimate for outside legalservices used in connection with public companyreporting.

1052 See Rule 257(b)(i).

1053 See General Instruction C to Form 1—K andrelated discussion in Section II.E.1.c. above.

1054 Id.‘°55We estimate that the burden of preparing the

information required by form i—K will beapproximately 3/4 of the burden for filing Form 1—A due to the lack of offering-specific disclosure andan issuer’s ability to update previously provideddisclosure.

1056 This estimate includes any special financialreports required to be filed on Form i—K.



hours/issuer x 0.75) and costs of$11,280,000 (188 issuers x 600 hours!issuer x 0.25 x $400) for the services ofoutside professionals.

3. Form 1—SA: Semiannual Report

Under the final rules, any issuer thatconducts a Tier 2 offering in reliance onRegulation A will be required to file asemiannual report with the Commissionon Form 1—SA: Semiannual Report.’°57A manually signed copy of the Form 1—SA must be executed by the issuer andrelated signatories before or at the timeof electronic filing, retained by theissuer for a period of five years and, ifrequested, produced to theCommission.’058 We do not anticipatethat the requirement to retain amanually signed copy of the Form 1—SAwill affect an issuer’s complianceburden. Issuers must providesemiannual updates on Form 1—SA,which, like a Form 10_Q,b050 consistsprimarily of financial statements andMD&A. Unlike form 10—Q, Form 1—SAdoes not require disclosure regardingquantitative and qualitative market riskor controls and procedures.’°6° Weestimate, however, that on balance thereduction in burden attributable toeliminating these two items in Form 1—SA will be offset by the increasedburden associated with requiringfinancial statement disclosure coveringsix months, rather than three months.We therefore believe the per responsecompliance burden of form 1—SA willbe similar to the compliance burden forissuers filing a Form 10—Q under theExchange Act.106’ Therefore, forpurposes of this PRA analysis, weestimate that the burden to prepare andfile a Form 1—SA will equal the burdento prepare and file form 10—Q, whichwe have previously estimated as 187.43hours per response.1062 Unlike form 1—K, Form 1—SA does not require theprovision of audited financialstatements. We therefore believe, incomparison to Form 1—K, issuers filinga Form 1—SA will be able to preparemore of the required disclosuresinternally. Accordingly, we estimatethat 85 percent of the burden ofpreparation will be carried by the issuerinternally and that 15 percent will becarried by outside professionals retained

1057 See Rule 257(b)(3).1058 See General Instruction C to form 1—SA and

related discussion in Section fl.E.1.c(2). above.‘° 17 CFR 249.308a.1060 See discussion in Section II.E.1.c(2). above.1061 Issuers will, however, have to file form 1—

SA, a semiannual report, less frequently than Form1O—Q, a quarterly report.

1062 See Form 10—Q, at 1.

by the issuer at an average cost of $400per hour.

We estimate that compliance with therequirements of form i—SA for issuerswith an ongoing reporting obligationunder Regulation A will require 35,237burden hours (188 issuers x 187 hours!issuer/filing x 1 filing/year) in theaggregate each year, which correspondsto 29,952 hours carried by the issuerinternally (188 issuers x 187 hours!issuer/filing x 1 filing/year x 0.85) andcosts of $2,113,872 (188 issuers x 187hours/issuer/filing x 1 filing/year x 0.15x $400) for the services of outsideprofessionals. 1063

4. form 1—U: Current Reporting

Under the final rules, any issuer thatconducts a Tier 2 offering in reliance onRegulation A is required to promptlyfile current reports on form 1—U withthe Commission.’°64 A manually signedcopy of the Form 1—U must be executedby the issuer and related signatoriesbefore or at the time of electronic filing,retained by the issuer for a period of fiveyears and, if requested, produced toCommission.1065 We do not anticipatethat the requirement to retain amanually signed copy of the Form 1—Uwill affect an issuer’s complianceburden. Issuers are required to file suchreports in the event they experiencecertain corporate events, much the sameway as issuers subject to an ongoingreporting obligation under the ExchangeAct file current reports on Form 8—K.’°66 The requirement to file a Form 1—U, however, will be triggered bysignificantly fewer corporate eventsthan those that trigger a reportingrequirement on a Form 8—K, and theform itself will be slightly lessburdensome for issuers to fill out.’°67Thus, the frequency of filing therequired disclosure and the burden toprepare and file a form 1—U will beconsiderably less than for Form 8—K. Weestimate that the burden to prepare andfile each current report will be 5 hours.While we do not know for certain howoften an issuer would experience acorporate event that would trigger acurrent report filing on Form i—U, weestimate that many issuers may notexperience a corporate event thattriggers reporting, while others mayexperience multiple events that triggerreporting. On average, we estimate that

2063 This estimate includes any special financialreports required to be filed on Form i—SA.

1064 See Rule 257(b)(4).‘°65 See General Instruction C to Form 1—U and

related discussion in Section II.E.1.c(3). above.‘°66We estimate the burden per response for

preparing a Form 8—K to be 5.71 hours. See Form8—K, at 1.

1067 See discussion at Section II.E.1.c(3). above.

an issuer will be required to file onecurrent report annually.bo68 Therefore,we estimate that an issuer’s compliancewith Form 1—U will result in an annualaggregate burden of 5 hours (1 currentreport annually x 5 hours per currentreport) per issuer.

As with Form 1—SA, we estimate that85 percent of the burden of preparationwill be carried by the issuer internallyand that 15 percent will be carried byoutside professionals retained by theissuer at an average cost of $400 perhour. We estimate that compliance withthe requirements of Form 1—U willrequire 940 burden hours (188 issuers x1 current report annually x 5 hours percurrent report) in aggregate each year,which corresponds to 799 hours carriedby the issuer internally (188 issuers x 5hours/issuer/year x 0.85) and costs of$56,400 (188 issuers x 5 hours/issuer!year x 0.15 x $400) for the services ofoutside professionals.

5. Form 1—Z: Exit ReportUnder the final rules, all Regulation A

issuers are required to file a noticeunder cover of Form 1—Z: Exit Report.Issuers conducting Tier 1 offerings willbe required to file Part I of Form 1—Zthat discloses information similar to theinformation previously required ofissuers on Form 2—A1069 Issuersconducting Tier 2 offerings will also berequired to disclose the sameinformation as issuers conducting Tier Iofferings in Part I of Form 1—Z, unlesspreviously reported by the issuer onForm 1—K. Issuers conducting Tier 2offerings will also be required tocomplete Part II of Form 1—Z in orderto notify investors and the Commissionthat it will no longer file and provideannual reports pursuant to therequirements of Regulation A.’°7° InTier 2 offerings, an issuer’s obligationsto file ongoing reports could beterminated at any time after completionof reporting for the fiscal year in whichthe offering statement was qualified, ifthe securities of each class to which theoffering statement relates are held ofrecord by fewer than 300 persons andoffers and sales made in reliance on aqualified offering statement are notongoing.’°7’ A manually signed copy ofthe Form i—Z must be executed by theissuer and related signatories before orat the time of electronic filing, retained

1065 We have previously estimated that on averageissuers file one current report on Form 8—Kannually. Although we believe that the frequencyof filing a Form 1—U will be considerably less thana Form 8—K, we are estimating that each issuer willbe required to file one Form 1—U per year.

I0 See discussion in Section II.E.4.b. above.1070 See Rule 257(d).1071 See Rule 252(f)(2).



by the issuer for a period of five yearsand, if requested, produced toCmmmission.’°72 We do not anticipatethat the requirement to retain amanually signed copy of the Form 1—Zwill affect an issuer’s complianceburden. We estimate that all of theissuers conducting Tier 1 offerings (63issuers, 250 total estimated issuers x0.25) and 50 percent of issuersconducting Tier 2 offerings (94 issuers,188 issuers with an ongoing reportingobligation x 0.50) will file a Form 1—Zin the second fiscal year afterqualification of the offering statement(157 total issuers, 63 + 94). Although webelieve that the vast majority of issuerssubject to ongoing reporting underRegulation A will qualify fortermination in the second fiscal yearafter qualification, we believe that onlyhalf or 50 percent of such issuers willactually choose to terminate theirreporting obligations. An issuer mayhave many reasons for continuing itsreporting obligations, such as a desire tofacilitate continued quotations in theover-the-counter (OTC) marketspursuant to revisions to Exchange ActRule 15c2—11.’°73

The form 1—Z is similar to the Form15 that issuers file to provide notice oftermination of the registration of a classof securities under Exchange ActSection 12(g) or to provide notice of thesuspension of the duty to file reportsrequired by Exchange Act Sections 13(a)or 15(d).b074 Therefore, we estimate thatcompliance with the form 1—Z willresult in a similar burden as compliancewith Form 15 that is, a burden of 1.50hours per response. We estimate that100% of the burden will be carried bythe issuer internally. We estimate thatcompliance with Form 1—Z will resultin a burden of 235.5 hours (157 issuersfiling Form 1—Z x 1.50 hours/issuer) inthe aggregate.

6. form 8—A: Short Form RegistrationUnder the Exchange Act

Under the final rules, Regulation Aissuers in Tier 2 offerings that elect tolist securities offered pursuant to aqualified offering statement on anational securities exchange or that seekto register the class of securities offeredpursuant to a qualified offeringstatement under the Exchange Act maydo so by filing a Form 8—A (short form)registration statement with theCommission.1075 In such circumstances,

1072 Instruction to Form 1—Z and relateddiscussion in Section ll.E.4.b. above.

1073 See discussion in Section II.E.2. above.1074 We currently estimate the burden per

response for preparing a Form 15 to be 1.50 hours.See Form 15 at 1.

1075 See discussion in Section II.E.3. above.

an issuer will be required to complywith the form requirements of Form 8—A, which will generally allow issuers toincorporate by reference in the forminformation provided in the relatedForm 1—A. While we do not know theexact number of issuers conducting Tier2 offerings that will seek to register aclass of securities under the ExchangeAct at or near the time of qualificationof an offering statement, for purpose ofthis PRA analysis, we estimate 2 percentof all issuers filing a Form 1—A (or 5issuers, 250 issuers x .02) will elect toregister a class of securities under theExchange Act and file a form 8—A.

The final rules do not alter the burdenhour per response of form 8—A, butrather amend the existing Form 8—A topermit issuers in Tier 2 offerings to relyon the form. Therefore, we estimate thatcompliance with the Form 8—A will notchange as a result of the final rules, aburden of 3 hours per response.1076 Weestimate that compliance with Form 8—A by issuers conducting a Tier 2 offeringwill result in a burden of 15 hours (5issuers filing Form 8—A x 3 hours/issuer) in aggregate each year. Weestimate that 100% of the burden willbe carried by the issuer internally.

7. Form ID Filings

Under the final rules, an issuer will berequired to file specified disclosureswith the Commission on EDGAR.1077We anticipate that many issuers relyingon Regulation A for the first time willnot have previously filed an electronicsubmission with the Commission and sowill need to file a form ID. Form ID isthe application form for access codes topermit filing on EDGAR. The final ruleswill not change the form itself, but weanticipate that the number of Form IDfilings will increase due to an increasein issuers relying on Regulation A. Forpurposes of this PRA analysis, weestimate that 75 percent of the issuerswho seek to offer and sell securities inreliance on amended Regulation A willnot have previously filed an electronicsubmission with the Commission andwill, therefore, be required to file aForm ID. As noted above, we estimatethat approximately 250 issuers per yearwill seek to offer and sell securities inreliance on Regulation A, whichcorresponds to approximately 188additional Form ID filings. We estimatethat 100% of the burden will be carriedby the issuer internally. As a result, weestimate the additional annual burden

107617 CFR 249.208a.1077 See Rules 252 and 257.

will be approximately 28.20 hours (188filings x 0.15 hours/filing).1078

8. Form F—X

Under the final rules, Canadianissuers are required to file a Form F—X,which furnishes to the Commission awritten irrevocable consent and powerof attorney at the time of filing theoffering statement required by Rule 252.It is used to appoint an agent for serviceof process by Canadian issuers eligibleto use Regulation A, issuers registeringsecurities on Forms F—8 or F—i 0 underthe Securities Act or filing periodicreports on Form 40—F under theExchange Act, as well as in certain othercircumstances.

The final rules will not change FormF—X itself, but will amend the rules toallow for the form to be filedelectronically for offerings underRegulation A. Canadian companies arethe only type of issuer that will berequired to use this form under the finalrules and we estimate that 100% of theburden will be carried by the issuerinternally. We estimate thatapproximately 2 percent of issuersutilizing amended Regulation A will beCanadian companies (or 5 responses,250 issuers x 0.02) resulting in anannual burden of approximately 10hours (2 hours per response x 5responses).’°7°

D. Collections of Information AreMandatory

The collections of informationrequired under Rules 251 through 263will be mandatory for all issuers seekingto rely on the Regulation A exemption.Responses on Form 1—A, Form 1—K,Form 1—SA, Form i—U and Form 1—Zwill not be kept confidential, althoughan issuer may request confidentialtreatment for non-publicly submittedoffering materials, or any portionthereof, for which it believes anexemption from the FOIA exists.’°8° Itis anticipated that most material notsubject to a confidential treatmentrequest will be made public when theoffering is qualified. A form 1—A that isnon-publicly submitted by an issuer andlater abandoned before being publiclyfiled with the Commission andresponses on Form ID will, however,remain non-public, absent a request for

1075 We currently estimate the burden associatedwith form ID is 0.15 hours per response. See Formmat;.

1079 this regard, we note that no Canadianissuers filed a Form 1—A in 2013.

‘°50 See Commission Rule 83, 17 CFR 200.83, andSecurities Act Rule 406, 17 CFR 230.406.


21892 federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations

such information under the Freedom ofInformation Act.’°8’

V. Final Regulatory Flexibility ActAnalysis

This Final Regulatory FlexibilityAnalysis has been prepared inaccordance with the RegulatoryFlexibility Act, 5 U.s.c. 603. It relatesto the following:

• Amendments to Rule 157(a), Rules251 through 263 of Regulation A, Rule505 of Regulation D, Form 1—A, Form 8—A, Rule 30—1 of the commission’sorganizational rules, Rule 4a—1 underthe Trust Indenture Act, Rule 12g5—1and Rule 15c2—11 under the ExchangeAct, and Item 101 of Regulation S—T;

• new Forms 1—K, 1—SA, 1—U, and 1—Z; and

• the rescission of Form 2—A.An Initial Regulatory Flexibility

Analysis (IRFA) was prepared inaccordance with the RegulatoryFlexibility Act and included in theProposing Release.

A. Need for the Rules

The rule amendments, new forms,and rescission of Form 2—A are designedto implement the requirements ofSection 3(b)(2) of the Securities Act andto make certain conforming changesbased on our amendments to RegulationA. Section 3(b)(2) directs thecommission to adopt rules adding aclass of securities exempt from theregistration requirements of theSecurities Act for offerings of up to $50million of securities within a 12-monthperiod, subject to various additionalterms and conditions set forth inSection 3(b)(2) or as provided for by thecommission as part of the rulemakingprocess.

Our primary objective is to implementSection 401 of the JOBS Act byexpanding and updating Regulation Ain a manner that makes public offeringsof up to $50 million less costly andmore flexible while providing aframework for regulatory oversight toprotect investors. In so doing, we havecrafted a revision of Regulation A thatboth promotes small company capitalformation and provides for meaningfulinvestor protection. We believe thatissuers, particularly small businesses,benefit from having a wide range ofcapital-raising strategies available tothem, and that an expanded andupdated Regulation A could serve as avaluable option that augments theexemptions from registration morefrequently relied upon, thereby

1081 5 U.S.C. 552. The Commission’s regulationsthat implement the FTeedom of Information Act areat 17 CFR 200.80 et seq.

facilitating capital formation for smallbusinesses.

B. Significant Issues Raised by PublicComments

In the Proposing Release, werequested comment on every aspect ofthe IRFA, including the number of smallentities that would be affected by theproposed amendments, the existence ornature of the potential impact of theproposals on small entities discussed inthe analysis, and how to quantify theimpact of the proposed rules. We didnot receive any comments specificallyaddressing the IRFA. We did, however,receive comments from members of thepublic on matters that could potentiallyimpact small entities. These commentsare discussed at length by topic in thecorresponding subsections of Section II.above.

While the proposed rulescontemplated that small entities wouldbe able to elect to proceed under therequirements of either Tier 1 or Tier 2,as discussed more fully below, an entityconsidered a small business under ourrules would only be required to fileongoing reports under Regulation A if itelected to conduct a Tier 2 offering.’082The following discussion thereforefocuses on the suggestions ofcommenters, as they relate to theproposed and final requirements forTier 1 offerings, which is the tier mostlikely to be relied upon by smallentities. 1083

Many commenters recommendedmaking changes to proposed rules that,in their view, would make Regulation Aa more viable capital raising option forsmaller issuers.1084 Some commentersrecommended improving the utility ofRegulation A for smaller issuers bypreempting state regulation of Tier 1offerings.’085 Others, however, opposedpreemption for all Regulation Aofferings.’086 Some commentersrecommended that we adopt a third tier,either expressly or through fleixbleapplicability of the proposed tier

1082 The distinction between a Tier 1 offering andTier 2 offering is discussed in Section II. above.

1083 For a more comprehensive discussion ofcommenter suggestions as to the proposed rules forboth Tier I and Tier 2 that could potentially impactsmall entities, see Section II. above.

1084 Andreessen/Cowen Letter; BDO Letter;Bernard Letter; Campbell Letter; CAQ Letter; publicStartup Co. Letter 1; Deloitte Letter; E&Y Letter;Guzik Letter 1; Heritage Letter; ICBA Letter; KPMGLetter; McGladrey Letter; Milken Institute Letter;Ladd Letter 2; SVB Financial Letter; Verrill DanaLetter 1; WR Hambrecht + Co Letter.

1085 Andreessen/Cowen Letter; Bernard Letter;Campbell Letter; Public Startup Co. Letter 1; GuzikLetter 1; Heritage Letter; Milken Institute Letter;Ladd Letter 2; SVB Financial Letter.

‘°86 See fn. 772 above.

requirements.1087 Some commenterssuggested that raising the offering limitof Tier 1 from $5 million to $10 millionor more would make Tier 1 moreuseful,b088 while others recommendedincluding various forms of ongoingdisclosure at a level lower than whatwas proposed to be required for Tier2.1089 One commenter suggestedreducing the Tier 1 narrative disclosureobligations, particularly for offerings of$2 million or less, so that suchrequirements would be moreappropriately tailored for smaller

Several commenters maderecommendations with respect to thefinancial statement and auditingrequirements in Form 1—A, as theyrelate to the requirements for Tier 1.1091

The final rules for Regulation A takeinto account some of the suggestions bycommenters on ways to make Tier 1more useful for small entities. Forexample, the final rules raise theoffering limit of Tier 1 to $20 million.Also, with respect to the offeringcircular narrative disclosurerequirements,’°92 we have adoptedcertain additional scaled disclosurerequirements for Tier 1 that areintended to lessen the complianceobligations for smaller issuers. We arefurther providing issuers under bothtiers with the accommodation providedto emerging growth companies inSecurities Act Section 7(a) to use theextended transition periods applicableto private companies for complyingwith new or revised accountingstandards under U.S. GAAP.Additionally, we have provided Tier Iissuers with additional flexibility withrespect to auditor independencestandards.

As noted in Section II.H.3. above,however, we do not agree with theposition of some commenters thatpreemption of state securities lawsregistration and qualificationrequirements is necessary or appropriatefor Tier 1 offerings.1093 We note thatsome commenters who suggested thatpreemption of state securities laws mayimprove the attractiveness of Tier Iofferings did so on the condition thatother aspects of the tier should changeaccordingly, namely requiring Tier 1

See, e.g., Public Startup Co. Letter 1.1088 Guzik Letter 1; ICBA Letter.‘°69Guzik Letter 1 (suggesting that Tier I ongoing

disclosure requirements could parallel Tier 2’srequirements, but without the requirement forsemiannual reports); Ladd Letter 2; Public StartupCo. Letters 1 and 5; SVB Financial Letter.

1090 Campbell Letter.1081 ODO Letter; CAQ Letter; Deloitte Letter; E&Y

Letter; KPMG Letter; McGladrey Letter.1092 See Section II.C.3.b(1). above.1093 See Section II.H.3. above.



issuers to provide audited financialstatements in the offering statement andpossibly on an ongoing basis. For thereasons discussed in SectionII.D.3.b(2)(c]. above, we have notadopted such changes in Tier 1.

Additionally, as noted in Section 11.1.above, we do not believe that thecreation of a third tier, as suggested bysome commenters, would meaningfullyalter a smaller entity’s options forcapital formation under Regulation A.While a third tier may provide issuerswith some additional flexibility forcapital formation under Regulation A,this additional flexibility would havepotential costs. For example, a third tiermay unnecessarily complicatecompliance with Regulation A forsmaller entities, and could potentiallyconfuse investors as to the type ofRegulation A offering an issuer wasundertaking and the type of informationsuch investor could expect to receive asa result, thereby lessening the viabilityof the exemption as a whole. For thisreason, we are not adopting a third orintermediate tier in Regulation A.

In the light of the changes discussedabove, we believe that the final rules weare adopting today provide smallerissuers with an appropriately tailoredregulatory regime that takes intoaccount the needs of small entities tohave a viable capital formation option inRegulation A, while maintainingappropriate investor protections.

C. Small Entities Subject to the Rules

For purposes of the RegulatoryFlexibility Act, under our rules, anissuer (other than an investmentcompany) is a “small business” or“small organization” if it has total assetsof $5 million or less as of the end of itsmost recent fiscal year and is engaged orproposing to engage in an offering ofsecurities which does not exceed $5million. 1094

While Regulation A is available forofferings of up to $50 million insecurities in a 12-month period, onlyofferings up to $5 million in securitiesin a 12-month period will constituteofferings by small entities under thedefinition set forth above. It is difficultto predict the number of small entitiesthat will use Regulation A due to themany variables included in theamendments. Nevertheless, we believe

1094 Securities Act Rule 157 [17 CFR 230.157]. Wenote that currently this rule refers to “the dollarlimitation prescribed by Section 3(b) of theSecurities Act.” The JOBS Act amended Section3(b) of the Securities Act. The former Section 3(b)is now Section 3(b)(1), and a new Section 3(b)(2)was added. To retain the meaning of Rule 157, weare adopting a technical correction to replace thereference to “Section 3(b)” with a reference to“Section 3(b)f1).”

that the final rules for Regulation A willincrease the overall number ofRegulation A offerings of $5 million orless due to the ability to non-publiclysubmit draft offering statements forreview by the Commission’s staff, theexpanded use of solicitation of interestmaterials, the ability to electronicallyfile and transmit offering statements andoffering circulars, the potential forpreemption of state regulatory review ifthe issuer elects to conduct a Tier 2offering, and other significant changessummarized in Section II. above.

Regulation A is currently limited toofferings with an aggregate offeringprice and aggregate sales of $5 millionor less.°° From 2009 through 2014,158 issuers filed offering statements and36 offering statements were qualified bythe Commission, or an average ofapproximately six qualified offeringstatements per year. Of the 36 offeringstatements that were qualified, 28included financial statements indicatingthat the issuer had total assets of $5million or less (as of the most recentbalance sheet included in such issuer’soffering statement at the time ofqualification), or an average ofapproximately five qualified offeringstatements per year in which the issuerindicated it had total assets of $5million or less. Based on these data, andfor the reasons discussed above, webelieve that at least five smallbusinesses will conduct offerings underRegulation A per year.

D. Reporting, Recordkeeping, and OtherCompliance Requirements

As discussed above in Section II., thefinal rules include reporting,recordkeeping and other compliancerequirements. In particular, the finalrules impose certain reportingrequirements on issuers offering andselling securities in a transaction relyingon the exemption provided by Section3(b) and Regulation A. The final rulesrequire that issuers relying on theexemption file with the Commissioncertain information specified in Form 1—A about the issuer and the offering,including the issuer’s contactinformation; use of proceeds from theoffering; price or method for calculatingthe price of the securities being offered;business and business plan; property;financial condition and results ofoperations; directors, officers,significant employees and certainbeneficial owners; material agreementsand contracts; and past securities

1095As explained in Section II.B.3. above,aggregate sales under Regulation A include priorsales generated from Regulation A offerings thatoccurred in the 12 months preceding the currentoffering.

sales.1096 Such issuers are also requiredto provide information on the materialfactors that make an investment in theissuer speculative or risky; dilution; theplan of distribution for the offering;executive and director compensation;conflicts of interest and related partytransactions; and financial statements.Similar to existing Regulation A, forTier I offerings, Form 1—A does notrequire the financial statements to beaudited unless the issuer has alreadyhad them audited for another purpose.

As discussed above in Sectionll.E.1.c., issuers conducting Tier 2offerings are also required to file annualreports on new Form 1—K, semiannualupdates on new Form 1—SA, currentevent reporting on new Form 1—U, andto provide notice to the Commission ofthe termination of their ongoingreporting obligations on new Form 1—Z.

An issuer subject to the Tier 2periodic and current event reportingdescribed above is required to provideinformation annually on Form 1—K,including the issuer’s business andbusiness plan; conflicts of interest andrelated party transactions; executive anddirector compensation; financialcondition and results of operations; andaudited financial statements. Thesemiannual update on Form 1—SAconsists primarily of unaudited, interimfinancial statements for the issuer’s firsttwo fiscal quarters and informationregarding the issuer’s financialcondition and results of operations. Thecurrent event reporting on Form 1—Urequires issuers to disclose certain majordevelopments, including changes ofcontrol; changes in the principalexecutive officer and principal financialofficer; fundamental changes in thenature of business; material transactionsor corporate events; unregistered salesof five percent or more of outstandingequity securities; changes in the issuer’scertifying accountant; and non-relianceon previous financial statements.

Form 1—Z is required for issuers inboth Tier 1 and Tier 2 offerings to reportsummary information about acompleted or terminated Regulation Aoffering. Issuers conducting Tier 2offerings also will be subject to theadditional provision in Form i—Z thatrelates to the voluntary termination ofan issuer’s continuous reportingobligations under Tier 2; however, weexpect its use by small entities will belimited.

Although we estimated in theProposing Release that approximately188 issuers would enter the proposedTier 2 ongoing reporting regime everyyear, we believe that very few small

See discussion in Section fl.C.3.b. above.



businesses will do so. A small businessunder our rules will only be required tofile ongoing reports under Regulation Aif it elects to conduct a Tier 2 offering.

F. Agency Action To Minimize Effect onSmall Entities

The Regulatory Flexibility Act directsus to consider significant alternativesthat would accomplish the statedobjective of our proposals, whileminimizing any significant adverseimpact on small entities. In connectionwith the final amendments and rules,we considered the followingalternatives: (1) The establishment ofdiffering compliance or reportingrequirements or timetables that take intoaccount the resources available to smallentities; (2) the clarification,consolidation or simplification ofcompliance and reporting requirementsunder the rule for small entities; (3) theuse of performance rather than designstandards; and (4) an exemption fromcoverage of the rules, or any parts of therules, for small entities.

We considered whether it is necessaryor appropriate to establish differentcompliance or reporting requirements,timetables, or to clarify, consolidate, orsimplify compliance and reportingrequirements under the final rules forsmall entities. We have made severalchanges from the proposal that mayreduce compliance burdens on smallentities. For example, in response topublic comment, the final rules providefor the further scaling of disclosureitems pertaining to executivecompensation and related partytransactions for entities offeringsecurities pursuant to Tier 1, which arelikely to be smaller entities.

With respect to using performancerather than design standards, we usedperformance standards to the extentappropriate under the statute. Forexample, issuers have the flexibility tocustomize the presentation of certaindisclosures in their offeringstatements. 1097

We also considered whether thereshould be an exemption from coverageof the rules, or any parts of the rules, forsmall entities. As discussed above, weare adopting different compliancereporting requirements for issuers thatqualify $20 million or less in securitiesannually under Tier 1. Those issuers,which are more likely to be smallentities, are not subject to ongoingreporting requirements and therequirement to provide auditedfinancial statements, although suchentities retain the flexibility to comp’ywith more rigorous initial and ongoing

1097 See Section fl.c.3.b. above.

compliance obligations if they sochoose. While audited financialstatements are not a Tier 1 requirement,in comparison to the proposed rules, thefinal rules provide certain additionalflexibility as to the independencestandards required to be followed byauditors of financial statements forissuers of less than $20 million thatconduct Tier 1 offerings—to the extentan issuer elects to provide auditedfinancial statements—by allowing suchauditors to comply with theindependence standards of either theAICPA or Article 2 of Regulation S—X.We believe that further distinctions incompliance requirements for Form 1—Ausers beyond the different sets ofrequirements for Tier 1 and Tier 2issuers may lead to investor confusionor reduced investor confidence inRegulation A offerings, especiallyconsidering that the disclosurerequirements are already less than whatis required by Form S—i for registeredofferings. Further, we anticipate that theburden for preparing a Form 1—A shouldbe less for companies at an earlier stageof development and with less extensiveoperations that are likely to be smallentities.’°98 For these reasons, webelieve that small entities should becovered by the final rules to the extentspecified above.

VI. Statutory Basis and Text ofAmendments

The amendments and forms containedin this document are being adoptedunder the authority set forth in Sections3(b), 19 and 28 of the Securities Act of1933, as amended, Sections 12, 15, 23(a)and 36 of the Securities Exchange Actof 1934, as amended, and Section 304 ofthe Trust Indenture Act of 1939, asamended.

List of Subjects

17 CFR Part 200

Administrative practice andprocedure, Authority delegations(Government agencies), Organizationand functions (Govermnent agencies).

17 CFR Parts 230, 232, 239, 240, 249,and 260

Reporting and recordkeepingrequirements, Securities.

In accordance with the foregoing, title17, chapter II of the Code of federalRegulations is amended as follows:

1098 See discussion in Section WA.;. above.

PART 200—ORGANIZATION;CONDUCT AND ETHICS; ANDINFORMATION AND REQUESTS

• 1. The authority citation for part 200is revised to read in part as follows:

Authority: 15 U.S.C. 77c, 770, 77s, 77z—3, 77sss, 78d, 78d—1, 78d—2, 78o-4, 78w,7811(d), 78mm, 80a—37, 80b—11, 7202, and7211 et seq., unless otherwise noted.* * * * *

• 2. Section 200.30—1 is amended by:• a. Revise paragraphs (b)(2) and (3);and• b. Add paragraph (b)(4).

The revisions and addition read asfollows:

§ 200.30—1 Delegation of authority toDirector of Division of Corporation Finance.* * * * *

(2) To determine the date and time ofqualification for offering statements andamendments to offering statementspursuant to Rule 252(e) ( 230.252(e) ofthis chapter);

(3) To consent to the withdrawal of anoffering statement or to declare anoffering statement abandoned pursuantto Rule 259 ( 230.259 of this chapter);and

(4) To deny a Form 1—Z filingpursuant to Rule 257 (230.257 of thischapter).* * * * *

PART 230-GENERAL RULES ANDREGULATIONS, SECURITIES ACT OF7933


Authority: 15 U.S.C. 77b, 77b note, 77c,77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z—3, 77sss,78c, 78d, 78j, 781, 78m, 78n, 780, 780—7 note,78t, 78w, 7811(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.* *

• 4. In § 230.15 7, paragraph (a) isrevised to read as follows:

§ 230.157 Small entities under theSecurities Act for purposes of theRegulatory Flexibility Act.*

(a) When used with reference to anissuer, other than an investmentcompany, for purposes of the SecuritiesAct of 1933, mean an issuer whose totalassets on the last day of its most recentfiscal year were $5 million or less andthat is engaged or proposing to engagein small business financing. An issuer isconsidered to be engaged or proposingto engage in small business financingunder this section if it is conducting or



proposes to conduct an offering ofsecurities which does not exceed thedollar limitation prescribed by section3(b)(1) of the Securities Act.* * * * *

• 5. Sections 230.251 through 230.263are revised to read as follows:Sec.230.251 Scope of exemption.230.252 Offering statement.230.253 Offering circular.230.254 Preliminary offering circular.230.255 Solicitations of interest and other

communications.230.256 Definition of “qualified

purchaser”.230.25 7 Periodic and current reporting; exit

report.230.258 Suspension of the exemption.230.259 Withdrawal or abandonment of

offering statements.230.260 Insignificant deviations from a term,

condition or requirement of RegulationA.

230.261 Definitions.230.262 Disqualification provisions.230.263 Consent to service of process.

§ 230.257 Scope of exemption.

(a) Tier 1 and Tier 2. A public offeror sale of eligible securities, as definedin Rule 261 (5 230.261), pursuant toRegulation A shall be exempt undersection 3(b) from the registrationrequirements of the Securities Act of1933 (the “Securities Act”) (15 U.S.C.77a et seq.).

(1) Tier 1. Offerings pursuant toRegulation A in which the sum of allcash and other consideration to bereceived for the securities being offered(“aggregate offering price”) plus thegross proceeds for all securities soldpursuant to other offering statementswithin the 12 months before the start ofand during the current offering ofsecurities (“aggregate sales”) does notexceed $20,000,000, including not morethan $6,000,000 offered by all sellingsecurityholders that are affiliates of theissuer (“Tier 1 offerings”).

(2) Tier 2. Offerings pursuant toRegulation A in which the sum of theaggregate offering price and aggregatesales does not exceed $50,000,000,including not more than $15,000,000offered by all selling securityholdersthat are affiliates of the issuer (“Tier 2offerings”).

(3) Additional limitation onsecondary sales in first year. Theportion of the aggregate offering priceattributable to the securities of sellingsecurityholders shall not exceed 30% ofthe aggregate offering price of aparticular offering in:

(1) The issuer’s first offering pursuantto Regulation A; or

(ii) Any subsequent Regulation Aoffering that is qualified within one year

of the qualification date of the issuer’sfirst offering.

Note to paragraph (a). Where a mixture ofcash arid non-cash consideration is to bereceived, the aggregate offering price must bebased on the price at which the securities areoffered for cash. Any portion of the aggregateoffering price or aggregate sales attributableto cash received in a foreign currency mustbe translated into United States currency ata currency exchange rate in effect on, or ata reasonable time before, the date of the saleof the securities. If securities are not offeredfor cash, the aggregate offering price oraggregate sales must be based on the value ofthe consideration as established by bona fidesales of that consideration made within areasonable time, or, in the absence of sales,on the fair value as determined by anaccepted standard. Valuations of non-cashconsideration must be reasonable at the timemade. If convertible securities or warrants arebeing offered and such securities areconvertible, exercisable, or exchangeablewithin one year of the offering statement’squalification or at the discretion of the issuer,the underlying securities must also bequalified and the aggregate offering pricemust include the actual or maximumestimated conversion, exercise, or exchangeprice of such securities.

(b) Issuer. The issuer of the securities:(1) Is an entity organized under the

laws of the United States or Canada, orany State, Province, Territory orpossession thereof, or the District ofColumbia, with its principal place ofbusiness in the United States or Canada;

(2) Is not subject to section 13 or 15(d)of the Securities Exchange Act of 1934(the “Exchange Act”) (15 U.S.C. 78a etseq.) immediately before the offering;

(3) Is not a development stagecompany that either has no specificbusiness plan or purpose, or hasindicated that its business plan is tomerge with or acquire an unidentifiedcompany or companies;

(4) Is not an investment companyregistered or required to be registeredunder the Investment Company Act of1940 (15 U.S.C. 80a—1 et seq.) or abusiness development company asdefined in section 2(a)(48) of theInvestment Company Act of 1940 (15U.S.C. sOa—2(a)(48]);

(5) Is not issuing fractional undividedinterests in oil or gas rights, or a similarinterest in other mineral rights;

(6) Is not, and has not been, subject toany order of the Commission enteredpursuant to Section 12(j) of theExchange Act (15 U.S.C. 781(j)) withinfive years before the filing of the offeringstatement;

(7) Has filed with the Commission allreports required to be filed, if any,pursuant to Rule 257 (5 230.257) duringthe two years before the filing of theoffering statement (or for such shorter

period that the issuer was required tofile such reports); and

(8) Is not disqualified under Rule 262(5 230.262).

(c) Integration with other offerings.Offers or sales made in reliance on thisRegulation A will not be integratedwith:

(1) Prior offers or sales of securities;or

(2) Subsequent offers or sales ofsecurities that are:

(i) Registered under the SecuritiesAct, except as provided in Rule 255(e)(230.255(e));

(ii) Exempt from registration underRule 701 (230.701);

(iii) Made pursuant to an employeebenefit plan;

(iv) Exempt from registration underRegulation S (55 230.901 through203.905);

(v) Made more than six months afterthe completion of the Regulation Aoffering; or

(vi) Exempt from registration underSection 4(a)(6) of the Securities Act (15U.S.C. 77d(a)(6)).

Note to paragraph (c). If these safe harborsdo not apply, whether subsequent offers andsales of securities will be integrated with theRegulation A offering will depend on theparticular facts and circumstances.

(d) Offering conditions—(1) Offers. (i)Except as allowed by Rule 255(5 230.25 5), no offer of securities may bemade unless an offering statement hasbeen filed with the Commission.

(ii) After the offering statement hasbeen filed, but before it is qualified:

(A) Oral offers may be made;(B) Written offers pursuant to Rule

254 (5 230.254) maybe made; and(C) Solicitations of interest and other

communications pursuant to Rule 255(5230.255) may be made.

(iii) Offers may be made after theoffering statement has been qualified,but any written offers must beaccompanied with or preceded by themost recent offering circular filed withthe Commission for such offering.

(2) Sales. (1) No sale of securities maybe made:

(A) Until the offering statement hasbeen qualified;

(B) By issuers that are not currentlyrequired to file reports pursuant to Rule25 7(b) (5 230.25 7(b)), until a PreliminaryOffering Circular is delivered at least 48hours before the sale to any person thatbefore qualification of the offeringstatement had indicated an interest inpurchasing securities in the offering,including those persons that respondedto an issuer’s solicitation of interestmaterials; and

(C) In a Tier 2 offering of securitiesthat are not listed on a registered



national securities exchange uponqualification, unless the purchaser iseither an accredited investor (as definedin Rule 501 ( 230.501)) or the aggregatepurchase price to be paid by thepurchaser for the securities (includingthe actual or maximum estimatedconversion, exercise, or exchange pricefor any underlying securities that havebeen qualified) is no more than tenpercent (10%) of the greater of suchpurchaser’s:

(1) Annual income or net worth if anatural person (with annual income andnet worth for such natural personpurchasers determined as provided inRule 501 ( 230.501)); or

(2) Revenue or net assets for suchpurchaser’s most recently completedfiscal year end if a non-natural person.

Note to paragraph (d)(2)(i)(C). Whensecurities underlying warrants or convertiblesecurities are being qualified pursuant to Tier2 of Regulation A one year or more after thequalification of an offering for whichinvestment limitations previously applied,purchasers of the underlying securities forwhich investment limitations would apply atthat later date may determine compliancewith the ten percent (1 0%) investmentlimitation using the conversion, exercise, orexchange price to acquire the underlyingsecurities at that later time withoutaggregating such price with the price of theoverlying warrants or convertible securities.

(D) The issuer may rely on a

representation of the purchaser whendetermining compliance with the tenpercent (10%) investment limitation inthis paragraph (d)(2)(i)(C), provided thatthe issuer does not know at the time ofsale that any such representation isuntrue.

(ii) In a transaction that represents asale by the issuer or an underwriter, ora sale by a dealer within 90 calendardays after qualification of the offeringstatement, each underwriter or dealerselling in such transaction must deliverto each purchaser from it, not later thantwo business days following thecompletion of such sale, a copy of theFinal Offering Circular, subject to thefollowing provisions:

(A) If the sale was by the issuer andwas not effected by or through anunderwriter or dealer, the issuer isresponsible for delivering the FinalOffering Circular as if the issuer were anunderwriter;

(B) For continuous or delayedofferings pursuant to paragraph (d)(3) ofthis section, the 90 calendar day periodfor dealers shall commence on the dayof the first bona fide offering ofsecurities under such offering statement;

(C) If the security is listed on aregistered national securities exchange,no offering circular need be delivered by

a dealer more than 25 calendar daysafter the later of the qualification date ofthe offering statement or the first dateon which the security was bona fideoffered to the public;

(D) No offering circular need bedelivered by a dealer if the issuer issubject, immediately prior to the time ofthe filing of the offering statement, tothe reporting requirements of Rule257(b) ( 230.25 7(b)); and

(E) The Final Offering Circulardelivery requirements set forth inparagraph (d)(2)(ii) of this section maybe satisfied by delivering a notice to theeffect that the sale was made pursuantto a qualified offering statement thatincludes the uniform resource locator(“URL”), which, in the case of anelectronic-only offering, must be anactive hyperlink, where the FinalOffering Circular, or the offeringstatement of which such Final OfferingCircular is part, may be obtained on theCommission’s Electronic DataGathering, Analysis and RetrievalSystem (“EDGAR”) and contactinformation sufficient to notify a

purchaser where a request for a FinalOffering Circular can be sent andreceived in response.

(3) Continuous or delayed offerings.(1) Continuous or delayed offerings maybe made under this Regulation A, solong as the offering statement pertainsonly to:

(A) Securities that are to be offered orsold solely by or on behalf of a personor persons other than the issuer, asubsidiary of the issuer, or a person ofwhich the issuer is a subsidiary;

(B) Securities that are to be offeredand sold pursuant to a dividend orinterest reinvestment plan or anemployee benefit plan of the issuer;

(C) Securities that are to be issuedupon the exercise of outstandingoptions, warrants, or rights;

(D) Securities that are to be issuedupon conversion of other outstandingsecurities;

(E) Securities that are pledged ascollateral; or

(F) Securities the offering of whichwill be commenced within two calendardays after the qualification date, will bemade on a continuous basis, maycontinue for a period in excess of 30calendar days from the date of initialqualification, and will be offered in anamount that, at the time the offeringstatement is qualified, is reasonablyexpected to be offered and sold withintwo years from the initial qualificationdate. These securities may be offeredand sold only if not more than threeyears have elapsed since the initialqualification date of the offeringstatement under which they are being

offered and sold; provided, however,that if a new offering statement has beenfiled pursuant to this paragraph(d)(3)(i)(F), securities covered by theprior offering statement may continue tobe offered and sold until the earlier ofthe qualification date of the newoffering statement or 180 calendar daysafter the third anniversary of the initialqualification date of the prior offeringstatement. Before the end of such three-year period, an issuer may file a newoffering statement covering thesecurities. The new offering statementmust include all the information thatwould be required at that time in anoffering statement relating to allofferings that it covers. Before thequalification date of the new offeringstatement, the issuer may include aspart of such new offering statement anyunsold securities covered by the earlieroffering statement by identifying on thecover page of the new offering circular,or the latest amendment, the amount ofsuch unsold securities being included.The offering of securities on the earlieroffering statement will be deemedterminated as of the date of qualificationof the new offering statement. Securitiesmay be sold pursuant to this paragraph(d)(3)(i)(F) only if the issuer is currentin its annual and semiannual filingspursuant to Rule 257(b) ( 230.257(h)),at the time of such sale.

(ii) At the market offerings, by or onbehalf of the issuer or otherwise, are notpermitted under this Regulation A. Asused in this paragraph (d)(3)(ii), theterm at the market offering means anoffering of equity securities into anexisting trading market for outstandingshares of the same class at other than afixed price.

(e) Confidential treatment. A requestfor confidential treatment may be madeunder Rule 406 ( 23 0.406) forinformation required to be filed, andRule 83 ( 200.83) for information notrequired to be filed.

(I] Electronic filing. Documents filedor otherwise provided to theCommission pursuant to this RegulationA must be submitted in electronicformat by means of EDGAR inaccordance with the EDGAR rules setforth in Regulation S—T (17 CFR part232).

§ 230.252 Offering statement.

(a) Documents to be included. Theoffering statement consists of thecontents required by Form 1—A( 239.90 of this chapter) and any othermaterial information necessary to makethe required statements, in light of thecircumstances under which they aremade, not misleading.



(b) Paper, printing, language andpagination. Except as otherwisespecified in this rule, the requirementsfor offering statements are the same asthose specified in Rule 403 (5 2 30.403)for registration statements under theAct. No fee is payable to theCommission upon either the submissionor filing of an offering statement onForm 1—A, or any amendment to anoffering statement.

(c) Signatures. The issuer, itsprincipal executive officer, principalfinancial officer, principal accountingofficer, and a majority of the membersof its board of directors or othergoverning body, must sign the offeringstatement in the manner prescribed byForm 1—A. If a signature is by a personon behalf of any other person, evidenceof authority to sign must be filed, exceptwhere an executive officer signs for theissuer.

(d) Non-public submission. An issuerwhose securities have not beenpreviously sold pursuant to a qualifiedoffering statement under this RegulationA or an effective registration statementunder the Securities Act may submit adraft offering statement to theConunission for non-public review bythe staff of the Commission beforepublic filing, provided that the offeringstatement shall not be qualified lessthan 21 calendar days after the publicfiling with the Commission of:

(1) The initial non-public submission;(2) All non-public amendments; and(3) All non-public correspondence

submitted by or on behalf of the issuerto the Commission staff regarding suchsubmissions (subject to any separatelyapproved confidential treatment requestunder Rule 251(e) (5 230.251(e)).

(e) Qualification. An offeringstatement and any amendment theretocan be qualified only at such date andtime as the Commission may determine.

(f] Amendments. (1)(i) Amendmentsto an offering statement must be signedand filed with the Commission in thesame manner as the initial filing.Amendments to an offering statementmust be filed under cover of Form 1—Aand must be numbered consecutively inthe order in which filed.

(ii) Every amendment that includesamended audited financial statementsmust include the consent of thecertifying accountant to the use of suchaccountant’s certification in connectionwith the amended financial statementsin the offering statement or offeringcircular and to being named as havingaudited such financial statements.

(iii) Amendments solely relating toPart ifi of Form 1—A must comply withthe requirements of paragraph (fJ(1)(i) ofthis section, except that such

amendments may be limited to Part I ofForm 1—A, an explanatory note, and allof the information required by Part III ofForm 1—A.

(2) Post-qualification amendmentsmust be filed in the followingcircumstances for ongoing offerings:

(1) At least every 12 months after thequalification date to include thefinancial statements that would berequired by Form 1—A as of such date;or

(ii) To reflect any facts or eventsarising after the qualification date of theoffering statement (or the most recentpost-qualification amendment thereof)which, individually or in the aggregate,represent a fundamental change in theinformation set forth in the offeringstatement.

§ 230.253 Offering circular.

(a) Contents. An offering circular mustinclude the information required byform 1—A for offering circulars.

(b) Information that may be omitted.Notwithstanding paragraph (a) of thissection, a qualified offering circular mayomit information with respect to thepublic offering price, underwritingsyndicate (including any materialrelationships between the issuer orselling securityholders and theunnamed underwriters, brokers ordealers), underwriting discounts orcommissions, discounts or commissionsto dealers, amount of proceeds,conversion rates, call prices and otheritems dependent upon the offeringprice, delivery dates, and terms of thesecurities dependent upon the offeringdate; provided, that the followingconditions are met:

(1) The securities to be qualified areoffered for cash.

(2) The outside front cover page of theoffering circular includes a bona fideestimate of the range of the maximumoffering price and the maximum numberof shares or other units of securities tobe offered or a hona fide estimate of theprincipal amount of debt securitiesoffered, subject to the followingconditions:

(i) The range must not exceed $2 forofferings where the upper end of therange is $10 or less or 20% if the upperend of the price range is over $10; and

(ii) The upper end of the range mustbe used in determining the aggregateoffering price under Rule 251(a)(5 230.251(a)).

(3) The offering statement does notrelate to securities to be offered bycompetitive bidding.

(4) The volume of securities (thenumber of equity securities or aggregateprincipal amount of debt securities) to

be offered may not be omitted inreliance on this paragraph (b).

Note to paragraph (b). A decrease in thevolume of securities offered or a change inthe bona fide estimate of the offering pricerange from that indicated in the offeringcircular filed as part of a qualified offeringstatement may be disclosed in the offeringcircular filed with the Commission pursuantto Rule 253(g) ( 230.253(g)), so long as thedecrease in the volume of securities offeredor change in the price range would notmaterially change the disclosure contained inthe offering statement at qualification.Notwithstanding the foregoing, any decreasein the volume of securities offered and anydeviation from the low or high end of theprice range may be reflected in the offeringcircular supplement filed with theCommission pursuant to Rule 253(g)(1) or (3)( 230.253(g)(1) or (3)) if, in the aggregate, thedecrease in volume and/or change in pricerepresent no more than a 20¾ change fromthe maximum aggregate offering pricecalculable using the information in thequalified offering statement. In nocircumstances may this paragraph be used tooffer securities where the maximumaggregate offering price would result in theoffering exceeding the limit set forth in Rule251(a) ( 230.251(a)) or if the change wouldresult in a Tier 1 offering becoming a Tier 2offering. An offering circular supplementmay not be used to increase the volume ofsecurities being offered. Additional securitiesmay only be offered pursuant to a newoffering statement or post-qualificationamendment qualified by the Commission.

(c) Filing of omitted information. Theinformation omitted from the offeringcircular in reliance upon paragraph (b)of this section must be contained in anoffering circular filed with theCommission pursuant to paragraph (g)of this section; except that if suchoffering circular is not so filed by thelater of 15 business days after thequalification date of the offeringstatement or 15 business days after thequalification of a post-qualificationamendment thereto that contains anoffering circular, the informationomitted in reliance upon paragraph (b)of this section must be contained in aqualified post-qualification amendmentto the offering statement.

(d) Presentation of information. (1)Information in the offering circular mustbe presented in a clear, concise andunderstandable manner and in a typesize that is easily readable. Repetition ofinformation should be avoided; cross-referencing of information within thedocument is permitted.

(2) Where an offering circular isdistributed through an electronicmedium, issuers may satisfy legibilityrequirements applicable to printeddocuments by presenting all requiredinformation in a format readilycommunicated to investors.


21898 federal Register/Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations

(e) Date. An offering circular must bedated approximately as of the date itwas filed with the Commission.

(fl Cover page legend. The cover pageof every offering circular must displaythe following statement highlighted byprominent type or in another manner:

The United States Securities andExchange Commission does not passupon the merits of or give its approvalto any securities offered or the terms ofthe offering, nor does it pass upon theaccuracy or completeness of anyoffering circular or other solicitationmaterials. These securities are offeredpursuant to an exemption fromregistration with the Commission;however, the Commission has not madean independent determination that thesecurities offered are exempt fromregistration.

(g) Offering circular supplements. (1]An offering circular that disclosesinformation previously omitted from theoffering circular in reliance upon Rule253(b) ( 230.253(b)) must be filed withthe Commission no later than twobusiness days following the earlier ofthe date of determination of the offeringprice or the date such offering circularis first used after qualification inconnection with a public offering orsale.

(2) An offering circular that reflectsinformation other than that covered inparagraph (g)(1) of this section thatconstitutes a substantive change from oraddition to the information set forth inthe last offering circular filed with theCommission must be filed with theCommission no later than five businessdays after the date it is first used afterqualification in connection with apublic offering or sale. If an offeringcircular filed pursuant to this paragraph(g)(2) consists of an offering circularsupplement attached to an offeringcircular that previously had been filedor was not required to be filed pursuantto paragraph (g) of this section becauseit did not contain substantive changesfrom an offering circular that previouslywas filed, only the offering circularsupplement need be filed underparagraph (g) of this section, providedthat the cover page of the offeringcircular supplement identifies thedate(s) of the related offering circularand any offering circular supplementsthereto that together constitute theoffering circular with respect to thesecurities currently being offered orsold.

(3) An offering circular that disclosesinformation, facts or events covered inboth paragraphs (g)(1) and (2) of thissection must be filed with theCommission no later than two businessdays following the earlier of the date of

the determination of the offering priceor the date it is first used afterqualification in connection with apublic offering or sale.

(4) An offering circular required to befiled pursuant to paragraph (g) of thissection that is not filed within the timeframes specified in paragraphs (g)ti)through (3) of this section, as applicable,must be filed pursuant to this paragraph(g)(4) as soon as practicable after thediscovery of such failure to file.

(5) Each offering circular filed underthis section must contain in the upperright corner of the cover page theparagraphs of paragraphs (g)(1) through(4) of this section under which the filingis made, and the file number of theoffering statement to which the offeringcircular relates.

§ 230.254 Preliminary offering circular.

After the filing of an offeringstatement, but before its qualification,written offers of securities may be madeif they meet the following requirements:

(a) Outside front cover page. Theoutside front cover page of the materialbears the caption Preliminary OfferingCircular, the date of issuance, and thefollowing legend, which must behighlighted by prominent type or inanother manner:

An offering statement pursuant toRegulation A relating to these securitieshas been filed with the Securities andExchange Commission. Informationcontained in this Preliminary OfferingCircular is subject to completion oramendment. These securities may notbe sold nor may offers to buy beaccepted before the offering statementfiled with the Commission is qualified.This Preliminary Offering Circular shallnot constitute an offer to sell or thesolicitation of an offer to buy nor maythere be any sales of these securities inany state in which such offer,solicitation or sale would be unlawfulbefore registration or qualification underthe laws of any such state. We may electto satisfy our obligation to deliver afinal Offering Circular by sending youa notice within two business days afterthe completion of our sale to you thatcontains the URL where the finalOffering Circular or the offeringstatement in which such Final OfferingCircular was filed may be obtained.

(b) Other contents. The PreliminaryOffering Circular contains substantiallythe information required to be in anoffering circular by form 1—A ( 239.90of this chapter), except that certaininformation may be omitted under Rule253(b) ( 230.253(b)) subject to theconditions set forth in such rule.

(c) Filing. The Preliminary OfferingCircular is filed as a part of the offeringstatement.

§ 230.255 Solicitations of interest andother communications.

(a) Solicitation of interest. At any timebefore the qualification of an offeringstatement, including before the nonpublic submission or public filing ofsuch offering statement, an issuer or anyperson authorized to act on behalf of anissuer may communicate orally or inwriting to determine whether there isany interest in a contemplated securitiesoffering. Such communications aredeemed to be an offer of a security forsale for purposes of the antifraudprovisions of the federal securities laws.No solicitation or acceptance of moneyor other consideration, nor of anycommitment, binding or otherwise, fromany person is permitted untilqualification of the offering statement.

(h)Condition s. The communicationsmust:

(1) State that no money or otherconsideration is being solicited, and ifsent in response, will not be accepted;

(2) State that no offer to buy thesecurities can be accepted and no partof the purchase price can be receiveduntil the offering statement is qualified,and any such offer may be withdrawnor revoked, without obligation orcommitment of any kind, at any timebefore notice of its acceptance givenafter the qualification date;

(3) State that a person’s indication ofinterest involves no obligation orcommitment of any kind; and

(4) After the public filing of theoffering statement:

(i) State from whom a copy of themost recent version of the PreliminaryOffering Circular may be obtained,including a phone number and addressof such person;

(ii) Provide the URL where suchPreliminary Offering Circular, or theoffering statement in which suchPreliminary Offering Circular was filed,may be obtained; or

(iii) Include a complete copy of thePreliminary Offering Circular.

(c) Indications of interest. Any writtencommunication under this rule mayinclude a means by which a person mayindicate to the issuer that such personis interested in a potential offering. Thisissuer may require the name, address,telephone number, and/or email addressin any response form included pursuantto this paragraph (c).

(d) Revised solicitations of interest. Ifsolicitation of interest materials are usedafter the public filing of the offeringstatement and such solicitation ofinterest materials contain information



that is inaccurate or inadequate in anymaterial respect, revised solicitation ofinterest materials must be redistributedin a substantially similar maimer assuch materials were originallydistributed. Notwithstanding theforegoing in this paragraph (d), if theonly information that is inaccurate orinadequate is contained in a PreliminaryOffering Circular provided with thesolicitation of interest materialspursuant to paragraphs (b)(4)(i) or (ii) ofthis section, no such redistribution isrequired in the following circumstances:

(1) in the case of paragraph (b)(4)(i) ofthis section, the revised PreliminaryOffering Circular will be provided toany persons making new inquiries andwill be recirculated to any personsmaking any previous inquiries; or

(2) in the case of paragraph (b)(4)(ii)of this section, the URL continues tolink directly to the most recentPreliminary Offering Circular or to theoffering statement in which suchrevised Preliminary Offering Circularwas filed.

(e) Abandoned offerings. Where anissuer decides to register an offeringunder the Securities Act after solicitinginterest in a contemplated, butsubsequently abandoned, Regulation Aoffering, the abandoned Regulation Aoffering would not be subject tointegration with the registered offering ifthe issuer engaged in solicitations ofinterest pursuant to this rule only toqualified institutional buyers andinstitutional accredited investorspermitted by Section 5(d) of theSecurities Act. If the issuer engaged insolicitations of interest to persons otherthan qualified institutional buyers andinstitutional accredited investors, anabandoned Regulation A offering wouldnot be subject to integration if the issuer(and any underwriter, broker, dealer, oragent used by the issuer in connectionwith the proposed offering) waits atleast 30 calendar days between the lastsuch solicitation of interest in theRegulation A offering and the filing ofthe registration statement with theCommission.

§ 230.256 Definition of “qualifiedpurchaser”.

For purposes of Section 18(b)(3) of theSecurities Act [15 U.S.C. 77r(b)(3)J, a“qualified purchaser” means any personto whom securities are offered or soldpursuant to a Tier 2 offering of thisRegulation A.

§ 230.257 Periodic and current reporting;exit report.

(a) Tier 1: Exit report. Each issuer thathas filed an offering statement for a Tier1 offering that has been qualified

pursuant to this Regulation A must filean exit report on Form i—Z (S 239.94 ofthis chapter) not later than 30 calendardays after the termination or completionof the offering.

(b) Tier 2: Periodic and currentreporting. Each issuer that has filed anoffering statement for a Tier 2 offeringthat has been qualified pursuant to thisRegulation A must file with theCommission the following periodic andcurrent reports:

(1) Annual reports. An annual reporton Form 1—K (5 239.91 of this chapter)for the fiscal year in which the offeringstatement became qualified and for anyfiscal year thereafter, unless the issuer’sobligation to file such annual report issuspended under paragraph (d) of thissection. Annual reports must be filedwithin the period specified in Form 1—K.

(2) Special financial report. (1) Aspecial financial report on form 1—K orForm 1—SA if the offering statement didnot contain the following:

(A) Audited financial statements forthe issuer’s most recent fiscal year (orfor the life of the issuer if less than a fullfiscal year) preceding the fiscal year inwhich the issuer’s offering statementbecame qualified; or

(B) unaudited financial statementscovering the first six months of theissuer’s current fiscal year if the offeringstatement was qualified during the lastsix months of that fiscal year.

(ii) The special financial reportdescribed in paragraph (b)(2)(i)(A) ofthis section must be filed under cover ofForm 1—K within 120 calendar daysafter the qualification date of theoffering statement and must includeaudited financial statements for suchfiscal year or other period specified inthat paragraph, as the case may be. Thespecial financial report described inparagraph (b)(2)(i)(B) of this sectionmust be filed under cover of Form 1—SAwithin 90 calendar days after thequalification date of the offeringstatement and must include thesemiannual financial statements for thefirst six months of the issuer’s fiscalyear, which may be unaudited.

(iii) A special financial report must besigned in accordance with therequirements of the form on which it isfiled.

(3) Semiannual report. A semiannualreport on form 1—SA (5 239.92 of thischapter) within the period specified inForm 1—SA. Semiannual reports mustcover the first six months of each fiscalyear of the issuer, commencing with thefirst six months of the fiscal yearimmediately following the most recentfiscal year for which full financialstatements were included in the offering

statement, or, if the offering statementincluded financial statements for thefirst six months of the fiscal yearfollowing the most recent full fiscalyear, for the first six months of thefollowing fiscal year.

(4) Current reports. Current reports onForm 1—U (5 239.93 of this chapter) withrespect to the matters and within theperiod specified in that form, unlesssubstantially the same information hasbeen previously reported to theCommission by the issuer under coverof Form 1—K or Form 1—SA.

(5) Reporting by successor issuers.Where in connection with a successionby merger, consolidation, exchange ofsecurities, acquisition of assets orotherwise, securities of any issuer thatis not required to file reports pursuantto paragraph (b) of this section areissued to the holders of any class ofsecurities of another issuer that isrequired to file such reports, the duty tofile reports pursuant to paragraph (b) ofthis section shall be deemed to havebeen assumed by the issuer of the classof securities so issued. The successorissuer must, after the consummation ofthe succession, file reports inaccordance with paragraph (b) of thissection, unless that issuer is exemptfrom filing such reports or the duty tofile such reports is terminated orsuspended under paragraph (d) of thissection.

(c) Amendments. All amendments tothe reports described in paragraphs (a)and (b) of this section must be filedunder cover of the form amended,marked with the letter A to designatethe document as an amendment, e.g.,“i—K/A,” and in compliance withpertinent requirements applicable tosuch reports. Amendments filedpursuant to this paragraph (c) must setforth the complete text of each item asamended, but need not include anyitems that were not amended.Amendments must be numberedsequentially and be filed separately foreach report amended. Amendmentsmust be signed on behalf of the issuerby a duly authorized representative ofthe issuer. An amendment to any reportrequired to include certifications asspecified in the applicable form mustinclude new certifications by theappropriate persons.

(d) Suspension of duty to file reports.(1) The duty to file reports under thisrule shall be automatically suspended ifand so long as the issuer is subject to theduty to file reports required by section13 or 15(d) of the Exchange Act (15U.S.C. 78m or 15 U.S.C. 78o).

(2) The duty to file reports underparagraph (b) of this section withrespect to a class of securities held of



record (as defined in Rule 12g5—1( 240.12g5—1 of this chapter)) by lessthan 300 persons, or less than 1,200persons for a bank (as defined in Section3(a)(6) of the Exchange Act (15 U.S.C.78c(a)(6)), or a bank holding company(as defined in section 2 of the BankHolding Company Act of 1956 (12U.S.C. 1841)), shall be suspended forsuch class of securities immediatelyupon filing with the Commission an exitreport on Form 1—Z ( 239.94 of thischapter) if the issuer of such class hasfiled all reports due pursuant to thisrule before the date of such Form 1—Zfiling for the shorter of:

(1) The period since the issuer becamesubject to such reporting obligation; or

(ii) Its most recent three fiscal yearsand the portion of the current yearpreceding the date of filing Form 1—Z.

(3) for the purposes of paragraph(d)(2) of this section, the term class shallbe construed to include all securities ofan issuer that are of substantially similarcharacter and the holders of whichenjoy substantially similar rights andprivileges. If the Form 1—Z issubsequently withdrawn or if it isdenied because the issuer was ineligibleto use the form, the issuer must, within60 calendar days, file with theCommission all reports which wouldhave been required if such exit reporthad not been filed. If the suspensionresulted from the issuer’s merger into, orconsolidation with, another issuer orissuers, the notice must be filed by thesuccessor issuer.

(4) The ability to suspend reporting,as described in paragraph (d)(2] of thissection, is not available for any class ofsecurities if:

(i) During that fiscal year a Tier 2offering statement was qualified;

(ii) The issuer has not filed an annualreport under this rule or the ExchangeAct for the fiscal year in which a Tier2 offering statement was qualified; or

(iii) Offers or sales of securities of thatclass are being made pursuant to a Tier2 Regulation A offering.

(e) Termination of dutyto file reports.If the duty to file reports is suspendedpursuant to paragraph (d)(1) of thissection and such suspension endsbecause the issuer terminates orsuspends its duty to file reports underthe Exchange Act, the issuer’s obligationto file reports under paragraph (b) ofthis section shall:

(1) Automatically terminate if theissuer is eligible to suspend its duty tofile reports under paragraphs (d)(2) and(3) of this section; or

(2) Recommence with the reportcovering the most recent financialperiod after that included in any

effective registration statement or filedExchange Act report.

§ 230.258 Suspension of the exemption.(a) Suspension. The Commission may

at any time enter an order temporarilysuspending a Regulation A exemption ifit has reason to believe that:

(i) No exemption is available or anyof the terms, conditions or requirementsof Regulation A have not been compliedwith;

(2) The offering statement, any salesor solicitation of interest material, orany report filed pursuant to Rule 257( 230.25 7) contains any untruestatement of a material fact or omits tostate a material fact necessary in orderto make the statements made, in light ofthe circumstances under which they aremade, not misleading;

(3) The offering is being made orwould be made in violation of section17 of the Securities Act;

(4) An event has occurred after thefiling of the offering statement thatwould have rendered the exemptionhereunder unavailable if it had occurredbefore such filing;

(5) Any person specified in Rule262(a) ( 230.262(a)) has been indictedfor any crime or offense of the characterspecified in Rule 262(a) (1)( 230.262(a)(1)), or any proceeding hasbeen initiated for the purpose ofenjoining any such person fromengaging in or continuing any conductor practice of the character specified inRule 262(a)(2) ( 230.262(a)(2)), or anyproceeding has been initiated for thepurposes of Rule 262(a)(3)—(8)( 230.262(a)(3) through (8)); or

(6) The issuer or any promoter,officer, director, or underwriter hasfailed to cooperate, or has obstructed orrefused to permit the making of aninvestigation by the Commission inconnection with any offering made orproposed to be made in reliance onRegulation A.

(b) Notice and hearing. Upon theentry of an order under paragraph (a) ofthis section, the Commission willpromptly give notice to the issuer, anyunderwriter, and any sellingsecurityholder:

(1) That such order has been entered,together with a brief statement of thereasons for the entry of the order; and

(2) That the Commission, uponreceipt of a written request within 30calendar days after the entry of theorder, will, within 20 calendar daysafter receiving the request, order ahearing at a place to be designated bythe Commission.

(c) Suspension order. If no hearing isrequested and none is ordered by theCommission, an order entered under

paragraph (a) of this section shallbecome permanent on the 30th calendarday after its entry and shall remain ineffect unless or until it is modified orvacated by the Commission. Where ahearing is requested or is ordered by theCommission, the Commission will, afternotice of and opportunity for suchhearing, either vacate the order or enteran order permanently suspending theexemption.

(d) Permanent suspension. TheCommission may, at any time afternotice of and opportunity for hearing,enter an order permanently suspendingthe exemption for any reason uponwhich it could have entered a temporarysuspension order under paragraph (a) ofthis section. Any such order shallremain in effect until vacated by theCommission.

(e) Notice procedures. All noticesrequired by this rule must be given bypersonal service, registered or certifiedmail to the addresses given by theissuer, any underwriter and any sellingsecurityholder in the offering statement.

§ 230.259 Withdrawal or abandonment ofoffering statements.

(a) Withdrawal. If none of thesecurities that are the subject of anoffering statement has been sold andsuch offering statement is not thesubject of a proceeding under Rule 258( 230.258), the offering statement maybe withdrawn with the Commission’sconsent. The application for withdrawalmust state the reason the offeringstatement is to be withdrawn and mustbe signed by an authorizedrepresentative of the issuer. Anywithdrawn document will remain in theCommission’s files, as well as therelated request for withdrawal.

(b) Abandonment. When an offeringstatement has been on file with theCommission for nine months withoutamendment and has not becomequalified, the Commission may, in itsdiscretion, declare the offeringstatement abandoned. If the offeringstatement has been amended, the nine-month period shall be computed fromthe date of the latest amendment.

§ 230.260 Insignificant deviations from aterm, condition or requirement ofRegulation A.

(a) Failure to comply. A failure tocomply with a term, condition orrequirement of Regulation A will notresult in the loss of the exemption fromthe requirements of section 5 of theSecurities Act for any offer or sale to aparticular individual or entity, if theperson relying on the exemptionestablishes that:

(1) The failure to comply did notpertain to a term, condition or



requirement directly intended to protectthat particular individual or entity;

(2) The failure to comply wasinsignificant with respect to the offeringas a whole, provided that any failure tocomply with Rule 251(a), (b), and (d)(1)and (3) (S 230.251(a), (b), and (d)(1) and(3)) shall be deemed to be significant tothe offering as a whole; and

(3) A good faith and reasonableattempt was made to comply with allapplicable terms, conditions andrequirements of Regulation A.

(b) Action by Commission. Atransaction made in reliance uponRegulation A must comply with allapplicable terms, conditions andrequirements of the regulation. Wherean exemption is established onlythrough reliance upon paragraph (a) ofthis section, the failure to comply shallnonetheless be actionable by theCommission under section 20 of theSecurities Act.

(c) Suspension. This provisionprovides no relief or protection from aproceeding under Rule 258 (5 230.2 58).

230.261 Definitions.

As used in this Regulation A, allterms have the same meanings as inRule 405 (5 23 0.405), except that allreferences to registrant in thosedefinitions shall refer to the issuer of thesecurities to be offered and sold underRegulation A. In addition, these termshave the following meanings:

(a) Affiliated issuer. An affiliate (asdefined in Rule 501 (5 230.501)) of theissuer that is issuing securities in thesame offering.

(b) Business day. Any day exceptSaturdays, Sundays or United Statesfederal holidays.

(c) Eligible securities. Equitysecurities, debt securities, and securitiesconvertible or exchangeable to equityinterests, including any guarantees ofsuch securities, but not including asset-backed securities as such term isdefined in Item 1101(c) of RegulationAB.

(d) Final order. A written directive ordeclaratory statement issued by afederal or state agency described in Rule262(a)(3) (5 230.262(a)(3)) underapplicable statutory authority thatprovides for notice and an opportunityfor hearing, which constitutes a finaldisposition or action by that federal orstate agency.

(e) Final offering circular. The morerecent of: the current offering circularcontained in a qualified offeringstatement; and any offering circularfiled pursuant to Rule 253(g)(5 230.253(g)). If, however, the issuer isrelying on Rule 253(b) ((5 230.253(b)),the Final Offering Circular is the most

recent of the offering circular filedpursuant to Rule 253(g)(1) or (3)(5 230.253(g)(1) or (3)) and anysubsequent offering circular filedpursuant to Rule 253(g) (5 230.253(g)).

(f Offering statement. An offeringstatement prepared pursuant toRegulation A.

(g) Preliminary offering circular. Theoffering circular described in Rule 254(5 230.254).

§ 230.262 Disqualification provisions.(a) Disqualification events. No

exemption under this Regulation A shallbe available for a sale of securities if theissuer; any predecessor of the issuer;any affiliated issuer; any director,executive officer, other officerparticipating in the offering, generalpartner or managing member of theissuer; any beneficial owner of 20% ormore of the issuer’s outstanding votingequity securities, calculated on the basisof voting power; any promotercormected with the issuer in anycapacity at the time of filing, any offerafter qualification, or such sale; anyperson that has been or will be paid(directly or indirectly) remuneration forsolicitation of purchasers in connectionwith such sale of securities; any generalpartner or managing member of anysuch solicitor; or any director, executiveofficer or other officer participating inthe offering of any such solicitor orgeneral partner or managing member ofsuch solicitor:

(1) Has been convicted, within tenyears before the filing of the offeringstatement (or five years, in the case ofissuers, their predecessors and affiliatedissuers), of any felony or misdemeanor:

(i) In connection with the purchase orsale of any security;

(ii) Involving the making of any falsefiling with the Commission; or

(iii) Arising out of the conduct of thebusiness of an underwriter, broker,dealer, municipal securities dealer,investment adviser or paid solicitor ofpurchasers of securities;

(2) Is subject to any order, judgmentor decree of any court of competentjurisdiction, entered within five yearsbefore the filing of the offeringstatement, that, at the time of suchfiling, restrains or enjoins such personfrom engaging or continuing to engagein any conduct or practice:

(i) In connection with the purchase orsale of any security;

(ii) Involving the making of any falsefiling with the Commission; or

(iii) Arising out of the conduct of thebusiness of an underwriter, broker,dealer, municipal securities dealer,investment adviser or paid solicitor ofpurchasers of securities;

(3) Is subject to a final order (asdefined in Rule 261 (5 230.261)) of astate securities commission (or anagency or officer of a state performinglike functions); a state authority thatsupervises or examines banks, savingsassociations, or credit unions; a stateinsurance commission (or an agency orofficer of a state performing likefunctions); an appropriate federalbanking agency; the U.S. CommodityFutures Trading Commission; or theNational Credit Union Administrationthat:

(1) At the time of the filing of theoffering statement, bars the person from:

(A) Association with an entityregulated by such commission,authority, agency, or officer;

(B) Engaging in the business ofsecurities, insurance or banking; or

(C) Engaging in savings association orcredit union activities; or

(ii) Constitutes a final order based ona violation of any law or regulation thatprohibits fraudulent, manipulative, ordeceptive conduct entered within tenyears before such filing of the offeringstatement;

(4) Is subject to an order of theCommission entered pursuant to section15(b) or 15B(c) of the SecuritiesExchange Act of 1934 (15 U.S.C. 78o(b)or 780—4(c)) or section 203(e) or (f) ofthe Investment Advisers Act of 1940 (15U.S.C. 80b—3(e) or (f)) that, at the timeof the filing of the offering statement:

(i) Suspends or revokes such person’sregistration as a broker, dealer,municipal securities dealer orinvestment adviser;

(ii) Places limitations on the activities,functions or operations of such person;or

(iii) Bars such person from beingassociated with any entity or fromparticipating in the offering of anypenny stock;

(5) Is subject to any order of theCommission entered within five yearsbefore the filing of the offeringstatement that, at the time of such filing,orders the person to cease and desistfrom committing or causing a violationor future violation of:

(i) Any scienter-based anti-fraudprovision of the federal securities laws,including without limitation section17(a)(1) of the Securities Act of 1933 (15U.S.C. 77q(a](1)), section 10(b) of theSecurities Exchange Act of 1934 (15U.S.C. 78j(b)) and 17 CFR 240.lOb—5,section 15(c)(1) of the SecuritiesExchange Act of 1934 (15 U.S.C.78o(c)(1)) and section 206(1) of theInvestment Advisers Act of 1940 (15U.S.C. 80b—6(i)), or any other rule orregulation thereunder; or



(ii) Section 5 of the Securities Act of1933 (15 U.S.C. 77e).

(6) Is suspended or expelled frommembership in, or suspended or barredfrom association with a member of, aregistered national securities exchangeor a registered national or affiliatedsecurities association for any act oromission to act constituting conductinconsistent with just and equitableprinciples of trade;

(7) Has filed (as a registrant or issuer],or was or was named as an underwriterin, any registration statement or offeringstatement filed with the commissionthat, within five years before the filingof the offering statement, was thesubject of a refusal order, stop order, ororder suspending the Regulation Aexemption, or is, at the time of suchfiling, the subject of an investigation orproceeding to determine whether a stoporder or suspension order should beissued; or

(8) Is subject to a United States PostalService false representation orderentered within five years before thefiling of the offering statement, or is, atthe time of such filing, subject to atemporary restraining order orpreliminary injunction with respect toconduct alleged by the United StatesPostal Service to constitute a scheme ordevice for obtaining money or propertythrough the mail by means of falserepresentations.

(b] Transition, waivers, reasonablecare exception. Paragraph (a) of thissection shall not apply:

(1) With respect to any order under§ 230.262(a)(3) or (5) that occurred orwas issued before June 19, 2015;

(2) Upon a showing of good cause andwithout prejudice to any other action bythe commission, if the commissiondetermines that it is not necessary underthe circumstances that an exemption bedenied;

(3) If, before the filing of the offeringstatement, the court or regulatoryauthority that entered the relevantorder, judgment or decree advises inwriting (whether contained in therelevant judgment, order or decree orseparately to the commission or itsstaff) that disqualification underparagraph (a) of this section should notarise as a consequence of such order,judgment or decree; or

(4) If the issuer establishes that it didnot know and, in the exercise ofreasonable care, could not have knownthat a disqualification existed underparagraph (a) of this section.

Note to paragraph (b)(4). An issuer willnot be able to establish that it has exercisedreasonable care unless it has made, in lightof the circumstances, factual inquiry intowhether any disqualifications exist. The

nature and scope of the factual inquiry willvary based on the facts and circumstancesconcerning, among other things, the issuerand the other offering participants.

(c) Affiliated issuers. For purposes ofparagraph (a) of this section, eventsrelating to any affiliated issuer thatoccurred before the affiliation arose willbe not considered disqualifying if theaffiliated entity is not:

(1) In control of the issuer; or(2] Under common control with the

issuer by a third party that was incontrol of the affiliated entity at the timeof such events.

(d) Disclosure ofprior “bad actor”events. The issuer must include in theoffering circular a description of anymatters that would have triggereddisqualification under paragraphs (a)(3)and (5) of this section but occurredbefore June 19, 2015. The failure toprovide such information shall notprevent an issuer from relying onRegulation A if the issuer establishesthat it did not know and, in the exerciseof reasonable care, could not haveknown of the existence of theundisclosed matter or matters.

§ 230.263 Consent to service of process.

(a) If the issuer is not organized underthe laws of any of the states or territoriesof the United States of America, it shallfurnish to the commission a writtenirrevocable consent and power ofattorney on Form F—X (5 239.42 of thischapter) at the time of filing the offeringstatement required by Rule 252(5 230.252).

(b) Any change to the name or addressof the agent for service of the issuershall be communicated promptly to thecommission through amendment of therequisite form and referencing the filenumber of the relevant offeringstatement.• 6. Section 230.505(b)(2)(iii)(A) and (B)are revised to read as follows:

§ 230.505 Exemption for limited offers andsales of securities not exceeding$5,000,000.* * * * *

(b) * * *

(2] * * *

(iii) * * *

(A] The term filing of the offeringstatement as used in § 23 0.262 shallmean the first sale of securities underthis section;

(B) The term underwriter as used in§ 2 30.262(a) shall mean a person thathas been or will be paid directly orindirectly remuneration for solicitationof purchasers in connection with salesof securities under this section; and* * * * *

PART 232—REGULATION S-T—GENERAL RULES AND REGULATIONSFOR ELECTRONIC FILINGS


Authority: 15 u.s.c. 77c, 77f, 77g, 77h,77j, 77s(a), 77z—3, 77sss(a), 78c(b), 781, 78m,78n, 780(d), 78w(a), 7811, 80a—6(c), 80a—8,80a—29, 80a—30, 80a—37, 7201 et seq.; and 18U.S.C. 1350, unless otherwise noted.* * * * *

• 8. Section 232.101 is amended by:• a. Revising paragraph (a)(1](vii), (xv),and (xvi], and (c)(6];

• b. Adding paragraph (a)(1)(xvii); and• c. Removing and reserving paragraph(b)(8).

The revisions and addition read asfollows:

§ 232.707 Mandated electronicsubmissions and exceptions.

(a) * * *

(1) * * *

(vii) form F—X (5 239.42 of thischapter] when filed in connection witha Form CB (55 239.800 and 249.480 ofthis chapter) or a Form 1—A (5 239.90 ofthis chapter);

* *

(xv) Form ABS—EL’ (5249.1401 of thischapter);

(xvi) Form ABS—15G (as defined in§ 249.1400 of this chapter); and

(xvii] Filings made pursuant toRegulation A (55 230.251—230.263 ofthis chapter).* * * * *

(c) * * *

(6) Filings on Form 144 (5 23 9.144 ofthis chapter) where the issuer of thesecurities is not subject to the reportingrequirements of section 13 or 15(d) ofthe Exchange Act (15 U.S.C. 78m or78o(d), respectively).* * * * *

PART 239—FORMS PRESCRIBEDUNDER THE SECURITIES ACT OF 1933


Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j,77s, 77z—2, 77z—3, 77sss, 78c, 781, 78m, 78n,78o(d), 780—7 note, 78u—5, 78w(a), 7811,78mm, 80a—2(a), 80a—3, 80a—8, 80a—9, 80a—10, 80a—13, 80a—24, 80a—26, 80a—29, 80a—30,and 80a—37, unless otherwise noted.* * * * *

• 10. Amend Form 1—A (referenced in§ 239.90) by revising it to read asfollows:



UNITED STATES SECURITIES AM)EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-A

REGULATION A OFFERINGSTATEMENT UNDER THESECURITIES ACT OF 1933

GENERAL INSTRUCTIONS

I. Eligibility Requirements for Use ofform 1—A.

This form is to be used for securitiesofferings made pursuant to Regulation A(17 CFR 230.251 et seq.). Carefulattention should be directed to theterms, conditions and requirements ofRegulation A, especially Rule 251,because the exemption is not availableto all issuers or for every type ofsecurities transaction. Further, theaggregate offering price and aggregatesales of securities in any 12-monthperiod is strictly limited to $20 millionfor Tier 1 offerings and $50 million forTier 2 offerings, including no more than$6 million offered by all sellingsecurityholders that are affiliates of theissuer for Tier 1 offerings and $15million by all selling securityholdersthat are affiliates of the issuer for Tier2 offerings. Please refer to Rule 251 ofRegulation A for more details.

II. Preparation, Submission and Filingof the Offering Statement.

An offering statement must beprepared by all persons seekingexemption under the provisions ofRegulation A. Parts I, II and III must beaddressed by all issuers. Part II, whichrelates to the content of the requiredoffering circular, provides alternativeformats, of which the issuer mustchoose one. General informationregarding the preparation, format,content, and submission or filing of theoffering statement is contained in Rule252. Information regarding non-publicsubmission of the offering statement iscontained in Rule 252(d). Requirementsrelating to the offering circular arecontained in Rules 253 and 254. Theoffering statement must be submitted orfiled with the Securities and ExchangeCommission in electronic format bymeans of the Commission’s ElectronicData Gathering, Analysis and RetrievalSystem (EDGAR) in accordance with theEDGAR rules set forth in Regulation 5—T (17 CFR part 232) for such submissionor filing.

III. Incorporation by Reference andCross-Referencing.

An issuer may incorporate byreference to other documents previouslysubmitted or filed on EDGAR. Cross-

referencing within the offeringstatement is also encouraged to avoidrepetition of information. For example,you may respond to an item of thisForm by providing a cross-reference tothe location of the information in thefinancial statements, instead ofrepeating such information.Incorporation by reference and cross-referencing are subject to the followingadditional conditions:

(a) The use of incorporation byreference and cross-referencing in Part IIof this Form is limited to the followingitems:

(1) Items 2—14 of Part II if followingthe Offering Circular format;

(2) Items 3—11 (other than Item 11(e))of Form S—i if following the Part I ofForm S—i format; or

(3) Items 3—26, 28, and 30 of Form 5—11 if following the Part I of Form S—ilformat.

(b) Descriptions of where theinformation incorporated by referenceor cross-referenced can be found mustbe specific and must clearly identify therelevant document and portion thereofwhere such information can be found.For exhibits incorporated by reference,this description must be noted in theexhibits index for each relevant exhibit.All descriptions of where informationincorporated by reference can be foundmust be accompanied by a hyperlink tothe incorporated document on EDGAR,which hyperlink need not remain activeafter the filing of the offering statement.Inactive hyperlinks must be updated inany amendment to the offeringstatement otherwise required.

(c) Reference may not be made to anydocument if the portion of suchdocument containing the pertinentinformation includes an incorporationby reference to another document.Incorporation by reference to documentsnot available on EDGAR is notpermitted. Incorporating informationinto the financial statements fromelsewhere is not permitted. Informationshall not be incorporated by reference orcross-referenced in any case where suchincorporation would render thestatement or report incomplete, unclear,or confusing.

(d) If any substantive modification hasoccurred in the text of any documentincorporated by reference since suchdocument was filed, the issuer must filewith the reference a statementcontaining the text and date of suchmodification.

IV. Supplemental Information.The information specified below must

be furnished to the Commission assupplemental information, if applicable.Supplemental information shall not be

required to be filed with or deemed partof the offering statement, unlessotherwise required. The informationshall be returned to the issuer uponrequest made in writing at the time ofsubmission, provided that the return ofsuch information is consistent with theprotection of investors and theprovisions of the Freedom ofInformation Act [5 U.S.C. 552] and theinformation was not filed in electronicformat.

(a) A statement as to whether or notthe amount of compensation to beallowed or paid to the underwriter hasbeen cleared with the Financial IndustryRegulatory Authority (FINRA).

(h) Any engineering, management,market, or similar report referenced inthe offering circular or provided forexternal use by the issuer or by aprincipal underwriter in connectionwith the proposed offering. There mustalso be furnished at the same time astatement as to the actual or proposeduse and distribution of such report ormemorandum. Such statement mustidentify each class of persons who havereceived or will receive the report ormemorandum, and state the number ofcopies distributed to each such classalong with a statement as to the actualor proposed use and distribution of suchreport or memorandum.

(c) Such other information asrequested by the staff in support ofstatements, representations and otherassertions contained in the offeringstatement or any correspondence to thestaff.

Correspondence appropriatelyresponding to any staff comments madeon the offering statement must also befurnished electronically. Whenapplicable, such correspondence mustclearly indicate where changesresponsive to the staffs comments maybe found in the offering statement.

PART I—NOTIFICATION

The following information must beprovided in the XML-based portion ofForm 1—A available through the EDGARportal and must be completed orupdated before uploading each offeringstatement or amendment thereto. Theformat of Part I shown below may differfrom the electronic version available onEDGAR. The electronic version of PartI will allow issuers to attach Part II andPart ifi for filing by means of EDGAR.All items must be addressed, unlessotherwise indicated.* * * * *

O No changes to the informationrequired by Part I have occurred sincethe last filing of this offering statement.



ITEM 1. Issuer InformationExact name of issuer as specified in theissuer’s charter:

_____________________________

Jurisdiction of incorporation/organization:

Year of incorporation:

_________________

CIK:Primary Standard Industrial ClassificationCode:

______________________________

I.R.S. Employer Identification Number:

Total number of full-time employees:

Total number of part-time employees:

Contact InformationAddress of Principal Executive Offices:

Telephone:()

_________________________

Provide the following information for theperson the Securities and Exchange Commission’s staff should call in connection withany pre-qualification review of the offeringstatement:

Name:Address:Telephone: ()

____________________

Provide up to two email addresses to which[he Securities and Exchange Commission’sstaff may send any comment letters relatingto the offering statement. After qualificationof the offering statement, such email addresses are not required to remain active:

_________

financial StatementsIndusiry Group (select one): L BankingO Insurance E Other

Use the financial statements for themost recent fiscal period contained inthis offering statement to provide thefollowing information about the issuer.The following table does not include allof the line items from the financialstatements. Long Term Debt would

include notes payable, bonds,mortgages, and similar obligations. Todetermine “Total Revenues” for allcompanies selecting “Other” for theirindustry group, refer to Article 5—030j)(1) of Regulation S—X. Forcompanies selecting “Insurance,” referto Article 7—04 of Regulation S—X forcalculation of “Total Revenues” andparagraphs 5 and 7(a) for “Costs andExpenses Applicable to Revenues”.

[if “Other” is selected, display thefollowing options in the FinancialStatements table:]Balance Sheet InformationCash and Cash Equivalents:Investment Securities:

Total Assets:

_____________—____________________

Accounts Payable and Accrued Liabilities: —

Long Term Debt:

_________________________

Total Liabilities:

___________________________

Total Stockholders’ Equity:

__________

Total Liabilities and Equity:

______________

Income Statement InformationTotal Revenues:

______ ___________________

Costs and Expenses Applicable to Revenues:

Depreciation and Amortization:

____________

Net Income:

___________________________

Earnings Per Share—Basic:Earnings Per Share—Diluted: -

__________

[If “Banking” is selected, display thefollowing options in the FinancialStatements table:]

Balance Sheet InformationCash and Cash Equivalents:Investment Securities: —

Loans:

______________

Property and Equipment:Total Assets:

Accounts Payable and Accrued Liabilities:Deposits:Long Term Debt:Total Liabilities:Total Stockholders’ Equity:Total Liabilities and Equity:Income Statement InformationTotal Interest Income:

_______

Total Interest Expense:Depreciation and Amortization:Net Income:

_______________

Earnings Per Share—Basic:Earnings Per Share—Diluted:

[if “Insurance” is selected, display thefollowing options in the FinancialStatements table:J

Total Investments:Accounts and Notes Receivable:

____________

Property and Equipment:

________________

Total Assets:

______________________________

Accounts Payable and Accrued Liabilities:

Long Term Debt:Total Liabilities:Total Stockholders’ Equity:

____________

Total Liabilities and Equity:Income Statement InformationTotal Revenues:Costs and Expenses Applicable to Revenues:Depreciation and Amortization:

____________

Net Income:Earnings Per Share—Basic:Earnings Per Share—Diluted:

[End of section that varies based on theselection of Industry Group]

Name of Auditor (if any):

Outstanding Securities

ITEM 2. Issuer Eligibility

0 Check this box to certify that all of thefollowing statements are true for theissuer(s):

• Organized under the laws of theUnited States or Canada, or any State,Province, Territory or possessionthereof, or the District of Columbia.

• Principal place of business is in theUnited States or Canada.

• Not subject to section 13 or 15(d) ofthe Securities Exchange Act of 1934.

• Not a development stage companythat either (a) has no specific business

plan or purpose, or (b) has indicatedthat its business plan is to merge withan unidentified company or companies.

• Not an investment companyregistered or required to be registeredunder the Investment Company Act of1940.

• Not issuing fractional undividedinterests in oil or gas rights, or a similarinterest in other mineral rights.

• Not issuing asset-backed securitiesas defined in Item 1101(c) of RegulationAB.

• Not, and has not been, subject toany order of the Commission enteredpursuant to Section 12(j) of theExchange Act (15 U.S.C. 781(j)) withinfive years before the filing of thisoffering statement.

• Has filed with the Commission allthe reports it was required to file, if any,pursuant to Rule 257 during the twoyears immediately before the filing ofthe offering statement (or for suchshorter period that the issuer wasrequired to file such reports).

Accounts and Notes Receivable:Balance Sheet InformationProperty, Plant and Equipment (PP&E): Cash and Cash Equivalents:

Policy Liabilities and Accruals:

____________

Name of class Units 1•f Name of trading center or(if any) outstanding a quotation medium (if any)

Common EquityPreferred EquityDebt Securities



ITEM 3. Application of Rule 262

LI Check this box to certify that, as ofthe time of this filing, each persondescribed in Rule 262 of Regulation Ais either not disqualified under that ruleor is disqualified but has received awaiver of such disqualification.LI Check this box if “bad actor”disclosure under Rule 262(d) isprovided in Part II of the offeringstatement.

ITEM 4. Summary InformationRegarding the Offering and OtherCurrent or Proposed Offerings

Check the appropriate box to indicatewhether you are conducting a Tier 1 orTier 2 offering:LI Tier 1 LI Tier 2

Check the appropriate box to indicatewhether the annual financial statementshave been audited:LI Unaudited LI Audited

Types of Securities Offered in thisOffering Statement (select all thatapply):

LI Equity (common or preferred stock)LI DebtLI Option, warrant or other right to

acquire another securityLI Security to be acquired upon

exercise of option, warrant or other rightto acquire security

LI Tenant-in-common securitiesLI Other (describe)____________

Does the issuer intend to offer thesecurities on a delayed or continuousbasis pursuant to Rule 251(d)(3]?Yes LI No LI

Does the issuer intend this offering tolast more than one year?Yes LI No LI

Does the issuer intend to price thisoffering after qualification pursuant toRule 253(b)?Yes LI No LI

Will the issuer be conducting a bestefforts offering?Yes LI No LI

Has the issuer used solicitation ofinterest communications in connectionwith the proposed offering?Yes LI No LI

Does the proposed offering involvethe resale of securities by affiliates ofthe issuer?Yes LI No LINumber of securitiesoffered:_____________Number of securities of that classalready outstanding:____________

The information called for by thisitem below may be omitted ifundetermined at the time offiling orsubmission, except that if a price rangehas been included in the offeringstatement, the midpoint of that rangemust be used to respond. Please refer toRule 251(a) for the definition of“aggregate offering price” or “aggregate

sales” as used in this item. Please leavethe field blank if undetermined at thistime and include a zero if a particularitem is not applicable to the offering.Price per security: S_____________

The portion of the aggregate offeringprice attributable to securities beingoffered on behalf of the issuer:$______________

The portion of the aggregate offeringprice attributable to securities beingoffered on behalf of sellingsecurityholders:$

____________

The portion of aggregate offeringattributable to all the securities of theissuer sold pursuant to a qualifiedoffering statement within the 12 monthsbefore the qualification of this offeringstatement:S______________

The estimated portion of aggregatesales attributable to securities that maybe sold pursuant to any other qualifiedoffering statement concurrently withsecurities being sold under this offeringstatement:$_____________

Total: $____________(the sum of the

aggregate offering price and aggregatesales in the four preceding paragraphs).

Anticipated fees in connection withthis offering and names of serviceproviders:

CR]] Number of any broker or dealerlisted:_____________Estimated net proceeds to the issuer:$______________

Clarification of responses (ifnecessary):_____________

ITEM 5. Jurisdictions in WhichSecurities are to be Offered

Using the list below, select thejurisdictions in which the issuer intendsto offer the securities:

[List will include all U.S. and Canadianjurisdictions, with an option to add andremove them individually, add all andremove all.]

Using the list below, select thejurisdictions in which the securities areto be offered by underwriters, dealers or

sales persons or check the appropriatebox:LI NoneLI Same as the jurisdictions in which theissuer intends to offer the securities.

[List will include all U.S. and Canadianjurisdictions, with an option to add andremove them individually, add all andremove alI.J

ITEM 6. Unregistered Securities Issuedor Sold Within One Year

LI NoneAs to any unregistered securities

issued by the issuer or any of itspredecessors or affiliated issuers withinone year before the filing of this form1—A, state:

(a) Name of such issuer.(b) (1) Title of securities issued

(2) Total amount of such securitiesissued

(3) Amount of such securities sold byor for the account of any person who atthe time was a director, officer,promoter or principal securityholder ofthe issuer of such securities, or was anunderwriter of any securities of suchissuer

(c)(1) Aggregate consideration forwhich the securities were issued andbasis for computing the amount thereof.

(2) Aggregate consideration for whichthe securities listed in (b)(3) of this item(if any) were issued and the basis forcomputing the amount thereof (if

Name of Service FProvider ees

Underwriters$_______

Sales Commissions$_________

Finders’ Fees$__________

Audit $LegaI

$_________

Promoters $Blue Sky CompIiance $


21906 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rnles and Regulations

different from the basis described in(c)(1)).(e) Indicate the section of the SecuritiesAct or Commission rule or regulationrelied upon for exemption from theregistration requirements of such Actand state briefly the facts relied upon forsuch exemption:________________

PART Il—INFORMATION REQUIREDIN OFFERING CIRCULAR

ta) Financial statement requirementsregardless of the applicable disclosureformat are specified in Part F/S of thisform 1—A. The narrative disclosurecontents of offering circulars arespecified as follows:

(1) The information required by:(1) the Offering Circular format

described below; or(ii) The information required by Part

I of Form 5—1 (17 CFR 239.11) or PartI of Form S—li (17 CFR 239.18), exceptfor the financial statements, selectedfinancial data, and supplementaryfinancial information called for by thoseforms. An issuer choosing to follow theForm S—i or Form S—il format mayfollow the requirements for smallerreporting companies if it meets thedefinition of that term in Rule 405 (17CFR 230.405). An issuer may only usethe form S—il format if the offering iseligible to be registered on that form;

The cover page of the offering circularmust identify which disclosure format isbeing followed.

(2) The offering circular must describeany matters that would have triggereddisqualification under Rule 262(a)(3) or(a)(5) but for the provisions set forth inRule 262(b)(i);

(3) The legend required by Rule 253(f)of Regulation A must be included on theoffering circular cover page (for issuersfollowing the S—i or S—li disclosuremodels this legend must be includedinstead of the legend required by Item50i(b)(7) of Regulation S—K);

(4) for preliminary offering circulars,the legend required by Rule 254(a) mustbe included on the offering circularcover page (for issuers following the 5—1 or S—li disclosure models, this legendmust be included instead of the legendrequired by Item 501(b)(lO) ofRegulation S—K); and

(5) For Tier 2 offerings where thesecurities will not be listed on aregistered national securities exchangeupon qualification, the offering circularcover page must include the followinglegend highlighted by prominent type orin another manner:

Generally, no sale may be made toyou in this offering if the aggregatepurchase price you pay is more thanio% of the greater of your annualincome or net worth. Different rulesapply to accredited investors and non-natural persons. Before making anyrepresentation that your investmentdoes not exceed applicable thresholds,we encourage you to review Rule251(d)(2)(i)(C) of Regulation A. Forgeneral information on investing, weencourage you to refer towwwinvestor.gov.

(b) The Commission encourages theuse of management’s projections offuture economic performance that havea reasonable basis and are presented inan appropriate format. See Rule 175, 17CFR 230.175.

(c) Offering circulars need not followthe order of the items or the order ofother requirements of the disclosureform except to the extent otherwisespecifically provided. Such informationmay not, however, be set forth in sucha fashion as to obscure any of therequired information or any informationnecessary to keep the requiredinformation from being incomplete ormisleading. Information requested to bepresented in a specified tabular formatmust be given in substantially thetabular format specified. Forincorporation by reference, please referto General Instruction III of this Form.

OFFERING CIRCULAR

Item 1. Cover Page of Offering Circular

The cover page of the offering circularmust be limited to one page and mustinclude the information specified in thisitem.

(a) Name of the issuer.Instruction to Item 1(a):Ifyour name is the same as, or

confusingly similar to, that of acompany that is well known, includeinformation to eliminate any possibleconfusion with the other company. Ifyour name indicates a line of businessin which you are not engaged or you areengaged only to a limited extent,include information to eliminate anymisleading inference as to yourbusiness. In some circumstances,disclosure may not be sufficient and youmay be required to change your name.You will not be required to change yourname ifyou are an establishedcompany, the character ofyour businesshas changed, and the investing public isgenerally aware of the change and thecharacter ofyour current business.

(b) Full mailing address of the issuer’sprincipal executive offices and theissuer’s telephone number (includingthe area code) and, if applicable, Website address.

(c) Date of the offering circular.(d) Title and amount of securities

offered. Separately state the amount ofsecurities offered by sellingsecurityholders, if any. Include a cross-reference to the section where thedisclosure required by Item 14 of Part Uof this Form 1—A has been provided;

(e) The information called for by theapplicable table below as to all thesecurities being offered, in substantiallythe tabular format indicated. Ifnecessary, you may estimate anyunderwriting discounts andcommissions and the proceeds to theissuer or other persons.

Underwriting discount and Proceeds to issuer Proceeds toPrice to public commissions other persons

Per share/unitTotal:

If the securities are to be offered on the offering, any minimum required sale arrangement. The following table musta best efforts basis, the cover page must and any arrangements to place the funds be used instead of the preceding table.set forth the termination date, if any, of received in an escrow, trust, or similar

Underwriting discount and Proceeds to issuer Proceeds toPrice to public commissions other persons

Per share/unitTotal MinimumTotal Maximum



Instructions to Item 1(e):1. The term “commissions” includes

all cash, securities, contracts, oranything else of value, paid, to be setaside, disposed of, or understandingswith or for the benefit of any otherpersons in which any underwriter isinterested, made in connection with thesale of such security.

2. Only commissions paid by theissuer in cash are to be indicated in thetable. Commissions paid by otherpersons or anyform of non-cashcompensation must be briefly identifiedin a footnote to the table with a cross-reference to a more completedescription elsewhere in the offeringcircular.

3. Before the commencement of salespursuant to Regulation A, the issuermust inform the Commission whether ornot the amount of compensation to beallowed or paid to the underwriters, asdescribed in the offering statement, hasbeen cleared with FINRA.

4. If the securities are not to be offeredfor cash, state the basis upon which theoffering is to be made.

5. Any finder’s fees or similarpayments must be disclosed on thecover page with a reference to a morecomplete discussion in the offeringcircular. Such disclosure must identifythe finder, the nature of the servicesrendered and the nature of anyrelationship between the finder and theissuer, its officers, directors, promoters,principal stockholders and underwriters(including any affiliates of suchpersons).

6. The amount of the expenses of theoffering borne by the issuer, includingunderwriting expenses to be borne bythe issuer, must be disclosed in afootnote to the table.

(f) The name of the underwriter orunderwriters.

(g) Any legend or informationrequired by the law of any state inwhich the securities are to be offered.

(h) A cross-reference to the riskfactors section, including the pagenumber where it appears in the offeringcircular. Highlight this cross-referenceby prominent type or in anothermanner.

(i) Approximate date ofcommencement of proposed sale to thepublic.

(j) If the issuer intends to rely on Rule253(b) and a preliminary offeringcircular is circulated, provide (1) a bonafide estimate of the range of themaximum offering price and themaximum number of securities offeredor (2) a bona fide estimate of theprincipal amount of the debt securitiesoffered. The range must not exceed $2for offerings where the upper end of the

range is $10 or less and 20% if theupper end of the price range is over $10.

Instruction to Item It]):The upper limit of the price range

must be used in determining theaggregate offering price for purposes ofRule 251(a).

Item 2. Table of Contents

On the page immediately followingthe cover page of the offering circular,provide a reasonably detailed table ofcontents. It must show the pagenumbers of the various sections orsubdivisions of the offering circular.Include a specific listing of the riskfactors section required by Item 3 of PartIT of this form 1—A.

Item 3. Summary and Risk Factors(a) An issuer may provide a summary

of the information in the offeringcircular where the length or complexityof the offering circular makes asummary useful. The summary shouldbe brief and must not contain all of thedetailed information in the offeringcircular.

(5) Immediately following the Table ofContents required by Item 2 or theSummary, there must be set forth underan appropriate caption, a carefullyorganized series of short, conciseparagraphs, summarizing the mostsignificant factors that make the offeringspeculative or substantially risky.Issuers should avoid generalizedstatements and include only factors thatare specific to the issuer.

Item 4. Dilution

Where there is a material disparitybetween the public offering price andthe effective cash cost to officers,directors, promoters and affiliatedpersons for shares acquired by them ina transaction during the past year, orthat they have a right to acquire, theremust be included a comparison of thepublic contribution under the proposedpublic offering and the average effectivecash contribution of such persons.

Item 5. Plan of Distribution and SellingSecurilyholders

(a) If the securities are to be offeredthrough underwriters, give the names ofthe principal underwriters, and state therespective amounts underwritten.Identify each such underwriter having amaterial relationship to the issuer andstate the nature of the relationship. Statebriefly the nature of the underwriters’obligation to take the securities.

Instructions to Item 5(a):1. All that is required as to the nature

of the underwriters’ obligation iswhether the underwriters are or will becommitted to take and to payfor all of

the securities if any are taken, orwhether it is merely an agency or thetype of best efforts arrangement underwhich the underwriters are required totake and to payfor only such securitiesas they may sell to the public.Conditions precedent to theunderwriters’ taking the securities,including market outs, need not bedescribed except in the case of anagency or best efforts arrangement.

2. It is not necessary to disclose eachmember of a selling group. Disclosuremay be limited to those underwriterswho are in privity of contract with theissuer with respect to the offering.

(5) State briefly the discounts andcommissions to be allowed or paid todealers, including all cash, securities,contracts or other consideration to bereceived by any dealer in connectionwith the sale of the securities.

(c) Outline briefly the plan ofdistribution of any securities beingissued that are to be offered through theselling efforts of brokers or dealers orotherwise than through underwriters.

(d) If any of the securities are to beoffered for the account ofsecurityholders, identify each sellingsecurityholder, state the amount ownedby the securityholder prior to theoffering, the amount offered for his orher account and the amount to beowned after the offering. Provide suchdisclosure in a tabular format. At thebottom of the table, provide the totalnumber of securities being offered forthe account of all securityholders anddescribe what percent of the pre-offeringoutstanding securities of such class theoffering represents.

Instruction to Item 5(d):The term “securityholder” in this

paragraph refers to beneficial holders,not nominee holders or other suchholders of record. If the sellingsecurityholder is an entity, disclosure ofthe persons who have sole or sharedvoting or investment power must beincluded.

(e) Describe any arrangements for thereturn of funds to subscribers if all ofthe securities to be offered are not sold.If there are no such arrangements, sostate.

(1] If there will be a material delay inthe payment of the proceeds of theoffering by the underwriter to the issuer,the salient provisions in this regard andthe effects on the issuer must be stated.

(g) Describe any arrangement to (1)limit or restrict the sale of othersecurities of the same class as those tobe offered for the period of distribution,(2) stabilize the market for any of thesecurities to be offered, or (3) withholdcommissions, or otherwise to hold each



underwriter or dealer responsible for thedistribution of its participation.

(h) Identify any underwriter thatintends to confirm sales to any accountsover which it exercises discretionaryauthority and include an estimate of theamount of securities so intended to beconfirmed.

Instruction to Item 5:Attention is directed to the provisions

of Rules lOb 9 [17 CFR 240.lob—9] and15c2—4 [17 CFR 240.1 5c2—4] under theSecurities Exchange Act of 1934. Theserules outline, among other things,antifraud provisions concerning thereturn offunds to subscribers and thetransmission of proceeds of an offeringto a seller.

Item 6. Use of Proceeds to Issuer

State the principal purposes for whichthe net proceeds to the issuer from thesecurities to be offered are intended tobe used and the approximate amountintended to be used for each suchpurpose. If the issuer will not receiveany of proceeds from the offering, sostate.

Instructions to Item 6:1. If any substantial portion of the

proceeds has not been allocated forparticular purposes, a statement to thateffect must be made together with astatement of the amount ofproceeds notso allocated.

2. State whether or not the proceedswill be used to compensate or otherwisemake payments to officers or directorsof the issuer OT any of its subsidiaries.

3. For best efforts offerings, describeany anticipated material changes in theuse ofproceeds if all of the securitiesbeing qualified on the offering statementare not sold.

4. If an issuer must provide thedisclosure described in Item 9(c) the useofproceeds and plan of operationsshould be consistent.

5. If any material amounts of otherfunds are to be used in conjunction withthe proceeds, state the amounts andsources of such other funds and whethersuch funds are firm or contingent.

6. If any material part of the proceedsis to be used to discharge indebtedness,describe the material terms of suchindebtedness. If the indebtedness to bedischarged was incurred within oneyear, describe the use of the proceedsarising from such indebtedness.

7. If anymaterial amount of theproceeds is to be used to acquire assets,otherwise than in the ordinary course ofbusiness, briefly describe and state thecost of the assets. If the assets are to beacquired from affiliates of the issuer ortheir associates, give the names of thepersons from whom they are to beacquired and set forth the basis used in

determining the purchase price to theissuer.

8. The issuer may reserve the right tochange the use ofproceeds, so long asthe reservation is prominently disclosedin the section where the use ofproceedsis discussed. It is not necessary todescribe the possible alternative uses ofproceeds unless the issuer believes thata change in circumstances leading to analternative use ofproceeds is likely tooccur.

Item 7. Description of Business

(a) Narrative description of business.(1) Describe the business done and

intended to be done by the issuer andits subsidiaries and the generaldevelopment of the business during thepast three years or such shorter periodas the issuer may have been in business.Such description must inclilde, but notbe limited to, a discussion of thefollowing factors if such factors arematerial to an understanding of theissuer’s business:

(i) The principal products andservices of the issuer and the principalmarket for and method of distribution ofsuch products and services.

(ii) The status of a product or serviceif the issuer has made publicinformation about a new product orservice that would require theinvestment of a material amount of theassets of the issuer or is otherwisematerial.

(iii) If material, the estimated amountspent during each of the last two fiscalyears on company-sponsored researchand development activities determinedin accordance with generally acceptedaccounting principles. In addition, state,if material, the estimated dollar amountspent during each of such years onmaterial customer-sponsored researchactivities relating to the development ofnew products, services or techniques orthe improvement of existing products,services or techniques.

(iv) The total number of personsemployed by the issuer, indicating thenumber employed full time.

(v) Any bankruptcy, receivership orsimilar proceeding.

(vi) Any legal proceedings material tothe business or financial condition ofthe issuer.

(vii) Any material reclassification,merger, consolidation, or purchase orsale of a significant amount of assets notin the ordinary course of business.

(2) The issuer must also describethose distinctive or specialcharacteristics of the issuer’s operationor industry that are reasonably likely tohave a material impact upon the issuer’sfuture financial performance. Examplesof factors that might be discussed

include dependence on one or a fewmajor customers or suppliers (includingsuppliers of raw materials or financing),effect of existing or probablegovernmental regulation (includingenviromnental regulation), materialterms of and/or expiration of materiallabor contracts or patents, trademarks,licenses, franchises, concessions orroyalty agreements, unusual competitiveconditions in the industry, cyclicality ofthe industry and anticipated rawmaterial or energy shortages to theextent management may not be able tosecure a continuing source of supply.

(b) Segment Data. If the issuer isrequired by generally acceptedaccounting principles to includesegment information in its financialstatements, an appropriate cross-reference must be included in thedescription of business.

(c) Industry Guides. The disclosureguidelines in all Securities Act IndustryGuides must be followed. To the extentthat the industry guides are codifiedinto Regulation S—K, the Regulation 5—K industry disclosure items must befollowed.

(d) For offerings of limitedpartnership or limited liability companyinterests, an issuer must comply withthe Commission’s interpretive views onsubstantive disclosure requirements setforth in Securities Act Release No. 6900(June 17, 1991).

Item 8. Description of PropertyState briefly the Location and general

character of any principal plants orother material physical properties of theissuer and its subsidiaries. If any suchproperty is not held in fee or is heldsubject to any major encumbrance, sostate and briefly describe how held.Include information regarding thesuitability, adequacy, productivecapacity and extent of utilization of theproperties and facilities used in theissuer’s business.

Instruction to Item 8:Detailed descriptions of the physical

characteristics of individual propertiesor legal descriptions by metes andbounds are not required and should notbe given.

Item 9. Management’s Discussion andAnalysis of Financial Condition andResults of Operations

Discuss the issuer’s financialcondition, changes in financialcondition and results of operations foreach year and interim period for whichfinancial statements are required,including the causes of material changesfrom year to year or period to period infinancial statement line items, to theextent necessary for an understanding of


federal Register I Vol. 80, No. 75 I Monday, April 20, 2015 / Rules and Regulations 21909

the issuer’s business as a whole.Information provided also must relate tothe segment information of the issuer.Provide the information specified belowas well as such other information that isnecessary for an investor’sunderstanding of the issuer’s financialcondition, changes in financialcondition and results of operations.

(a) Operating results. Provideinformation regarding significantfactors, including unusual or infrequentevents or transactions or newdevelopments, materially affecting theissuer’s income from operations, and, ineach case, indicating the extent towhich income was so affected. Describeany other significant component ofrevenue or expenses necessary tounderstand the issuer’s results ofoperations. To the extent that thefinancial statements disclose materialchanges in net sales or revenues,provide a narrative discussion of theextent to which such changes areattributable to changes in prices or tochanges in the volume or amount ofproducts or services being sold or to theintroduction of new products orservices.

Instruction to Item 9(a):1. The discussion and analysis shall

focus specifically on material eventsand uncertainties known tomanagement that would cause reportedfinancial information not to benecessarily indicative offutureoperating results or offuture financialcondition. This would includedescriptions and amounts of(A) mattersthat would have an impact on futureoperations that have not had an impactin the past, and (B) matters that havehad an impact on reported operationsthat are not expected to have an impactupon future operations.

2. Where the consolidated financialstatements reveal material changes fromyear to year in one or more line items,

the causes for the changes shall bedescribed to the extent necessary to anunderstanding of the issuer’s businessesas a whole. If the causes fora changein one line item also relate to other lineitems, no repetition is required and aline-by-line analysis of the financialstatements as a whole is not required orgenerally appropriate. Issuers need notrecite the amounts of changes from yearto year which are readily computablefrom the financial statements. Thediscussion must not merely repeatnumerical data contained in theconsolidated financial statements.

3. When interim period financialstatements are included, discuss anymaterial changes in financial conditionfrom the end of the preceding fiscal yearto the date of the most recent interimbalance sheet provided. Discuss anymaterial changes in the issuer’s resultsof operations with respect to the mostrecent fiscal year-to-date period forwhich an income statement is providedand the corresponding year-to-dateperiod of the preceding fiscal year.

(b) Liquidity and capital resources.Provide information regarding thefollowing:

(1) the issuer’s liquidity (both shortand long term), including a descriptionand evaluation of the internal andexternal sources of liquidity and a briefdiscussion of any material unusedsources of liquidity. If a materialdeficiency in liquidity is identified,indicate the course of action that theissuer has taken or proposes to take toremedy the deficiency.

(2) the issuer’s material commitmentsfor capital expenditures as of the end ofthe latest fiscal year and any subsequentinterim period and an indication of thegeneral purpose of such commitmentsand the anticipated sources of fundsneeded to fulfill such commitments.

(c) Plan of Operations. Issuers(including predecessors) that have not

received revenue from operationsduring each of the three fiscal yearsimmediately before the filing of theoffering statement (or since inception,whichever is shorter) must describe, ifformulated, their plan of operation forthe 12 months following thecommencement of the proposedoffering. If such information is notavailable, the reasons for itsunavailability must be stated. Disclosurerelating to any plan must include,among other things, a statementindicating whether, in the issuer’sopinion, the proceeds from the offeringwill satisfy its cash requirements orwhether it anticipates it will benecessary to raise additional funds inthe next six months to implement theplan of operations.

(d) Trend information. The issuermust identify the most significant recenttrends in production, sales andinventory, the state of the order bookand costs and selling prices since thelatest financial year. The issuer alsomust discuss, for at least the currentfinancial year, any known trends,uncertainties, demands, commitmentsor events that are reasonably likely tohave a material effect on the issuer’s netsales or revenues, income fromcontinuing operations, profitability,liquidity or capital resources, or thatwould cause reported financialinformation not necessarily to beindicative of future operating results orfinancial condition.

Item 10. Directors, Executive Officersand Significant Employees

(a) For each of the directors, personsnominated or chosen to becomedirectors, executive officers, personschosen to become executive officers,and significant employees, provide theinformation specified below insubstantially the following tabularformat:

Name Position Age Term of Office(1) Approximate hours per week for part-timeemployees (2)

Executive Officers:

Directors:

Significant Employees:


21910 federal_Register / Vol. 80, No. 75 / Monday, April 20, 2015 I Rules and Regulations

(1) Provide the month and year of thestart date and, if applicable, the enddate. To the extent you are unable toprovide specific dates, provide suchother description in the table or in anappropriate footnote clarifying the termof office. If the person is a nominee orchosen to become a director orexecutive officer, it must be indicated inthis column or by footnote.

(2) for executive officers andsignificant employees that are workingpart-time, indicate approximately theaverage number of hours per week ormonth such person works or isanticipated to work. This column maybe left blank for directors. The entirecolumn may be omitted if all thoselisted in the table work full time for theissuer.

In a footnote to the table, brieflydescribe any arrangement orunderstanding between the personsdescribed above and any other persons(naming such persons) pursuant towhich the person was or is to beselected to his or her office or position.

Instructions to Item iota):1. No nominee or person chosen to

become a director or person chosen tobe an executive officer who has notconsented to act as such may be namedin response to this item.

2. The term “executive officer” meansthe president, secretary, treasurer, anyvice president in charge of a principalbusiness function tsuch as sales,administration, or finance) and anyother person who performs similarpolicy making functions for the issuer.

3. The term “significant employee”means persons such as productionmanagers, sales managers, or researchscientists, who are not executiveofficers, but who make or are expectedto make significant contributions to thebusiness of the issuer.

(b) Family relationships. State thenature of any family relationshipbetween any director, executive officer,person nominated or chosen by theissuer to become a director or executiveofficer or any significant employee.

Instruction to Item iOtb):The term “family relationship” means

any relationship by blood, marriage, oradoption, not more remote than firstcousin.

(c) Business experience. Give a briefaccount of the business experiencedaring the past five years of eachdirector, executive officer, personnominated or chosen to become adirector or executive officer, and eachsignificant employee, including his orher principal occupations andemployment during that period and thename and principal business of anycorporation or other organization inwhich such occupations andemployment were carried on. When anexecutive officer or significant employeehas been employed by the issuer for lessthan five years, a brief explanation mustbe included as to the nature of theresponsibilities undertaken by theindividual in prior positions to provideadequate disclosure of this priorbusiness experience. What is required isinformation relating to the level of the

employee’s professional competence,which may include, depending uponthe circumstances, such specificinformation as the size of the operationsupervised.

(d) Involvement in certain legalproceedings. Describe any of thefollowing events which occurred duringthe past five years and which arematerial to an evaluation of the abilityor integrity of any director, personnominated to become a director orexecutive officer of the issuer:

(1) A petition under the federalbankruptcy laws or any state insolvencylaw was filed by or against, or areceiver, fiscal agent or similar officerwas appointed by a court for thebusiness or property of such person, orany partnership in which he wasgeneral partner at or within two yearsbefore the time of such filing, or anycorporation or business association ofwhich he was an executive officer at orwithin two years before the time of suchfiling; or

(2] Such person was convicted in acriminal proceeding (excluding trafficviolations and other minor offenses).

Item 11. Compensation of Directors andExecutive Officers

(a) Provide, in substantially thetabular format indicated, the annualcompensation of each of the threehighest paid persons who wereexecutive officers or directors during theissuer’s last completed fiscal year.

Name Capacities in which compensation was received comation comtion comtion

(b) Provide the aggregate annualcompensation of the issuer’s directors asa group for the issuer’s last completedfiscal year. Specify the total number ofdirectors in the group.

(c) For Tier 1 offerings, the annualcompensation of the three highest paidpersons who were executive officers ordirectors and the aggregate annualcompensation of the issuer’s directorsmay be provided as a group, rather thanas specified in paragraphs (a) and (b) ofthis item. In such case, issuers mustspecify the total number of persons inthe group.

(d) Briefly describe all proposedcompensation to be made in the futurepursuant to any ongoing plan orarrangement to the individuals specified

in paragraphs (a) and (b) of this item.The description must include asummary of how each plan operates,any performance formula or measure ineffect (or the criteria used to determinepayment amounts), the time periodsover which the measurements ofbenefits will be determined, paymentschedules, and any recent materialamendments to the plan. Informationneed not be included with respect toany group life, health, hospitalization,or medical reimbursement plans that donot discriminate in scope, terms oroperation in favor of executive officersor directors of the issuer and that areavailable generally to all salariedemployees.

Instructions to Item ii:

1. In case of compensation paid or tobe paid otherwise than in cash, if it isimpracticable to determine the cashvalue thereof, state in a note to the tablethe nature and amount thereof

2. This item is to be answered on anaccrual basis if practicable; if not soanswered, state the basis used.

Item 12. Security Ownership ofManagement and CertainSecurilyholders

(a) Include the information specifiedin paragraph (b) of this item as of themost recent practicable date (stating thedate used), in substantially the tabularformat indicated, with respect to votingsecurities beneficially owned by:

(1) all executive officers and directorsas a group, individually naming each



director or executive officer who (2) any other securityholder who calculated if the issuer were subject tobeneficially owns more than 10% of any beneficially owns more than 10% of any Rule 13d—3(d)(1) of the Securitiesclass of the issuer’s voting securities; class of the issuer’s voting securities as Exchange Act of 1934.

such beneficial ownership would be (b) Beneficial Ownership Table:

Name and address of Amount and nature of Amount and nature ofbeneficial ownership I Percent of class (3)Title of class beneficial owner(1) beneficial ownership acquirablef2)

(1) The address given in this colunmmay be a business, mailing, orresidential address. The address may beincluded in an appropriate footnote tothe table rather than in this column.

(2) This column must include theamount of equity securities eachbeneficial owner has the right to acquireusing the manner specified in Rule 13d—3(d)(1) of the Securities Exchange Act of1934. An appropriate footnote must beincluded if the column heading does notsufficiently describe the circumstancesupon which such securities could beacquired.

(3) This column must use the amountscontained in the two preceding columnsto calculate the percent of class ownedby such beneficial owner.

Item 13. Interest of Management andOthers in Certain Transactions

(a) Describe briefly any transactions orany currently proposed transactionsduring the issuer’s last two completedfiscal years and the current fiscal year,to which the issuer or any of itssubsidiaries was or is to be a participantand the amount involved exceeds$50,000 for Tier 1 or the lesser of$120,000 and one percent of the averageof the issuer’s total assets at year end forthe last two completed fiscal years forTier 2, and in which any of thefollowing persons had or is to have adirect or indirect material interest,naming the person and stating his or herrelationship to the issuer, the nature ofthe person’s interest in the transactionand, where practicable, the amount ofsuch interest:

(1) Any director or executive officer ofthe issuer;

(2) Any nominee for election as adirector;

(3) Any securityholder named inanswer to Item 12(a)(2);

(4) If the issuer was incorporated ororganized within the past three years,any promoter of the issuer; or

(5) Any immediate family member ofthe above persons. An “immediatefamily member” of a person means suchperson’s child, stepchild, parent,stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or

any person (other than a tenant oremployee) sharing such person’shousehold.

Instructions to Item 13(a):1. For purposes of calculating the

amount of the transaction describedabove, all periodic installments in thecase of any lease or other agreementproviding for periodic payments must beaggregated to the extent they occurredwithin the time period described in thisitem.

2. No information need be given inanswer to this item as to any transactionwhere:

(a) The rates of charges involved inthe transaction are determined bycompetitive bids, or the transactioninvolves the rendering of services as acommon or contract carrier at rates orcharges fixed in conformity with law orgovernmental authority;

(b) The transaction involves servicesas a bank depositary offunds, transferagent, registrar, trustee under a trustindenture, or similar services;

Ic) The interest of the specified personarises solely from the ownership ofsecurities of the issuer and the specifiedperson receives no extra or specialbenefit not shared on a pro-rata basis byall of the holders of securities of theclass.

3. This item calls for disclosure ofindirect as well as direct materialinterests in transactions. A person whohas a position or relationship with afirm, corporation, or other entity whichengages in a transaction with the issueror its subsidiaries may have an indirectinterest in such transaction by reason ofthe position or relationship. However, aperson is deemed not to have a materialindirect interest in a transaction withinthe meaning of this item where:

(a) the interest arises only (i) from theperson’s position as a director ofanother corporation or organization(other than a partnership) that is a partyto the transaction, or (ii) from the director indirect ownership by the person andall other persons specified inparagraphs (1) through (5) of this item,in the aggregate, of less than a 10percent equity interest in another person(other than a partnership) that is a party

to the transaction, or (iii) from both suchposition and ownership;

(b) the interest arises only from theperson’s position as a limited partner ina partnership in which the person andall other persons specified inparagraphs (1) through (5) of this itemhad an interest of less than 10 percent;or

(c) the interest of the person arisessolely from the holding of an equityinterest (unless the equity interestconfers management rights similar to ageneral partner interest) or a creditorinterest in another person that is a partyto the transaction with the issuer or anyof its subsidiaries and the transaction isnot material to the other person.

4. Include the name of each personwhose interest in any transaction isdescribed and the nature of therelationships by reason of which suchinterest is required to be described. Theamount of the interest of any specifiedperson must be computed withoutregard to the amount of the profit or lossinvolved in the transaction. Where it isnot practicable to state the approximateamount of the interest, the approximateamount involved in the transactionmust be disclosed.

5. Information must be included as toany material underwriting discountsand commissions upon the sale ofsecurities by the issuer where any of thespecified persons was or is to be aprincipal underwriter or is a controllingperson, or member, of a firm which wasor is to be a principal underwriter.Information need not be givenconcerning ordinary management feespaid by underwriters to a managingunderwriter pursuant to an agreementamong underwriters, the parties towhich do not include the issuer or itssubsidiaries.

6. As to any transaction involving thepurchase or sale of assets by or to anyissuer or any subsidiary, otherwise thanin the ordinary course of business, statethe cost of the assets to the purchaserand, if acquired by the seller within twoyears before the transaction, the cost tothe seller.

7. Information must be included inanswer to this item with respect totransactions not excluded above which



involve compensation from the issuer orits subsidiaries, directly or indirectly, toany of the specified persons for servicesin any capacity unless the interest ofsuch persons arises solely from theownership individually and in theaggregate of less than 10 percent of anyclass of equity securities of anothercorporation furnishing the services tothe issuer or its subsidiaries.

(b) If any expert named in the offeringstatement as having prepared orcertified any part of the offeringstatement was employed for suchpurpose on a contingent basis or, at thetime of such preparation or certificationor at any time thereafter, had a materialinterest in the issuer or any of itsparents or subsidiaries or was connectedwith the issuer or any of its subsidiariesas a promoter, underwriter, votingtrustee, director, officer or employee,describe the nature of such contingentbasis, interest or connection.

Item 14. Securities Being Offered

(a) If capital stock is being offered,state the title of the class and furnish thefollowing information regarding allclasses of capital stock outstanding:

(1) Outline briefly: (i) dividend rights;(ii) voting rights; (iii) liquidation rights;(iv) preemptive rights; (v) conversionrights; (vi) redemption provisions; (vii)sinking fund provisions; (viii) liabilityto further calls or to assessment by theissuer; (ix) any classification of theBoard of Directors, and the impact ofclassification where cumulative votingis permitted or required; (x) restrictionson alienability of the securities beingoffered; (xi) any provisiondiscriminating against any existing orprospective holder of such securities asa result of such securityholder owninga substantial amount of securities; and(xii) any rights of holders that may bemodified otherwise than by a vote of amajority or more of the sharesoutstanding, voting as a class.

(2) Briefly describe potentialliabilities imposed on securityholdersunder state statutes or foreign law, forexample, to employees of the issuer,unless such disclosure would beimmaterial because the financialresources of the issuer or other factorsare such as to make it unlikely that theliability will ever be imposed.

(3) If preferred stock is to be offeredor is outstanding, describe briefly anyrestriction on the repurchase orredemption of shares by the issuer whilethere is any arrearage in the payment ofdividends or sinking fund installments.If there is no such restriction, so state.

(b) If debt securities are being offered,outline briefly the following:

(1) Provisions with respect to interest,conversion, maturity, redemption,amortization, sinking fund orretirement.

(2) Provisions with respect to the kindand priority of any lien securing theissue, together with a brief identificationof the principal properties subject tosuch lien.

(3) Material affirmative and negativecovenants.

Instruction to Item 14(b):In the case of secured debt there must

be stated: (i) the approximate amount ofunbonded property available for useagainst the issuance of bonds, as of themost recent practicable date, and (ii)whether the securities being issued areto be issued against such property,against the deposit of cash, orotherwise.

(c) If securities described are to beoffered pursuant to warrants, rights, orconvertible securities, state briefly:

(1) the amount of securities issuableupon the exercise or conversion of suchwarrants, convertible securities orrights;

(2) the period during which and theprice at which the warrants, convertiblesecurities or rights are exercisable;

(3) the amounts of warrants,convertible securities or rightsoutstanding; and

(4) any other material terms of suchsecurities.

(d) In the case of any other kind ofsecurities, include a brief descriptionwith comparable information to thatrequired in (a), (b) and (c) of Item 14.

Part f/S

(a) General Rules

(1) The appropriate financialstatements set forth below of the issuer,or the issuer and its predecessors or anybusinesses to which the issuer is asuccessor must be filed as part of theoffering statement and included in theoffering circular that is distributed toinvestors.

(2) Unless the issuer is a Canadiancompany, financial statements must beprepared in accordance with generallyaccepted accounting principles in theUnited States (US GAAP). If the issueris a Canadian company, such financialstatements must be prepared inaccordance with either US GAAP orInternational Financial ReportingStandards (IFRS) as issued by theInternational Accounting StandardsBoard (IASB). If the financial statementscomply with IFRS, such compliancemust be explicitly and unreservedlystated in the notes to the financialstatements and if the financialstatements are audited, the auditor’s

report must include an opinion onwhether the financial statementscomply with IFRS as issued by theIASB.

(3) The issuer may elect to delaycomplying with any new or revisedfinancial accounting standard until thedate that a company that is not an issuer(as defined under section 2(a) of theSarbanes-Oxley Act of 2002 (15 U.S.C.7201(a)) is required to comply with suchnew or revised accounting standard, ifsuch standard also applies to companiesthat are not issuers. Issuers electingsuch extension of time accommodationmust disclose it at the time the issuerfiles its offering statement and apply theelection to all standards. Issuers electingnot to use this accommodation mustforgo this accommodation for allfinancial accounting standards and maynot elect to rely on this accommodationin any future filings.

(b) Financial Statements for Tier 1Offerings

(1) The financial statements preparedpursuant to this paragraph (b), including(b)(7), need not be prepared inaccordance with Regulation S—X.

(2) The financial statements preparedpursuant to paragraph (b), including(b)(7), need not be audited. If thefinancial statements are not audited,they shall be labeled as “unaudited”.However, if an audit of these financialstatements is obtained for otherpurposes and that audit was performedin accordance with either U.S. generallyaccepted auditing standards or theStandards of the Public CompanyAccounting Oversight Board by anauditor that is independent pursuant toeither the independence standards ofthe American Institute of CertifiedPublic Accountants (AICPA) or Rule 2—01 of Regulation S—X, those auditedfinancial statements must be filed, andan audit opinion complying with Rule2—02 of Regulation S—X must be filedalong with such financial statements.The auditor may, but need not, beregistered with the Public CompanyAccounting Oversight Board.

(3) Consolidated Balance Sheets. Ageof balance sheets at filing and atqualification:

(A) If the filing is made, or theoffering statement is qualified, morethan three months but no more thannine months after the most recentlycompleted fiscal year end, include abalance sheet as of the two mostrecently completed fiscal year ends.

(B) If the filing is made, or the offeringstatement is qualified, more than ninemonths after the most recentlycompleted fiscal year end, include abalance sheet as of the two most



recently completed fiscal year ends andan interim balance sheet as of a date noearlier than six months after the mostrecently completed fiscal year end.

(C) If the filing is made, or the offeringstatement is qualified, within threemonths after the most recentlycompleted fiscal year end, include abalance sheet as of the two fiscal yearends preceding the most recentlycompleted fiscal year end and aninterim balance sheet as of a date noearlier than six months after the date ofthe most recent fiscal year end balancesheet that is required.

(D) If the filing is made, or the offeringstatement is qualified, during the periodfrom inception until three months afterreaching the annual balance sheet datefor the first time, include a balancesheet as of a date within nine months offiling or qualification.

(4) Statements of comprehensiveincome, cash flows, and changes instockholders’ equity. File consolidatedstatements of income, cash flows, andchanges in stockholders’ equity for eachof the two fiscal years preceding thedate of the most recent balance sheetbeing filed or such shorter period as theissuer has been in existence. If aconsolidated interim balance sheet isrequired by (b)(3) above, consolidatedinterim statements of income and cashflows shall be provided and must coverat least the first six months of theissuer’s fiscal year and thecorresponding period of the precedingfiscal year.

(5) Interim financial statements.Interim financial statements may becondensed as described in Rule 8—03(a)of Regulation S—X. The interim incomestatements must be accompanied by astatement that in the opinion ofmanagement all adjustments necessaryin order to make the interim financialstatements not misleading have beenincluded.

(6) Oil and Gas Producing Activities.Issuers engaged in oil and gas producingactivities must follow the financialaccounting and reporting standardsspecified in Rule 4—10 of RegulationS—x.

(7) Financial Statements of OtherEntities. The circumstances describedbelow may require you to file financialstatements of other entities in theoffering statement. The financialstatements of other entities must bepresented for the same periods as if theother entity was the issuer as describedabove in paragraphs (b)(3) and (b114)unless a shorter period is specified bythe rules below. The financial statementof other entities shall follow the sameaudit requirement as paragraph (b)(2) ofthis Part F/S.

(i) Financial Statements of Guarantorsand Issuers of Guaranteed Securities.Financial statements of a subsidiary thatissues securities guaranteed by theparent or guarantees securities issued bythe parent must be presented asrequired by Rule 3—10 of Regulation 5—x.

(ii) Financial Statements of AffiliatesWhose Securities Collateralize anIssuance. Financial statements for anissuer’s affiliates whose securitiesconstitute a substantial portion of thecollateral for any class of securitiesbeing offered must be presented asrequired by Rule 3—16 of Regulation 5—x.

(iii) Financial Statements ofBusinesses Acquired or to be Acquired.File the financial statements required byRule 8—04 of Regulation S—X.

(iv) Pro Forma Financial Information.If financial statements are presentedunder paragraph (b)(7)(iii) above, filepro forma information showing theeffects of the acquisition as described inRule 8—05 of Regulation S—X.

(v) Real Estate Operations Acquiredor to be Acquired. File the financialinformation required by Rule 8—06 ofRegulation S—X.

Instructions to paragraph (b) in PartF/S:

1. Issuers should refer to Rule257(b)(2) to determine whether a specialfinancial report will be required afterqualification of the offering statement.

2. If the last day that the financialstatements included in the offeringstatement can be accepted, according tothe age requirements of this item fallson a Saturday, Sunday, or holiday, suchoffering statement may be filed on thefirst business day following the last dayof the specified period.

3. As an alternative, an issuer may—but need not—elect to comply with theprovisions of paragraph (c).

(c) Financial Statement Requirementsfor Tier 2 Offerings

(1) In addition to the general rules inparagraph (a), provide the financialstatements required by paragraph (b) ofthis Part F/S, except the following rulesshould be followed in the preparation ofthe financial statements:

(1) The issuer and, when applicable,other entities for which financialstatements are required, must complywith Article 8 of Regulation S—X, as ifit was conducting a registered offeringon Form S—i, except the age of interimfinancial statements may followparagraphs (b)(3)—(4) of this Part F/S.

(ii) Audited financial statements arerequired for Tier 2 offerings for theissuer and, when applicable, forfinancial statements of other entities.

However, interim financial statementsmay be unaudited.

(iii) The audit must be conducted inaccordance with either U.S. GenerallyAccepted Auditing Standards or thestandards of the Public CompanyAccounting Oversight Board (UnitedStates) and the report and qualificationsof the independent accountant shallcomply with the requirements of Article2 of Regulation S—X. Accounting firmsconducting audits for the financialstatements included in the offeringcircular may, but need not, be registeredwith the Public Company AccountingOversight Board.

PART Ill—EXHIBITS

Item 16. Index to Exhibits

(a) An exhibits index must bepresented at the beginning of Part III.

(b) Each exhibit must be listed in theexhibit index according to the numberassigned tO it under Item 17 below.

(c) For incorporation by reference,please refer to General Instruction III ofthis Form.

Item 17. Description of Exhibits

As appropriate, the followingdocuments must be filed as exhibits tothe offering statement.

1. Underwriting agreement—Eachunderwriting contract or agreement witha principal underwriter or letterpursuant to which the securities are tobe distributed; where the terms have yetto be finalized, proposed formats may beprovided.

2. Charter and bylaws—The charterand bylaws of the issuer or instrumentscorresponding thereto as currently ineffect and any amendments thereto.

3. Instruments defining the rights ofsecurityholders—

(a) All instruments defining the rightsof any holder of the issuer’s securities,including but not limited to (i) holdersof equity or debt securities being issued;(ii) holders of long-term debt of theissuer, and of all subsidiaries for whichconsolidated or unconsolidatedfinancial statements are required to befiled.

(b) The following instruments neednot be filed if the issuer agrees to filethem with the Commission uponrequest: (i) instruments defining therights of holders of long-term debt of theissuer and all of its subsidiaries forwhich consolidated financial statementsare required to be filed if such debt isnot being issued pursuant to thisRegulation A offering and the totalamount of such authorized issuancedoes not exceed 5% of the total assetsof the issuer and its subsidiaries on aconsolidated basis; (ii) any instrument



with respect to a class of securities thatis to be retired or redeemed before theissuance or upon delivery of thesecurities being issued pursuant to thisRegulation A offering and appropriatesteps have been taken to assure suchretirement or redemption; and (iii)copies of instruments evidencing scripcertificates or fractions of shares.

4. Subscription agreement—The formof any subscription agreement to beused in connection with the purchase ofsecurities in this offering.

5. Voting trust agreement—Anyvoting trust agreements andamendments.

6. Material contracts(a) Every contract not made in the

ordinary course of business that ismaterial to the issuer and is to beperformed in whole or in part at or afterthe filing of the offering statement orwas entered into not more than twoyears before such filing. Only contractsneed be filed as to which the issuer orsubsidiary of the issuer is a party or hassucceeded to a party by assumption orassignment or in which the issuer orsuch subsidiary has a beneficial interest.Schedules (or similar attachments) tomaterial contracts may be excluded ifnot material to an investment decisionor if the material information containedin such schedules is otherwise disclosedin the agreement or the offeringstatement. The material contract filedmust contain a list briefly identifyingthe contents of all omitted schedules,together with an agreement to furnishsupplementally a copy of any omittedschedule to the Commission uponrequest.

(b) If the contract is such as ordinarilyaccompanies the kind of businessconducted by the issuer and itssubsidiaries, it is made in the ordinarycourse of business and need not be filedunless it falls within one or more of thefollowing categories, in which case itmust be filed except where immaterialin amount or significance: (1) anycontract to which directors, officers,promoters, voting trustees,securityholders named in the offeringstatement, or underwriters are parties,except where the contract merelyinvolves the purchase or sale of currentassets having a determinable marketprice, at such market price; (ii) anycontract upon which the issuer’sbusiness is substantially dependent, asin the case of continuing contracts tosell the major part of the issuer’sproducts or services or to purchase themajor part of the issuer’s requirementsof goods, services or raw materials orany franchise or license or otheragreement to use a patent, formula,trade secret, process or trade name upon

which the issuer’s business depends toa material extent; (iii) any contractcalling for the acquisition or sale of anyproperty, plant or equipment for aconsideration exceeding 15% of suchfixed assets of the issuer on aconsolidated basis; or (iv) any materiallease under which a part of the propertydescribed in the offering statement isheld by the issuer.

(c) Any management contract or anycompensatory plan, contract orarrangement including, but not limitedto, plans relating to options, warrants orrights, pension, retirement or deferredcompensation or bonus, incentive orprofit sharing (or if not set forth in anyformal document, a written description)is deemed material and must be filedexcept for the following: (i) ordinarypurchase and sales agency agreements;(ii) agreements with managers of storesin a chain organization or similarorganization; (iii) contracts providingfor labor or salesperson’s bonuses orpayments to a class of securityholders,as such; (iv) any compensatory plan,contract or arrangement that pursuant toits terms is available to employeesgenerally and that in operation providesfor the same method of allocation ofbenefits between management and non-management participants.

7. Plan of acquisition, reorganization,arrangement, liquidation, orsuccession—Any material plan ofacquisition, disposition, reorganization,readjustment, succession, liquidation orarrangement and any amendmentsthereto described in the offeringstatement. Schedules (or similarattachments) to these exhibits must notbe filed unless such schedules containinformation that is material to aninvestment decision and that is nototherwise disclosed in the agreement orthe offering statement. The plan filedmust contain a list briefly identifyingthe contents of all omitted schedules,together with an agreement to furnishsupplementally a copy of any omittedschedule to the Commission uponrequest.

8. Escrow agreements—Any escrowagreement or similar arrangement whichhas been executed in connection withthe Regulation A offering.

9. Letter re change in certifyingaccountant—A letter from the issuer’sformer independent accountantregarding its concurrence ordisagreement with the statements madeby the issuer in the current reportconcerning the resignation or dismissalas the issuer’s principal accountant.

10. Power of attorney—If any name issigned to the offering statementpursuant to a power of attorney, signedcopies of the power of attorney must be

filed. Where the power of attorney iscontained elsewhere in the offeringstatement or documents filed therewith,a reference must be made in the indexto the part of the offering statement ordocument containing such power ofattorney. In addition, if the name of anyofficer signing on behalf of the issuer issigned pursuant to a power of attorney,certified copies of a resolution of theissuer’s board of directors authorizingsuch signature must also be filed. Apower of attorney that is filed with theCommission must relate to a specificfiling or an amendment thereto. Apower of attorney that confers generalauthority may not be filed with theCommission.

11. Consents—(a) Experts: The written consent of (i)

any accountant, counsel, engineer,geologist, appraiser or any personswhose profession gives authority to astatement made by them and who isnamed in the offering statement ashaving prepared or certified any part ofthe document or is named as havingprepared or certified a report orevaluation whether or not for use inconnection with the offering statement;(ii) the expert that authored any portionof a report quoted or summarized assuch in the offering statement, expresslystating their consent to the use of suchquotation or summary; (iii) any personswho are referenced as having reviewedor passed upon any information in theoffering statement, and that suchinformation is being included on thebasis of their authority or in relianceupon their status as experts.

(h) All written consents must be datedand signed.

12. Opinion re legality—An opinionof counsel as to the legality of thesecurities covered by the OfferingStatement, indicating whether they willwhen sold, be legally issued, fully paidand non-assessable, and if debtsecurities, whether they will be bindingobligations of the issuer.

13. “Testing the waters” materials—Any written communication orbroadcast script used under theauthorization of Rule 255. Suchmaterials need not be filed if they aresubstantively the same as materialspreviously filed with the offeringstatement.

14. Appointment of agent for serviceof process—A Canadian issuer must fileForm F—X.

15. Additional exhibits—(a) Any non-public, draft offering

statement previously submittedpursuant to Rule 252(d) and any related,non-public correspondence submittedby or on behalf of the issuer.



(b) Any additional exhibits which theissuer may wish to file, which must beso marked as to indicate clearly thesubject matters to which they refer.

SIGNATURES

Pursuant to the requirements ofRegulation A, the issuer certifies that ithas reasonable grounds to believe that itmeets all of the requirements for filingon Form 1—A and has duly caused thisoffering statement to be signed on itsbehalf by the undersigned, thereuntoduly authorized, in the City of

________

State of , on

________

(dote).(Exact name of issuer as specified in its charter)_______________

________________________________

By (Signature and Title)

__________

This offering statement has been signed bythe following persons in the capacities andon the dates indicated.(Signature)_______________

_________________

(Title)______________

___________________

(Date)________________

_________________

Instructions to Signatures:1. The offeringstatement must be

signed by the issuer, its principalexecutive officer, principal financialofficer, principal accounting officer, anda majority of the members of its boardof directors or other governing body. Ifa signature is by a person on behalf ofany other person, evidence of authorityto sign must be filed with the offeringstatement, except where an executiveofficer signs on behalf of the issuer.

2. The offering statement must besigned using a typed signature. Eachsignatory to the filing must alsomanually sign a signature page or otherdocument authenticating,acknowledging or otherwise adoptinghis or her signature that appears in thefiling. Such document must be executedbefore or at the time the filing is madeand must be retained by the issuer fora period offive years. Upon request, theissuer must furnish to the Commissionor its staff a copy of any or alldocuments retained pursuant to thissection.

3. The name and title of each personsigning the offering statement must betyped or printed beneath the signature.

Note: The text of Form 1—A will not appearin the Code of Federal Regulations.

• 11. Revise § 239.91 to read as follows:

§ 239.97 Form 1—K.

This form shall be used for filingannual reports under Regulation A( 230.251—230.263 of this chapter).

• 12. Add Form i—K (referenced in§ 239.91) to read as follows:

UNITED STATES

SECURITIES AND EXCHANGECOMMISSION


FORM 1-K


A. Rules as to Use of Form 1—K.(1) This Form shall be used for annual

reports pursuant to Rule 257(b)(1) ofRegulation A ( 230.25 1—230.263).

(2) Annual reports on this Form shallbe filed within 120 calendar days afterthe end of the fiscal year covered by thereport.

(3) This Form also shall be used forspecial financial reports filed pursuantto Rule 257(b)(2)(i)(A) of Regulation A.Such special financial reports shall befiled and signed in the manner set forthin this Form, but otherwise need onlyprovide Part I and the financialstatements required by Rule257(b)(2)(i)(A). Special financial reportsfiled using this Form shall be filedwithin 120 calendar days after thequalification date of the offeringstatement.

B. Preparation of Report.

(1) Regulation A contains certaingeneral requirements that are applicableto reports on any form, includingamendments to reports. These generalrequirements should be carefully readand observed in the preparation andfiling of reports on this form.

(2) This Form is not to be used as ablank form to be filled in, but only asa guide in the preparation of the report.

(3) Except where information isrequired to be given for the fiscal yearor as of a specified date, it shall be givenas of the latest date reasonablypracticable.

(4) References in this Form to theitems in Farm 1—A are to the items setforth in Part II and Part III of Form 1—A, not Part I.

(5) In addition to the informationexpressly required to be included in thisForm, there shall be added such furthermaterial information, if any, as may benecessary to make the requiredstatements, in light of the circumstancesunder which they are made, notmisleading.

C. Signature and Filing of Report.(1) The report must be filed with the

Commission in electronic format bymeans of the Commission’s ElectronicData Gathering, Analysis and RetrievalSystem (“EDGAR”) in accordance withthe EDGAR rules set forth in RegulationS—T (17 CFR part 232).

(2) The report must be signed by theissuer, its principal executive officer,

principal financial officer, principalaccounting officer, and at least amajority of the members of its board ofdirectors or other governing body. If asignature is by a person on behalf of anyother person, evidence of authority tosign must be filed with the report,except where an executive officer signson behalf of the issuer.

(3) The report must be signed using atyped signature. Each signatory to thefiling must also manually sign asignature page or other documentauthenticating, acknowledging orotherwise adopting his or her signaturethat appears in the filing. Suchdocument must be executed before or atthe time the filing is made and must beretained by the issuer for a period of fiveyears. Upon request, the issuer mustfurnish to the Commission or its staff acopy of any or all documents retainedpursuant to this paragraph.

D. Incorporation by Reference andCross-Referencing.

(1) An issuer may incorporate byreference to other documents previouslysubmitted or filed on EDGAR. Cross-referencing within the report is alsoencouraged to avoid repetition ofinformation. For example, you mayrespond to an item of this Form byproviding a cross-reference to thelocation of the information in thefinancial statements, instead ofrepeating such information.Descriptions of where the informationincorporated by reference or cross-referenced can be found must bespecific and must clearly identify therelevant document and portion thereofwhere such information can be found.For exhibits incorporated by reference,this description must be noted in theexhibits index for each relevant exhibit.All descriptions of where informationincorporated by reference can be foundmust be accompanied by a separatehyperlink to the incorporated documenton EDGAR. A hyperlink need notremain active after the filing of thereport, except that amendments to thereport must update any hyperlinksreferred to in the amendment that areinactive.

(2) Reference may not be made to anydocument if the portion of suchdocument containing the pertinentinformation includes an incorporationby reference to another document.Incorporation by reference to documentsnot available on EDGAR is notpermitted. Information shall not beincorporated by reference or cross-referenced in any case where suchincorporation would render thestatement or report incomplete, unclear,or confusing. Incorporating information



into the financial statements fromelsewhere is not permitted.

(3) If any substantive modification hasoccurred in the text of any documentincorporated by reference since suchdocument was filed, the issuer must filewith the reference a statementcontaining the text and date of suchmodification.

PART I

NOTIFICATION

The following information must beprovided in the XML-based portion ofForm 1—K available through the EDGARportal and must be completed orupdated before uploading each offeringstatement or amendment thereto. Theformat of Part I shown below may differfrom the electronic version available onEDGAR. The electronic version of PartI will allow issuers to attach Part II forfiling by means of EDGAR. All items

must be addressed, unless otherwiseindicated.* * * * *

This Form 1—K is to provide an El AnnualReport OR El Special Financial Report for thefiscal year ended____________Exact name of issuer as specified in theissuer’s charter:

______________

Jurisdiction of incorporation?organization:

____________

I.R.S. Employer IdentificationNumber:___________Address of Principal Executive Offices:

Phone: ()

____________________________

Title of each class of securities issued pursuant to Regulation A:

______________________

Summary Information Rearding PriorOfferings and Proceeds

The following information must beprovided for any Regulation A offeringthat has terminated or completed priorto the filing of this Form 1—K, unlesssuch information has been previously

reported in a manner permissible underRule 257. If such information has beenpreviously reported, check this box[]and leave the rest of Part I blank.Commission file Number of the offeringstatement:______________Date of qualification of the offeringstatement:_____________Date of commencement of theoffering: —

Amount of securities qualified to besold in the offering:____________Amount of securities sold in theoffering:____________Price per security: S_____________The portion of aggregate salesattributable to securities sold on behalfof

the issuer:

$

_______________

The portion of aggregate salesattributable to securities sold on behalfof selling securityholders:$_______________

Fees in connection with this offeringand names of service providers:

UnderwritersSales CommissionsFinders’ feesAudit:LegalPromotersBlue Sky Comp1iance

Name of Service Provider Fees

$$$

CRD Number of any broker or dealerlisted:

_________

Net proceeds to the issuer:$_____________

Clarification of responses (ifnecessary):_____________

PART II

INFORMATION TO BE INCLUDED INREPORT

Item 1. Business

Set forth the information required byItem 7 of Form 1—A.

Item 2. Management’s Discussion andAnalysis of Financial Condition andResults of Operations

Set forth the information required byItem 9(a), (b) and (d) of Form 1—A forthe most recent two completed fiscalyears.

Item 3. Directors and Officers

Set forth the information required byItems 10 and 11 of Form 1—A.

Item 4. Security Ownership ofManagement and CertainSecurityholders

Set forth the information required byItem 12 of Form 1—A.

Item 5. Interest of Management andOthers in Certain Transactions

Set forth the information required byItem 13 of form 1—A.

Item 6. Other Information

Set forth any information required tobe disclosed in a report on Form 1—Uduring the last six months of the fiscalyear covered by this Form 1—K, but notreported, whether or not otherwiserequired by this Form 1—K. If disclosureof such information is made under thisitem, it need not be repeated in a reporton Form 1—U that would otherwise berequired to be filed with respect to suchinformation or in a subsequent report onForm 1—U.

Item 7. Financial Statements

(a) The appropriate audited financialstatements set forth below of the issuer,or the issuer and its predecessors or anybusinesses to which the issuer is asuccessor must be filed as part of theForm 1—K.

(b) Unless the issuer is a Canadiancompany, financial statements must beprepared in accordance with generallyaccepted accounting principles in theUnited States (US GAAP). If the issueris a Canadian company, such financial

statements must be prepared inaccordance with either US GAAP orInternational Financial ReportingStandards (IfRS) as issued by theInternational Accounting StandardsBoard (IASB). If the financial statementscomply with IFRS, such compliancemust be explicitly and unreservedlystated in the notes to the financialstatements and the auditor’s report mustinclude an opinion on whether thefinancial statements comply with IfRSas issued by the IASB.

(c) The audit of the financialstatements must be conducted inaccordance with either U.S. GenerallyAccepted Auditing Standards or thestandards of the Public CompanyAccounting Oversight Board (UnitedStates) and the report and qualificationsof the independent accountant shallcomply with the requirements of Article2 of Regulation S—X. Accounting firmsconducting audits for the financialstatements may, but need not, beregistered with the Public CompanyAccounting Oversight Board.

(d) Balance Sheet. There shall be filedan audited consolidated balance sheetas of the end of each of the most recenttwo fiscal years.



(e) Statements of income, cash flows,and changes in stockholders’ equity.File audited consolidated statements ofincome, cash flows, and changes instockholders’ equity for each of the twofiscal years preceding the date of themost recent balance sheet being filed orsuch shorter period as the issuer hasbeen in existence.

(f) Oil and Gas Producing Activities.Issuers engaged in oil and gas producingactivities must follow the financialaccounting and reporting standardsspecified in Rule 4—10 of Regulation 5—x.

(g) Financial Statements of OtherEntities. The circumstances describedbelow may require you to file financialstatements of other entities. Thefinancial statements of other entitiesmust be presented for the same periodsas the issuer’s financial statementsdescribed above in paragraphs (d) and(e) unless a shorter period is specifiedby the rules below.

(1) Financial Statements ofGuarantors and Issuers of GuaranteedSecurities. Financial statements of asubsidiary that issues securitiesguaranteed by the parent or guaranteessecurities issued by the parent must bepresented as required by Rule 3—10 ofRegulation S—X.

(2) financial Statements of Affiliatest’Vhose Securities Collateralize anIssuance. Financial statements for anissuer’s affiliates whose securitiesconstitute a substantial portion of thecollateral for any class of securitiesbeing offered must be presented asrequired by Rule 3—16 of Regulation S—x.Item 8. Exhibits

(a) An exhibits index must bepresented immediately preceding thefirst signature page of the report.

(b) File, as exhibits to this Form, theexhibits required by Form 1—A, exceptfor the exhibits required by paragraphs1, 12, and 13 of Item 17.

SIGNATURES

Pursuant to the requirements ofRegulation A, the issuer has duly causedthis report to be signed on its behalf bythe undersigned, thereunto dulyauthorized.(Exact name of issuer as specified in its charter)


________________

DatePursuant to the requirements of Regulation

A, this report has been signed below by thefollowing persons on behalf of the issuer andin the capacities and on the dates indicated.By (Signature and Title)

________

—______

Date

By (Signature and Title)Date

_________________

Note: The text of form 1—K will not appearin the Code of Federal Regulations.

• 13. Add § 239.92 to read as follows:

§ 239.92 Form 1—SA.

This form shall be used for filingsemiannual reports under Regulation A( 230.251—230.263 of this chapter).• 14. Add Form 1—SA (referenced in§ 239.92) to read as follows:

UNITED STATES SECURITIES ANDEXCHANGE COMMISSION


FORM 1-SA

I SEMIANNUAL REPORTPURSUANT TO REGULATION A or

SPECIAL FINANCIAL REPORTPURSUANT TO REGULATION A

For the fiscal semiannual period ended

(Exact name of issuer as specified in itscharter)State or other jurisdiction of incorporation ororganization

__________________________________

(I.R.S. Employer Identification No.)

________

(Full mailing address of principal executiveoffices)(Issuer’s telephone number, including areacode)


A. Rules as to Use of form 1—SA.

(1) This Form shall be used forsemiannual reports pursuant to Rule257(b)(3) of Regulation A (S 230.251—230.263).

(2) Semiannual reports on this Formshall be filed within 90 calendar daysafter the end of the semiannual periodcovered by the report.

(3) This Form also shall be used forspecial financial reports filed pursuantto Rule 257(b)(2)(i)(B) of Regulation A.Such special financial reports shall befiled and signed in the maimer set forthin this Form, but otherwise need onlyprovide the cover page and financialstatements required by Rule257(b)(2)(i)(B). Special financial reportsfiled using this Form shall be filedwithin 90 calendar days after thequalification date of the offeringstatement.


(1) Regulation A contains certaingeneral requirements that are applicableto reports on any form, includingamendments to reports. These generalrequirements should be carefully readand observed in the preparation andfiling of reports on this Form.

(2) This Form is not to be used as ablank form to be filled in, but only asa guide in the preparation of the report.


C. Signature and Filing of Report.

(1) The report must be filed with theCommission in electronic format bymeans of the Commission’s ElectronicData Gathering, Analysis and RetrievalSystem (“EDGAR”) in accordance withthe EDGAR rules set forth in RegulationS—T (17 CFR part 232).

(2) The report must be signed by theissuer, its principal executive officer,principal financial officer and principalaccounting officer. If a signature is by aperson on behalf of any other person,evidence of authority to sign must befiled with the report, except where anexecutive officer signs on behalf of theissuer.

(3) The report must be signed using atyped signature. Each signatory to thefiling must also manually sign asignature page or other documentauthenticating, acknowledging orotherwise adopting his or her signaturethat appears in the filing. Suchdocument must be executed before or atthe time the filing is made and must beretained by the issuer for a period of fiveyears. Upon request, the issuer mustfurnish to the Commission or its staff acopy of any or all documents retainedpursuant to this paragraph.


(1) An issuer may incorporate byreference to other documents previouslysubmitted or filed on EDGAR. Cross-referencing within the report is alsoencouraged to avoid repetition ofinformation. For example, you mayrespond to an item of this Form byproviding a cross-reference to thelocation of the information in thefinancial statements, instead ofrepeating such information.Descriptions of where the informationincorporated by reference or cross-referenced can be found must bespecific and must clearly identify therelevant document and portion thereofwhere such information can be found.For exhibits incorporated by reference,this description must be noted in theexhibits index for each relevant exhibit.All such descriptions of whereinformation incorporated by referencecan be found must be accompanied by



a separate hyperlink to the incorporateddocument on EDGAR. A hyperlink neednot remain active after the filing of thereport, except that amendments to thereport must update any hyperlinksreferred to in the amendment that areinactive.

(2) Reference may not be made to anydocument if the portion of suchdocument containing the pertinentinformation includes an incorporationby reference to another document.Incorporation by reference to documentsnot available on EDGAR is notpermitted. Information shall not beincorporated by reference or cross-referenced in any case where suchincorporation would render thestatement or report incomplete, unclear,or confusing. Incorporating informationinto the financial statements fromelsewhere is not permitted.


INFORMATION TO BE INCLUDED INREPORT

Item 1. Management’s Discussion andAnalysis of financial Condition andResults of Operations

Set forth the information required byItem 9(a), (b), and (d) of Form 1—A forthe interim period for which financialstatements are required by Item 3 below.

Item 2. Other Information

Set forth any information required tobe disclosed in a report on Form 1—Uduring the semiannual period coveredby this Form 1—SA, but not reported,whether or not otherwise required bythis Form 1—SA. If disclosure of suchinformation is made under this item, itneed not be repeated in a report onForm 1—U that would otherwise berequired to be filed with respect to suchinformation or in a subsequent report onForm 1—U.

Item 3. Financial Statements

The appropriate financial statementsset forth below of the issuer, or theissuer and its predecessors or anybusinesses to which the issuer is asuccessor must be filed as part of theForm 1—SA.

Unless the issuer is a Canadiancompany, financial statements must beprepared on a consolidated basis inaccordance with generally acceptedaccounting principles in the UnitedStates (US GAAP). If the issuer is aCanadian company, such financialstatements must be prepared in

accordance with either US GAAP orInternational Financial ReportingStandards (IFRS) as issued by theInternational Accounting StandardsBoard (IASB). If the financial statementscomply with IFRS as issued by theIASB, such compliance must beexplicitly and unreservedly stated in thenotes to the financial statements.

The financial statements includedpursuant to this item may be condensed,unaudited, and are not required to bereviewed. For additional guidance onpresentation of the financial statementsrefer to Rule 8—03(a) of Regulation S—X.The financial statements must includethe following:

(a) An interim consolidated balancesheet as of the end of the six monthperiod covered by this report and abalance sheet as of the end of thepreceding fiscal year. An interimbalance sheet as of the end of thecorresponding six month interim periodof the preceding fiscal year need not beprovided unless necessary for anunderstanding of the impact of seasonalfluctuations on the issuer’s financialcondition.

(b) Interim consolidated statements ofincome must be provided for the sixmonth interim period covered by thisreport and for the corresponding periodof the preceding fiscal year. Incomestatements must be accompanied by astatement that in the opinion ofmanagement all adjustments necessaryin order to make the interim financialstatements not misleading have beenincluded.

(c) Interim statements of cash flowsmust be provided for the six monthinterim period covered by this reportand for the corresponding period of thepreceding fiscal year.

(d) Footnote and other disclosuresshould be provided as needed for fairpresentation and to ensure that thefinancial statements are not misleading.Refer to Rule 8—03(b) of Regulation 5—X for examples of disclosures that maybe needed.

(e) financial Statements ofGuarantors and Issuers of GuaranteedSecurities. Financial statements of asubsidiary that issues securitiesguaranteed by the parent or guaranteessecurities issued by the parent must bepresented as required by Rule 3—10 ofRegulation S—X, except that the periodspresented are those required by thisitem and the financial statements neednot be audited.

Item 4. Exhibits

(a) An exhibits index must bepresented immediately preceding thefirst signature page of the report.

(b) File, as exhibits to this Form, theexhibits required by Form 1—A, exceptfor the exhibits required by paragraphs1,12, and 13 of Item 17.

SIGNATURES

Pursuant to the requirements ofRegulation A, the issuer has duly causedthis report to be signed on its behalf bythe undersigned, thereunto dulyauthorized.(Exact name of issuer as specified in its charter)

By (Signature and Title)Date

Pursuant to the requirements of RegulationA, this report has been signed below by thefollowing persons on behalf of the issuer andin the capacities and on the dates indicated.By (Signature and Title)

_________________

DateBy (Signature and Title)Date

Note: The text of Form 1—SA will notappear in the Code of Federal Regulations.


§ 239.93 Form 1—U.This form shall be used for filing

current reports under Regulation A( 230.251—230.263 of this chapter).• 16. Add Form 1—U (referenced in§ 239.92) to read as follows:

UMTED STATES SECURITIES ANDEXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-U

CURRENT REPORT PURSUANT TOREGULATION A

Date of Report (Date of earliest event reported)

_______ _________________________

Exact name of issuer as specified in its charter)

State or other jurisdiction of incorporation ororganization

_______________________-


_______

(Full mailing address of principal executiveoffices)

(Issuer’s telephone number, including areacode)

___________________________________

Title of each class of securities issued pursuant to Regulation A:

_____________________


A. Rules as to Use of Form 1—U.

(1) This Form shall be used forcurrent reports pursuant to Rule257(b)(4) of Regulation A ( 230.251—230.263).

(2) A report on this Form is requiredto be filed, as applicable, upon theoccurrence of any one or more of theevents specified in Items 1—9 of thisForm. Unless otherwise specified, a


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules arid Regulations 21919

report is to be filed within four businessdays after occurrence of the event. If theevent occurs on a Saturday, Sunday, orholiday on which the Commission is notopen for business, then the fourbusiness day period shall begin to runon, and include, the first business daythereafter.

(3) If the issuer previously hasprovided substantially the sameinformation as required by this Form ina report required by Rule 257(b) ofRegulation A, the issuer need not makean additional report of the informationon this Form. To the extent that an itemcalls for disclosure of developmentsconcerning a previously reported eventor transaction, any information requiredin the new report or amendment aboutthe previously reported event ortransaction may be provided byincorporation by reference to thepreviously filed report, if a hyperlink tosuch report as filed with theCommission is included.

(4) Copies of agreements, amendmentsor other documents or instruments arenot required to be filed as exhibits to theForm 1—U unless specifically requiredby the applicable item. This instructiondoes not affect the requirement tootherwise file such agreements,amendments or other documents orinstruments, including as exhibits tooffering statements and periodic reportspursuant to the requirements ofRegulation A.


(1) Regulation A contains certaingeneral requirements which areapplicable to reports on any form,including amendments to reports. Thesegeneral requirements should becarefully read and observed in thepreparation and filing of reports on thisForm.

(2) This Form is not to be used as ablank form to be filled in, but only asa guide in the preparation of the report.Nevertheless, the report shall containthe number and caption of eachapplicable item, but the text of suchitem may be omitted. All items that arenot required to be answered in aparticular report may be omitted and noreference thereto need be made in thereport. All instructions should also beomitted.


C. Signature and Filing of Report.

(1) The report must be filed with theCommission in electronic format bymeans of the Commission’s ElectronicData Gathering, Analysis and RetrievalSystem (“EDGAR”) in accordance withthe EDGAR rules set forth in RegulationS—T (17 CFR part 232).

(2) The report must be signed by anofficer duly authorized to sign on behalfof the issuer. The report must be signedusing a typed signature. The signatory tothe filing must also manually sign asignature page or other documentauthenticating, acknowledging orotherwise adopting his or her signaturethat appears in the filing. Suchdocument must be executed before or atthe time the filing is made and must beretained by the issuer for a period of fiveyears. Upon request, the issuer mustfurnish to the Commission or its staff acopy of any or all documents retainedpursuant to this paragraph.


(1) An issuer may incorporate byreference to other documents previouslysubmitted or filed on EDGAR. Cross-referencing within the report is alsoencouraged to avoid repetition ofinformation. For example, you mayrespond to an item of this Form byproviding a cross-reference to thelocation of the information in anotheritem, instead of repeating suchinformation. Descriptions of where theinformation incorporated by referenceor cross-referenced can be found mustbe specific and must clearly identify therelevant document and portion thereofwhere such information can be found.For exhibits incorporated by reference,this description must be noted in theexhibits index for each relevant exhibit.All such descriptions of whereinformation incorporated by referencecan be found must be accompanied bya separate hyperlink to the incorporateddocument on EDGAR. A hyperlink neednot remain active after the filing of thereport, except that amendments to thereport must update any hyperlinksreferred to in the amendment that areinactive.

(2) Reference may not be made to anydocument if the portion of suchdocument containing the pertinentinformation includes an incorporationby reference to another document.Incorporation by reference to documentsnot available on EDGAR is notpermitted. Information shall not beincorporated by reference or cross-referenced in any case where suchincorporation would render thestatement or report incomplete, unclear,

or confusing. Incorporating informationinto any financial statements fromelsewhere is not permitted.


INFORMATION TO BE INCLUI)ED INTHE REPORT

Item 1. Fundamental Changes

(a) If the issuer has entered into orterminated a material definitiveagreement that has resulted in or wouldreasonably be expected to result in afundamental change to the nature of itsbusiness or plan of operations, disclosethe following information to the extentapplicable:

(1) the date on which the agreementwas entered into, amended, orterminated, the identity of the parties tothe agreement or amendment, and abrief description of any materialrelationship between the issuer or itsaffiliates and any of the parties (otherthan the relationship created by thematerial definitive agreement oramendment);

(2) a brief description of the materialterms and conditions of the agreement;

(3) a brief description of the materialcircumstances surrounding thetermination; and

(4) any material early terminationpenalties incurred by the issuer due toa termination.

(b) For purposes of this item, amaterial definitive agreement means anagreement that provides for obligationsthat are material to and enforceableagainst the issuer, or rights that arematerial to the issuer and enforceable bythe issuer against one or more otherparties to the agreement, in each casewhether or not subject to conditions.

(c) file any material definitiveagreement disclosed pursuant to thisitem as an exhibit to the report on thisForm.

Instructions to Item 1:1. A material definitive agreement

that is not made in the ordinary courseof business is not necessarily required tobe disclosed under this item if it doesnot result in, and ivould not reasonablybe expected to result in, a fundamentalchange to the nature of the issuer’sbusiness or plan of operations.

2. Without limiting the generality ofthe foregoing and solely for the purposesof this Item 1, a material definitiveagreement is deemed to result in afundamental change if it involves any ofthe following:



a. An acquisition transaction forwhich the purchase price, as defined byU.S. GAAF or IFRS, exceeds fifty-percent of the total consolidated assetsof the issuer as of the end of the mostrecently completed fiscal year. litheacquirer transferred assets to theacquiree than the carrying value ofthose assets should be excluded fromthe purchase price;

b. A merger, consolidation,acquisition or similar transaction thatrequires approval by the issuer’ssecurityh olders; or

c. Any contract upon which theissuer’s business is substantiallydependent, as in the case of continuingcontracts to sell the major part of theissuer’s products or services or topurchase the major part of the issuer’srequirements ofgoods, services or rawmaterials or anyfranchise or license orother agreement to use a patent,formula, trade secret, process or tradename upon which the issuer’s businessis substantially dependent.

3. An issuer must provide disclosureunder this item if the issuer succeeds asa party to the agreement or amendmentto the agreement by assumption orassignment [other than in connectionwith a merger or acquisition or similartransaction that is otherwise reportedpursuant to this item).

4. No disclosure under this item isrequired regarding the termination of amaterial definitive agreement if:

a. The agreement terminated on itsstated termination date, or as a result ofall parties completing their obligationsunder such agreement.

b. Only negotiations or discussionsregarding termination of a materialdefinitive agreement are beingconducted and the agreement has notbeen terminated.

c. The issuer believes in good faiththat the material definitive agreementhas not been terminated, unless theissuer has received a notice oftermination pursuant to the terms ofagreement.

Item 2. Bankruptcy or Receivership(a) If a receiver, fiscal agent or similar

officer has been appointed for an issueror its parent, in a proceeding under theU.S. Bankruptcy Code or in any otherproceeding under state, federal, orCanadian laws, in which a court orgovernmental authority has assumedjurisdiction over substantially all of theassets or business of the issuer or itsparent, or if such jurisdiction has beenassumed by leaving the existingdirectors and officers in possession butsubject to the supervision and orders ofa court or governmental authority,disclose the following information:

(1) the name or other identification ofthe proceeding;

(2) the identity of the court orgovernmental authority;

(3) the date that jurisdiction wasassumed; and

(4) the identity of the receiver, fiscalagent or similar officer and the date ofhis or her appointment.

(N If an order confirming a plan ofreorganization, arrangement orliquidation has been entered by a courtor governmental authority havingsupervision or jurisdiction oversubstantially all of the assets or businessof the issuer or its parent, disclose thefollowing:

(1) the identity of the court orgovernmental authority;

(2) the date that the order confirmingthe plan was entered by the court orgovernmental authority;

(3) a summary of the material featuresof the plan;

(4) the number of shares or other unitsof the issuer or its parent issued andoutstanding, the number reserved forfuture issuance in respect of claims andinterests filed and allowed under theplan, and the aggregate total of suchnumbers; and

(5) information as to the assets andliabilities of the issuer or its parent asof the date that the order confirming theplan was entered, or a date as closethereto as practicable.

Instruction to Item 2:The information called for in

paragraph (b)(5) of this item may bepresented in the form in which it wasfurnished to the court or governmentalauthority.

Item 3. Material Modification to Rightsof Securityholders

(a) If the constituent instrumentsdefining the rights of the holders of anyclass of securities of the issuer that wereissued pursuant to Regulation A havebeen materially modified, disclose thedate of the modification, the title of theclass of securities involved and brieflydescribe the general effect of suchmodification upon the rights of holdersof such securities.

(b) if the rights or benefits evidencedby any class of securities issuedpursuant to Regulation A have beenmaterially limited or qualified by theissuance or modification of any otherclass of securities by the issuer, brieflydisclose the date of the issuance ormodification, the general effect of theissuance or modification of such otherclass of securities upon the rights orbenefits of the holders of the securitiesissued pursuant to Regulation A.

Instruction to Item 3:Working capital restrictions and other

limitations upon the payment of

dividends must be reported pursuant tothis item.

Item 4. Changes in Issuer’s CertifyingAccountant

(a) If an independent accountant whowas previously engaged as the principalaccountant to audit the issuer’s financialstatements, or an independentaccountant upon whom the principalaccountant expressed reliance in itsreport regarding a significant subsidiary,resigns (or indicates that it declines tostand for re-appointment aftercompletion of the current audit) or isdismissed, disclose the information thatwould be required under Item 304(a)(1)of Regulation S—K (17 CFR229.304(a)(1)), including compliancewith Item 304(a)(3) of Regulation S—K(17 CFR 229.304(a)(3)) if the issuer werea “registrant.”

(5) if a new independent accountanthas been engaged as either the principalaccountant to audit the issuer’s financialstatements or as an independentaccountant on whom the principalaccountant is expected to expressreliance in its report regarding asignificant subsidiary, the issuer mustdisclose the information that would berequired by Item 304(a)(2) of RegulationS—K (17 CFR 229.304(a)(2)) if the issuerwere a “registrant.”

Instructions to Item 4:1. Information under this Item 4 is

only required if the issuer’s most recentqualified offering statement on Form 1—A or report on Form 1—K, whichever ismost recent, contains audited financialstatements.

2. The resignation or dismissal of anindependent accountant, or its refusalto stand for re-appointment, isareportable event separate from theengagement of a new independentaccountant. On some occasions, tworeports on Form 1—U are required for asingle change in accountants, the firston the resignation (or refusal to standfor re-appointment) or dismissal of theformer accountant and the second whenthe new accountant is engaged.Information required in the secondForm 1—U filing in such situations neednot be provided to the extent that it hasbeen reported previously in the firstForm 1-U filing.

Item 5. Non-reliance on PreviouslyIssued Financial Statements or aRelated Audit Report or CompletedInterim Review

(a) If the issuer’s board of directors, acommittee of the board of directors orthe officer or officers of the issuerauthorized to take such action if boardaction is not required, concludes thatany previously issued financial



statements, covering one or more yearsor interim periods for which the issueris required to provide financialstatements under Regulation A,including Form 1—A, should no longerbe relied upon because of an error insuch financial statements as addressedin FASB Accounting StandardsCodification Topic 250 or lAS 8, as maybe modified, supplemented orsucceeded, disclose the followinginformation:

(1) the date of the conclusionregarding the non-reliance and anidentification of the financial statementsand years or periods covered thatshould no longer be relied upon;

(2) a brief description of the factsunderlying the conclusion to the extentknown to the issuer at the time of filing;and

(3) a statement of whether the auditcommittee, or the board of directors inthe absence of an audit committee, orauthorized officer or officers, discussedwith the issuer’s independentaccountant the matters disclosed in thefiling pursuant to this paragraph (a).

(b) If the issuer is advised by, orreceives notice from, its independentaccountant that disclosure should bemade or action should be taken toprevent future reliance on a previouslyissued audit report or completed interimreview related to previously issuedfinancial statements, disclose thefollowing information:

(1) the date on which the issuer wasso advised or notified;

(2) identification of the financialstatements that should no longer berelied upon;

(3) a brief description of theinformation provided by the accountant;and

(4) a statement of whether the auditcommittee, or the board of directors inthe absence of an audit committee, orauthorized officer or officers, discussedwith the independent accountant thematters disclosed in the filing pursuantto paragraph (b) of this item.

(c) If the issuer receives advisement ornotice from its independent accountantrequiring disclosure under paragraph (b)of this item, the issuer must:

(1) provide the independentaccountant with a copy of thedisclosures the issuer is making inresponse to this item and theindependent accountant shall receive acopy no later than the day that thedisclosures are filed with theCommission;

(2) request the independentaccountant to furnish to the issuer aspromptly as possible a letter addressedto the Commission stating whether theindependent accountant agrees with the

statements made by the issuer inresponse to this item and, if not, statingthe respects in which it does not agree;and

(3) amend the issuer’s previously filedForm 1—U by filing the independentaccountant’s letter as an exhibit to thefiled Form 1—U no later than twobusiness days after the issuer’s receiptof the letter.

Item 6. Changes in Control of Issuer(a) If, to the knowledge of the issuer’s

board of directors, a committee of theboard of directors, governing bodysimilar to a board of directors, orauthorized officer or officers of theissuer, a change in control of the issuerhas occurred, furnish the followinginformation:

(1) the identity of the persons whoacquired such control;

(2) the date and a description of thetransactions which resulted in thechange in control;

(3) the basis of the control, includingthe percentage of voting securities of theissuer now beneficially owned directlyor indirectly by the persons whoacquired control;

(4) the amount of the considerationused by such persons;

(5) the sources of funds used by thepersons, unless all or any part of theconsideration used is a loan made in theordinary course of business by a bank asdefined by Section 3(a)(6) of theSecurities Exchange Act of 1934.

(6) the identity of the persons fromwhom control was assumed; and

(7) any arrangements orunderstandings among members of boththe former and new control groups andtheir associates with respect to electionof directors or other matters.

(b) Describe any arrangements, knownto the issuer, including any pledge byany person of securities of the issuer orany of its parents, the operation ofwhich may at a subsequent date resultin a change in control of the issuer. Itis not necessary to describe ordinarydefault provisions contained in thecharter, trust indentures, or othergoverning instruments relating tosecurities of the issuer in response tothis paragraph.

Item 7. Departure of Certain OfficersIf the issuer’s principal executive

officer, principal financial officer,principal accounting officer, or anyperson performing similar functions,retires, resigns or is terminated fromthat position, disclose the fact that theevent has occurred and the date of theevent.

Instruction to Item 7:The disclosure requirements of this

item do not apply to an issuer that is a

wholly-owned subsidiary of an issuerwith a class of securities registeredunder Section 12 of the Exchange Act(15 U.S.C. 781), orthat is required to filereports under Section 15(d) of theExchange Act (15 U.S.C. 78o(d)) orunder Regulation A.

Item 8. Certain Unregistered Sales ofEquity Securities

(a) If the issuer sells equity securitiesin a transaction that is not registeredunder the Securities Act or qualifiedunder Regulation A, furnish theinformation set forth in Item 6 of Part Iof Form 1—A. For purposes ofdetermining the required filing date forthe Form 1—U under this item, the issuerhas no obligation to discloseinformation under this item until theissuer enters into an agreementenforceable against the issuer, whetheror not subject to conditions, underwhich the equity securities are to besold. If there is no such agreement, theissuer must provide the disclosurewithin four business days after theoccurrence of the closing or settlementof the transaction or arrangement underwhich the equity securities are to besold.

(b) No report need be filed if theequity securities sold, in the aggregatesince its last report filed under this itemor its last periodic report containingsuch disclosure, whichever is morerecent, constitute less than 10% of thenumber of shares outstanding of theclass of equity securities sold.

Instructions to Item 8:1. For purposes of this item, “the

number of shares outstanding” refers tothe actual number of shares of equitysecurities of the class outstanding anddoes not include outstanding securitiesconvertible into or exchangeable forsuch equity securities.

2. It is not necessary to follow theformat of Item 6of Partlof Form 1—Awhen providing the informationrequired by this item.

Item 9. Other EventsThe issuer may, at its option, disclose

under this item any events orinformation, the disclosure of which isnot otherwise called for by this Form,that the issuer deems of importance tosecurityholders.

SIGNATURESPursuant to the requirements of

Regulation A, the issuer has duly causedthis report to be signed on its behalf bythe undersigned, thereunto dulyauthorized.(Exact name of issuer as specified in its charter)

_______________________




Date_____________

Note: The text of Form 1—U will not appearin the Code of Federal Regulations.


§ 239.94 Form 1—Z.This form shall be used to file an exit

report under Regulation A ( 230.25 1—230.263 of this chapter).• 18. Add Form 1—Z (referenced in§ 239.94) to read as follows:

UNTTED STATES SECURITIES ANDEXCHANGE COMMISSION


FORM 1-Z

EXIT REPORT UNDER REGULATIONA


(1) The following information must beprovided in the XML-based form 1—Zavailable through the EDGAR portal.

The format shown below may differfrom the electronic version available onEDGAR.

(2) An issuer filing this Formpursuant to Rule 257(a) must onlycomplete the Preliminary Informationand Part I.

(3) An issuer filing this form tosuspend its duty to file reports underRule 25 7(d) must complete thePreliminary Information and Part II.Such issuer must also provide Part I ifit has not previously provided the PartI information in a Form 1—K filing.

PRELIMINARY INFORMATION

Exact name of issuer as specified in theissuer’s charter:

_________

Address of Principal ExecutiveOffices:______________Phone: ()Commission FileNumber(s):______________

PART I

Summary Information Regarding theOffering and Proceeds

Date of qualification of the offeringstatement:______________

Date of commencement of theoffering:____________

Amount of securities qualified to besold in the offering:____________Amount of securities sold in theoffering:_____________

Price per security:$____________

The portion of aggregate salesattributable to securities sold on behalfof the issuer:$

________________

The portion of aggregate salesattributable to securities sold on behalfof selling securityholders:$________________

Fees in connection with this offeringand names of service providers:

UnderwritersSales CommissionsFinders’ feesAuditLegal:PromotersBlue Sky Compliance

Name of Service Provider Fees

$__________________

_________

S$$$$

CRD Number of any broker or dealerlisted:

_________

Net proceeds to the issuer:$_____________

Clarification of responses (ifnecessary):___________

PART II

Certification of Suspension of Duty toFile Reports

Title of each class of securities covered bythis Form -

_____________________________

Commission file Number(s)

______________

Approximate number of holders of record asof the certification date:

________

Pursuant to the requirements of RegulationA, (Name of issuer as specified incharter) certifies that it meets all of theconditions for termination of Regulation Areporting specified in Rule 257(d) and thatthere are no classes of securities other thanthose that are the subject of this Form 1—Zregarding which the issuer has Regulation Areporting obligations.

__________

[Name ofissuer as specified in charter) has caused thiscertification to be signed on its behalf by theundersigned duly authorized person.By:

__________

Date:

__________

Title:

__________

Instruction: This Part II of Form 1—Z isrequired by Rule 257(d) of Regulation A. Anofficer of the issuer or any other dulyauthorized person may sign, and must do soby typed signature. The name and title of the

person signing the form must be typed orprinted under the signature. The signatory tothe filing must also manually sign a signaturepage or other document authenticating,acknowledging or otherwise adopting his orher signature that appears in the filing. Suchdocument must be executed before or at thetime the filing is made and must be retainedby the issuer for a period of five years. Uponrequest, the issuer must furnish to theCommission or its staff a copy of any or alldocuments retained pursuant to thisinstruction.

Note: The text of Form I—Z will not appearin the Code of Federal Regulations.

PART 240—GENERAL RULES ANDREGULATIONS, SECURITIESEXCHANGE ACT OF 1934

• 19. The authority citation for part 240continues 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—I, 781, 78m,78n, 78n—1, 78o, 780—4, 780—10, 78p, 78q,78q—1, 78s, 78u—5, 78w, 78x, 7811, 78mm,80a—20, 80a—23, 80a—29, 80a—37, 80b—3, 80b—4, 80b—11, 7201 et seq.; and 8302; 7 U.S.C.2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.1350; and Pub. L. 111—203, 939A, 124 Stat.1376, (2010), unless otherwise noted.

• 20. Section 240.12g5—1 is amended byadding paragraph (a)(7) to read asfollows:

§240.12g5—7 Definition of securities “heldof record”.

(a) * * *

(7) Other than when determiningcompliance with Rule 257(d)(2) ofRegulation A ( 230.257(d)(2) of thischapter), the definition of “held ofrecord” shall not include securitiesissued in a Tier 2 offering pursuant toRegulation A by an issuer that:

(i) Is required to file reports pursuantto Rule 25 7(b) of Regulation A(230.257(b) of this chapter);

(ii) Is current in filing annual,semiannual and special financial reportspursuant to such rule as of its mostrecently completed fiscal year end;

(iii) Has engaged a transfer agentregistered pursuant to Section 17A(c) ofthe Act to perform the function of atransfer agent with respect to suchsecurities; and

(iv) Had a public float of less than $75million as of the last business day of itsmost recently completed semiannualperiod, computed by multiplying theaggregate worldwide number of sharesof its common equity securities held bynon-affiliates by the price at which suchsecurities were last sold (or the average


Federal Register / Vol. 80, No. 75/Monday, April 20, 2015 / Rules and Regulations 21923

bid and asked prices of such securities)in the principal market for suchsecurities or, in the event the result ofsuch public float calculation was zero,had annual revenues of less than $50million as of its most recentlycompleted fiscal year. An issuer thatwould be required to register a class ofsecurities under Section 12(g) of the Actas a result of exceeding the applicablethreshold in this paragraph (a)(7)(iv),may continue to exclude the relevantsecurities from the definition of “held ofrecord” for a transition period endingon the penultimate day of the fiscal yeartwo years after the date it becameineligible. The transition periodterminates immediately upon the failureof an issuer to timely file any periodicreport due pursuant to Rule 257(S 230.257 of this chapter) at which timethe issuer must file a registrationstatement that registers that class ofsecurities under the Act within 120days.* * * * *

• 21. Section 240.15c2—11 is amendedby revising paragraphs (a)(3) and(d)(2)(i) to read as follows:

§240.15c2—11 Initiation or resumption ofquotations without specific information.* * * * *

(a) * * *

(3) A copy of the issuer’s most recentannual report filed pursuant to section13 or 15(d) of the Act or pursuant toRegulation A ((55 230.251 through230.263 of this chapter), or a copy of theannual statement referred to in section12(g)(2)(G)(i) of the Act in the case of anissuer required to file reports pursuantto section 13 or 15(d) of the Act or anissuer of a security covered by section12(g)(2)(B) or (C) of the Act, togetherwith any semiannual, quarterly andcurrent reports that have been filedunder the provisions of the Act orRegulation A by the issuer after suchannual report or annual statement;provided, however, that until suchissuer has filed its first annual reportpursuant to section 13 or 15(d) of theAct or pursuant to Regulation A, orannual statement referred to in section12(g)(2)(G)(i) of the Act, the broker ordealer has in its records a copy of theprospectus specified by section 10(a) ofthe Securities Act of 1933 included ina registration statement filed by theissuer under the Securities Act of 1933,other than a registration statement onForm F—6, or a copy of the offeringcircular specified by Regulation Aincluded in an offering statement filedby the issuer under Regulation A, thatbecame effective or was qualified withinthe prior 16 months, or a copy of anyregistration statement filed by the issuer

under section 12 of the Act that becameeffective within the prior 16 months,together with any semiannual, quarterlyand current reports filed thereafterunder section 13 or 15(d) of the Act orRegulation A; and provided further, thatthe broker or dealer has a reasonablebasis under the circumstances forbelieving that the issuer is current infiling annual, semiannual, quarterly,and current reports filed pursuant tosection 13 or 15(d) of the Act orRegulation A, or, in the case of aninsurance company exempted fromsection 12(g) of the Act by reason ofsection 12(g)(2)(G) thereof, the annualstatement referred to in section12(g)(2)(G)(i) of the Act; or* * * * *

(d) * * *

(2) * * *

(i) A broker-dealer shall be incompliance with the requirement toobtain current reports filed by the issuerif the broker-dealer obtains all currentreports filed with the Commission bythe issuer as of a date up to five businessdays in advance of the earlier of the dateof submission of the quotation to thequotation medium and the date ofsubmission of the information inparagraph (a) of this section pursuant tothe applicable rule of the financialIndustry Regulatory Authority, Inc. orits successor organization; and

PART 249—FORMS, SECURITIESEXCHANGE ACT OF 7934

• 22. The authority citation for part 249continues to read in part as follows:

Authority: 15 U.S.C. 78a et seq. and 7201et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C.1350, unless otherwise noted.* * * * *

• 23. Section 249.208 is amended by:• a. Revising paragraph (a); and• b. Adding paragraph (e).

The revision and addition read asfollows:

§ 249.208a Form 8—A, for registration ofcertain classes of securities pursuant tosection 72 (b) or (g) of the SecuritiesExchange Act of 1934.

(a) Subject to paragraph (N of thissection, this form may be used forregistration pursuant to section 12(b) or(g) of the Securities Exchange Act of1934 of any class of securities of anyissuer which:

(1) Is required to file reports pursuantto sections 13 and 15(d) of that Act;

(2) Is concurrently qualifying a Tier 2offering statement relating to that classof securities using the Form S—i orForm S—il disclosure models; or

(3) Pursuant to an order exemptingthe exchange on which the issuer hassecurities listed from registration as anational securities exchange.

(e) Notwithstanding the foregoing inparagraphs (c) and (d) of this section, ifthe form is used for registration of aclass of securities being offered underRegulation A, it shall become effective:

(1) For the registration of a class ofsecurities under Section 12(b), upon thelatest of the filing of the form with theCommission, the qualification of theRegulation A offering statement or thereceipt by the Commission ofcertification from the national securitiesexchange listed on the form; or

(2) For the registration of a class ofsecurities under Section 12(g), upon thelater of the filing of the form andqualification of that Regulation Aoffering statement.• 24. Amend form 8—A (referenced in§ 249.208a) by revising it to read asfollows:



FORM 8-A

FOR REGISTRATION OF CERTAINCLASSES OF SECURITIES PURSUANTTO SECTION 12(b) OR (g) OF THESECURITIES EXCHANGE ACT OF 1934GENERAL INSTRUCTIONS

A. Rule as to Use of Form 8—A.

(a) Subject to paragraph (b) below,this form may be used for registrationpursuant to Section 12(b) or (g) of theSecurities Exchange Act of 1934 of anyclass of securities of any issuer which is(1) required to file reports pursuant toSection 13 or 15(d) of that Act, (2) isconcurrently qualifying a Tier 2 offeringstatement relating to that class ofsecurities using the Form S—I or FormS—li disclosure models that includesfinancial statements that are audited inaccordance with the standards of, andby an accounting firm that is registeredwith, the Public Company AccountingOversight Board (United States), or (3)pursuant to an order exempting theexchange on which the issuer hassecurities listed from registration as anational securities exchange.

(b) If the registrant would be requiredto file an annual report pursuant toSection 15(d) of the Act for its last fiscalyear, except for the fact that theregistration statement on this form willbecome effective before such report isrequired to be filed, an annual report forsuch fiscal year shall nevertheless befiled within the period specified in theappropriate annual report form.



(c) If this form is used for theregistration of a class of securities underSection 12(b), it shall become effective:

(1) If a class of securities is notconcurrently being registered under theSecurities Act of 1933 (15 U.S.C. 77a etseq.) (“Securities Act”), upon the laterof receipt by the Commission ofcertification from the national securitiesexchange listed on this form or the filingof the Form 8—A with the Commission;or

(2) If a class of securities isconcurrently being registered under theSecurities Act, upon the latest of thefiling of the form 8—A with theCommission, receipt by the Commissionof certification from the nationalsecurities exchange listed on this formor effectiveness of the Securities Actregistration statement relating to theclass of securities.

(d) If this form is used for theregistration of a class of securities underSection 12(g), it shall become effective:

(1) If a class of securities is notconcurrently being registered under theSecurities Act, upon the filing of theForm 8—A with the Commission; or

(2) If class of securities isconcurrently being registered under theSecurities Act, upon the later of thefiling of the form 8—A with theCommission or the effectiveness of theSecurities Act registration statementrelating to the class of securities.

(e) Notwithstanding the foregoing inparagraphs (c) and (d) of this form, ifthis form is used for registration of aclass of securities being offered underRegulation A, it shall become effective:

(1) for the registration of a class ofsecurities under Section 12(b), upon thelatest of the filing of the Form 8—A withthe Commission, the qualification of theRegulation A offering statement or thereceipt by the Commission ofcertification from the national securitiesexchange listed on this form; or

(2) for the registration of a class ofsecurities under Section 12(g), upon thelater of the filing of the Form 8—A andqualification of the Regulation Aoffering statement.

(Note: Registration pursuant toparagraph (e) of this form is notpermitted if the filing of the Form 8—Aand, where applicable, the receipt bythe Commission of certification from thenational securities exchange listed onthis form occurs more than five calendardays after the qualification of theRegulation A offering statement)

B. Application of General Rules andRegulations.

(a) The General Rules and Regulationsunder the Act contain certain generalrequirements which are applicable to

registration on any form. These generalrequirements should be carefully readand observed in the preparation andfiling of registration statements on thisform.

(b) Particular attention is directed toRegulation 12B which contains generalrequirements regarding matters such asthe kind and size of paper to be used,legibility, information to be givenwhenever the title of securities isrequired to be stated, incorporation byreference and the filing of theregistration statement. The definitionscontained in Rule 12b—2 should beespecially noted.

C. Preparation of RegistrationStatement.

This form is not to be used as a blankform to be filled in, but only as a guidein the preparation of the registrationstatement on paper meeting therequirements of Rule 12b—12. Theregistration statement shall contain theitem numbers and captions, but the textof the items may be omitted. Theanswers to the items shall be preparedin the manner specified in Rule 12b—13.

D. Signature and Filing of RegistrationStatement.

Eight complete copies of theregistration statement, including allpapers and documents filed as a partthereof (other than exhibits) shall befiled with the Commission and at leastone such copy shall be filed with eachexchange on which the securities are tobe registered. Exhibits Shall be filedwith the Commission and with anyexchange in accordance with theInstructions as to Exhibits. At least onecopy of the registration statement filedwith the Commission and one filed witheach exchange shall be manually signed.Unsigned copies shall be conformed.



FORM 8-A

FOR REGISTRATION OF CERTAINCLASSES Of SECURITIES PURSUANTTO SECTION 12(b) OR (g) OF THESECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in itscharter)

(State or other jurisdiction of incorporationor organization)

(Address of principal executive offices)


Securities to be registered pursuant toSection 12(b) of the Act:Title of each class to be so registered

Name of each exchange on which each classis to be registered

If this form relates to the registrationof a class of securities pursuant toSection 12(b) of the Exchange Act andis effective pursuant to GeneralInstruction A.(c) or (e), check thefollowing box. LI

If this form relates to the registrationof a class of securities pursuant toSection 12(g) of the Exchange Act andis effective pursuant to GeneralInstruction A.(d) or (e), check thefollowing box. El

If this form relates to the registrationof a class of securities concurrently witha Regulation A offering, check thefollowing box. El

Securities Act registration statementor Regulation A offering statement filenumber to which this formrelates:_________ (if applicable)

Securities to be registered pursuant toSection 12(g) of the Act:

(Title of class)

(Title of class)

INFORMATION REQUIRED INREGISTRATION STATEMENT

Item 1. Description of Registrant’sSecurities to be Registered.

Furnish the information required byItem 202 of Regulation S—K ( 229.202 ofthis chapter), as applicable.

Instruction. If a description of thesecurities comparable to that requiredhere is contained in any prior filingwith the Commission, such descriptionmay be incorporated by reference tosuch other filing in answer to this item.If such description will be included ina form of prospectus or an offeringcircular subsequently filed by theregistrant pursuant to Rule 424(b) underthe Securities Act ( 230.424(b) of thischapter) or Rule 253(g) of Regulation A(230.253(g) of this chapter), thisregistration statement shall state thatsuch prospectus or offering circularshall be deemed to be incorporated byreference into the registration statement.If the securities are to be registered ona national securities exchange and thedescription has not previously beenfiled with such exchange, copies of thedescription shall be filed with copies ofthe application filed with the exchange.(Zip Code)



Item 2. Exhibits.List below all exhibits filed as a part

of the registration statement:Instruction. See the instructions as to

exhibits, set forth below.

SIGNATUREPursuant to the requirements of

Section 12 of the Securities ExchangeAct of 1934, the registrant has dulycaused this registration statement to besigned on its behalf by the undersigned,thereto duly authorized.(Registrant)

Date

By

*print the name and title of thesigning officer under such officer’ssignature.

INSTRUCTIONS AS TO EXHIBITSIf the securities to be registered on

this form are to be registered on an

exchange on which other securities ofthe registrant are registered, or are to beregistered pursuant to Section 12(g) ofthe Act, copies of all constituentinstruments defining the rights of theholders of each class of such securities,including any contracts or otherdocuments which limit or qualify therights of such holders, shall be filed asexhibits with each copy of theregistration statement filed with theConunission or with an exchange,subject to Rule 12b—32 regardingincorporation of exhibits by reference.

Note: The text of Form 8—A will not appearin the Code of federal Regulations.

PART 260—GENERAL RULES ANDREGULATIONS, TRUST INDENTUREACT OF 1939

• 25. The authority citation for part 260is revised to read as follows:

Authority: 15 U.S.C. 77c, 77ddd, 77eee,77ggg, 77nnn, 77sss, 7811 (d), 80b—3, 80b—4,and 80b—11, unless otherwise noted.

• 26. Section 260.4a—1 is revised to readas follows:

§ 260.4a—1 Exempted securities undersection 304(a)(8).

The provisions of the Trust IndentureAct of 1939 shall not apply to anysecurity that has been or will be issuedotherwise than under an indenture. Thesame issuer may not claim thisexemption within a period of twelveconsecutive months for more than$50,000,000 aggregate principal amountof any securities.

By the Commission.Dated: March 25, 2015.

Brent J. Fields,Secretary.[FR Doc. 2015—07305 Filed 4—17—15; 8:45 am]

BILLING CODE 8011-01—P


CERTIFICATE OF SERVICE

I hereby certify that I have caused to be served, by UPS Next Day Air, a copy of thewithin Petition for Review this 21st day of May, 2015, upon the following:

U.S. Securities and Exchange Commission100 F Street, NEWashington, DC 20549

United States Attorney for the District of Columbia555 4th St., NWWashington, DC 20530

The Honorable Loretta E. LynchAttorney General of the United StatesU.S. Department of Justice950 Pennsylvania Ave., NWWashington, DC 20530-0001

Sookyoung ShinAssistant Attorney General,

Commonwealth of Massachusetts
