Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act

Federal RegisterJan 23, 2014

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-9497; 34-71120; 39-2493; File No. S7-11-13]

RIN 3235-AL39

Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules.

SUMMARY:

We are proposing rule amendments to Regulation A to implement Section 401 of the Jumpstart Our Business Startups Act. Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act, which directs the Commission to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act. The proposed rules include issuer eligibility requirements, content and filing requirements for offering statements and ongoing reporting requirements for issuers.

DATES:

Comments should be received by March 24, 2014.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments:

• Use the Commission's Internet comment forms (

http://www.sec.gov/rules/proposed.shtml)

;

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-11-13 on the subject line; or

• Use the Federal Rulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments:

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-13. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for public inspection and copying in the Commission's Public Reference Room, 100 F Street NE., Room 1580, Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Zachary O. Fallon, Special Counsel; Shehzad K. Niazi, Attorney-Advisor; or Karen C. Wiedemann, Attorney Fellow; Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3460, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

We propose to amend Rules 251 through 263

under Regulation A.

17 CFR 230.251 through 230.263.

We also propose to revise Form 1-A,

rescind Form 2-A,

and create four new forms, Form 1-K (annual updates), Form 1-SA (semiannual updates), Form 1-U (current reporting), and Form 1-Z (exit report).

17 CFR 239.90.

17 CFR 239.91.

We further propose to revise Rule 4a-1

under the Trust Indenture Act

to increase the dollar ceiling of the exemption from the requirement to issue securities pursuant to an indenture, and to amend Rule 15c2-11

of the Securities Exchange Act of 1934 (the “Exchange Act”)

to permit an issuer's ongoing reports filed under Regulation A to satisfy a broker-dealer's obligations to review and maintain certain information about an issuer's quoted securities. In addition, we propose a technical amendment to Exchange Act Rule 15c2-11 to amend subsection (d)(2)(i) of the rule to update the outdated reference to the “Schedule H of the By-Laws of the National Association of Securities Dealers, Inc.” which is now known as the “Financial Industry Regulatory Authority, Inc.” and to reflect the correct rule reference.

17 CFR 260.4a-1.

15 U.S.C. 77aaa

et seq.

17 CFR 240.15c2-11.

15 U.S.C. 78a

et seq.

As a result of the proposed revisions to Regulation A, conforming and technical amendments would be made to Rule 157(a),

in order to reflect amendments to Section 3(b) of the Securities Act, and Rule 505(b)(2)(iii),

in order to reflect the proposed changes to Rule 262 of Regulation A. Additionally, Item 101(a)

of Regulation S-T

would be revised to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under proposed Regulation A. The portion of Item 101(c)(6)

of Regulation S-T dealing with paper filings related to a Regulation A offering, and Item 101(b)(8)

of Regulation S-T dealing with the optional electronic filing of Form F-X by Canadian issuers, would therefore be rescinded.

17 CFR 230.157(a).

17 CFR 230.505(b)(2)(iii).

17 CFR 232.101(a).

17 CFR 232.10

et seq.

17 CFR 232.101(c)(6).

17 CFR 232.101(b)(8).

Table of Contents

I. Introduction and Background

A. JOBS Act Section 401

B. Current Regulation A

C. Use of Regulation A

D. The Section 3(b)(2) Exemption

II. Proposed Amendments to Regulation A

A. Overview

B. Scope of Exemption

1. Eligible Issuers

2. Eligible Securities

3. Offering Limitations and Secondary Sales

4. Investment Limitation

5. Integration

6. Treatment Under Section 12(g)

7. Liability Under Section 12(a)(2)

C. Offering Statement

1. Electronic Filing; Delivery Requirements

2. Non-Public Submission of Draft Offering Statements

3. Form and Content

4. Continuous or Delayed Offerings and Offering Circular Supplements

5. Qualification

D. Solicitation of Interest (“Testing the Waters”)

E. Ongoing Reporting

1. Continuing Disclosure Obligations

2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing Reporting Under Regulation A

3. Exchange Act Registration of Regulation A Securities

4. Exit Report on Form 1-Z

F. Insignificant Deviations From a Term, Condition or Requirement

G. Bad Actor Disqualification

H. Relationship With State Securities Law

I. Regulation A in Comparison to Other Methods of Capital Formation

J. Additional Considerations Related to Smaller Offerings

K. Regulation A Offering Limitation

L. Technical and Conforming Amendments

III. General Request for Comment

IV. Economic Analysis

A. Economic Baseline

1. Current Methods of Raising up to $50 Million of Capital

2. Liquidity Considerations

3. Investors in Offerings of up to $50 Million

B. Analysis of Proposed Rules

1. General Considerations

2. Scope of Exemption

3. Offering Statement

4. Solicitation of Interest (“Testing the Waters”)

5. Ongoing Reporting Requirements

6. Bad Actor Disqualification

7. Relationship With State Securities Law

8. Effect of Regulation A on OTC Markets and Dealer Intermediation

C. Request for Comment

V. Paperwork Reduction Act

A. Background

B. Estimate of Issuers

C. Estimate of Issuer Burdens

1. Regulation A (Form 1-A and Form 2-A)

2. Form 1-K: Annual Report

3. Form 1-SA: Semiannual Report

4. Form 1-U: Current Reporting

5. Form 1-Z: Exit Report

6. Form ID Filings

D. Collections of Information Are Mandatory

E. Request for Comment

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for the Proposed Action

B. Objectives

C. Legal Basis

D. Small Entities Subject to the Proposed Rules

E. Reporting, Recordkeeping, and Other Compliance Requirements

F. Duplicative, Overlapping or Conflicting Federal Rules

G. Significant Alternatives

H. Request for Comment

VII. Small Business Regulatory Enforcement Fairness Act

VIII. Statutory Basis and Text of Proposed Amendments

I. Introduction and Background

A. JOBS Act Section 401

This rulemaking would implement a statutory directive under the Jumpstart Our Business Startups Act (the “JOBS Act”)

to create a new exemption from registration under the Securities Act of 1933 (the “Securities Act”) for small offerings. Section 401 of the JOBS Act amended Section 3(b) of the Securities Act by designating existing Section 3(b), the Commission's exemptive authority for offerings of up to $5 million, as Section 3(b)(1), and creating a new Section 3(b)(2). New Section 3(b)(2) directs the Commission to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a twelve-month period. Issuers conducting offerings in reliance on Section 3(b)(2) would be required to follow terms and conditions established by the Commission, and, where applicable, to make ongoing disclosure.

Public Law 112-106, 126 Stat. 306.

Congress enacted Section 3(b)(2) against a background of public commentary suggesting that Regulation A, an exemption for small issues originally adopted by the Commission in 1936 under the authority of Section 3(b) of the Securities Act,

should be expanded and updated to make it more useful to small companies.

Section 3(b)(2) requires us to engage in rulemaking that is meant to increase the use of Regulation A, thereby helping to make capital available to small companies.

SEC Release No. 33-632 (Jan. 21, 1936). Prior to codification as such, Regulation A was a collection of individual rules issued by the Federal Trade Commission and the Commission during the period of 1933-1936. Each such rule exempted particular classes of securities from registration under the Securities Act. Regulation A's initial annual offering limit was raised from $100,000 to $300,000 in 1945, $500,000 in 1970, $1.5 million in 1978, and to its current level of $5 million in 1992.

H.R. Rep. No. 112-206 (2011), at 3-4.

See also

Remarks and prepared statements of William Hambrecht, CEO of WR Hambrecht + Co., (“A confluence of . . . reasons . . . has made Regulation A a poor alternative for small growth-oriented companies seeking to raise development capital and also explains why the offering mechanism has virtually disappeared from the capital raising landscape.”), and Michael Lempres, Asst. General Counsel, SVB Financial Group, (“Regulation A has not proved to be a useful capital raising vehicle for small issuers. . . . An average of eight filings a year, with a maximum amount of $5 million each, proves the irrelevance of Regulation A as it stands today. It simply is not a viable vehicle for raising funds and is providing benefit to neither companies nor investors.”) before the H. Comm. on Fin. Serv. for the 111th Congress, Serial No. 111-168 (December 8, 2010),

available at: http://archives.financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1381

; Remarks and prepared statement of David Weild, Sr. Advisor, Grant Thorton, (“[A]n increase to the Regulation A [offering] ceiling will provide a less costly and more effective alternative for smaller, entrepreneurial companies that want to access the public capital markets. It may also enable smaller, growth-oriented companies to access the public market at an earlier stage in their growth cycle.”) before the H. Comm. on Fin. Serv., Subcommittee on Capital Markets and Gov't Sponsored Entities for the 112th Congress, Serial No. 112-19 (March 16, 2011),

available at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231755

; Remarks and prepared statements of Professor John C. Coffee, Columbia Law School (“[I]n 2010 only seven offerings went effective under Regulation A (which is based on Section 3(b)). Most issuers saw Section 3(b) as unattractive (in comparison to a private placement under Regulation D) both because of Section 3(b)'s low ceiling (

i.e.,

$5 million) and the need to file an offering document that is reviewed by the SEC.”), before the U.S. Senate Comm. on Banking, Housing and Urban Affairs (December 1, 2011),

available at: http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=a96c1bc1-b064-4b01-a8ad-11e86438c7e5

; U.S. Government Accountability Office (GAO),

Factors that May Affect Trends in Regulation A Offerings

(July 2012) (

available at: http://www.gao.gov/assets/600/592113.pdf

H.R. Rep. No. 112-206, at 3 (2011) (“The low number of Regulation A filings—each for the maximum amount of $5 million—demonstrates that a revision to Regulation A is necessary. To increase the use of Regulation A offerings and help make capital available to small companies, Representative Schweikert introduced H.R. 1070, which increases the offering threshold to $50 million.”).

To implement Section 401 of the JOBS Act, as mandated by Section 3(b)(2), we have endeavored to craft a workable revision of Regulation A that would both promote small company capital formation and provide for meaningful investor protection. We propose to amend Regulation A to create two tiers of offerings: Tier 1, for offerings of up to $5 million in a twelve-month period, and Tier 2, for offerings of up to $50 million in a twelve-month period. Both Tiers would be subject to basic requirements as to issuer eligibility, disclosure, and other matters, drawn from the current provisions of Regulation A and updated in some areas to align Regulation A with current practice for registered offerings. In addition to these basic requirements, Tier 2 offerings would be subject to additional requirements, including the provision of audited financial statements, ongoing reporting obligations, and certain limitations on sales.

B. Current Regulation A

Currently, Regulation A permits unregistered public offerings of up to $5 million of securities in any twelve-month period by non-reporting U.S. and Canadian companies, including no more than $1.5 million of securities offered by securityholders of the company.

The exemption requires that an offering statement on Form 1-A be filed with the Commission.

Filings are made on paper,

rather than electronically, and are subject to staff review. The offering statement must be “qualified,”

which, in the absence of a delaying notation, would occur without Commission action on the 20th calendar day after filing.

The core of the offering statement is the offering circular, a disclosure document much like an abbreviated version of the prospectus in a registered offering.

The offering circular, which must be delivered to prospective purchasers,

can be in a

question-and-answer format or a more traditional narrative disclosure format.

17 CFR 230.251(a), (b). Under Rule 251(b), affiliates resales are prohibited unless the issuer has had net income from continuing operations in at least one of its last two fiscal years.

17 CFR 230.251(d), 17 CFR 230.252.

17 CFR 232.101(c)(6).

17 CFR 230.251(g).

See also

17 CFR 200.30-1(b)(2) (delegated authority to authorize the qualification of offering statements under Regulation A to the Director of the Division of Corporation Finance).

The qualification process under Regulation A is similar to the process of a registration statement being declared effective under the Securities Act. As with registration, the staff review process for an offering circular generally takes more than the 20 calendar days provided by rule, even taking into account that pre-qualification amendments to an offering statement restart the 20 calendar-day period. Issuers include a delaying notation on Form 1-A to ensure that both the issuer and staff reviewing the offering statement have completed the review process before an offering statement is qualified.

17 CFR 230.253.

17 CFR 230.251(d).

Form 1-A, Part II (Offering Circular), 17 CFR 239.90.

Regulation A permits issuers to communicate with potential investors, or “test the waters” for potential interest in the offering, before filing the offering statement.

Any solicitation material used to test the waters must be submitted to the Commission not later than the time of first use and must contain a required legend or disclaimer.

17 CFR 230.254.

17 CFR 230.254(b)(2). Testing the waters solicitation materials must state: (i) That no money is being solicited or will be accepted, if sent in response; (ii) that no sales will be made or commitment to purchase accepted until delivery of an offering circular that includes complete information about the issuer and the offering; (iii) that an indication of interest by a prospective purchaser is non-binding; and (iv) the identity of the chief executive officer of the issuer and a brief description of the issuer's business and products.

Regulation A offering circulars are required to contain issuer financial statements,

but the financial statements are not required to be audited unless the issuer otherwise has audited financial statements available.

Qualification of a Regulation A offering statement does not trigger reporting obligations under the Exchange Act. A Regulation A offering is a public offering, with no prohibition on general solicitation and general advertising. Securities sold under Regulation A are not “restricted securities” under the Securities Act and, therefore, are not subject to the limitations on resale that apply to securities sold in private offerings.

17 CFR 230.253(a).

Form 1-A, Part F/S, 17 CFR 239.90. Market participants have indicated that the laws of some states may require audited financial statements for offerings conducted under Regulation A.

See, e.g.,

17 CFR 230.502(d);

see also

Rule 144 (17 CFR 230.144).

Because Regulation A offerings are exempt from the registration requirements of the Securities Act, issuers and other offering participants are not subject to the liability provisions of Section 11 of the Securities Act. Instead, other anti-fraud and civil liability provisions of the securities laws, including Sections 12(a)(2) and 17 of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, apply to the offer and sale of securities in reliance upon Regulation A.

Securities offerings conducted pursuant to Regulation A are subject to state securities law registration and qualification requirements, unless an exemption is available under state law.

See

SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at fn. 57 (discussing the anti-fraud and civil liability provisions applicable to Regulation A).

C. Use of Regulation A

In recent years, Regulation A offerings have been rare in comparison to offerings conducted in reliance on other Securities Act exemptions or on a registered basis. From 2009 through 2012, there were 19 qualified Regulation A offerings for a total offering amount of approximately $73 million.

During the same period, there were approximately 27,500 offerings of up to $5 million (

i.e.,

at or below the cap on Regulation A offering size), for a total offering amount of approximately $25 billion, claiming a Regulation D exemption, and 373 offerings of up to $5 million, for a total offering amount of approximately $840 million, conducted on a registered basis. In 2012 alone, there were eight qualified Regulation A offerings for a total offering amount of approximately $34.5 million, compared to approximately 7,700 Regulation D offerings of up to $5 million for a total offering amount of approximately $7 billion, and 52 registered offerings of up to $5 million for a total offering amount of approximately $132 million.

One qualified offering involved a dividend reinvestment plan by an issuer that did not include an offering amount.

The figures cited above are derived from information contained in the Commission's EDGAR database and the S&P Capital IQ database.

See also

Section IV. below for a discussion on the usage of current methods of raising capital of up to $50 million.

Section 402 of the JOBS Act required the Comptroller General to conduct a study on the impact of state “Blue Sky” laws on offerings conducted under Regulation A, and to report its findings to Congress. The resulting U.S. Government Accountability Office (“GAO”) report to Congress indicates that various factors may have influenced the use of Regulation A, including the type of investors businesses seek to attract, the process of filing the offering statement with the Commission, state securities law compliance, and the cost-effectiveness of Regulation A relative to other exemptions.

Factors that May Affect Trends in Regulation A Offerings,

GAO-12-839 (July 2012) (

available at: http://www.gao.gov/assets/600/592113.pdf

). The GAO report concludes that it is unclear whether increasing the Regulation A offering ceiling from $5 million to $50 million will improve the utility of the exemption.

D. The Section 3(b)(2) Exemption

Section 401 of the JOBS Act imposes a number of requirements for the rules the Commission must adopt under Section 3(b)(2), and also provides for the exercise of Commission discretion in setting additional terms and conditions for the exemption.

The mandatory provisions, in addition to the $50 million annual offering limit, include:

• Features based on the current provisions of Regulation A:

• the securities may be offered and sold publicly;

• the securities are not “restricted securities” within the meaning of federal securities laws and regulations;

• the civil liability provisions of Section 12(a)(2) of the Securities Act would apply to offers and sales of the securities; and

• issuers may solicit interest in the offering before filing an offering statement;

• A new requirement for issuers to file audited financial statements with the Commission annually;

and

JOBS Act Section 401(a)(2).

• A limitation on the types of securities eligible for exemption under Section 3(b)(2) to equity securities, debt securities, and debt securities convertible into or exchangeable for equity interests, including any guarantees of such securities.

The Commission, in its discretion, may determine to include other terms, conditions, or requirements, including:

• electronic filing of offering materials, the form and content of which would be prescribed by the Commission, including audited financial statements, issuer business description, issuer financial condition, issuer corporate governance principles, use of investor funds, and other appropriate matters;

• “bad actor” disqualification provisions (which, if included, must be substantially similar to the regulations adopted under Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”));

and

Public Law 111-203, § 926, 124 Stat. 1376, 1851 (July 21, 2010). Among other things, Section 926 required the issuance of disqualifying rules substantially similar to the “bad actor” disqualification provisions of Rule 262 of existing Regulation A.

• periodic disclosures regarding the issuer, its business operations, financial condition, corporate governance principles, use of investor funds, and other appropriate matters.

JOBS Act Section 401(a)(2).

Section 401 of the JOBS Act also requires the Commission to review the $50 million offering limit not later than two years after enactment of the JOBS Act and every two years thereafter and, if the Commission decides not to increase the amount, requires that it report its reasoning to Congress.

II. Proposed Amendments to Regulation A

A. Overview

Title IV of the JOBS Act amended Section 3(b) of the Securities Act to add Section 3(b)(2), which, subject to various terms and conditions, directs the Commission to enact rules that add a class of securities exempt from the registration provisions of the Securities Act. Prior to the amendment, Section 3(b) contained the statutory authority relied upon to establish current Regulation A. Although the JOBS Act amended Section 3(b) to designate this existing authority as Section 3(b)(1) and add new Section 3(b)(2), it did not amend the existing statutory authority of Regulation A or direct the Commission to amend specific rules adopted thereunder.

We propose to implement this JOBS Act mandate by expanding Regulation A into two tiers: Tier 1, for offerings of up to $5 million; and Tier 2, for offerings of up to $50 million.

The proposals for offerings under Tier 1 and Tier 2 build on current Regulation A, and preserve, with some modifications, existing provisions regarding issuer eligibility, offering circular contents, testing the waters, and “bad actor” disqualification. We also propose to modernize the Regulation A filing process for all offerings and align practice in certain areas with prevailing practice for registered offerings, to create additional flexibility and streamline compliance for Regulation A issuers. Issuers in Tier 2 offerings would be required to include audited financial statements in their offering documents and to file annual, semiannual and current reports with the Commission, and purchasers in Tier 2 offerings would be subject to certain limitations on their investment. The differences between Tier 1 and Tier 2 offerings are described more fully below.

Cf.

Title II of the JOBS Act, Public Law 112-106, § 201 (directing the Commission to amend Rule 506 of Regulation D, 17 CFR 230.506).

An issuer of $5 million or less of securities could elect to proceed under either Tier 1 or Tier 2.

In developing the current proposals, we considered the statutory language of JOBS Act Section 401, the legislative history, the current Regulation A exemption, comment letters received to date on Title IV of the JOBS Act

and recent recommendations of the Commission's Government-Business Forum on Small Business Capital Formation,

the Advisory Committee on Small and Emerging Companies,

and the Equity Capital Formation Task Force.

To facilitate public input on JOBS Act rulemaking before the issuance of rule proposals, the Commission has invited members of the public to make their views known on various JOBS Act initiatives in advance of any rulemaking by submitting comment letters to the Commission's Web site at

http://www.sec.gov/spotlight/jobsactcomments.shtml

. Comment letters received to date on Title IV of the JOBS Act are

available at: http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml

Prior recommendations of the Commission's Government-Business Forum on Small Business Capital Formation (“Small Business Forum”) are

available at: http://www.sec.gov/info/smallbus/sbforum.shtml

Prior recommendations of the Advisory Committee on Small and Emerging Companies (“Advisory Committee”) are

available at: http://www.sec.gov/info/smallbus/acsec.shtml

Equity Capital Task Force,

From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies,

presentation to the U.S. Dep't. of Treasury (November 11, 2013),

available at: http://www.equitycapitalformationtaskforce.com/

(“ECTF Report”).

Following are the key provisions of the proposed amendments to Regulation A:

Scope of the exemption:

• Tier 1: annual offering limit of $5 million, including no more than $1.5 million on behalf of selling securityholders.

• Tier 2: annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders.

• Update the restrictions on issuer eligibility to exclude from Regulation A issuers that are or have been subject to any order of the Commission pursuant to Section 12(j) of the Exchange Act entered within five years before the filing of the offering statement.

• Update the restrictions on issuer eligibility to exclude from Regulation A issuers that have not filed with the Commission the ongoing reports required by the proposed rules during the two years immediately preceding the filing of an offering statement.

• Limit the amount of securities an investor can purchase in a Tier 2 offering to no more than 10% of the greater of annual income and net worth.

• Exclude asset-backed securities, as defined in Regulation AB, from the list of eligible securities.

• Update the safe harbor from integration and provide additional guidance on the potential integration of offerings conducted concurrently with, or close in time after, a Regulation A offering.

Solicitation materials:

• Permit issuers to “test the waters” or solicit interest in a potential offering with the general public either before or after the filing of the offering statement, so long as any solicitation materials used after publicly filing the offering statement are preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained. This requirement could be satisfied by providing the uniform resource locator (“URL”) where the preliminary offering circular or the offering statement may be obtained on EDGAR.

Qualification, communications, and offering process:

• Require issuers and intermediaries in the prequalification period to deliver a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale.

• Modernize the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process:

See

Securities Offering Reform, SEC Rel. No. 33-8591 (July 19, 2005) [70 FR 44722].

• Permit issuers and intermediaries to satisfy their delivery requirements as to the final offering circular under an “access equals delivery” model when the final offering circular is filed and available on EDGAR;

• Require issuers that sell to prospective purchasers in reliance on the delivery of a preliminary offering circular to, not later than two business days after completion of the sale, provide the purchasers with a copy of the final offering circular or a notice that the sale occurred pursuant to a qualified offering statement that includes the URL where the final offering circular or to the offering statement of which such final offering circular is part may be obtained and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent and received in response; and

• Permit issuers to file offering circular supplements after qualification of the offering statement in certain circumstances in lieu of post-qualification amendments, including to provide the types of information that may be excluded from a prospectus under Rule 430A.

• Permit continuous or delayed offerings under the proposed rules, but require issuers in continuous or delayed Tier 2 offerings to be current in their annual and semiannual reporting obligations.

• Permit issuers to qualify additional securities in reliance on Regulation A by filing a post-qualification amendment to a qualified offering statement.

Offering statement:

• Require issuers to electronically file offering statements with the Commission.

• Permit the non-public submission of offering statements and amendments for review by Commission staff before filing such documents with the Commission, so long as all such documents are publicly filed not later than 21 calendar days before qualification.

• Eliminate the Model A (Question-and-Answer) disclosure format under Part II (Offering Circular) of Form 1-A.

• Update and clarify the Model B (Narrative) disclosure format under Part II of Form 1-A (renaming it as Offering Circular), while continuing to permit the use of Part I of Form S-1 narrative disclosure as an alternative.

• Allow an offering statement to be qualified only by order of the Commission rather than, in the absence of a delaying notation on the offering statement, without Commission action on the 20th calendar day after filing.

• Require issuers in a Tier 2 offering to include audited financial statements in their offering circulars.

• Require all issuers to file balance sheets for the two most recently completed fiscal year ends (or for such shorter time that they have been in existence).

• Permit issuers to provide financial statements in Form 1-A that are dated not more than nine months before the date of non-public submission or filing, and require issuers to include financial statements in Form 1-A that are dated not more than nine months before qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.

Ongoing reporting:

• Require issuers that conduct a Tier 1 offering to electronically file a Form 1-Z exit report with the Commission not later than 30 calendar days after termination or completion of a qualified Regulation A offering to provide information about sales in such offering and to update certain issuer information.

• Require issuers that conduct a Tier 2 offering to electronically file with the Commission annual and semiannual reports, as well as current event updates.

• Require issuers that conduct a Tier 2 offering to, where applicable, provide special financial reports to provide information to investors in between the time the financial statements are included in Form 1-A and the issuer's first periodic report due after qualification of the offering statement.

• Permit the ongoing reports filed by an issuer conducting a Tier 2 offering to be used to satisfy a broker-dealer's obligations under Exchange Act Rule 15c2-11.

• Provide that issuers conducting Tier 2 offerings would exit the Regulation A ongoing reporting regime when they become subject to the ongoing reporting requirements of Section 13 of the Exchange Act, and may exit the Regulation A reporting regime at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which the offering statement was qualified, so long as the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Regulation A offering statement are not ongoing.

• Require issuers that conduct a Tier 2 offering to include in their first annual report after termination or completion of a qualified Regulation A offering, or in their Form 1-Z exit report, information about sales in the terminated or completed offering and to update certain issuer information.

• Eliminate the requirement that issuers file a Form 2-A with the Commission to report sales and the termination of sales made under Regulation A every six months after qualification and within 30 calendar days after the termination, completion, or final sale of securities in the offering.

“Bad actor” disqualification provisions:

• Substantially conform the “bad actor” disqualification provisions of Rule 262 to new Rule 506(d) and add a new disclosure requirement similar to Rule 506(e).

Application of state securities laws:

• In light of the total package of investor protections proposed to be included in the implementing rules for Regulation A, provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” defined to be all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering.

B. Scope of Exemption

1. Eligible Issuers

Section 401 of the JOBS Act does not include any express issuer eligibility requirements.

Currently, Regulation A is limited to companies organized in and with their principal place of business inside the United States or Canada. It is unavailable to:

Section 3(b)(2)(G)(ii) specifies that if the Commission chooses to enact so-called “bad actor” disqualification provisions, such provisions must be substantially similar to the regulations adopted in accordance with Section 926 of the Dodd-Frank Act. Proposed “bad actor” disqualification provisions are discussed below in Section II.F.

• companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act (“reporting companies”);

• companies registered or required to be registered under the Investment Company Act of 1940 (“investment companies”);

15 U.S.C. 80a-1

et seq.

(“Investment Company Act”). The proposed rules would clarify the current exclusion of business development companies from Regulation A.

See

SEC Rel. No. 33-6924, at fn. 65 (noting that companies registered or required to be registered under the Investment Company Act of 1940, including business development companies, are prohibited from using Regulation A).

• development stage companies that have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies (“blank check companies”);

and

Rule 251(a)(3);

see also

SEC Rel. No. 33-6949 [57 FR 36442] (July 30, 1992), at fn. 50 (clarifying that blank check companies regardless of whether they are issuing penny stock are precluded from relying on Regulation A).

• issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.

Regulation B formerly provided exemptive relief for such issuers. Regulation B was rendered obsolete in light of other exemptions, such as those afforded issuers under Section 4(a)(2) of the Securities Act and Regulation D, and was rescinded in May 1996.

See

SEC Release No. 33-7300 [61 FR 30398] (May 31, 1996).

Several commenters have suggested that the expanded exemption should continue to be unavailable to blank check companies,

two of which also suggested that the exemption should be unavailable to special purpose acquisition companies (“SPACs”).

Two commenters suggested that business development companies (“BDCs”) should be permitted to rely on

the exemption,

and also suggested that shell companies should no longer be permitted to rely on Regulation A.

One commenter expressed concern over allowing BDCs, as well as real estate investment trusts (“REITs”), to rely on the exemption without additional entity-specific disclosure requirements,

while another suggested that REITs should be allowed to rely on the exemption without additional disclosure obligations.

One commenter suggested that the Commission permit reporting companies, and foreign private issuers

that expressly consent to Exchange Act Section 10(b) liability, to rely on the exemption.

One commenter proposed limiting the availability of the exemption to non-reporting companies, and to operating companies, while continuing to make the exemption unavailable to pooled investment funds.

Letter from Catherine T. Dixon, Chair, Federal Regulation of Securities Committee, American Bar Association, Sept. 7, 2012 (“ABA Letter”); Letter from William R. Hambrecht, Chairman and CEO, WR Hambrecht + Co., Jan. 4, 2013 (“WR Hambrecht + Co. Letter”); Letter from A. Heath Abshure, President, North American Securities Administrators Association (“NASAA”), April 10, 2013 (“NASAA Letter 2”);

see also

Letter from Robert R. Kaplan, Jr. and Mark A. Cleaves, Kaplan Voekler Cunningham & Frank PLC (“Kaplan Voekler”), May 14, 2013 (Kaplan Voekler Letter 2”).

NASAA Letter 2; WR Hambrecht + Co. Letter;

see also

Kaplan Voekler Letter 2 (noting that there are important distinctions between SPACs, blank check companies, and shell companies). A SPAC is a type of blank check company created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe.

ABA Letter (suggesting that permitting BDCs to rely on Regulation A would be consistent with the policy goals behind enactment of Section 3(b)(2) of the Securities Act, and Commission staff guidance on the JOBS Act and the treatment of BDCs as emerging growth companies under Title I of the JOBS Act); WR Hambrecht + Co. Letter (suggesting that permitting BDCs to rely on Regulation A would be consistent with the policy goals behind enactment of Section 3(b)(2) of the Securities Act). A BDC is a closed-end company that, among other things, is operated for the purpose of making investments in certain types of securities, and makes available to issuers of such securities significant managerial assistance.

See

Section 2(a)(48) of the Investment Company Act.

ABA Letter; WR Hambrecht + Co. Letter. A shell company is a company that has, or at any time previously has had, no or nominal operations, and either no or nominal assets, assets consisting solely of cash or cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. 17 CFR 230.405;

see also

17 CFR 144(i)(1)(i).

NASAA Letter 2 (citing the unique “nature and timing of [such companies'] capital formation and investment strategies, fee structures, and liquidity, necessitate disclosure fitting for these specific entities.”). We solicit comment on potential BDC- and REIT-specific disclosure in Section II.C.3.b. below.

Kaplan Voekler Letter 2. A REIT is a company that owns and generally operates income-producing real estate or real estate-related assets.

See

Sections 856 through 859 of Internal Revenue Code, 26 U.S.C. 856-859;

see also

general discussion of REIT characteristics in SEC Rel. No. IC-29778 (Aug. 31, 2011) [76 FR 55300], at 55302. Among other things, a REIT must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

Under Rule 405 (17 CFR § 230.405), a foreign private issuer is any foreign issuer—other than a foreign government—except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter:

(i) More than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and

(ii) Any of the following:

(A) The majority of the executive officers or directors are United States citizens or residents;

(B) More than 50 percent of the assets of the issuer are located in the United States; or

ABA Letter.

WR Hambrecht + Co. Letter.

We propose to add two new categories of ineligible issuers to, but to otherwise maintain, Regulation A's existing issuer eligibility requirements. As proposed, the exemption would continue to be available to companies organized in, and with their principal place of business inside, the United States or Canada. Under the proposal, the exemption would continue to be unavailable to Exchange Act reporting companies, investment companies, blank check companies, certain issuers disqualified from participation in such offerings under the “bad actor” provisions of Rule 262, as proposed to be amended,

and to issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.

See

discussion in Section II.G. below.

See

proposed Rules 251(b) and 262.

Additionally, we propose to make the exemption unavailable to issuers that have not filed with the Commission the ongoing reports required by the proposed rules during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports).

We recently proposed a similar eligibility requirement for issuers in our proposed rules for securities-based crowdfunding transactions pursuant to Section 4(a)(6) of the Securities Act.

We believe that our rules for ongoing reporting in Regulation A, as proposed to be amended, would benefit investors by enabling them to consider updated information about the issuer, make informed investment decisions, facilitate the development of an efficient secondary market in such securities, and would enhance our ability to analyze and monitor the Regulation A market. We therefore believe fulfilling an obligation to file ongoing reports pursuant to proposed Regulation A is an important investor protection that should be a factor in determining issuer eligibility.

See

Section II.E.1. below for a discussion on proposed ongoing reporting requirements applicable to Tier 1 and Tier 2 offerings.

See

SEC Rel. No. 33-9470 (Oct. 23, 2013), at 36 [78 FR 66427] (proposed rules for Regulation Crowdfunding under Title III of the JOBS Act)

and

proposed Rule 100(b)(5) of Regulation Crowdfunding.

We further propose to exclude from the category of eligible issuers under Regulation A issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement. Under Section 12(j) of the Exchange Act, an issuer's securities registered under the Exchange Act may be subject to a denial, suspension, or revocation of registration pursuant to an order by the Commission if, after notice and opportunity for a hearing, the Commission finds that the issuer of such securities has failed to comply with any of the provisions of, or the rules and regulations enacted under, the Exchange Act. We do not believe that issuers that, after notice and opportunity for a hearing, are or have been subject to such orders by the Commission within a five-year period immediately preceding the filing of the offering statement should benefit from the provisions of Regulation A, as proposed to be amended. We would therefore exclude such issuers from the category of eligible issuers.

We solicit comment on the proposed issuer eligibility requirements, the suggestions made in the advance comments to date, and on the issues discussed below.

Request for Comment

1. As proposed, in addition to the two newly proposed issuer eligibility requirements, should we otherwise maintain the existing categories of Regulation A issuer eligibility requirements? Why or why not? If not, which categories of issuer eligibility requirements should we alter, and why? Please explain.

2. As proposed, should we add an additional issuer eligibility requirement to exclude issuers that have not filed with the Commission the ongoing reports required by the proposed rules during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports)? If so, should we only require issuers to be current in their Regulation A ongoing reporting at the time of the filing of a new offering statement in order to be eligible? Alternatively, should we consider a time period other than two years? Why or why not?

3. As proposed, should we add an additional issuer eligibility requirement to exclude issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering

statement? Why or why not? If not, please explain. Alternatively, should we alter the proposed five-year period during which an issuer could not have been subject to an order by the Commission pursuant to Section 12(j) to cover a longer or shorter period of time? Why or why not? If so, please explain.

a. U.S. Nexus Other Than Organization and Domicile

We are seeking comment on whether we should expand availability of the Regulation A exemption to issuers that may not satisfy domicile-based requirements, particularly those that have a substantial United States nexus, such as certain foreign companies with domestic operations, or domestic subsidiaries of foreign multinational companies.

A domestic subsidiary of a foreign multinational company (

i.e.,

one organized in the United States or Canada) would be eligible to rely on Regulation A if its principal place of business were located in the United States or Canada.

As its name suggests, one goal of the JOBS Act was the creation of jobs within the United States.

Expansion of issuer eligibility to include foreign issuers with a substantial U.S. nexus may serve to better implement the JOBS Act goal of domestic job creation. According to statistics from the U.S. Department of Commerce's Bureau of Economic Analysis (“BEA”), many American jobs are created not only by U.S. companies, but by the U.S. affiliates of foreign multinational companies.

According to the report, total U.S. employment by majority-owned U.S. affiliates of foreign multinational companies rose in 2011 at nearly twice the rate of employment in the U.S. private-industry sector as a whole.

As the BEA data suggest, domestic job creation is not necessarily dependent on company domicile or principal place of business.

See, e.g.,

H.R. Rep. No. 112-206, at 4 (2012) (“Small companies are critical to economic growth in the United States. Amending Regulation A to make it viable for small companies to access capital will permit greater investment in these companies, resulting in economic growth and jobs. By reducing the regulatory burden and expense of raising capital from the investing public, [Title IV of the JOBS Act] will boost the flow of capital to small businesses and fuel America's most vigorous job-creation machine.”).

See

Anderson, Thomas, U.S. Dep't of Commerce, Bureau of Econ. Analysis,

Summary Estimates for Multinational Companies: Employment, Sales, and Capital Expenditures for 2011

(Apr. 18, 2013) (“BEA Release 13-16”), at Table 3,

available at: http://www.bea.gov/newsreleases/international/mnc/2013/_pdf/mnc2011.pdf

. The BEA's advance summary estimates for 2011 show total employment of approximately 22.9 million workers by U.S. parents of multinational companies (some of which are themselves foreign-owned), accounting for approximately one-fifth of total U.S. private sector employment, and total employment of approximately 5.6 million workers by majority-owned U.S. affiliates of foreign multinational companies, accounting for approximately five percent of total U.S. private sector employment.

Id.

at 1-2. As some U.S. parents of multinational companies are themselves foreign-owned, there is some overlap between the employment figures of U.S. parents of multinational companies and U.S. affiliates of foreign multinational companies. For more information on multinational companies,

see http://www.bea.gov/iTable/index_MNC.cfm.

BEA Release 13-16,

at 2.

See id.; see also

Matthew J. Slaughter,

American Companies and Global Supply Networks: Driving U.S. Economic Growth and Jobs by Connecting with the World,

Business Roundtable et al. (January 2013), at 9,

available at: http://businessroundtable.org/uploads/studies-reports/downloads/BRT-SlaughterPaper-singles-Dec21.pdf

(noting that both U.S.-headquartered multinational companies and foreign-headquartered multinational companies that operate in the U.S. create tens of millions of well-paying jobs domestically).

Currently, Regulation A is limited to companies organized, and with their principal place of business, in the United States or Canada.

The Commission could make the Regulation A exemption available to all non-U.S. issuers, rather than only Canadian issuers. Additionally, we could subject issuers to conditions intended to ensure that the capital raised in the offering is put to work in the United States. For example, we could add a requirement that a minimum percentage of the offering proceeds be used in the United States, in connection with the issuer's domestic operations.

Such a requirement could, however, be difficult to administer because of challenges in delineating domestic versus foreign operations and in tracing use of proceeds.

The Commission originally proposed the elimination of Canadian issuers from the Regulation A exemptive scheme in 1992 on the grounds that such issuers rarely used the exemption.

See

SEC Rel. No. 33-6924, at 19. In response to public comment, however, this proposal was not adopted. SEC Rel. No. 33-6949, at 36443. No Canadian issuers have qualified an offering in reliance on Regulation A since 2002.

Cf.

Rule 147. 17 CFR 230.147. Rule 147 is a safe harbor from registration under Section 3(a)(11) of the Securities Act. Section 3(a)(11) is more commonly known as the intrastate exemption, and requires, among other things, that issuers conducting an intrastate offering use at least 80% of the net proceeds of the offering in connection with their business operations in the relevant state.

Alternatively, issuer eligibility under Regulation A could be extended to “domestic issuers,” defined as any issuer that is not a foreign government or a “foreign private issuer.”

Domestic issuers would, in general, have a demonstrated presence in the United States, which could increase the likelihood that proceeds from the offering are used within the United States.

We could limit issuer eligibility further by adding a condition that most of the offering proceeds be used in connection with the issuer's U.S. domestic operations.

In Regulation S (17 CFR 230.901

et seq.

), a “domestic issuer” is defined as any issuer other than a “foreign government” or “foreign private issuer.” 17 CFR 230.902(e). A “foreign government” means the government of any foreign country or of any political subdivision of a foreign country.

See

17 CFR 230.405.

See

fn. 56. above for the definition of a “foreign private issuer.”

The Commission previously used the term “domestic issuers” in the proposed amendments to Regulation A in 1992 to refer to entities organized and with a principal place of business in the United States.

See

SEC Rel. No. 33-6924, at 19, 156.

Request for Comment

4. Should issuer eligibility to rely on Regulation A continue to require an issuer to be organized under the laws of the United States or Canada with a principal place of business in the United States or Canada? Or should Regulation A be limited to issuers organized and with a principal place of business in the United States, thereby excluding Canadian issuers? Should Regulation A be made available to “domestic issuers” as described above, or to all issuers, including foreign private issuers? Is there a reason to treat Canadian issuers differently from other foreign issuers? What would the impact be on issuers, investors, and other market participants if the issuer eligibility criteria were broadened? Please explain.

5. If we modify or eliminate current requirements regarding domicile and principal place of business, should we limit availability of the exemption in some other way that reflects a U.S. nexus? If so, how should we define, or in what ways should we limit the availability of the exemption to issuers that demonstrate, a U.S. nexus? Are there criteria we could use that would be easy to administer? If so, what criteria?

6. If we extend issuer eligibility to include foreign private issuers, should we require express consent from such issuers to Exchange Act Section 10(b) liability?

Should we consider requiring additional or alternative conditions for the eligibility of such issuers? Why or why not? Should we make other changes in Regulation A to accommodate such issuers? For example, as proposed with respect to Canadian issuers,

should we permit all non-U.S. issuers to prepare their financial statements using International Financial Reporting Standards (IFRS) as issued by the International Accounting

Standards Board (IASB), rather than U.S. Generally Accepted Accounting Principles (U.S. GAAP)?

In 2010, the U.S. Supreme Court held that Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), covers only transactions in securities listed on domestic exchanges, and securities purchased or sold domestically.

Morrison

National Australia Bank Ltd.,

130 S. Ct. 2869 (2010).

But see,

Section 929P(b) of the Dodd-Frank Act, Public Law 111-203, § 929P(b).

See

discussion in Section II.C.3.b(2). below.

b. Additional and Alternative Types of Issuers

As noted above, we propose not to amend Regulation A's existing prohibitions on use of the exemption by investment companies registered or required to be registered under the Investment Company Act, including BDCs; blank check companies and SPACs; and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights. As proposed, shell companies that do not meet the definition of “blank check company” would continue to be able to rely on the exemption.

We seek comment on whether to permit BDCs, blank check companies and SPACs, and oil, gas and mineral interest rights issuers to rely on Regulation A, as well as on the potential exclusion of shell companies.

A shell company that is a development stage company with no specific business plan or purpose would not be an eligible issuer under the exclusion for blank check companies.

BDCs.

BDCs are a type of closed-end company operated for the purpose of making investments in small, developing, or financially troubled companies. Typically, BDCs are subject to the registration and reporting requirements of the Securities Act and Exchange Act. The Investment Company Act requires BDCs to have at least 70% of their investment portfolio in eligible portfolio companies and certain other assets at the time they make any new investment.

Rules 2a-46 and 55a-1 of the Investment Company Act define eligible portfolio companies to include all private companies and companies whose securities are listed on a national securities exchange but have an aggregate market value of less than $250 million, or that met such requirements at the time of the BDC's initial investment in such company.

Currently, BDCs are able to rely on Regulation E

for offerings of up to $5 million in any twelve-month period. Extension of Regulation A issuer eligibility to BDCs could assist small companies with capital formation by indirectly providing such companies—otherwise qualifying as eligible portfolio companies—with greater access to investment capital. As noted above, however, one commenter expressed concern about the potential extension of Regulation A to BDCs absent disclosure requirements that are more appropriately tailored for these issuers.

See

Section 2(a)(48) of the Investment Company Act.

17 CFR 270.2a-46; 17 CFR 270.55a-1.

17 CFR 230.601

et seq.

NASAA Letter 2;

see also

fn. 54 above.

Blank Check Companies and SPACs.

By its terms, the definition of blank check companies under the federal securities laws can include early stage and startup companies with no specific business plans.

Extension of Regulation A issuer eligibility to include companies with characteristics that are similar to blank check companies could therefore be consistent with Title IV's goal of increasing the capital formation options for smaller companies.

As noted above, however, some commenters have expressed concern about, and recommended against, permitting blank check companies and SPACs to use Regulation A.

As currently proposed, blank check companies and SPACs would not be permitted to rely on the exemption. We seek comment on whether the Commission should revisit this exclusion, and, if so, on what basis.

A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies or other entity.

See

17 CFR 230.419.

See

fn. 85 below. The Commission recently acknowledged, in proposing rules for securities-based crowdfunding transactions under Section 4(a)(6) of the Securities Act, the challenges associated with distinguishing between early stage companies that can provide information sufficient to support such transactions and those whose business plan is so indeterminate that they may not be able to provide adequate information.

See

SEC Rel. No. 33-9470, at 37.

See

fn. 89 below;

see also

fn. 51 above for the definition of a SPAC.

Shell Companies.

A shell company is a company that has, or at any time previously has had, no or nominal operations, and either no or nominal assets, assets consisting solely of cash or cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets.

Shell companies are not expressly excluded from Regulation A, although any shell company that met the definition of a blank check company would be excluded on that basis. As noted above, some commenters have suggested that the Commission consider an express exclusion for shell companies.

At their earliest stages of development, however, many small early stage and startup companies have limited operations and few, if any, assets. We anticipate that some Regulation A issuers would be startups where it may be uncertain as to whether they fall within the shell company definition.

We believe, however, that Regulation A, as proposed to be amended, is intended to provide smaller companies, including early stage companies, the opportunity to raise capital from the general public in a manner that is consistent with the proposed rules. In our view, excluding such companies from proposed Regulation A would be contrary not only to the provisions of current Regulation A, but also to Title IV of the JOBS Act.

We do not therefore propose to exclude shell companies from reliance on Regulation A. For the same reasons we are soliciting comment on potential blank check companies' access to, or exclusion from, the exemptive scheme; however, we also seek comment on whether shell companies should be prohibited from relying on Regulation A.

17 CFR 230.405;

see also

17 CFR 144(i)(1)(i).

ABA Letter; WR Hambrecht + Co. Letter (suggesting that shell company access to Regulation A is inconsistent with the JOBS Act because such companies do not promote job creation).

But see

SEC Rel. No. 33-8869 (December 6, 2007) at fn. 172 (“Rule 144(i)(1)(i) is not intended to capture a `startup company,' or, in other words, a company with a limited operating history, in the definition of a reporting or non-reporting shell company, as we believe that such a company does not meet the condition of having `no or nominal operations.' ”).

Operating Companies.

We are also seeking comment on whether we should take a different approach with respect to issuer eligibility requirements and, instead of prohibiting blank check company access to the exemption (as is currently proposed and consistent with current Regulation A), to limit availability of the exemption to companies satisfying a new definition of “operating company.”

The Commission previously proposed to limit Regulation A to operating companies in 1992.

Though not adopted at that time, the Commission proposed to make the exemption available only “to raise funds to put into the operations of an actual business and not simply for investment.” The proposal would have specifically excluded “those enterprises with the principal business of investing or reinvesting funds in securities, properties, commodities, business

opportunities or similar media of speculative opportunity.”

Along the same lines, we seek comment on whether we should exclude certain non-operating companies from Regulation A. We could, for example, limit availability of the exemption to operating companies, defined to include issuers that have generated total revenue in excess of a certain amount (

e.g.,

$1,000,000) over a certain period of time (

e.g.,

its prior two fiscal years) through the provision of goods or services, or based on similar or different criteria intended to facilitate access to the proposed rules by small companies. Adopting an operating company definition could more effectively eliminate the types of blank check companies, SPACs, and shell companies that are not otherwise the intended beneficiaries of Regulation A from eligibility, an issue we discuss above, request comment on below, and about which several commenters have expressed concern.

An operating company definition would not alter our current proposal to continue to prohibit reporting company and investment company reliance on Regulation A.

See

SEC Rel. No. 33-6924, at 20-21.

Id.

The adopting release noted that partnerships or certain other entities organized primarily for investment purposes had historically been eligible to use Regulation A, and that after consideration of public comment it was appropriate to continue to make the exemption available to such issuers. See SEC Rel. No. 33-6949, at 36443.

ABA Letter (“The purpose and goal of Section 3(b)(2) should . . . be to expand the capital raising opportunities available to operating companies. We are concerned about the possibility of abuse should non-operating companies be able to rely on the exemption. The Commission's proposed rules should . . . provide that Section 3(b)(2) will not be available for use by issuers that are blank check companies or shell companies and should define “eligible issuer” for purposes of Section 3(b)(2) to exclude specifically these types of issuers.”); WR Hambrecht + Co. Letter (suggesting limiting Regulation A issuers to operating companies, and prohibiting reliance on the exemption by blank check companies, SPACs, and shell companies); NASAA Letter 2 (indicating that offerings by blank check companies and SPACs are generally prohibited as fraudulent offerings under state securities laws).

Issuers of Interests in Mineral Rights.

Issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights, have historically been prohibited from relying on Regulation A. Instead, such issuers were permitted to conduct offerings in reliance on Regulation B.

Regulation B was rescinded in 1996, however, as it was deemed no longer necessary in light of other exemptions available to these types of issuers, such as Section 4(a)(2) of the Securities Act and Regulation D.

In light of the elimination of Regulation B and the current ability of such issuers to conduct offerings under,

e.g.,

Rule 506 of Regulation D, we seek comment on whether such issuers should continue to be ineligible to rely on Regulation A, or should now be permitted to conduct offerings under Regulation A.

Regulation B was an exemption from registration under the Securities Act relating to fractional undivided interests in oil or gas.

See

17 CFR 230.300-230.346 (1995).

See

SEC Release No. 33-7300 (May 31, 1996) [61 FR 30397].

Request for Comment

7. Should we amend Regulation A to make BDCs eligible to rely on it? Why or why not? Would it raise particular concerns about investor protection? If so, please explain.

8. Would extension of Regulation A issuer eligibility to BDCs be inconsistent with the exemption's current prohibition on use by reporting companies? If so, should we limit the extension of Regulation A issuer eligibility to only non-Exchange Act reporting BDCs? If not, should we permit BDC ongoing reporting under the Exchange Act to satisfy their reporting obligations under Regulation A?

If Regulation A eligibility were extended to BDCs, should other rules be amended to require additional disclosure about such issuers? If so, what specific additional disclosure should we require about BDCs?

See

Section II.E. below for a discussion of an issuer's ongoing reporting obligations under proposed Regulation A.

9. Should we extend Regulation A issuer eligibility to include blank check companies? Or would such an extension be inconsistent with the intent of Title IV of the JOBS Act, or the Commission's investor protection mandate? Why or why not?

10. If all or some segment of blank check companies are permitted to rely on Regulation A, should we specifically exclude SPACs from being able to rely on the exemption? Why or why not?

11. Should we amend Regulation A to make shell companies ineligible to rely on it? Or would the exclusion of shell companies from Regulation A be too broad, such that many small companies or startups would become ineligible to rely on the exemption?

12. Should we limit access to Regulation A to issuers that qualify as “operating companies”? If so, should we use the operating company definition described above, or some modified version? Please include a discussion of the effects on issuer access to the exemption that would result from using such a definition as a condition to issuer eligibility.

13. Should we reconsider the continued prohibition on use of the Regulation A exemptive scheme by issuers of fractional undivided interest in oil or gas rights, or similar interests in other mineral rights? If so, please explain. Are there risks associated with this type of issuer that merit maintaining Regulation A's current prohibition on use by such issuers?

14. Are there other limitations on issuer eligibility that we should consider? Alternatively, are there other types of issuers that could benefit from Regulation A, as proposed to be amended? Please provide data, if available, on the impact of imposing fewer, more, or different limitations on issuer eligibility than we have proposed.

c. Potential Limits on Issuer Size

Regulation A currently limits the size of offerings that can be conducted under the exemption, but not the size of issuers eligible to rely on the exemption. We do not currently propose any issuer size-based limitations and to date we have not received any public comment on this issue. While we appreciate that limitations on offering size may, to some extent, create a practical limitation on the ability of larger issuers to rely on Regulation A, we are soliciting comment on potentially limiting access to Regulation A on the basis of issuer size.

We could, for example, look to the standards for “smaller reporting companies” and limit availability of the exemption to issuers with less than $75 million in public float, or, if unable to calculate the public float, less than $50 million in annual revenue.

Alternatively, consistent with a recent recommendation by the Commission's Advisory Committee on Small and Emerging Companies (“Advisory Committee”) as to the appropriate size limits for “smaller reporting companies,”

we could limit access to Regulation A to companies with a public float of up to $250 million, or, if unable to calculate the public float, less than $100 million in annual revenue.

Limiting access to the exemption on the basis of issuer size might more effectively target the segment of the market that Congress sought to assist by

enacting Title IV of the JOBS Act. We solicit comment below on whether the reference to “public float” would be an appropriate metric for the non-reporting companies using Regulation A.

See

17 CFR 229.10(f).

See

SEC Rel. No. 33-9258 (Sept. 12, 2011) [76 FR 57769] (the Advisory Committee was formed to provide the Commission with advice on its rules, regulations, and policies as they relate to, among other things, capital raising by emerging privately-held small businesses and publicly traded companies with less than $250 million in public float),

available at: http://www.sec.gov/rules/other/2011/33-9258.pdf

Recommendations Regarding Disclosure and Other Requirements for Smaller Public Companies,

Securities and Exchange Commission, Advisory Committee on Small and Emerging Companies (February 1, 2013), at 2-3 (the Advisory Committee recommendation was made in the context of potentially revising the definition of a smaller reporting company),

available at: http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf

Request for Comment

15. Should we limit availability of the Regulation A exemption to smaller issuers? Or does the $50 million annual offering limit effectively limit availability of the exemption to smaller issuers such that the Commission need not consider issuer size-based limitations? Why or why not? Should we use issuer size-based limitations to determine the imposition of certain requirements of proposed Regulation A such as the on-going disclosure requirements?

16. If we include size-based issuer eligibility requirements, is a test based on the smaller reporting company public float and revenue thresholds appropriate for potential Regulation A issuers? Should we look to the higher thresholds recommended by the Advisory Committee, or other size thresholds? Alternatively, are there better metrics on which to determine issuer size-based eligibility (

e.g.,

an assets test)? Would the concept of public float have any applicability to non-reporting companies, or to repeat Regulation A issuers, which could develop a trading market for their securities?

d. Reporting Companies

We do not propose to make Regulation A available to companies that are subject to the reporting requirements of Section 13 of the Exchange Act.

Before the amendments to Regulation A adopted in 1992, reporting companies were permitted to conduct offerings in reliance on Regulation A, provided they were current in their public reporting.

In 1992, however, the Commission determined that it was no longer necessary to permit reporting companies to rely on the exemption in light of the small business integrated registration and reporting system adopted at that time.

Simplified registration and reporting forms under Regulation S-B were presumed to meet the capital raising needs of reporting small business issuers.

As a result, reporting companies were excluded from the Regulation A exemptive scheme.

100

While the forms and form of the disclosure rules that apply to smaller issuers has changed since that time, their content is substantially the same as in 1992.

101

As discussed in Section II.E.3. below, however, we solicit comment on whether we should permit Regulation A issuers to register under the Exchange Act by means of a simplified process under certain circumstances.

17 CFR 230.252(f) (1992).

SEC Rel. No. 33-6949, at 36443.

“Small business issuers” were defined as companies with annual revenues of less than $25 million whose voting stock does not have a public float of $25 million or more.

Id.,

at 36446.

100

SEC Rel. No. 33-6924 (March 20, 1992) [57 FR 9768], at 9771.

101

In 2007, the Commission rescinded Regulation S-B (enacted in tandem with the 1992 amendments to Regulation A,

see

SEC Rel. No. 33-6949), eliminated the SB forms and the definition of “small business issuer,” and adopted the current smaller reporting company regime.

See

SEC Rel. No. 33-8876 (Dec. 19, 2007) [73 FR 934].

The two public comments we have received to date on this issue take opposing positions on whether Regulation A should be available to reporting companies. One commenter suggested that reporting companies should be allowed to rely on the exemption because it would permit issuers to conduct a public offering of unrestricted securities that is less burdensome, quicker and less expensive than a public offering subject to full Securities Act registration (

e.g.,

by permitting issuers to incorporate by reference Exchange Act reports into an abbreviated offering statement).

102

This commenter suggested that reporting company access could be limited on the basis of the issuer's size.

103

The other commenter suggested that reporting companies should not be permitted to rely on Regulation A, but companies should be permitted to become a reporting company by means of a Regulation A offering.

104

102

ABA Letter.

103

Id.

(suggesting reporting company access to the exemptive scheme should be limited to issuers with less than $1 billion in revenue).

104

WR Hambrecht + Co. Letter.

Given the availability of scaled disclosure requirements for Securities Act registration and Exchange Act reporting by smaller reporting companies, we continue to believe that reporting companies would not necessarily benefit from access to Regulation A, as proposed to be amended. We therefore do not propose to permit reporting companies to rely on the proposed rules. We are soliciting comment, however, on whether reporting companies should be permitted to rely on Regulation A.

Request for Comment

17. Should we amend issuer eligibility requirements to permit reporting companies to rely on the Regulation A exemption? Why or why not? Would reporting companies find Regulation A a useful means of raising capital? How would such a change affect issuers, investors, financial intermediaries, and other market participants?

18. If reporting companies were permitted to rely on Regulation A, should we impose limitations on their use of the exemption? For example, should reporting companies be eligible to use Regulation A only for a limited period of time,

e.g.,

a three-year period after they begin Exchange Act reporting? Or should we limit reporting company access to the exemptive scheme on the basis of issuer size?

19. If reporting companies are permitted to rely on Regulation A, should the availability of the exemption be conditioned on being current with Exchange Act reporting requirements,

105

which would be consistent with ongoing use of Regulation A?

106

Additionally, if reporting companies are permitted to rely on the exemption, should such companies be permitted to satisfy their disclosure requirements under Regulation A through incorporation by reference to their previous or ongoing reports filed under the Exchange Act? Or, as proposed with respect to issuers of Regulation A securities that register such securities under the Exchange Act, if reporting companies are permitted to rely on Regulation A, should the Regulation A reporting obligation for such issuers be suspended altogether for the duration of any obligation to file ongoing reports under the Exchange Act?

107

105

As noted above, before the 1992 amendments to Regulation A, reporting companies were permitted to conduct offerings in reliance on Regulation A, provided they were current in their Exchange Act reporting obligations.

See

former Rule 252(f), 17 CFR 230.252(f) (1991).

106

See

discussion on proposed issuer eligibility requirements in Section II.B.1. above;

see also

proposed Rule 251(b)(7).

107

See

discussion in Section II.E. below.

2. Eligible Securities

Section 3(b)(3) of the Securities Act limits the availability of any exemption enacted under Section 3(b)(2) to “equity securities, debt securities, and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities.”

108

On the basis of the statutory language, it is unclear which types of securities were meant to be excluded, although there is some evidence that suggests the exemption is meant for ordinary—and not exotic—securities.

109

We solicit

comment on the types of securities that should be excluded, if any, consistent with the statutory mandate.

108

15 U.S.C. 77c(b)(3).

109

Small Company Capital Formation Act of 2011: Markup of H.R. 1070 before the H. Comm. on Fin. Serv. for the 112th Congress,

157 Cong. Rec. 89, (daily ed. June 21, 2011),

available at: http://

financialservices.house.gov/calendar/eventsingle.aspx?EventID=247453

We propose to limit the types of securities eligible for sale under both Tier 1 and Tier 2 of Regulation A to the specifically enumerated list of securities in Section 3(b)(3), with the exception of asset-backed securities. Asset-backed securities are subject to the provisions of Regulation AB, an appropriately-tailored regulatory regime enacted to cover such securities that was not in effect when Regulation A was last updated in 1992.

110

We do not believe that Title IV of the JOBS Act was enacted to facilitate the issuance of asset-backed securities, nor do we believe that Regulation A's disclosure requirements are suitable for offerings of such securities. We therefore propose to exclude asset-backed securities from the list of eligible securities under Regulation A.

110

Regulation AB, 17 CFR 229.1100

et seq.,

was enacted in 2005.

See

SEC Rel. No. 33-8518 (Dec. 22, 2004). Asset-backed securities are defined in Rule 1101(c)(1) to generally mean a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial asset, either fixed or revolving, that by their terms convert into cash within a finite time period.

Request for Comment

20. As proposed, should we exclude asset-backed securities from the list of eligible securities under Regulation A? Why or why not? If asset-backed securities were eligible to be sold under Regulation A, what changes would be required to Form 1-A and the other proposed Regulation A forms to accommodate these issuers?

21. Should any additional types of securities be specifically excluded from offerings conducted in reliance on Regulation A? If so, what types of securities, and why? Should the rules provide more specificity as to the types of securities that are included or excluded from Regulation A offerings? What effects could excluding specified types of securities from Regulation A offerings have on issuers, investors, and other market participants?

3. Offering Limitations and Secondary Sales

Regulation A currently permits offerings of up to $5 million of securities in any twelve-month period, including up to $1.5 million of securities offered by selling securityholders.

111

Section 3(b)(2)(A) provides that the aggregate offering amount of all securities offered and sold within the prior twelve-months in reliance on Section 3(b)(2) shall not exceed $50 million. As noted above, we propose to amend Regulation A to create two tiers of requirements: Tier 1, for offerings of up to $5 million of securities in a twelve-month period; and Tier 2, for offerings of up to $50 million of securities in a twelve-month period.

112

Proposed Tier 1 would reflect the same offering size limitations that currently apply under Regulation A. Proposed Tier 2 would reflect the Section 3(b)(2) offering size limitation.

113

We believe issuers raising smaller amounts of capital may benefit from a tiered system that affords two options for capital formation based on differing disclosure and other requirements.

111

Rule 251(b), 17 CFR 230.251(b).

112

If the offering included securities that were convertible, exercisable or exchangeable for other securities, the offer and sale of the underlying securities would also be required to be qualified and the aggregate offering price would include the aggregate conversion, exercise, or exchange price of such securities, regardless of when they become convertible, exercisable or exchangeable. This differs from the approach taken in registered offerings that involve similar securities, but we believe would simplify compliance.

113

Offerings of up to $5 million could be conducted under either Tier 1 or Tier 2.

We believe sales by selling securityholders to be an important part of the exemptive scheme and therefore propose to preserve in Tier 1 Regulation A's current limitation of no more than $1.5 million of securities offered by selling securityholders, and permit Tier 2 offerings to include up to $15 million of securities offered by selling securityholders. Sales by selling securityholders have been permissible under Regulation A in one form or another since 1940.

114

Initially, sales by an issuer and sales by a “controlling stockholder” were treated as separate categories of exempt transactions; the offering amount of each respective category was not aggregated for purposes of determining the maximum offering amount available under the exemption.

115

Later, Regulation A contained a single offering ceiling for all sales of an issuer's securities during a twelve-month period, while each category of seller had a different permissible maximum selling amount.

116

In 1972, the Commission returned to the concept of separate categories of seller transactions, each of which contained an independent offering ceiling.

117

For example, at that time, Rule 254(a) required issuer and affiliate sales in any twelve-month period to be aggregated against the then-current $500,000 offering ceiling with any one affiliate being limited to $100,000 in offers in any twelve-month period.

118

Sales by non-affiliates were excluded from the $500,000 offering ceiling, and any one such seller was permitted to offer up to $100,000, but, in the aggregate with other such non-issuer/affiliate sellers in an amount of no more than $300,000 in any twelve-month period.

119

In 1992, the Commission returned to a single offering ceiling for all sales of an issuer's securities in a twelve-month period, and limited all secondary sales to its current $1.5 million limit (representing 30% of the maximum offering limit permitted in a primary offering), aggregated with issuer sales during the same period for a total of up to $5 million.

120

114

SEC Rel. No. 33-2410 (December 3, 1940) [5 FR 4749].

115

Id.

116

See, e.g.,

Rule 254(a), 17 CFR 230.254(a) (1956), cited in SEC Rel. No. 33-3663 (July 31, 1956) [21 FR 5739], at 5741. Additionally, at this time, secondary sales by certain newly organized or unproven entities were prohibited.

Id.,

at 5739.

117

See

SEC Rel. No. 33-5225 (Jan 10, 1972) [37 FR 599].

118

Id.

119

Id.

120

See

SEC Rel. No. 33-6949, at 36443;

see also

Rule 251(b).

Two commenters recommended permitting secondary sales by selling securityholders in the expanded exemptive scheme.

121

One such commenter suggested that removing the limitation on the amount of securities available for resale by selling securityholders would decrease the cost of capital for smaller issuers and encourage greater investment in companies by increasing a potential investors liquidity options.

122

The other suggested adopting a limitation similar to the current Regulation A provision in order to encourage investment in companies and improve the liquidity options of investors.

123

Both commenters suggested removing current restrictions on affiliate resales in Rule 251(b),

124

which prohibits such sales when the issuer has not had net income from continuing operations in at least one of its last two fiscal years.

121

ABA Letter; WR Hambrecht + Co. Letter.

122

ABA Letter.

123

WR Hambrecht + Co. Letter.

124

17 CFR 230.251(b).

Another commenter, however, urged the Commission to prohibit selling securityholders, such as venture capital and private equity firms, from relying on the expanded exemption.

125

In this commenter's view, superior negotiating power at the time of such parties' initial investment and greater access to information about the issuer should disqualify such parties from the

exemption because, while maintaining such advantages, they may seek to offload their investment on the general public (and, sometimes against the wishes of the issuer itself).

126

This commenter further argued that selling securityholder offerings do not provide capital to the issuer or contribute to job creation.

127

Alternatively, the commenter suggested that if selling securityholders are permitted to rely on the exemption, the Commission should require approval of a majority of the issuer's independent directors as a pre-condition to any sales.

128

125

NASAA Letter 2.

126

Id.

127

Id.

128

Id.

Selling securityholder access to Regulation A has been a historically important feature of the exemptive scheme. We believe it would continue to be an important part of Regulation A, as proposed to be amended. Allowing selling securityholders access to avenues for liquidity should encourage investment in companies seeking to raise capital.

129

Thus, we believe that allowing selling securityholders to sell securities under Regulation A would facilitate capital formation and be consistent with Title IV of the JOBS Act.

129

See

discussion in Section IV.B.2.c. below.

We do not propose to amend Regulation A to eliminate the ability of selling securityholders to conduct secondary offerings.

130

Consistent with the existing provisions of Regulation A, we propose to permit sales by selling securityholders up to 30% of the maximum amount permitted under the applicable offering limitation ($1.5 million in any twelve-month period for Tier 1 and $15 million in any twelve-month period for Tier 2). Sales by selling securityholders under either Tier would be aggregated with sales of Regulation A securities by the issuer and other selling securityholders for purposes of calculating the maximum permissible amount of securities that may be sold during any twelve-month period.

130

See

proposed Rule 251(a).

In addition, we propose to eliminate the last sentence of Rule 251(b), which prohibits affiliate resales unless the issuer has had net income from continuing operations in at least one of its last two fiscal years. This provision was originally adopted in Regulation A in 1956 to prohibit secondary sales of securities of certain new companies and companies without net income in at least one of their last two fiscal years

131

in order “to correct . . . the threat of the `bail-out' by the promoters and insiders of their securities holdings.”

132

When the Commission amended Regulation A in 1992, it maintained these restrictions in modified form, by limiting them to affiliate resales where the issuer had no net income from continuing operations in at least one of its last two fiscal years.

133

131

See

SEC Rel. No. 33-3663, at 5739.

132

SEC Ann. Rep. 29 (1956).

133

See

SEC Rel. No. 33-6924, at fn. 59;

see also

Rule 251(b).

While one commenter has expressed concern that affiliates of an issuer could use an informational advantage to sell securities in unsuccessful ventures at the expense of the investing public,

134

we are not persuaded that the absence of net income is necessarily a meaningful indicator of enhanced risk that this could occur. Further, the Commission's current disclosure review and qualification processes and enforcement programs are significantly more sophisticated and robust than they were in the 1950s. In addition, today's proposed rules for Regulation A include revised “bad actor” disqualification provisions and additional issuer eligibility requirements aimed at limiting the market participants that have access to the exemption.

135

134

NASAA Letter 2.

135

See

discussions in Section II.G. (Bad Actor Disqualification) below, and Section II.B.1. (Eligible Issuers) above.

We also do not believe that a focus on issuers that have not had net income from continuing operations in at least one of its last two fiscal years would be appropriately tailored for startup and early stage companies that may devote large portions of their resources to startup expenses and research and development.

136

In this market, net income from continuing operations may not be a material data point in the evaluation of an investment opportunity.

137

In addition, as mentioned above, some commenters have argued that limiting the liquidity options of selling securityholders, including sales by affiliates of the issuer, may discourage investment in the issuer in the first instance and increase the issuer's cost of capital.

138

136

See

ABA Letter; WR Hambrecht + Co. Letter.

137

See

ECTF Report.

138

See

ABA Letter; WR Hambrecht + Co. Letter.

On balance, we believe that investor protections provided by Regulation A, as proposed to be amended, support the elimination of the current restriction on affiliate resales, particularly in light of the potential benefits of permitting secondary sales. We therefore do not propose to carry this provision forward in amended Regulation A.

Request for Comment

22. Should we consider different annual offering thresholds for selling securityholder sales than the proposed $1.5 million limitation for Tier 1 offerings and $15 million limitation for Tier 2 offerings? Why or why not? If so, should sales in reliance on Regulation A by selling securityholders be permitted up to the annual offering ceiling for each respective Tier, or limited at a different threshold? Should we limit sales by selling securityholders to a percentage of the total amount offered in conjunction with a primary offering of Regulation A securities over a given period of time, or to Regulation A offerings where primary securities are offered? Alternatively, should we prohibit all sales by selling securityholders in Regulation A? Why or why not?

23. Should the rules treat sales by non-affiliate selling securityholders as a separate category of exempt transaction, as was once the case under Regulation A, and not aggregate such sales with issuer sales for purposes of determining the maximum offering amount available under the exemption? If so, should non-affiliate resales be permitted up to the applicable annual offering ceiling, or limited at a different threshold?

24. If selling securityholders are permitted to rely on Regulation A, should we impose eligibility requirements or other limitations on those securityholders? For example, should we require selling securityholders to have owned the securities offered for resale under Regulation A for a specified period of time before resale? If so, why and what should the relevant holding period be (

e.g.

six months or twelve months before initial submission or filing of the offering statement)? If the rules impose a holding period before securities can be offered for resale under Regulation A, should the holding period only apply to affiliates? Or to all selling securityholders?

25. Does the existing Rule 251(b) requirement that an issuer have net income from continuing operations in each of its last two fiscal years, in order for an affiliate to be able to conduct a secondary sale in reliance on Regulation A, have continuing validity, and should we therefore retain this provision? Why or why not? Please explain.

4. Investment Limitation

Regulation A does not currently limit the amount of securities an investor can purchase in a qualified Regulation A offering. We recognize, however, that with the increased annual offering

limitation provided in Section 3(b)(2) comes a risk of commensurately increased investor losses. To address that risk, Title IV of the JOBS Act mandates certain investor protections

139

and suggests that the Commission consider others as part of its Section 3(b)(2) rulemaking.

140

Additionally, we believe that Congress recognized in Section 3(b)(2) that certain other investor protections—not directly contemplated by Title IV of the JOBS Act—may be necessary in the revised regulation. To that end, Section 3(b)(2)(G) indicates that the Commission may include in the expanded exemption “such other terms, conditions, or requirements . . . necessary in the public interest and for the protection of investors . . . .”

139

See

Section 3(b)(2)(D) (expressly providing for Section 12(a)(2) liability for any person offering or selling Section 3(b)(2) securities); Section 3(b)(2)(F) (requiring issuers to file audited financial statements with the Commission annually).

140

See

Section 3(b)(2)(G) (inviting the Commission to consider, among other things, requiring audited financial statements in the offering statement and implementing bad actor disqualification provisions); Section 3(b)(4) (inviting the Commission to consider implementing ongoing reporting requirements).

Consistent with Section 3(b)(2)(G) and the Commission's investor protection mandate, in addition to the disclosure, reporting and other requirements of Regulation A, we propose to limit the amount of securities investors can purchase in a Tier 2 offering to no more than 10% of the greater of their annual income and their net worth.

141

For this purpose, annual income and net worth would be calculated for individual purchasers as provided in the accredited investor definition under Rule 501 of Regulation D.

142

141

If securities that are convertible, exercisable or exchangeable for other securities are being purchased by an investor, the proposed investment limitation would include the aggregate conversion, exercise, or exchange price of such securities, in addition to the purchase price. This treatment corresponds to the treatment of such securities for purposes of calculating the offering cap.

142

17 CFR 230.501.

We believe that this proposed new requirement could usefully augment the other requirements for Tier 2 offerings. Limiting the amount of securities that a potential investor could invest in a Tier 2 offering to 10% of the greater of the investor's annual income and net worth would help to mitigate any concern that an investor may not be able to absorb the potential loss of the investment.

143

The additional investor protection afforded by such a loss limitation is similar to the provisions for our recently proposed rules for securities-based crowdfunding transactions under Section 4(a)(6) of the Securities Act.

144

We believe that an investment limitation for Tier 2 offerings, coupled with the additional investor protection requirements discussed above and more fully below, could protect investors in Tier 2 offerings in a similar way as the proposed rules for securities-based crowdfunding transactions.

143

An underwriter in a firm commitment underwritten Regulation A offering, or participating broker-dealer that is involved in stabilization activities with respect to an offering of Regulation A securities would not be considered an investor that is subject to the proposed investment limitations.

144

See

Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C. 77d(a)(6)(ii), and SEC Rel. No. 33-9470. In Section 4(a)(6), Congress outlined a new exemption for securities-based crowdfunding transactions intended to take advantage of the internet and social media to facilitate capital-raising by the general public, or crowd. In that provision, Congress established limitations on the amount of securities an investor could acquire through this type of offering, as well as a variety of other investor protections, including disclosure requirements and the use of regulated intermediaries.

See, generally,

the requirements for issuers and intermediaries set forth in Title III of the JOBS Act, Public Law 112-106, 126 Stat. 306, §§ 301-305.

Under the proposal, issuers would be required to make investors aware of the investment limitations,

145

but would otherwise be able to rely on an investor's representation of compliance with the proposed investment limitation unless the issuer knew, at the time of sale, that any such representation was untrue. We are mindful of the privacy issues and practical difficulties associated with verifying individual income and net worth, and do not therefore propose to require investors to disclose personal information to issuers in order to verify compliance with the investment limitation.

146

We are, however, soliciting comment below on whether verification of the income and net worth limit should be required.

145

See

cover page of the offering circular of proposed Form 1-A.

146

Investors may, for example, be reluctant to provide issuers with their Internal Revenue Service (IRS) Form W-2 (Wage and Tax Statement) in order to verify compliance with the proposed annual income investment limitation or to disclose documents, such as bank or investment account statements, that would verify net worth. Relatedly, issuers may have difficulty ascertaining the veracity or comprehensiveness of any documentation provided to them by investors.

Cf.

SEC Rel. No. 33-9415 (July 10, 2013) [78 FR 4471], at II.B (discussing verification of accredited investor status for private offerings under Rule 506(c) of Regulation D).

Request for Comment

26. As proposed, should we impose investment limitations on investors in Tier 2 offerings? Or does Regulation A, as proposed to be amended, have sufficient investor protections for Tier 2 offerings, such that an investment limitation for investors is not necessary? Why or why not?

27. Are the proposed investment limitations appropriate in the context of a Tier 2 offering? Why or why not? What impact would the proposed investment limitation restriction have on issuers and investors? Should the proposed limitations on investment not apply to accredited investors? Are there other investment limitation criteria we should consider? For example, should we impose a limitation based on a percentage of total investment assets in addition to, or instead of, annual income or net worth?

28. Alternatively, should the investment limitation be higher or lower than the 10% proposed? If so, what percentage and why would that percentage be appropriate? Would the proposed investment limitation be appropriate for investors that are entities rather than natural persons? Should we establish a minimum annual investment amount, similar to $2,000 annual investment that would be permitted under our proposed crowdfunding rules, that all investors could make in Regulation A offerings irrespective of their income and net worth? Why or why not?

29. Should the proposed investment limitation apply on a per offering basis, as proposed? Or should the limitation apply on an aggregated basis, across all investments in Regulation A securities? Why or why not? If the limitation were to apply on an aggregated basis, how should the limitation apply? Should we limit the provision so that only Regulation A offerings close in time (for example, within a twelve-month period), or otherwise related, would be aggregated in the 10% calculation?

30. Should we permit issuers, as proposed, to rely on an investor's representation of compliance with the 10% investment limitation, unless the issuer has knowledge that any such representation was untrue? Why or why not? If not, what level of inquiry or verification should issuers have to perform in order to ensure compliance with the requirement? Should the issuer and its intermediaries be required to have a reasonable belief that the investor certification can be relied upon (

e.g.,

should they be required to conduct further investigation if they have reason to believe that the certification is untrue)? Why or why not? If we permit issuers to rely on an investor's representation regarding compliance with the 10% investment limitation, as proposed, should we require the representation to be made in a particular form, such as an investor questionnaire? Should we require the issuer to provide disclosure or educational materials in connection with the representation?

5. Integration

Existing Rule 251(c) of Regulation A governs the integration of Regulation A offerings with other offerings.

147

This provision provides that offerings under Regulation A are not to be integrated with any of the following:

147

17 CFR 230.251(c). The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to multiple offerings that would not be available for the combined offering.

• prior offers or sales of securities; or

• subsequent offers and sales of securities that are:

• registered under the Securities Act, except as provided in Rule 254(d);

148

Rule 254(d) provides a safe harbor for an issuer that has a bona fide change of intention and decides to register an offering under the Securities Act after soliciting interest in a Regulation A offering, but without having filed the related offering statement. To take advantage of the safe harbor, such issuers must wait at least 30 calendar days from the date of the last solicitation of interest before filing a registration statement for the offering with the Commission. 17 CFR 230.254(d). Under existing Regulation A, issuers are not allowed to solicit interest in an offering after filing the offering statement with the Commission.

See

discussion in Section II.D. below.

• made in reliance on Rule 701 under the Securities Act;

• made pursuant to an employee benefit plan;

• made in reliance on Regulation S; or

• made more than six months after completion of the Regulation A offering.

We believe Regulation A's existing integration safe harbors provide issuers, particularly smaller issuers whose capital needs often change, with valuable certainty as to the contours of a given offering and its eligibility for an exemption from Securities Act registration. To date, the public comment we received on integration suggested we maintain Regulation A's existing integration provisions.

149

We propose, subject to certain exceptions discussed below, to generally preserve the existing Regulation A integration safe harbors.

150

We also propose to provide additional guidance on the potential integration of offerings conducted concurrently with, or close in time after, a Regulation A offering.

149

ABA Letter.

150

Existing Rule 254(d) of Regulation A would become proposed Rule 255(e).

The safe harbor from integration provided by existing Rule 251(c) expressly provides that any offer or sale made in reliance on Regulation A will not be subject to integration with any other offer or sale made either before the commencement of, or more than six months after, the completion of the Regulation A offering.

151

In other words, for transactions that fall within the provisions of existing Rule 251(c), issuers do not have to conduct an independent integration analysis under the provisions of, for example, another rule-based exemption in order to determine whether, under the terms of that rule, the two offerings would be treated as one for purposes of qualifying for an exemption. This bright-line rule assists issuers in analyzing certain transactions, but does not address the issue of potential offers or sales that occur concurrently with, or close in time after, a Regulation A offering.

151

Contra

Rule 502(a) of Regulation D, 17 CFR 230.502(a), which states that offers and sales made more than six months before the start, or after the completion, of a Regulation D offering will not be considered part of that Regulation D offering.

Currently, the note to Rule 251(c) indicates that, if the provisions of the safe harbor are unavailable, offers and sales may still not be integrated with the Regulation A offering depending on the particular facts and circumstances, so there is no presumption that offerings outside the integration safe harbors should be integrated.

152

Additionally, we believe that an offering made in reliance on Regulation A should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering.

153

For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Regulation A, including without limitation any “testing the waters” communications.

154

Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted could not include in any such general solicitation an advertisement of the terms of an offering made in reliance on Regulation A that would not be permitted under Regulation A. An issuer conducting, for example, a concurrent Rule 506(c) offering could not include in its Rule 506(c) general solicitation materials an advertisement of a concurrent Regulation A offering, unless that advertisement also included the necessary legends for, and otherwise complied with, Regulation A.

155

152

The note cites to the guidance provided in SEC Rel. No. 33-4552 (Nov. 6, 1962) [27 FR 11316], which states the Commission's traditional five-factor test for integration.

153

We recently proposed a similar approach to integration in the context of offerings under the proposed provisions for securities-based crowdfunding transactions pursuant to Title III of the JOBS Act.

See

SEC Rel. No. 33-9470, text accompanying fn. 33-34.

154

For a concurrent offering under Rule 506(b), an issuer would have to conclude that purchasers in the Rule 506(b) offering were not solicited by means of a Regulation A general solicitation. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the Regulation A offering may preclude reliance on Rule 506(b).

See also

SEC Rel. No. 33-8828 (Aug. 3, 2007) [72 FR 45116].

155

See

discussion in Section II.D. below.

In addition to this approach to integration, we propose to add to the list of safe harbor provisions subsequent offers or sales of securities made pursuant to the proposed rules for securities-based crowdfunding transactions under Title III of the JOBS Act. Given the unique capital formation method available to issuers and investors in the proposed rules for securities-based crowdfunding transactions and the small dollar amounts involved, we do not propose to integrate offers or sales of such securities that occur subsequent to the commencement of any offers or sales of securities made in reliance on Regulation A.

156

See

SEC Rel. No. 33-9470. An issuer contemplating a securities-based crowdfunding transaction pursuant to Section 4(a)(6) subsequent to any offers or sales conducted in reliance on Regulation A, as proposed to be amended, should look to the proposed rules for securities-based crowdfunding transactions to ensure compliance with the advertising provisions of that proposed exemption.

We further propose to amend Rule 254(d) to provide that where an issuer decides to register an offering after soliciting interest in a contemplated, but abandoned, Regulation A offering, any offers made pursuant to Regulation A would not be subject to integration with the registered offering, unless the issuer engaged in solicitations of interest in reliance on Regulation A to persons other than qualified institutional buyers (“QIBs”) and institutional accredited investors permitted by Section 5(d)

157

of the Securities Act.

158

An issuer (and any underwriter, broker, dealer, or agent used by the issuer in connection with the proposed offering) soliciting interest in a Regulation A offering to persons other than QIBs and institutional accredited investors must wait at least 30 calendar days between the last such solicitation of interest in the Regulation A offering and the filing of the registration statement with the Commission.

159

We believe these updated provisions are necessary, given the broad permissible target audience of Regulation A solicitations, the proposed expanded use of solicitation materials in Regulation A discussed more fully in Section II.D. below, and the addition of

similar provisions for registered offerings under Section 5(d).

157

15 U.S.C. 77e(d).

158

See

proposed Rule 255(e).

159

Id.

Request for Comment

31. As proposed, should we adopt an integration safe harbor in Regulation A that largely follows the existing provisions of Rule 251(c), while adding the exemption provided by the proposed JOBS Act crowdfunding rules into the list of safe harbors for subsequent offers or sales? Why or why not? Should we alter or add additional provisions to the list of safe harbors for subsequent offers or sales? If so, please provide supporting analysis for your suggestions. For example, should we reduce the six-month period in Rule 251(c)(2)(v)?

32. Should we amend the provisions of Rule 254(d), as proposed,

160

to take into account the expanded use of solicitation materials in Regulation A, the ability of emerging growth companies to solicit interest from certain types of investors under Title I of the JOBS Act, and the potential effect that an abandoned Regulation A offering, in which an issuer solicited interest from potential investors, may have on that issuer's ability to immediately thereafter register the offering under the Securities Act? Why or why not? Are there any alternative approaches for the interaction of these two provisions in the context of an abandoned Regulation A offering followed immediately thereafter by a registered offering? If so, please explain.

160

See

proposed Rule 255(e).

6. Treatment Under Section 12(g)

Exchange Act Section 12(g) requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the Commission.

161

Unlike Title III of the JOBS Act, which includes a provision regarding the treatment under Section 12(g) of securities issued in securities-based crowdfunding transactions pursuant to Section 4(a)(6) of the Securities Act, Title IV does not include a provision regarding how Regulation A issuers should be treated under Section 12(g).

161

15 U.S.C. 78

(g).

Section 12(g) was originally enacted by Congress as a way to ensure that investors in over-the-counter securities about which there was little or no information, but which had a significant shareholder base, were provided with ongoing information about their investment.

162

As discussed more fully below, Regulation A, as proposed to be amended, would require issuers that conducted Tier 2 offerings to provide ongoing information to their investors, albeit somewhat less than is required of an Exchange Act reporting company. If securities issued under Regulation A were to be excluded for purposes of determining record holders under Section 12(g), a company may never become subject to mandatory Exchange Act reporting as a result of selling securities under Regulation A, regardless of how many shareholders it has or whether such shareholders were accredited investors. Alternatively, if Regulation A issuers that conducted Tier 2 offerings were current in their ongoing reporting were exempt from registration under Section 12(g), or their obligations to register were suspended, issuers would have the ability to remain in the Regulation A reporting regime on a long-term basis, irrespective of growth in their shareholder base.

162

See, generally, Report of the Special Study of Securities Markets of the Securities and Exchange Commission,

House Document No. 95, House Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess. (1963), at 60-62.

One commenter suggested we provide a conditional exemption from mandatory Exchange Act reporting under Section 12(g) for emerging growth companies that have conducted a Regulation A offering and comply with its ongoing reporting requirements; otherwise, emerging growth companies that may cross the Section 12(g) asset and record holder thresholds following a Regulation A offering would be disincentivized from relying on the exemption.

163

In the commenter's view, the exemption from Section 12(g) could be temporary and lapse once the issuer obtains a non-affiliate market capitalization of $250 million.

164

163

Letter from Michael L. Zuppone, Paul Hastings LLP, Nov. 26, 2013 (“Paul Hastings Letter”).

164

The commenter suggested $250 million of non-affiliate market capitalization to accord with the threshold the Commission set for defining the mandate of its Advisory Committee on Small and Emerging Companies.

See

fn. 94 above.

We believe, however, that the Section 12(g) record holder threshold continues to provide an important baseline, above which issuers should be subject to the more expansive disclosure and compliance obligations of the Exchange Act. We are not proposing to exempt Regulation A securities from the requirements of Section 12(g) or to provide that issuers that are current in their Regulation A ongoing reporting under Tier 2 would be exempt from Section 12(g) or have their obligations to register under Section 12(g) suspended. We do, however, solicit comment as to whether a Section 12(g) exemption or suspension should be provided.

Request for Comment

33. Should Regulation A securities be exempt from Section 12(g), either conditionally or otherwise? Would an exemption from Section 12(g) encourage Regulation A issuers to continue ongoing reporting under the proposed rules for Tier 2 offerings, where such issuers might otherwise cease reporting?

165

See

discussion in Section IV.B.2.f. below.

34. Does Section 12(g) continue to serve as a valuable proxy for market interest in the equity securities of an issuer issued pursuant to Regulation A, such that an issuer that crosses its asset and record holder thresholds should become subject to mandatory Exchange Act reporting? Why or why not?

7. Liability Under Section 12(a)(2)

The liability provisions of Section 12(a)(2) of the Securities Act apply to any public offering of securities by use of an oral communication or prospectus that includes a material misleading statement or material misstatement of fact.

166

Section 3(b)(2)(D) of the Securities Act provides that “[t]he civil liability provision in section 12(a)(2) [of the Securities Act] shall apply to any person offering or selling [Regulation A] securities.” Therefore, consistent with current Regulation A,

167

sellers of Regulation A securities would have liability under Section 12(a)(2) to investors for any offer or sale by means of an offering circular or an oral communication that includes a material misleading statement or material misstatement of fact.

168

166

15 U.S.C. 77

(a)(2).

167

See

SEC Rel. No. 33-6924, at fn. 57.

168

Regulation A prohibits sales until the Form 1-A has been qualified.

See

Rule 251(d)(2), 17 CFR 230.251(d)(2);

cf.

Securities Offering Reform, SEC Rel. No. 33-8591, at 173

et seq.

(discussing Section 12(a)(2) liability in the context of information conveyed at the time of sale).

C. Offering Statement

Section 3(b)(2)(G)(i) gives the Commission discretion to require an offering statement in such form and with such content as it determines necessary in the public interest and for the protection of investors. The provision permits electronic filing of offering statements, and provides a non-exhaustive list of potential content that may be required in the offering statement, including audited financial statements, a description of the issuer's business operations, financial condition, corporate governance principles, use of

investor funds, and other appropriate matters.

1. Electronic Filing; Delivery Requirements

Currently, Regulation A offering statements are filed with the Commission in paper form.

169

The paper filing process does not align with the Commission's electronic filing requirements for issuers in registered offerings

170

or notices in connection with offerings under Regulation D.

171

The Commission has required electronic filing of registration statements since 1996,

172

and of Form D filings since 2009.

173

Requiring offering statements to be filed electronically rather than on paper may reduce potential logistical problems and delays that can occur with the receipt, processing and dissemination of paper filings by the Commission for issuers seeking to raise capital under Regulation A. Electronic filing would facilitate a more efficient review process for such filings by Commission staff by allowing the offering and related materials, once submitted or filed, to be rapidly processed and disseminated internally. In addition, paper submissions—while publicly available in a technical sense—are not widely or immediately accessible. Electronic filing of offering statements could facilitate investor and market access to the information contained in offering statements in a more efficient way than paper filings do.

169

17 CFR 232.101(c)(6). There are no filing fees associated with filing a Form 1-A with the Commission.

See

Section 6(b) of the Securities Act, 15 U.S.C. 77f(b) (permitting the recovery of costs of services to the government only with respect to registered offerings).

170

Offerings registered under the Securities Act are required to be filed electronically on the Commission's Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) system.

See

Rule 101(a)(1)(i) of Regulation S-T (17 CFR 232.101(a)(1)(i)).

171

Issuers relying on Regulation D are required to electronically file a notice of sales on Form D with the Commission.

See

Rule 101(a)(1)(xiii) of Regulation S-T (17 CFR 232.101(a)(1)(xiii));

see also

Rule 503 of Regulation D (17 CFR 230.503). Form D is also required for offerings under Section 4(a)(5) of the Securities Act.

172

See

SEC Rel. No. 33-6977 (Feb. 23, 1993) [58 FR 14628]. Foreign private issuers have been required to file their registration statements electronically since 2002. SEC Rel. No. 33-8099 (May 16, 2002).

173

See

SEC Rel. No. 33-8891 (Feb. 6, 2008) [73 FR 10592].

In Section 3(b)(2)(G)(i), Congress gave the Commission discretion to require issuers to file their offering statements electronically. Commenters are generally supportive of electronic filing.

174

Consistent with these comments and the language of Section 3(b)(2)(G)(i), we propose to require Regulation A offering statements to be filed with the Commission electronically on the EDGAR system.

175

174

ABA Letter; WR Hambrecht + Co.; Kaplan Voekler Letter 2;

see also

Letter from George W. Beard, Managing Member, Beacon Investment Partners LLC (DE), Oct. 5, 2012 (“Beacon Investment Letter”).

See also

Final Report of the 30th Annual SEC Government-Business Forum on Small Business Capital Formation, Recommendation 16, at 31 (Nov. 17, 2011) (

available at: http://www.sec.gov/info/smallbus/gbfor30.pdf

175

In conjunction with this proposed change, the portion of Item 101(c)(6) of Regulation S-T (17 CFR 232.101(c)(6)) dealing with filings related to Regulation A offerings would be rescinded.

As proposed, amended Form 1-A would consist of three parts:

• an eXtensible Markup Language (XML) based fillable form, which would capture key information about the issuer and its offering using an easy to fill out online form, similar to Form D,

176

with drop-down menus, indicator boxes or buttons, and text boxes, while also assisting issuers in determining their ability to rely on the exemption. The XML-based fillable form would enable the convenient provision of information to the Commission, and support the assembly and transmission of such information to EDGAR, without requiring the issuer to purchase or maintain additional software or technology;

177

176

17 CFR 239.500.

177

Part I (Notification) of Form 1-A. As discussed more fully in Section II.C.3.a. below, the cover page and Part I of current Form 1-A would be converted into, and form the basis of, the XML-based fillable form.

• a text file attachment containing the body of the disclosure document and financial statements, formatted in HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) to be compatible with the EDGAR filing system;

178

and

178

Part II (Offering Circular) of Form 1-A.

See

discussion in Section II.C.3.b. below.

• text file attachments, containing the exhibits index and the exhibits to the offering statement, formatted in HTML or ASCII to be compatible with the EDGAR filing system.

179

Part III (Exhibits) of Form 1-A.

See

discussion in Section II.C.3.c. below.

We further propose to require all other documents required to be submitted or filed with the Commission in conjunction with a Regulation A offering, such as ongoing reports, to be submitted or filed electronically on EDGAR.

180

See

discussion regarding proposed ongoing reporting requirements at Section II.E. below. Consistent with current Regulation A, there would be no filing fees associated with Regulation A, as proposed to be amended.

We believe this proposed approach to electronic filing would be both practical and useful for issuers of Regulation A securities, investors in such securities, other market participants, and the Commission staff who work with issuers throughout the qualification process. Issuers would maintain better control over their filing process, reduce the printing costs associated with filing seven copies of the offering statement and any amendments with the Commission, obtain immediate confirmation of acceptance of an offering statement, and ultimately save time in the qualification process. Investors would gain real-time access to the information contained in Regulation A filings.

181

The efficiency of the Regulation A market should improve with the increased accessibility of information about Regulation A issuers and offerings. Additionally, as with registered offerings, EDGAR would allow the Commission to store, process, and disseminate filings in a more efficient manner, which may, in turn, improve the efficiency of the staff review and qualification processes.

181

Investors would not, however, have immediate access to non-public submissions of draft offering statements.

See

discussion in Section II.C.2. below.

As proposed, electronic filing would also facilitate the capture of important financial and other information about Regulation A issuers and offerings that would enable the Commission and market participants to monitor and analyze any market that develops in Regulation A securities, including, for example, issuer size, issuer location, key financial metrics, summary information about securities offered and offering amounts, the jurisdictions in which offerings take place, and expenses associated with the offering.

182

The specific disclosure requirements included in the XML-based fillable form are discussed more fully in Section II.C.3.a. below.

We appreciate, however, that requiring EDGAR filing would impose costs on issuers that currently are not required to enter the EDGAR filing system or format their disclosure documents in ways that the EDGAR system can accept. For that reason, we are soliciting comment on whether electronic filing should be mandated for Regulation A offerings.

If electronic filing on EDGAR is required, one commenter suggested that the Commission propose for Regulation A offering circulars an analog to the “access equals delivery” model for prospectuses under Securities Act Rule 172.

183

Currently, Regulation A prohibits sales pursuant to a qualified offering statement unless a preliminary offering circular or final offering circular is furnished to an investor at least 48

hours before the mailing of the confirmation of sale, and the final offering circular is delivered to the investor with the confirmation of sales (unless delivered at any earlier time).

184

By comparison, under Rule 172, a final prospectus in a registered offering is deemed to precede or accompany a security for sale for purposes of Section 5(b)(2) of the Securities Act as long as the final prospectus meeting the requirements of Section 10(a) of the Securities Act is filed with the Commission on EDGAR.

185

Additionally, Rule 172(a), which provides an exemption from Section 5(b)(1) of the Securities Act, permits issuers to send written confirmations and notices of allocations after effectiveness of a registration statement without being accompanied or preceded by a final prospectus, so long as the registration statement is effective and the final prospectus is filed with the Commission.

186

183

Kaplan Voekler Letter 2.

184

Rule 251(d)(2).

185

17 CFR 230.172(b);

see also

Securities Offering Reform, SEC Rel. No. 33-8591, at 245 (discussing Rule 172). This provision also applies where the issuer will make a good faith and reasonable effort to file the final prospectus with the Commission as part of the registration statement within the required Rule 424 time period. 17 CFR 230.172(c)(3). Currently, there is no analog in Regulation A to filings permitted in the registered context under Rule 424, although one commenter has suggested we consider one.

See

Kaplan Voekler Letter 2;

see also

discussion in Section II.C.3. below and text accompanying fn. 235.

186

17 CFR 230.172(a);

see also

Securities Offering Reform, SEC Rel. No. 33-8591, at 251 (discussing Rule 172(a)).

We are proposing an access equals delivery model for Regulation A final offering circulars. The expanded use of the Internet and continuing technological developments suggest that we should consider alternative methods of final offering circular delivery for Regulation A, particularly given that the regulation has not been substantively updated since 1992. Where, upon qualification of an offering statement, sales of Regulation A securities occur on the basis of offers made using a preliminary offering circular, issuers and intermediaries could presume that investors have access to the Internet, and would be permitted to satisfy their delivery requirements for the final offering circular if it is filed and available on EDGAR.

187

We further propose to require issuers to include a notice in any preliminary offering circular they use that would inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically. As with registered offerings, we propose to permit dealers, during the aftermarket delivery period, to be deemed to satisfy their final offering circular delivery requirements if it is filed and available on EDGAR.

188

187

Cf.

Securities Offering Reform, SEC Rel. No. 33-8591, at 244.

188

See

proposed Rule 251(d)(2)(ii) for the dealer aftermarket delivery requirements.

Further, consistent with prior Commission releases on the use of electronic media for delivery purposes, “electronic-only” offerings of Regulation A securities would not be prohibited under the proposed rules for Regulation A.

189

In such offerings, however, an issuer and its participating intermediaries would have to obtain the consent of investors to the electronic delivery of:

189

An electronic-only offering is an offering in which investors are permitted to participate only if they agree to accept the electronic delivery of all documents and other information in connection with the offering.

See

SEC Rel. No. 34-37182 (May 9, 1996) [61 FR 24644] (Use of Electronic Media by Broker-Dealers, Transfer Agents and Investment Advisers for Delivery of Information) and SEC Rel. No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic Media).

• the preliminary offering circular and other information, but not the final offering circular, in instances where, upon qualification, the issuer plans to sell Regulation A securities based on offers made using a preliminary offering circular; and

• all documents and information, including the final offering circular, when the issuer sells Regulation A securities based on offers conducted during the post-qualification period using a final offering circular.

We further propose to maintain the existing requirements of Rule 251(d)(2)(ii), which requires dealers to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification,

190

but to otherwise update and amend Rule 251(d)(2)(i), which currently requires that a preliminary or final offering circular be furnished to prospective purchasers at least 48 hours before the mailing of the confirmation of sale. When originally adopted in 1973, Regulation A's offering circular delivery requirements aligned with the prospectus delivery requirements for registered offerings.

191

In the intervening time, prospectus delivery requirements have changed,

192

with no corresponding updates to Regulation A. Notably, the Commission formalized its 48-hour preliminary prospectus delivery requirement in 1982 by amending Exchange Act Rule 15c2-8 to require only broker-dealers participating in a registered offering of securities by a non-reporting issuer to deliver a preliminary (and not final) prospectus at least 48 hours in advance of the mailing of the confirmation of sale.

193

190

See

proposed Rule 251(d)(2)(ii). As proposed, this provision clarifies the date on which dealer delivery obligations commence in the context of continuous or delayed offerings pursuant to proposed Rule 251(d)(3).

191

See

SEC Rel. No. 33-5277 (July 26, 1972) (noting that there should be no distinction in the delivery requirements of Regulation A offerings and registered offerings, and therefore proposing (and eventually adopting) rules requiring delivery of the offering circular 48 hours in advance of mailing of a confirmation of sale.); SEC Rel. No. 33-6075 (June 1, 1979) [44 FR 33362], at 33363-64 (permitting for the first time the use of a preliminary offering circular in Regulation A offerings, and imposing the same delivery requirements for such preliminary offering circulars as were then in effect for registered offerings).

192

See

SEC Rel. No. 33-6383 (March 3, 1982) [47 FR 11380] (Integrated Disclosure Release, which, among other things, added Exchange Act Rule 15c2-8, 17 CFR 240.15c2-8, which requires broker-dealers participating in a registered offering of securities of a non-reporting issuer to deliver a copy of the preliminary prospectus to any prospective purchaser at least 48 hours before the mailing of the confirmation of sale.);

see also

Securities Offering Reform, SEC Rel. No. 33-8591, at 173

et seq.

and 241

et seq.

(discussing information conveyed at time of sale for purposes of Section 12(a)(2) liability and prospectus delivery requirement reforms).

193

SEC Rel. No. 33-6383, at 11400. The advance delivery requirements do not, however, apply in the context of registered offerings by issuers subject to a reporting obligation under Section 13 or 15(d) of the Exchange Act. Before the addition of Rule 15c2-8(b), the Commission required assurances that the managing underwriter had taken reasonable steps to send investors a preliminary prospectus at least 48 hours in advance of mailing confirmations of sale before accelerating effectiveness of a registration statement.

See

SEC Rel. No. 33-4968 (May 1, 1969) [34 FR 7235].

Cf.

17 CFR 230.460 (Distribution of Preliminary Prospectus in Registered Offerings).

We believe the delivery of the preliminary offering circular to potential investors before they make an investment decision remains an important investor protection that should be preserved in Regulation A, particularly in light of the proposed expanded use of “testing the waters” solicitation materials to include the period of time after non-public submission or filing of the offering statement discussed further in Section II.D. below.

194

We also recognize the need to update and amend Regulation A's offering circular delivery requirements to accord with the requirements of broker-dealers in the context of registered offerings. We therefore propose to amend Rule 251(d)(2)(i) to require issuers and participating broker-dealers to deliver only a preliminary offering circular to prospective purchasers

195

at least 48

hours in advance of sale when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors.

196

Unlike Exchange Act Rule 15c2-8, this delivery requirement would apply to both issuers and participating broker-dealers.

197

We believe this is an important investor protection that should apply to issuers in advance of sale, and is consistent with current Regulation A.

198

Consistent with current Rule 251(d)(1)(iii), we propose to continue to require a final offering circular to accompany or precede any written communications that constitute an offer in the post-qualification period.

199

194

Cf.

Securities Offering Reform, SEC Rel. No. 33-8591, at 245 (noting that access equals delivery is not appropriate for preliminary prospectus delivery obligations in IPOs because it is important for potential investors to be sent the preliminary prospectus).

195

Prospective purchasers would include any person that has indicated an interest in purchasing the Regulation A securities before qualification,

including, but not limited to, those investors that respond to an issuer's solicitation materials.

See

proposed Rule 251(d)(2)(i).

196

In accordance with time of sale provisions discussed in Securities Offering Reform,

see

SEC Rel. No. 33-8591, at p. 173

et seq.,

we propose to base the 48-hour period in advance of “sale” rather than the “mailing of the confirmation of sale.”

See also

Section II.D. below for a discussion of the delivery requirements for solicitation materials used after publicly filing the offering statement.

197

Cf.

Exchange Act Rule 3a4-1, 17 CFR 240.3a4-1 (Associated persons of an issuer deemed not to be brokers). Issuers would be able to rely on reasonable assurances of delivery from participating broker-dealers to satisfy their delivery obligations.

198

Cf.

17 CFR 230.460 (Distribution of Preliminary Prospectus in Registered Offerings). Additionally, with continued improvements in information and communication technologies, we believe direct public offerings (

i.e.,

offerings conducted by an issuer without the involvement of an underwriter) may become a more attractive option for certain issuers. For that reason, it is important that the advance preliminary offering circular delivery requirements for participating broker-dealers apply equally to issuers.

199

See

proposed Rule 251(d)(1)(iii). Consistent with Rule 172(a) in the context of registered offerings, issuers and intermediaries sending written confirmations and notices of allocation in the post-qualification period would be allowed to rely on the EDGAR filing of the final offering circular to satisfy any delivery requirements under Rule 251(d)(1)(iii). For a discussion of Rule 172(a),

see

Securities Offering Reform, SEC Rel. No. 33-8591, at 251.

In addition to the revised delivery requirements discussed above, we propose to add a provision analogous to Rule 173.

200

Currently, Regulation A requires the delivery of a final offering circular to the purchaser with the confirmation of sale, unless it has been delivered already.

201

The proposed provision would allow issuers and participating broker-dealers that satisfy the 48-hour requirement by furnishing a preliminary offering circular to, not later than two business days after completion of the sale, provide the purchaser with a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement. As proposed, the notice must include the URL

202

where the final offering circular, or the offering statement of which such final offering circular is part, may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent and received in response.

200

17 CFR 230.173.

201

17 CFR 230.251(d)(2)(i)(C).

202

In the case of an electronic-only offering, the notice must include an active hyperlink to the final offering circular or to the offering statement of which such final offering circular is part.

We propose to allow an issuer to withdraw an offering statement, with the Commission's consent, if none of the securities that are the subject of such offering statement have been sold and such offering statement is not the subject of a Commission order temporarily suspending a Regulation A exemption.

203

Under the proposed rules, the Commission also would be able to declare an offering statement abandoned if the offering statement has been on file with the Commission for nine months without amendment and has not become qualified.

204

These withdrawal and abandonment procedures are similar to the ones that apply to reporting companies.

203

See

proposed Rule 259(a).

204

See

proposed Rule 259(b).

Request for Comment

35. Should the rules require the electronic filing of Regulation A offering and related documents on EDGAR, as proposed? Why or why not? Please address expected costs of electronic filings and benefits to both issuers and investors of having these documents available in electronic format. Alternatively, for Tier 1 offerings, what would be the benefits, if any, of maintaining Regulation A's current paper filing system for offering statements and related documents? Should we maintain paper filing for issuers conducting Tier 1 Regulation A offerings? Why or why not?

36. As proposed, should we require issuers to file the body of the disclosure document, financial statements, and text file attachments, containing the exhibits index and the exhibits to the offering statement, electronically in a HTML or ASCII format that is compatible with the EDGAR filing system? Or should we permit the filing of offering and related materials in Portable Document Format (PDF) or in some other format that is readily accessible to smaller issuers to constitute an official filing with the Commission under Regulation S-T?

205

See

17 CFR 232.104 (Unofficial PDF copies included in an electronic submission).

37. Should we adopt, as proposed, an access equals delivery model for final offering circular delivery requirements, in which case investors would be presumed to have access to the Internet, and issuers and intermediaries could satisfy their delivery requirements if the final offering circular were filed with the Commission on EDGAR?

206

Or should we maintain our existing requirement that issuers deliver to purchasers a final offering circular with the mailing of the confirmation of sale to such purchasers (if not delivered previously)? Why or why not?

206

Kaplan Voekler Letter 2.

38. Should we update, as proposed, the delivery requirements in Rule 251(d)(2)(i) to maintain advance delivery requirements of preliminary offering circulars, while eliminating the requirement that issuers and broker-dealers participating in the distribution of Regulation A securities pursuant to an offering statement deliver a final offering circular to investors at least 48 hours before sale? Why or why not? Would updating this provision, as proposed, be inconsistent with the rationale behind similar updates to prospectus delivery requirements for registered offerings? Why or why not?

39. While not currently proposed, should we adopt a provision similar to Exchange Act Rule 15c2-8(b), which would only require the advance delivery of a preliminary offering circular in the context of offerings by issuers not already subject to an ongoing reporting obligation under Regulation A? Similarly, should we adopt an analog to Rule 174(b),

207

which applies to registered offerings, so that a dealer would not have an aftermarket delivery obligation to purchasers of Regulation A securities to the extent the issuer of such securities is subject to an ongoing reporting obligation under Regulation A immediately before the time of filing the offering statement? Or, in such circumstances, should we only require dealer aftermarket delivery for a 25 calendar-day period? Why or why not?

207

17 CFR 230.174(b).

40. In conjunction with the proposed access equals delivery model for final offering circular delivery requirements, should we adopt, as proposed, a provision analogous to Rule 173? If so, should compliance with that requirement be made a condition of Regulation A? Why or why not? Does the rationale behind Rule 173 apply to Regulation A offerings?

208

See

Securities Offering Reform, SEC Rel. No. 33-8591, at p. 173

et seq.

2. Non-Public Submission of Draft Offering Statements

Unlike Title I of the JOBS Act,

209

Title IV does not provide for confidential submissions of offering statements under Regulation A. Commenters, however, supported providing issuers with the option of confidential submission of offering statements under Regulation A.

210

We propose to allow the non-public submission of draft offering statements by issuers of Regulation A securities. We note, however, that such submissions would not be subject to the statutorily-mandated confidentiality of draft IPO registration statements confidentially submitted by “emerging growth companies”

211

under Title I of the JOBS Act.

212

209

Title I of the JOBS Act permits emerging growth companies to confidentially submit draft registration statements to the Commission for nonpublic review, provided the initial confidential submission and all amendments thereto are publicly filed not later than 21 calendar days before the issuer conducts its roadshow.

See

Section 106(a) of Title I, which added subsections 5(d) and 6(e) to the Securities Act.

210

Letter from Jonathan C. Guest, McCarter & English, LLP, July 10, 2012 (“McCarter & English Letter”); ABA Letter; WR Hambrecht + Co. Letter.

211

Under Section 2(a)(19) of the Securities Act, an “emerging growth company” is defined as, among other things, an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. 15 U.S.C. 77b(a)(19).

212

Under Section 6(e)(2) of the Securities Act, confidential submissions of draft registration statements by emerging growth companies are protected from compelled disclosure under the Freedom of Information Act (FOIA) (5 U.S.C. 552). There is no similar provision under Section 3(b) of the Securities Act. Issuers requesting confidential treatment of draft offering statement submissions under Regulation A could submit such documents under cover of the Commission's Rule 83.

See

17 CFR 200.83.

Under Regulation A's proposed non-public submission of draft offering statement provisions, issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act would be permitted to submit to the Commission a draft offering statement for non-public review. As with the confidential submission of draft registration statements, all non-public submissions of draft offering statements would be submitted via EDGAR. The initial non-public submission, all non-public amendments thereto, and correspondence with Commission staff regarding such submissions would be required to be publicly filed as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

213

Unlike emerging growth companies, which must publicly file any confidential submissions not later than 21 calendar days before a road show, the timing requirements for filing by issuers seeking qualification under Regulation A would not depend on whether or not the issuer conducts a road show.

214

213

The timing is consistent with the guidance provided to emerging growth companies under Title I of the JOBS Act, where such issuers do not “test the waters” under Section 5(d) or otherwise conduct a traditional road show.

See

JOBS Act Frequently Asked Questions on Confidential Submission Process for Emerging Growth Companies, Question 9 (April 10, 2012),

available at: http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm

214

Regulation A's proposed testing the waters provisions would encompass a variety of activities, including activities that could constitute a traditional road show.

See

Section II.D. below for a discussion on the timing and requirements for the use of testing the waters solicitation materials under Rule 254 as proposed to be amended.

Request for Comment

41. As proposed, should the rules permit the non-public submission of draft offering statements under Regulation A? Would there be any adverse impact on public investors of permitting the non-public submission of offering statements?

42. Is the proposed requirement of public filing at least 21 calendar days before qualification appropriate? Should public filing be required sooner or later than proposed?

43. Should the availability of non-public submission of Regulation A offering statements be limited, as proposed, to issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act, in a manner similar to the limitation under Title I of the JOBS Act on the use of confidential submissions to issuers that have not previously sold common equity securities pursuant to an effective registration statement? Or should issuers be permitted to use the non-public submission provisions more than once?

44. As proposed, should issuers that non-publicly submit an offering statement under Regulation A be required to request confidential treatment under the cover of the Commission's Rule 83? Or should we adopt a new rule relating to confidential treatment of draft offering statements in Regulation A?

3. Form and Content

Section 3(b)(2)(G)(i) of the Securities Act

215

identifies certain requirements that the Commission may include, among others, in the requirements for offerings relying on the exemption. The requirements largely follow the existing offering statement requirements of Form 1-A.

216

For example, financial statements,

217

a description of the issuer's business operations,

218

financial condition,

219

and use of investor funds

220

are all currently required disclosures in Form 1-A. Additionally, Form 1-A requires issuers to disclose, among other things, their contact information, the price or method for calculating the price of the securities being offered, information about the issuer's property, results of operations, directors, officers, significant employees and certain beneficial owners, material agreements and contracts, past securities sales, material factors that make an investment in the issuer speculative or risky, dilution, the plan of distribution for the offering, executive and director compensation, and conflicts of interest and related party transactions. As with Regulation A generally, however, Form 1-A has not been substantively revised by the Commission since 1992.

215

See

JOBS Act Section 401(a)(2).

216

The primary exception is the suggestion that issuers be required to submit audited financial statements. Currently, the financial statements required under Regulation A are required to be audited only if the issuer has them available.

217

See

Form 1-A, Part II, Part F/S.

218

Id.,

Part II,

e.g.,

Model B, Item 6. (Description of Business).

219

Id., e.g.,

Part F/S.

220

Id., e.g.,

Item 5. (Use of Proceeds to Issuer).

Currently, Form 1-A consists of three parts: Part I (Notification), Part II (Offering Circular), and Part III (Exhibits). Part I of Form 1-A calls for certain basic information about the issuer and proposed offering that is necessary to determine the availability of the exemption.

221

For example, the existence of any “bad actor” disqualifications under Rule 262 and the presence of proposed affiliate sales in the absence of issuer net income from operations in at least one of the last two fiscal years,

222

both of which may affect availability of the exemption, are required to be disclosed in Part I. Part I is filed with the Commission and publicly available, but is not required to be provided to investors.

223

221

See

SEC Rel. No. 33-6275 (Jan. 9, 1981) [46 FR 2637], at 2638.

222

See

Rule 251(b).

223

See

Rule 251(d)(2);

see also

SEC Rel. No. 33-6275, at 2639.

Part II of the offering statement consists of an offering circular—similar to the prospectus in a registration statement—which serves as the primary disclosure document to investors of the material facts about the issuer, its

securities, and the offering. Issuers organized as corporations are given the option of following any one of three disclosure formats in Part II:

• Model A (Question-and-Answer Format);

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Model A is based on the North American Securities Administrators Association's (NASAA) Form U-7, also known as the Small Company Offering Registration (SCOR) form, adopted April 28, 1989.

See http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-forms/

• Model B, a somewhat scaled version of Form S-1 that largely follows the Commission's disclosure standards in effect for registration statements when Model B was adopted in 1981;

225

and

225

See

SEC Rel. No. 33-6275 [46 FR 2637], at 2639-40; SEC Rel. No. 33-6924 [57 FR 9768], at 9771.

• Part I of Form S-1.

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17 CFR 239.11. Issuers choosing Part I of Form S-1 must, however, follow the financial statement requirements of Form 1-A, Part F/S.

Issuers organized in non-corporate form, such as limited partnerships and limited liability companies, have the option of using either Model B or Part I of Form S-1. Part F/S of the offering circular—containing financial statements and notes—is required disclosure for all issuers. Part III requires an exhibits index and a description of exhibits required to be filed as part of the offering statement.

Commenters generally supported maintaining Regulation A's existing Form 1-A, with modifications and updates to implement the provisions of the JOBS Act.

227

While some commenters supported simplifying the form or paring it down to focus on matters of greatest significance,

228

one commenter supported a more expansive disclosure regime.

229

This commenter suggested that the Commission coordinate with the States to create a single disclosure document that would address disclosure from both a federal and state securities law perspective. In the opinion of this commenter, a single form with heightened disclosure is better than a less-comprehensive federal form that would thereafter require additional disclosure items (and review) by state securities regulators.

230

According to this commenter, the need for robust disclosure is magnified by the increase in the annual offering amount and by an issuer's ability to solicit indications of interest before filing the offering statement, engage in general solicitation, and sell to investors regardless of investor qualifications.

231

227

ABA Letter; WR Hambrecht + Co.; NASAA Letter 2.

228

Letter from Thomas D. O'Rourke, President, Alpine Ventures, Sept. 26, 2012 (“Alpine Ventures Letter”); Letter from Rutheford B. Campbell, Jr., William L. Matthews Professor of Law, University of Kentucky, Nov. 13, 2012 (“Campbell Letter”);

see also

Letter from Richard Lacey, Small Business Owner, April 23, 2012 (“Lacey Letter”) (suggesting the form should be simple); Letter from William Klehm, Fallbrook Technologies, September 23, 2013 (“Fallbrook Letter”) (suggesting, among other things, that Regulation A should be simple and user-friendly); Letter from Og Oggilby, Bank Clerk, Jan. 22, 2013 (“Oggilby Letter”) (suggesting relaxed regulations on the sale of securities of small companies).

But see

Letter from David R. Burton, General Counsel, National Small Business Association (“NSBA”), June 12, 2012 (“NSBA Letter”) (suggesting the Commission not modify or update Regulation A other than by raising the annual offering limitation to $50 million).

229

Letter from Jack Herstein, President, NASAA, July 3, 2012 (“NASAA Letter 1”) (suggesting that heightened disclosure is bett

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