Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A)

Federal RegisterApr 20, 2015

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-9741; 34-74578; 39-2501; File No. S7-11-13]

RIN 3235-AL39

Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A)

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rules.

SUMMARY:

We are adopting amendments to Regulation A and other rules and forms to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act of 1933, which directs the Commission to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually. The final rules include issuer eligibility requirements, content and filing requirements for offering statements, and ongoing reporting requirements for issuers in Regulation A offerings.

DATES:

The final rules and form amendments are effective on June 19, 2015.

FOR FURTHER INFORMATION CONTACT:

Zachary O. Fallon, Special Counsel; Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3460; or Shehzad K. Niazi, Special Counsel; Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

We are amending Rules 251 through 263

of Regulation A under the Securities Act of 1933 (the “Securities Act”).

17 CFR 230.251 through 230.263.

15 U.S.C. 77a

et seq.

We are revising Form 1-A,

rescinding Form 2-A,

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

17 CFR 239.90.

17 CFR 239.91.

Further, we are revising Rule 4a-1

under the Trust Indenture Act of 1939 (the “Trust Indenture Act”)

to increase the dollar ceiling of the exemption from the requirement to issue securities pursuant to an indenture. We are also amending Rule 12g5-1

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

to permit issuers to rely on a conditional exemption from mandatory registration of a class of securities under Section 12(g) of the Exchange Act, Rule 15c2-11

of 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, and Rule 30-1

of the Commission's organizational rules and provisions for delegated authority to permit the Division of Corporation Finance to issue notices of qualification and deny Form 1-Z filings. In addition, we are adopting a technical amendment to Exchange Act Rule 15c2-11 to update the outdated reference to “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 240.12g5-1.

15 U.S.C. 78a

et seq.

17 CFR 240.15c2-11.

17 CFR 200.30-1.

As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a),

505(b)(2)(iii),

and Form 8-A. Additionally, we are revising Item 101(a)

of Regulation S-T

to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6)

of Regulation S-T to remove the reference to paper filings in a Regulation A offering, and removing and reserving Item 101(b)(8)

of Regulation S-T dealing with the optional electronic filing of Form F-X by Canadian issuers.

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

II. Final Rules and 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)

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)

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

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

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

H. Relationship With State Securities Law

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

I. Additional Considerations Related to Smaller Offerings

J. Transitional Guidance for Issuers Currently Conducting Regulation A Offerings

K. Technical and Conforming Amendments

III. Economic Analysis

A. Broad Economic Considerations

B. Baseline

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

2. Investors

3. Financial Intermediaries

C. 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)

D. Offering Statement

1. Electronic Filing and Delivery

2. Disclosure Format and Content

3. Audited Financial Statements

4. Other Accounting Requirements

5. Continuous and Delayed Offerings

6. Nonpublic Review of Draft Offering Statements

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

F. Ongoing Reporting

1. Periodic and Current Event Reporting Requirements

2. Termination and Suspension of Reporting and Exit Reports

3. Exchange Act Registration

G. Insignificant Deviations

H. Bad Actor Disqualification

I. Relationship With State Securities Law

IV. Paperwork Reduction Act

A. Background

B. Estimated Number of Regulation A Offerings

C. PRA Reporting and Cost Burden Estimates

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 8-A: Short Form Registration Under the Exchange Act

7. Form ID Filings

8. Form F-X

D. Collections of Information Are Mandatory

V. Final Regulatory Flexibility Act Analysis

A. Need for the Rules

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Basis and Text of Amendments

I. Introduction

On December 18, 2013, we proposed rule and form amendments

to implement Section 401 of the Jumpstart Our Business Startups Act (the “JOBS Act”).

Section 401 of the JOBS Act amended Section 3(b) of the Securities Act by designating existing Section 3(b) as Section 3(b)(1), and creating new Sections 3(b)(2)-(5). 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 12-month period. Sections 3(b)(2)-(5) specify mandatory terms and conditions for such exempt offerings and also authorize the Commission to adopt other terms, conditions, or requirements as necessary in the public interest and for the protection of investors.

In addition, Section 3(b)(5) directs the Commission to review the $50 million offering limit specified in Section 3(b)(2) not later than two years after the enactment of the JOBS Act and every two years thereafter, and authorizes the Commission to increase the annual offering limit if it determines that it would be appropriate to do so. Accordingly, we are revising Regulation A under the Securities Act to require issuers conducting offerings in reliance on Section 3(b)(2) to comply with terms and conditions established by the Commission's rules, and, where applicable, to make ongoing disclosure.

See

Rel. No. 33-9497 [79 FR 3925] (Dec. 18, 2013) (the “Proposing Release”),

available at: http://www.sec.gov/rules/proposed/2013/33-9497.pdf

Public Law 112-106, 126 Stat. 306.

We are adopting a number of terms and conditions for Regulation A offerings pursuant to our discretionary authority under Sections 3(b)(2)-(5). Where we have done so, as discussed in detail in Section II. below, it is because we find such terms and conditions to be necessary in the public interest and for the protection of investors.

II. Final Rules and Amendments to Regulation A

A. Overview

We are adopting final rules to implement the JOBS Act mandate by expanding Regulation A into two tiers: Tier 1, for securities offerings of up to $20 million; and Tier 2, for offerings of up to $50 million.

The final rules 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. As proposed, and with the modifications described below, the final rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for Regulation A issuers. Under the final rules, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Rule 501(a) of Regulation D, or be subject to certain limitations on their investment. The differences between Tier 1 and Tier 2 offerings are described more fully below.

An issuer of $20 million or less of securities could elect to proceed under either Tier 1 or Tier 2.

In developing the final rules, we considered the statutory language of JOBS Act Section 401, the JOBS Act legislative history, recent recommendations of the Commission's Government-Business Forum on Small Business Capital Formation,

the Advisory Committee on Small and Emerging Companies,

the Equity Capital Formation Task Force,

comment letters received on Title IV of the JOBS Act before the Commission's proposed rules were issued in December of 2013,

and comment letters received to date on the Commission's proposed rules to implement Section 401 of the JOBS Act.

Recommendations of the Commission's Government-Business Forum on Small Business Capital Formation are

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

Recommendations of the Advisory Committee on Small and Emerging Companies 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/

To facilitate public input on JOBS Act rulemaking before the issuance of rule proposals, the Commission 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

The comment letters received to date in response to the Proposing Release are

available at: http://www.sec.gov/comments/s7-11-13/s71113.shtml

The key provisions of the final rules and amendments to Regulation A follow:

Scope of the exemption—the final rules:

• Establish two tiers of offerings:

• Tier 1: Annual offering limit of $20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.

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

• Limit sales by selling securityholders in an issuer's initial Regulation A offering and any subsequently qualified Regulation A offering within the first 12-month period following the date of qualification of the initial Regulation A offering to no more than 30% of the aggregate offering price.

• Preserve the existing issuer eligibility requirements of Regulation A, and also exclude 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 and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement.

• Limit the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons). This limit will not apply to purchases of securities that will be listed on a national

securities exchange upon qualification.

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

• Update the safe harbor from integration and provide 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” with, or solicit interest in a potential offering from, 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.

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 unless the issuer is subject to, and current in, Tier 2 ongoing reporting obligations. Where the issuer is subject to, and current in, a Tier 2 ongoing reporting obligation, issuers and intermediaries will only be required to comply with the general delivery requirements for offers.

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

See, e.g.,

Securities Offering Reform, 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 sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on the Commission's Electronic Data Gathering, Analysis and Retrieval system (EDGAR);

• Require issuers and intermediaries, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice with the uniform resource locator (URL) where the final offering circular 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; and

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

• Permit continuous or delayed offerings, but require issuers in continuous or delayed Tier 2 offerings to be current in their annual and semiannual reporting obligations in order to do so.

• 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 file offering statements with the Commission electronically on EDGAR.

• 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 of Form 1-A.

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

• Permit real estate investment trusts (REITs) and similarly eligible companies to provide the narrative disclosure required by Part I of Form S-11 in Part II of Form 1-A.

• Require that offering statements be qualified by the Commission before sales may be made pursuant to Regulation A.

• Require Tier 1 and Tier 2 issuers to file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence).

• Require Tier 2 issuers to include financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB).

• Require Tier 1 and Tier 2 issuers to include financial statements in Form 1-A that are dated not more than nine months before the date of non-public submission, filing, or 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 Tier 1 issuers to provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the Commission not later than 30 calendar days after termination or completion of an offering.

• Require Tier 2 issuers to file electronically with the Commission on EDGAR annual and semiannual reports, as well as current event reports.

• Require Tier 2 issuers to file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer's first required periodic report.

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

• Provide that Tier 2 issuers' reporting obligations under Regulation A would suspend when they are subject to the ongoing reporting requirements of Section 13 of the Exchange Act, and may also be suspended under Regulation A at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which an 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, or fewer than 1,200 persons for banks or bank holding companies, and offers or sales made in reliance on a qualified Tier 2 Regulation A offering statement are not ongoing. In certain circumstances, Tier 2 Regulation A reporting obligations may terminate when issuers are no longer subject to the ongoing reporting requirements of Section 13 of the Exchange Act.

• Require Tier 2 issuers 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.

Exchange Act registration:

• Conditionally exempt securities issued in a Tier 2 offering from the mandatory registration requirements of Section 12(g) of the Exchange Act, for so long as the issuer engages the services of a transfer agent that is registered with the Commission under Section 17A of the Exchange Act, remains subject to a Tier 2 reporting obligation, is current in its annual and semiannual reporting at fiscal year end, and had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.

• Permit Tier 2 issuers to use a Form 8-A short form registration statement concurrently with the qualification of a Regulation A offering statement that includes Part I of Form S-1 or Form S-11 narrative disclosure in Form 1-A in order to register a class of securities under Sections 12(g) or 12(b) of the Exchange Act.

“Bad actor” disqualification provisions:

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

Application of state securities laws:

• Provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” in light of the total package of investor protections included in the final rules. A qualified purchaser will be defined to be any person to whom securities are offered or sold in a Tier 2 offering.

The Commission is required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limitation every two years. In addition to revisiting the Tier 2 offering limitation, the staff will also undertake to review the Tier 1 offering limitation at the same time. The staff also will undertake to study and submit a report to the Commission no later than 5 years following the adoption of the amendments to Regulation A, on the impact of both the Tier 1 and Tier 2 offerings on capital formation and investor protection. The report will include, but not be limited to, a review of: (1) The amount of capital raised under the amendments; (2) the number of issuances and amount raised by both Tier 1 and Tier 2 offerings; (3) the number of placement agents and brokers facilitating the Regulation A offerings; (4) the number of Federal, State, or any other actions taken against issuers, placement agents, or brokers with respect to both Tier 1 and Tier 2 offerings; and (5) whether any additional investor protections are necessary for either Tier 1 or Tier 2. Based on the information contained in the report, the Commission may propose to either decrease or increase the offering limit for Tier 1, as appropriate.

B. Scope of Exemption

1. Eligible Issuers

a. Proposed Rules

Section 401 of the JOBS Act does not include any express issuer eligibility requirements. The proposed rules would have maintained Regulation A's existing issuer eligibility requirements and added two new categories of ineligible issuers.

The two new categories would exclude 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 and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement. Additionally, we requested comment on other potential changes to the existing issuer eligibility requirements, including whether the exemption should be limited to “operating companies,” United States domestic issuers, or issuers that use a certain amount of the proceeds raised in a Regulation A offering in the United States. We also solicited comment on whether we should extend issuer eligibility to non-Canadian foreign issuers, business development companies as defined in Section 2(a)(48) of the Investment Company Act of 1940 (BDCs),

blank check companies,

or Exchange Act reporting companies, or, alternatively, eliminate shell companies or REITs from the exemptive regime.

Existing Regulation A limits issuer eligibility to issuers organized, and with a principal place of business, in the United States or Canada, while excluding Exchange Act reporting companies, investment companies, including business development companies, development stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, issuers of fractional undivided interests in oil or gas rights or a similar interest in other mineral rights, and issuers disqualified because of Rule 262, 17 CFR 230.262 (2014).

See

17 CFR 230.251(a) (2014).

15 U.S.C. 80a-2(a)(48).

“Blank check companies” are development stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

See

Securities Act Rule 419(a)(2)(i), 17 CFR 230.419(a)(2)(i);

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).

b. Comments on the Proposed Rules

Commenters expressed a wide range of views on the proposed issuer eligibility requirements. A number of commenters expressed general support for the proposed issuer eligibility requirements.

Many commenters expressly supported the new proposed issuer eligibility criterion relating to the requirement to be current in Tier 2 ongoing reporting obligations.

One commenter also expressly supported the proposed exclusion of issuers subject to an order of the Commission entered pursuant to Section 12(j) of the Exchange Act from the list of eligible issuers.

Other commenters suggested additional limitations on issuer eligibility, including: a requirement that issuers be “operating companies,”

excluding shell companies and issuers of penny stock,

and excluding other types of investment vehicles, such as commodity pools and investment funds that invest in gold or virtual currencies.

Letter from Catherine T. Dixon, Chair, Federal Regulation of Securities Committee, Business Law Section, American Bar Association, April 3, 2014 (“ABA BLS Letter”); Letter from Gabrielle Buckley, Chair, Section of International Law, American Bar Association, May 14, 2014 (“ABA SIL Letter”); Letter from Andrew F. Viles, Canaccord Letter Genuity Inc., March 27, 2014 (“Canaccord Letter”); Letter from Pw Carey, March 24, 2014 (“Carey Letter”); Letter from Kurt N. Schacht, CFA, Managing Director, Standards and Financial Market Integrity, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute, March 24, 2014 (“CFA Institute Letter”); Letter from Kim Wales, Executive Board Member, Crowdfund Intermediary Regulatory Advocates (CFIRA), May 14, 2014 (“CFIRA Letter 1”); Letter from Christopher Tyrrell, Chair, Crowdfunding Intermediary Regulatory Advocates, February 23, 2015 (“CFIRA Letter 2”); Robert R. Kaplan, Jr. and T. Rhys James, Kaplan Voekler Cunningham & Frank PLC, March 23, 2014 (“KVCF Letter”); Letter from William F. Galvin, Secretary, Commonwealth of Massachusetts, March 24, 2014 (“Massachusetts Letter 2”); Letter from Morrison & Foerster LLP, March 26, 2014 (“MoFo Letter”); Letter from Andrea Seidt, President, North American Securities Administrators Association (NASAA) and Ohio Securities Commissioner, March 24, 2014 (“NASAA Letter 2”); Letter from William M. Beatty, Securities Administrator, Washington Department of Financial Institutions, March 24, 2014 (“WDFI Letter”); Letter from William R. Hambrecht, Chairman, WR Hambrecht+ Co, March 4, 2014 (“WR Hambrecht + Co Letter”).

ABA BLS Letter; CFA Institute Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.

CFA Institute Letter.

CFIRA Letter 1; WR Hambrecht + Co Letter (suggesting that limiting the availability of the

exemption to, among other things, operating companies would provide investors with more confidence in the offerings conducted pursuant to Regulation A).

But see

KVCF Letter (suggesting that limiting availability of the exemption to operating companies would unnecessarily limit the utility of the exemption).

ABA BLS Letter; MoFo Letter.

Massachusetts Letter 2.

A few commenters recommended allowing blank check companies and special purpose acquisition companies (SPACs) to rely on Regulation A.

One of these commenters recommended allowing blank check companies seeking to raise at least $10 million to use Regulation A in the same manner as any other eligible issuer, but suggested that, if a company is raising less than $10 million in a Tier 2 offering, the Commission should implement certain additional requirements.

Another commenter recommended allowing issuers of fractional interests in oil and gas or other mineral rights to rely on Regulation A based on a “reasonable” eligibility test to be developed by the Commission.

Several commenters opposed any change to the proposed issuer eligibility requirements that would exclude REITs from participating in Regulation A offerings.

Other commenters advocated expanding the current categories of eligible issuers, and specifically supported the continued inclusion of Canadian companies and shell companies as eligible issuers, as proposed.

Gilman Law Letter; Letter from Mark Goldberg, Chairman, Investment Program Association, March 24, 2014 (“IPA Letter”); Letter from David N. Feldman, Partner, Richardson Patel LLP, January 15, 2014 (“Richardson Patel Letter”). 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.

Richardson Patel Letter (recommending that for offerings of less than $10 million under Tier 2, the rules should require that: (a) Monies raised be placed into escrow, minus underwriters compensation and 10% for offering expenses, until a reverse merger is completed; (b) a combination with an operating business be completed within three years; (c) full Form 10 information be disclosed regarding a pending reverse merger to investors who will have 15-20 days to reconfirm their investment or receive their money back; (d) there be no requirement that a certain percentage of investors reconfirm; and (e) accredited investors have no limit on the investment they make in the offering).

Letter from Mark Kosanke, President, Real Estate Investment Securities Association, March 24, 2014 (“REISA Letter”) (suggesting that the Commission base the eligibility test on the issuer having an “established track record” or some minimum amount of assets).

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

Letter from Jonathan C. Guest, McCarter & English, LLP, February 19, 2014 (“McCarter & English Letter”) (also opposing any limitation on issuer eligibility on the basis of whether most of the offering proceeds were being used in connection with the issuer's operations in the United States, noting that many Canadian issuers would be excluded as a result); OTC Markets Letter.

(1) Non-Canadian Foreign Issuers

Many commenters recommended making non-Canadian foreign companies eligible issuers under Regulation A.

Several commenters suggested that the proposed approach to non-Canadian foreign companies is inconsistent with the treatment of foreign private issuers in registered offerings.

Additionally, commenters noted a variety of benefits arising from allowing foreign companies to access the U.S. capital markets through Regulation A offerings, including job creation,

increasing the amount of disclosure available for investors in foreign companies,

encouraging domestic exchange listings,

expanding investment opportunities for U.S. investors,

and general economic benefits.

One commenter recommended making all foreign private issuers eligible if they maintained a principal place of business in the United States.

Two commenters also recommended permitting companies relying on Exchange Act Rule 12g3-2(b) to make offerings under Regulation A.

ABA SIL Letter; Letter from Scott Kupor, Managing Partner, Andreessen Horowitz, and Jeffrey M. Solomon, Chief Executive Officer, Cowen and Company, February 26, 2014 (“Andreessen/Cowen Letter”); Letter from BDO USA, LLP, March 20, 2104 (“BDO Letter”); Canaccord Letter (suggesting expanding issuer eligibility to companies organized in jurisdictions with “robust securities regulation systems” such as the United Kingdom and other countries in the European Union, Australia, and Asian markets such as Singapore and Hong Kong); McCarter & English Letter; OTC Markets Letter; Richardson Patel Letter; Letter from Michael T. Lempres, Assistant General Counsel, SVB Financial Group, March 21, 2014 (“SVB Financial Letter”); Letter from Bill Soby, Managing Director, Silicon Valley Global Shares, March 24, 2014 (“SVGS Letter”).

Andreessen/Cowen Letter; BDO Letter; Richardson Patel Letter. In the context of registered offerings, foreign private issuers may provide scaled disclosure if it qualifies as a “smaller reporting company,” which is defined in Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1), Securities Act Rule 405, 17 CFR 230.405, and Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and rely on other disclosure accommodations.

ABA SIL Letter; SVGS Letter (noting that high-paying jobs would be created by expanding global tech companies).

SVB Financial Letter.

Andreessen/Cowen Letter; SVB Financial Letter.

Andreessen/Cowen Letter; OTC Markets Letter.

ABA SIL Letter; Andreessen/Cowen Letter; McCarter & English Letter; SVB Financial Letter.

ABA SIL Letter.

McCarter & English Letter; OTC Markets Letter. Rule 12g3-2(b) generally provides foreign private issuers with an automatic exemption from registration under Section 12(g) if the issuer (i) is not required to file reports under Exchange Act Sections 13(a) or 15(d); (ii) maintains a listing of the subject class of securities on one or two exchanges in non-U.S. jurisdictions that comprise more than 55% of its worldwide trading volume; and (iii) publishes in English on its Web site certain material items of information.

See

17 CFR 240.12g3-2(b).

(2) BDCs

A number of commenters supported making BDCs eligible issuers under Regulation A.

Most of these commenters noted that BDCs serve an important function in facilitating small or emerging business capital formation or in providing a bridge from the private to public markets.

Several of these commenters recommended at least allowing small business investment company (SBIC) licensed BDCs to use the exemption given the review process such entities are required to undergo with the U.S. Small Business Administration.

One of these commenters noted that if BDCs become eligible to use Regulation A, the Commission should consider requiring them to provide quarterly financial disclosure so as to enhance transparency and provide the market with critical investment information.

ABA BLS Letter; CFIRA Letter 1; Letter from Michael Sauvante, Executive Director, Commonwealth Fund LLC, March 21, 2014 (“Commonwealth Fund Letter 1”); Letter from Michael Sauvante, Executive Director, Commonwealth Fund LLC, March 22, 2014 (“Commonwealth Fund Letter 2”); KVCF Letter; Letter from Daniel Gorfine, Director, Financial Markets Policy, and Staci Warden, Executive Director, Center for Financial Markets, Milken Institute, March 19, 2014 (“Milken Institute Letter”); MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter.

ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letter 1; Commonwealth Fund Letter 2; KVCF Letter; Milken Institute Letter; MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter.

Milken Institute Letter; SBIA Letter. A SBIC-licensed BDC is a company that is licensed by the Small Business Administration (SBA) to operate as such under the Small Business Investment Act of 1958.

Milken Institute Letter.

(3) Potential Limits on Issuer Size

Several commenters opposed using the issuer's size to limit eligibility.

Two of these commenters thought that the $50 million offering limit for Tier 2 would already limit the utility of the

exemption for issuers on the basis of issuer size—with smaller issuers likely benefitting most from the exemption—and recommended against size-based eligibility criteria that may be difficult to define.

One commenter suggested that most issuers with a large public float would likely be subject to Exchange Act reporting requirements and therefore would be ineligible to use Regulation A.

Another commenter noted that a size restriction based on public float would be particularly harmful to biotechnology companies, because they often have a public float that is disproportionately high in relation to their corporate structure, number of employees, or revenues.

Letter from E. Cartier Esham, Executive Vice President, Emerging Companies, Biotechnology Industry Organization (BIO), March 11, 2014 (“BIO Letter”); IPA Letter; Letter from Tom Quaadman, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, March 24, 2014 (“U.S. Chamber of Commerce Letter”).

BIO Letter; U.S. Chamber of Commerce Letter.

IPA Letter.

BIO Letter.

(4) Exchange Act Reporting Companies

A number of commenters supported allowing Exchange Act reporting companies to conduct offerings under Regulation A.

Several of these commenters recommended allowing Exchange Act reporting companies that are current in their reporting obligations to conduct Tier 2 offerings,

with one commenter limiting its recommendation to companies with a non-affiliate float of less than $250 million.

Three commenters further suggested that, if Exchange Act reporting companies are permitted to conduct offerings pursuant to Regulation A, Exchange Act reporting should satisfy any Regulation A reporting obligation.

One such commenter further suggested that Exchange Act reporting companies should be required to be current in their Exchange Act reporting obligations in order to be eligible to rely on the exemption, in a manner that is consistent with Regulation A as it existed before 1992.

Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter; Letter from U.S. Senator Pat Roberts, May 27, 2014 (“Sen. Roberts Letter”); Letter from Jack H. Brier, President and Founder, US Alliance Corporation, March 19, 2014 (“US Alliance Corp. Letter”).

Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter.

BIO Letter.

Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets Letter.

CFIRA Letter 1. Before amendments to Regulation A were adopted in 1992, Exchange Act reporting companies were permitted to conduct offerings in reliance on Regulation A, provided they were current in their public reporting.

See

17 CFR 230.252(f) (1992).

c. Final Rules

We are adopting the issuer eligibility criteria as proposed. Under the final rules, Regulation A will be limited to companies organized in and with their principal place of business in the United States or Canada. It will be unavailable to:

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

• companies registered or required to be registered under the Investment Company Act of 1940 and BDCs;

• blank check companies;

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

• issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the rules under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports);

• issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement;

and

See

Rule 251(b).

• issuers subject to “bad actor” disqualification under Rule 262.

See

Rule 262.

We expect that the amendments we are adopting will significantly expand the utility of the Regulation A offering exemption.

Our approach in the final rules is generally to maintain the issuer eligibility requirements of existing Regulation A with the limited addition of two new categories of ineligible issuers. We believe this approach will provide important continuity in the Regulation A regime as it expands in the way Congress mandated. For this reason, we do not believe it is necessary to adopt final rules to exclude issuers that are currently eligible to conduct Regulation A offerings. Additionally, we recognize that expanding the categories of eligible issuers, as suggested by a number of commenters, could provide certain benefits, including increased investment opportunities for investors and avenues for capital formation for certain issuers. We are concerned, however, about the implications of extending issuer eligibility before the Commission has the ability to assess the impact of the changes to Regulation A being adopted today. In light of these changes, we believe it prudent to defer expanding the categories of eligible issuers (for example, by including non-Canadian foreign issuers, BDCs, or Exchange Act reporting companies) until the Commission has had the opportunity to observe the use of the amended Regulation A exemption and assess any new market practices as they develop.

Additionally, we are not adopting further restrictions on eligibility at this time. In light of the disclosure requirements contained in the final rules, we do not believe that it is necessary to exclude additional types of issuers, such as shell companies, issuers of penny stock, or other types of investment vehicles, from relying on the exemption in Regulation A. At the same time, we are concerned about potentially increased risks to investors that could result from extending issuer eligibility to other types of entities, such as blank check companies, before the Commission has the opportunity to observe developing market practices. We therefore believe the prudent approach with respect to any potential expansion of issuer eligibility is to give the Regulation A market time to develop under rules that we are adopting today. We also do not believe it is necessary to limit availability of the exemption to issuers of a certain size, as we agree with commenters that suggested that the annual offering limit will serve to limit the utility of the exemption for larger issuers in need of greater amounts of capital. We further do not believe that it is appropriate to limit the availability of the exemption to “operating companies,” as that term would restrict availability of the exemption to fewer issuers than are currently eligible under Regulation A, such as by excluding shell companies.

As proposed, the final rules include two new issuer eligibility requirements that add important investor protections to Regulation A. First, potential issuers must have filed all required ongoing reports under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports) to remain eligible to conduct offerings pursuant to the rules. This requirement will benefit investors by providing them with more information, with respect to issuers that have previously made a Regulation A offering, to consider when making an investment decision, facilitate the development of an efficient secondary market in such securities, and enhance our ability to analyze and observe the Regulation A market. Second, issuers subject to orders by the Commission entered pursuant to Section 12(j) of the Exchange Act within a five-year period immediately preceding the filing of the offering statement will not be eligible to conduct an offering pursuant to Regulation A. This requirement will increase investor protection and

compliment the exclusion of delinquent Regulation A filers discussed immediately above by excluding issuers with a demonstrated history of delinquent filings under the Exchange Act from the pool of eligible issuers under Regulation A.

2. Eligible Securities

a. Proposed Rules

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.”

The proposed rules would have limited 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) and also would have excluded asset-backed securities, as defined in Regulation AB, from the list of eligible securities.

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

b. Comments on the Proposed Rules

Several commenters supported the exclusion of asset-backed securities from the list of eligible securities.

One commenter recommended clarifying that warrants exercisable for equity or debt securities are eligible securities.

ABA BLS Letter; Carey Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.

ABA BLS Letter.

c. Final Rules

We are adopting final rules that limit the types of securities eligible for sale under Regulation A to the specifically enumerated list in Section 3(b)(3), which includes warrants and convertible equity securities, among other equity and debt securities.

The final rules exclude asset-backed securities from the list of eligible securities. Asset-backed securities are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure, and reporting requirements for such securities. These rules were not in effect when Regulation A was last updated in 1992.

We do not believe that Section 401 of the JOBS Act was enacted to facilitate the issuance of asset-backed securities.

See

Rule 261(c);

see also

Rule 405 (defining “equity security” to include, among other things, warrants and certain convertible securities). We have also revised the proposed definition in Rule 261(c) to clarify that all securities, rather than just equity securities, that are convertible or exchangeable into equity interests are eligible, subject to the other terms of Regulation A.

Regulation AB, 17 CFR 229.1100

et seq.,

went into effect in 2005.

See

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 its terms converts into cash within a finite time period.

3. Offering Limitations and Secondary Sales

a. Proposed Rules

We proposed to amend Regulation A to create two tiers of requirements: Tier 1, for offerings of up to $5 million of securities in a 12-month period; and Tier 2, for offerings of up to $50 million of securities in a 12-month period.

As proposed, issuers could conduct offerings of up to $5 million under either Tier 1 or Tier 2. Consistent with the existing provisions of Regulation A, we also proposed to permit sales by selling securityholders of up to 30% of the maximum offering amount permitted under the applicable tier ($1.5 million in any 12-month period for Tier 1 and $15 million in any 12-month period for Tier 2). Sales by selling securityholders under either tier would be aggregated with sales by the issuer for purposes of calculating the maximum permissible amount of securities that may be sold during any 12-month period. In addition, we proposed 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.

As proposed, 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.

b. Comments on the Proposed Rules

Commenters were generally supportive of the proposed offering limitations on primary and secondary offerings. Many commenters, however, suggested changes to the proposed offering limits for both tiers, as well as to the proposed limits on secondary sales.

(1) Offering Limitation

Several commenters recommended that the Commission increase the $50 million offering limitation for Tier 2.

As an alternative, one commenter recommended applying the $50 million limit on a per offering basis rather than on a 12-month basis, and suggested that the Commission consider eliminating the offering limits for certain types of issuers, such as those that have yet to generate revenue.

Additionally, two commenters recommended that the Commission do more to increase the utility of Tier 1 offerings by raising the Tier 1 offering limitation to $10 million or more in a 12-month period.

Another commenter suggested that the Commission create a third tier in between Tier 1 and Tier 2 that would have a $15 million offering limitation.

Letter from Salomon Kamalodine, Director, Investment Banking, B. Riley & Co., March 24, 2014 (“B. Riley Letter”); Letter from William Klehm, Chairman and CEO, Fallbrook Technologies, March 22, 2014 (“Fallbrook Technologies Letter”) (recommended raising the limit to $75 million); OTC Markets Letter (recommended raising the limit to $80 million); Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 24, 2014 (“Public Startup Co. Letter 1”) (recommended raising the limit to $75 million); Richardson Patel Letter (recommended raising the limit to $100 million).

Richardson Patel Letter.

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

Public Startup Co. Letter 1.

With respect to offering limit calculations, one commenter recommended that the aggregate offering price of the underlying security only be included in the $50 million offering limitation during the 12-month period in which such security is first convertible, exercisable, or exchangeable.

This commenter suggested that its recommended approach would accommodate common small business offering structures that involve warrants exercisable at a premium over several years.

Andreessen/Cowen Letter;

cf.

Proposing Release, fn. 112.

(2) Secondary Sales Offering Limitation

Several commenters specifically supported the proposed limitations on secondary sales.

While some commenters indicated their support for resale limitations,

they expressed a preference for either proscribing resales entirely

or requiring the approval of the resale offering by a majority of the issuer's independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer.

One commenter recommended prohibiting

resales under Regulation A entirely.

Another commenter recommended requiring selling securityholders to hold the issuer's securities for 12 months before being eligible to sell pursuant to Regulation A, in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain.

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

Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.

Massachusetts Letter 2; NASAA Letter 2.

NASAA Letter 2 (supporting the proposed limits coupled with a board approval requirement in lieu of prohibiting resales entirely); WDFI Letter (not expressing a preference for prohibiting resales entirely).

Carey Letter.

Letter from Andrew M. Hartnett, Missouri Commissioner of Securities, March 24, 2014 (“MCS Letter”).

Many other commenters recommended raising the resale limits or eliminating them entirely.

One such commenter recommended alternatively removing non-affiliate securityholders from the resale limitation since concerns over investor information asymmetries would be reduced when dealing with non-affiliate securityholders.

This commenter also recommended that the Commission reevaluate the need for resale limits within a year of implementing the rules. Another commenter also recommended allowing for unlimited sales by non-affiliate selling securityholders and further suggested that the rules not aggregate such sales with issuer sales.

Two commenters suggested that limitations on resales are contrary to the Congressional intent behind the enactment of Title IV of the JOBS Act.

ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; Richardson Patel Letter; WR Hambrecht + Co Letter.

Milken Institute Letter.

B. Riley Letter.

CFIRA Letter 1; WR Hambrecht + Co Letter (noting that the JOBS Act contemplated an increase in the offering threshold to $50 million, but did not limit the percentage that could be sold by selling securityholders).

(3) Rule 251(b)

Many commenters specifically supported the proposed elimination of the requirement that issuers must have had net income from continuing operations in at least one of its last two fiscal years in order for affiliate resales to be permitted, generally noting that many companies have net losses for many years, including, for example, due to high research and development costs.

ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter.

c. Final Rules

We are adopting the proposed amendments to Regulation A with modifications to the Tier 1 offering limitation and the secondary sales offering limitation. We discuss these amendments in detail below. We are also making a technical change to clarify the description of how compliance with the offering limitations is calculated in Rule 251(a).

The proposed rules used the phrase “aggregate offering price for all securities sold” when discussing the gross proceeds resulting from prior or anticipated sales of securities under Regulation A. We have clarified Rule 257(a)(1) to define as “aggregate sales” gross proceeds within the prior 12 month time frame contemplated by Regulation A. We have also made conforming changes elsewhere in the final rules and forms.

Tier 1

As discussed more fully in the “Additional Considerations for Smaller Offerings” section below, we are making changes to the proposed rules in response to comments and to increase the utility of Tier 1 of the Regulation A exemption.

Several commenters

and a report on the impact of state securities law requirements on offerings conducted under Regulation A by the U.S Government Accountability Office (GAO), as required by Section 402 of the JOBS Act,

highlighted the $5 million offering limitation in existing Regulation A as one of the main factors limiting the utility of the exemption. In certain circumstances, fixed costs associated with conducting Regulation A offerings, such as legal and accounting fees, may serve as a disincentive to use the exemption for lower offering amounts. We are therefore increasing the offering limitation in the final rules for Tier 1 offerings in a 12-month period from the proposed $5 million limitation to $20 million.

We believe that raising the offering limitation for Tier 1 offerings, in addition to other changes discussed in Section II.I. below, will increase the utility of the exemption for smaller issuers by providing them with additional options for capital formation and potentially increasing the proceeds received by the issuer. Consistent with the proportionate limitation on secondary sales in the proposed rules, we are also increasing the limitation on secondary sales in Tier 1 offerings in a 12-month period from the proposed $1.5 million limitation to $6 million.

See

Section II.I. below.

See, e.g.,

Guzik Letter 1; ICBA Letter; Public Startup Co. Letter 1.

Factors that May Affect Trends in Regulation A Offerings,

GAO-12-839 (July 2012) (the “GAO Report”) (

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.

Rule 251(a)(1). We intend to revisit the Tier 1 offering limitation at the same time that we are required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limitation and will consider whether additional investor protections would be necessary if the Tier 1 offering limitation is increased.

Tier 2

We are adopting the proposed $50 million Tier 2 offering limitation.

Some commenters suggested that we raise the offering limitation to an amount above the statutory limitation set forth in Section 3(b)(2), but we do not believe an increase is warranted at this time. While Regulation A has existed as an exemption from registration for some time, today's changes are significant. We believe that the final rules for Regulation A will provide for a meaningful addition to the existing capital formation options of smaller companies while maintaining important investor protections. We are concerned, however, about expanding the offering limitation of the exemption beyond the level directly contemplated in Section 3(b)(2) at the outset of the adoption of final rules. As noted above in Section II.B.1., the final rules do not limit issuer eligibility on the basis of issuer size, as we believe that the $50 million annual offering limitation will serve to limit the utility of the exemption for larger issuers in need of greater amounts of capital. Similarly, we believe that the more extensive disclosure requirements associated with Exchange Act reporting are more appropriate for larger and generally more complex issuers that raise money in the public capital markets.

We are therefore concerned that an increase in the offering limitation at this time may increase risks to investors by encouraging larger issuers to conduct offerings pursuant to Regulation A in instances where disclosure pursuant to a registered offering under the Securities Act would be more appropriate.

Rule 251(a)(2).

See

discussion in Section III.C.3. below.

The Commission is required by Section 401 of the JOBS Act to review the Section 3(b)(2) offering limitation every two years, and we will consider the use of the final rules by market participants as part of that review. We will therefore revisit the offering limitation by April 2016, as required by the statute, with a view to considering whether to increase the $50 million offering limitation. We also are adopting the proposed $15 million limitation on secondary sales for Tier 2 as proposed, with a change in the application of the limitation for secondary sales under both Tier 1 and Tier 2 discussed in the following section.

Application of the Limitation on Secondary Sales

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

selling securityholders access to avenues for liquidity will encourage them to invest in companies, although we acknowledge that providing for secondary sales in any amount may give rise to certain concerns. As highlighted by at least one commenter at the pre-proposing stage, permitting some secondary sales pursuant to Regulation A could place investors at an informational disadvantage to selling securityholders who have potentially greater access to inside information about the issuer and does not necessarily provide capital to the issuer.

Other commenters stated that such concerns are misplaced in the context of secondary sales by non-affiliates, who generally do not have access to inside information.

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

See, e.g.,

Milken Institute Letter.

We do not believe that a wholesale prohibition on secondary sales, as suggested by some commenters, is appropriate or necessary for either Tier 1 or Tier 2 of Regulation A. However, in order to strike an appropriate balance between allowing selling securityholders continued access to avenues for liquidity in Regulation A and the concern that secondary offerings do not directly provide new capital to companies and could pose the potential risks to investors discussed above, the final rules continue to permit secondary sales but provide additional limitations on secondary sales in the first year. The final rules limit the amount of securities that selling securityholders can sell at the time of an issuer's first Regulation A offering and within the following 12 months to no more than 30% of the aggregate offering price of a particular offering.

While the final rules continue to provide selling securityholders with the flexibility to sell securities during this period, we believe that this approach to the final rules will help to ensure that secondary sales at the time of such offerings will be made in conjunction with capital raising events by the issuer.

Rule 251(a)(3) (Additional limitation on secondary sales in first year).

Further, we are providing different requirements for secondary sales by affiliates and by non-affiliates. The final rules limit secondary sales by affiliates that occur following the expiration of the first year after an issuer's initial qualification of an offering statement to no more than $6 million, in the case of Tier 1 offerings, or no more than $15 million, in the case of Tier 2 offerings, over a 12-month period. Secondary sales by non-affiliates that are made pursuant to a qualified offering statement following the expiration of the first year after an issuer's initial qualification of an offering statement will not be limited except by the maximum offering amount permitted by either Tier 1 or Tier 2.

Although the secondary sales offering amount limitation will only apply to affiliates during this period, consistent with the proposal, non-affiliate secondary sales will be aggregated with sales by the issuer and sales by affiliates for purposes of calculating compliance with the maximum offering amount permissible under the respective tiers.

Rule 251(a).

Secondary sales of shares acquired in a Regulation A offering—which are freely tradable—are not subject to limitations on secondary sales, but must be resold under an exemption from Securities Act registration (

e.g.,

Section 4(a)(1), 15 U.S.C. 77d(a)(1)).

We do not believe that the concerns expressed by one commenter about informational disadvantages that may exist with affiliate sales are present with respect to resales by non-affiliates.

On the contrary, in comparison to requirements for non-affiliate resales of restricted securities after the expiration of Securities Act Rule 144 holding periods,

100

we believe that Regulation A provides purchasers of such securities with the benefit of, among other things, narrative and financial disclosure that is reviewed and qualified by the Commission in transactions that are subject to Section 12(a)(2) liability and the antifraud provisions of Section 17 of the Securities Act.

101

NASAA (pre-proposal) Letter.

100

Under Rule 144, non-affiliates of an issuer are, among other things, permitted to resell restricted securities after the expiration of a one-year holding period without limitations or requirements as to: (i) The availability of current public information about the issuer or its securities, (ii) the volume of resales, (iii) the manner of sale, or (iv) disclosure.

See

17 CFR 230.144.

101

15 U.S.C. 77

(a)(2), 77q.

We also disagree with the commenters who suggested limitations on secondary sales are contrary to the legislative intent behind the enactment of Title IV of the JOBS Act. We note that Section 3(b)(2) expressly provides that the Commission may impose additional terms, conditions, or requirements as it deems necessary in the public interest and for the protection of investors.

102

For the reasons discussed above, we believe that limiting secondary sales by affiliates is not only consistent with the language and purpose of the statute but also necessary in the public interest and for the protection of investors.

102

See

Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).

Offering Limit Calculation

Under the proposal, if the offering included securities that are convertible into, or exercisable or exchangeable for, other securities (rights to acquire), the offer and sale of the underlying securities also would generally be required to be qualified,

103

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.

104

Consistent with the views of at least one commenter,

105

we are concerned that the proposed requirement could have a greater impact on smaller issuers than larger issuers because smaller issuers frequently issue rights to acquire other securities in capital raising events. The proposed method of calculating the offering limit would presume the exercise price of underlying securities that, by their terms, may occur at a date in the distant future or only upon the occurrence of key events. By including all securities underlying any rights to acquire other securities in the offering limit calculation, the proposed rules could effectively limit the proceeds of an offering available to an issuer by requiring such issuers to include in the aggregate offering price at the time of qualification the securities underlying rights to acquire that may or may not become exercisable or exchangeable in the future. We are adopting final rules that will require issuers to aggregate the price of all securities for which qualification is currently being sought, including the securities underlying any rights to acquire that are convertible, exercisable, or exchangeable within the first year after qualification or at the discretion of the issuer. As such, and consistent with the treatment of rights to acquire in the context of registered offerings, if an offering includes rights to acquire other securities at a time more than one year after qualification and the issuer does not otherwise seek to qualify such underlying securities, the aggregate offering price would not include the aggregate conversion, exercise, or exchange price of the underlying securities.

106

For purposes

of calculating the price of underlying securities that use a pricing formula, as opposed to a known conversion price, the issuer will be required to use the maximum estimated price for which such securities may be converted, exercised, or exchanged.

107

103

Qualification would not be required for securities transactions exempt from registration pursuant to Securities Act Section 3(a)(9), 15 U.S.C. 77c(a)(9). Section 3(a)(9) exempts from registration any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

104

See

note to proposed Rule 251(a).

105

Andreessen/Cowen Letter.

106

See

note to Rule 251(a). In these circumstances, the securities underlying the rights to acquire would need to be separately qualified under Regulation A or, depending on the circumstances, registered, exempt from registration, or otherwise offered in an appropriate manner at the time of issuance.

107

Id.

Rule 251(b)

We are adopting as proposed final rules that eliminate the last sentence of Rule 251(b),

108

which prohibited affiliate resales unless the issuer had net income from continuing operations in at least one of its last two fiscal years. We agree with the views expressed by commenters that the absence of net income, by itself, is not a sufficient indicator of an enhanced risk that existing shareholders will use informational advantages to transfer their holdings to the investing public that would necessitate the continued application of the prohibition in the final rules. Further, as noted in the Proposing Release, the Commission's current disclosure review and qualification processes and enforcement programs are significantly more sophisticated and robust than they were when this provision was added to Regulation A in its original form.

109

In addition, the final rules being adopted today include revised “bad actor” disqualification provisions and additional issuer eligibility requirements aimed at limiting access to the exemption for market participants with demonstrated track records of non-compliance or abuse.

110

108

17 CFR 230.251(b) (2014).

109

See

Proposing Release, at Section II.B.3.

110

See

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

4. Investment Limitation

a. Proposed Rules

Regulation A does not currently limit the amount of securities an investor can purchase in a qualified Regulation A offering. As we noted in the Proposing Release, however, we recognize that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses.

111

To address that risk we proposed, among other things, 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 or their net worth. For this purpose, annual income and net worth would be calculated as provided in the accredited investor definition under Rule 501 of Regulation D.

112

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

113

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.

111

See

Proposing Release, at Section II.B.4.

112

17 CFR 230.501.

113

See

paragraph (a)(5) to Part II of proposed Form 1-A.

b. Comments on Proposed Rules

A number of commenters generally supported investment limitations for Tier 2 offerings.

114

These commenters believed that an investment limitation would serve as an important investor protection. Several commenters recommended revisiting the necessity of the limitations after a one- to three- year trial period,

115

and another commenter

116

recommended extending the investment limitation to Tier 1 offerings to make them more consistent with our proposed rules for securities-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act.

117

Some commenters' support for the proposed investment limitations was conditioned on suggested changes to the proposed rules that would require issuers to do more to ensure compliance with the limitations and that would impose adverse consequences on issuers for the failure to do so.

118

One commenter believed that the 10% limitation is “significantly higher” than is appropriate for “all but the wealthiest, least risk averse” investors.

119

Two commenters suggested that the 10% limitation should be aggregated across all Regulation A offerings instead of being applied on a per offering basis,

120

while one commenter specifically argued against such an aggregated limit.

121

114

CFA Institute Letter; IPA Letter; Letter from Robert Kisel, Small Business Owner, March 18, 2014 (“Kisel Letter”) (erroneously referring to the 10% limit as a 5% limit); MCS Letter; REISA Letter; Richardson Patel Letter; WDFI Letter.

115

CFIRA Letter 1; Kisel Letter; Milken Institute Letter.

116

CFA Institute Letter.

117

See

Crowdfunding, Rel. No. 33-9470 [78 FR 66427] (Nov. 5, 2013).

118

CFA Institute Letter; MCS Letter; WDFI Letter.

119

Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, March 24, 2014 (“CFA Letter”).

120

CFA Letter (not recommending this specifically, but noting this as one reason why the investment limit was not an adequate substitute for state review of Tier 2 offerings); William A. Jacobson, Clinical Professor of Law, Cornell Law School, and Director, Cornell Securities Law Clinic, March 24, 2014 (“Cornell Clinic Letter”).

121

KVCF Letter.

Numerous commenters recommended eliminating the investment limitation for Tier 2 offerings.

122

Several of these commenters alternatively recommended at least doubling the limit if the provision is not eliminated entirely.

123

Other commenters thought that the investment limitation is unnecessary in light of the other investor protections for Tier 2 offerings, such as the expanded disclosure requirements.

124

Several commenters noted that the limit does not have a statutory basis and suggested that it may be contrary to Congressional intent,

125

or contrary to the principles underlying federal securities law, which focus on fraud prevention and full disclosure.

126

One commenter recommended eliminating the investment limitations only if the final rules do not preempt state law registration requirements for Tier 2 offerings, arguing that the limitations may conflict with state investor suitability standards,

127

while another commenter indicated that investment limitations would be unnecessary with appropriate state oversight, but supported limits for retail investors in startup companies and high-risk offerings.

128

Another commenter recommended creating various categories of investor sophistication with corresponding requirements and limitations for each.

129

122

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

123

Fallbrook Technologies Letter; Leading Biosciences Letter; ICBA Letter.

124

ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; MoFo Letter; Paul Hastings Letter; SVB Financial Letter.

125

ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1; Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter.

126

ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken Institute Letter.

127

Groundfloor Letter.

128

NASAA Letter 2.

129

Cornell Clinic Letter (recommending the tiered investment limits in our proposed rules for securities-based crowdfunding as an example).

Many commenters, including those both for and against the investment limit, recommended providing exceptions to the limit for certain types of investors, such as accredited investors, or altering the application of

the limit to such types of investors.

130

These commenters believed that the investor protections afforded by the investment limit would not be necessary for all types of investors or in all types of Regulation A offerings. Some commenters recommended eliminating the investment limit for accredited investors.

131

One such commenter recommended eliminating the investment limit generally and, if not, at least for institutional investors and offerings of securities listed on securities exchanges.

132

Several commenters recommended eliminating the investment limit for non-natural persons or institutional investors.

133

Other commenters recommended eliminating the investment limits for other types of investors or offerings.

134

Two commenters noted that it would be difficult to apply the investment limits to non-natural persons (such as small businesses and IRAs) if the rules use an income or net worth test.

135

One of these commenters recommended that, if the test applies to such investors, it should be based on assets or revenue.

136

130

ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; WR Hambrecht + Co Letter.

131

ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter;

cf.

Cornell Clinic Letter (recommending an unspecified higher limit for accredited investors); Milken Institute Letter; WR Hambrecht + Co Letter (supporting eliminating the investment limit generally).

132

Milken Institute Letter.

133

ABA BLS Letter; Canaccord Letter; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters believed that, as proposed, the investment limitations would not apply to non-natural persons and asked the Commission to confirm or clarify this point.

134

Cornell Clinic Letter (creating a separate, higher limit for institutional investors and other types of non-retail investors included in the “accredited investor” definition); Heritage Letter (eliminating the investment limit for “any current or former investor, employee or officer of the issuer”); Ladd Letter 2 (eliminating the investment limit for any non-accredited affiliates, founders, employees, agents, independent contractors and owners); Milken Institute Letter (eliminating the investment limit for investors that purchase Tier 2 securities on an exchange); Paul Hastings Letter (eliminating the investment limit for offerings conducted by registered broker-dealers); Richardson Patel Letter (eliminating the investment limit for any non-individual investor with at least $100,000 in assets or $100,000 in revenue in the previous fiscal year).

135

McCarter & English Letter; Richardson Patel Letter.

136

Richardson Patel Letter.

Many commenters explicitly supported allowing issuers to rely on an investor's representation of compliance with the 10% investment limit.

137

Most of these commenters stated that any more rigorous verification process would cause the compliance costs to be too high. One commenter recommended eliminating any obligation for the issuer to monitor the 10% investment limit and allowing the issuer to rely on a representation by the investor that he or she will notify the issuer upon exceeding the 10% limit.

138

Another commenter recommended permitting an issuer to rely on representations from its underwriters or broker-dealers as to the 10% investment limit, rather than having to seek this directly from investors.

139

This commenter believed that the issuers in most Tier 2 offerings would have little direct contact with the investors and that the intermediaries would be better positioned to assess compliance (possibly already having information about the investor's finances).

137

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

138

REISA Letter.

139

KVCF Letter.

Several commenters disagreed with allowing investors to represent compliance with the investment limitation and recommended a standard that would require an issuer to do more to ensure compliance.

140

Two commenters recommended adopting a standard requiring issuers to take reasonable steps to verify that the purchasers are in compliance with the 10% investment limit.

141

Two commenters recommended requiring an issuer to have a “reasonable belief” or “reasonable basis” that it can rely on an investor's representation of compliance with the 10% investment limit.

142

One such commenter also suggested allowing accredited investors to exceed the 10% investment limit, but requiring that the issuer take reasonable steps to verify accredited investor status.

143

One commenter recommended requiring a “duty of inquiry” so that the issuer would have to follow-up on any “red flags.”

144

Additionally, this commenter recommended that the Commission create an independent and secure means of verifying investor income or to require a mandatory questionnaire for individual investors to complete before buying a security issued under Regulation A.

140

Letter from Paul Sigelman, President & CEO, Accredited Assurance, March 24, 2014 (“Accredited Assurance Letter”); CFA Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter.

141

Accredited Assurance Letter; WDFI Letter.

142

CFA Institute Letter; MCS Letter.

143

MCS Letter.

144

Cornell Clinic Letter.

c. Final Rules

We are adopting an investment limitation for Tier 2 offerings in the final rules, with minor modifications from the proposed rules. We believe that the investment limitation serves as an important investor protection and may help to mitigate the risk that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses. We do not believe that the limitation is needed for accredited investors because investors that qualify as accredited under our rules satisfy certain criteria that suggest they are capable of protecting themselves in transactions that are exempt from registration under the Securities Act.

145

We also do not believe that the limitation is necessary for investments in securities that will be listed on a national securities exchange upon qualification because of the issuer listing requirements and the potential liquidity that exchanges provide to investors that seek to reduce their holdings. These both are important investor protections that help to mitigate concerns about the magnitude of loss that could potentially result from an investor purchasing a large amount of securities in a single offering.

145

See

Rule 501(a) of Regulation D, 17 CFR 230.501(a);

see also

fns. 721, 722 below.

In response to questions raised by commenters, we are clarifying that non-accredited, non-natural persons are subject to the investment limitation and should calculate the limitation based on no more than 10% of the greater of the purchaser's revenue or net assets (as of the purchaser's most recent fiscal year end).

148

Non-accredited, natural persons must calculate the investment limitations on the basis of 10% of the greater of the purchaser's annual income or net worth (determined as provided in Rule 501 of Regulation D).

149

148

Rule 251(d)(2)(i)(C)(

149

Rule 251(d)(2)(i)(C)(

See

Securities Act Rule 501(a)(5) [17 CFR 230.501(a)(5)] (net worth). Consistent with this rule, the calculation of a natural person's net worth for purposes of the investment limit excludes the value of the primary residence of such person.

If the investor is purchasing securities that are convertible into, or exercisable or exchangeable for, other securities, if such securities are exercisable within a year or otherwise are being qualified, the investment limitation will include the aggregate conversion, exercise, or exchange price of such securities, in addition to the purchase price.

150

We believe this is an appropriate calculation because it is consistent with the offering limit calculation for the respective tiers

151

and because it applies investment limitations to reasonably foreseeable investment decisions (

i.e.,

those involving securities exercisable within a year or otherwise qualified by the issuer) while reducing the risk that issuers may seek to sell large amounts of securities that are convertible, exercisable or exchangeable into other securities in the near term at a low cost in an effort to avoid the 10% limitation.

150

See

note to Rule 251(d)(2)(i).

151

See

discussion in Section II.B.3.c. above.

As proposed, we are adopting final rules that require issuers to notify investors of the investment limitations.

152

Issuers may rely on a representation of compliance with the investment limitation from the investor, unless the issuer knew at the time of sale that any such representation was untrue.

153

As we noted in the Proposing Release, we are cognizant of the privacy issues and practical difficulties associated with verifying individual income and net worth and, therefore, are not requiring investors to disclose personal information to issuers in order to verify compliance.

154

152

See

paragraph (a)(5) to Part II of Form 1-A.

153

Rule 251(d)(2)(i)(D). Similarly, issuers may also rely on representations of investor compliance with the investment limitations from participating broker-dealers, unless the issuer knew at the time of sale that any such representation was untrue.

154

See

Proposing Release, at Section II.B.4.

Some commenters suggested requiring an issuer to have a reasonable belief that it can rely on an investor's representation of compliance with the investment limitations or to take reasonable steps to verify compliance, while other commenters suggested we establish consequences for issuers (and intermediaries, when applicable) if an investor failed to comply with the limitations.

155

At the same time, many commenters supported the proposed approach, noting the low compliance costs and the certainty it would provide issuers and their intermediaries.

156

We believe that the rules, as adopted, will limit potential losses for non-accredited investors with respect to individual offerings, while providing certainty to, and lower compliance costs for, issuers and intermediaries.

155

See

fn. 140-144 above.

156

See

fn. 137 above.

We do not believe that additional requirements for issuers and their intermediaries, such as requiring issuers to take reasonable steps to verify an investors' compliance with the investment limitations, are necessary to protect investors in light of the total package of investor protections included in the final rules for Tier 2 offerings.

157

We believe that additional requirements, like the ones suggested by some commenters, may have an unintended consequence of dissuading issuers from selling to non-accredited investors in Tier 2 offerings by increasing compliance uncertainties and obligations. We are therefore not adopting any additional compliance requirements with respect to investment limitations in the final rules.

157

For example, the final rules include limitations on issuer eligibility, bad actor disqualification provisions, a requirement that offering statements must be qualified by the Commission, narrative and financial disclosure requirements, which for Tier 2 offerings must include audited financial statements on an initial and annual basis, as well as annual, semiannual, and current event reporting.

While many commenters urged the Commission to eliminate or provide less restrictive investment limitations in the final rules,

158

we believe that these requirements, as proposed and adopted, usefully augment other requirements for, and investor protections applicable to, Tier 2 offerings. As we noted in the Proposing Release, Title IV of the JOBS Act mandates certain investor protections

159

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

160

Congress recognized in Section 3(b)(2) that investor protections beyond those expressly provided in 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. . . .” Limiting the amount of securities that a non-accredited investor can purchase in a particular Tier 2 offering (other than a Tier 2 offering of securities listed on a national securities exchange) should help to mitigate concerns that such investors may not be able to absorb the potential loss of the investment and is consistent with the authority granted to the Commission in Section 3(b)(2).

161

We further believe that setting the investment limitation at 10% of the greater of such investor's net worth/net assets and annual income/revenue, as opposed to some other percentage (

e.g.,

5% or 20%), is generally consistent with similar maximum investment limitations placed on investors in Title III of the JOBS Act and will help to set a loss limitation standard in such offerings.

162

158

See

fn. 122 above.

159

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).

160

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).

161

As proposed and adopted, 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 will not be considered an investor that is subject to the investment limitations.

162

Section 301 of the JOBS Act;

see also

Securities Act Section 4(a)(6), 15 U.S.C. 77d(a)(6).

Despite the suggestions of some commenters,

163

we do not believe that further distinctions as to the applicability of investment limitations are appropriate among investors that do not qualify as accredited investors. On the contrary, we believe that the regulatory distinctions among accredited and non-accredited investors and the familiarity many market participants have with such terms will help to ease compliance with, and

determinations about the applicability of, the investment limitations and will avoid unnecessary complexity associated with other, additional distinctions.

163

See

fn. 134 above.

5. Integration

a. Proposed Rules

We proposed amending Rule 251(c) of Regulation A, which governs the integration of Regulation A offerings with other offerings, to provide that offerings under Regulation A would not to be integrated with any of the following:

164

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

• certain specified subsequent offers and sales of securities.

165

See

proposed Rule 251(c), which included in the safe harbor subsequent offers or sales that are registered under the Securities Act, or made pursuant to Securities Act Rule 701, an employee benefit plan, Regulation S, proposed Regulation Crowdfunding (

see

Rel. No. 33-9470), or more than six months after completion of the Regulation A offering.

The proposed safe harbor was substantially the same as the existing integration safe harbor in Rule 251(c), with the addition of a separate provision for securities-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act.

166

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

We further proposed 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)

167

and institutional accredited investors permitted by Section 5(d)

168

of the Securities Act.

169

As proposed, an issuer (and any underwriter, broker, dealer, or agent that is acting on behalf of the issuer in connection with the proposed offering) soliciting interest in a Regulation A offering to persons other than QIBs and institutional accredited investors would need to 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.

170

The Proposing Release also provided guidance on the applicability of the integration doctrine for offerings conducted outside the scope of the safe harbor.

171

167

QIBs are large institutions meeting specific requirements outlined in Rule 144A, or entities the seller (or a person acting on its behalf) reasonably believes to be QIBs.

See

Rule 144A, 17 CFR 230.144A.

168

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

see also

fn. 537 below.

169

Proposed Rule 255(e).

170

Id.

171

See

Proposing Release, Section II.B.5.

b. Comments on the Proposed Rules

One commenter specifically supported the proposed changes to the integration provisions of Regulation A.

172

Another commenter objected to the proposed changes to the integration provisions and related guidance.

173

This commenter cautioned that it would be very difficult to police compliance with these provisions and suggested that they would be used to evade regulatory requirements.

172

ABA BLS Letter.

173

CFA Letter.

c. Final Rules

We are adopting, as proposed, an integration safe harbor, with one clarifying change. Under the final rules, offerings pursuant to Regulation A will not be integrated with:

• Prior offers or sales of securities; or

• subsequent offers and sales of securities that are:

• Registered under the Securities Act, except as provided in Rule 255(c);

• made pursuant to Rule 701 under the Securities Act;

• made pursuant to an employee benefit plan;

• made pursuant to Regulation S;

• made pursuant to Section 4(a)(6) of the Securities Act; or

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

174

Rule 251(c).

We believe that the integration safe harbor has historically provided and, as amended, will continue to provide, issuers, particularly smaller issuers whose capital needs often change, with valuable certainty as to the contours of a given offering and their eligibility for an exemption from Securities Act registration. The addition of subsequent offers or sales made pursuant to Section 4(a)(6), which is the only substantive change to the existing safe harbor being adopted today, should not significantly alter the application of the doctrine in practice. Given the unique capital formation method available to issuers and investors through Section 4(a)(6) of the Securities Act and the small dollar amounts involved, we believe that the addition to the safe harbor list of subsequent crowdfunding offers and sales conducted pursuant to such section is appropriate and will not unduly increase risks to investors.

175

As with any exemption from registration, the burden of proof of compliance with a claimed exemption rests with the party claiming it.

176

In our view, the benefits of providing issuers with certainty as to the scope of the integration doctrine, particularly for Regulation A, outweighs the concern expressed by one commenter that compliance with the doctrine may be difficult to enforce.

177

In light of the broad permissible target audience of Regulation A solicitations, the potential for 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), we believe the integration provisions in the final rule are necessary to ensure that amended Regulation A functions as a viable capital raising option for issuers.

175

See

15 U.S.C.77d(a)(6);

see also

Rel. No. 33-9470.

176

See Ralston Purina Co.,

346 U.S. 119.

177

CFA Letter.

We are also clarifying in the final rules the scope of the proposed safe harbor from integration in instances where an issuer abandons a contemplated Regulation A offering before qualification, but after soliciting interest in such offering to persons other than QIBs and institutional accredited investors. The proposed language could be read to imply that issuers must wait at least 30 calendar days to avoid integration with a subsequent registered offering or else be subject to integration. The final rules clarify that waiting less than 30 calendar days before a subsequent registered offering would not necessarily result in integration and would instead depend on the particular facts and circumstances.

178

See

Note to Rule 251(c) and Rule 255(e);

see also

Section II.D. below for a discussion on solicitation materials.

We are also reaffirming the integration guidance provided in the Proposing Release, which is consistent with guidance provided by the Commission in a 2007 rule proposal on Regulation D.

179

As noted in the Proposing Release,

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

180

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

181

179

See

Revision of Limited Offering Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) (expressing the view that the determination as to whether the filing of the registration statement should be considered to be a general solicitation or general advertising that would affect the availability of an exemption under Securities Act Section 4(a)(2) for such a concurrent unregistered offering should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would otherwise not foreclose the availability of the Section 4(a)(2) exemption).

180

For a concurrent offering under Rule 506(b), an issuer will 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

OTC Markets Letter (highlighting difficulties associated with issuer securities becoming eligible for Depository Trust Company (DTC) services, which services typically limit the number of an issuer's record holders thereby minimizing the impact of the Section 12(g) mandatory registration provisions; further suggesting that companies issuing Regulation A securities be required to use registered transfer agents).

187

B. Riley Letter; Fallbrook Technologies Letter; Milken Institute Letter; MoFo Letter.

188

Ladd Letter 2; WR Hambrecht + Co Letter.

Several commenters recommended changing, delaying, or conditioning the application of Section 12(g)'s registration requirements, especially the corresponding Section 13 reporting obligations that come with registration.

189

One of these commenters recommended delaying the application of Exchange Act reporting requirements for Tier 2 issuers until the issuer's non-affiliate market capitalization reached $250 million, so long as the issuer filed reports under Regulation A.

190

This commenter believed that non-affiliate market capitalization was a superior proxy for market interest than the thresholds under Section 12(g) and noted that the Commission uses the measure in establishing primary S-3 eligibility. Another commenter recommended exempting initial Tier 2 issuers from all or part of Exchange Act reporting obligations until the earliest of the occurrence of several events.

191

Yet another commenter suggested exempting Tier 2 issuers from Exchange Act reporting until they reach a certain unspecified level of revenue or market capitalization.

192

Two commenters recommended deeming Tier 2 issuers' ongoing reports under Regulation A to satisfy the issuer's Exchange Act reporting obligations for a phase-in period.

193

One commenter recommended at least allowing for 2,000 holders of record (whether accredited or not) without being subject to Exchange Act registration requirements,

194

while two other commenters suggested eliminating the cap of 500 non-accredited investors.

195

One commenter conditioned its support for a conditional exemption from Section 12(g) on the Commission requiring Tier 2 issuers to remain current in their ongoing Regulation A reporting requirements.

196

189

Heritage Letter; KVCF Letter; McCarter & English Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA Letter.

190

Paul Hastings Letter.

191

McCarter & English Letter (suggesting the earliest of: (1) The last day of any fiscal year of the issuer during which it had annual gross revenues of $250 million; (2) the last day of any fiscal year following the fifth anniversary of the date of the first sale of equity securities under Regulation A; and (3) the date on which the issuer has an aggregate worldwide market value of voting and non-voting equity held by its non-affiliates of at least $75 million computed as of the last business day of the issuer's most recently completed second quarter).

192

Milken Institute Letter.

193

ABA BLS Letter (a 24 month phase-in period that could expire earlier if the company triggered Exchange Act reporting in some other manner); MoFo Letter.

194

Heritage Letter.

195

KVCF Letter; SBIA Letter.

196

MoFo Letter.

c. Final Rules

We are adopting today final rules that exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in (as of its fiscal year end),

197

its Regulation A

periodic reporting obligations.

198

Additionally, in order for the conditional exemption to apply, issuers are required to engage the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act. The final rules also provide that the exemption from Section 12(g) is only available to companies that meet requirements similar to those in the “smaller reporting company” definition under Securities Act and Exchange Act rules.

199

As such, the conditional exemption in the final rules is limited to issuers that have a public float of less than $75 million, determined as of the last business day of its most recently completed semiannual period,

200

or, in the absence of a public float, annual revenues of less than $50 million, as of the most recently completed fiscal year.

201

An issuer that exceeds either of the thresholds, in addition to exceeding the threshold in Section 12(g) of the Exchange Act, would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all ongoing reports due pursuant to Rule 257 during such period.

202

Section 12(g) registration will only be required if, on the last day of the fiscal year in which the company exceeded the public float or annual revenue threshold, the company has total assets of more than $10 million and the class of equity securities is held by more than 2,000 persons or 500 persons who are not accredited investors.

203

In such circumstances, an issuer that exceeds the thresholds in Section 12(g) and Rule 12g5-1(a)(7) would be required to begin reporting under the Exchange Act the fiscal year immediately following the end of the two-year transition period.

204

An issuer entering Exchange Act reporting will be considered an “emerging growth company” to the extent the issuer otherwise qualifies for such status.

205

197

The determination as to “current” reporting status is determined at the time of fiscal year end in reference to the filing of all periodic reports, including special financial reports, required to be filed during such fiscal year. For these purposes, a newly qualified issuer that at fiscal year end has not yet been obligated to file a periodic report, including, if applicable, a special financial report, would be considered “current” for these purposes.

198

Rule 12g5-1(a)(7).

199

“Smaller reporting company” is defined in Securities Act Rule 405, 17 CFR 230.405, Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1). The provision of the smaller reporting company definition relating to initial registration statements under the Securities Act is not applicable to exempt offering pursuant to Regulation A.

See

Item 10(f)(1)(a)(ii) of Regulation S-K, 17 CFR 229.10(f)(a)(ii). The final rules do not therefore incorporate this concept for purposes of Rule 12g5-1(a)(7).

See

Rule 12g5-1(a)(7).

200

Consistent with the smaller reporting company definition, an issuer will calculate “public float” by multiplying the aggregate worldwide number of shares of its common equity securities held by non-affiliates by the price at which such securities were last sold (or the average bid and asked prices of such securities) in the principal market for such securities. Rule 12g5-1(a)(7).

see also

Rule 251(f). As proposed, and in conjunction with this change, Item 101(c)(6) of Regulation S-T (17 CFR 232.101(c)(6)) is revised so that it no longer prohibits electronic submission of filings related to Regulation A offerings.

•

Part I:

An eXtensible Markup Language (XML) based fillable form, which captures key information about the issuer and its offering using an easy to complete online form, similar to Form D, with drop-down menus, indicator boxes or buttons, and text boxes, and assists issuers in determining their ability to rely on the exemption. The XML-based fillable form will provide a convenient means of assembling and transmitting information to EDGAR, without requiring the issuer to purchase or maintain additional software or technology;

233

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.

•

Part II:

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;

234

and

234

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

See

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

•

Part III:

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

235

Part III (Exhibits) of Form 1-A.

See

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

As proposed and adopted, all other documents required to be submitted or filed with the Commission in conjunction with a Regulation A offering, such as ongoing reports, must generally be submitted or filed electronically on EDGAR.

236

As materials will be available on EDGAR, we do not see a need to separately require issuers to maintain a corporate Web site where the public may access all non-confidential filings. Issuers may, however, elect to provide the filings on their Web site or to their EDGAR filing page. Consistent with current Regulation A, there are no filing fees associated with the Regulation A filing and qualification process.

236

For a discussion on the ongoing reporting requirements,

see

Section II.E. below.

We believe the approach to electronic filing adopted today will be both practical and useful for issuers of Regulation A securities, investors in such securities, and other market participants. Issuers will be able to maintain better control over their filing process, reduce the printing costs associated with filings, obtain immediate confirmation of acceptance of an offering statement, and ultimately save time in the qualification process. Investors will gain real-time access to the information contained in Regulation A filings.

237

We anticipate that 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, electronic filing on EDGAR will allow for more efficient storing, processing, and disseminating of Regulation A filings than paper filings, which should improve the efficiency of the staff review and qualification processes.

237

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

See

discussion in Section II.C.2. below.

Electronic filing also will facilitate the capture of important financial and other information about Regulation A issuers and offerings that will enable the Commission and market participants to analyze any market that develops in Regulation A securities, including, for example, information about 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 Regulation A offerings.

238

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

We appreciate that requiring EDGAR filing will impose some new costs on issuers, as addressed more fully in the Economic Analysis section of the release.

239

We do not, however, believe that the incremental cost associated with the EDGAR filing requirements justifies maintaining a paper-only filing requirement. On the contrary, we believe that the potential additional cost to issuers associated with the EDGAR filing requirement should be minimal and electronic filing on EDGAR would eliminate any processing delays and costs otherwise associated with the current paper filing system, such as printing or mailing costs.

239

See

Section III. below.

(2) Delivery Requirements

We are adopting, as proposed, an access equals delivery model for Regulation A final offering circulars when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on EDGAR. The expanded use of the Internet and continuing technological developments suggest that we should update the final offering circular delivery method for Regulation A in a manner that is consistent with similar updates to delivery requirements for registered offerings.

240

Contrary to the views of some commenters,

241

we do not believe that access to EDGAR generally has proven to be a challenge for investors in registered offerings since the adoption of the Securities Offering Reform Release in 2005. We also do not believe that it will be a challenge for investors under Regulation A or raise investor protection concerns, particularly in light of our final delivery requirements (including, where applicable, the inclusion of hyperlinks to offering materials on EDGAR that must be provided to investors by issuers and intermediaries).

242

Therefore, where sales of Regulation A securities occur

after qualification on the basis of offers made using a preliminary offering circular, issuers and intermediaries can presume that investors have access to the Internet and may satisfy their delivery requirements for the final offering circular by filing it on EDGAR.

243

Issuers are, however, required to include a notice in any preliminary offering circular that will inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically.

244

240

See

Securities Offering Reform, Rel. No. 33-8591.

241

See

fn. 228 above.

242

See

Rule 251(d)(2), Rule 254(a), and Rule 255(b) and (d).

243

Cf.

Rel. No. 33-8591, at 244.

244

See

Rule 254(a).

Further, as proposed, “electronic-only” offerings of Regulation A securities will be permitted under the final rules, provided that issuers and intermediaries comply with relevant Commission guidance.

245

Specifically, in such offerings, an issuer and its participating intermediaries must obtain the consent of investors to, or otherwise be able to evidence the receipt of, the electronic delivery of:

245

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

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), Rel. No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic Media), and Rel. No. 33-7233 (Oct. 6, 1995) [60 FR 53458] (Use of Electronic Media for Delivery Purposes).

• The preliminary offering circular and information other than the final offering circular, in instances where the issuer sells 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 made during the post-qualification period using a final offering circular.

As we noted in the Proposing Release, in light of the proposed requirements for electronic delivery and in order to be consistent with requirements for registered offerings, we believe it appropriate to permit dealers, during the aftermarket delivery period, to be deemed to satisfy their final offering circular delivery requirements if such document is filed and available on EDGAR.

246

We are amending Rule 251(d)(2)(ii) of existing Regulation A to make clear that dealers, like issuers and intermediaries, can also rely on the provisions for access equals delivery.

247

Additionally, the amendment clarifies that a dealer can rely on access equals delivery for a final offering circular provided it complies with the requirements of Rule 251(d)(2)(ii). This clarifying amendment is necessary to avoid any confusion that the final rules could be read to impose a double delivery requirement on dealers during the aftermarket delivery period.

246

See

Proposing Release, at Section II.C.1.

247

See

Rule 251(d)(2)(ii). Notwithstanding the final delivery requirements, broker-dealers remain subject to the anti-fraud provisions of Section 15 of the Exchange Act.

Separately, we are modifying the terms of Rule 251(d)(2)(ii) to make it more consistent with the dealer delivery requirements for registered offerings under Securities Act Rule 174.

248

As proposed, the rules would have required dealers in all circumstances to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification.

249

Consistent with the suggestion of one commenter,

250

we are revising the proposed rules to more closely align the Regulation A delivery requirements with those required in Securities Act Rules 174(b) and (d).

251

We, therefore, are adopting the proposed 90 calendar day dealer delivery requirement, but eliminating the dealer delivery requirement when the issuer is subject immediately prior to filing the offering statement to Tier 2 ongoing reporting

252

and reducing the length of the delivery requirement to 25 calendar days after the later of the qualification date of the offering statement or the first bona fide offering of securities if the securities will be listed on a national securities exchange.

253

As adopted, the final rules reduce dealer aftermarket delivery requirements, which should aid dealers in compliance with the final rules.

248

While we have made clarifying revisions to proposed Rule 251(d)(2)(iii) and renumbered it as Rule 251(d)(2)(ii), the final rule is consistent with Rule 174, as there is no need for an analog to Rule 174(g), which covers the dealer delivery obligations in registered offerings by blank check companies under Rule 174(g). Blank check companies are ineligible issuers under Regulation A.

See

Rule 251(b).

249

See

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

250

Paul Hastings Letter.

251

See

17 CFR 230.174(b), (d).

252

Rule 251(d)(2)(ii)(D);

see also

Securities Act Rule 174(b).

253

Rule 251(d)(2)(ii)(C);

see also

Securities Act Rule 174(d).

The final rules also update and amend Rule 251(d)(2)(i) to align with changes in the prospectus delivery requirements for registered offerings that have occurred since these requirements were last updated in Regulation A.

254

We believe the delivery of the preliminary offering circular to potential investors before they make an investment decision on the basis of information provided during the prequalification period remains an important investor protection that the final rules should preserve, 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, as discussed further in Section II.D. below.

255

We also recognize that updating and amending Regulation A's offering circular delivery requirements will likely benefit market participants by minimizing discrepancies between the requirements of broker-dealers in Regulation A and registered offerings.

254

See

Proposing Release, at Section II.C.1.

255

See

Securities Offering Reform, 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).

We therefore are amending, as proposed, Rule 251(d)(2)(i) to require issuers and participating broker-dealers to deliver only a preliminary offering circular to prospective purchasers

256

at least 48 hours in advance of sale only when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors.

257

To make the final rules more consistent with the requirements of Exchange Act Rule 15c2-8(b) for issuers who already provide continuous, ongoing information to investors and the market, the final rules do not require an issuer or its intermediaries to deliver a preliminary offering circular at least 48 hours in advance of sale where the issuer is already subject to a Tier 2 reporting obligation. In such instances, however, the issuer and its intermediaries will otherwise remain subject to the general delivery requirements of the rules, including compliance with the requirements for making offers pursuant to Rule 251(d)(1) and for including a preliminary offering circular in any solicitation materials used after filing the offering statement with the Commission pursuant to Rule 255. As proposed and adopted, the delivery requirements under the final rules apply to both issuers and

participating broker-dealers.

258

We believe these delivery requirements are an important investor protection that should apply to issuers in advance of sale, in addition to their intermediaries, and is consistent with current Regulation A.

259

We are also adopting, as proposed, the requirement that a final offering circular must accompany or precede any written communications that constitute offers in the post-qualification period.

260

256

Prospective purchasers 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

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

257

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

see

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

et seq.,

the final rules provide that the 48-hour delivery obligation must be made in advance of “sale” rather than the “mailing of the confirmation of sale.”

see also

Proposing Release, at fn. 212.

Under the proposed rules, 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 by emerging growth companies, 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 and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

269

Unlike emerging growth companies in registered offerings, 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.

269

See

proposed Rule 252(f).

b. Comments on Proposed Rules

Commenters were generally supportive of the proposed non-public submission process for Regulation A offerings.

270

One commenter recommended keeping all filings confidential other than the final qualified version and possibly any interim version actually used in conjunction with solicitation materials.

271

Another commenter recommended requiring the inclusion of a legend on non-public offering statements so that the confidentiality of such submissions would be automatic, without the need for a separate confidentiality request,

272

while another commenter recommended treating the proposed non-public submissions the same way that draft registration statements are treated under Title I of the JOBS Act.

273

270

BIO Letter; McCarter & English Letter; Paul Hastings Letter; Richardson Patel Letter.

271

Verrill Dana Letter 1.

272

McCarter & English Letter. The Proposing Release indicated that issuers seeking to non-publicly submit offering statements should submit such statements under cover of the Commission's Rule 83, 17 CFR 200.83, which deals with confidential treatment requests.

273

Milken Institute Letter (recommending that the Commission seek Congressional authority, if necessary, to protect these submissions from requests under the FOIA.

c. Final Rules

We are adopting rules that will, as proposed, provide for the submission of non-public draft offering statements under Regulation A.

274

In a change from the proposal, however, the final rules do not require an issuer seeking non-public staff review of its draft offering statement to submit such draft pursuant to the Commission's Rule 83. Instead, all such draft offering statements under Rule 252(a) shall receive non-public review. The final rules only permit

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 to submit to the Commission a draft offering statement for non-public review. Consistent with the treatment of draft registration statements in registered offerings by emerging growth companies, a non-publicly submitted offering statement must be substantially complete upon submission in order for staff of the Division of Corporation Finance to begin its review. All non-public submissions of draft offering statements must be submitted via EDGAR, and the initial non-public submission, all non-public amendments thereto, and correspondence submitted by or on behalf of the issuer to the Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

274

See

Rule 252(d).

We do not believe, as was suggested by at least one commenter,

275

that requiring issuers to file only the qualified version of the offering statement and any earlier versions used in conjunction with solicitation materials would provide investors with sufficient disclosure to make informed investment decisions. Further, in light of the preemption of state securities laws registration requirements for Tier 2 offerings in the final rules,

276

the 21 calendar day filing requirement will insure that state securities regulators are able to require first-time issuers that non-publicly submit draft offering statements to file such material with them for a minimum of 21 calendar days before any potential sales to investors in their respective states.

277

Unlike emerging growth companies, the timing requirement for filing by issuers seeking qualification under Regulation A does not depend on whether or not the issuer conducts a road show or tests the waters in a contemplated offering before qualification.

278

275

Verrill Dana Letter 1.

276

See

discussion in Section II.H. below.

277

Notwithstanding the final rules that provide for the preemption of state securities laws' registration and qualification requirements of Tier 2 offerings, state securities regulators retain, among other things, their authority to require the filing with them of any documents filed with the Commission.

See, e.g.,

Section 18(c)(2) of the Securities Act. The timing of filing requirements at the state level, however, may reduce the time period in which an offering statement and related materials are on file with the state before Commission qualification.

278

See

Section II.D. below for a discussion on the timing and requirements for the use of solicitation materials under Rule 255. Regulation A's testing the waters provisions encompass a variety of activities, including, but not limited to, activities that could constitute a traditional road show.

Unlike Title I of the JOBS Act, Title IV does not provide for confidential submissions of offering statements under Regulation A.

279

Consequently, the requirements of the FOIA are controlling on the scope of the Commission's ability to adopt confidentiality rules for non-publicly submitted offering statements. We are therefore not adopting any specific additional rule or requirement for non-public submissions that would deem such submissions “confidential.” However, where an issuer seeks confidential treatment for non-publicly submitted offering materials, or any portion thereof, for which it believes an exemption from the FOIA exists, it should continue to do so in compliance with the Commission's Rule 83.

280

279

See

fn. 267 above.

280

See

17 CFR 200.83. Where an issuer seeks confidential treatment of any information included in a publicly filed offering statement or related materials, it should do so in compliance with Securities Act Rule 406.

See

17 CFR 230.406.

See

Rule 251(e) (confidential treatment).

While non-publicly submitted offering statements must be submitted electronically on EDGAR, the

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