Report to Congress on Regulation A / Regulation D Performance

Report to Congress on Regulation A / Regulation D Performance

As Directed by the House Committee on Appropriations in

H.R. Rept. No. 116-122

This is a report by the staff of the U.S. Securities and Exchange Commission (SEC). The

Commission has expressed no view regarding the analysis, findings, or conclusions

contained herein.

August 2020

1

Executive Summary

Congress directed the staff of the Securities and Exchange Commission (Commission or

SEC) to report on the performance of Regulation A and Regulation D offerings. In its Joint

Explanatory Statement accompanying the Financial Services and General Government

Appropriations Act, 1 Congress states:

The Committee is concerned about the implications of private and quasi-public

market growth on public markets and investors. The Committee believes public

markets offer certain valuable benefits to investors that private and quasi-public

markets do not provide, including more robust transparency, better pricing

efficiency, more accurate valuations, deeper levels of liquidity and lower trading

costs, and stronger accountability mechanisms. The Committee directs the SEC’s

Division of Economic and Risk Analysis to study the performance of Reg A+ and

Reg D offerings and within 180 days issue a public report comparing the

performance of Reg A+ and Reg D offerings versus all other offerings.

In response to the Committee’s directive, this Report presents the SEC staff’s analysis of

available data and evidence on the state and performance of exempt offerings under Regulation

A and Regulation D during the time periods noted for each of these types of offerings. 2 The time

span of our analysis preceded the onset of the global COVID-19 pandemic, which is expected to

have a negative impact on offering activity. 3

1

See H. Committee Print of Consolidated Appropriations Act, 2020, Comm. on Approp., 116 Cong, 2d Sess. No.

38-678 (Jan. 2020), at 652, available at: https://www.govinfo.gov/content/pkg/CPRT116HPRT38678/pdf/CPRT-116HPRT38678.pdf. The Joint Explanatory Statement (Joint Explanatory

Statement) accompanying Division C of the Consolidated Appropriations Act, 2020 addressed reporting

directives to the SEC generally. The enactment of appropriations for the Commission on December 20, 2019,

confirmed the directive to prepare this report. See Consolidated Appropriations Act, 2020, Pub. Law No. 11693, 133 Stat. 2317 (2020).

2

Staff in the Division of Economic Risk and Analysis (DERA) was primarily responsible for the data analysis in

this report.

3

See, e.g., S.P. Kothari, DERA Economic and Risk Outlook, U.S. SEC. AND EXCHANGE COMM’N (Apr. 23, 2020),

available at https://www.sec.gov/files/DERA_Economic-and-Risk-Outlook-Report_Apr2020.pdf.

2

Main Findings

Regulation D Offerings

Our analysis of Regulation D offerings is based on available data from electronic filings

for 2009 through 2019, except where noted elsewhere.

•

As a capital-raising tool, Regulation D accounts for a large share of the offering market

and provides a robust choice for issuers seeking to raise capital.

•

Over the past decade, there has been a steady increase in the number of offerings and

amounts raised in Regulation D offerings. In 2019, over $1.5 trillion was reported raised

under Regulation D.

•

By comparison, during the same timeframe, approximately $1.2 trillion was raised

through registered offerings, and just over $1 billion was reported raised under

Regulation A during the same timeframe.

•

Private funds raised more than $11 trillion of the $15.5 trillion sold in Regulation D

markets during 2009 through 2019. However, non-fund issuers dominate in terms of

number of offerings.

•

Private funds for which data is available exhibited strong performance, with significant

variation across funds, as shown in greater detail in Section III.B.2. However, this period

has also coincided with favorable market performance, resulting in high market portfolio

returns.

Note: The distinct risk and illiquidity profile of private funds, as well as differences in

data sources and methodologies for measuring performance, make direct comparisons

with mutual fund and market portfolio returns difficult.

3

•

On the basis of our analysis of a small subset of public companies that conducted

Regulation D offerings during the timeframe, and in line with prior studies, we find that

such companies tend to be smaller, less profitable, and more financially constrained than

public companies conducting registered offerings. The companies relying on Regulation

D grew faster one year after the offering but had lower profitability and stock returns,

compared to public companies undertaking registered offerings.

Regulation A Offerings

Our analysis of Regulation A offerings is based on data from the effective date of the

amendments that dramatically expanded it in mid-2015 (also termed “Regulation A+”) through

the end of 2019, except where noted elsewhere.

•

As a capital-raising tool, Regulation A met with somewhat mixed offering success during

this period. While the use of Regulation A has increased over time, amounts raised (as

reported) were generally below amounts sought.

Note: Proceeds information is incomplete because of lags in reporting and most offerings

being made on a continuous basis.

•

Among Regulation A offerings, we find Tier 2 accounted for most of the issuer activity,

successful offerings, and growth in proceeds. (See discussion of Tier 2 in Section II.B.

below).

•

Among issuers with some offering proceeds, close to 80% of issuers continued to file

reports on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system

(EDGAR) one year after the offering, and just under one-half of issuers remain there

three years after the offering.

4

•

The typical issuer with available post-offering data experienced a considerable increase

in assets and revenues, but not in profitability, following the offering. The magnitude of

the jump is generally related to the small initial size and early stage of the typical issuer.

•

A minority of issuers that raised capital under Regulation A had a secondary trading

market for their securities (on the over-the-counter (OTC) market or a stock exchange).

Among those issuers, typical performance was below performance benchmarks; however,

underperformance was not statistically significant.

Note: Our analysis and inference are limited by small sample size, data noise, and selfselection of issuers into the Regulation A market.

Summary of Conclusions

Overall, our analysis confirms that Regulation D accounted for significantly more capital

raising than Regulation A, with the difference on the order of magnitude of 1000x in a typical

year during the examined period. Although the use of Regulation D by private funds, which are

ineligible under Regulation A, plays a significant role, Regulation D use by non-fund issuers also

significantly outpaced Regulation A use. Excluding funds, most of the issuers relying on either

exempt offering method are small, unlisted companies, which considerably limits data

availability. However, according to available data, some of the operating companies using these

offering methods exhibit considerable growth potential.

5

I. Introduction

Regulation A and Regulation D are two sets of rules that enable issuers to conduct an

offering that is exempt from the registration requirements of the Securities Act of 1933 (the

“Securities Act”). 4 Over the past decade, markets for securities that are exempt from registration

have experienced significant growth.

In response to the reporting directive from Congress, 5 the Commission’s staff has studied

the performance of Regulation A and Regulation D offerings. In this report, we analyze the

performance of these offerings. Except where specified otherwise, the analysis is based on

available data from electronic filings through the most recently completed calendar year (2009

through 2019 for Regulation D and June 2015 through December 2019 for Regulation A), which

coincided with a period of generally favorable macroeconomic and market performance.

Subsequent to the end of the period analyzed in this report, as of August 2020, the U.S. has

experienced significant macroeconomic and market dislocations related to the global effects of

COVID-19 and the related response. These factors are expected to have a negative impact on

offering activity, including under Regulation A and Regulation D, as well as on the likelihood of

liquidity events, such as initial public offerings (IPOs), and the performance of these investments

in 2020.

Some of the analysis in this study incorporates the findings of the Commission staff’s

lookback review of Regulation A (published March 4, 2020), as called for in the 2015

4

For a discussion of the various exemptions from registration under the Securities Act, including Regulation A

and Regulation D, see Concept Release on Harmonization of Securities Offering Exemptions, Release No. 3310649 (Jun. 18, 2019) [84 FR 30460 (Jun. 26, 2019).

5

See supra footnote 1.

6

Regulation A adopting release, and the findings of the biennial offering limit review, as required

by Section 3(b)(5) of the Securities Act. 6

Below is a summary of the characteristics and performance of Regulation A and

Regulation D offerings.

Regulation D

•

Over the past decade, there has been a steady increase in Regulation D offerings. As

a capital-raising tool, Regulation D accounts for a large share of the offering market and

provides a robust financing method for issuers seeking to raise capital. In 2017-2019, the

Regulation D market surpassed the registered offering market based on the amount of

reported proceeds. In 2019, Regulation D accounted for over $1.5 trillion in reported

proceeds. By comparison, in 2019 registered offerings accounted for approximately $1.2

trillion in proceeds, and Regulation A accounted for just over $1 billion in reported

proceeds. Much like public capital markets, capital raising through Regulation D

offerings has been pro-cyclical. Private funds raised the largest amount of financing in

the Regulation D market during this period.

•

Private funds exhibited strong returns during this period. While there is variance in

mean and median returns, depending on the year and data source, the private fund asset

class exhibited generally strong returns in absolute terms during this period. However, as

noted above, this period also coincided with favorable market and mutual fund

performance.

6

See U.S. SEC. AND EXCHANGE COMM’N, Regulation A Lookback Study and Offering Limit Review Analysis

(2020), available at https://www.sec.gov/files/regulationa-2020.pdf (“Regulation A Lookback Report”).

7

As an important caveat, the distinct risk and illiquidity profile of private funds and data

differences make it difficult to draw direct comparisons.

• Among non-fund issuers in the Regulation D market, issuers in the

Banking/Financial, Technology, and Real Estate industries accounted for the most

capital raised. As more than 95% of non-fund Regulation D issuers are private

companies, data on their performance are scarce. We present available evidence on the

performance of investments in private companies. We then turn to the (small) subset of

Regulation D issuers that are public companies and thus have performance data available.

These issuers tend to be smaller, less profitable, and more financially constrained at the

time of the Regulation D offering, compared to public companies conducting registered

offerings. Reporting companies with Regulation D offerings grew faster but had lower

profitability and stock returns one year after the offering than reporting companies

undertaking registered offerings. However, selection bias is likely because these issuers

tend to be smaller, less profitable, and more financially constrained at the time of the

Regulation D offering, compared to public companies conducting registered offerings.

As an important caveat, the public company subset of Regulation D issuers is not

representative of the much larger set of private companies relying on Regulation D.

Regulation A

•

As a capital-raising tool, Regulation A met with somewhat mixed offering success

during this period. While the use of Regulation A has increased over time, amounts

reported raised were generally below amounts sought, with the caveat that proceeds

information is incomplete because of the nature of observed reporting, as well as the fact

8

that most offerings were made on a continuous basis, with an increase in offering activity

in later years.

•

Among Regulation A offerings, Tier 2 accounted for most of the issuer activity,

successful offerings, and growth in proceeds. Among issuers reporting some offering

proceeds, close to 80% of issuers continued filing in EDGAR (including filings other

than those required under Regulation A) a year after the offering, and just under one-half

of issuers continued filing in EDGAR three years after the offering. Where data were

available, the typical issuer experienced a considerable increase in assets and revenues,

but not in profitability, following the offering. The magnitude of the jump is related to

the small initial size and early stage of the typical issuer.

•

For the minority of Regulation A issuers that had a secondary trading market for

their securities, stock returns after the offering were positively skewed, with means

substantially higher than medians. Typical performance, in absolute terms and in

excess of the market index return, was below the performance of other considered groups

of small issuers. The underperformance was not significant, although the power of the

analysis was limited by very small sample size. Finally, with the caveat about the latency

of potential violations, there have been few instances of civil cases or administrative

proceedings involving Regulation A during this period.

The rest of the report is organized as follows: Section II presents the market and offering

landscape and evidence on the offering and issuer characteristics for both Regulation A and

Regulation D offerings; Section III presents available evidence on performance of Regulation A

and Regulation D offerings and issuers; and Section IV provides our conclusions. In each

9

section below, we present the analysis of the Regulation D market first, given its much larger

size, followed by the analysis of the Regulation A market.

II. Market and Offering Landscape

The existing regulatory framework and market practices permit a wide variety of methods

for issuers to access external financing or realign their capital structure. Below we present an

overview of the requirements of Regulation A and Regulation D, including recent rule changes,

as well as the associated market practices and how they fit within the broader landscape of

exempt and registered offerings.

Over the past several years, but particularly since the implementation of the Jumpstart

Our Business Startups Act of 2012 (“JOBS Act”), the Commission has undertaken several

rulemaking actions that involved changes to the framework for exempt offerings under

Regulation A and Regulation D, as seen in Table 1 below.

Table 1. Recent Rulemaking Actions Involving Regulation A and Regulation D under the

Securities Act

Date

Summary of Commission Action

Jul.

2013

Adopted Rule 506(c) implementing

Title II of the JOBS Act.

Jul.

2013

Amended Rule 506 to disqualify

certain “bad actors” under Rule 506 of

Regulation D.

Title

Eliminating the Prohibition Against

General Solicitation and General

Advertising in Rule 506 and Rule

144A Offerings

Disqualification of Felons, Other

“Bad Actors” from Rule 506

Offerings

Mar.

2015

Raised offering limits and made other

changes to Regulation A to implement

Title IV of the JOBS Act.

Amendments for Small and

Additional Issues Exemptions under

the Securities Act (Regulation A)

Oct.

2016

Dec.

2018

Amended Rule 504 to increase the

aggregate amount of securities that

can be offered and sold in a 12-month

period from $1 million to $5 million,

and repealed Rule 505.

Amended Regulation A to extend

eligibility to reporting companies,

implementing the mandate of

Economic Growth, Regulatory Relief,

& Consumer Protection Act of 2018.

Citation

Release No. 33-9415 (July 10,

2013) [78 FR 44771 (July 24,

2013)]

Release No. 33-9414 (July 10,

2013) [78 FR 44729 (July 24,

2013)]

Release No. 33-9741 (Mar. 25,

2015) [80 FR 21806 (Apr. 20,

2015)] (“2015 Regulation A

Release”)

Exemptions to Facilitate Intrastate

and Regional Securities Offerings

Release No. 33-10238 (Oct. 26,

2016) [81 FR 83494 (Nov. 21,

2016)]

Amendments to Regulation A

Release No. 33-10591 (Dec.

19, 2018) [84 FR 520 (Jan. 31,

2019)]

10

Jun.

2019

Published a concept release on the

harmonization of the exempt offering

framework.

Concept Release on Harmonization

of Securities Offering Exemptions

Dec.

2019

Proposed amendments to the

accredited investor definition.

Amending the “Accredited Investor”

Definition

Mar.

2020

Proposed further amendments to

simplify, harmonize, and improve

aspects of the exempt offering

framework.

Facilitating Capital Formation &

Expanding Investment Opportunities

by Improving Access to Capital in

Private Markets

Release No. 33-10649 (Jun. 18,

2019) [84 FR 30460 (Jun. 26,

2019)] (“Harmonization

Concept Release”)

Release No. 33-10734 (Dec.

18, 2019) [85 FR 2574 (Jan.

15, 2020)]

Release No. 33-10763 (Mar. 4,

2020) [85 FR 17956 (Mar. 31,

2020)] (“Harmonization

Proposing Release”).

By allowing issuers to forgo the registration process, Regulation D affords issuers greater

speed and flexibility of raising capital, reduced compliance costs, and a lower risk of sharing

proprietary information with competitors. Raising capital under Regulation D may also enable

issuers to retain a more concentrated ownership and control structure (including greater founder

control over the company’s future decisions). Similar to Regulation D, Regulation A enables

issuers to forgo the registration process and provide less extensive disclosures. Unlike

Regulation D, as shown below, the Regulation A offering market is much smaller.

A. Regulation D

1. Institutional and Regulatory Background

Regulation D was adopted in 1982 7 to provide a unified scheme for exempting certain

securities offerings from the registration requirements of the Securities Act. It was designed to

simplify existing rules and regulations to facilitate capital formation, particularly for small

businesses, consistent with the protection of investors. At its inception, the Regulation D market

was comprised of offerings undertaken in reliance on three rules: Rule 504, Rule 505, and Rule

506. Today, Regulation D offerings may be conducted under Rule 504, Rule 506(b), and Rule

7

Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales,

Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)].

11

506(c). Rule 505 was repealed, in conjunction with certain amendments to Rule 504, effective

May 22, 2017.

Rule 504

Rule 504 of Regulation D provides an exemption from registration under the Securities

Act for the offer and sale of up to $5 million of securities in a 12-month period. Reporting

companies, investment companies, and certain development-stage companies are ineligible to

issue securities under Rule 504. In October 2016, the Commission adopted amendments to

expand Rule 504 and repeal Rule 505, with the changes effective May 22, 2017. Prior to these

rule changes, Rule 504 limited the aggregate amount of securities that could be offered and sold

in a 12-month period to $1 million, while Rule 505 (available to both non-reporting and

reporting companies) limited the aggregate offering amount in a 12-month period to $5 million,

subject to certain other conditions. In general, issuers relying on Rule 504 may not use general

solicitation or general advertising to market the securities, and securities are restricted. These

prohibitions are generally inapplicable if the issuer complies with state registration requirements,

or state exemptions from registration for sales to accredited investors. 8

8

Rule 501 contains the definition of the accredited investor. Today, natural persons may qualify as accredited

investors based on the following criteria: (1) Individuals who have a net worth exceeding $1 million (excluding

the value of the individual’s primary residence), either alone or with their spouses; (2) Individuals who had an

income in excess of $200,000 in each of the two most recent years, or joint income with the individual’s spouse

in excess of $300,000 in each of those years, and have a reasonable expectation of reaching the same income

level in the current year; and (3) Directors, executive officers, and general partners of the issuer or of a general

partner of the issuer. Some entities may qualify as accredited investors based on their status alone. These

entities include: (1) Banks, savings and loan associations, brokers or dealers registered pursuant to Section 15 of

the Exchange Act, insurance companies, small business investment companies, investment companies

registered under the Investment Company Act, or business development companies as defined in Section

2(a)(48) of that Act; (2) Private business development companies as defined in Section 202(a)(22) of the

Advisers Act; and (3) Entities in which all of the equity owners are accredited investors. Other entities may

qualify as accredited investors based on a combination of their status and the amount of their total assets. These

entities include: (1) Tax exempt charitable organizations, corporations, Massachusetts or similar business trusts,

or partnerships, not formed for the specific purpose of acquiring the securities offered, with total assets in

excess of $5 million; (2) Plans established and maintained by a state, its political subdivisions, or any agency or

instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total

12

Rule 506

Rule 506 was adopted in 1982 as a non-exclusive safe harbor under Section 4(a)(2) of the

Securities Act. In 2013, the Commission amended Rule 506 pursuant to Title II of the JOBS

Act, which directed the Commission to permit general solicitation and general advertising in

certain Rule 506 offerings. (Prior to the JOBS Act, general solicitation had not been allowed for

Rule 506 offerings.) Rule 506(c), which became effective on September 23, 2013, allows

general solicitation and general advertising in Rule 506 offerings, without any limitation on

amounts offered, as long as all purchasers are accredited investors and issuers take reasonable

steps to verify that such purchasers are accredited investors. Rule 506, as it existed before the

adoption of Rule 506(c), was preserved and re-designated as Rule 506(b). Offerings under both

Rule 506(b) and Rule 506(c) must satisfy the conditions of (i) Rule 501 (definitions for the terms

used in Regulation D); (ii) Rule 502(a) (integration); (iii) Rule 502(d) (limitations on resale); and

(iv) Rule 506(d) (“bad actor” disqualification). Offerings under Rule 506(b) must also satisfy

the conditions of (i) Rule 502(b) (type of information to be furnished); and (ii) Rule 502(c)

(limitations on the manner of offering).

Rule 506(b) is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act. It

allows an issuer to offer and sell an unlimited amount of securities, provided that: (1) offers do

assets in excess of $5 million; (3) Employee benefit plans (within the meaning of the Employee Retirement

Income Security Act) if a bank, savings and loan association, insurance company, or registered investment

adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; and (4) Trusts

with total assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered,

the purchases of which are directed by a person who meets the legal standard of having sufficient knowledge

and experience in financial and business matters to be capable of evaluating the merits and risks of the

prospective investment.

13

not involve general solicitation or general advertising; and (2) sales are made only to accredited

investors, or up to 35 sophisticated non-accredited investors. 9

2. Offering and Issuer Characteristics

Below we discuss amounts of Regulation D capital raising, issuer types, and the

distribution of issuer industries and locations. In Table 2 below, we present data on Regulation

D offering and issuer characteristics.

Data Sources

Our analysis and the data presented are based on electronic Form D filings from 2009

through 2019 available on EDGAR. 10 (The Commission required the form to be filed on

EDGAR starting in March 2009.)

To address duplication, we consolidate multiple amended filings at the offering level,

using the original “accession id” available in subsequent filings; thus, the number of unique

offerings is less than the total number of filings during the same period. In offerings with

amendments, “total amounts sold” reported in the amended filing are compared to the “total

amounts sold” reported in the original filing to calculate incremental proceeds, which are

attributed to the calendar year in which the amendment is filed. For offerings initiated prior to

2009 and continuing in subsequent years, an issuer’s only electronic filings during the considered

period would have been Form D amendments. If these amendments reference a post-2008 sale

9

See Rule 506(b)(2)(ii) (stating that “[e]ach purchaser who is not an accredited investor either alone or with

his purchaser representative(s) has such knowledge and experience in financial and business matters that he

is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes

immediately prior to making any sale that such purchaser comes within this description.”).

10

See also Scott Bauguess, Rachita Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.: An Analysis

of the Market for Unregistered Securities Offerings, 2009–2017 (U.S. Sec. and Exchange Comm’n, DERA

White Paper, Aug. 2018), available at https://www.sec.gov/dera/staff-papers/whitepapers/dera_white_paper_regulation_d_082018 (“Regulation D White Paper”).

14

date, the first amendment filed electronically is treated as an original Form D filing, as Form D

was not filed electronically prior to 2009.

A number of pooled investment funds appear to report, in their annual amendments, net

asset values (NAVs) for total amount sold under the offering. NAVs could reflect fund

performance as well as new investment into, and redemptions from, the fund. In the absence of

detailed information in the filed form, we treat the “total amounts sold” as amounts raised in the

offering. Finally, when an issuer checks the box to claim multiple offering exemptions (Rule

504, 505, or 506), for the purposes of this analysis, we assume that any issuer that checks the box

for Rule 506 is relying on Rule 506.

Comparative Data

Where feasible, we provide comparative data for issuers that raised capital through

registered offerings during 2009 through 2019 and also for the current set of reporting

companies. We obtain data for issuers conducting registered offerings from SDC Platinum’s

New Issues database. We select all registered public offerings conducted in the U.S. market

during 2009 through 2019, excluding IPOs 11 and government/federal agency offerings. We

obtain financial information for reporting companies from S&P’s Compustat, a commercial

database that compiles, aggregates, and standardizes financial data reported by public companies.

For the purposes of this analysis, we use data from Compustat North America (Fundamentals

Annual) for the latest fiscal year that is available for all companies, as of the time of retrieval, in

11

For this analysis, we consider follow-on equity offerings and debt offerings as more appropriate benchmarks for

Regulation D offerings because the motivations for conducting an IPO may extend beyond raising capital to

meet a company’s financial needs. See, e.g., Marco Pagano, Fabio Panetta, & Luigi Zingales, Why Do

Companies Go Public? An Empirical Analysis, 53 J. FIN. 27 (1998) (showing that companies go public after a

period of strong investment and growth to capitalize on higher valuations, to reduce leverage and cost of debt,

and for change in control).

15

the database. The data presented in the tables and figures below may be incomplete for small

and non-exchange-listed public companies.

Capital Raising under Regulation D

Table 2 below presents summary statistics for Regulation D capital raising activity and

issuer characteristics. 12 Almost all of the capital raised in the Regulation D market is raised

under Rule 506(b). For 2019, of the approximately $1.56 trillion raised through Regulation D,

Rule 506(b) offerings accounted for $1.5 trillion, which exceeds the capital raised in 2019

through registered offerings ($1.2 trillion). Offerings under Rule 506(c) raised approximately

$66 billion, and offerings under Rule 504 raised approximately $228 million.

12

See also Harmonization Concept Release; Regulation D White Paper, supra footnote 10.

16

Table 2. Summary of Regulation D Issuer and Offering Characteristics, 2009–2019 13

Number of Issuers

173,697

Number of Offerings

242,070

Amounts Reported Sold

$13,576 billion

Mean Amount Sold (if reported)

$58 million

Median Amount Sold (if reported)

$1.50 million

Mean Offer Size (if reported)

$71 million

Median Offer Size (if reported)

$2.25 million

Median Years Since Incorporation

2

Median Issuer Size (if reported)

Private Funds (Net Asset Value)

Non-Fund Issuers (Revenue)

Used Intermediary

$25 million - $50 million

$1 million - $5 million

20%

Total Investors

As reported in initial Form D filings

All filings, including amendments

Average Investors/Offering (if reported)

13

3.4 million

5.9 million

10

The number of issuers is based on a unique Central Index Key (CIK) identifier. Number of offerings represents

all new offerings initiated during the period 2009 through 2019, as represented by a Form D filing, and

offerings initiated prior to 2009 but continuing into the period 2009 through 2019 (as represented by an

amendment filed). Amounts Reported Sold is calculated as described above and includes amounts sold reported

in initial Form D filings and incremental amounts sold reported in amendment filings. Total number of

investors, as reported in Form D and Form D/A filings, is calculated similarly. Issuers are not required to file a

Form D at the close of offering. Not all offerings report amounts raised sold in their initial Form D filing.

17

Table 3 14 below summarizes recent data on the state of the Regulation D market.

Table 3. Offerings by Exemptions Available under Regulation D in 2019

Rule 504

Rule 506(b)

Rule 506(c)

Regulation D Total

Number of New

Offerings

476

24,636

2,269

27,381

Amount Reported

Raised

$0.2 billion

$1,491.9 billion

$66.3 billion

$1,558.4 billion

Reporting Company and Listing Status

Table 4 below presents a classification of the reporting and trading status of Regulation D

issuers during the 2009 through 2019 time period. 15 Approximately 2% of all Regulation D

issuers are also reporting issuers and are listed on a stock exchange or quoted on the OTC

market. Almost 90% of offerings by non-fund issuers raise capital through equity securities.

14

This table includes Regulation D offerings for all issuers, including pooled investment funds. Data are

obtained from Form D filings. The amount raised is based on “Total amount sold” in new and amended

Form D filings. Incremental proceeds reported in amended filings are recorded in the year of the amended

filing. We believe reported data is likely an underestimate of the amount raised because (1) Rule 503 of

Regulation D requires issuers to file a Form D no later than 15 days after the first sale of securities, but a

failure to do so does not invalidate the exemption; so, some Regulation D issuers may fail to file a Form D

(we note that, while failure to file Form D does not affect the exempt offering, it could have other

consequences, including, under Rule 507, the potential loss of ability to rely upon Regulation D in the

future), and (2) there is no requirement to file a Form D at completion of the offering, or to file an

amendment to reflect additional amounts offered if the aggregate offering amount does not exceed the

original offering size by more than ten percent (so, amounts reported may be lower than total amounts

sold).

15

We obtain this information by merging the list of Regulation D issuers with Compustat North America data

using CIK as the common identifier, which yields matches for 4,108 unique Regulation D issuers. This

includes some companies that became reporting companies subsequent to their Regulation D offering. Trading

venue for reporting company Regulation D issuers is based on Compustat data reported during calendar year

2019 or later. Trading venue for issuers conducting registered offerings is based on SDC Platinum data. The

proportion of U.S. exchange-listed issuers is close to 90% for registered equity offerings.

18

Table 4. Reporting Company and Listing Status of Regulation D Issuers

Regulation D Issuers

2009–2019

Reporting Companies

Exchange-Listed

OTC - Bulletin Board

OTC - Other

No Trading Market / Unknown

Non-Reporting Companies

Private Funds

Private Non-Fund Issuers

2,184

23

1,852

51

67,582

102,007

TOTAL

173,697

As the table above shows, almost half of the 4,108 reporting companies that are also

Regulation D issuers are OTC companies. This is a much larger proportion than the share of

OTC companies in the current set of all reporting companies (23%), and is also larger than the

proportion of OTC companies in the subset of companies that raised capital through a registered

offering during 2009 through 2019 (22%). (See Figure 1 below.)

19

Figure 1. Secondary Market Trading Status of Regulation D Issuers that are Reporting

Companies 16

54%

45%

Regulation D issuers that are

Reporting companies

1%

71%

Issuers with Registered offering

during 2009-2019

22%

U.S. Exchange Listed

OTC/ Pink Sheet

7%

Foreign listed/ Private/Unknown

73%

All Reporting issuers

23%

4%

0%

16

20%

40%

60%

80%

Some Regulation D issuers became reporting companies subsequent to their private offering. The proportions

remain similar (53% exchange-listed; 46% OTC) when we consider only those Regulation D issuers that were

reporting companies during the year they conducted their Regulation D offering.

20

Industry Distribution

Table 5 below presents the industry distribution of Regulation D issuers, issuers that

conducted a follow-on registered equity or debt offering during the 2009 through 2019 period,

and all reporting companies (based on information reported in calendar year 2019 or later). 17

The largest number (39%) of Regulation D issuers are from the pooled investment fund industry.

Among non-fund Regulation D issuers, most issuers are in the technology, real estate, health

care, and financial services industries.

Table 5. Industry Distribution of Regulation D Issuers and Reporting Companies (2009–

2019)

Regulation D

Issuers

Issuers with a

Registered Offering

All Reporting

Companies

Private Funds

38.9%

Not applicable

Not applicable

Agriculture

0.8%

0.2%

0.2%

Banking/Financial

7.6%

19.9%

39.0%

Business Services

1.6%

6.2%

1.8%

Energy

6.0%

11.3%

6.4%

Health Care

10.0%

19.2%

11.2%

Manufacturing

2.7%

11.1%

9.8%

Other

21.4%

7.0%

12.7%

Real Estate

25.5%

7.3%

4.1%

Restaurants

1.8%

0.8%

0.7%

Retailing

2.0%

2.3%

2.1%

Technology

20.0%

12.9%

11.2%

Travel

0.7%

1.7%

0.8%

Industry

Geographic Distribution

17

Industry information for Regulation D issuers is based on Form D data, which use a broader industry

classification. See https://www.sec.gov/files/formd.pdf. Industry information for reporting companies is based

on Compustat data reported in 2019 or later. Industry information for issuers with follow-on equity or

registered debt offerings is obtained from SDC Platinum. For comparability, SIC-based industry definitions for

reporting companies and registered offerings are converted to the Form D industry classification.

21

Most Regulation D issuers are located, in terms of principal place of business, in

California or New York (see Figures 2 and 3 below), 18 even though many are incorporated in

Delaware. The next largest states based on principal place of business are Texas, Florida, and

Massachussetts. This is similar to reporting companies, whose top five states of headquarters

locations are California, New York, Illinois, Texas, and Massachusetts. While 9% of offerings

are conducted by Regulation D issuers that are headquartered outside of the United States, 20%

of reporting companies (as reported in 2019) were located abroad, and 15% of registered

offerings conducted in the United States during 2009 through 2019 were undertaken by

companies located in a foreign country. During 2009 through 2019, approximately 10% of

Regulation D offerings were initiated by foreign-incorporated companies. By comparison, 30%

of reporting companies and approximately 13% of issuers conducting registered offerings 19 were

incorporated outside of the United States based on information filed during 2019.

18

Figure 2 is based on Form D initial filings, excluding amendments, and includes offerings by operating

companies and pooled investment funds. Figure 3 is based on amounts reported raised in Form D initial filings

and amendments and includes offerings by operating companies pooled investment funds.

19

For issuers conducting registered offerings, SDC data on country of incorporation is available only for 63% of

observations.

22

Figure 2. Number of Regulation D Offerings by Issuer Headquarters Location (2009–2019)

Figure 3. Regulation D Amounts Sold by Issuer Headquarters Location (2009–2019)

bln = billion

23

Issuer Size and Age Distribution

Figure 4 below shows the distribution of issuer revenue ranges as reported in Item 5 of

Form D. Most issuers conducting Regulation D offerings that report their revenues on Form D

tend to be small. Although most non-fund issuers decline to disclose their revenues (65%), for

those that do, most have revenues of less than $1 million. Issuers that report more than $100

million in revenues account for only about 1% of the number of all new offerings. 20 Not

surprisingly, among Regulation D issuers that report size, large issuers (greater than $100 million

in revenue) account for a greater share of proceeds. Large Regulation D issuers include private

companies as well as exchange-listed companies and large OTC companies. By comparison,

65% of reporting companies and 83% of reporting companies that conducted a follow-on

registered offering during 2009 through 2019 reported revenues exceeding $100 million. 21

20

Form D also contains information on NAV of hedge funds and other investment funds. Since 2009, more

than three-quarters of issuers have declined to disclose NAV, but of those that do, a trend similar to

revenue is reported—the largest number of issuers is in the smallest NAV categories.

21

Calculated based on DERA analysis of SEC reporting companies that had a class of equity security with a

market price reported in Compustat at the end of fiscal year 2018 and as reported during calendar year 2019

or later. Data for fiscal year 2019 were still being filed as of the time of this analysis and will be

comprehensively available in Compustat with a lag.

24

Figure 4. Size Distribution of Non-Fund Regulation D Issuers (2009–2019)

Over $100,000,000

0.9%

$25,000,001 - $100,000,000

1%

1.0%

$5,000,001 - $25,000,000

1%

2.3%

$1,000,001 - $5,000,000

1%

3.8%

$1 - $1,000,000

3%

Not Applicable

3%

2.2%

No Revenues

4%

11%

9.8%

15.4%

Decline to Disclose

64.5%

0%

20%

40%

Amounts Sold

60%

77%

80%

Number of Issuers

The small reported size of Regulation D issuers is also consistent with their young age, as

measured by years since incorporation. Seventy percent of Regulation D issuers were

incorporated for less than 3 years when they initiated their offering. This includes 87% of fund

issuers and 63% of non-fund issuers. (See Figure 5 below.) While data on date of incorporation

is not available for reporting companies in our data source, previous research has indicated that

reporting companies tend to be older than 3 years when they have their IPOs. 22 Among

reporting companies with available data on the date of their IPO, more than 80% had their IPO

prior to 2015.

22

Prior empirical research finds that the median age of firms conducting an IPO during 1980-2003 was relatively

stable at seven years. See, e.g., Tim Loughran and Jay Ritter, Why Has IPO Underpricing Changed Over

Time?, 33 FIN. MGMT. 5 (2004).

25

Figure 5. Regulation D Issuer Age, 2009–2019

100%

80%

60%

40%

20%

0%

Funds

1 year or less

Non-Funds

2-3 years

4-5 years

greater than 5

Trends in Regulation D Offerings

Almost 90% of offerings by non-fund issuers raise capital through equity securities. A

substantial amount of empirical research has documented that public capital markets are procyclical and appear to be affected by business cycles, investor sentiment, and time-varying

information asymmetry. 23 Figure 6 below shows Regulation D offering activity on the basis of

the number of new Form D filings (excluding amendments) on EDGAR, by calendar year,

plotted alongside the S&P 500 index levels, for the period 1993 through 2019. The data indicate

that Regulation D offerings, similar to public capital markets, are also driven by business cycles.

23

See, e.g., Michelle Lowry, Why Does IPO Volume Fluctuate So Much?, 67 J. FIN. ECON. 3 (2003);

Aydogan Alti, IPO Market Timing, 18 REV. FIN. STUD. 1105 (2005); Chris Yung, Gonul Colak, & Wei

Wang, Cycles in the IPO Market, 89 J. FIN. ECON. 192 (2008).

26

30,000

3,500

25,000

3,000

2,500

20,000

2,000

15,000

1,500

10,000

1,000

5,000

0

500

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

New Regulation D offerings

0

S&P500 Index

B. Regulation A

1. Institutional and Regulatory Background

The Commission originally adopted Regulation A in 1936 as an exemption for small

issuers under Section 3(b) of the Securities Act, the Commission’s exemptive authority for

offerings of up to $5 million. 24 Title IV of the JOBS Act redesignated Section 3(b) as

Section 3(b)(1) and added new Sections 3(b)(2) through 3(b)(5) to the Securities

Act. 25Section 3(b)(2) directed the Commission to adopt rules adding a class of securities exempt

from the registration requirements of the Securities Act for offerings of up to $50 million of

securities within a 12-month period. Sections 3(b)(2) through (5) specify certain terms and

24

See Release No. 33-632 (Jan. 21, 1936).

25

See Release No. 33- 9741 (Mar. 25, 2015).

27

S&P 500 Index

Number o f Offerings

Figure 6. Number of Regulation D Offerings (1993-2019)

conditions for such exempt offerings and authorize the Commission to adopt other terms,

conditions, or requirements as necessary in the public interest and for the protection of investors.

In 2015, the Commission adopted final rules to implement Section 401 of the JOBS Act

by creating two tiers of Regulation A offerings: Tier 1, for offerings of up to $20 million in a 12month period; and Tier 2, for offerings of up to $50 million in a 12-month period.

In adopting the two-tiered structure for Regulation A in 2015, the Commission stated that it

expected the requirements for Tier 1 to result in securities offerings that would be more local in

character, while Tier 2 offerings would likely be more national in character. While an issuer of

$20 million or less of securities can elect to proceed under either Tier 1 or Tier 2, Tier 2 issuers

are subject to additional requirements. For example, Tier 2 issuers are required to include

audited financial statements in their offering circulars (Part F/S of Form 1-A) and must provide

ongoing reports on an annual and semiannual basis with additional requirements for interim

current event updates, therefore providing a continuous flow of information to investors and the

market (Rule 257 of Regulation A). Tier 2 offerings are not subject to state securities law

registration and qualification requirements, while Tier 1 offerings remain subject to those state

requirements.

In addition to expanding the Regulation A offering limit and establishing an ongoing

reporting regime for Tier 2 issuers, the 2015 amendments sought to modernize the Regulation A

filing process (including by requiring electronic filing), align practice in certain areas with

prevailing practice for registered offerings, and create additional flexibility for issuers in the

offering process. In 2018, the Commission amended Regulation A, making reporting companies

eligible under Regulation A.

28

2. Offering and Issuer Characteristics

Table 6 below summarizes information on issuer and offering characteristics in qualified

Regulation A offerings during the period from the 2015 Regulation A amendments through the

end of 2019 (the most recently completed calendar year).

Table 6. Regulation A Issuer and Offering Characteristics 26

Metric

Mean

Median

Total assets

$32,582,700

$311,500

Employees

38.9

2.5

Age (years since incorporation)

6.6

3.0

$2,642,800

$0

Revenue

% revenue >0

47%

Net income

-$490,100

% net income >0

-$14,000

21%

Cash and cash equivalents

$1,842,700

$31,200

Property, plants, and equipment

$4,677,200

$0

Long-term debt

$5,758,900

$0

% continuous offerings

80%

% testing the waters

27%

% offerings with affiliate selling security holders

6%

States of solicitation

38

% equity offerings

93%

51

Although issuers are highly heterogeneous, to date, most issuers in qualified Regulation

A offerings have been small (based on assets and revenues) and relatively young. Among the

issuers with revenue information available, just under one-half had generated revenue. Turning

26

Statistics are based on qualified offering statements. The information is based on Part I of Form 1-A of

Regulation A offering statements or latest amendment qualified between June 2015 and December 2019.

See infra footnote 110. Certain security types characterized as “other” were reclassified as equity or debt

based on description. Revenue information was not available for approximately 5.5% of issuers.

29

to offering characteristics, most offerings (93%) involved equity securities, were conducted on a

continuous basis (80%), and did not report sales by affiliated security holders (94%). Offerings

were generally conducted on a best-efforts basis. 27 Over one-quarter of qualified offerings used

testing the waters (solicitation of investor interest), almost all of which were Tier 2 offerings.

The median offering involved national solicitation by the issuer or intermediary, but solicitation

was generally limited to a handful of states in Tier 1 offerings (median of three among qualified

Tier 1 offerings).

Secondary Trading Market

Between June 2015 and December 2019, the majority of Regulation A issuers lacked a

liquid secondary trading market for their securities. Table 7 and Figure 7 below summarize data

on secondary trading markets for Regulation A issuers.

Table 7. Secondary Trading Market of Regulation A Issuers 28

Market

Issuers

%

Exchange-listed

OTC

No market identified

Total

11

75

260

346

3.2%

21.7%

75.1%

100%

27

Information in Part I of Form 1-A across qualified offerings (or latest amendment qualified between June

2015 and December 2019) indicates that 93% of the offerings reported being best-efforts offerings. Some

of the remaining offerings were associated with mergers and dividend reinvestment plans, while some

others may reflect inaccuracies in tagging. We are not aware of firm commitment underwriting in this

market segment.

28

Information on exchange listing was based on searches of CERT submissions and news searches and

excludes issuers delisted as of December 31, 2019. Information on OTC quotation was based on data from

OTC Markets as of the end of December 2019. Among OTC issuers, 14 were identified as being quoted on

either OTCQX or OTCQB and 61 were identified as being quoted on OTC Pink. No issuers were

identified as being quoted on the OTC Bulletin Board. For issuers with multiple classes of securities, we

cannot determine whether the class issued in a Regulation A offering is quoted on the OTC market. Grey

market issuers are excluded. Among securities quoted on the OTC market, liquidity can vary significantly

from issuer to issuer and is on average lower than the liquidity of securities listed on major exchanges.

Many filers mention a lack of a public market for their securities in their disclosures.

30

Figure 7. Secondary Trading Market of Regulation A Issuers

No market identified

260

OTC

Exchange listing

75

11

Relatively few reporting companies relied on Regulation A during this period. The

amendments to permit reporting companies to use Regulation A became effective on January 31,

2019. Approximately 17 reporting companies sought to use Regulation A to conduct an offering

in 2019, of which 11 offerings were qualified. The impact of reporting companies’ eligibility to

rely on Regulation A on capital formation and investor protection remains to be seen.

Industry Distribution

The industry distribution reflects a heavy concentration of offerings in the finance sector

(primary Standard Industrial Classification (SIC) codes between 6000 and 6999).

Figure 8 below shows the industry distribution of the amounts sought in qualified

Regulation A offerings. Finance, insurance, and real estate accounted for 53% of financing

sought in qualified Regulation A offerings. Examining more granular SIC code data suggests

that financial issuers were frequently real estate investment trusts (REITs) and other real estate

companies, other holding companies, non-depository credit institutions, and commercial banks.

The most common industry among nonfinancial issuers in qualified offerings was business

services (which includes software), followed by chemicals.

31

Figure 8. Capital Sought in Qualified Regulation A Offerings, by Issuer Industry 29

Transport,

communic., utilities

3%

Agric., forestry, fishing

1%

Services

18%

Retail & wholesale

5%

Pub. admin. & nonclass.

0%

Mining & construction

2%

Finance, insurance, real

estate

53%

Manufacturing

18%

Figure 9 below shows the industry distribution of the proceeds reported in Regulation A

offerings. The finance sector accounted for 79% of reported proceeds (with real estate issuers

accounting for 69% of all reported proceeds). The most common industry among nonfinancial

issuers was transportation equipment, followed by business services.

29

See infra footnotes 110 and 111. The industry is based on the primary SIC code as reported in Part I of

Form 1-A or the latest amendment to it.

32

Figure 9. Proceeds Reported in Regulation A Offerings, by Issuer Industry 30

Retail &

wholesale

3%

Services

4%

Transport,

Agric., forestry, fishing

communic., utilities

0%

2%

Mining & construction

0%

Manufacturing

12%

Finance, insurance, real

estate

79%

Geographic Distribution

Close to 50% of qualified offerings were by issuers incorporated in Delaware, with an

additional 13% by issuers incorporated in Nevada. As with reporting companies, headquarters

location often differs from the state of incorporation.

Figure 10 below summarizes the geographic distribution of financing sought in qualified

Regulation A offerings, by state of issuers headquarters location. Issuers headquartered in

California accounted for 24% of the aggregate amounts sought, followed by Washington, D.C.

(16%) and Florida (9%). Figure 11 below summarizes the geographic distribution of the

proceeds reported in Regulation A offerings, by state of issuer headquarters location. Issuers

headquartered in Washington, D.C., accounted for 36% of reported proceeds (due to one large

30

See infra footnote 111. The industry is based on the primary SIC code as reported in Part I of Form 1-A or

the latest amendment to it.

33

REIT sponsor headquartered in Washington, D.C.), followed by California (13%) and Utah

(7%).

Figure 10. Capital Sought in Qualified Regulation A Offerings, by Issuer Location 31

Figure 11. Proceeds Reported in Regulation A Offerings, by Issuer Location 32

mln = million

31

See infra footnote 110. The state of location is based on the state of headquarters location as reported in

Part I of Form 1-A or the latest amendment. The maps exclude Alaska, Hawaii, and U.S. territories. Those

areas did not have issuers with qualified Regulation A offerings between June 2015 and December 2019.

32

See supra footnote 31 and infra footnote 111.

34

III. Evidence on the Performance of Regulation A and Regulation D offerings and issuers

Below we analyze evidence on the performance of Regulation A and Regulation D

offerings, based on primary data, where they are available, and the analysis of data from research

studies and other external reports. We start by discussing the performance measures and data

limitations (Section III.A). Next, we present the evidence on the performance of Regulation D

(Section III.B) and evidence on the performance of Regulation A (Section III.C).

A. Performance Measures and Data Considerations

Measures

At the outset, we acknowledge that “performance” can mean different things for issuers,

investors, and capital markets. From the perspective of issuers relying on exemptions under

Regulation A and Regulation D, offering performance can be assessed as a capital-raising tool.

Issuers choosing to rely on a particular offering method to meet their external financing needs

may weigh the amount of capital they can raise to fund their businesses or investment projects

against the cost of raising capital using that offering method.

From the perspective of investors, performance can be measured in several ways: (1)

subsequent operating and financial performance of the issuer (e.g., profitability and growth); (2)

for private issuers, the incidence of subsequent financing rounds, public market exits, acquisition

exits, and business survival; and (3) for public issuers (and the subset of private issuers with

return information, such as those private funds that provide such information), returns. A binary

metric of issuer performance that can also be highly relevant for investors in a Regulation A or

Regulation D offering is the incidence of fraud or another securities law violation. Finally, the

breadth of additional investment opportunities that become available when issuers can utilize

these exemptions, which can be used to diversify investor portfolios relative to investing only in

35

public companies, can also be used to characterize the performance of the Regulation A and

Regulation D exemptions from the standpoint of investors.

Data Sources

We collect the data for the discussed performance measures from the following sources.

We extract data on the exemptions’ performance as a capital-raising tool from EDGAR filings.

We use Form D filings to obtain data for Regulation D issuers. Data on Regulation A issuers are

based on Form 1-A filings and amendments to those filings, offering circular supplements,

annual reports on Form 1-K, semi-annual reports on Form 1-SA, current reports on Form 1-U,

exit reports on Form 1-Z for Regulation A issuers, as well as Exchange Act reports for

Regulation A issuers that are, or become, Exchange Act reporting companies. We obtain data on

issuer financial and operating performance from EDGAR filings and Compustat, where

available. We gather market data for traded issuers from Center for Research in Security Prices

(CRSP)/Compustat and OTC Markets, where specified. Information on mergers and acquisitions

(M&A) and public market exits and follow-on capital raises is collected from EDGAR filings,

SDC Platinum, and S&P Capital IQ. Information on private fund returns is obtained from

commercial databases (Preqin for private equity (PE) funds and HFM Global (HFM) (formerly

known as Hedge Fund Intelligence (HFI)), Eureka, TASS, and BarclayHedge for hedge funds).

Primary data on the performance of Regulation A and Regulation D offerings are supplemented

with statistics obtained from external sources, including research studies and industry reports.

Data Limitations

We acknowledge several limitations on our analysis related to the features of exemptions

and availability of data. Because of the nature of the market, with most issuers not publicly

traded on an exchange or quoted on the OTC market, as well as the scaled or very limited

36

disclosure requirements applicable to most issuers offering securities under Regulation A and

Regulation D, comprehensive performance data are not available for all issuers and offerings,

and some of the available data are noisy. 33 For example, trading information is available only

for a subset of operating company issuers in Regulation D offerings that are either exchangelisted or quoted on the OTC market; and even where trading information is available, the traded

class of securities generally does not have the same terms and characteristics as the securities

offered under Regulation D. 34 Trading information is also available only for a small number of

Regulation A issuers that have obtained an exchange listing after the offering, as well as for

those Regulation A issuers that are quoted on the OTC market.

Return information is available for a subset of private funds, including hedge funds and

PE funds that rely on Regulation D. Such data may be an incomplete representation of the riskadjusted performance of the full set of private fund issuers relying on Regulation D for several

reasons. Comprehensive data on returns of all pooled investment funds relying on Regulation D

are not required to be disclosed. Data from commonly used databases is provided voluntarily

and so may be affected by selection bias, resulting in overrepresentation of funds and fund-years

with better risk-adjusted performance. Further, because of the differences in reporting entity

identifiers, we are not able to match such data to individual Regulation D offerings. Thus, some

offerings conducted under other exemptions from registration under the Securities Act and

Investment Company Act of 1940 (“Investment Company Act”) may be represented in the

33

For instance, some of the performance data are manually collected from filings in an unstructured format or

automatically collected from filings in a structured format, such as XML. Data may contain noise,

particularly in cases of unaudited or restated financial statements or filings with tagging errors.

34

For example, securities issued under Regulation D are restricted securities that may only be resold in a limited

set of circumstances, in particular, pursuant to an effective registration statement under the Securities Act or a

valid exemption from registration for the resale, such as Section 4(a)(1) of the Securities Act, or the nonexclusive safe harbor of Rule 144. See https://www.sec.gov/fast-answers/answersrestrichtm.html.

37

statistics, and some fund offerings conducted under Regulation D may not be included in the

presented statistics.

Data on survivorship of issuers in Regulation A and Regulation D offerings are also

affected by noise. Measuring survivorship through the presence of subsequent EDGAR filing

activity significantly underestimates survivorship because many Regulation A and Regulation D

issuers do not incur ongoing reporting obligations under either the Exchange Act or Regulation

A. Measuring survivorship through the absence of bankruptcy filings may significantly

overestimate survivorship because many smaller issuers that either do not have significant

liabilities or that do not have significant assets recoverable through a bankruptcy proceeding will

likely liquidate without a bankruptcy filing.

Performance data available for private issuers are not directly comparable to the data for

public issuers on the basis of similar metrics. For example, return data for Regulation A and

Regulation D issuers quoted on the OTC market are not directly comparable to return data on

exchange-listed securities, because the OTC market has significantly lower liquidity and a higher

incidence of days with no trading. As another example, where return data for private securities

are available (e.g., in the case of private fund returns), a direct comparison to the returns on

publicly traded assets may be difficult because of a lack of comparability. Private investments

are characterized by different risk exposures (e.g., nontraditional systematic risk factors in

private fund portfolios), illiquidity (e.g., because of restricted status of securities, contractual

provisions such as lock-up periods, and/or a lack of a secondary trading market), and high

transaction costs (including trading, due diligence, and search costs). This lack of comparability

is an outgrowth of individual market segments being designed to meet specific needs of different

types of issuers and attract specific investor clienteles through offering transactions.

38

It is unclear whether our findings can be extrapolated beyond the specific time period

under consideration. Unless specified otherwise, our data end at the end of the most recently

completed full year of data (2019). For Regulation D, the analysis begins in 2009 because

electronic data on Regulation D became available in the second quarter of 2009. For Regulation

A, the analysis begins in mid-2015, when the amendments became effective and electronic data

on issuers and offerings became available. The 2009-2019 period coincided with generally

favorable market conditions. We recognize that evidence on performance obtained during boom

periods may not apply to other periods. Therefore, where available, we supplement primary

performance data on private investments with evidence from related academic literature

spanning earlier periods and greater variation in macroeconomic cycles.

Sections III.B. and III.C below present the available evidence on the performance of

Regulation A and Regulation D. These exemptions have unique characteristics and associated

differences in data availability, sample construction, and appropriate benchmarks. Further, the

two market segments are vastly different in size, with annual Regulation D proceeds exceeding

annual reported Regulation A proceeds by an order of magnitude of 1000x. Therefore, we

present the analysis for the two exemptions separately.

B. Regulation D

Below we present evidence from primary data analysis and synthesis of existing studies

on the performance of Regulation D as a capital-raising tool and on the performance of

Regulation D investments. In line with prior work, we analyze performance of funds and nonfund issuers separately because of the unique institutional characteristics and aspects of

performance data and metrics applicable to these two categories of issuers.

39

1. Performance of Regulation D as a Capital-Raising Tool

First, we consider the performance of Regulation D as a capital-raising tool and as a

source of diverse investment opportunities. As described above, Regulation D has accounted for

a large amount of capital formation. Total capital raised annually in the private capital market is

large both in absolute terms and when compared to the amounts raised in the public markets.

(See Figure 12 below.) In 2019, registered offerings of equity and debt accounted for

approximately $1.2 trillion of new capital, compared to more than $2.7 trillion reported raised

through all unregistered offering channels. 35 Of this, the largest amount was raised by

Regulation D offerings—approximately $1.6 trillion—which is considerably larger than the

amount of public debt (straight and convertible) and public equity (common and preferred)

offerings over the same time. Over the 2009 through 2019 period, $13.6 trillion was raised

through Regulation D offerings compared to $14.1 trillion raised through registered offerings of

debt and equity, including IPOs. As shown in Figure 12 below, in each of the years since 2017

through 2019, the amounts raised in the Regulation D market have surpassed aggregate amounts

raised through registered offerings of debt and equity.

35

See Harmonization Proposing Release, at n. 12. Besides Regulation D, other unregistered offerings include

offerings relying on Rule 144A, Regulation A as described above, Regulation Crowdfunding, Regulation S,

and Section 4(a)(2) of the Securities Act. By its terms, Rule 144A is available solely for resale

transactions. However, market participants use it to facilitate capital raising by issuers by means of a twostep process, in which the first step is a primary offering on an exempt basis to one or more financial

intermediaries, and the second step is a resale to “qualified institutional buyers” in reliance on Rule 144A.

40

Figure 12. Aggregate Capital Reported Raised in 2009–2019 through Regulation D

Offerings and Registered Offerings 36 ($ billion)

$2,000

$1,800

$1,600

Amounts Raised ($ billion)

$1,400

$1,200

$1,000

$800

$600

$400

$200

$-

2009

2010

2011

Public Equity Offerings

2012

2013

2014

2015

Public Debt Offerings

2016

2017

2018

2019

Regulation D Offerings

Table 8 below estimates the size of the private and public markets in terms of number of

offerings per year. As the table shows, offerings in the private market occur with a significantly

higher frequency compared to public market issuances. Regulation D offerings occur with far

greater frequency than any other offering method surveyed, indicating that the accumulation of

capital raised through Regulation D occurs by way of much smaller offering denominations than

other methods. This finding is consistent with Regulation D being the primary tool for capital

raising by smaller entities.

Table 8. Number of Regulation D Offerings and Registered Offerings by Year (2009–2019)

Year

Public Equity

Offerings- IPOs

Registered

Follow-on Equity

Offerings

Registered Debt

Offerings

Regulation D

Offerings 37

36

In this figure, amounts raised in public equity offerings include amounts raised in IPOs.

37

These represent offerings that were initiated during the year or were active during the year. Generally, offerings

by pooled investment funds are continuous in nature and extend into multiple years.

41

2009

68

874

1,445

18,295

2010

200

872

1,930

25,993

2011

201

662

1,465

27,336

2012

206

748

1,473

28,184

2013

283

967

1,510

30,429

2014

347

829

1,576

33,429

2015

218

767

1,565

34,877

2016

119

702

1,636

35,793

2017

178

798

1,846

37,785

2018

269

723

1,641

40,417

2019

244

685

1,484

41,196

Relative to registered markets, where the majority of capital is raised through fixed

maturity debt, approximately two-thirds of Regulation D offerings represent new equity capital.

Registered offerings of new equity capital constitute less than 17% of the overall capital raised

through registered offerings.

Next, we characterize the available data on the composition and diversity of investment

opportunities available in Regulation D offerings. The largest category of issuers in the

Regulation D capital market, based on the amount sold, are pooled investment funds

(predominantly private funds), which include hedge funds, venture capital (VC) funds, PE

funds, and other pooled investment funds, according to the classification on Form D. 38 Since the

38

Other pooled investment funds include, for example, commodity pools and registered investment companies.

Commodity pools are investment trusts, syndicates, or similar enterprises that are operated for the purpose of

trading commodity futures. Registered investment companies are entities such as mutual funds that issue

securities to investors, hold pools of securities and other assets, and are registered with the Commission under

the Investment Company Act. Other pooled investment funds also include private funds that would be

investment companies but for the exclusion provided in Sections 3(c)(1) or 3(c)(7) of the Investment Company

42

Commission first required electronic filing of Forms D in 2009, pooled investment funds have

accounted for $11.7 trillion of new capital raised through Regulation D offerings and reported on

Form D, compared to approximately $2 trillion raised by non-funds. Hedge funds are the largest

category of fund issuers in the Regulation D market, having raised more than $4 trillion of new

capital during this period. In terms of the amounts raised by fund type, PE funds raised the

largest mean amount. A breakdown of the number of offerings and amount of capital raised

during 2009 through 2019 by type of pooled investment fund, as reported by issuers in Item 4 of

Form D, is presented in Table 9 below.

Table 9. Number of Offerings and Amounts Raised by Fund Type, 2009–2019

Pooled Investment

Funds

Hedge Funds

Private Equity Funds

Venture Capital Funds

Other Investment Funds

Number

of

Offerings

Aggregate

Amounts

Reported Sold

($ billion)

Mean

Amounts

Reported Sold

($ million)

Median

Amounts

Reported Sold

($ million)

65,591

$11,738.0

$179

$16

20,242

17,939

8,437

18,973

$4,022

$3,215

$308

$4,193

$199

$179

$37

$221

$26

$33

$3

$6

While funds dominate in terms of amounts sold in the Regulation D market, non-fund

issuers initiated almost three-fourths of new offerings. (See Figure 13 below.) Of the non-fund

offerings that identified a specific industry, most were from the Finance/Banking/Insurance,

Technology, and Real Estate industries. Almost 22% of offerings check “Other” for industry, for

Act. While some registered investment companies use Regulation D, based on our analysis of Form D data, the

overwhelming majority (99.7%) of pooled investment fund offerings reported on Form D are excluded from the

definition of “investment company” under the Investment Company Act. Very few Form D fund issuers are

identified as mutual funds in Morningstar data (based on CIK identifiers, where available). Thus, for purposes

of evaluating the performance of pooled investment fund Regulation D issuers, we focus on private fund

returns.

43

which further information is not available. In terms of total amounts reported to be raised, the

top industries were Banking & Financial, Technology, and Real Estate. (See Figure 14 below.)

Similar to Regulation D, industries with the largest amounts raised in registered offerings were

Banking & Financial and Technology, followed by Manufacturing and Energy.

Figure 13. Number of Offerings and Amounts Raised by Fund and Non-Fund Regulation D

Issuers: 2009–2019

Number of Offerings

Amounts Raised

Private

Funds

86%

Private

Funds

19%

Non

Fund

Issuers

81%

Non

Fund

Issuers

14%

44

Figure 14. Number of Offerings and Amounts Raised by Non-Fund Industry (2009–2019)

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%

Number Regulation D Offerings

Number of Registered Offerings

Regulation D - Amount Sold

Registered Offerings - Amounts Sold

Consistent with the large number of non-fund offerings and the smaller proportion of

capital they raised in the Regulation D market, the median offering size for non-fund issuers is

substantially lower than the median offering size for funds. During 2009 through 2019, the

median offer size of non-fund issuers was $1 million (see Table 10 below). This indicates a

large number of small offerings by non-fund issuers, consistent with the original regulatory

objective to target the capital formation needs of small businesses. As the table below shows,

mean and median amounts raised in Regulation D offerings are significantly smaller than the

amounts raised in registered offerings, across all industries.

45

Table 10. Mean and Median Amount Raised by Offering and Industry Type (2009–2019)

Offering Type

Regulation D

Public Equity (nonIPO) 39

Public Debt

Amounts Raised

($ million)

Mean

Median

Mean

Median

Mean

Median

Private Funds

$179

$16

n.a.

n.a.

n.a.

n.a.

Agriculture

$10

$1

$86

$11

$528

$500

Banking/Financial

$40

$2

$362

$75

$581

$400

Business Services

$6

$1

$200

$80

$580

$399

Energy

$18

$1

$288

$170

$550

$449

Health Care

$9

$2

$83

$30

$753

$595

Manufacturing

$12

$1

$206

$81

$582

$498

Other

$10

$1

$172

$82

$438

$399

Real Estate

$12

$2

$250

$146

$393

$349

Restaurants

$4

$1

$252

$105

$604

$499

Retailing

$8

$1

$289

$208

$866

$650

Technology

$8

$1

$169

$59

$993

$750

Travel

$6

$1

$417

$200

$466

$447

Intermediaries in securities offerings serve an important role in reducing information

asymmetry about issuers and in lowering search costs involved in matching issuers with

investors. While intermediation is widespread in registered offerings of debt and equity, it is

much less common among unregistered offerings. On the basis of Form D data, we find

approximately 20% of Regulation D offerings initiated during 2009 through 2019 reported using

an intermediary to raise capital. The use of intermediaries is different across issuer types and

39

See supra footnote 11.

46

industries. Among Regulation D issuers, 28% of offerings by financial issuers and 21% of

private fund offerings reported using an intermediary, while approximately 15% of offerings by

operating companies (i.e., non-fund, non-financial companies) used an intermediary in their

offerings. The biggest users of intermediaries are issuers in the real estate industry (35%) and

energy industry (32%). There is also significant variation in fees paid between fund and nonfund issuers. Private funds, on average, paid approximately 2% during the 2009 through 2019

period, while non-fund issuers paid approximately 5.4% on average.

A large proportion of investors in Regulation D offerings are accredited investors. While

Rule 506(c) prohibits sales to non-accredited investors, up to 35 non-accredited investors can

purchase securities in a Rule 506(b) offering. Based on the analysis of data from initial Form D

filings, including by pooled investment funds, we estimate that approximately 3.4% to 6.9% of

all offerings initiated during 2009 through 2019 had one or more non-accredited investor

participating in the offering. 40

On the basis of information in initial Form D filings and amended filings, we estimate

that approximately 5.9 million investors participated in Regulation D offerings initiated during

2009 through 2019. However, these counts do not adjust for any repeat participation among

investors in offerings. Because the data do not identify individual investors, we cannot estimate

the number of unique investors participating in Regulation D offerings.

40

This estimated range is based on DERA staff analysis of Form D data on initial Form D filing among all

Rule 506(b) offerings from 2009 to 2019. In particular, the 3.4% estimate is based on offerings that report

that at least one non-accredited investor already have invested in the offering as of the Form D filing and

may represent a lower bound because it relies on available Form D filings, and because a final Form D

upon the conclusion of an offering is not required to be filed. If we also include Rule 506(b) offerings on

Form D that accept non-accredited investors but reported having zero non-accredited investors in the initial

filing, the estimated percentage of offerings involving accredited investors during the 2009-2019 period is

approximately 6.9%, which may be viewed as an upper bound estimate.

47

2. Performance of Private Funds

As discussed in Section II.A.2 above, private funds account for the largest share of

Regulation D market activity. Below we present available evidence on the performance of

private funds. First, we present data on the performance of hedge funds. Next, we turn to other

private funds (notably, PE and VC funds). Because of the nature of the data and the long-term

cash flow structure of PE and VC funds, we consider these funds’ performance separately from

hedge funds. We conclude with a summary of the evidence on the performance of mutual funds,

which are registered investment companies, and returns on the market index.

Hedge Funds 41

Table 11 and Figure 15 below present data on hedge fund performance. We obtain

information on all funds covered in four major commercial data sources on hedge fund returns:

BarclayHedge, HFM, Eureka, and TASS. Different databases vary in their coverage of hedge

funds reporting their performance. Following the sample period used for Regulation D data, we

present mean and median returns, as well as the 25th (P25) and 75th percentiles of the return

distribution (P75) and the number of observations (Obs.) for each year during 2009 through

2019.

41

As used in this sub-section, except where defined otherwise, the reference to “hedge funds” is based on the use

of the term by commercial data vendors that aggregate and check the accuracy of data self-reported by funds,

which has also been used in academic research, and not on a strict application of any legal definition of a hedge

fund. For example, one of the vendors whose data we use below, EurekaHedge, explains that “[h]edge funds

are investment vehicles that explicitly pursue absolute returns on their underlying investments. . . the ‘Hedge

Fund’ definition has come to incorporate any absolute return fund investing within the financial markets

(stocks, bonds, commodities, currencies, derivatives, etc.) and/or applying non-traditional portfolio management

techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in

any number of strategies and they are perhaps most readily identifiable by their structure, which is typically a

limited partnership (the manager acting as the general partner and investors acting as the limited partners) with

performance related fees, high minimum investment requirements and restrictions on types of investor, entry

and exit periods.” See https://www.eurekahedge.com/Research/News/1829/What-is-a-Hedge-Fund. This

definition may differ from that used by the other vendors whose data we use.

48

Table 11. Hedge Fund Returns (2009–2019) 42

Year

Mean

Median

P25

P75

Obs.

Barclay Hedge

2009

33.5%

23.0%

12.2%

43.7%

1,646

2010

13.8%

10.2%

5.1%

18.7%

1,902

2011

-3.7%

-3.1%

-9.4%

2.8%

2,193

2012

11.9%

10.0%

5.1%

16.5%

2,572

2013

13.6%

10.7%

4.1%

20.2%

3,072

2014

5.9%

4.6%

1.2%

9.3%

3,607

2015

1.7%

1.3%

-2.7%

6.2%

4,059

2016

6.1%

4.1%

0.0%

9.8%

4,568

2017

10.9%

7.9%

3.4%

15.4%

5,063

2018

-4.9%

-4.4%

-10.1%

-0.1%

5,444

2019

11.3%

8.6%

3.9%

16.7%

5,782

2009-2019

7.4%

5.2%

-0.6%

12.7%

HFM

2009

35.5%

24.7%

11.6%

47.3%

784

2010

16.4%

12.8%

7.4%

21.9%

872

2011

0.7%

1.2%

-6.3%

7.3%

959

2012

11.5%

10.4%

3.8%

16.9%

1,047

2013

14.6%

11.8%

5.2%

21.6%

1,154

2014

7.1%

5.8%

0.7%

11.4%

1,270

2015

1.7%

1.6%

-4.9%

8.1%

1,338

2016

10.9%

7.6%

1.9%

15.4%

1,438

2017

22.7%

9.0%

3.3%

15.5%

1,523

2018

-0.1%

0.5%

-7.3%

6.8%

1,499

2019

11.3%

8.5%

3.5%

15.7%

1,317

2009-2019

11.2%

7.3%

0.4%

15.3%

Eureka

42

Returns are annual returns for all funds reported in the respective database, including funds of funds (FOFs)

and global as well as U.S. funds reporting data. For each database used here, funds report returns, which

generally are expected to be reported net of fees. Twelve months of monthly return data are required for a

fund-year observation to be included in the estimate. Thus, funds entering or exiting in the course of a

calendar year are not included in the statistics for that calendar year. Due to differences in fund identifiers

and overlaps, we are unable to consolidate data on all funds, so the data are presented for each database.

Also, self-reporting may result in upward-biased estimates of average performance.

49

2009

24.6%

16.4%

3.6%

35.7%

2,650

2010

13.3%

10.2%

3.4%

19.0%

2,785

2011

-1.8%

-1.4%

-8.4%

5.1%

2,848

2012

7.4%

6.8%

0.5%

13.9%

2,817

2013

11.4%

9.6%

0.5%

19.1%

2,822

2014

5.3%

4.1%

-1.6%

9.7%

2,724

2015

0.0%

-0.1%

-6.2%

6.1%

2,631

2016

6.0%

4.6%

-1.0%

10.7%

2,541

2017

14.9%

6.6%

1.5%

12.9%

2,411

2018

-4.1%

-3.1%

-9.9%

2.5%

2,161

2019

9.9%

7.9%

2.8%

15.6%

1,827

2009-2019

8.0%

5.1%

-2.1%

13.3%

TASS

2009

18.8%

12.1%

5.5%

23.5%

8,023

2010

8.4%

7.0%

2.8%

11.4%

8,118

2011

-2.5%

-2.9%

-8.3%

6.0%

7,823

2012

7.7%

6.9%

2.0%

12.0%

7,146

2013

11.0%

8.0%

3.4%

13.8%

6,343

2014

4.7%

4.1%

-0.2%

8.9%

5,887

2015

3.0%

2.3%

-2.2%

9.5%

5,330

2016

4.9%

3.0%

-2.5%

12.0%

5,084

2017

12.0%

7.1%

2.5%

12.6%

4,742

2018

-0.1%

-2.0%

-8.3%

4.4%

4,344

2019

11.5%

7.0%

2.8%

12.5%

3,880

2009-2019

7.4%

5.6%

-0.8%

11.7%

On the basis of the data presented above, we note considerable variance in return

statistics over time, which were also somewhat sensitive to sample coverage in different sources.

However, the hedge fund asset class as a whole reported generally strong returns in absolute

terms during this period. As an important caveat, this period has coincided with favorable

market performance. Thus, Figure 15 below plots mean annual hedge fund returns from the four

databases alongside annual market portfolio returns from CRSP.

50

Figure 15. Average Hedge Fund Returns versus Market Returns (2009–2019)

2009

70%

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

-10%

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

0%

-10%

-20%

-20%

Barclay Hedge

Eureka

HFM

TASS

CRSP value-weighted

CRSP equal-weighted

For most years of the sample period, the market portfolio realized higher returns than the

return reported in the hedge fund data. However, as hedge funds may invest in a variety of nonequity assets and have a distinct risk and illiquidity profile, comparisons with stock market

returns should be treated with caution.

Evidence on Hedge Fund Returns from External Studies

A number of studies have considered hedge fund returns. For example, a recent

academic study has found mean (median) annual net hedge fund returns to be approximately 9%

(8%). 43 Extensive research has analyzed risks of hedge fund investments and found that

systematic risk exposures of hedge funds often differ from those of public market investments. 44

43

See Vikas Agarwal, T. Clifton Green, & Honglin Ren, Alpha or Beta in the Eye of the Beholder: What Drives

Hedge Fund Flows?, 127 J. FIN. ECON. 417 (2018) (“Agarwal et al. (2018)”) at Table 1 (examining 71,117

observations from Eurekahedge, HFR, Lipper TASS, and Morningstar for 16,185 hedge funds and FOFs from

1994 through 2012. Average (median) CAPM alpha was 4.9% (3.4%); average (median) multi-factor alphas

were 2.7-5.1% (1.4-3.4%), depending on the risk adjustment model).

44

See, e.g., William Fung & David A. Hsieh, Hedge Fund Benchmarks: A Risk-Based Approach, FIN.

ANALYSTS J., Sept./Oct. 2004, at 65; William Fung & David A. Hsieh, Measurement Biases in Hedge Fund

51

A small number of recent studies examine the subset of larger private funds subject to Form PF

reporting requirements. 45 For example, a recent study examining quarterly Form PF data on

returns of larger hedge funds from 2012Q4 through 2016Q4 reports average (median) quarterly

gross returns of 2.5% (2.2%) with a 25th-75th percentile range of -0.5% to 5.1% and average

(median) quarterly net returns of 1.8% (1.7%), with a 25th-75th percentile range of -0.7% to 4.2%,

respectively. 46 Another recent report, examining all Form PF filers’ private fund returns from

2012 through 2016, finds median annual gross returns of 12.1%, with the median fee of 1.9%,

Performance Data: An Update, FIN. ANALYSTS J., May/June 2009, at 36; Manuel Ammann, Otto R. Huber,

& Markus Schmid, Benchmarking Hedge Funds: The Choice of the Factor Model (Working Paper, 2011);

Zheng Sun, Ashley W. Wang, & Lu Zheng, Only Winners in Tough Times Repeat: Hedge Fund

Performance Persistence over Different Market Conditions, 53 J. FIN. AND QUANTITATIVE ANALYSIS 2199

(2018); Charles Cao et al., What Is the Nature of Hedge Fund Manager Skills? Evidence from the RiskArbitrage Strategy, 51 J. FIN. AND QUANTITATIVE ANALYSIS 929 (2016); Agarwal et al. (2018), supra

footnote 43; Jakub W. Jurek & Erik Stafford, The Cost of Capital for Alternative Investments, 70 J. FIN.

2185 (2015); Turan G. Bali, Stephen J. Brown, & Mustafa O. Caglayan, Systematic Risk and the Cross

Section of Hedge Fund Returns, 106 J. FIN. ECON. 114 (2012); Turan G. Bali, Stephen J. Brown, &

Mustafa O. Caglayan, Macroeconomic Risk and Hedge Fund Returns, 114 J. FIN. ECON. 1 (2014); Andrea

Buraschi, Robert Kosowski, & Fabio Trojani, When There Is No Place to Hide: Correlation Risk and the

Cross-Section of Hedge Fund Returns, 27 REV. FIN. STUD. 581 (2014); Ravi Jagannathan, Alexey

Malakhov, & Dmitry Novikov, Do Hot Hands Exist Among Hedge Fund Managers? An Empirical

Evaluation, 65 J. FIN. 217 (2010); Andrea Buraschi, Robert Kosowski, & Worrawat Sritrakul, Incentives

and Endogenous Risk Taking: A Structural View on Hedge Fund Alphas, 69 J. FIN. 2819 (2014); Ronnie

Sadka, Liquidity Risk and the Cross-Section of Hedge-Fund Returns, 98 J. FIN. ECON. 54 (2010); and Ilia

D. Dichev & Gwen Yu, Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn, 100 J. FIN.

ECON. 248 (2011).

45

Form PF must be filed by any adviser (a) that is registered or required to register with the SEC as an investment

adviser, (b) that manages one or more private funds and (c) together with its related persons, collectively, had at

least $150 million in private fund assets under management as of the last day of the most recently completed

fiscal year. See https://www.sec.gov/about/forms/formpf.pdf.

46

The study focused on the subset of Form PF filers that are qualifying hedge funds (i.e., with a NAV of at

least US$500 million as of the last day in any month in the fiscal quarter immediately preceding the

adviser’s most recently completed fiscal quarter). See Mathias S. Kruttli, Phillip J. Monin, & Sumudu W.

Watugala, Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds (Fed. Reserve

Board, Fin. & Econ. Discussion Series No. 2017-121, 2017), at Table 1. See also Mark D. Flood & Phillip

Monin, Form PF and Hedge Funds: Risk-Measurement Precision for Option Portfolios (Office of Fin.

Research, Working Paper No. 16-02, 2016).

52

significant dispersion across funds, and near-zero net returns for the bottom 25% of reporting

funds. 47

Other Private Funds

Below we discuss the performance of other private funds, including PE and VC funds.

For purposes of the analysis below, we follow Preqin, our data source, in presenting data on

buyout, VC, and certain other private fund strategies (such as private debt investing,

infrastructure, natural resources, real estate PE, etc.) as part of the broader “PE” category,

applying that term in a broader sense not limited to buyout funds. 48 All of these strategies share

certain commonalities, such as the nature of fundraising from limited partners (LPs), a lack of

liquidity, long-term focus, and irregular cash flows that must be considered in evaluating

performance. We also present breakdowns showing performance of these types of private fund

strategies.

According to a Preqin analysis, in 2019 global PE fund assets under management (AUM)

accounted for approximately $4 trillion, 49 and fundraising was estimated at $595 billion across

47

See David Johnson & Francis Martinez, Form PF Insights on Private Equity Funds and Their Portfolio

Companies (Office of Fin. Research, Brief Series No. 18-01, 2018), at 4 and Figure 8.

48

Preqin notes that it “collects performance data from a variety of sources to ensure a high degree of accuracy and

confidence.” Sources of data include institutional investors that are limited partners, fund managers (with over

2,200 firms choosing to submit performance data to date), listed firm financial reports, public filings, and

annual reports. See https://docs.preqin.com/pro/Private-Capital-Performance-Guide.pdf and

https://docs.preqin.com/pro/Preqin-Glossary.pdf. This approach to sample construction not limited to buyout

and VC funds has also been used, for example, in Arthur Korteweg & Morten Sorensen, Skill and Luck in

Private Equity Performance, 124 J. FIN. ECON. 535 (2017) (“Korteweg & Sorensen (2017)”). See also J.

Martin and R.-D. Manac Varieties of Funds and Performance: The Case of Private Equity, WORKING PAPER,

University of Amsterdam (2018); Nathalie Gresch and Rico von Wyss, Private Equity Funds of Funds vs.

Funds: A Performance Comparison, 14 J. PRIVATE EQUITY 43 (2011); Daniel Hobohm, Investors in Private

Equity Funds: Large-Scale Performance Analysis and the Question if Location Matters, WORKING PAPER,

Ludwig Maximilian University of Munich (2008).

49

See Elisângela Mendonça, Global Private Equity Crosses the $4tn Assets Mark - Report, PRIVATE EQUITY

NEWS, Feb. 5, 2020, https://www.penews.com/articles/global-private-equity-crosses-the-4tn-assets-mark-report20200205.

53

1,316 funds. 50 According to a different recent report, in 2019 the U.S. VC industry had $444

billion in AUM across 5,733 funds by 2,371 VC firms. 51 The same study estimated that in 2019

new VC fundraising reached $50.5 billion across 272 funds, while VC funds invested $133.4

billion across 11,360 deals with 10,430 portfolio companies.

PE and VC fund performance is frequently measured using annualized internal rates of

return (IRR) on the basis of fund contributions and distributions (which include the value of any

unrealized investments). 52 Thus, in our analysis below, we use IRR as a measure of

performance. 53 Table 12 below presents the analysis of performance of PE and VC funds

covered in Preqin data, as described above, grouped by fund size, where fund size is measured

by capital committed to the funds. 54 From the results, it appears that the top quartile of PE and

50

See Chris Cumming, Private-Equity Fundraising Dips in 2019 for First Time Since 2010, WALL ST. J., Feb. 2,

2020, https://www.wsj.com/articles/private-equity-fundraising-dips-in-2019for-first-time-since-201011580651367.

51

See NVCA Yearbook 2020, Public Data Pack, https://nvca.org/recommends/nvca-2020-yearbook_publicdata-pack-2/ (“NVCA (2020)”). The median fund was relatively small ($80 million), reflecting right

skewness.

52

IRR is a time-weighted return that uses the present value of cash contributed, distributions, and the value of

unrealized investments as of measurement date, and excludes performance fees.

One alternative measure is a multiple of invested capital (also referred to as total value to paid in capital),

defined as the sum of all fund distributions and value of unrealized investments divided by the value of all fund

contributions by LPs. See, e.g., Korteweg & Sorensen (2017) (performing the main analysis using IRRs and

obtaining similar results in robustness tests using multiples).

53

Data are obtained from Preqin Ltd. The data are as of 2018, with an update in 2019 covering 19 PE strategies,

including buyout, and VC strategies and 9 regional focuses around the globe, including the United States and

North America. Due to a low number of funds in certain strategies, some strategies were combined into a

broader strategy. Real Estate strategy includes Real Estate Co-Investment, Real Estate Secondaries, Real Estate

Fund of Funds and Real Estate. Infrastructure strategy includes Infrastructure Secondaries, Infrastructure Fund

of Funds, and Infrastructure. Early Stage includes Early Stage (Seed), Early Stage (Start-Up) and Early Stage.

Venture strategy includes Venture Debt and Venture (General). Net IRR is calculated using capital calls,

management fees, distributions, and the fair value of unrealized investments and is expressed as an annualized

rate of return. For definitions of these and other strategies used in this data, see

https://docs.preqin.com/pro/Preqin-Glossary.pdf.

54

Some literature has found diseconomies of scale in fund performance. See, e.g., Mark Humphery-Jenner,

Private Equity Fund Size, Investment Size, and Value Creation, 16 REV. FIN. 799 (2012); Florencio Lopez-deSilanes, Ludovic Phalippou and Oliver Gottschalg, Giants at the Gate: Investment Returns and Diseconomies of

Scale in Private Equity 50 J. Fin. Quant. Anal. 377 (2015); Korteweg & Sorensen (2017), supra note 52;

Douglas Cumming and Na Dai, Fund Size, Limited Attention and Valuation of Venture Capital Backed Firms,

54

VC funds has generated substantial returns for its investors. Overall, PE and VC funds exhibited

strong performance. The median IRR across all PE and VC funds is approximately 14%, which

is close to the 10% historical average annual return on the S&P 500 index. This result is

generally consistent with what academic studies on the performance of PE funds document. 55

However, PE and VC fund investments are less liquid and generally have a greater risk exposure

than an investment in the S&P 500 index.

18 J. EMPIR. FIN. 2 (2011) (finding diseconomies of scale in the VC industry). But see Harris et al. (2014),

supra note 55 (finding no significant relation between performance and fund size for buyout funds and finding

that VC funds in the bottom quartile of size underperform while top size quartile VC funds have the best

performance although they do not differ significantly from funds in the second and third size quartiles).

55

See, e.g., Robert S. Harris, Tim Jenkinson, & Steven N. Kaplan, Private Equity Performance: What Do We

Know?, 69 J. FIN. 1851 (2014) (“Harris et al. (2014)”).

55

Table 12. Net Internal Rate of Return (%) by Fund Size (2009–2019)

Size ($ million)

Mean

Median

P25

P75

Obs.

< 100

19.4

15.7

9.5

24.9

736

100 - 250

15.1

13.5

8.2

20.0

804

250 -1000

15.7

13.7

8.8

20.2

1194

1000 - 5000

13.9

13.2

8.1

18.7

486

> 5000

17.3

16.1

13.4

21.2

68

All funds

16.2

14.0

8.7

20.9

3,288

Tables 13 through 15 below provide additional breakdowns of fund performance data by

vintage year, fund strategy, and region. On the basis of average IRRs, it appears that early-stage

VC and secondaries have performed the best over the time period under consideration. 56 In

terms of regional focus, PE funds with primary regional focus on deals in North America, Asia,

and Middle East have generated the highest average IRRs.

56

Secondaries funds are funds that purchase stakes in privately held companies directly from the holder of the

securities. Early-stage VC funds invest in companies at an early stage of their lifecycle (seed or startup). For

definitions of these and other strategies used in this data, see https://docs.preqin.com/pro/Preqin-Glossary.pdf.

56

Table 13. Net Internal Rate of Return (%) by Vintage Year

Vintage Year

Mean

Median

25%

75%

Obs.

2009

16.8

13.0

8.6

20.2

238

2010

14.3

13.2

8.9

19.0

361

2011

15.9

14.5

9.8

20.4

438

2012

16.5

14.0

10.0

20.1

404

2013

14.5

13.2

8.5

18.4

488

2014

16.6

14.0

9.0

21.0

523

2015

15.4

14.4

8.4

22.0

505

2016

19.2

15.0

8.4

24.2

289

2017

17.4

12.5

3.0

27.1

220

57

Table 14. Net Internal Rate of Return (%) by Fund Strategy (2009–2019)

Main Focus

Mean

Median

P25

P75

Obs.

Balanced

18.9

13.4

8

21.3

31

Buyout

16.5

15.7

8.7

23

685

Co-investment

19.4

17.7

10.8

23.4

142

Direct Lending

9.2

9.4

6.6

11.9

92

Direct Secondaries

20.8

17.1

10.4

22.3

26

Distressed Debt

13.4

11

7.4

15.1

88

Early Stage

21.9

17.4

8.6

29.2

251

Expansion / Late Stage

17.5

13.2

9.3

20.2

66

Fund of Funds

13.2

13.3

9.3

17.4

486

Growth

16.2

12.8

7.9

21.5

253

Infrastructure

15.6

9.7

6.8

14.5

96

Mezzanine

10.9

9.9

8.1

13.9

80

Natural Resources

9.2

8.2

-0.7

21.3

75

Real Estate

15.4

14

10

19.6

654

Secondaries

22.5

17.5

13.9

23.8

135

Special Situations

10.6

10.5

5.5

14.5

39

Timber

4.6

4.4

2.9

7.7

18

Turnaround

16

20.2

7.8

30.3

19

Venture

18.7

15

7

27.7

230

All Funds

16.1

13.9

8.7

20.6

3,466

58

Table 15. Net Internal Rate of Return (%) by Regional Focus (2009–2019)

Main Region

Mean

Median

P25

P75

Obs.

Africa

11.0

10.2

7.6

13.6

18

Middle East & Israel

21.1

17.9

9.5

27.0

32

Australasia

17.9

15.6

11.6

24.6

47

Diversified Multi-Regional

10.2

9.5

4.1

14.4

73

Americas

10.8

10.0

3.3

16.6

76

Asia

17.9

14.4

9.2

22.5

320

Europe

16.1

13.2

8.5

19.4

693

US

13.8

12.5

8.1

18.1

914

North America

17.7

15.8

9.9

23.0

1,293

All Funds

16.1

13.9

8.7

20.6

3,466

Evidence on PE and VC Fund Returns from External Studies

Various academic studies have examined PE and VC returns during earlier time periods,

providing somewhat mixed evidence about the performance of those funds. 57 Several studies

find strong outperformance of PE and VC fund investments compared to public equity markets. 58

For example, one study finds that buyout and VC funds outperform the S&P 500 on average by

20% to 27% over the life of a fund. 59 Other studies find that PE funds on average either do not

57

See, e.g., the survey of the literature in Andrew Metrick & Ayako Yasuda, Venture Capital and Other

Private Equity: A Survey, 17 EUR. FIN. MGMT. 619 (2011).

58

See, e.g., John H. Cochrane, The Risk and Return of Venture Capital, 75 J. FIN. ECON. 3 (2005) (“Cochrane

(2005)”); Arthur Korteweg & Morten Sorensen, Risk and Return Characteristics of Venture Capital-Backed

Entrepreneurial Companies, 23 REV. FIN. STUD. 3738 (2010) (“Korteweg & Sorensen (2010)”); Harris et al.

(2014), supra footnote 55.

59

See Harris et al. (2014), supra footnote 55.

59

outperform public equity markets, or perform only marginally better, on a risk-adjusted basis. 60

Another important feature of PE fund performance documented by the academic literature is

long-term performance persistence. PE funds that are high performers tend to continue to do

well, while underperformers tend to continue to underperform. 61 One recent study finds,

however, that as the PE industry has matured, the persistence in performance has substantially

declined. 62

A number of studies have focused on VC performance. 63 A few studies have focused on

the performance of FOFs that invest in buyout and VC funds. For instance, one recent study

finds that, net of fees, FOFs “provide returns equal to or above public market indices for both

buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they

underperform direct fund investment strategies in buyout. In contrast, the average performance

of FOFs in venture capital is on a par with results from direct venture fund investing.” 64 The

study reports data, as of December 2012, for FOFs with vintage years 1997 through 2007 on the

60

See, e.g., Steven N. Kaplan & Antoinette Schoar, Private Equity Performance: Returns, Persistence, and

Capital Flows, 60 J. FIN. 1791 (2005) (“Kaplan & Schoar (2005)”); Francesco Frazoni, Eric Nowak, & Ludovic

Phalippou, Private Equity Performance and Liquidity Risk, 67 J. FIN. 2341 (2012); Narasimhan Jegadeesh,

Roman Kräussl, & Joshua M. Pollet, Risk and Expected Returns of Private Equity Investments: Evidence Based

on Market Prices, 28 REV. FIN. STUD. 3269 (2015); Ludovic Phalippou & Oliver Gottschalg, The Performance

of Private Equity Funds, 22 REV. FIN. STUD. 1747 (2009); Joost Driessen, Tse-Chun Lin, & Ludovic Phalippou,

A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity

Funds, 47 J. FIN. & QUANTITATIVE ANALYSIS 511 (2012) (finding annual underperformance of -12% for VC

funds and no underperformance for Leveraged Buyout (LBO) funds).

61

See Kaplan & Schoar (2005), supra footnote 60; Korteweg & Sorensen (2017), supra footnote 52 (finding that

the spread in expected net-of-fee future returns between top and bottom quartile PE firms is 7–8 percentage

points annually.)

62

See Reiner Braun, Tim Jenkinson, & Ingo Stoff, How Persistent Is Private Equity Performance? Evidence from

Deal-Level Data, 123 J. FIN. ECON. 273 (2017).

63

See, e.g., Cochrane (2005), supra footnote 58; Arthur Korteweg & Stefan Nagel, Risk-Adjusting the Returns to

Venture Capital, 71 J. FIN. 1437 (2016) (“Korteweg & Nagel (2016)”); Axel Buchner, Abdulkadir Mohamed, &

Armin Schwienbacher, Does Risk Explain Persistence in Private Equity Performance?, 39 J. CORP. FIN. 18

(2016).

64

See Robert S. Harris et al., Financial Intermediation in Private Equity: How Well Do Funds of Funds

Perform?, 129 J. FIN. ECON. 287 (2018) (“Harris et al. (2018)”).

60

basis of information from Burgiss and Preqin databases, respectively, finding average (median)

annualized IRRs of 8.1% (7.2%) and 7.9% (6.7%), respectively. 65 Across vintage years 1997

through 2007, average public market equivalent (PME) 66 performance of all FOFs in the study

relative to S&P 500 was 1.16 and median was 1.15; average and median PME relative to Russell

2000, which captures small cap stocks, was 1.03 (1.00), respectively. 67 According to a recent

industry study, as of mid-2018, net IRRs for buyout funds in the United States averaged 15% for

five years ending June 2018 (just over 10% for 10- and 20-year investment horizons),

outperforming S&P 500 modified PME performance. 68

The presented data on private fund performance uses common performance measures

without adjusting for risk. 69 In extrapolating from the presented data, it is important to note that

65

See id. at Table 1.

66

A PME measure compares an investment in a PE fund to an equivalently timed investment in the relevant

public market index. For more detail on PME, see also Kaplan & Schoar (2005), supra footnote 60. PME

takes into account irregular cash flows associated with the PE asset class. The measure does not account

for risk differentials between PE and public market investments. See also, e.g., Harris et al. (2018), supra

footnote 64.

67

See Harris et al. (2018), supra footnote 64, at Table 2.

68

See Global Private Equity Report 2019, BAIN & COMPANY, available at

https://www.bain.com/contentassets/875a49e26e9c4775942ec5b86084df0a/bain_report_private_equity_rep

ort_2019.pdf, at Figure 1.27.

69

Some studies have sought to adjust private funds’ returns for risk. See, e.g., Korteweg & Nagel (2016),

supra footnote 63. The study examines VC fund cash flows between 1979 and 2012, obtained from Preqin,

yielding a sample of 545 funds, raised by 278 firms, with vintage years between 1979 and 2008. Mean

(median) IRR is 8.84% (4.37%), respectively, while mean (median) investment multiple is 1.57 (1.16),

respectively. See id. at Table 1. The study finds average PME (normalized by deducting 1) is 0.048 (not

statistically significantly different from 0). See id. at Table 2. For nearly liquidated funds, the average

PME is 0.276. The study finds that the PME understates the PME premium because VC funds have betas

in excess of 1 and thus overstate the abnormal returns of VC funds relative to public market investments

during periods of favorable market conditions. See also Arthur Korteweg, Risk Adjustment in Private

Equity Returns, 11 ANN. REV. FIN. EC. 131 (2019). The study indicates that “risk-adjusted return estimates

vary substantially by method, time period, and data source” and further notes that “[t] he weight of

evidence suggests that, relative to a similarly risky investment in the stock market, the average venture

capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee

returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally

earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio.”

61

PE valuations, and associated returns, tend to be affected by aggregate conditions. 70 Time-toliquidity for PE funds is also likely to be affected by market conditions. For example, according

to one report, on the basis of data from 2011 through 2019, the average time-to-liquidity for

active buyout funds was around 3.2 years (2.7 in 2019). 71 The report also suggests that, when

faced with adverse market conditions, active buyout funds are likely to delay exits, leading to

increasing average time-to-liquidity.

Mutual Fund Returns and Market Portfolio Returns

For comparison with the performance of hedge funds and other private funds, in this section

we provide summary statistics for the performance of U.S. mutual funds (net of fees), 72 as well as

market portfolio returns. Table 16 below presents return statistics of U.S. mutual funds from 2009

through 2019 as a function of fund size. The statistics in the P25 and P75 columns represent the

25th and 75th percentiles of the return distribution, respectively. Tables 17 and 18 below present

mutual fund returns by year and by fund category, respectively.

70

See, e.g., Private Equity Valuations During Downturns, EFRONT, Apr. 30, 2020, available at

https://www.efront.com/research-papers/private-equity-valuations-during-downturns/.

71

See Returns, Risks, and Liquidity of LBO Funds in Q4 2019, EFRONT, May 11, 2020, at 8, available at

https://www.efront.com/research-papers/returns-risks-and-liquidity-of-lbo-funds-in-q4-2019/.

72

The analysis of U.S. mutual fund performance is based on CRSP Survivor-Bias-Free Mutual Fund database.

We exclude all ETFs, money market funds, and variable annuities. We report summary statistics of returns net

of fees at the fund level. We aggregate share classes to the fund level using weights based on total net assets in

the prior month. Annual returns are subsequently calculated by compounding the fund’s monthly returns. If a

monthly return is missing, then no return would be calculated for that year. We group funds into different broad

investment categories using CRSP objective codes.

62

Table 16. U.S. Mutual Funds Returns by Fund Size (2009–2019)

Size ($ million)

Mean

Median

P25

P75

Obs.

<100

9.41

7.44

-0.30

18.04

33,791

100-250

9.46

6.93

0.34

17.13

12,562

250-1000

9.40

7.01

0.28

17.16

18,466

1000-5000

8.97

6.89

0.03

16.93

13,102

>5000

8.84

6.95

-0.13

16.95

4,603

All

9.31

7.11

0.06

17.43

73,978

Table 17. Historical Returns of U.S. Mutual Funds (2009–2019)

Year

Mean

Median

P25

P75

Obs.

2009

28.13

26.86

16.92

35.88

6,021

2010

13.30

12.87

7.29

18.26

6,088

2011

-1.82

-0.74

-6.14

3.85

6,143

2012

12.17

12.81

7.64

16.53

6,390

2013

16.65

17.58

0.44

31.57

6,598

2014

4.77

4.92

1.01

9.15

6,906

2015

-2.23

-1.18

-4.30

1.08

7,211

2016

7.38

6.31

1.80

11.26

7,321

2017

14.88

13.90

5.87

21.72

7,180

2018

-6.76

-5.78

-11.08

-1.30

7,145

2019

18.95

19.93

9.73

26.59

6,975

63

Table 18. U.S. Mutual Fund Returns by Fund Category (2009–2019)

Fund Category

Mean Median

P25

P75

Obs.

Alternative Strategy

2.69

2.20

-3.87

8.42

4,065

Foreign Bonds

4.64

4.30

-1.85 10.21

1,677

Foreign Equity

9.87

9.25

-4.67 22.66 12,426

General Bonds

5.37

3.84

0.69

7.91

6,951

Mixed Strategy

7.98

7.72

0.25

14.26

8,086

Mortgage-Backed Securities

4.64

3.95

1.09

6.72

1,041

US Corporate Bonds

6.33

5.97

0.58

9.67

910

US Equity

12.98

12.87

0.98

23.84 30,773

US Government Bonds

2.71

1.81

0.27

4.84

1,752

US Municipal Bonds

4.83

3.64

0.79

8.02

6,297

64

We also report annual value- and equal-weighted market portfolio returns from the CRSP

database in Table 19 below.

Table 19. Market Portfolio Returns (2009–2019) 73

Market Return

Market Return

(Value-Weighted)

(Equal-Weighted)

2009

31.3%

64.3%

2010

17.7%

25.2%

2011

-1.1%

-9.0%

2012

15.8%

16.8%

2013

30.5%

30.9%

2014

10.5%

2.9%

2015

-1.7%

-6.9%

2016

12.7%

16.0%

2017

20.7%

15.8%

2018

-6.3%

-13.1%

2019

29.3%

21.7%

Year

Because of differences in the measures of performance and sources of data applicable to

different categories of private funds versus mutual funds and the market index portfolio, as well

as, importantly, substantial differences in risk exposures, underlying investment portfolios,

liquidity, timing of cash flows, nature of data reporting, and extent of regulatory oversight

73

Annual returns are calculated by compounding monthly returns, including distributions, of an equalweighted or value-weighted market portfolio, as indicated, obtained from CRSP. These returns are gross of

trading costs.

65

applicable to private funds versus registered investment companies, it is difficult to draw a

meaningful comparison of performance between these very different asset classes.

3. Performance of Non-Fund Regulation D Issuers

Various studies have compared the behavior of private and public companies, arriving at

mixed conclusions. 74 Small private companies often face significant financing constraints,

which can both limit growth during booms and increase downside risk during contractions. In

particular, small businesses typically have limited access to securities markets and commonly

rely on personal savings, business profits, outside debt, and friends and family as initial sources

of capital. 75 According to one survey, approximately 64% of small businesses relied on personal

or family savings, compared to 0.6% receiving VC capital. The survey also finds that about one-

74

As a general caveat, there may be differences in methodology and data definitions in the performance

estimates reported in various sources cited in this section. See, e.g., Huasheng Gao, Po-Hsuan Hsu, & Kai

Li, Innovation Strategy of Private Firms, 53 J. FIN. QUANTITATIVE ANALYSIS 1 (2018) (finding that public

companies’ patents rely more on existing knowledge, while private companies’ patents are broader in scope

and more exploratory); Viral Acharya & Zhaoxia Xu, Financial Dependence and Innovation: The Case of

Public Versus Private Firms, 124 J. FIN. ECON. 223 (2017) (showing that public companies in externalfinance-dependent industries spend more on R&D and generate a better patent portfolio than their private

counterparts); John Asker, Joan Farre-Mensa, & Alexander Ljungqvist, Corporate Investment and Stock

Market Listing: A Puzzle?, 28 REV. FIN. STUD. 342 (2015) (finding that listed companies invest less and are

less responsive to changes in investment opportunities compared to observably similar, matched private

companies); Naomi Feldman et al., The Long and the Short of It: Do Public and Private Firms Invest

Differently? (Fed. Reserve Board, Fin. & Econ. Discussion Series No. 2018-068, 2018) (finding that public

companies invest more in long-term assets—particularly innovation—than private companies); Vojislav

Maksimovic, Gordon M. Phillips, & Liu Yang, Do Public Firms Respond to Investment Opportunities

More than Private Firms? The Impact of Initial Firm Quality, (Nat’l Bureau of Econ. Research, Working

Paper No. 24104, 2017) (finding that public companies respond more to demand shocks after their IPO and

are more productive than their matched private counterparts, particularly in industries that are capital

intensive and dependent on external financing); Menachem Abudy, Simon Benning, & Efrat Shust, The

Cost of Equity for Private Firms, 37 J. CORP. FIN. 431 (2016) (finding that private companies are

associated with a higher cost of equity); Ilan Cooper & Richard Priestley, The Expected Returns and

Valuations of Private and Public Firms, 120 J. FIN. ECON. 41 (2016) (finding that the cost of capital and

valuations are similar across private and public companies).

75

See U.S. DEP’T OF TREASURY, A Financial System that Creates Economic Opportunities: Banks and Credit

Unions (June 2017), available at https://www.treasury.gov/press-center/pressreleases/Documents/A%20Financial%20System.pdf. See also Alicia M. Robb & David T. Robinson, The

Capital Structure Decisions of New Firms, 27 REV. FIN. STUD. 153 (2014), at Table 4 (showing that while

entrepreneurial companies frequently rely on outside loans, outside equity use is uncommon).

66

third of businesses used banks and other financial institutions as a source of capital for financing

business operations in 2014. The survey further finds that a significant share of businesses that

established new funding relationships continued to have unmet credit needs. Further, according

to the survey, small businesses owned by underrepresented minorities faced significantly higher

hurdles in obtaining external financing.

Below, we present available evidence and research on the performance of non-fund

issuers in the Regulation D market. Comprehensive data on returns of private placements by

non-fund issuers, including securities issued under Regulation D, are not available because many

issuers in unregistered offerings do not experience liquidity events (and data on returns in those

cases are limited) and most securities purchased in unregistered offerings do not trade in a

secondary market. 76 Thus, with few exceptions, academic studies have focused on private fund

returns, discussed in Section III.B.2 above.

Evidence on Returns

A 2016 study has analyzed U.S. angel investment returns for a sample of 245 companies

that received investment from an angel investor group and that either reported a successful exit

or shut down. 77 The study found an average 2.5x investment multiple and 22% IRR (gross of

76

Most private securities are restricted. A limited secondary market for private securities exists, which

includes the market for limited partnership (LP) interests in private funds and the direct market for the

stock of private companies. See Robert Loveland, Eric Fricke, & Sinan Goktan, Do Private Firms Benefit

from Trading in the Private Securities Market?, J. ENTREPRENEURIAL FIN., Fall 2017 (“Loveland et al.

(2017)”). See also Darian M. Ibrahim, The New Exit in Venture Capital, 65 VAND. L. REV. 1 (2012);

William A. Birdthistle & M. Todd Henderson, One Hat Too Many? Investment Desegregation in Private

Equity, 76 U. CHI. L. REV. 45 (2009); David F. Larcker, Brian Tayan, & Edward Watts, Cashing It In:

Private-Company Exchanges and Employee Stock Sales Prior to IPO (Stanford Closer Look Series, Sept.

12, 2018). We lack trading data from such marketplaces in order to construct return, risk, or liquidity

measures.

77

See Robert E. Wiltbank & Wade T. Brooks, Tracking Angel Returns: 2016 Report with 2017 Update,

ANGEL RES. INST. (2017), available at https://angelresourceinstitute.org/reports/tracking-angel-returns2017-update.pdf.

67

legal and other investment costs), with an average 4.5-year holding period. The study found that

returns were skewed, with 10% of all exits generating 85% of all cash, while 70% of investments

generated negative returns. According to the study, a 2017 update identified 20 additional

outcomes (exits or closures), yielding an average 2.3x investment multiple and a 19.3% average

IRR for the full sample. Another industry study considering 684 AngelList investments with

nonnegative returns finds a mean (median) IRR of 35% (21%), and a mean (median) investment

multiple of 1.7x ( 2.7x), net of fees and carried interest. 78

Certain additional data are made available by individual intermediaries. For example,

one intermediary reports a 41% unrealized net IRR and a 3.3x investment multiple (based on

unrealized value divided by amount invested) for Regulation D investments in companies funded

through its website from 2013 through 2016, based on 119 startup investments. 79 This

intermediary also reported, as of December 2018, that 81% (96 of 119) startups were still active,

40% raised a subsequent Series A round in excess of $3 million, and 9% (11 out of 119) were

valued over $100 million.

Some studies have examined financial returns to individuals or households from the

choice to become an entrepreneur. 80 For instance, a 2002 study finds that that, although

entrepreneurial investment is extremely concentrated, the returns to PE are no higher than the

78

See Abraham Othman, Startup Growth and Venture Returns, ANGELLIST (Dec. 2019), available at

https://angel.co/pdf/growth.pdf. AngelList is a platform that allows accredited investors to make VC-like

investments in startups. Data on all investments are not available in the cited source. But see also, e.g., Olga

Itenberg & Erin E. Smith, Syndicated Equity Crowdfunding: The Trade-Off Between Deal Access and Conflicts

of Interest (Simon Bus. Sch., Working Paper No. FR 17-06, Mar. 2017).

79

See https://wefunder.com/funds (retrieved March 23, 2020).

80

For a review of the evidence on earnings from entrepreneurship, see, e.g., Thomas Astebro, The Returns to

Entrepreneurship, in OXFORD HANDBOOK OF ENTREPRENEURIAL FINANCE (Douglas Cumming ed. 2012).

68

returns to public equity. 81 The study attributes the willingness of households to invest

substantial amounts in a single privately held firm with a seemingly far worse risk-return tradeoff to large nonpecuniary benefits, a preference for skewness, or overestimated probability of

survival. In turn, a 2011 study finds that owners of private companies require compensation for

a lack of diversification in the form of higher returns. 82

Evidence on Exits

In instances where a private non-fund issuer has a subsequent registered offering or an

M&A exit, returns on a private company investment can be examined on the basis of the “exit”

valuation. Prior work has thus considered IPO and M&A exits, with some of those studies

providing information on returns attained through such exits, for a subset of the companies. 83 As

an important caveat, where IPO and M&A exits are observed, data on the terms of such exits

compared to the terms of pre-exit private investments are scarce and valuations are difficult to

compare because of variation in legal and contractual terms of securities and limited disclosure

available about pre-exit private placement rounds. Terms of private company exits involving a

private financial or corporate acquirer are not required to be disclosed and acquirers may have

competitive or other commercial reasons to prefer non-disclosure.

81

See Tobias J. Moskowitz & Annette Vissing-Jørgensen, The Returns to Entrepreneurial Investment: A Private

Equity Premium Puzzle?, 92 AM. ECON. REV. 745 (2002)

82

See Elisabeth Müller, Returns to Private Equity – Idiosyncratic Risk Does Matter!, 15 REV. FIN. 545

(2011).

83

See, e.g., Umit Ozmel, David T. Robinson, & Toby E. Stuart, Strategic Alliances, Venture Capital, and Exit

Decisions in Early Stage High-Tech Firms, 107 J. FIN. ECON. 655 (2013); Susan Chaplinsky & Swasti

Gupta-Mukherjee, The Decline in Venture-Backed IPOs: Implications for Capital Recovery, in HANDBOOK

OF RESEARCH ON IPOS (Mario Levis & Silvio Vismara eds. 2013), at 35; Eric Ball, Hsin Hui Chiu, &

Richard Smith, Can VCs Time the Market? An Analysis of Exit Choice for Venture-Backed Firms, 24 REV.

FIN. STUD. 3105 (2011); Richard Smith, Robert Pedace, & Vijay Sathe, VC Fund Financial Performance:

The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options, 40 FIN. MGMT.

1029 (2011).

69

For instance, a 2016 study 84 examined Thomson Reuters’ Venture Economics data,

supplemented with Thomson Reuters’ SDC Platinum New Issues and Mergers and Acquisitions

data, EDGAR filings, and hand collection of data, for “all U.S.-based portfolio companies with

reported investments from VC firms that had final outcomes during the period 1986–2008

resulting in (1) mergers, acquisitions or buyouts (categorized broadly as “M&A” exits); (2) IPOs;

or (3) failures.” The study counted as failures companies classified as bankrupt (Chapter 7 or

Chapter 11), defunct, or “living dead.” Because of underreporting of failures, the study

classified “active investments as living dead if they have not received a financing round for at

least five years as of December 2008,” which was the end of the sample period. The study found

that “[o]f the 4468 total companies identified as failures in our sample, 126 are bankruptcies,

1869 are defunct, and 2473 are living dead.” Calculation of exit returns results in sample

attrition. The study notes that “[a] total of 1222 M&A exits and 1436 IPO exits have sufficient

post-money valuation data to calculate returns.” The study notes a sharp rise in the frequency of

M&A exits over time, stating that “with the exception of 2007, M&A make up more than the

majority of exits in every year from 2001 onwards.” The study further finds that “the mean

[non-annualized] return to VCs from M&A exits is 99.5% compared to 211.7% for IPO exits, a

difference of 112.2% that is significant at the 1% level. Both forms of exit display highly

skewed returns where the mean returns substantially exceed the median returns (-31.5% for

M&A; 109.7% for IPOs).”

Like IPO activity more generally, VC-backed IPO exits are highly cyclical. According to

a recent report, there were 82 VC-backed IPO exits in 2019, totaling $199 billion, compared to

84

See Susan Chaplinsky & Swasti Gupta-Mukherjee, Investment Risk Allocation and the Venture Capital Exit

Market: Evidence from Early Stage Investing, 73 J. BANKING & FIN. 38 (2016).

70

89 exits totaling $65 billion in 2018 and 59 exits totaling $51 billion in 2017. 85 By comparison,

in 2008 and 2009, there were only 13 and 11 IPO exits, respectively, according to the same

report. The report also estimates that, in 2019, among IPO exits, the average time from first VC

funding round to exit was approximately 7 years; the average ratio of IPO pre-money valuation

to total VC invested was 5.7. Because of the impact of exits of a few private companies with

high valuations on means in samples with a relatively small number of observations, the ratio has

varied significantly over time (even during the boom years), from as low as 2.5 in 2016 to as

high as 12.0 in 2012.

Some sources self-report exit outcomes for angel and other private investors. For

example, according to one industry survey of angel investors, approximately 40% of all exits

resulted in positive returns (41.7% for angels with an entrepreneurial background and 34.7% for

angels without an entrepreneurial background). 86 In some other instances, funds and other

investors in private companies may rely on follow-on financing rounds to calculate updated

valuations of private companies they hold in their portfolios. Such valuations may be

confounded by differences in the terms of securities offered in different financing rounds, as well

as any deviations from fundamental value due to information frictions. 87

85

See NVCA (2020), supra footnote 51, at 21–22.

86

Because some investments did not have an exit, the study also considered the percentage of positive exits

as a proportion of all companies, with estimates ranging from 7–8% for angels with 1–10 investments, 12%

for angels with 11–50 investments, and 15% for angels with over 50 investments. See Laura Huang et al.,

The American Angel, AM. ANGEL CAMPAIGN (Nov. 2017), at 13, 17, available at

https://www.theamericanangel.org/. Data on returns, net of fees, obtained from such exits are not available

in the cited source. The source obtained data from a survey of angel investors between March 2016 and

February 2017, which may contain biases and may not be representative of the performance of all

Regulation D angel investors.

87

For a recent analysis of venture-backed company valuations, see, e.g., Will Gornall & Ilya A. Strebulaev,

Squaring Venture Capital Valuations with Reality, 135 J. FIN. ECON. 120 (2020). Focusing on 135 U.S.

private companies with reported valuations above $1 billion, the study finds that “reported ‘unicorn’ postmoney valuations average 48% above fair value, with 14 being more than 100% above.” They attribute the

difference to the difference in legal terms of preferred shares issued in recent financing rounds and other

71

Identifying an appropriate benchmark return for evaluating returns of private companies

is challenging for several reasons. Because of more limited disclosure requirements for exempt

offerings, it is difficult to observe comprehensive, standardized information on the risk profile of

the underlying investment. Finally, the illiquidity and the nature of data on private firm returns

make it difficult to construct an appropriate benchmark. 88 Such risk, liquidity, and measurement

differentials can have important effects on the returns of private securities. 89

Performance of Reporting Companies Using Regulation D

As discussed above, most non-fund Regulation D issuers are private companies for which

financial and operating performance data are scarce. However, a small minority of Regulation D

issuers are public companies, for which such data are available. Approximately 4% of non-fund

Regulation D issuers were reporting companies with data in Compustat North America when

share classes, which may lack such protections as IPO return guarantees, vetoes over down-IPOs, or

seniority to all other investors.

88

See, e.g., Douglas Cumming, Lars Helge Hass, & Denis Schweizer, Private Equity Benchmarks and

Portfolio Optimization, 37 J. BANKING & FIN. 3515 (2013) (stating that “institutional investments in PE are

both long-term and illiquid, and it is thus somewhat difficult to establish optimal portfolio weights,

particularly relative to more liquid asset classes.”). The study shows that listed PE indices, transactionbased PE indices, and appraisal value-based PE indices do not appropriately capture risk/return inputs for

portfolio optimization or for risk models. See also Korteweg & Sorensen (2010), supra footnote 58 (stating

that because “[v]aluations of entrepreneurial companies are only observed occasionally, albeit more

frequently for well-performing companies. . . estimators of risk and return must correct for sample selection

to obtain consistent estimates. . . Our selection correction leads to markedly lower intercepts and higher

estimates of risks compared to previous studies.”); Antti Ilmanen, Swati Chandra, & Nicholas McQuinn,

Demystifying Illiquid Assets: Expected Returns for Private Equity, J. ALTERNATIVE INVESTMENTS, Winter

2020, at 8 (noting that “modeling private equity is not straightforward, due to a lack of good quality data

and artificially smooth returns,” the study attempts to assess “private equity’s realized and estimated

expected return edges over lower-cost public equity counterparts” and finds “a decreasing trend over time,

which does not seem to have slowed the institutional demand for private equity. We conjecture that this is

due to investors’ preference for the return-smoothing properties of illiquid assets in general.”).

89

For example, many issuers in private placements are smaller. Small companies, even among listed

companies, tend to be more financially constrained and disproportionately affected by downturns. See,

e.g., Gabriel Perez‐Quiros & Allan Timmermann, Firm Size and Cyclical Variations in Stock Returns, 55 J.

FIN. 1229 (2000); Murillo Campello & Long Chen, Are Financial Constraints Priced? Evidence from Firm

Fundamentals and Stock Returns, 42 J. MONEY, CREDIT, & BANKING 1185 (2010).

72

they conducted their Regulation D offering. 90 This category of issuers reported approximately

$400 billion in Regulation D proceeds during 2009 through 2019. This represents approximately

3% of capital reported to be raised by all issuers and 22% of capital raised by non-fund issuers in

the Regulation D market during 2009 through 2019. By comparison, reporting companies raised

approximately $11.7 trillion and $1.8 trillion in registered debt offerings and registered followon equity offerings, respectively, during the same period. 91

Characteristics of Reporting Company Regulation D Issuers

This small subset of reporting companies that conducted Regulation D offerings has

distinct characteristics and is not representative of all Regulation D non-fund issuers. Therefore,

inference from the performance of this subset of companies should be treated with significant

caution. Past studies of private investments in public equity (PIPEs) found that public

companies that undertake PIPE offerings have a distinct set of characteristics. For example, one

study finds that public companies with lower stock performance, higher burn rates, and more

uncertain cash flows that tend to have fewer financing options in public equity markets are more

likely to choose a PIPE. 92 As a caveat, past studies of PIPEs that we found used commercial

90

To obtain financial data we merge our Regulation D data with Compustat North America by year, using

CIK as the issuer identifier. This is to account for multiple offerings by an issuer. Based on the merge

using issuer and year criteria, the number of unique issuers which have financial data for the year of

offering and subsequent year falls from 4,108 to 3,720. Excluding issuers with missing data in the year of

the offering or the year after the offering and applying various filters reduces the sample size further. As a

caveat, some issuers may conduct continuous Regulation D offerings over several years, resulting in

confounding effects (a close-out Form D filing upon completion of the offering is not required).

91

We merge data related to companies conducting registered debt and registered follow-on equity offerings

obtained from SDC Platinum with Compustat North America (Fundamentals Annual) to obtain financial and

accounting data for the set of reporting companies relying on registered offerings during 2009 through 2019.

We exclude reporting companies that conducted both registered offerings and Regulation D offerings to avoid

confounding effects.

92

See, e.g., Susan Chaplinsky & David Haushalter, Financing under Extreme Risk: Contract Terms and Returns

to Private Investments in Public Equity, 23 REV. FIN. STUD. 2789 (2010) (“Chaplinsky & Haushalter (2010)”).

They find, for example, that 84% of PIPE issuers had negative net income, return on assets was -0.39 on

average, and almost 22% of these issuers had sales less than $1 million. The book-to-market ratio, which is

73

data on PIPEs from earlier time periods and did not differentiate between PIPE offerings under

Regulation D and under Section 4(a)(2).

Consistent with past studies, we observe that reporting companies that use Regulation D

are very different from reporting companies that undertake only registered offerings. 93 Table 20

below presents available data on the initial size and profitability of reporting issuers in the year

that they conducted a Regulation D offering or a registered offering. Similar to the selection

effect documented in prior studies, we find reporting companies that conduct registered offerings

are on average larger and more profitable than reporting companies that conduct Regulation D

offerings.

sometimes used as a proxy for financial distress, placed many PIPE issuers in the lowest decile of all companies

on the New York Stock Exchange. The study also highlights the substantial differences in PIPE issuers’ risks

and shows that the riskiest companies issue stock at a high discount. See also, e.g., Ioannis V. Floros & Travis

R.A. Sapp, Why Do Firms Issue Private Equity Repeatedly? On the Motives and Information Content of

Multiple PIPE Offerings, 36 J. BANKING & FIN. 3469 (2012) (confirming these findings in an analysis of repeat

PIPE issuers and showing that issuers in successive PIPE transactions increasingly rely on hedge funds, which

extract greater purchase price discounts); Hsuan-Chi Chen, Na Dai, & John D. Schatzberg, The Choice of

Equity Selling Mechanisms: PIPEs versus SEOs, 16 J. CORP. FIN. 104 (2010) (“Chen et al. (2010)”) (concluding

that companies lacking access to traditional alternatives of equity offerings due to information asymmetry and

low operating performance and undervalued issuers seeking to raise capital at a lower cost rely on PIPEs).

93

Data on registered debt and equity offerings for 2009 through 2019 are obtained from SDC Platinum’s New

Issues database. As explained above, we consider follow-on equity offerings and debt offerings as a better

benchmark for Regulation D offerings, in terms of being a capital-raising tool. We exclude IPOs for the

purposes of this analysis as previous research has shown that companies pursue IPOs for many reasons

other than raising capital. See supra footnote 11.

We merge SDC data with Compustat data for companies that did not rely on Regulation D offerings during

2009 through 2019. We use various firm identifiers—CUSIP, CIK, and Ticker—to merge SDC data with

Compustat. Companies that conduct both Regulation D offerings and registered offerings are included in

only the Regulation D issuers group. Approximately one-third of Regulation D reporting companies in our

sample also conducted a registered offering during the 2009-2019 period. We find that excluding such dual

issuers from the Regulation D group as well, does not alter the principal implications presented in the

following paragraphs.

74

Table 20. Characteristics of Reporting Company Regulation D Issuers

Panel A: Characteristics of Reporting Companies in Regulation D versus Registered Offerings

in the Offering Year 94

Reporting Companies with

Regulation D Offerings

Companies

Reporting Companies with Debt or

Follow-On Equity Offerings

Mean

Median

Mean

Median

($ million)

($ million)

($ million)

($ million)

Sales

$672

$6

$9,965

$2,025

Assets

$1,658

$40

$46,263

$6,085

Net Income

$31

-$5

$875

$145

Financial Metric

Number of FirmYear Observations

6,198

5,840

Panel B: Financial Condition of Reporting Company Regulation D Issuers

Variable

Proportion of Firm-Year

Observations with Available Data

Sales < $1 million

38%

Assets < $10 million

29%

Negative Net Income

77%

Penny Stock

40%

OTC companies

46%

Panel C: Distribution of Financial Metrics of Reporting Company Regulation D Issuers

Metric

Number

of FirmYears

Median

Mean

Standard

Deviation

Minimum

Maximum

Sales ($ million)

6,198

$6

$672

$3,304

$0

$27,027

94

Financial metrics are winsorized at 1% and 99% levels before averages of financial metrics are calculated.

75

Assets ($ million)

6,240

$40

$1,658

$7,887

$0

$67,499

Net Income ($ million)

6,197

-$5

$31

$274

-$262

$2,243

Market Valuation

($ million)

5,140

$58

$916

$4,216

$1

$36,932

Return on Assets

6,191

-0.2

-1.5

4.9

-38.1

0.3

Stock Price

($, close of fiscal year)

5,433

$1.7

$7.9

$14.9

$0.01

$85.2

Data in Panels A and B above show that reporting company Regulation D issuers tend to

be small. 95 Almost 40% had sales less than $1 million, and almost 30% had assets less than $5

million. The median reporting company Regulation D issuer had a net loss in the year of the

offering and more than three-quarters of such issuers had a net loss during the year they

conducted a Regulation D offering (compared to one-fifth of reporting companies that undertook

a registered offering). As described above, prior studies have found that low profitability and

small size, often considered as proxies of a firm’s financial constraints, can be major factors for

the self-selection of reporting companies into private placements instead of public capital

markets. These differentials point to difficulty in comparing performance of reporting company

Regulation D issuers and reporting companies with registered offerings.

Data in Panel C above show significant variability in pre-offering financial and operating

characteristics within the subset of reporting company Regulation D issuers. Large standard

deviations, mean values that are much higher than median values, and wide ranges indicate that

95

Seventy percent of reporting issuers relying on Regulation D offerings during 2009 through 2019 met the

current definition of smaller reporting company (SRC) in the year they conducted their Regulation D offering.

In contrast, only about 20% of reporting companies that relied on registered offerings during 2009 through 2019

met the current SRC definition in the year they conducted their follow-on equity or debt offering. An SRC is

defined in Securities Act Rule 405, Exchange Act Rule 12b-2, and Item 10 of Regulation S-K to include an

issuer with: (1) a public float of less than $250 million or (2) revenues of less than $100 million and either no

public float or a public float of less than $700 million. See

https://www.sec.gov/smallbusiness/goingpublic/SRC.

76

while the typical issuer is small and has a net loss, the distribution has long tails, with some

issuers that are much larger. This variability may complicate inference about performance of

reporting company Regulation D issuers as a group.

Financial and Return Performance of Reporting Company Regulation D Issuers

We next analyze the financial and stock return performance of reporting company

Regulation D issuers one year after the offering. As a caveat, because some reporting companies

using Regulation D are very small, there is considerable skewness in percentage changes. 96 To

mitigate extreme tails and data noise, we correct for outliers through winsorization and impose

minimum initial size filters (excluding issuer-years with initial assets less than $10 million and

penny stocks). These filters result in the exclusion of a significant proportion of OTC-quoted

companies from this analysis. 97 Before calculating percentage changes, we standardize sales,

assets, and profits by the number of shares outstanding to account for fluctuations due to

issuance of equity and/or stock-based mergers.

96

The long right tail in the distribution of asset and revenue growth rates persists even after corrections for

extreme observations, with the resulting high means, both relative to medians and to mean growth rates

documented for large public companies. Conversely, because most issuers in this small subset had a net

loss, the distribution of post-offering profitability changes after the offering has a long left tail, with means

below medians. This is in line with prior studies. A long right tail means that the distribution contains

some extremely high growth rate values. See, e.g., Emma Schultz & Garry J. Twite, Are PIPEs a Bet on

Growth Options? (Working Paper, 2016) (noting that common stock PIPEs are “risky bets on low

probability positive outcomes. . . Firms are issuing common stock PIPE financing because they have not

yet achieved the level of operations [that would] reveal their potential success to public investors, whereas

firms that have achieved these levels issue SEOs. . . Common stock PIPEs are investments in firms with

large highly uncertain growth opportunities, having more dispersed long-run returns than SEOs, with large

positive extreme values.”); see also Table 3 in the same Working Paper, showing mean sales growth rates

that are very high in absolute terms and compared to medians. See also Jongha Lim, Michael Schwert, &

Michael S. Weisbach, The Economics of PIPEs, J. FIN. INTERMEDIATION (forthcoming 2019) (“Lim et al.

(2019)”); David J. Brophy, Paige P. Ouimet, & Clemens Sialm, Hedge Funds as Investors of Last Resort?,

22 REV. FIN. STUD. 541 (2009) (“Brophy et al. (2009)”).

97

These are generally in line with previous studies that focused on the exchange-listed subset of PIPE issuers in

their sample construction. See, e.g., Chen et al. (2010), supra footnote 92; Chaplinsky and Haushalter (2010),

supra footnote 92; Lim et al. (2019), supra footnote 96; Brophy et al. (2009), supra footnote 96.

77

Table 21 below presents average and median percentage changes in size and profitability

one year after the offering for reporting company Regulation D issuers. The data show that

exchange-listed reporting Regulation D issuers grew faster in terms of sales and assets. They

had, on average, lower profitability (return on assets) than OTC-quoted Regulation D issuers, but

profits for the median exchange-listed company grew faster than for the median OTC company

in the combined reporting company Regulation D subset. Overall, a number of reporting

company Regulation D issuers (both OTC and exchange-listed) exhibit very high growth

potential, as evidenced by high mean growth rates for sales and assets.

Table 21. Financial Performance of Reporting Company Regulation D Issuers One Year

after Offering 98

Companies

Growth Metric

Exchange-Listed

Regulation D Issuers

OTC-Quoted

Regulation D Issuers

Mean Growth

Median Growth

Mean Growth

Median Growth

Sales

39%

9%

36%

2%

Assets

23%

3%

2%

-6%

Return on Assets

-1.4%

0.15%

2%

0.14%

Obs.

2,285-2,608

631-790

Table 22 below examines performance of reporting company Regulation D issuers

relative to reporting companies that relied on registered offerings and follow-on equity offerings.

As an important caveat, performance differentials between reporting company Regulation D

issuers and reporting companies that undertake registered offerings should not be interpreted

98

Performance growth metrics are winsorized at 1% and 99% levels for all matched Regulation D-Compustat

companies before average growth is calculated for each group. Because most issuers in this small subset

report net losses, we scale net income by assets for purposes of analyzing changes in profitability.

78

causally. As discussed above, prior studies find that public companies pursuing private

placements are associated with smaller size, more financial constraints, lower profitability, and

greater uncertainty about their growth options and thus are systematically different from public

companies pursuing registered offerings. 99 Because most companies in the registered offering

sample are exchange-listed, in this table we focus on exchange-listed Regulation D issuers to

somewhat facilitate comparability. Despite this adjustment, considerable differences in

comparability, and in within-group distributions, are likely to remain. 100

99

See supra footnote 92 and accompanying discussion.

100

Another approach is matching reporting companies in Regulation D and registered offerings based on ex ante

financial characteristics.

79

Table 22. Performance of Reporting Company Regulation D Issuers and Benchmark

Groups of Registered Offering Issuers One Year after Offering 101

Exchange-Listed

Regulation D Issuers

Issuers in Registered

Debt and Follow-on

Equity Offerings

Issuers in Registered

Follow-on Equity

Offerings

Growth

Variable

Mean

Median

Mean

Median

Mean

Median

Sales

39%

9%

6%

4%

6%

3%

Assets

23%

3%

4%

3%

3%

0.46%

Return on

Assets

-1.4%

0.15%

1.0%

0.27%

1.2%

0.23%

1.2%

0.0%

1.4%

1.2%

1.7%

1.4%

Stock Return 102

Number of

Issuer-Years

1,843-2,608

4,906-5,029

2,770-3,486

Exchange-listed reporting companies that conduct Regulation D offerings have higher

asset and sales growth (and greater variability in growth), but reporting companies relying on

registered offerings have higher profitability. 103 The post-offering performance likely reflects ex

ante characteristics of the underlying companies, which may have also led the company to raise

capital through private placements in lieu of registered offerings. Also, as discussed above, very

high mean sales and asset growth rates are indicative of a significant positive right tail of growth

101

Performance growth metrics are also winsorized at 1% and 99% levels for exchange-listed companies

before average growth is calculated. Growth rates are based on financial data available in Compustat.

Returns are calculated as compounded returns over 12 months from the month of the Regulation D

offering.

102

CRSP data’s coverage is biased towards exchange-listed companies. For consistency, we maintain minimum

size caps at the same level (assets of at least $10 million and stock price of at least $1 at the end of the fiscal

year) and include only exchange-listed companies.

103

We also calculated growth rates after filtering out observations with firm size exceeding the 95th percentile of

asset size of Regulation D companies. Our conclusions do not change. We also considered overall growth

rates, in lieu of per-share growth rates, and the conclusions remained similar.

80

rates that skews means. Nevertheless, high mean asset and sales growth rates indicate that a

number of Regulation D issuers have strong growth potential.

We emphasize that the financial characteristics and performance data presented above are

based on a small subset of non-fund Regulation D issuer companies with available data on

financial characteristics and post-offering performance and thus are not representative of the

performance of over 105,000 non-fund Regulation D issuers that are private companies.

Survival Outcomes of Regulation D Issuers

Below we look at business outcomes of Regulation D issuers. Data on post-offering

outcomes are similarly scant, with incomplete coverage and, as a result, the data may not be

representative of the universe of Regulation D issuers.

Going Public

We estimate that approximately 918 issuers conducted an IPO during 2009 through 2019

subsequent to a Regulation D offering. Figure 16 below presents the time-series distribution of

the number of Regulation D issuers’ IPOs following their Regulation D offerings. On average,

IPOs by issuers that had made a prior (paper or electronic) Form D filing on EDGAR accounted

for approximately 36% of the total number of IPOs per year. (Other IPO issuers may have raised

private financing without filing a Form D, for instance, under Section 4(a)(2).)

81

Figure 16. Number of IPOs by Year (2009–2019)

400

350

300

250

200

150

100

50

0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IPOs with Regulation D offerings

All IPOs

Figure 17 below presents the total capital raised by issuers with prior Regulation D

offerings as well as the total amounts raised during the period 2009 through 2019. On average,

IPOs by issuers that had made a prior Form D filing on EDGAR raised approximately 26% of

the total annual IPO proceeds during the period under consideration.

Figure 17. IPO Proceeds by Year (2009–2019)

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IPOs with Regulation D offerings

Mergers and Acquisitions

82

All IPOs

Using data available on M&A in the United States, we estimate that—of the 102,542

reported M&A transactions conducted in the U.S. during 2009 through 2019—9,759 M&A

transactions involved target companies that previously had a Regulation D offering, and 4,688

transactions involved acquirers that previously had a Regulation D offering. 104 Since the SDC

database covers transactions involving both private and public companies, the target and

acquiring Regulation D issuers are a mix of private companies and reporting companies at the

time of transaction.

Table 23 below presents summary statistics of target companies and acquirers that

previously had a Regulation D offering, relative to all M&A transactions. The data show that

Regulation D issuers were more likely to be targets (7,969 companies) than acquirers (2,284

companies). Though acquirers of Regulation D issuers are mostly U.S. companies (68%), a

higher proportion of Regulation D targets than non-Regulation D targets have been acquired by

foreign companies (mostly located in Canada, United Kingdom, Japan, and Germany). The table

below also lists the top industries of target companies, which are somewhat similar between

Regulation D issuers and non-Regulation D issuer targets.

Table 23. Summary Statistics for M&A Transactions Involving Regulation D Issuers

Targets that are

Regulation D

Issuers

104

Acquirers that are

Regulation D

Issuers

All M&A

Companies

M&A data are from SDC Platinum’s Mergers and Acquisitions database. As there was no common identifier

available, we used fuzzy matching techniques to perform a merge based on issuer name, principal state of

business, and industry. This approach identifies 5,132 (89,407) transactions involving Regulation D issuers that

are targets and 3,953 transactions where Regulation D issuers are acquirers. The data are subject to limitations

of the matching technique and coverage in the database. For example, coverage of transactions involving private

acquirers may be incomplete and, thus, acquisition exit estimates may be under-inclusive. Each transaction

involves a unique acquirer and target firm. We consider multiple acquisitions in a target in a year as one

transaction. The proportion acquired is added across stakes acquired during the year. We consider only targets

that had M&A transactions after a Regulation D offering. We report industry classifications provided in SDC.

83

Number of Transactions (Unique

Acquirer, Target, Year)

9,688

4,424

102,542

Number of Unique AcquirerTarget Transactions

9,230

4,417

101,479

Number of Unique Target

Companies

7,969

2,284

95,400

Number of Targets/Acquirers

with ticker information

959

(Targets)

696

(Acquirers)

4,918

(Acquirer or Target)

Proportion of Equity acquired –

Mean (Median)

92%

98%

96%

(100%)

(100%)

(100%)

Proportion of U.S. Acquirers

68%

na

84%

• Pre-packaged

Software (25%)

• Business Services

(22%)

• Measuring

Equipment (7%)

• Pharmaceuticals

• Business Services

(30%)

• Pre-packaged

Software (21%)

• Investment &

Commodity Firms

(20%)

• Business Services

(18%)

• Pre-packaged

Software (9%)

• Health Services

(7%)

• Measuring

Equipment

Top Industries of Target

Companies

Figure 18 below presents time-series data on M&A transactions for Regulation D issuers

relative to all transactions. These estimates are sensitive to database coverage and the matching

technique.

84

Figure 18. M&A Transactions by Year (2009–2019)

12,000

9,000

6,000

3,000

0

2009

2010

2011

2012

2013

2014

2015

Regulation D Issuer Targets

2016

2017

2018

2019

Regulation D Issuer Acquirers

Total M&A Transactions

Bankruptcies

To determine how frequently issuers that previously had a Regulation D offering go

bankrupt, we match our sample of Regulation D issuers with bankruptcy data from SDC.

Because the bankruptcy database includes public companies, we are able to match only

Regulation D issuers that are registered companies. This limits our ability to estimate

bankruptcy outcomes for the whole Regulation D sample.

We find that during the period 2009 through 2019, 143 reporting companies that

previously had a Regulation D offering filed for bankruptcy. Over the same period, there were a

total of 4,108 reporting companies that previously had a Regulation D offering. This results in

an estimated rate of bankruptcy outcomes of approximately 3.5% for that sample. Over the same

period, there were 14,111 reporting companies that did not have Regulation D offerings. Of

85

those, 170, or approximately 1%, filed for bankruptcy. Thus, it appears that a larger fraction of

reporting companies that previously had a Regulation D offering went bankrupt compared to

reporting companies that did not undertake Regulation offerings.

Misconduct

Another measure of performance of Regulation D issuers is the prevalence of fraud and

other misconduct associated with these issuers. As an important caveat, data on fraud,

particularly among private issuers, are scarce and subject to latency. Available data reflect fraud,

whether related to offerings or to disclosure violations, that is detected and results in litigation

against the issuer. Given the difficulty of detecting fraud or misconduct and numerous factors

affecting whether it ultimately results in litigation, this data represent only a subset of potential

fraud or misconduct and underestimates the actual rate of fraud.

We use information on SEC litigation against issuers related to potential misconduct as a

measure of the outcomes of Regulation D issuers. Based on Ives Group’s Audit Analytics data

on litigation and private placements from 2009 through 2019, we have identified relatively few

SEC civil cases involving Form D filers. As a caveat, these estimates are limited by any gaps in

coverage of individual CIKs in the Audit Analytics litigation database and do not distinguish

offering fraud from financial reporting and other violations that resulted in SEC litigation. In

particular, we identified 221 (6) SEC-related civil complaints, some of which did not involve

securities offerings, during this time involving non-fund (fund) Form D filers, excluding cases

that were dismissed or ruled in favor of the defendant. By comparison, we estimate from Audit

Analytics data that there were 108,158 (69,642) unique non-fund (fund) Form D filers during this

period. Given the scarcity of data, we have identified very few research or other external studies

of private company securities fraud. One study focuses on the sample of SEC securities fraud

86

cases brought against private companies during the period from October 1, 2015, to September

30, 2019. 105 Another study uses survey data on financial reporting fraud. 106 A different study

focuses on fraud-related lawsuits involving the small subset of private companies that conducted

an IPO. 107

C. Regulation A

1. Offering Performance

Below we discuss available information on qualified Regulation A offerings and the

number of issuances and amount raised under the exemption by both Tier 1 and Tier 2

offerings. 108

Capital Raising under Regulation A

In Table 24 below, we analyze the available evidence on offering activity under

Regulation A. Except where specified otherwise, we consider evidence from the effectiveness of

the 2015 amendments (June 19, 2015) through December 31, 2019. During this period, we

estimate that 442 issuers filed offering statements in connection with 487 offerings, of which

105

See Verity Winship, Private Company Fraud (Univ. of Ill. Coll. of Law, Legal Studies Research Paper No.

20-13, 2020).

106

See A. Scott Fleming et al., Financial Reporting Fraud: Public and Private Companies, 1 J. FORENSIC

ACCT. RES. A27 (2016).

107

See Xuan Tian, Gregory F. Udell, & Xiaoyun Yu, Disciplining Delegated Monitors: When Venture

Capitalists Fail to Prevent Fraud by their IPO Firms, 61 J. ACCT. & ECON. 526 (2016). The study

considers “423 SEC AAERs [Accounting and Auditing Enforcement Releases] and 1,085 private classaction lawsuits, among which 212 suits were subject to both SEC enforcement and private class-action

litigation” for IPOs from 1995 through 2005.

108

As discussed in greater detail in Section II.B.1 above, the 12-month maximum offering limit for Tier 1 is $20

million and for Tier 2 is $50 million. Tier 2 offerings are not subject to state securities law registration and

qualification requirements, while Tier 1 offerings remain subject to those state requirements. However, Tier 2

issuers are subject to additional requirements. For example, Tier 2 issuers are required to include audited

financial statements in their offering circulars and must provide ongoing reports on an annual and semiannual

basis with additional requirements for interim current event updates.

87

approximately 382 offering statements filed by 346 issuers were qualified. 109 The total amount

sought was approximately $11.2 billion across all offerings, including approximately $9.1 billion

across qualified offerings.

Table 24. Capital Sought under Regulation A (June 19, 2015 – December 31, 2019) 110

All Offerings with Filed

Offering Statements

($ million)

Aggregate dollar amount sought

Number of offerings

Average dollar amount sought

Offerings Qualified by Commission Staff

($ million)

Aggregate dollar amount sought

Number of offerings

Average dollar amount sought

Tiers 1 & 2

Tier 1

Tier 2

$11,170.2

487

$22.9

$1,101.5

145

$7.6

$10,068.6

342

$29.4

Tiers 1 & 2

Tier 1

Tier 2

$9,094.8

382

$23.8

$759.0

105

$7.2

$8,335.8

277

$30.1

Table 25 and Figure 19 below summarize information about the proceeds reported in

Regulation A offerings. From June 2015 through December 2019, approximately $2.4 billion in

proceeds was reported by 183 issuers.

109

Regulation A requires an issuer to file an offering statement that must be qualified before sales can occur.

110

These data exclude offerings identified as withdrawn or abandoned. Some offerings included in our data

may have been effectively halted and may be withdrawn or abandoned at a future date. Unless noted

otherwise, the analysis relies on the information reported by issuers in the most recent amendment between

June 2015 and December 2019, including post-qualification amendments. Offerings were identified based

on CIK and file number; offerings identified as duplicates were consolidated; and amendments were

consolidated with the original offering for purposes of the number of offerings. Rounding affects totals.

After a prospective Regulation A issuer files an offering statement with the Commission, the offering

statement is subject to review by Commission staff. The offering statement may then be declared qualified

by a notice of qualification. After a Regulation A offering statement has been qualified, issuers may begin

selling securities.

88

Table 25. Capital Reported Raised under Regulation A (June 2015 – December 2019) 111

Capital Reported Raised

($ million)

Tiers 1 & 2

Tier 1

Tier 2

Aggregate dollar amount reported raised

Number of issuers reporting proceeds

Average dollar amount reported raised

$2,445.9

183

$13.4

$230.4

39

$5.9

$2,215.6

144

$15.4

Figure 19. Capital Reported Raised under Regulation A

Aggregate dollar amount

reported raised ($

million)

Number of issuers

reporting proceeds

Tier 1

$230.4

Tier 2

$2,215.6

Average dollar amount

reported raised ($

million)

Tier 1

39

Tier 2

144

Tier 1

$5.9

Tier 2

$15.4

Turning to a comparison of different offering tiers, as illustrated in Figure 19 above, Tier

2 accounted for the majority of Regulation A offerings (70% of filed and 73% of qualified

offerings), amounts sought (90% of amounts sought in filed offerings and 92% of amounts

111

Capital raised is based on information reported by companies in Forms 1-Z, 1-K, 1-SA, 1-U, and offering

circular supplements pertaining to completed and ongoing Regulation A offerings and post-qualification

amendments, and for issuers whose shares have become exchange-listed, information from other public

sources. Estimates represent a lower bound on the amounts raised given the timeframes for reporting

proceeds following completed or terminated offerings and that offerings qualified during the report period

may be ongoing. In particular, proceeds in ongoing offerings disclosed in periodic reports of Tier 2 issuers

are likely to be amended at a future date. Issuers that report proceeds of zero are excluded from the count.

Some of the issuers that have not yet made reports of proceeds may have ongoing offerings. Other issuers

may have halted attempts to raise capital under Regulation A but have not made subsequent EDGAR

filings. If an issuer reported proceeds both from a Tier 1 and a Tier 2 offering, that issuer is counted twice

(once under Tier 1 and once under Tier 2).

89

sought in qualified offerings), and reported proceeds (91%) during this period. The larger Tier 2

offering limit does not appear to be the sole factor for issuers’ decision between tiers, given that

approximately 43% of filed Tier 2 offerings an

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