[Federal Register Volume 85, Number 62 (Tuesday, March 31, 2020)]
[Proposed Rules]
[Pages 17956-18051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04799]
[[Page 17955]]
Vol. 85
Tuesday,
No. 62
March 31, 2020
Part II
Securities and Exchange Commission
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17 CFR Parts 227, 229, 230, et al.
Facilitating Capital Formation and Expanding Investment Opportunities
by Improving Access to Capital in Private Markets; Proposed Rule
Federal Register / Vol. 85 , No. 62 / Tuesday, March 31, 2020 /
Proposed Rules
[[Page 17956]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 227, 229, 230, 239, 249, 270, and 274
[Release Nos. 33-10763; 34-88321; File No. S7-05-20]
RIN 3235-AM27
Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to facilitate capital formation and increase opportunities for
investors by expanding access to capital for entrepreneurs across the
United States. Specifically, the proposed amendments would simplify,
harmonize, and improve certain aspects of the exempt offering framework
to promote capital formation while preserving or enhancing important
investor protections. Over the years, and particularly since Congress
passed the Jumpstart Our Business Startups Act of 2012, the Commission
has introduced, expanded, or otherwise revised a number of exemptions
from registration. The proposed amendments seek to address gaps and
complexities in the exempt offering framework that may impede access to
investment opportunities for investors and access to capital for
issuers.
DATES: Comments should be received on or before June 1, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-05-20 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-05-20. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Anthony Barone or John Byrne, Special
Counsel, Office of Small Business Policy, or Steven G. Hearne, Senior
Special Counsel, Office of Rulemaking, at (202) 551-3460, Division of
Corporation Finance; Lawrence Pace or Benjamin Kalish, Senior Counsel,
at (202) 551-6792, Division of Investment Management; U.S. Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing to amend or add the
following rules and forms:
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Commission reference CFR citation (17 CFR)
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Regulation Crowdfunding:
Rule 100 through 503.................... Sec. Sec. 227.100 through
227.503.
Rule 100................................ Sec. 227.100.
Rule 201................................ Sec. 227.201.
Rule 204................................ Sec. 227.204.
Rule 206................................ Sec. 227.206.
Rule 503................................ Sec. 227.503.
Securities Act of 1933 (Securities Act):
\1\
Rule 147................................ Sec. 230.147.
Rule 147A............................... Sec. 230.147A.
Rule 148................................ Sec. 230.148.
Rule 152................................ Sec. 230.152.
Rule 155................................ Sec. 230.155.
Rule 241................................ Sec. 230.241.
Regulation A:
Rule 251 through 263.................... Sec. Sec. 230.251 through
230.263.
Rule 251................................ Sec. 230.251.
Rule 255................................ Sec. 230.255.
Rule 259................................ Sec. 230.259.
Rule 262................................ Sec. 230.262.
Regulation D:
Rule 501 through 508.................... Sec. Sec. 230.501 through
230.508.
Rule 502................................ Sec. 230.502.
Rule 504................................ Sec. 230.504.
Rule 506................................ Sec. 230.506.
Regulation S:
Rule 901 through 905.................... Sec. Sec. 230.901 through
230.905.
Rule 902................................ Sec. 230.902.
Rule 906................................ Sec. 230.906.
Regulation S-K:
Item 10 through 1305.................... Sec. Sec. 229.10 through
229.1305.
Item 601................................ Sec. 229.601.
Form S-6................................ Sec. 239.16.
Form N-14............................... Sec. 239.23.
Form 1-A................................ Sec. 239.90.
Form C.................................. Sec. 239.900.
Securities Exchange Act of 1934 (Exchange
Act): \2\
Form 20-F............................... Sec. 249.200f.
Form 8-K................................ Sec. 249.308.
Investment Company Act of 1940 (Investment
Company Act): \3\
Rule 3a-9............................... Sec. 270.3a-9.
Form N-8B-2............................. Sec. 274.12.
Securities Act and Investment Company Act:
Form N-1A............................... Sec. Sec. 239.15A and
274.11A.
Form N-2................................ Sec. Sec. 239.14 and
274.11a-1.
Form N-3................................ Sec. Sec. 239.17a and
274.11b.
Form N-4................................ Sec. Sec. 239.17b and
274.11c.
Form N-5................................ Sec. Sec. 239.24 and
274.5.
Form N-6................................ Sec. Sec. 239.17c and
274.11d.
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Table of Contents
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a-1 et seq.
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I. Introduction
A. Background
B. Overview of Current Exemptions
1. Regulation D
2. Regulation A
3. Regulation Crowdfunding
4. Rule 147 and Rule 147A
II. Discussion of Proposed Amendments
A. Integration
1. Integration Principles
a. General Principle of Integration
b. Application of the General Principle of Integration
2. Integration Safe Harbors
3. Conforming Amendments to Securities Act Exemptions
B. General Solicitation and Offering Communications
1. Exemption From General Solicitation for ``Demo Days'' and
Similar Events
2. Solicitations of Interest
3. Other Regulation Crowdfunding Offering Communications
C. Rule 506(c) Verification Requirements
D. Harmonization of Disclosure Requirements
1. Rule 502(b) of Regulation D
2. Confidential Information Standard
3. Proposed Amendments To Simplify Compliance With Regulation A
E. Offering and Investment Limits
1. Regulation A
2. Rule 504
3. Regulation Crowdfunding
F. Regulation Crowdfunding and Regulation A Eligibility
1. Regulation Crowdfunding Eligible Issuers
[[Page 17957]]
2. Regulation Crowdfunding Eligible Securities
3. Regulation A Eligibility Restrictions for Delinquent Exchange
Act Filers
G. Bad Actor Disqualification Provisions
III. General Request for Comment
IV. Economic Analysis
A. Broad Economic Considerations
B. Baseline
C. Economic Effects of the Proposed Amendments
1. Integration
2. General Solicitation and Offering Communications
3. Rule 506(c) Verification Requirements
4. Disclosure Requirements
5. Offering and Investment Limits
6. Eligibility Requirements in Regulation Crowdfunding and
Regulation A
7. Bad Actor Disqualification Provisions
V. Paperwork Reduction Act
A. Summary of the Collection of Information
B. Summary of the Effects on the Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
VI. Small Business Regulatory Enforcement Fairness Act
VII. Initial Regulatory Flexibility Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Request for Comment
Statutory Authority and Text of Proposed Rule Amendments
I. Introduction
A. Background
The Securities Act requires that every offer \4\ and sale of
securities be registered with the Securities and Exchange Commission
(the ``Commission''), unless an exemption from registration is
available. In various circumstances, registration is not necessary, nor
is it the most effective means, to achieve the objectives of the
Securities Act or the Commission's mission more broadly. In recognition
of the fact that registration is not always necessary or appropriate,
the Securities Act contains a number of exemptions from its
registration requirement and the Commission is authorized to adopt
additional exemptions. As an example, emerging companies--from early-
stage start-ups seeking seed capital to companies that are on a path to
become a public reporting company--may use the exempt offering rules to
access critical capital needed to grow and scale. Our dynamic markets
benefit from a robust pipeline of new companies--supported by the
exempt offering framework--that can one day join the public markets.
The exempt offering framework also supports the capital needs of many
small and medium-sized companies that contribute substantially to our
economy but that are unlikely to become public companies due to their
size, the nature of their capital needs, or other factors.
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\4\ See 15 U.S.C. 77b(a)(3) (noting that an offer includes every
attempt to dispose of a security or interest in a security, for
value; or any solicitation of an offer to buy a security or interest
in a security).
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The scope of exempt offerings has evolved over time through
Commission rules and legislative changes. Significantly, the Jumpstart
Our Business Startups Act of 2012 (``JOBS Act'') greatly expanded the
options to raise capital in exempt offerings.\5\ Since then, the Fixing
America's Surface Transportation Act of 2015 (the ``FAST Act'') \6\ and
the Economic Growth, Regulatory Relief, and Consumer Protection Act of
2018 (the ``Economic Growth Act'') \7\ resulted in further expansions
of, and revisions to, many of our exemptions.\8\ The current exempt
offering framework is complex and made up of differing requirements and
conditions, which may be confusing and difficult for issuers, who bear
the burden of demonstrating the availability of any exemption,\9\ to
navigate. Smaller companies, which may be more likely to rely on these
exemptions given the initial and ongoing costs associated with
conducting a registered offering and becoming a reporting company, may
find the framework particularly difficult to navigate given their more
limited resources.\10\
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\5\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act,
among other things: (1) Directed the Commission to revise Rule 506
to eliminate the prohibition against general solicitation or general
advertising for offers and sales of securities to accredited
investors (See Section 201(a)(1)); (2) added Section 4(a)(6) [15
U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-1(b)] to the
Securities Act and directed the Commission to issue rules to permit
certain crowdfunding offerings (See Section 302); and (3) directed
the Commission to expand Regulation A (See Section 401).
\6\ Public Law 114-94, 129 Stat. 1312 (2015).
\7\ Public Law 115-174, 132 Stat. 1296 (2018).
\8\ The FAST Act added Section 4(a)(7) to the Securities Act [15
U.S.C. 77d(a)(7)], providing a new exemption for private resales of
securities. See Section 76001. Among other changes, the Economic
Growth Act required the Commission to amend Regulation A to permit
entities subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act to use the exemption. See Section 508.
\9\ See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953)
(``Keeping in mind the broadly remedial purposes of federal
securities legislation, imposition of the burden of proof on an
issuer who would plead the exemption seems to us fair and
reasonable.'').
\10\ See, e.g., comments of Sara Hanks, CEO, CrowdCheck, at the
38th Annual SEC Government-Business Forum on Small Business Capital
Formation (Aug. 14, 2019), available at https://www.sec.gov/files/2019-sec-government-business-forum-small-business-capital-formation-transcript.pdf, transcript at 132-135.
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On June 18, 2019, the Commission issued a concept release that
solicited public comment on possible ways to simplify, harmonize, and
improve the exempt offering framework under the Securities Act to
promote capital formation and expand investment opportunities while
maintaining appropriate investor protections.\11\ In the Concept
Release, the Commission noted that the regulatory framework for exempt
offerings has evolved, and the significance of the exempt securities
markets has increased both in terms of the absolute amounts raised and
relative to the public registered markets. In 2019, registered
offerings accounted for $1.2 trillion (30.8 percent) of new capital,
compared to approximately $2.7 trillion (69.2 percent) that we estimate
was raised through exempt offerings.\12\ Of the approximately $2.7
trillion estimated as raised in exempt offerings in 2019, Table 1 shows
the amounts that we estimate were raised under each of the identified
exemptions.\13\
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\11\ Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June
26, 2019)] (``Concept Release'').
\12\ Unless otherwise indicated, information in this release on
Regulation D, Regulation A, and Regulation Crowdfunding offerings is
based on analyses by staff in the Commission's Division of Economic
Risk and Analysis (``DERA'') of data collected from SEC filings. See
Concept Release, at Section II.
\13\ ``Other exempt offerings'' includes Section 4(a)(2),
Regulation S, and Rule 144A offerings. The data used to estimate the
amounts raised in 2019 for other exempt offerings includes: (1)
Offerings under Section 4(a)(2) of the Securities Act that were
collected from Thomson Financial's SDC Platinum, which uses
information from underwriters, issuer websites, and issuer
Commission filings to compile its Private Issues database; (2)
offerings under Regulation S that were collected from Thomson
Financial's SDC Platinum service; and (3) resale offerings under
Rule 144A that were collected from Thomson Financial SDC New Issues
database, Dealogic, the Mergent database, and the
Asset[hyphen]Backed Alert and Commercial Mortgage Alert
publications, to further estimate the exempt offerings under Section
4(a)(2) and Regulation S. We include amounts sold in Rule 144A
resale offerings because those securities are typically issued
initially in a transaction under Section 4(a)(2) or Regulation S but
generally are not included in the Section 4(a)(2) or Regulation S
data identified above. These numbers are accurate only to the extent
that these databases are able to collect such information and may
understate the actual amount of capital raised under these offerings
if issuers and underwriters do not make this data available. The
data on Rule 144A debt offerings from Mergent is available only
through the end of August 2019. We have extrapolated the data to
obtain a full calendar year.
[[Page 17958]]
Table 1--Overview of Amounts Raised in the Exempt Market in 2019
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Amounts reported
or estimated as
Exemption raised in 2019 ($
billion)
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Rule 506(b) of Regulation D......................... $1,492
Rule 506(c) of Regulation D......................... 66
Regulation A: Tier 1................................ 0.044
Regulation A: Tier 2................................ 0.998
Rule 504 of Regulation D............................ 0.228
Regulation Crowdfunding............................. 0.062
Other exempt offerings.............................. 1,167
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The Commission requested comment on several possible approaches to
amend the framework as a whole and to improve specific provisions of
the existing exemptions.\14\ While commenters voiced many perspectives
on what changes would best serve the interests of emerging companies
raising capital, as well as small and medium sized companies more
generally, and the investors in those companies, a consistent theme in
their comments was that many elements of the current structure work
effectively and a major restructuring is not needed.\15\ Many
commenters suggested improvements to the less frequently used capital
raising pathways to improve their efficacy.\16\ Based on the comments
received on the Concept Release, as well as other input from market
participants,\17\ we are proposing a set of amendments that would
generally retain the current exempt offering structure and reduce
potential friction points identified by commenters, which together are
intended to facilitate capital formation while preserving and in some
cases enhancing investor protections. We believe that these amendments
would address gaps and complexities in the exempt offering framework
and help provide viable alternatives to the dominant capital raising
tools, such as offerings to accredited investors under Rule 506(b) of
Regulation D, benefiting issuers and investors by creating an offering
framework that is more consistent, transparent, and manageable, and
that reflects the evolving capital needs of our markets.
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\14\ Unless otherwise indicated, comments cited in this release
are to comment letters received in response to the Concept Release,
which are available at https://www.sec.gov/comments/s7-08-19/s70819.htm.
\15\ See, e.g., letter from AngelList Advisors, LLC dated
September 25, 2019 (``AngelList Letter'') (generally supporting the
exempt offering framework); letter from CrowdCheck, Inc. dated
October 30, 2019 (``CrowdCheck Letter'') (generally supporting
Regulation A and Regulation Crowdfunding); and letter from Crowdfund
Capital Advisors dated September 24, 2019 (``CCA Letter'')
(generally supporting Regulation Crowdfunding). See also
Recommendation of the SEC Small Business Capital Formation Advisory
Committee regarding the exemptive offering framework (Dec. 13,
2019), available at https://www.sec.gov/spotlight/sbcfac/recommendation-harmonization-general-principles.pdf (``2019 Small
Business Advisory Committee Recommendation on the Exemptive Offering
Framework'') (stating that ``[t]he elements of the current exempt
offering framework that are functioning well should be maintained,
and therefore, the Commission should `do no harm' to Rule 506(b) of
Regulation D''); and Report of the 2019 SEC Government-Business
Forum on Small Business Capital Formation (Dec. 2019), available at
https://www.sec.gov/files/small-business-forum-report-2019.pdf
(``2019 Forum Report''), at 4 (noting that panelists discussed the
importance of maintaining the elements of the exempt framework that
are functioning well for marketplace participants, such as the
private placement exemption and Rule 506(b) safe harbor), and at 30
(quoting panelist Bart Dillashaw: ``don't mess with 506(b) because
there is this venture, angel, private investment role that seems to
work pretty well, and certainly a lot of money is raised on it'').
\16\ See, e.g., comment letters discussed in Sections II.B.3,
II.D.3.c, II.F and II.G.
\17\ See, e.g., 2019 Forum Report (recommending that the
Commission improve clarity and education through, among other
things, the use of ``consistent terms in exempt offering rules for
ease of understanding'' and ``bright line rules and examples to
provide clarity for investors, small businesses, and lawyers''); and
2019 Small Business Advisory Committee Recommendation on the
Exemptive Offering Framework (recommending that the exempt framework
should be amended to make it less complex for small businesses to
raise capital).
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We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed rule amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.
B. Overview of Current Exemptions
The Securities Act contains a number of exemptions from its
registration requirements and authorizes the Commission to adopt
additional exemptions. Most of these exemptions are based on
characteristics of the securities themselves, though some exempted
securities are identified based on the transaction in which they are
offered or sold.\18\ Section 4 of the Securities Act identifies
transactions that are exempt from the registration requirements.\19\ In
addition, Section 28 of the Securities Act, which was added by the
National Securities Markets Improvement Act of 1996 (``NSMIA''),\20\
further authorizes the Commission to exempt other persons, securities,
or transactions to the extent ``necessary or appropriate in the public
interest [and] consistent with the protection of investors.'' \21\
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\18\ For example, Section 3(b)(1) of the Securities Act
authorizes the Commission to exempt certain issues of securities
where the aggregate amount offered does not exceed $5 million to the
extent that ``the enforcement of this title with respect to such
securities is not necessary in the public interest and for the
protection of investors by reason of the small amount involved or
the limited character of the public offering.'' 15 U.S.C. 77c(b)(1).
\19\ 15 U.S.C. 77d.
\20\ Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
\21\ 15 U.S.C. 77z-3.
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Table 2 summarizes some of the characteristics of the most commonly
used exemptions \22\ from registration.\23\
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\22\ Commission rules also provide exemptions for certain
offerings where the purpose of the offering is other than to raise
capital. For example, 17 CFR 230.701 (``Rule 701'') exempts certain
sales of securities made to compensate employees, consultants, and
advisors.
\23\ Generally, Table 2 is organized by typical offering size
from largest to smallest. The information in this table is not
comprehensive and is intended only to highlight some of the more
significant aspects of the current rules. Certain regulatory
exemptions from registration are based on statutory provisions, but
provide specific frameworks or safe harbors to comply with the
statutory exemptions. For example, Rule 506(b) provides a safe
harbor to comply with the exemption under Section 4(a)(2) [15 U.S.C.
77d(a)(2)], and Rule 147 provides a safe harbor under Section
3(a)(11) [15 U.S.C. 77c(a)(11)]. An issuer may choose not to avail
itself of one of these specific regulatory exemptions and instead
conduct an offering pursuant to the statutory exemption itself, such
as Section 4(a)(2), following principles-based requirements that
have been developed over time.
Table 2--Overview of Capital-Raising Exemptions
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Preemption of
Offering limit General Issuer Investor SEC filing Restrictions on state
Type of offering within 12-month solicitation requirements requirements requirements resale registration and
period qualification
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Section 4(a)(2).............. None............ No.............. None............ Transactions by None........... Yes. Restricted No.
an issuer not securities.
involving any
public
offering. See
SEC v. Ralston
Purina Co.
Rule 506(b) of Regulation D.. None............ No.............. ``Bad actor'' Unlimited Form D......... Yes. Restricted Yes.
disqualificatio accredited securities.
ns apply. investors. Up
to 35
sophisticated
but non-
accredited
investors.
[[Page 17959]]
Rule 506(c) of Regulation D.. None............ Yes............. ``Bad actor'' Unlimited Form D......... Yes. Restricted Yes.
disqualificatio accredited securities.
ns apply. investors.
Issuer must
take
reasonable
steps to
verify that
all purchasers
are accredited
investors.
Regulation A: Tier 1......... $20 million..... Permitted; U.S. or Canadian None........... Form 1[dash]A, No............. No.
before issuers. including two
qualification, Excludes blank years of
testing-the- check financial
waters companies,* statements.
permitted registered Exit report.
before and investment
after the companies,
offering business
statement is development
filed. companies,
issuers of
certain
securities, and
certain issuers
subject to a
Section 12(j)
order. ``Bad
actor''
disqualificatio
ns apply. No
asset-backed
securities.
Regulation A: Tier 2......... $50 million..... Non-accredited Form 1[dash]A, No............. Yes.
investors are including two
subject to years of
investment audited
limits based financial
on the greater statements.
of annual Annual, semi-
income and net annual,
worth, unless current, and
securities exit reports.
will be listed
on a national
securities
exchange.
Rule 504 of Regulation D..... $5 million...... Permitted in Excludes blank None........... Form D......... Yes. Restricted No.
limited check securities
circumstances. companies, except in
Exchange Act limited
reporting circumstances.
companies, and
investment
companies.
``Bad actor''
disqualificatio
ns apply.
Regulation Crowdfunding; $1.07 million... Permitted with Excludes non- Investment Form C, 12-month resale Yes.
Section 4(a)(6). limits on U.S. issuers, limits based including two limitations.
advertising blank check on the lesser years of
after Form C is companies, of annual financial
filed. Offering Exchange Act income and net statements
must be reporting worth. that are
conducted on an companies, and certified,
internet investment reviewed or
platform companies. audited, as
through a ``Bad actor'' required.
registered disqualificatio Progress and
intermediary. ns apply. annual reports.
Intrastate: Section 3(a)(11). No federal limit Offerees must be In-state Offerees and None........... Securities must No.
(generally, in-state residents purchasers come to rest
individual residents. ``doing must be in- with in-state
state limits business'' and state residents.
between $1 and incorporated in- residents.
$5 million). state; excludes
registered
investment
companies.
Intrastate: Rule 147......... No federal limit Offerees must be In-state Offerees and None........... Yes. Resales No.
(generally, in-state residents purchasers must be within
individual residents. ``doing must be in- state for six
state limits business'' and state months.
between $1 and incorporated in- residents.
$5 million). state; excludes
registered
investment
companies.
Intrastate: Rule 147A........ No federal limit Yes............. In-state Purchasers must None........... Yes. Resales No.
(generally, residents and be in-state must be within
individual ``doing residents. state for six
state limits business'' in- months.
between $1 and state; excludes
$5 million). registered
investment
companies.
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* While the exemptions identified here as excluding blank check companies do not use the term ``blank check company,'' they exclude development stage
issuers 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, which is substantially similar to the definition of blank check company in Securities Act Rule 419, used elsewhere
in Commission rules. See 17 CFR 230.419.
As Table 2 illustrates, the current exemptions impose a variety of
conditions designed to protect investors, including both initial
investors and those purchasing securities in the secondary market.\24\
Exemptions tend to incorporate more investor protection measures where
non-accredited or less sophisticated investors are permitted to
participate in the offering.
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\24\ Resales of securities issued in unregistered offerings are
required to be registered under the Securities Act when no exemption
from registration is available. When resale registration occurs,
purchasers in the secondary market receive the disclosure and other
benefits that accompany registration. In certain cases, including
offers and sales pursuant to the Rule 144 safe harbor under
Securities Act Section 4(a)(1), resales do not require registration.
A key premise of the Rule 144 safe harbor is that once a restricted
security has come to rest for a period of time in the hands of an
investor who is at investment risk, that investor is deemed not to
have purchased the securities with a view to distribution and would
be deemed not to be an underwriter, after meeting Rule 144's holding
period and other conditions, absent a scheme to avoid registration.
Since adopting Rule 144, the Commission has shortened its holding
periods several times. The staff is evaluating whether the current
holding periods are sufficient to protect investors in certain
circumstances, such as the sale of equity securities acquired on
conversion of a debt security held for the applicable holding period
where the conversion price has been structured so that the investor
may not have meaningful investment risk during the holding period
other than issuer bankruptcy.
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[[Page 17960]]
1. Regulation D
Regulation D, adopted in 1982,\25\ is a series of rules that sets
forth three exemptions from the registration requirements of the
Securities Act.\26\ One exemption, Rule 506(b) of Regulation D, is a
non-exclusive safe harbor under Section 4(a)(2) of the Securities Act
pursuant to which an issuer may offer and sell an unlimited amount of
securities, provided that offers are made without the use of general
solicitation or general advertising and sales are made only to
accredited investors and up to 35 non-accredited investors who meet an
investment sophistication standard.\27\ A second exemption, Rule 506(c)
of Regulation D, provides an exemption without any limitation on
offering amount pursuant to which offers may be made through general
solicitation or general advertising, so long as the purchasers in the
offering are limited to accredited investors and the issuer takes
reasonable steps to verify their accredited investor status.\28\
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\25\ Revision of Certain Exemptions From Registration for
Transactions Involving Limited Offers and Sales, Release No. 33-6389
(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (``Regulation D
Adopting Release'').
\26\ Rules 500 through 503 of Regulation D contain the notes,
definitions, terms, and conditions that apply generally throughout
Regulation D. The exemptions and safe harbor of Regulation D are set
forth in Rule 504, Rule 506(b), and Rule 506(c). Rule 507 of
Regulation D is a provision that disqualifies issuers under certain
circumstances from relying on Regulation D for failure to file a
notice of sales on Form D. Rule 508 of Regulation D provides that
certain insignificant deviations from a term, condition, or
requirement of Regulation D will not necessarily result in the loss
of a Regulation D exemption.
\27\ See Rule 506(b)(2)(ii) (stating that each purchaser who is
not an accredited investor either alone or with a purchaser
representative has such knowledge and experience in financial and
business matters that such purchaser is capable of evaluating the
merits and risks of the prospective investment, or the issuer
reasonably believes immediately prior to making any sale that such
purchaser comes within that description).
\28\ The Commission adopted Rule 506(c) in 2013 to implement
Section 201(a) of the JOBS Act. See Eliminating the Prohibition
Against General Solicitation and General Advertising in Rule 506 and
Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013) [78 FR
44771 (Jul. 24, 2013)] (``Rule 506(c) Adopting Release'').
---------------------------------------------------------------------------
Offerings under both Rule 506(b) and Rule 506(c) must satisfy the
conditions of:
Rule 501 (definitions for the terms used in Regulation D);
Rule 502(a) (integration);
Rule 502(d) (limitations on resale); and
Rule 506(d) (``bad actor'' disqualification).
Offerings under Rule 506(b) must also satisfy the conditions of:
Rule 502(b) (type of information to be furnished); and
Rule 502(c) (limitations on the manner of offering).
A third exemption, Rule 504 of Regulation D, provides an exemption
from registration under the Securities Act for the offer and sale of up
to $5 million of securities in a 12-month period.\29\ Rule 504 was
adopted pursuant to the Commission's authority under Section 3(b)(1) of
the Securities Act.\30\ Prior to rule changes adopted by the Commission
in 2016, the aggregate amount of securities that could be offered and
sold in a 12-month period under Rule 504 was $1 million.\31\ In
general, issuers \32\ relying on Rule 504 may not use general
solicitation or advertising to market the securities, and purchasers in
a Rule 504 offering will receive securities subject to the limitations
on resale in Rule 502(d). However, Rule 502(c)'s limitation on manner
of offering and Rule 502(d)'s resale limitations are inapplicable if
the issuer offers and sells the securities in compliance with certain
state registration requirements, public filing, and delivery
requirements or, if sales are made only to accredited investors,
according to state law exemptions from registration that permit general
solicitation and general advertising.\33\
---------------------------------------------------------------------------
\29\ Rule 504.
\30\ 15 U.S.C. 77c(b)(1).
\31\ See Exemptions to Facilitate Intrastate and Regional
Securities Offerings, Release No. 33-10238 (Oct. 26, 2016) [81 FR
83494 (Nov. 21, 2016)] (``Intrastate and Regional Offerings
Release''). The removal of Rule 505 was effective on May 22, 2017.
Rule 505 was an exemption from Securities Act registration that had
been available to both non-reporting and reporting companies so long
as the aggregate offering amount did not exceed $5 million in a 12-
month period and certain other conditions were met.
\32\ See Rule 504(a) (disqualifying entities that are subject to
the reporting requirements of Section 13 or 15(d) of the Exchange
Act, investment companies, or blank check companies from issuing
securities under Rule 504).
\33\ See Rule 504(b)(1).
---------------------------------------------------------------------------
In 2019, issuers in the Regulation D market raised approximately
$1.56 trillion (average proceeds of $25.4 million). The vast majority
of capital raised in this market, approximately $1.5 trillion (average
proceeds of $26.5 million), was raised under Rule 506(b). Out of the
remaining amount, offerings under Rule 506(c) raised approximately $66
billion (average proceeds of $17 million) and offerings under Rule 504
raised approximately $228 million (average proceeds of $0.6 million).
2. Regulation A
Regulation A was originally adopted by the Commission in 1936 as an
exemption for small issuances under the authority of Section 3(b) of
the Securities Act.\34\ Section 401 of the JOBS Act \35\ amended
Section 3(b) of the Securities Act by designating Section 3(b), the
Commission's exemptive authority for offerings of up to $5 million, as
Section 3(b)(1), and adding new Sections 3(b)(2) through 3(b)(5) to the
Securities Act.\36\ Section 3(b)(2) directed the Commission to adopt
rules adding a class of securities exempt from the registration
requirements of the Securities Act for offerings of up to $50 million
of securities within a 12-month period. Sections 3(b)(2) through (5)
specify certain terms and conditions for such exempt offerings and
authorize the Commission to adopt other terms, conditions, or
requirements as necessary in the public interest and for the protection
of investors. In 2015, the Commission adopted final rules to implement
Section 401 of the JOBS Act by creating two tiers of Regulation A
offerings: Tier 1, for offerings of up to $20 million in a 12-month
period; and Tier 2, for offerings of up to $50 million in a 12-month
period.\37\ In 2018, the Commission adopted further amendments to the
issuer eligibility and related provisions pursuant to the Economic
Growth Act to allow issuers that are subject to the ongoing reporting
requirements of Section 13 or 15(d) of the Exchange Act to use the
exemption.\38\ Table 3 broadly summarizes the Commission requirements
for each tier.
---------------------------------------------------------------------------
\34\ See Release No. 33-632 (Jan. 21, 1936).
\35\ See Sec. 401(a), Public Law 112-106, 126 Stat. 306 (Apr. 5,
2012).
\36\ See 15 U.S.C. 77c(b)(2) through (5).
\37\ See Amendments for Small and Additional Issues Exemptions
under the Securities Act (Regulation A), Release No. 33-9741 (March
25, 2015) [80 FR 21806 (Apr. 20, 2015)] (``2015 Regulation A
Release'').
\38\ See Amendments to Regulation A, Release No. 33-10591 (Dec.
19, 2018) [84 FR 520 (Jan. 31, 2019)] (``2018 Regulation A
Release'').
[[Page 17961]]
Table 3--Overview of Regulation A Requirements
------------------------------------------------------------------------
Tier 1 Tier 2
------------------------------------------------------------------------
Issuer Requirements......... U.S. or Canadian issuers; excludes blank
check companies, registered investment
companies, business development
companies, issuers of certain securities,
and certain issuers subject to a Section
12(j) order.
-------------------------------------------
Offering Limit within a 12- $20 million......... $50 million.
month Period.
-------------------------------------------
Offering Communications..... Testing-the-waters permitted before and
after the offering statement is filed.
-------------------------------------------
Investor Limits............. No limits........... Non-accredited
investors are
subject to
investment limits
based on annual
income and net
worth, unless
securities will be
listed on a
national securities
exchange.
SEC Filing Requirements..... Form 1-A filed with Form 1-A filed with
the Commission, the Commission,
including two years including two years
of financial of audited
statements (which financial
may be unaudited). statements.
Restrictions on Resale...... No.................. No.
-------------------------------------------
Disqualification Provisions. Felons and bad actors disqualified in
accordance with Rule 262.
-------------------------------------------
Preemption of State No.................. Yes.
Registration and
Qualification.
Ongoing Reporting........... Exit report due Annual report on
within 30 calendar Form 1-K due within
days after 120 calendar days
termination or of issuer's fiscal
completion of an year end;
offering. Semi-annual report
on Form 1-SA due
within 90 calendar
days after the end
of the first six
months of issuer's
fiscal year;
Current reports on
Form 1-U due within
four business days
of occurrence of
one of the events
specified in that
form; and if
applicable, an exit
report on Form 1-Z
to terminate an
issuer's reporting
obligations.
------------------------------------------------------------------------
The Commission is required by Section 3(b)(5) of the Securities Act
to review the Tier 2 offering limit every two years. In addition to
revisiting the Tier 2 offering limit, the Commission stated in the 2015
Regulation A Release that the staff would undertake to review the Tier
1 offering limit at the same time.\39\ The Commission also stated that
the staff would study and submit a report to the Commission no later
than five years following the adoption of the amendments on the impact
of both Tier 1 and Tier 2 offerings on capital formation and investor
protection.\40\ The staff report on Regulation A, which includes
additional detail on Regulation A, is discussed in Section II.E.1.
---------------------------------------------------------------------------
\39\ See 2015 Regulation A Release, at Section II.A.
\40\ See id. The 2015 Regulation A Release stated that the
report would 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.
---------------------------------------------------------------------------
From June 2015 through December 2019, issuers in the Regulation A
market reported raising approximately $2.4 billion in 382 qualified
offerings. The vast majority of capital raised under Regulation A,
approximately $2.2 billion (90.6 percent), was raised under Tier 2,
with only $230 million (9.4 percent) raised under Tier 1.
3. Regulation Crowdfunding
Title III of the JOBS Act added Securities Act Section 4(a)(6),
which provides an exemption from registration for certain crowdfunding
transactions.\41\ To qualify for the exemption under Section 4(a)(6),
transactions must meet a number of statutory requirements including
limits on the amount an issuer may raise, limits on the amount an
individual may invest and a requirement that the transactions be
conducted through an intermediary that is registered as either a
broker-dealer or a ``funding portal.'' In addition, Title III added
Section 4A to the Securities Act, which requires, among other things,
that issuers and intermediaries that facilitate transactions under
Section 4(a)(6) provide certain specified information to investors and
the Commission. Title III also mandated that the Commission establish
bad actor provisions disqualifying certain issuers from availing
themselves of the Section 4(a)(6) exemption and adopt rules to exempt
from the registration requirements of Section 12(g), either
conditionally or unconditionally, securities acquired pursuant to an
offering under Section 4(a)(6). In 2015, to implement the requirements
of Title III, the Commission adopted Regulation Crowdfunding, which
became effective on May 16, 2016.\42\ On March 31, 2017, the Commission
adjusted for inflation certain thresholds in Regulation Crowdfunding,
as required by Section 4A(h).\43\ From May 2016 through December 2019,
issuers in the Regulation Crowdfunding market reported raising
approximately $170 million in 795 completed offerings (an average of
approximately $0.21 million raised in each offering).
---------------------------------------------------------------------------
\41\ Crowdfunding generally refers to a method of capital
raising in which an entity or individual raises funds via the
internet from a large number of people typically making small
individual contributions.
\42\ See Crowdfunding, Release No. 33-9974 (Oct. 30, 2015) [80
FR 71387 (Nov. 16, 2015)] (``Crowdfunding Adopting Release'').
\43\ See Inflation Adjustments and Other Technical Amendments
under Titles I and III of the JOBS Act (Technical Amendments;
Interpretation), Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
---------------------------------------------------------------------------
4. Rule 147 and Rule 147A
Rule 147 is considered a ``safe harbor'' under Section 3(a)(11) of
the Securities Act and provides objective standards that an issuer can
rely on to meet the
[[Page 17962]]
requirements of that exemption.\44\ The Rule 147 safe harbor was
intended to provide assurances that the intrastate offering exemption
would be used for the purpose Congress intended in enacting Section
3(a)(11), namely the local financing of issuers by investors within the
issuer's state or territory.\45\ Under Rule 147, states retain the
flexibility to adopt requirements that are consistent with their
respective interests in facilitating capital formation and protecting
their resident investors in intrastate securities offerings, including
the authority to impose additional disclosure requirements for offers
and sales made to persons within their state or territory, and the
authority to limit the ability of certain bad actors to rely on
applicable state exemptions.\46\
---------------------------------------------------------------------------
\44\ See Definitions and Clarification of Certain Conditions
Regarding Intrastate Offering Exemption, Release No. 33-5450 (Jan.
7, 1974) [39 FR 2353 (Jan. 21, 1974)] (``Rule 147 Adopting
Release''). See also ``Part of an Issue,'' ``Person Resident,'' and
``Doing Business Within,'' Release No. 33-5349 (Jan. 8, 1973) [38 FR
2468 (Jan. 26, 1973)].
\45\ See Rule 147 Adopting Release. See also Intrastate and
Regional Offerings Release.
\46\ See Intrastate and Regional Offerings Release, at Section
I.
---------------------------------------------------------------------------
Rule 147A is an intrastate offering exemption adopted by the
Commission in 2016 that seeks to accommodate modern business practices
and communications technology and provide an alternative means for
smaller issuers to raise capital locally, including through offerings
relying on intrastate crowdfunding provisions.\47\ Rule 147A was
adopted pursuant to the Commission's general exemptive authority under
Section 28 of the Securities Act and therefore is not subject to the
statutory limitations of Section 3(a)(11). Accordingly, Rule 147A has
no restriction on offers, but requires that all sales be made only to
residents of the issuer's state or territory to ensure the intrastate
nature of the exemption. Rule 147A also does not require issuers to be
incorporated or organized in the same state or territory where the
offering occurs so long as issuers can demonstrate the in-state nature
of their business. Consistent with Rule 147, states retain the
flexibility to adopt requirements that are consistent with their
respective interests in facilitating capital formation and protecting
their resident investors in intrastate securities offerings, including
the authority to impose additional disclosure requirements for offers
and sales made to persons within their state or territory, or the
authority to limit the ability of certain bad actors to rely on
applicable state exemptions.
---------------------------------------------------------------------------
\47\ See Intrastate and Regional Offerings Release.
---------------------------------------------------------------------------
Table 4 broadly summarizes the Commission requirements for each
rule. We refer to ``in-state'' as the state or territory in which the
issuer is resident and doing business at the time of the sale of the
security.
Table 4--Overview of Rule 147 and Rule 147A Requirements
----------------------------------------------------------------------------------------------------------------
Requirements of Rule
147 (safe harbor Requirements of
under Section Rule 147A
3(a)(11))
----------------------------------------------------------------------------------------------------------------
The issuer is organized in-state. (Rule 147(c)(1)(i))................ [check]
The officers, partners, or managers of the issuer primarily direct, [check] [check]
control and coordinate the issuer's activities (``principal place of
business'') in-state. (Rule 147(c)(1); and Rule 147A(c)(1)).........
The issuer satisfies at least one of the ``doing business'' [check] [check]
requirements. (Rule 147(c)(2); and Rule 147A(c)(2)).................
Offers are limited to in-state residents or persons whom the issuer [check]
reasonably believes are in-state residents. (Rule 147(d))...........
Sales are limited to in-state residents or persons whom the issuer [check] [check]
reasonably believes are in-state residents. (Rule 147(d); and Rule
147A(d))............................................................
The issuer obtains a written representation from each purchaser as to [check] [check]
residency. (Rule 147(f)(1)(iii); and Rule 147A(f)(1)(iii))..........
----------------------------------------------------------------------------------------------------------------
II. Discussion of Proposed Amendments
The proposed amendments are intended to address gaps and
complexities in the exempt offering framework that may impede access to
capital for issuers and thereby limit investment opportunities. More
specifically, the amendments would:
Address, in one broadly applicable rule, the ability of
issuers to move from one exemption to another, and ultimately to a
registered offering, providing more certainty to issuers raising
capital;
Provide greater certainty to issuers and protect investors
by setting clear and consistent rules governing offering communications
between investors and issuers;
Address potential gaps and inconsistencies in our rules by
increasing offering and investment limits based on our experience with
the rules, marketplace practices, capital raising trends, and comments
received; and
Harmonize certain disclosure requirements and bad actor
disqualification provisions to reduce differences between exemptions,
while preserving or increasing investor protections.
A. Integration
We are proposing to modernize and simplify the Securities Act
integration framework for registered and exempt offerings. This
framework currently consists of a mixture of rules and Commission
guidance for determining whether multiple securities transactions
should be considered part of the same offering. As the number of
exemptions from registration available to issuers has evolved over time
through Commission rules and legislative changes, the integration
framework has grown more complex. This complexity has allowed for
regulatory uncertainty to develop, especially as issuers grow, and
transition between utilizing types of exempt and registered offerings.
The proposed amendments, discussed in Table 5 below, seek to improve
the integration framework to allow an efficient path to capital
formation, while preserving the investor protections in the exemptions
from registration.
[[Page 17963]]
The Commission first articulated the integration concept in 1933
and further developed it in two interpretive releases issued in the
1960s.\48\ The interpretive releases state that determining whether a
particular securities offering should be integrated with another
offering requires an analysis of the specific facts and circumstances
of the offerings. The Commission identified five factors to consider in
determining whether the offerings should be integrated. The five
factors are whether: (1) The different offerings are part of a single
plan of financing, (2) the offerings involve issuance of the same class
of security, (3) the offerings are made at or about the same time, (4)
the same type of consideration is to be received, and (5) the offerings
are made for the same general purpose.\49\ A common critique of this
five factor analysis is that the Commission did not assign any specific
weights to any of the five factors, nor indicate how many of the
factors need to be present in order for there to be integration.\50\
---------------------------------------------------------------------------
\48\ See SEC Release No. 33-97 (Dec. 28, 1933); Section 3(a)(11)
Exemption for Local Offerings, Release No. 33-4434 (Dec. 6, 1961)
[26 FR 11896 (Dec, 13, 1961)] (``Section 3(a)(11) Release''); and
Non-Public Offering Exemption, Release No. 33-4552 (Nov. 6, 1962)
[27 FR 11316 (Nov. 16, 1962)] (``Non-Public Offering Exemption
Release'').
\49\ See Rule 502(a); Section 3(a)(11) Release; and Non-Public
Offering Exemption Release.
\50\ See Stanley Keller, Integration of Private and Public
Offerings 2019 (March 2019) at page 6 (``The five factor test has
not brought certainty to the area because its application is
subjective and the staff has not provided definitive guidance as to
what weight to give to the various factors or indeed how many of
them have to be met.''). See also ABA Task Force Report on
``Integration of Securities Offerings,'' 41 Bus. Law. 595 (1986)
(proposing an integration safe harbor rule to provide increased
certainty).
---------------------------------------------------------------------------
In 1982, the Commission relied on the five factor test in
establishing the framework used to determine whether two offerings that
fall outside of the Rule 502(a) safe harbor should be integrated and
treated as one offering.\51\ Rule 506(b) of Regulation D is by far the
most commonly used exemption from registration. As a result,
application of the integration framework in Rule 502(a) tends to be the
predominant means to analyze whether two offerings should be integrated
if the exemption relied upon does not have its own specific integration
provision. Notwithstanding the fact that Rule 502(a) only applies to
Regulation D offerings, the integration framework in Rule 502(a) is
often referred to when considering integration issues arising in other
exempt offerings which do not have their own integration guidelines,
such as Section 4(a)(2).
---------------------------------------------------------------------------
\51\ See Regulation D Adopting Release.
---------------------------------------------------------------------------
In 2007 guidance, the Commission set forth a framework other than
the five factor test for analyzing the integration of simultaneous
registered and private offerings.\52\ The Commission noted that the
determination as to whether the filing of a registration statement
should be considered to be a general solicitation or general
advertising that would affect the availability of the Section 4(a)(2)
exemption for a concurrent private placement should be based on a
consideration of whether the investors in the private placement were
solicited by the registration statement or through some other means
that would not foreclose the availability of the Section 4(a)(2)
exemption.\53\ The Commission stated that issuers should analyze
whether the offering is exempt under Section 4(a)(2) ``on its own,''
including whether securities were offered and sold to the private
placement investors through the means of a general solicitation in the
form of the registration statement.\54\
---------------------------------------------------------------------------
\52\ See Revisions of Limited Offering Exemptions in Regulation
D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]
(``Regulation D Proposing Release''), at Section II.C.1.
\53\ Id.
\54\ Id. The Commission provided the following examples: If an
issuer files a registration statement and then seeks to offer and
sell securities without registration to an investor who became
interested in the purportedly private placement offering by means of
the registration statement, then the Section 4(a)(2) exemption would
not be available for that offering. If the prospective private
placement investor became interested in the concurrent private
placement through some means other than the registration statement
that was consistent with Section 4(a)(2), such as through a
substantive, pre-existing relationship with the issuer or direct
contact by the issuer or its agents outside of the public offering
effort, then the filing of the registration statement generally
would not impact the potential availability of the Section 4(a)(2)
exemption for that private placement and the private placement could
be conducted while the registration statement for the public
offering was on file with the Commission. Similarly, if the issuer
is able to solicit interest in a concurrent private placement by
contacting prospective investors who (1) were not identified or
contacted through the marketing of the public offering and (2) did
not independently contact the issuer as a result of the general
solicitation by means of the registration statement, then the
private placement could be conducted in accordance with Section
4(a)(2) while the registration statement for a separate public
offering was pending.
---------------------------------------------------------------------------
More recently, in connection with the Regulation A and Regulation
Crowdfunding rulemakings in 2015 and the Rule 147 and Rule 147A
rulemaking in 2016, the Commission set forth a facts and circumstances
integration framework in the context of concurrent exempt offerings.
The facts and circumstances integration framework includes situations
where one offering permits general solicitation and the other does not,
as well as situations where both offerings rely on exemptions
permitting general solicitation.\55\ Under this analysis, where an
integration safe harbor is not available, integration of concurrent or
subsequent offers and sales of securities with any offering conducted
under Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A
will depend on the particular facts and circumstances, including
whether each offering complies with the requirements of the exemption
that is being relied on for the particular offering.
---------------------------------------------------------------------------
\55\ See 2015 Regulation A Release, at Section II.B.5;
Crowdfunding Adopting Release, at Section II.A.1.c; and Intrastate
and Regional Offerings Release, at Section II.B.5.
---------------------------------------------------------------------------
Commenters on the Concept Release generally supported clarifying
and modernizing the existing integration standards.\56\ One commenter
suggested that the current approach to integration using the five
factor test is ``unnecessarily complex, and both issuers and investors
would benefit from more clarity as to the scope of the integration
doctrine, particularly in the context of Regulation D.'' \57\ Some
commenters supported using the approach to integration in the
Commission's recent rulemakings as the basis for a more comprehensive,
general integration rule.\58\ One of these
[[Page 17964]]
commenters explained that the approach to analyzing integration issues
reflected in these recent rulemakings also ``preserves the investor
protections of each exemption'' while providing issuers with more
certainty in planning their offerings under ``changing circumstances,
markets and environments.'' \59\ Other commenters, as well as the 2016,
2017, and 2018 Government-Business Forums on Small Business Capital
Formation (``Small Business Forums''), also recommended that the
Commission provide additional clarity about the integration of exempt
offerings in which general solicitation is permitted--such as Rule
506(c) offerings.\60\
---------------------------------------------------------------------------
\56\ See, e.g., letter from Davis Polk & Wardwell LLP dated
September 24, 2019 (``Davis Polk Letter''); letter from Dechert LLP
dated September 24, 2019 (``Dechert Letter''); CrowdCheck Letter;
letter from Securities Industry and Financial Markets Association
dated September 24, 2019 (``SIFMA Letter''); and 2019 Small Business
Advisory Committee Recommendation on the Exemptive Offering
Framework (stating ``Integration should be revised so that the
exemptions can be better utilized.''). But see letter from Public
Investors Advocate Bar Association dated September 24, 2019 (``PIABA
Letter'') (positing that shortening the six month period in Rule
502(a) would ``serve to promote'' Ponzi schemes); and letter from
North American Securities Administrators Association dated October
11, 2019 (``NASAA Letter'') (positing that ``loosening'' integration
safe harbors would ``increase the likelihood of regulatory arbitrage
or create gaps in the investor protection landscape'').
\57\ See letter from Center for Capital Markets Competitiveness
dated September 24, 2019 (``CCMC Letter'') (indicating that the
uncertainty surrounding the current integration doctrine creates a
``barrier to companies seeking to raise capital'').
\58\ See, e.g., Davis Polk Letter (generally ``welcom[ing]
harmonizing exempt offerings with more bright-line rules,'' while
noting that ``as long as each Exempt Offering complies with its
applicable rules, effective deregulation should result in each
offering standing on its own''); Dechert Letter; letter from
Committee on Securities Regulation of the Business Law Section of
the New York State Bar Association dated October 16, 2019 (``NYSBA
Letter''); CrowdCheck Letter; letter from Federal Regulation of
Securities Committee of the Business Law Section of the American Bar
Association dated October 16, 2019 (``ABA Letter''); and CCMC Letter
(supporting one integration doctrine along the lines of the analysis
articulated in connection with Regulation A and Rules 147 and
147A.).
\59\ See Dechert Letter.
\60\ See, e.g., Davis Polk Letter (noting that ``the current
language of Rule 152 does not provide an integration safe harbor for
an issuer that conducts a Rule 506(c) offering and then subsequently
engages in a registered offering''); Dechert Letter (suggesting that
Rule 152 be amended to account for Rule 506(c)); and ABA Letter
(supporting broadening Rule 152 so that it applies to offerings
under Rule 506(b) and Rule 506(c)). See also Final Report of the
2016 SEC Government-Business Forum on Small Business Capital
Formation (March 2017), available at https://www.sec.gov/info/smallbus/gbfor35.pdf (``2016 Forum Report''); Final Report of the
2017 SEC Government-Business Forum on Small Business Capital
Formation (March 2018), available at https://www.sec.gov/files/gbfor36.pdf (``2017 Forum Report''); and Final Report of the 2018
SEC Government-Business Forum on Small Business Capital Formation
(June 2019), available at https://www.sec.gov/info/smallbus/gbfor37.pdf (``2018 Forum Report'') (all three forums recommending
that the Commission clarify that Rule 152 applies to a Rule 506(c)
offering so that an issuer using Rule 506(c) may subsequently engage
in a registered public offering without adversely affecting the Rule
506(c) offering exemption).
---------------------------------------------------------------------------
We believe that statutory and regulatory changes to the Securities
Act exemptive scheme, including those arising from the JOBS Act,
developments in the capital markets, and the evolution of
communications technology compel a further examination of the
integration framework and its application throughout the Securities Act
rules. The proposed rules would build upon the approach to integration
in the Commission's recent rulemakings and provide comprehensive rules
applicable to all securities offerings under the Securities Act,
including registered and exempt offerings.
Providing additional clarity on how securities offerings
interrelate, including the relationship between exempt and registered
offerings and when two or more securities offerings will be considered
integrated as one offering, should reduce uncertainty and perceived
risk among issuers when considering and planning possible capital
raising alternatives, while preserving investor protections built into
the respective offering exemptions. We also believe that providing
greater certainty to issuers on how securities offerings interrelate
and the flexibility to choose between types of offerings may encourage
issuers to raise more capital in the securities markets, including in
registered offerings.\61\
---------------------------------------------------------------------------
\61\ See, e.g., CCMC Letter.
---------------------------------------------------------------------------
We are proposing to amend the current integration framework to
better facilitate the determination as to whether separate sales of
securities are part of the same offering (i.e., are considered
integrated).\62\ Our proposed integration framework provides a general
principle of integration that looks to the particular facts and
circumstances of the offering, and focuses the analysis on whether the
issuer can establish that each offering either complies with the
registration requirements of the Securities Act, or that an exemption
from registration is available for the particular offering. To assist
in the application of the general principle, we are proposing
provisions applying this general principle to specific fact patterns.
To provide additional clarity, we are proposing four non-exclusive safe
harbor integration provisions. The following tables provide an overview
of the proposed general integration principle and safe harbors
discussed in this section.
---------------------------------------------------------------------------
\62\ The focus of this release is on several exemptions from
registration under the Securities Act that facilitate capital
raising. We are not proposing to extend these rules to business
combination transactions, for which we have already adopted rules or
provided guidance that will continue to apply. See, e.g., Rule 165
[17 CFR 230.165].
Table 5--Overview of the Proposed General Integration Principle and Safe Harbors
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Integration Principle
----------------------------------------------------------------------------------------------------------------
General Principle of Integration....... For all offerings not covered by a safe harbor, offers and sales would
not be integrated if, based on the particular facts and circumstances,
the issuer can establish that each offering either complies with the
registration requirements of the Securities Act, or that an exemption
from registration is available for the particular offering.
Application of the General Principle to The issuer must have a reasonable belief, based on the facts and
exempt offerings where general circumstances, that: (1) The purchasers in each exempt offering were
solicitation is not permitted. not solicited through the use of general solicitation; or (2) the
purchasers in each exempt offering established a substantive
relationship with the issuer (or person acting on the issuer's behalf)
prior to the commencement of the offering not permitting general
solicitation.
Application of the General Principle to If an exempt offering permitting general solicitation includes
concurrent exempt offerings that each information about the material terms of a concurrent offering under
allow general solicitation. another exemption also permitting general solicitation, the offering
materials must include the necessary legends for, and otherwise comply
with, the requirements of each exemption.
----------------------------------------------------------------------------------------------------------------
Non-Exclusive Integration Safe Harbors
----------------------------------------------------------------------------------------------------------------
Safe Harbor 1.......................... Any offering made more than 30 calendar days before the commencement of
any other offering, or more than 30 calendar days after the
termination or completion of any other offering, would not be
integrated; provided that, for an exempt offering for which general
solicitation is not permitted, the purchasers either were not
solicited through the use of general solicitation, or established a
substantive relationship with the issuer prior to the commencement of
the offering for which general solicitation is not permitted.
Safe Harbor 2.......................... Offers and sales made in compliance with Rule 701, pursuant to an
employee benefit plan, or in compliance with Regulation S would not be
integrated with other offerings.
Safe Harbor 3.......................... An offering for which a Securities Act registration statement has been
filed would not be integrated if made subsequent to: (i) A terminated
or completed offering for which general solicitation is not permitted;
(ii) a terminated or completed offering for which general solicitation
is permitted and made only to qualified institutional buyers
(``QIBs'') \63\ and institutional accredited investors (``IAIs'');
\64\ or (iii) an offering for which general solicitation is permitted
that terminated or completed more than 30 calendar days prior to the
commencement of the registered offering.
[[Page 17965]]
Safe Harbor 4.......................... Offers and sales made in reliance on an exemption for which general
solicitation is permitted would not be integrated if made subsequent
to any prior terminated or completed offering.
----------------------------------------------------------------------------------------------------------------
The proposed integration framework and safe harbor provisions would
be set forth in new Rule 152, which would replace current Rules 152 and
155 concerning the integration of non-public and public offerings.\65\
Consistent with current Rule 155, proposed Rule 152 would specify that
the safe harbors are not available to any issuer for any transaction or
series of transactions that, although in technical compliance with the
rule, is part of a plan or scheme to evade the registration
requirements of the Securities Act. Finally, to ensure consistency in
the application of the integration framework across exemptions, we are
proposing to replace the integration provisions of Regulation D,
Regulation A, Regulation Crowdfunding, and Rules 147 and 147A with
references to proposed Rule 152.
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\63\ See 17 CFR 230.144(a)(1) (defining ``qualified
institutional buyer'').
\64\ See Rule 501(a)(1), (2), (3), (7) and (8) (listing entities
that are considered ``institutional accredited investors'').
\65\ As a result of the proposed changes, we are proposing to
remove and reserve Rule 155.
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1. Integration Principles
We are proposing to establish a general principle of integration
that would require an issuer to consider the particular facts and
circumstances of each offering, including whether the issuer can
establish that each offering either complies with the registration
requirements of the Securities Act, or that an exemption from
registration is available for the particular offering. We also are
proposing two provisions applying this general principle to specific
fact patterns.
a. General Principle of Integration
Based on our review of the existing integration framework and after
consideration of comments, we are proposing to revise Rule 152 to
provide a general principle of integration based upon a facts and
circumstances analysis that codifies Commission guidance on integration
originally provided in 2007. The general principle of integration, as
set forth in proposed paragraph (a) of Rule 152 would apply to all
offers and sales of securities not covered by one of the four safe
harbors set forth in proposed paragraph (b) of Rule 152, which we
describe below. Specifically, our proposed general principle of
integration provides that offers and sales will not be integrated if,
based on the particular facts and circumstances, the issuer can
establish that each offering either complies with the registration
requirements of the Securities Act, or that an exemption from
registration is available for the particular offering. This proposed
facts and circumstances analysis of integration would replace the
traditional five factor test first articulated by the Commission in
1962.
b. Application of the General Principle of Integration
We also propose to include two provisions applying the general
integration principles that would supplement and provide greater
specificity to the facts and circumstances analysis:
For an exempt offering for which general solicitation is
not permitted, offers and sales will not be integrated with other
offerings if the issuer has a reasonable belief, based on the facts and
circumstances, that (i) the purchasers in each exempt offering were not
solicited through the use of general solicitation, or (ii) the
purchasers in each exempt offering established a substantive
relationship with the issuer (or person acting on the issuer's behalf)
prior to the commencement of the offering not permitting general
solicitation; and
For an exempt offering permitting general solicitation
that includes information about the material terms of a concurrent
offering under another exemption also permitting general solicitation,
the offering materials must include the necessary legends for, and
otherwise comply with, the requirements of each exemption.
Integration With Exempt Offering for Which General Solicitation Is Not
Permitted
Proposed Rule 152(a)(1) would codify Commission guidance first
issued in 2007 in the context of setting forth a framework for
analyzing how an issuer can conduct simultaneous registered and private
offerings.\66\ In that guidance, the Commission noted that the
determination as to whether the filing of a registration statement
should be considered to be a general solicitation or general
advertising that would affect the availability of the Section 4(a)(2)
exemption for a concurrent private placement should be based on a
consideration of whether the investors in the private placement were
solicited by the registration statement or through some other means
that would not foreclose the availability of the Section 4(a)(2)
exemption.\67\ In 2015 and 2016, the Commission provided additional
guidance and indicated that, 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 an offering made in reliance on
Regulation A, Regulation Crowdfunding, Rule 147, or Rule 147A.\68\
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\66\ See Regulation D Proposing Release.
\67\ Id.
\68\ For a concurrent offering under Rule 506(b), purchasers in
the Rule 506(b) offering could not be solicited by means of a
general solicitation under Regulation A (including any ``testing-
the-waters'' communications), Regulation Crowdfunding, or Rule 147
or 147A. The issuer would need an alternative means of establishing
how purchasers in the Rule 506(b) offering were solicited. For
example, the issuer may have had a pre-existing substantive
relationship with such purchasers. See 2015 Regulation A Release, at
Section II.B.5; Crowdfunding Adopting Release, at Section II.A.1.c;
and Intrastate and Regional Offerings Release, at Section II.B.5.
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Commenters supported allowing concurrent exempt offerings, where
one offering permits general solicitation such as Rule 506(c), and the
other prohibits general solicitation, such as Rule 506(b).\69\ Proposed
Rule 152(a)(1) would codify the position that an issuer may conduct
such concurrent offerings without integration concerns, provided that
for an offering prohibiting general solicitation the issuer has a
reasonable belief, based on the facts and circumstances, that the
purchasers in each exempt offering were not solicited through the use
of general solicitation or the purchasers in each exempt offering
established a substantive relationship with the issuer (or person
acting on the issuer's behalf) prior to the commencement of the
offering not permitting general solicitation. The most common scenario
entails an issuer conducting a registered offering while also
soliciting investors for a concurrent Rule 506(b) or Section 4(a)(2)
offering. For example, an issuer filing a Securities Act registration
statement with the Commission would be able to conduct a concurrent
Rule 506(b) offering if it reasonably believes that the
[[Page 17966]]
investors in the Rule 506(b) offering were not solicited by the
registration statement nor became interested in the concurrent offering
through the use of general solicitation in connection with the
registered offering.
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\69\ See, e.g., Davis-Polk Letter, and letter from CoinList
dated September 26, 2019 (``CoinList Letter''); see also the 2016
Forum Report, the 2017 Forum Report, and the 2018 Forum Report.
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Investors with whom the issuer has a pre-existing substantive
relationship may include the issuer's existing or prior investors,
investors in prior deals of the issuer's management, or friends or
family of the issuer's control persons. For example, proposed Rule
152(a)(1)(ii) would allow a purchaser with whom the issuer has a pre-
existing substantive relationship to become aware of the issuer's
registered offering due to the marketing of the offering, and still
participate in a concurrent or subsequent private offering by the
issuer in reliance on an exemption prohibiting general solicitation.
However, a pre-existing substantive relationship is not the exclusive
means of demonstrating the absence of a general solicitation. For
example, the issuer could sell in reliance on Rule 506(b) or Section
4(a)(2) only to investors whom the issuer or its agents contacted
outside of its public offering, or general solicitation effort.\70\
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\70\ See, e.g., Regulation D Proposing Release, at text
accompanying notes 127-128. Whether there has been a general
solicitation is a fact-specific determination. In general, the
greater the number of persons without financial experience,
sophistication, or any prior personal or business relationship with
the issuer that are contacted by an issuer or persons acting on its
behalf through impersonal, non-selective means of communication, the
more likely the communications are part of a general solicitation.
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Proposed Rule 152(a)(1) would also apply to an offering made under
an exemption from registration for which general solicitation is
prohibited that follows a registered offering or an offering that
permits general solicitation. For example, an offering conducted in
reliance on Rule 506(c) and a subsequent offering conducted in reliance
on Rule 506(b) would not be integrated if the investors in the Rule
506(b) offering were not solicited through the use of general
solicitation in connection with the Rule 506(c) offering, or if the
investors established a substantive relationship with the issuer (or
person acting on the issuer's behalf) prior to the commencement of the
Rule 506(b) offering.
In general, we view a ``pre-existing'' relationship as one that the
issuer has formed with an offeree prior to the commencement of the
securities offering or, alternatively, that was established through
another person (for example a registered broker-dealer or investment
adviser) prior to that person's participation in the offering.\71\ A
``substantive'' relationship is one in which the issuer (or a person
acting on its behalf, such as a registered broker-dealer or investment
adviser) has sufficient information to evaluate, and does, in fact,
evaluate, an offeree's financial circumstances and sophistication, in
determining his or her status as an accredited or sophisticated
investor.\72\
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\71\ Certain offerings by private funds that rely on the
exclusions from the definition of ``investment company'' set forth
in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act posted
on a website platform may be able to rely on a limited staff
accommodation with respect to the timing of the formation of a
relationship. See Division of Corporation Finance no-action letter
to Lamp Technologies, Inc. (May 29, 1997).
\72\ We do not believe that self-certification alone (by
checking a box) without any other knowledge of a person's financial
circumstances or sophistication would be sufficient to form a
``substantive'' relationship for these purposes.
Persons other than registered broker-dealers and investment
advisers may form a pre-existing, substantive relationship with an
offeree as a means of establishing that a general solicitation is
not involved in a Regulation D offering. Generally, whether a ``pre-
existing, substantive relationship'' exists turns on procedures
established by broker-dealers in connection with their customers.
This is because traditional broker-dealer relationships require that
a broker-dealer deal fairly with, and make suitable recommendations
to, customers, and, thus, implies that a substantive relationship
exists between the broker-dealer and its customers. We have long
stated, however, that the presence or absence of a general
solicitation is always dependent on the facts and circumstances of
each particular case. Thus, there may be facts and circumstances in
which a third party, other than a registered broker-dealer, could
establish a ``pre-existing, substantive relationship'' sufficient to
avoid a ``general solicitation.'' See, e.g., Use of Electronic
Media, Release No. 7856 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]
(``Use of Electronic Media Release'').
We also recognize there may be particular instances where
issuers may develop pre-existing, substantive relationships with
offerees. However, in the absence of a prior business relationship
or a recognized legal duty to offerees, it is likely more difficult
for an issuer to establish a pre-existing, substantive relationship,
especially when contemplating or engaged in an offering over the
internet. Issuers would have to consider not only whether they have
sufficient information about particular offerees, but also whether
they in fact use that information appropriately to evaluate the
financial circumstances and sophistication of the offerees prior to
commencing the offering.
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Integration With Exempt Offerings for Which General Solicitation Is
Permitted
Proposed Rule 152(a)(2) builds upon the guidance set forth by the
Commission in its 2015 Regulation A and Regulation Crowdfunding
rulemakings and in its 2016 Rule 147 and Rule 147A rulemaking. In the
context of two concurrent offerings each relying on a Securities Act
exemption permitting general solicitation,\73\ proposed Rule 152(a)(2)
would clarify that if an issuer's general solicitation materials for
one offering discuss the material terms \74\ of another concurrent
offering, the offering materials must include the necessary legends
for, and otherwise comply with, the requirements of each exemption.\75\
This would provide issuers with greater flexibility and the ability to
more effectively use existing Securities Act exemptions without
compromising the investor protections included in the requirements of
each exemption.
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\73\ For example, Rule 506(c), Regulation A, and Regulation
Crowdfunding. Concurrent offerings permitting general solicitation
may also include intrastate or regional offerings relying on Rules
147 and 147A or Rule 504(b)(1)(i), (ii) or (iii), all of which
permit general solicitation but also require compliance with state
registration requirements or exemptions to state registration under
state securities laws. However, an issuer would not be able to
describe the terms of a Rule 147 offering using any form of general
solicitation viewable by out-of-state residents, as this would
constitute an offer by the issuer to residents residing out of the
state in which the issuer has its principal place of business, which
is prohibited by the Rule 147 safe harbor for a valid Section
3(a)(11) exempt offering.
\74\ Depending on the facts and circumstances, the material
terms of the offering could include the amount of the securities
offered, the nature of the securities, the price of the securities,
and the closing date of the offering period. See Rule 204 of
Regulation Crowdfunding.
\75\ For example, the limitations imposed on advertising the
terms of the offering pursuant to Rule 204 of Regulation
Crowdfunding would limit the issuer's general solicitation
referencing the terms of that offering in a concurrent offering made
pursuant to Regulation A, Rule 506(c), or Rule 147A. See Concept
Release, at text accompanying note 483. In the case of a Regulation
A offering, a Form 1-A filed with the Commission that discusses the
material terms of a concurrent offering by the same issuer under
Regulation Crowdfunding would not comply with the limitations on
advertising in Rule 204.
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For example, under the proposed rule, an issuer may undertake an
offering in reliance on Rule 506(c), so long as the issuer meets all of
the conditions to that exemption, including taking reasonable steps to
verify that all purchasers in the Rule 506(c) offering are accredited
investors, while conducting a concurrent offering in reliance on
Regulation A, so long as the concurrent offering complies with all the
requirements of Regulation A. If this issuer were to discuss in its
Rule 506(c) general solicitation materials the material terms of its
concurrent Regulation A offering, proposed Rule 152(a)(2) would require
the issuer to include in its Rule 506(c) general solicitation materials
all the necessary legends and comply with any restrictions on the use
of general solicitation under Regulation A.\76\
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\76\ Rule 255 of Regulation A requires certain statements in any
communications constituting offers made in reliance on Regulation A.
Any such legends or statements would not be required to be included
in the issuer's Rule 506(c) general solicitation materials if such
materials do not mention the material terms of the other concurrent
offering.
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[[Page 17967]]
2. Integration Safe Harbors
In order to simplify the integration analysis and harmonize our
integration framework for both exempt and registered offerings, we are
proposing four non-exclusive safe harbors from integration. For offers
and sales meeting the conditions of these safe harbors, the issuer need
not conduct any further integration analysis.\77\ By providing a more
simplified and harmonized integration framework, these safe harbors are
intended to reduce uncertainty and provide greater confidence to
issuers in planning and choosing their capital raising options under
the Securities Act, including registered offerings. Proposed Rule
152(b) would provide the following:
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\77\ As noted above, however, proposed Rule 152 would specify
that the safe harbors are not available to any issuer for any
transaction or series of transaction that, although in technical
compliance with the rule, is part of a plan or scheme to evade the
registration requirements of the Securities Act.
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Any offering made more than 30 calendar days before the
commencement of any other offering, or more than 30 calendar days after
the termination or completion of any other offering, will not be
integrated, provided that:
[cir] For an exempt offering for which general solicitation is not
permitted, the purchasers either: (i) Were not solicited through the
use of general solicitation, or (ii) established a substantive
relationship with the issuer prior to the commencement of the offering
for which general solicitation is not permitted;
Offers and sales made in compliance with Rule 701,
pursuant to an employee benefit plan, or in compliance with Regulation
S will not be integrated with other offerings;
An offering for which a registration statement under the
Securities Act has been filed will not be integrated if it is made
subsequent to:
[cir] A terminated or completed offering for which general
solicitation is not permitted;
[cir] A terminated or completed offering for which general
solicitation is permitted and made only to QIBs and IAIs; or
[cir] An offering for which general solicitation is permitted that
terminated or completed more than 30 calendar days prior to the
commencement of the registered offering; or
Offers and sales made in reliance on an exemption for
which general solicitation is permitted will not be integrated if made
subsequent to any prior terminated or completed offering.
a. 30-Day Integration Safe Harbor
Current Securities Act integration safe harbors generally provide
for a six-month safe harbor time period, outside of which other
offerings will not be considered as integrated, or part of the same
offering.\78\ We are proposing a safe harbor in Rule 152(b)(1) that
would shorten this time period to 30 days and harmonize current
Securities Act exemptions by providing the same 30-day safe harbor time
period throughout their integration provisions. This safe harbor would
apply to both offerings for which a registration statement has been
filed under the Securities Act and exempt offerings.\79\ In light of
the changes in technology, the markets, and the securities laws since
1982, we preliminarily believe a shortened 30-day safe harbor time
period would enhance an issuer's flexibility and expand the capital
raising options available to issuers under the Securities Act to access
capital when needed, while still providing a sufficient length of time
to impede what integration seeks to prevent: Improperly avoiding
registration by artificially dividing a single offering into multiple
offerings. In considering an appropriate cooling off period between
offerings, we considered changes in the informational environment that
have occurred since the six-month time period was adopted in Regulation
D in 1982.\80\ Given the accelerating speed and consumption of
electronically disseminated information in today's financial
marketplace, we believe a 30-day time frame is sufficient to mitigate
concerns that an exempt offering may condition the market for a
subsequent registered offering or undermine the protections of a
subsequent exempt offering. In this regard, we think it likely that the
effects of any offers made more than 30 days prior to or after
commencement of another offering would be sufficiently diluted by
intervening market developments so as to render an integration analysis
unnecessary.
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\78\ See Rule 502(a); Rule 251(c); Rule 147(g); and Rule
147A(g). These rules rely on a six-month time period, but offer
exceptions for certain offers and sales under specific exemption or
circumstances. For example, Rule 502(a) excludes offers or sales of
securities under an employee benefit plan as defined in Rule 405. In
addition, Rule 251(c), Rule 147(g), and Rule 147A(g) all exclude
offers or sales from integration for all prior offers and sales of
securities without regard to a time period so long as the prior
offers and sales have terminated. Under Rule 147, Rule 147A, and
Rule 251, subsequent offers and sales will not be integrated with
offers and sales that are registered under the Securities Act,
exempt from registration under Rule 701, Regulation A, Regulation S,
or Section 4(a)(6) of the Securities Act, or made pursuant to an
employee benefit plan. Further, generally, transactions otherwise
meeting the requirements of an exemption will not be integrated with
simultaneous offers and sales of securities being made outside the
United States in compliance with Regulation S [17 CFR 230.901
through 230.905] See Rule 500(g); and Note to Rule 502(a).
\79\ Both this proposed safe harbor and the safe harbor in
proposed Rule 152(b)(3)(iii) would apply to a registered offering
made more than 30 calendar days after the termination or completion
of any other offering.
\80\ See Regulation D Adopting Release, at text accompanying
note 18. See also Proposed Revisions of Certain Exemptions from the
Registration Provisions of the Securities Act of 1933 for
Transactions Involving Limited Offers and Sales, Release No. 33-6339
(Aug. 7, 1981) [46 FR 41791 (Aug. 18, 1981)], at Section V.C.1
(referring to uniform six month safe harbor provisions in now
rescinded Rules 146(b)(1) and 242(b)).
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In order to provide clarity with respect to use of the 30-day safe
harbor where an offering under an exemption that does not permit
general solicitation, such as Rule 506(b), follows the filing of a
registration statement for a registered offering or an exempt offering
that permits general solicitation, such as Rule 506(c), proposed Rule
152(b)(1) would provide that the purchasers in the offering for which
general solicitation is not permitted (i) must not have been solicited
through the use of general solicitation, or (ii) must have established
a substantive relationship with the issuer prior to the commencement of
the offering for which general solicitation is not permitted. This is
consistent with the Commission's current guidance and proposed Rule
152(a)(1), but we believe it is appropriate to address this in proposed
Rule 152(b)(1) to avoid any uncertainty as to the application of the
30-day safe harbor in this situation.
A 30-day safe harbor time period is consistent with several current
integration provisions that also require 30-day minimum waiting periods
between offerings. For example, in conjunction with certain other
requirements, Rule 155 requires an issuer to wait at least 30 days
between an abandoned private offering and a subsequently registered
offering,\81\ or an
[[Page 17968]]
abandoned registered offering followed by a subsequent private
offering.\82\ Similarly, Rule 255(e), Rule 147, and Rule 147A currently
provide safe harbors from integration, if an issuer waits at least 30
days between the last solicitation of interest in a subsequently
abandoned Regulation A offering, or the last offer made pursuant to
Rule 147 or Rule 147A, and the filing of a subsequent registered
offering.\83\
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\81\ See Rule 155(b). Rule 155(b) currently provides a safe
harbor that a private offering of securities will not be considered
part of an offering for which the issuer later files a registration
statement if: (1) No securities were sold in the private offering;
(2) the issuer and any person acting on its behalf terminate all
offering activity in the private offering before the issuer files
the registration statement; (3) the preliminary and final
prospectuses used in the registered offering disclose specified
information about the abandoned private offering (including: The
size and nature of the private offering; the date on which the
issuer abandoned the private offering; that any offers to buy or
indications of interest given in the private offering were rejected
or otherwise not accepted; and that the prospectus delivered in the
registered offering supersedes any offering materials used in the
private offering); and (4) the issuer does not file the registration
statement until at least 30 calendar days after termination of all
offering activity in the private offering, unless the issuer and any
person acting on its behalf offered securities in the private
offering only to persons who were (or who the issuer reasonably
believes were) accredited investors or satisfy the knowledge and
experience standard of Rule 506(b)(2)(ii).
\82\ See Rule 155(c). Rule 155(c) currently provides that an
offering for which the issuer filed a registration statement will
not be considered part of a later commenced private offering if: (1)
No securities were sold in the registered offering; (2) the issuer
withdraws the registration statement under 17 CFR 230.477 (``Rule
477''); (3) neither the issuer nor any person acting on the issuer's
behalf commences the private offering earlier than 30 calendar days
after the effective date of withdrawal of the registration statement
under Rule 477; (4) the issuer provides specified information about
the private offering to each offeree in the private offering; and
(5) any disclosure document used in the private offering discloses
any changes in the issuer's business or financial condition that
occurred after the issuer filed the registration statement that are
material to the investment decision in the private offering.
\83\ Rule 255(e) provides a safe harbor to issuers that file a
registered offering after an abandoned Regulation A offering.
Specifically, for solicitations of interest made in reliance on
Regulation A to persons other than QIBs or IAIs, Rule 255(e)
provides that an abandoned Regulation A offering will not be subject
to integration with a subsequently filed registered offering, if the
issuer waits at least 30 days between the last such solicitation of
interest in the Regulation A offering and the filing of the
registration statement with the Commission.
Rules 147(h) and 147A(h) provide safe harbors to issuers from
integration with any subsequent registered offerings, if issuers
make offers pursuant to these rules to persons other than QIBs and
IAIs and the issuers or their agents wait at least 30 days between
the last such offer made in reliance on these rules and the filing
of the registration statement with the Commission.
As discussed below, we are proposing to replace the integration
provisions of several Securities Act exemptions with references to
proposed Rule 152. Solicitations of interest or offers made to
persons other than QIBs or IAIs currently covered by the Rule
255(e), Rule 147(h) and Rule 147A(h) safe harbors would be covered
by this proposed 30-day safe harbor, and solicitations of interest
or offers limited to QIBs or IAIs currently covered by the Rule
255(e), Rule 147(h), and Rule 147A(h) safe harbors would be covered
by proposed Rule 152(b)(3).
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Commenters on the Concept Release \84\ and others \85\ have been
generally supportive of shortening the six month time period in Rule
502(a) and expressed concern that the six-month integration safe harbor
could inhibit issuers from meeting their capital needs.\86\ Several of
these commenters explicitly supported a 30-day safe harbor time period,
while others supported other shortened time periods.\87\ One commenter
alternatively suggested that changes to the six-month time period in
Rule 502(a) would be unnecessary if the integration analysis
universally used the standards in Regulation A and Rules 147 and
147A.\88\ In contrast, two commenters were opposed to changing the
integration standards,\89\ with one of those commenters expressly
stating its opposition to shortening the six-month period in Rule
502(a).\90\
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\84\ See CCMC Letter; SIFMA Letter (suggesting that a 30-day
period would allow issuers to raise capital as expeditiously as is
required in today's market); and Dechert Letter (``Due to the very
real and substantial impact of ceasing offering activities for any
period of time, we believe that 30 days is sufficient to ensure that
issuers do not abuse their ability to conduct separate
offerings.'').
\85\ See Final Report of the Advisory Committee on Smaller
Public Companies to the United States Securities and Exchange
Commission (Apr. 23, 2006), available at http://www.sec.gov/info/smallbus/acspc/acspcfinalreport.pdf (``Final Report of the Advisory
Committee on Smaller Public Companies''), at 94 (recommending that
the Commission shorten the integration safe harbor from six months
to 30 days). See also Regulation D Proposing Release, at Section
II.C.
\86\ See CCMC Letter; SIFMA Letter; Dechert Letter; Davis Polk
Letter; letter from EquityZen Inc. dated September 30, 2019
(``EquityZen Letter''); and NYSBA Letter.
\87\ See Davis Polk Letter (suggesting 90 days is appropriate,
as it would provide additional flexibility, permitting issuers to
rely on the safe harbor once every fiscal quarter, while still
requiring issuers to wait a sufficient period of time before
initiating a substantially similar offering in reliance on the safe
harbor); EquityZen Letter (suggesting a 90-day period generally, and
a 30-day period for inadvertent general solicitation activity);
letter from Silicon Prairie Portal & Exchange, LLC dated September
24, 2019 (``Silicon Prairie Letter'') (suggesting a 90-day period);
ABA Letter (suggesting a 90-day period); and NYSBA Letter
(recommending a shorter period generally, and specifically
suggesting a 45-day period in situations of inadvertent general
solicitation activity).
\88\ See CrowdCheck Letter.
\89\ See PIABA Letter; and NASAA Letter.
\90\ See PIABA Letter.
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Having considered these comments, we believe that the current six-
month safe harbor time period in Rules 502(a), 251(c), 147(g), and
147A(g) may be longer than necessary to protect investors and could
inhibit issuers, particularly smaller issuers, from meeting their
capital raising needs.\91\ In our view, issuers seeking to register
offerings under the Securities Act should be encouraged to do so, and
we are mindful of the risk that offers made pursuant to an exemption
shortly before a registration statement is filed could be viewed as
conditioning the market for that registered offering. Accordingly, we
are proposing to shorten the current six-month time frame in these
rules to 30 days. We are not aware of issuers abusing the similar 30-
day waiting periods in the current provisions of Rule 255(e) and Rules
147(h) and 147A(h). As a result, we believe that a 30-day waiting
period or separation between offerings would be sufficient to prevent
issuers from using a generally solicited exempt offering, such as an
offering made in reliance on Rule 506(c), for the purposes of
conditioning the market for a later registered offering. We further
note that waiting less than 30 days before filing a subsequent
registered offering would not necessarily result in integration or be
considered as conditioning the market for the subsequent registered
offering. Instead, such a determination would depend on the particular
facts and circumstances surrounding the offerings.\92\
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\91\ See Rule 255(e) of Regulation A; Rule 147(h); Rule 147A(h);
Regulation D Proposing Release; and Final Report of the Advisory
Committee on Smaller Public Companies. Smaller issuers may face
capital raising challenges because they are seeking relatively small
amounts of capital. See e.g., Transcript of SEC Small Business
Capital Formation Advisory Committee (Nov. 12, 2019), available at
https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-111219.pdf, at 15-62 (discussing the fact that transaction costs
make raising amounts under $750,000 ``not worth it''); and
Transcript of SEC Small and Emerging Companies Advisory Committee
(Feb. 15, 2017), available at https://www.sec.gov/info/smallbus/acsec/acsec-transcript-021517.pdf, at 144-145 (indicating that it is
easier for issuers to access $100 million of capital than amounts
under $10 million).
\92\ See, e.g., 2015 Regulation A Release, at text accompanying
note 178 (waiting less than the 30 days before a registered
offering, as required in Rule 255(e), would not necessarily result
in integration with a Regulation A offering, but would instead
depend on the particular facts and circumstances, as explained in
the Note to Rule 251(c)).
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We are mindful that issuers may seek to undertake serial Rule
506(b) offerings each month, selling to up to 35 unique non-accredited
investors in each offering, potentially resulting in unregistered sales
of securities to hundreds of non-accredited investors in a year.\93\
While recent data may suggest that shortening the safe harbor to 30-
days is not likely to result in a large increase in the number of non-
accredited investors participating in Rule 506(b) offerings,\94\ we are
[[Page 17969]]
proposing to amend Rule 506(b)(2)(i) to address this concern. Under the
proposed rule, where an issuer conducts more than one offering under
Rule 506(b), the number of non-accredited investors purchasing in all
such offerings within 90 calendar days of each other would be limited
to 35.\95\ We preliminarily believe that this would protect against the
possibility that an issuer could inappropriately make use of the
proposed 30-day safe harbor to effectively conduct a public
distribution of securities to non-accredited investors.
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\93\ In 2007, the Commission expressed this concern that such
sales could result in large numbers of non-accredited investors
failing to receive the protections of Securities Act registration.
See Regulation D Proposing Release, at text accompanying note 134.
\94\ Based on the analysis of Form D data on initial Form D
filings, we estimate that in 2019, among all Rule 506(b) offerings
by issuers other than pooled investment funds, approximately 4.45
percent of offerings included non-accredited investors. Among all
Rule 506(b) offerings with non-accredited investors by issuers,
other than pooled investment funds, the average (median) number of
non-accredited investors was reported to be 6.7 (4.0), based on Form
D filings in 2019. These estimates of the number of investors may
represent a lower bound because they rely on available Form D
filings, and because a final Form D upon the conclusion of an
offering is not required to be filed.
\95\ Proposed Rule 506(b)(2)(i) provides that there are no more
than, or the issuer reasonably believes that there are no more than,
35 purchasers of securities from the issuer in offerings under this
section in any 90 calendar day period. Under Rule 501(e), only non-
accredited investors are included in computing the number of
``purchasers.''
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In conjunction with our proposal to amend Rule 152 to include a 30-
day integration safe harbor and to shorten the integration safe harbor
time period throughout Rules 502(a), 251(c), 147(g), and 147A(g) from
six months to 30 days, we are also proposing to remove and reserve Rule
155. As proposed Rule 152(b)(1) would supersede the specific
requirements in Rule 155 relating to the integration of abandoned
offerings with subsequent offerings, other than the 30-day waiting
period between the termination of an abandoned offering and the
commencement of a subsequent offering.\96\ Specifically, Rule 155(b)
provides that an abandoned private offering of securities will not be
considered part of an offering for which the issuer later files a
registration statement if the offering meets certain enumerated
conditions, including a requirement that the issuer does not file the
registration statement until at least 30 calendar days after
termination of all offering activity in the private offering, unless
the issuer and any person acting on its behalf offered securities in
the private offering only to persons who were (or who the issuer
reasonably believes were) accredited investors or who satisfy the
knowledge and experience standard of Rule 506(b)(2)(ii).\97\ Rule
155(c) provides a similar safe harbor for a registered offering
followed by a private offering of securities subject to a similar set
of enumerated conditions, including the requirement that neither the
issuer nor any person acting on the issuer's behalf commences the
private offering earlier than 30 calendar days after the effective date
of withdrawal of the registration statement.\98\
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\96\ Rule 155(b) and (c) currently provide safe harbors for
integration of abandoned offerings. 17 CFR 230.155(b) and (c).
\97\ See supra note 81.
\98\ See supra note 82.
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We received comments on the Concept Release that were generally
supportive of either eliminating or shortening the 30-day time period
in Rule 155.\99\ One of these commenters suggested that elimination of
certain of Rule 155's conditions would increase the likelihood of
registration.\100\ Other than the required 30-day waiting period
between an abandoned and subsequent offering, we believe the list of
conditions in Rule 155(b) and (c) is no longer warranted and may be
eliminated without compromising investor protections for the same
reasons that support our proposal to reduce the integration safe
harbors from six months to 30 days. As we believe a 30-day time period
between offerings, including if one is abandoned, establishes a more
workable standard, without significantly compromising investor
protections, we are proposing to remove and reserve Rule 155.
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\99\ See ABA Letter; and NYSBA Letter.
\100\ See ABA Letter.
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To provide greater certainty to issuers as to the availability of
all of our proposed safe harbors that require the prior offering to be
``terminated or completed,'' \101\ we are proposing that:
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\101\ See proposed Rule 152(b)(1), (b)(3) and (b)(4).
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Offerings of securities made under Section 4(a)(2),
Regulation D, or Rule 147 or 147A would be considered ``terminated or
completed,'' on the later of the date: (i) The issuer entered into a
binding commitment to sell securities under the offering (subject only
to conditions outside of the investor's control); or (ii) the issuer
and its agents ceased efforts to make further offers to sell the
issuer's securities.\102\
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\102\ Efforts to sell securities through the offering include,
but are not limited to, the distribution of any offering materials.
For purposes of exemptions permitting the use of general
solicitation, the cessation of selling efforts would require the
removal of any publicly available general solicitation materials, to
the extent possible.
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Offerings under Regulation A would be considered
``terminated or completed'' upon the: (i) Withdrawal of an offering
statement under Rule 259(a) of Regulation A; (ii) filing of a Form 1-Z
with respect to that offering; (iii) declaration by the Commission that
the offering statement has been abandoned under Rule 259(b) of
Regulation A; or (iv) third anniversary of the initial qualification
date of the offering statement, in the case of continuous or delayed
offerings.
Offerings under Regulation Crowdfunding would be
considered ``terminated or completed'' upon the deadline of the
offering identified in the offering materials pursuant to Rule 201(g)
of Regulation Crowdfunding, or indicated by the Regulation Crowdfunding
intermediary in any notice to investors delivered under Rule 304(b) of
Regulation Crowdfunding.
Offerings for which a Securities Act registration
statement has been filed will be considered, for purposes of the
proposed safe harbors, ``terminated or completed'' upon the: (i)
Withdrawal of the registration statement after the Commission grants
such application under Rule 477; (ii) filing of an amendment or
supplement to the registration statement indicating that the registered
offering has been terminated or completed and the deregistering of any
unsold securities if required by Item 512(a)(3) of Regulation S-K;
\103\ (iii) entry of an order by the Commission declaring that the
registration statement has been abandoned under Rule 479; or (iv) as
set forth in Rule 415(a)(5).\104\
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\103\ 17 CFR 229.512(a)(3).
\104\ 17 CFR 230.415(a)(5).
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b. Rule 701, Employee Benefit Plans and Regulation S
We are proposing Rule 152(b)(2), which would provide a safe harbor
for all offers and sales made in compliance with Rule 701, pursuant to
an employee benefit plan, or made in compliance with Regulation S,
regardless of when these offerings occur, including offers and sales
made concurrently with other offerings.\105\ Offers and sales pursuant
to Rule 701 \106\ and employee benefit plans are limited to investors,
such as employees, consultants and advisors, with whom the issuer has
written compensation plans or agreements. Given the privity between
these investors and the issuer, these offers and sales may not raise
the same level of investor protection concerns as offerings to other
investors.
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\105\ The safe harbor integration provisions in current Rule
251(c) and Rules 147(g) and 147A(g) for these offers or sales do not
cover offers or sales concurrent with another offering.
\106\ The Rule 701 exemption is only available to issuers that
are not subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934. See Rule 701(b). This
proposed safe harbor is in accord with Rule 701(f), which provides
that an offering under Rule 701 will not be integrated with any
other offering, as offers and sales exempt under Rule 701 are deemed
to be a part of a single, discrete offering and are not subject to
integration with any other offers or sales, whether registered under
the Securities Act or otherwise exempt from the registration
requirements of the Securities Act.
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We are proposing a similar safe harbor for all offers and sales
made in compliance with Regulation S, regardless of when the Regulation
S offering occurs in relation to another domestic registered or exempt
offering in the United States. In adopting Regulation S, the Commission
stated
[[Page 17970]]
that ``[o]ffshore transactions made in compliance with Regulation S
will not be integrated with registered domestic offerings or domestic
offerings that satisfy the requirements for an exemption from
registration under the Securities Act.'' \107\ Proposed Rule 152(b)(2)
would codify this position. Specifically, concurrent offshore offerings
that are conducted in compliance with Regulation S are not currently,
and would not be, integrated with registered domestic offerings or
domestic offerings that are conducted in compliance with any exemption.
When determining the availability of this safe harbor, it would still
be necessary to assess each transaction for compliance with Regulation
S and the conditions of the other exemption.
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\107\ See Offshore Offers and Sales, Release No. 33-6863 (April
24, 1990) [55 FR 18306 (May 2, 1990)], at Section III.C.1. In
addressing the offshore transaction component of the Regulation S
safe harbor, the Commission stated, ``Offers made in the United
States in connection with contemporaneous registered offerings or
offerings exempt from registration will not preclude reliance on the
safe harbors.'' Id. at note 36. Likewise, in addressing directed
selling efforts, the Commission stated, ``Offering activities in
contemporaneous registered offerings or offerings exempt from
registration will not preclude reliance on the safe harbors.'' Id.
at note 47. See also Rule 500(g) of Regulation D (formerly
Preliminary Note No. 7 to Regulation D) (``Regulation S may be
relied upon for such offers and sales even if coincident offers and
sales are made in accordance with Regulation D inside the United
States.''); and Note to Rule 502(a) (``Generally, transactions
otherwise meeting the requirements of an exemption will not be
integrated with simultaneous offerings being made outside the United
States in compliance with Regulation S.'').
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Although, as noted above, the Commission has provided guidance
similar to the proposed safe harbor, we have become aware that there
may be some uncertainty among market participants about whether it is
possible to conduct concurrent Regulation S and Rule 506(c) offerings,
particularly when the offerings are conducted using the internet, and
if so, how to comply with the requirement that separate offering
materials be used in each offering. Two commenters on the Concept
Release suggested that the Commission clarify that general solicitation
under Rule 506(c) would not constitute ``directed selling efforts'' for
purposes of Regulation S,\108\ which Rule 902(c) defines as any
activity undertaken for the purpose of, or that could reasonably be
expected to have the effect of, conditioning the market in the United
States for securities offered in reliance on Regulation S.\109\
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\108\ See CoinList Letter; and NYSBA Letter.
\109\ See Rule 902(c)(1).
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In light of these concerns, we are proposing amendments to
Regulation S that would permit an issuer that is conducting an exempt
offering that allows general solicitation, such as under Rule 506(c),
and uses widely accessible internet or similar communications, to
continue to be able to rely on Regulation S for a concurrent offshore
offering even though the general solicitation activity would likely be
deemed ``directed selling efforts'' under current Rule 902(c). Under
the proposal, an issuer that engages in general solicitation activity
under an exemption that allows general solicitation would not be
considered to have engaged in ``directed selling efforts'' in
connection with an offering under Regulation S, if the general
solicitation activity is not undertaken for the purpose of conditioning
the market in the United States for any of the securities being offered
in reliance on Regulation S. The definition of ``directed selling
efforts'' currently covers any activity undertaken for the purpose of,
or that could reasonably be expected to have the effect of,
conditioning the market in the United States for the Regulation S
securities. Due to the nature of a widely accessible general
solicitation communication, it is likely that the ``reasonably be
expected to have the effect of'' provision would be implicated by such
activity, even though the issuer may not have undertaken the activity
``for the purpose of'' conditioning the U.S. market. Under the
proposal, this definition would be narrowed, only for the purposes of
general solicitation activities undertaken in connection with offers
and sales under an exemption from registration, such that general
solicitation activity that may have the effect of conditioning the U.S.
market but is not undertaken for the purpose of doing so would not be
covered.
We are mindful that, regardless of the issuer's intent, such
activities may increase the risk of flowback of the Regulation S
securities to the United States when there is a concurrent exempt
offering of the securities in the United States using general
solicitation. Therefore, we are proposing new Rule 906 of Regulation S,
applicable to securities offered and sold in a transaction subject to
the conditions of Rule 901 or Rule 903, that would require an issuer
that engages in general solicitation activity covered by the proposed
exclusion from the definition of ``directed selling efforts'' to
prohibit resales to U.S. persons (or for the account or benefit of a
U.S. person) of the Regulation S securities for a period of six months
from the date of sale except to QIBs or IAIs. We preliminarily believe
that this restriction on resales would appropriately guard against
potential flowback of such securities to the United States. We are
proposing to limit resales during the six-month period to QIBs and
IAIs, investors that the Commission has long recognized as having the
ability to fend for themselves. This approach may help alleviate
possible concerns about less-sophisticated investors not fully
appreciating the distinctions between the securities sold in each of
the offerings, and help guard against flowback to the United States by
limiting the potential pool of investors who may purchase in the
resale. This six-month limitation on resales would apply regardless of
the Regulation S category applicable to the securities, and
notwithstanding, and in addition to, any applicable distribution
compliance period.\110\
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\110\ See Rule 902(f).
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c. Subsequent Registered Offerings
The safe harbor in proposed Rule 152(b)(3) would provide a safe
harbor for certain offerings made prior to the commencement of an
offering for which a Securities Act registration statement has been
filed. Proposed Rule 152(b)(3)(i) would provide that an offering for
which a Securities Act registration statement has been filed will not
be integrated with terminated or completed offerings for which general
solicitation is not permitted.\111\ Proposed Rule 152(b)(3)(ii) would
provide that an offering for which a Securities Act registration
statement has been filed will not be integrated with a terminated or
completed offering for which general solicitation is permitted made
only to QIBs and IAIs.\112\ Finally, Proposed Rule 152(b)(3)(iii) would
make clear that an offering for which a registration statement under
the Securities Act has been filed will not be integrated with any
offering for which general solicitation is permitted that terminated or
completed more than 30
[[Page 17971]]
calendar days prior to the registered offering.\113\
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\111\ Proposed Rule 152(b)(3)(i) builds on the Commission's
existing integration guidance relating to offerings for which
general solicitation is not permitted. Offers and sales preceding
registered offerings that do not involve general solicitation are
generally not the type of offerings that, when taken together,
appear to be susceptible to concerns relating to the prior offers
and sales conditioning the market for the registered offering.
\112\ Proposed Rule 152(b)(3)(ii) builds on current Rule 255(e)
of Regulation A, and current Rules 147(h) and 147A(h), which
provides that offerings limited to QIBs and IAIs are not integrated
with a subsequently filed registered offering. Similarly, where an
issuer has solicited interest in a contemplated, but subsequently
abandoned Regulation A offering only to QIBs or IAIs, the abandoned
Regulation A offering would not be subject to integration with a
subsequently filed registered offering.
\113\ Proposed Rule 152(b)(3)(iii) would work in coordination
with proposed Rule 152(b)(1) to clarify the application of the 30-
day safe harbor to subsequent registered offerings.
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Rule 152 currently provides that the phrase ``transactions by an
issuer not involving any public offering'' in Section 4(a)(2) shall be
deemed to apply to transactions that did not involve any public
offering at the time of the unregistered offering even though the
issuer decides subsequently to make a public offering and/or files a
registration statement. In 2007, the Commission clarified that an
issuer's contemplation of filing a Securities Act registration
statement at the same time that it is conducting an unregistered
offering under Section 4(a)(2) would not cause the Section 4(a)(2)
exemption to be unavailable for that unregistered offering.\114\ So
long as all of the applicable requirements of the exemption prohibiting
general solicitation were met for offers and sales that occurred prior
to the general solicitation, those offers and sales would not be
integrated with the subsequent registered offering.\115\ Once the
public offering is commenced or the registration statement is filed,
the issuer must satisfy all of the applicable requirements for that
subsequent offering.
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\114\ See Regulation D Proposing Release, at text accompanying
note 124. See also Concept Release, at text accompanying note 499.
\115\ In these circumstances, companies should be careful to
avoid any pre-filing communications regarding the contemplated
public offering that could render the Section 4(a)(2) exemption
unavailable for what would be an otherwise exempt private placement.
See Regulation D Proposing Release, at note 124.
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We continue to believe that capital raising around the time of a
public offering, in particular an initial public offering, including
immediately before the filing of a registration statement, often is
critical if companies are to have sufficient funds to continue to
operate while the public offering process is ongoing.\116\ We believe
that Rule 152 as currently written is unnecessarily restrictive, given
the changing financial requirements and circumstances of issuers,
particularly smaller issuers, immediately prior to a registered public
offering and may be revised without compromising investor protections.
A lengthy waiting period prior to a registered offering combined with a
potentially uncertain registration process are particular concerns for
smaller issuers contemplating a registered public offering, whose
financing needs are often erratic and unpredictable, due in part to
limited amounts of working capital, cash reserves, and access to
credit.\117\ For this reason, we are proposing Rule 152(b)(3), which
would permit companies to conduct offerings shortly before the filing
of a Securities Act registration statement without concern that the two
offerings would be integrated.
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\116\ Id. at Section II.C.
\117\ See, e.g., Final Report of the Advisory Committee on
Smaller Public Companies, at page 96. See also Regulation D
Proposing Release, at note 116 and accompanying text.
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d. Offers or Sales Preceding Exempt Offerings Permitting General
Solicitation
Proposed Rule 152(b)(4) would provide a safe harbor for all offers
and sales made in reliance on an exemption for which general
solicitation is permitted that follow any other terminated or completed
offering. Rule 251(c) of Regulation A, Rule 147(g), and Rule 147A(g)
currently provide that offers and sales made in reliance on these
exemptions will not be integrated with terminated or completed offers
and sales made prior to the commencement of these exempt
offerings.\118\ We are proposing to establish a new safe harbor that
would expand these current integration safe harbors in Regulation A and
Rules 147 and 147A to also include offerings relying on: Regulation
Crowdfunding; Rule 504(b)(1)(i), (ii) or (iii) that, depending upon
state registration requirements, permit general solicitation; and Rule
506(c). The following table summarizes the types of offerings that
would not be integrated under this proposed safe harbor:
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\118\ These integration provisions also provide that offers and
sales subsequent to these exempt offerings will not be integrated if
they are: (1) Registered under the Securities Act; (2) exempt from
registration under Rule 701; (3) made pursuant to an employee
benefit plan; (4) exempt from registration under Regulation S; (5)
exempt from registration under Section 4(a)(6) of the Securities
Act; (6) made more than six months after completion of the offering;
or (7) limited to QIBS and IAIs. See Rule 251(c); Rule 255(e); Rule
147(g) and (h); and Rule 147A(g) and (h).
Table 6--Summary of Types of Offerings Not Integrated Under the Safe
Harbor
------------------------------------------------------------------------
Offering 1 Offering 2
------------------------------------------------------------------------
Exempt offering permitting general Exempt offering prohibiting
solicitation, including: general solicitation, including:
Regulation A Regulation A
Regulation Crowdfunding Regulation Crowdfunding
Rule 147 or 147A Rule 147 or 147A
Rule 504(b)(1)(i), (ii), or Rule 504(b)(1)(i), (ii),
(iii) or (iii)
Rule 506(c) Rule 506(c)
Exempt offering permitting general
solicitation, including:
Rule 504(b)(1)
Rule 506(b)
Section 4(a)(2)
Securities Act registered offering.
------------------------------------------------------------------------
Offers and sales preceding exempt offerings that permit general
solicitation are generally not the type of offerings that, when taken
together, appear to be susceptible to concerns relating to the prior
offers and sales conditioning the market for the subsequent exempt
offering. We do not believe integrating any type of offers or sales
with a subsequent exempt offering permitting general solicitation, such
as an offering pursuant to Regulation A, Rule 147, Rule 147A, Rule
504(b)(1)(i), (ii) or (iii), Rule 506(c) or Regulation Crowdfunding, is
necessary to further investor protection. For example, a subsequent
Regulation A or Regulation Crowdfunding offering would provide
investors in these offerings with an offering document and ongoing
disclosures to provide them with material information about the
offering prior to making their investment decision. Similarly,
intrastate offerings pursuant to Rule 147 and Rule 147A, as well as
regional multi-state offerings under Rule 504(b)(1)(i), (ii) and (iii),
are all subject to state registration requirements which generally
require the delivery of a disclosure document prior to sale. Finally,
Rule 506(c) requires issuers to take reasonable steps to verify that
all investors in the offering are accredited investors who are deemed
to be sophisticated investors who do not need the protections of
Securities Act registration.
3. Conforming Amendments to Securities Act Exemptions
As part of our effort to modernize and harmonize the integration
framework for registered and exempt offerings, we are also proposing to
replace the integration provisions of several Securities Act exemptions
with references to proposed Rule 152. Specifically, we are proposing to
amend current Rule 502(a), Rule 251(c), Rule 147(g), and Rule 147A(g)
to provide cross-references to the new facts and circumstances analysis
and safe harbors for integration in Rule 152. We are additionally
proposing to eliminate Rule 255(e), Rule 147(h), and Rule 147A(h) since
the relief provided by these rules would be provided by
[[Page 17972]]
proposed Rule 152(b)(3). All of these existing integration provisions
currently refer to a facts and circumstances analysis when their
enumerated safe harbors do not apply, and the proposed Rule 152(b) safe
harbors are generally consistent with the current safe harbors in the
individual rules.
Although Regulation Crowdfunding has no codified integration
provision, in the 2015 adopting release, the Commission provided
guidance on integration using the same facts and circumstances analysis
set forth in the Commission's 2015 amendments to Regulation A and 2016
amendments to Rule 147 and adoption of new Rule 147A.\119\ Market
participants conducting crowdfunding offerings have requested guidance
on the integration of crowdfunding offerings with other exempt
offerings under the Securities Act.\120\ In response, we are proposing
to amend Rule 100 of Regulation Crowdfunding to codify this integration
guidance, and further harmonize how offerings under Regulation
Crowdfunding interrelate with other offerings under the Securities Act
by cross-referencing the proposed Rule 152(b) safe harbors. We believe
codifying the Commission's guidance on integration by adding the cross-
reference to proposed Rule 152 in a new provision in Rule 100 of
Regulation Crowdfunding would provide greater certainty to issuers
contemplating a Regulation Crowdfunding offering who may also be
considering other offerings under the Securities Act.
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\119\ Securities Act Section 4A(g) states that ``[n]othing in
the exemption shall be construed as preventing an issuer from
raising capital through means other than [S]ection 4(a)(6).'' Given
this statutory language, the Commission provided guidance in the
Crowdfunding Adopting Release that an offering made in reliance on
Section 4(a)(6) is not required to be integrated with another exempt
offering made by the issuer to the extent that each offering
complies with the requirements of the applicable exemption that is
being relied on for that particular offering. See Crowdfunding
Adopting Release, at text accompanying notes 1343-1344.
\120\ See, e.g., 2018 Forum Report.
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Request for Comment
1. Should we adopt a comprehensive integration framework for
registered and exempt offerings, as proposed? Is the proposed general
principle of integration, which requires an issuer to consider the
particular facts and circumstances of each offering, appropriate?
Should the framework also include provisions applying this general
principle to particular fact patterns? If so, are the proposed
provisions appropriate? Are there other provisions applying the general
principle to specific fact patterns that we should include? In light of
the proposed provisions, should the rules define the terms ``pre-
existing'' and ``substantive relationship''? Should we instead
eliminate the concept of integration altogether and rely on general
anti-evasion principles to prohibit the use of multiple closely-timed
offerings to evade the securities laws?
2. Should we replace the five factor test of integration, currently
set forth in Rule 502(a), with the more recent approach to integration
adopted in rulemakings involving Regulation A, Regulation Crowdfunding,
and Rules 147 and 147A, as proposed? Is there another integration
principle that should apply in this context? Are there situations in
which the five factor test should continue to apply? If so, should the
current factors be revised, such as by adding new factors, or should we
provide guidance with respect to the relative importance of the factors
to the analysis? Are there uses of the five factor test for purposes
other than the integration of offerings?
3. Should we adopt specific safe harbors as part of the proposed
integration framework? If so, are the proposed safe harbors
appropriate? Are there additional or different safe harbors we should
codify? What effect, if any, would the proposed safe harbors have on
investor protection or on issuers' ability to raise capital in the
exempt offering markets? Should any of the integration provisions in
proposed Rule 152(a) be reframed as safe harbors in proposed Rule
152(b)? Similarly, should any of the safe harbors in proposed Rule
152(b) be reframed as principles of integration in proposed Rule
152(a)?
4. Do the proposed rules make clear the interaction between the
integration provisions set forth in proposed Rule 152(a) and the non-
exclusive safe harbors set forth in proposed Rule 152(b)?
5. Should we include an integration safe harbor that would apply to
any offering made more than 30 calendar days prior to, or more than 30
calendar days after, another offering, as proposed? Is this time period
too short? Would a longer time period such as 45, 90, or 120 days be
more appropriate? Would this proposal raise any investor protection
concerns?
6. Should we, as proposed, amend Rule 506(b) to provide that where
an issuer conducts more than one offering under Rule 506(b), the number
of non-accredited investors purchasing in all such offerings within 90
calendar days of each other would be limited to 35? If so, is the
proposed timeframe (90 days) and number of purchasers (35) appropriate,
or should these be revised? Should we instead, if we consider 35 non-
accredited investors over a 90-day period to be an appropriate
limitation, set the safe harbor at 90 days to simplify compliance? Do
the risks of sales to large numbers of non-accredited investors in
multiple offerings by the same issuer in reliance on Rule 506(b)
warrant such limits on the number of non-accredited investors
participating in these offerings? Should this limitation apply in all
cases in which an issuer conducts more than one offering under Rule
506(b), or should we only require such limit on the number of non-
accredited investors if the Rule 506(b) offerings are of the same class
of securities, or part of the same plan of financing? Should we only
require such limit on the number of non-accredited investors if the
Rule 506(b) offerings would be integrated if the five factor test were
applied? Alternatively, instead of amending Rule 506(b), should we
include this requirement as a condition to reliance on the proposed 30-
day safe harbor when an issuer conducts two or more Rule 506(b)
offerings?
7. Should we, as proposed, condition the availability of the 30-day
safe harbor on the requirement that, for an exempt offering for which
general solicitation is not permitted, the purchasers in such offering
were not solicited through the use of general solicitation or that the
purchasers established a substantive relationship with the issuer prior
to commencement of the offering for which general solicitation is not
permitted? Alternatively, is a provision similar to that in proposed
Rule 152(b)(1) more appropriate in Rule 502(c) of Regulation D
concerning purchasers in offerings for which general solicitation is
not permitted? Should the provision be included in both proposed Rule
152(b)(1), as well as in Rule 502?
8. Should we adopt an integration safe harbor for all offerings
made in compliance with Rule 701, pursuant to an employee benefit plan,
or in compliance with Regulation S, as proposed?
9. Is it necessary to reference Rule 701 in proposed Rule
152(b)(2), given the integration provision in Rule 701(f)?
10. Should general solicitation in the United States in connection
with an exempt, U.S. offering constitute directed selling efforts under
Rule 902(c)(1) of Regulation S for purposes of the offshore
transaction? Should we, as proposed, amend the definition of ``directed
selling efforts'' to permit issuers to make concurrent offers under
Regulation S and an exemption from registration that permits general
solicitation? Should we expand the
[[Page 17973]]
definition of ``directed selling efforts'' to also exclude activities
that would be ``reasonably expected to'' condition the U.S. market,
regardless of the intent of those activities? Would an issuer be able
to demonstrate the intent underlying general solicitation activities
under the proposed amendment? Would the proposed amendments provide
sufficient clarity to issuers using social media to make concurrent
U.S. and non-U.S. offerings? In such situations, would an issuer have
difficulty separately complying with Regulation S and other exemptions?
Do the proposed amendments to Regulation S raise investor protection
concerns for offshore investors? Should we expand the proposed
exclusion from ``directed selling efforts'' to apply not only to
concurrent exempt offerings that permit general solicitation, but also
to domestic registered offerings?
11. Should we require the resale restrictions of proposed Rule 906?
Will proposed Rule 906 help prevent flowback of securities to the
United States? Is the proposed six-month time period appropriate, or
should we consider a longer or shorter time period for the resale
restriction to apply? Should the time period during which resales are
restricted instead correspond to the distribution compliance period for
Category 2 or Category 3 offerings under Regulation S, as applicable?
Should we permit resales to QIBs and IAIs during this six-month period,
as proposed? We expect that issuers would consider implementing
measures similar to the ``offering restrictions'' defined in Rule
902(g) to comply with the proposed Rule 906 resale restriction, but
should we specify measures an issuer must take to comply with the
proposed resale restrictions? If so, what type of measures would be
appropriate? Are the proposed definition of ``directed selling
efforts'' and new Rule 906 in keeping with the territorial approach
taken in Regulation S?
12. Should we adopt the safe harbor in proposed Rule 152(b)(3) that
applies to registered offerings subsequent to a terminated or completed
offering for which general solicitation was not permitted, as proposed?
Should we also, as proposed, include a safe harbor that applies to
registered offerings subsequent to a terminated or completed offering
limited to QIBs and IAIs? Should we additionally include a safe harbor
that applies to registered offerings subsequent to offerings for which
general solicitation is permitted that terminated or completed more
than 30 days prior? Do the safe harbors, as proposed, sufficiently
cover the relief provided by Rule 255(e) of Regulation A, Rule 147(h),
and Rule 147A(h) so as to make them no longer necessary? Alternatively,
should we omit the provision in this safe harbor concerning Rules
255(e), 147(h), and 147A(h), and retain these integration provisions as
currently provided in Rules 255, 147, and 147A? Would this help
simplify the safe harbor in proposed Rule 152(b)(3)? Would this make
the integration provisions of Rules 255, 147, and 147A less clear? Does
the 30 calendar day provision in proposed Rule 152(b)(3)(iii) for
registered offerings appropriately coordinate with the more general
provisions of proposed Rule 152(b)(1)? In addition to registered
offerings, should we revise this safe harbor provision to cover exempt
offerings permitting general solicitation, such as Rule 506(c), as
well?
13. Should we adopt the safe harbor in proposed Rule 152(b)(4) that
would apply to any offering in reliance on an exemption for which
general solicitation is permitted made subsequent to an offering that
has been terminated or completed?
14. Should we include any other safe harbors from integration in
Rule 152? For example:
a. Should we include a safe harbor for all offers or sales to
investors with whom the issuer has a pre-existing substantive
relationship? Should this safe harbor be available for all such offers
or sales, regardless of when they occur in relation to another offering
(i.e., whether prior to, concurrent with, or subsequent to another
offering) and regardless of whether the other offering is exempt or
registered? If we were to adopt such a safe harbor, would that make any
of the proposed safe harbors unnecessary?
b. Should we include a safe harbor from integration for all
offerings limited to QIBs and accredited investors? Should such a safe
harbor include offers or sales preceding or concurrent with a
registered offering? Alternatively should such a safe harbor apply only
to QIBs and IAIs, regardless of whether the offer or sale was prior to,
concurrent with, or subsequent to other offerings? Do offers and sales
to such investors raise concerns with respect to conditioning the
market for a subsequent registered offering of the issuer's securities?
c. Should we include a safe harbor available for offers or sales
made in reliance on Rule 506(c) that are made concurrently with an
exempt offering permitting general solicitation, such as in reliance on
Regulation A, Regulation Crowdfunding or Rule 147A, provided that, if
the general solicitation materials used in connection with the Rule
506(c) offering include the material terms of the other concurrent
exempt offering permitting general solicitation, then the Rule 506(c)
materials must conform to the legend and other requirements of the
other exempt offering permitting general solicitation? In this regard,
is our proposed Rule 152(a)(2) more appropriate as a safe harbor or as
an integration principle?
15. Instead of our proposed approach to replace the current
integration provisions in Securities Act exemptions with a cross-
reference to proposed Rule 152, should we revise the current
integration provisions to reflect the provisions of proposed Rule 152?
Alternatively, should we revise the current safe harbor provisions in
the Securities Act exemptions to reflect the safe harbor provisions of
proposed Rule 152(b) and provide cross-references to Rule 152(a) for
guidance on integration when these safe harbors are not applicable?
16. Should we codify in Regulation Crowdfunding the Commission's
existing integration guidance providing that offers and sales made in
reliance on Regulation Crowdfunding will not be integrated with other
exempt offerings made by the issuer, provided that each offering
complies with the requirements of the applicable exemption that is
being relied upon for the particular offering in Rule 100 of Regulation
Crowdfunding, as proposed?
17. Should we define the terms ``terminated or completed,'' as
proposed? Should the analysis of whether an offering is ``terminated or
completed'' be predicated on the issuer's entry into a binding
commitment, subject only to conditions outside of the investor's
control, to sell securities under the offering, as proposed, or should
we consider an alternative such as the closing of the final sale of
securities under the offering? Are there any administrative or
logistical issues that would be raised if the ``termination or
completion'' of an offering were determined based on the closing of the
final sale of securities under the offering? Should anything else be
considered ``terminated or completed'' with respect to offerings under
Regulation A and Regulation Crowdfunding, and registered offerings?
18. Should we consider revisions to Regulation Crowdfunding that
relate to intermediaries in light of the proposed integration safe
harbors? For example, should we revise the portal requirements under
Regulation Crowdfunding to permit concurrent Rule 506(c) offerings to
be offered and sold via a portal's internet platform? What other
Regulation Crowdfunding rules should be revised to facilitate Rule
[[Page 17974]]
506(c) offerings concurrent with Regulation Crowdfunding offerings?
Should we provide guidance regarding issues that may arise when an
intermediary seeks to host concurrent offerings? Should we expand any
of our rules, for example, the rules under Regulation Crowdfunding, to
permit certain entities to act as intermediaries for sales of
securities to accredited investors in concurrent Rule 506(c) offerings?
B. General Solicitation and Offering Communications
Section 4(a)(2) of the Securities Act exempts from the registration
requirements ``transactions by an issuer not involving any public
offering,'' \121\ but does not define the phrase. The precise limits of
this statutory exemption are also not defined by rule. Whether a
transaction is one not involving any public offering is essentially a
question of fact and necessitates a consideration of the surrounding
circumstances, including such factors as the relationship between the
offerees and the issuer, and the nature, scope, size, type, and manner
of the offering.\122\ An issuer relying on Section 4(a)(2) is
restricted in its ability to make public communications to attract
investors to its offering because public advertising is incompatible
with a claim of exemption under Section 4(a)(2).\123\
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\121\ 15 U.S.C. 77d(a)(2).
\122\ See Non-Public Offering Exemption Release. Section 4(a)(2)
was traditionally viewed as a way to provide ``an exemption from
registration for bank loans, private placements of securities with
institutions, and the promotion of a business venture by a few
closely related persons.'' Id. In 1962, prompted by increased use of
the exemption for speculative offerings to unrelated and uninformed
persons, the Commission clarified limitations on the exemption's
availability. See id.
\123\ See id.
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The Commission adopted Rule 506 of Regulation D as a non-exclusive
safe harbor under Section 4(a)(2), providing objective standards on
which an issuer could rely to meet the requirements of the Section
4(a)(2) exemption.\124\ This included a prohibition on the use of
general solicitation or advertising to market the securities. In 2012,
Section 201(a) of the JOBS Act directed the Commission to eliminate the
prohibition on using general solicitation in offerings under Rule 506
where all purchasers of the securities are accredited investors and the
issuer takes reasonable steps to verify that the purchasers are
accredited investors.\125\ To implement Section 201(a), the Commission
adopted paragraph (c) of Rule 506, and retained the prior Rule 506 safe
harbor as paragraph (b).\126\ As a result, general solicitation or
advertising continues to be prohibited in an offering under Rule
506(b).
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\124\ See Regulation D Adopting Release, at Section III.C.
Attempted compliance with any rule in Regulation D does not preclude
an issuer from claiming the availability of another applicable
exemption. For example, an issuer's failure to satisfy all the terms
and conditions of Rule 506(b) does not raise a presumption that the
exemption provided by Section 4(a)(2) is not available. See Rule
500(c).
\125\ Sec. 201(a), Public Law 112-106, 126 Stat. 306 (Apr. 5,
2012).
\126\ See Rule 506(c) Adopting Release.
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1. Exemption From General Solicitation for ``Demo Days'' and Similar
Events
The Securities Act defines, and the Commission has historically
interpreted, the term ``offer'' broadly.\127\ The Commission has
explained that ``the publication of information and publicity efforts,
made in advance of a proposed financing which have the effect of
conditioning the public mind or arousing public interest in the issuer
or in its securities constitutes an offer.'' \128\ Although the terms
``general solicitation'' and ``general advertising'' are not defined in
Regulation D, Rule 502(c) does provide examples of general solicitation
and general advertising, including advertisements published in
newspapers and magazines, communications broadcast over television and
radio, and seminars where attendees have been invited by general
solicitation or general advertising.\129\ The Commission has stated
that other uses of publicly available media, such as unrestricted
websites, also constitute general solicitation and general
advertising.\130\ In this release, we refer to both general
solicitation and general advertising as they relate to an offer of
securities as ``general solicitation.''
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\127\ See Securities Offering Reform, Release No. 33-8591 (July
19, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering Reform
Release''), at note 88 (``The term `offer' has been interpreted
broadly and goes beyond the common law concept of an offer.'')
(citing Diskin v. Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971) and
SEC v. Cavanaugh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998)). See also
Section 2(a)(3) of the Securities Act (noting that an offer includes
every attempt to dispose of a security or interest in a security,
for value; or any solicitation of an offer to buy a security or
interest in a security).
\128\ See Securities Offering Reform Release.
\129\ See Rule 502(c).
\130\ See Use of Electronic Media for Delivery Purposes, Release
No. 33-7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)], at Section
II.A.D; and Use of Electronic Media Release, at Section II.C.2.
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Commenters have raised questions about issuers that present to
potential investors at ``demo days'' and similar events.\131\ These
events are generally organized by a group or entity (such as a
university, angel investors, an accelerator, or an incubator) that
invites issuers to present their businesses to potential investors,
with the aim of securing investment. If the issuer's presentation at a
``demo day'' or similar event constitutes an offer of securities, the
issuer would not be deemed to have engaged in general solicitation if
the organizer of the event has limited participation in the event to
individuals or groups of individuals with whom the issuer or the
organizer has a pre-existing substantive relationship or that have been
contacted through an informal, personal network of experienced,
financially sophisticated individuals, such as angel investors.
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\131\ See CCMC Letter (stating that ``the SEC should clarify
that startups and angel investors are permitted to participate in
``demo days'' or other publicity events in which companies serially
present to audiences that may include potential investors but for
which no specific investment solicitation is made''); and letter
from Investment Adviser Association dated October 18, 2019 (``IAA
Letter'') (suggesting that the Commission ``should clarify that
limited communications designed for consumption by a non-public
audience (such as institutional publications or institutionally
focused consultant databases), or participation in a `demo day' or
similar event, would not be considered general solicitation or
general advertising'').
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However, we understand that in many cases it may not be practical
for the organizer of the event to limit participation in this manner.
As a result, we are proposing Rule 148, which would provide that
certain ``demo day'' communications would not be deemed general
solicitation or general advertising.\132\ Specifically, as proposed, an
issuer would not be deemed to have engaged in general solicitation if
the communications are made in connection with a seminar or meeting by
a college, university, or other institution of higher education, a
local government, a nonprofit organization, or an angel investor group,
incubator, or accelerator sponsoring the seminar or meeting.\133\
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\132\ Because communications that comply with proposed Rule 148
would not be deemed a general solicitation or general advertising,
the limitations on the manner of offering in Rule 502(c) of
Regulation D would be inapplicable.
\133\ A proposed Instruction to Rule 148 would provide that for
purposes of the rules the term ``angel investor group'' means a
group: (A) Of accredited investors; (B) that holds regular meetings
and has written processes and procedures for making investment
decisions, either individually or among the membership of the group
as a whole; and (C) is neither associated nor affiliated with
brokers, dealers, or investment advisers.
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With respect to the organization and conduct of the event, the
sponsor would not be permitted to make investment recommendations or
provide investment advice to attendees of the event, nor would it be
permitted to engage in any investment negotiations between the issuer
and investors attending the event. The sponsor would not be permitted
to
[[Page 17975]]
charge attendees of the event any fees, other than reasonable
administrative fees, or receive any compensation for making
introductions between attendees and issuers, or for investment
negotiations between the parties. The sponsor also would not be
permitted to receive any compensation with respect to the event that
would require it to register as broker or dealer under the Exchange
Act, or as an investment adviser under the Advisers Act.
In addition, the proposed rule would specify that the advertising
for the event may not reference any specific offering of securities by
the issuer and that the information conveyed at the event regarding the
offering of securities by the issuer is limited to:
Notification that the issuer is in the process of offering
or planning to offer securities;
The type and amount of securities being offered; and
The intended use of the proceeds of the offering.
We believe that this tailored approach, which limits the types of
organizations that may sponsor events and the scope of the sponsor's
activities, coupled with the limitation on the information about a
securities offering that an issuer is permitted to provide at the
event, appropriately provides for investor protection while permitting
issuers, particularly small and emerging issuers, and investors, the
opportunity to more efficiently expand and grow their networks. For
issuers that have been reported to have historically had less access to
capital at start up, this approach may offer an opportunity to help
bridge any funding gaps by allowing them to reach broader
audiences.\134\
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\134\ For example, diverse founders, including women-owned and
minority-owned businesses may have less access to start-up capital
and venture capital (``VC'') funding. See Office of the Advocate for
Small Business Capital Formation Annual Report for Fiscal Year 2019,
available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf, at 26 and 30. See also Presentation
at Feb. 4, 2020 Small Business Capital Formation Advisory Committee
meeting by James Gelfer, Senior Strategist, Lead Venture Analyst,
PitchBook, available at https://www.sec.gov/spotlight/sbcfac/2020-02-04-presentation-pitchbook-venture-climate.pdf, at 13 (``Female-
founded companies as a proportion of total US VC deal activity''
(showing the proportion of total U.S. VC deals for companies that
had at least one female founder (22.8 percent of VC deals and 14.2
percent of VC dollars) and for companies with all female founders
(6.8 percent of VC deals and 2.7 percent of VC dollars)). See also
Banerji, Devika & Reimer, Torsten, Startup Founders and Their
LinkedIn Connections: Are Well-Connected Entrepreneurs More
Successful? 90 Computers in Hum. Behavior 46 (2019) (finding that
social connectedness of founders was the best predictor of funds
raised).
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In light of recent developments in the capital markets, including
the adoption of Rule 506(c), as well as developments in communications
and technology, we considered, but are not proposing at this time,
adding revised examples of general solicitation to our rules.
Furthermore, several commenters on the Concept Release, as well as the
SEC Small Business Capital Formation Advisory Committee, have suggested
that further guidance and clarification as to the types of
communications that classify as ``general solicitation'' and ``general
advertising'' would be helpful.\135\
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\135\ See, e.g., NYSBA Letter; letter from Institute for
Portfolio Alternatives dated September 24, 2019 (``IPA Letter'');
CCMC Letter; Dechert Letter; IAA Letter; letter from Association for
Corporate Growth dated September 24, 2019; ABA Letter; and
Transcript of SEC Small Business Capital Formation Advisory
Committee (Feb. 4, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-020420.pdf (``2020 Transcript of
Small Business Advisory Committee''), at 172-174 (discussing
confusion surrounding general solicitation).
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As a result, we considered whether to update and expand the current
Rule 502(c) examples of general solicitation by adding examples to a
new rule outside of Regulation D, deleting the current examples from
Rule 502(c) and including a reference in Rule 502(c) to the new rule.
For example, we considered stating in the new rule that an issuer would
be considered to be engaging in general solicitation if, among other
things, the issuer or any person acting on the issuer's behalf uses one
or more of the following methods of communication to offer securities:
Any advertisement, article, notice or other communication
published on a publicly available website or mobile application,
including social media, published in any newspaper, magazine, or
similar media, or broadcast over television, radio or a similar medium;
Any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising, other than certain
``demo day'' activities covered by proposed Rule 148; or
Any form of direct mail, telephone, email, text messaging,
or similar method of communication, if the issuer (or any underwriter,
broker, dealer, or agent acting on behalf of the issuer) does not have
a pre-existing, substantive relationship with the offerees, or cannot
otherwise demonstrate the absence of a general solicitation.
This approach would encompass present day communication methods
that did not exist at the time of Rule 502(c)'s adoption, such as
websites, social media, texts, and email, and would clarify that cold
calling and other similar methods of communication that do not involve
the use of mass media may still be considered general solicitation if
the issuer or its agent does not have a pre-existing, substantive
relationship with the offerees, or cannot otherwise demonstrate the
absence of a general solicitation.
We note the existence of a pre-existing, substantive relationship
is not the exclusive means of demonstrating the absence of a general
solicitation. For example, an issuer may also demonstrate the absence
of a general solicitation by limiting its communications to direct
contact by the issuer or its agents outside of a public offering
effort. In addition, groups of experienced, sophisticated investors,
such as ``angel investors,'' may share information about offerings
through their network and members who have a relationship with a
particular issuer may introduce that issuer to other members. Issuers
that contact one or more experienced, sophisticated members of the
group through this type of referral may be able to establish a
reasonable belief that other offerees in the network have the necessary
financial experience and sophistication.
Request for Comment
19. Should we, as proposed, provide a specific exception for
communications in connection with a ``demo-day'' or similar event so
that it would not be considered general solicitation if certain
conditions are met? Should we permit organizations other than those
listed in proposed Rule 148 to act as sponsors of such events? An
instruction to the proposed rule provides that the term ``angel
investor group'' means a group that is composed of accredited investors
that holds regular meetings and has written processes and procedures
for making investment decisions, either individually or among the
membership of the group as a whole, and is neither associated nor
affiliated with brokers, dealers, or investment advisers. Does this
definition appropriately cover the types of groups that sponsor such
events, or are there changes that should be made to the definition?
Should we include, as proposed, accelerators and incubators as
organizations that may act as sponsors of these events? Should we
define the terms ``accelerator'' and ``incubator'' for this purpose?
Alternatively, should we specify only the types of groups that would be
prohibited from acting as sponsors of these events, such as broker-
dealers, investment advisers, or others? Are the proposed conditions to
this exception, such as limitations on the sponsor's fees and the types
of information an issuer may provide at the event appropriate? If
[[Page 17976]]
not, how should those conditions be revised? Are there additional
conditions that we should specify with respect to this exception, such
as a requirement that certain disclosures be provided to event
attendees, or limitations on the characteristics of the entities that
may avail themselves of this exception (i.e., entities formed for the
purposes of sponsoring events in order to engage in general
solicitation)?
20. Should we provide a definition of ``general solicitation'' and
``general advertising''? If so, how should those terms be defined?
Should we instead eliminate all prohibitions on ``general
solicitation'' and ``general advertising'' and focus investor
protections at the time of sale rather than at the time of offer?
21. Should we move the existing list of examples provided in Rule
502(c) to a new rule? Do the current examples in Rule 502(c) pose any
particular challenges we should consider in formulating a new rule? Are
there different or additional examples that we should provide? For
example, should we include any form of direct mail, telephone, email,
text messaging, or similar method of communication, if the issuer (or
any underwriter, broker, dealer, or agent acting on behalf of the
issuer) does not have a pre-existing, substantive relationship with the
offerees, or cannot otherwise demonstrate the absence of a general
solicitation?
22. Should we define the term ``pre-existing substantive
relationship'' in the rule? If so, should we define the term
consistently with the guidance set forth in this release? If not, how
should we define this term?
23. Would the proposed changes positively impact access to capital
by counterbalancing social network effects for underrepresented
founders, such as women, minorities, and entrepreneurs in rural areas?
2. Solicitations of Interest
The JOBS Act added Securities Act Section 5(d), permitting emerging
growth companies (``EGCs''),\136\ and persons authorized to act on
their behalf, to engage in oral or written communications with
potential investors that are QIBs or IAIs before or after filing a
registration statement to gauge such investors' interest in a
contemplated securities offering.\137\ Securities Act Rule 163B, which
the Commission adopted in September 2019, extended to all issuers the
``test-the-waters'' accommodation previously available only to
EGCs.\138\ Under the new rule, all issuers and those authorized to act
on their behalf are allowed to gauge market interest in a registered
securities offering through discussions with QIBs and IAIs prior to, or
following, the filing of a registration statement.
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\136\ See 17 CFR 230.405 (defining ``emerging growth company'').
\137\ Sec. 105(c), Public Law 112-106, 126 Stat. 306 (2012).
\138\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10699 (Sep. 25, 2019) [84 FR 53011 (Oct. 4,
2019)] (``Solicitations of Interest Release'').
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Regulation A also permits issuers to ``test-the-waters'' with, or
solicit interest in a potential offering from, the general public
either before or after the filing of the offering statement, provided
that all solicitation materials include certain required legends and,
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.\139\
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\139\ See 17 CFR 230.255.
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These solicitations of interest are deemed to be offers of a
security for sale for purposes of the antifraud provisions of the
federal securities laws.\140\ We believe that the existing testing-the-
waters provisions allow issuers to consult effectively with investors
as they evaluate market interest in a contemplated registered or
Regulation A securities offering before incurring the costs associated
with such an offering, while preserving investor protections. This
consultation allows investors to have input into the structuring of the
offering and also allows for investors to convey to the issuer the
types of information about which they are most interested, leading
ultimately to a lower cost of capital for the issuer and potentially
resulting in more investor-friendly deal terms. Because we are of the
view that issuers may similarly benefit from an ability to consult with
investors as they evaluate market interest in other types of offerings,
we are proposing a new exemption that would permit an issuer to solicit
indications of interest in an exempt offering orally or in writing
prior to determining which exemption it would rely upon to conduct the
offering. We are also proposing amendments to Regulation Crowdfunding
to permit an issuer to solicit indications of interest under a new
Regulation Crowdfunding-specific provision, as well as amendments to
Regulation Crowdfunding's and Regulation A's testing-the-waters
provisions to reflect the possibility that an issuer may choose to
test-the-waters using a generic solicitation of interest prior to
determining whether to conduct its offering under Regulation A or
Regulation Crowdfunding.
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\140\ See Solicitations of Interest Release; and 17 CFR
230.255(a).
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a. Generic Solicitation of Interest Exemption
We are proposing to create a new exemption, using our authority
under Section 28 of the Securities Act, that would permit an issuer to
use generic solicitation of interest materials for an offer of
securities prior to a making a determination as to the exemption under
which the offering may be conducted. This new exemption, which is
substantially based on existing Rule 255 of Regulation A, would be set
forth in proposed Rule 241. We believe that proposed Rule 241 would
further the public interest by allowing issuers significant flexibility
to gauge market interest in an exempt offering, tailor the size and
other terms of the offering, and reduce the costs of conducting an
exempt offering. Investors would also benefit from this flexibility,
because they would potentially have input into the structuring of the
offering and be able to convey to the issuer the types of information
about which they are most interested, leading ultimately to a lower
cost of capital for the issuer. As discussed below, the proposed rule
also includes several conditions intended to ensure appropriate
investor protections.
An issuer that chooses to ``test-the-waters'' under the proposed
exemption would not be permitted to identify which specific exemption
from registration it may rely upon for a subsequent offer and sale of
the securities. We believe that if the issuer has determined the
exemption under which the offering will be conducted, the issuer must
comply with the specific terms of the exemption being relied upon. For
example, an issuer could conduct a generic solicitation of interest
under proposed Rule 241 and determine based on feedback from potential
investors that it wishes to proceed with an offering under Regulation
A. From that point in time, any testing-the-waters materials that the
issuer uses would be required to comply with Rule 255 of Regulation A.
As proposed, Rule 241(b) would require the materials used under
this exemption to bear a legend or disclaimer notifying potential
investors that (1) the issuer is considering an offering of securities
exempt from registration under the Securities Act, but has not
determined a specific exemption from registration the issuer
[[Page 17977]]
intends to rely upon for the subsequent offer and sale of the
securities; (2) no money or other consideration is being solicited, and
if sent, will not be accepted; (3) no sales will be made or commitments
to purchase accepted until the issuer determines the exemption under
which the offering is intended to be conducted and, where the exemption
includes filing, disclosure, or qualification requirements, all such
requirements are met; and (4) a prospective purchaser's indication of
interest is non-binding. These solicitations would be deemed to be
offers of a security for sale for purposes of the antifraud provisions
of the federal securities laws.\141\
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\141\ Proposed Rule 241(a).
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Depending on the method of dissemination of the information, such
offers may be considered a general solicitation.\142\ If soliciting
generic indications of interest under the proposed rule is done in a
manner that would constitute general solicitation, and the issuer
ultimately decides to conduct an unregistered offering under an
exemption that does not permit general solicitation, the issuer would
need to analyze whether the generally solicited offer and the
subsequent private offering could be integrated, thereby making the
exemption that does not permit general solicitation unavailable. Such
an issuer, however, may be able to rely on the integration safe harbor
in proposed Rule 152(b)(1) to conduct an offering that does not permit
general solicitation if it waits 30 days following termination of the
generic solicitation of interest before commencing the private
offering. Note, however, that even if the 30-day safe harbor is
available, the issuer would not be able to follow a generic
solicitation of interest that used a general solicitation with an
offering pursuant to an exemption that does not permit general
solicitation, such as Rule 506(b), if the offerees contacted in
connection with the Rule 506(b) offering were solicited by means of the
general solicitation. Alternatively, an issuer that wanted to have the
option to conduct an offering that does not permit general solicitation
immediately following a generic solicitation of interest could ``test-
the-waters'' using the proposed legend without using general
solicitation, for example, by limiting its communications to potential
investors with whom the issuer has a pre-existing substantive
relationship or to direct contact by the issuer or its agents outside
of a public offering effort.
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\142\ Such offers also may be considered ``directed selling
efforts'' as defined in Regulation S. Under the proposed amendment
to the definition of directed selling efforts in Rule 902 of
Regulation S, a generic solicitation that would be considered
general solicitation activity would not be considered ``directed
selling efforts'' in connection with an offering under Regulation S,
if the general solicitation activity is not undertaken for the
purpose of conditioning the market in the United States for any of
the securities being offered in reliance on Regulation S. Such an
issuer would be subject to the proposed Rule 906 restrictions on
resales. See supra Section II.A.2.
---------------------------------------------------------------------------
We believe that the proposed exemption would be consistent with the
protection of investors. As with the existing testing-the-waters
provisions of Rule 163B and Regulation A, the anti-fraud provisions of
the federal securities laws would apply to these generic solicitations
of interest.\143\ In addition, proposed Rule 241 would provide an
exemption from registration only with respect to the generic
solicitation of interest, not for a subsequent offer or sale. Should
the issuer move forward with an exempt offering following the generic
solicitation of interest, the issuer must comply with the exemption
relied upon for the subsequent offering, and investors will have the
benefit of the investor protections encompassed in such exemption. For
example, if an issuer relies on proposed Rule 241 for a generic
solicitation of interest and then opts to rely on Regulation A for the
offering, the investors will receive the full disclosures required by
Regulation A prior to the time of sale.
---------------------------------------------------------------------------
\143\ See, e.g., Section 17(a) of the Securities Act. See also
Solicitations of Interest Release; and 2015 Regulation A Release.
---------------------------------------------------------------------------
In addition to the information currently required to be disclosed
under Regulation A and Regulation Crowdfunding, we are proposing to
also require that the generic solicitation materials be made publicly
available as an exhibit to the offering materials filed with the
Commission, if the Regulation A or Regulation Crowdfunding offering is
commenced within 30 days of the generic solicitation.\144\ We believe
that making the solicitation materials publicly available would help to
hold issuers accountable for the content of solicitation materials by
making them subject to scrutiny by the potential investors and the
public and, in the case of Regulation A, staff review and comment. It
also would help to ensure that the solicitation information is
consistent with the information contained in the Regulation A or
Regulation Crowdfunding offering materials.
---------------------------------------------------------------------------
\144\ See proposed Rule 201(z); and proposed paragraph 13 of
Form 1-A, Part III, Item 17. Currently, an issuer that solicits
indications of interest in reliance on Rule 255 of Regulation A is
required to submit or file solicitation materials to the Commission
as an exhibit when the offering statement is either submitted for
non-public review or filed (and update for substantive changes in
such material after the initial nonpublic submission or filing).
---------------------------------------------------------------------------
We are also proposing an amendment to the information requirements
in Rule 502(b) so that if the issuer sells securities under Rule 506(b)
within 30 days of the generic solicitation of interest to any purchaser
that is not an accredited investor, the issuer would be required to
provide such purchaser with any written communication used under
proposed Rule 241. Although this information would not be made publicly
available, we believe that potential investors may benefit from the
ability to compare the solicitation materials with the information
being provided in the Rule 506(b) offering, which may help investors
hold issuers accountable for any inconsistencies in such materials. We
are not proposing that an issuer that subsequently opts to rely on any
other exemption, including Rule 506(c), Rule 504, Rule 147, or Rule
147A, for the offering be required to file or provide to investors any
materials used under proposed Rule 241, because such rules do not
require issuers to file with the Commission any disclosure provided to
investors or distinguish between accredited and non-accredited
investors for disclosure purposes.
We are not proposing to limit the types of investors that may be
solicited under proposed Rule 241. While Securities Act Section 5(d)
and Rule 163B only permit the use of testing-the-waters communications
with QIBs and IAIs, Regulation A permits such communications with all
investor types. We believe that limiting the communications under the
proposed exemption to QIBs and IAIs would undermine the intent of the
exemption, which is to allow issuers to gauge market interest in a
potential exempt offering. Unlike registered offerings, there is likely
to be relatively limited institutional investor interest in many types
of exempt offerings, particularly those that rely on general
solicitation. In addition, small or emerging businesses are likely to
face challenges in attracting significant institutional investor
interest, either directly or through an underwriter or other
intermediary. Thus, limiting this accommodation to institutional
investors would significantly undermine its utility.
We are also not proposing to provide for the preemption of state
securities law registration and qualification requirements for offers
made under proposed Rule 241. Section 18 of the Securities Act
generally provides for preemption of state law registration and
qualification requirements for ``covered
[[Page 17978]]
securities,'' \145\ and the Commission has previously used its
authority under the Securities Act to define such term. In connection
with the 2015 amendments to Regulation A, the Commission determined
that preemption of state securities law registration and qualification
requirements is appropriate for purchasers in Tier 2 offerings, and
defined ``qualified purchaser'' to include any person to whom
securities are offered or sold in a Tier 2 offering.\146\ However, in
light of concerns raised in connection with the Regulation A amendments
by state regulators about the testing-the-waters provisions applicable
to Regulation A, as well as what the Commission anticipated would be
the generally more local nature of Tier 1 offerings, the Commission did
not include offerees in Tier 1 offerings in the definition of
``qualified purchaser.'' \147\ We preliminarily believe that similar
concerns would exist with respect to the proposed generic solicitation
of interest exemption.
---------------------------------------------------------------------------
\145\ See 15 U.S.C. 77r(c). Section 18(c) of the Securities Act
preserves general anti-fraud authority for state securities law
regulators.
\146\ See 17 CFR 230.256; and 2015 Regulation A Release, at text
accompanying note 799.
\147\ See 2015 Regulation A Release, at text accompanying note
798.
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b. Regulation Crowdfunding
An issuer currently may not make offers or sales under Regulation
Crowdfunding prior to filing a Form C with the Commission.\148\
Commenters on the Concept Release expressed support for permitting
testing-the-waters in advance of an offering under Regulation
Crowdfunding.\149\ These commenters indicated that prohibiting testing-
the-waters under Regulation Crowdfunding restricts issuers' ability to
adequately gauge interest in an offering, before incurring the expense
of preparing a Form C.\150\
---------------------------------------------------------------------------
\148\ See Section 4A(b) of the Securities Act.
\149\ See CrowdCheck Letter; CCA Letter; letter from Wefunder
dated September 13, 2019 (``Wefunder Letter''); letter from
MainVest, Inc. dated September 24, 2019 (``MainVest Letter'');
letter from Republic dated September 24, 2019 (``Republic Letter'');
letter from Jade Barker dated September 24, 2019; letter from
Association of Online Investment Platforms dated July 5, 2019
(``AOIP Letter''); letter from Indemnis et al. dated September 24,
2019 (``Indemnis et al. Letter''); letter from Andrew A. Schwartz
dated September 24, 2019 (``A. Schwartz Letter''); Letter from
Christian Bilger dated September 30, 2019 (``C. Bilger Letter'');
letter from Patrick McHenry, U.S. Representative, dated October 15,
2019 (``Rep. McHenry Letter''); and Silicon Prairie Letter.
\150\ See, e.g., Wefunder Letter (describing the fact that
issuers are currently required to spend ``over $10,000'' to prepare
for a Regulation Crowdfunding offering, without clarity on the
investor interest in the offering); MainVest Letter (suggesting that
testing-the-waters would allow issuers to more accurately ``assess
the markets appetite and valuing of their business''); Republic
Letter (stating that, under the current rules, ``companies cannot
assess investor interest in their offering before having to commit
the time and expense necessary to conduct a Reg. CF offering'');
Indemnis et al. Letter (stating that the current rules prohibit
issuers from gaining ``any real insight into the likelihood of
success''); C. Bilger Letter (arguing that testing-the-waters would
allow issuers ``to assess the support and project feasibility before
[making a] costly Reg CF filing''); and AOIP Letter (suggesting that
permitting testing-the-waters would save issuers both time and
money).
---------------------------------------------------------------------------
Some commenters supported permitting testing-the-waters under
Regulation Crowdfunding, subject to certain restrictions on the means
by which such communications were provided to investors, the content of
such communications, and the way in which such communications were
included in an issuer's public filings.\151\ Two of these commenters
supported allowing testing-the-waters if such communications were only
conducted through an intermediary's platform.\152\ Another commenter
suggested that testing-the-waters materials should be required to
direct investors to the funding portal (or broker-dealer) for more
information on the offering.\153\ In addition, several commenters
suggested that testing-the-waters materials should be filed with the
Commission on Form C.\154\
---------------------------------------------------------------------------
\151\ See, e.g., CrowdCheck Letter; Wefunder Letter; Republic
Letter; and Silicon Prairie Letter.
\152\ See Republic Letter; and Indemnis et al. Letter.
\153\ See CCA Letter.
\154\ See Wefunder Letter (suggesting that testing-the-waters
materials should be filed as a partially complete Form C);
CrowdCheck Letter (suggesting that testing-the-waters materials
should be included as part of Form C when the final Form C is
filed); and Silicon Prairie Letter (suggesting that tombstone
advertisements should be separately filed on EDGAR).
---------------------------------------------------------------------------
We are proposing to permit Regulation Crowdfunding issuers to test-
the-waters orally or in writing prior to filing a Form C with the
Commission under proposed Rule 206, which is based on existing Rule 255
of Regulation A.\155\ Consistent with the views of commenters, we
believe that permitting such issuers to test-the-waters orally or in
writing prior to incurring the expense of filing a Form C with the
Commission may greatly facilitate the use of the exemption, as well as
limit the costs incurred by issuers. As noted above with respect to the
proposed generic testing-the-waters provision, we believe that the
flexibility afforded by the amendment would benefit investors, who
would potentially have input into the structuring of the offering and
be able to convey to the issuer the types of information about which
they are most interested, leading ultimately to a lower cost of capital
for the issuer.
---------------------------------------------------------------------------
\155\ We are also proposing an amendment to Rule 204 to permit
issuers to engage in communications under proposed Rule 206.
---------------------------------------------------------------------------
Under proposed Rule 206, issuers would be permitted to test-the-
waters with all potential investors. These testing-the-waters materials
would be considered offers that are subject to the antifraud provisions
of the federal securities laws. Like Rule 255, proposed Rule 206 would
require issuers to include certain legends in the testing-the-waters
materials. The legends would provide that: (1) No money or other
consideration is being solicited, and if sent, will not be accepted;
(2) no sales will be made or commitments to purchase accepted until the
Form C is filed with the Commission and only through an intermediary's
platform; and (3) a prospective purchaser's indication of interest is
non-binding.
Under proposed Rule 201(z), issuers would be required to include
any Rule 206 solicitation materials as an exhibit to the Form C that is
filed with the Commission.\156\ As noted above, we believe that making
the solicitation materials publicly available would promote
accountability for the content of those materials and help to ensure
that they are consistent with the information contained in the
Regulation Crowdfunding offering materials. Unlike Rule 255 of
Regulation A, which permits issuers to use testing-the-waters materials
both before and after the filing of the offering statement with the
Commission, issuers under proposed Rule 206 could only use testing-the-
waters materials before the Form C is filed. Once the Form C is filed,
any offering communications would be required to comply with the terms
of Regulation Crowdfunding, including the Rule 204 advertising
restrictions. We believe this is appropriate because, while sales under
Regulation A may not occur until after the offering statement is
qualified, a Regulation Crowdfunding offering commences upon filing of
the Form C.
---------------------------------------------------------------------------
\156\ See Proposed Rule 201(z).
---------------------------------------------------------------------------
In addition, under the proposed rule, an issuer that makes use of
proposed Rule 241's generic testing-the-waters materials and then opts
to rely on Regulation Crowdfunding for an offering within 30 days of
the most recent generic testing-the-waters materials would be required
to file the generic solicitation materials as an exhibit to the Form C.
We are proposing to require filing of the materials only during the 30-
day time period because once 30 days elapses following a terminated or
completed generic solicitation, that offer would not be subject to
integration with any subsequent offer or sale in
[[Page 17979]]
accordance with the proposed safe harbor of Rule 152(b)(1).
c. Regulation A
As discussed above, we are proposing to amend Form 1-A's exhibit
requirements to require an issuer that uses proposed Rule 241 to
conduct a generic solicitation of interest and then opts to rely on
Regulation A for its offering within 30 days of the most recent generic
solicitation communication to file the generic solicitation materials
as an exhibit to the Form 1-A.
d. Regulation D
Similarly, we are proposing to amend Rule 502(b)(2)(viii) to
require an issuer that uses proposed Rule 241 to conduct a generic
solicitation of interest and then opts to rely on Rule 506(b) within 30
days of the most recent generic solicitation communication and sells
securities to any purchaser that is not an accredited investor, to
provide the generic solicitation materials to such purchaser a
reasonable time prior to sale. As discussed above, we believe potential
investors may benefit from the ability to compare the solicitation
materials with the information being provided in the Rule 506(b)
offering.
Request for Comment
24. Should we, as proposed, permit generic solicitations of
interest in advance of an exempt offering of securities under any
exemption from registration? Are there any investor protection concerns
with doing so? Should we limit the ability to provide testing-the-
waters materials to IAIs and QIBs?
25. Should we, as proposed, require filing of the generic
solicitation materials as an exhibit to the Form C in a subsequent
Regulation Crowdfunding offering, or with the Form 1-A in a subsequent
Regulation A offering? Should we instead require the generic
solicitation materials to be either filed with Form C or Form 1-A, or
filed separately on EDGAR? Should we, as proposed, limit the filing
requirement to offerings that commence within 30 days of the most
recent generic test-the-waters communication? Should we instead impose
the filing requirement irrespective of the timing of the subsequent
offering or for some alternative timeframe?
26. Should we, as proposed, require an issuer to provide the
generic solicitation materials to non-accredited investors in a
subsequent Rule 506(b) exempt offering if such Rule 506(b) offering is
within 30 days of the generic solicitation? Should we require such
materials to be provided to the Commission? Should we require such
material to be provided to investors or the Commission even outside of
the 30-day period proposed?
27. Should we require an issuer that uses generic solicitation
materials and subsequently relies on Rule 506(c), Rule 504, Rule 147,
Rule 147A, or an exemption other than Regulation A, Regulation
Crowdfunding, or Rule 506(b) within 30 days to provide the generic
solicitation materials to such investors? Should we require such
materials to be provided to the Commission? Should we require such
material to be provided to investors or the Commission even outside of
the 30-day period proposed?
28. Should we, as proposed, amend Regulation Crowdfunding to permit
testing-the-waters for a Regulation Crowdfunding offering, similar to
the current testing-the-waters provision of Regulation A? Should we
impose additional restrictions on the manner or content of such
communications? For example, should we permit testing-the-waters in
Regulation Crowdfunding only if any such communications are only
conducted through an intermediary's platform, or only if the testing-
the-waters materials are required to direct investors to the funding
portal (or broker-dealer) for more information on the offering?
29. As proposed, the rules would not preempt state securities law
registration and qualification requirements for offers made under the
proposed Rule 241 exemption. Should we adopt Rule 241 as proposed?
Would the lack of state preemption make it less likely that issuers
will use proposed Rule 241? If so, should we preempt state securities
law registration and qualification requirements for offers made under
the proposed Rule 241 exemption? If not, should we limit preemption to
materials provided to accredited investors or QIBs and IAIs?
30. Should we permit testing-the-waters communications to continue
following the filing of the Form C with the Commission in a Regulation
Crowdfunding offering?
3. Other Regulation Crowdfunding Offering Communications
Under Rule 204 of Regulation Crowdfunding, an issuer may not
advertise the terms of a Regulation Crowdfunding offering outside of
the intermediary's platform except in a notice that directs investors
to the intermediary's platform and includes no more than the following
information:
A statement that the issuer is conducting an offering
pursuant to Section 4(a)(6) of the Securities Act, the name of the
intermediary through which the offering is being conducted, and a link
directing the potential investor to the intermediary's platform;
The terms of the offering, which means the amount of
securities offered, the nature of the securities, the price of the
securities, and the closing date of the offering period; and
Factual information about the legal identity and business
location of the issuer, limited to the name of the issuer of the
security, the address, phone number, and website of the issuer, the
email address of a representative of the issuer, and a brief
description of the business of the issuer.\157\
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\157\ See Rule 204.
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Although advertising the terms of the offering other than through
the intermediary's platform is limited to a brief notice, an issuer may
communicate with investors and potential investors about the terms of
the offering through communication channels provided on the
intermediary's platform. An issuer must identify itself as the issuer,
and persons acting on behalf of the issuer must identify their
affiliation with the issuer, in all communications on the
intermediary's platform.\158\
---------------------------------------------------------------------------
\158\ See Rule 204(c).
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Commenters have expressed uncertainty as to whether they may orally
communicate with potential investors outside of the intermediary's
platform once the Form C is filed. According to these commenters, the
current requirements of Regulation Crowdfunding make it unclear if an
issuer can discuss an ongoing offering at start-up pitch events, in
person at the issuer's business, or in the issuer and investor
communities, and if so, to what extent.\159\
---------------------------------------------------------------------------
\159\ See CrowdCheck Letter (suggesting that issuers should be
permitted to discuss directly with prospective investors at start-up
pitch events); MainVest Letter (suggesting that the current
framework prohibits issuers ``with brick and mortar locations'' from
discussing the offering with customers, and potential investors, who
come into the issuer's business with questions about the offering);
C. Bilger Letter (indicating that the current restrictions are
``unreasonable'' and ``unrealistic'' as ``[m]ost investment through
Reg CF offerings occurs between issuers and investors that have a
pre-existing relationship or are geographically proximate to one
another,'' and further suggesting that ``[i]nvestors should be
encouraged to pursue multiple channels of investment due diligence
(completely separate from a funding portal), including onsite
inspection of the issuer's business and personal interview of the
issuer's management''); and Wefunder Letter (``Due to legal
ambiguity, some lawyers recommend that issuers do not speak with
potential investors face-to face.'').
---------------------------------------------------------------------------
We are proposing to amend Rule 204 to state that oral
communications with prospective investors are permitted once the Form C
is filed, so long as the
[[Page 17980]]
communications comply with the requirements of Rule 204.\160\ We
believe that this amendment to Rule 204 would be appropriate because it
would provide Regulation Crowdfunding issuers with certainty as to the
acceptable form and content of communications with potential investors,
which may make the exemption more attractive to issuers, while
providing potential investors with the protections afforded by Rule
204. These proposed changes would also align the Regulation
Crowdfunding communication rules more closely with Rule 255 of
Regulation A.
---------------------------------------------------------------------------
\160\ For our proposals regarding communications prior to the
filing of a Form C, see supra Section II.B.2.
---------------------------------------------------------------------------
Request for Comment
31. Should we allow for oral communications about the offering
outside of the funding portal's platform channels, as proposed? If so,
what would be the benefits of allowing more communications? Should we
impose any additional requirements to address investor protection
concerns?
32. Should we expand the types of information considered to be the
terms of the offering for purposes of Rule 204? For example, should we
amend the definition of ``terms of the offering'' to include
information about the planned use of proceeds of the offering or about
the issuer's progress toward meeting its funding target? Should we
amend Rule 204 to allow for oral communications pertaining to any
disclosure required by Rule 201 that is included in the filed Form C?
Alternatively, should an issuer that uses advertising that includes the
terms of the offering be permitted to include additional information,
such as information about the planned use of proceeds of the offering
or the issuer's progress toward meeting its funding target, even if
such information is not included within the definition of the ``terms
of the offering''? Are there other steps we should take to clarify the
advertising restrictions in Rule 204?
33. In light of proposed Rule 152(a)(2), which concerns the
integration of concurrent exempt offerings permitting general
solicitation, should we amend Rule 204 of Regulation Crowdfunding to
permit an issuer to disclose the material terms of a concurrent
offering made in reliance on Regulation Crowdfunding in a Regulation A
offering statement or a Securities Act registration statement filed
with the Commission? Are any revisions needed to Regulation A to permit
such disclosures?
C. Rule 506(c) Verification Requirements
As discussed above, Rule 506(c) permits issuers to generally
solicit and advertise an offering, provided that:
All purchasers in the offering are accredited investors,
The issuer takes reasonable steps to verify that
purchasers are accredited investors, and
Certain other conditions in Regulation D are
satisfied.\161\
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\161\ See Rule 501 (Definitions and terms used in Regulation D);
Rule 502(a) (Integration); and Rule 502(d) (Limitations on Resales).
---------------------------------------------------------------------------
Rule 506(c) provides a principles-based method for verification of
accredited investor status as well as a non-exclusive list of
verification methods. The principles-based method of verification
requires an objective determination by the issuer (or those acting on
its behalf) as to whether the steps taken are ``reasonable'' in the
context of the particular facts and circumstances of each purchaser and
transaction.\162\ Rule 506(c) includes a non-exclusive list of
verification methods that issuers may use, but are not required to use,
when seeking to satisfy the verification requirement with respect to
natural person purchasers.\163\
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\162\ See Rule 506(c) Adopting Release, at Section II.B.1.
\163\ The rule does not set forth a non-exclusive list of
methods for the verification of investors that are not natural
persons. In the adopting release, the Commission expressed the view
that the potential for uncertainty and the risk of participation by
non-accredited investors is highest in offerings involving natural
persons as investors. See Rule 506(c) Adopting Release, at Section
II.B.3.
---------------------------------------------------------------------------
The Commission included the non-exclusive list of verification
methods for natural persons in Rule 506(c) in response to comments
requesting more certainty, but expressly stated that issuers are not
required to use any of the specified methods and may rely on the
principles-based approach to comply with the verification
requirement.\164\ However, the structure of Rule 506(c)'s verification
requirement, with its prominent description of several non-exclusive
verification methods, may be creating uncertainty for issuers and
inadvertently encouraging issuers (or those acting on their behalf) to
rely only on the non-exclusive list.
---------------------------------------------------------------------------
\164\ See Rule 506(c) Adopting Release, at Section II.B.3.
---------------------------------------------------------------------------
Commenters on the Concept Release expressed concerns regarding the
costs and burdens of the ``reasonable steps to verify'' requirement.
For example, one commenter stated that some issuers may be concerned
about the added cost of capital represented by the fees charged by
third party verification services.\165\ Some commenters also expressed
concern about the difficulty of determining the appropriate levels of
verification of the accredited investor status of purchasers and the
impact on investor privacy.\166\ Other commenters stated that issuers
may be focusing on compliance with the non-exclusive list of methods
and that may be driving away potential investors who are wary of
turning over financially sensitive information, such as tax returns or
brokerage statements, to the issuer for verification.\167\ Some
commenters further noted that some platforms and intermediaries
involved in the verification process do not use all of the methods of
verification included in the non-exclusive list of Rule 506(c), and, as
a result, some accredited investors have been excluded from
offerings.\168\
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\165\ See CrowdCheck Letter.
\166\ See CCMC Letter; and letter from Jor Law dated July 10,
2019. See also 2020 Transcript of Small Business Advisory Committee,
at 173-174 (discussing verification methods and concerns surrounding
investor privacy).
\167\ See IPA Letter; and letter from Wyrick Robbins Yates &
Ponton LLP dated September 17, 2019 (``Wyrick Robbins Letter'')
(``Our experience tells us that sophisticated funds and/or high net-
worth angel investors are very much reluctant to share sensitive
financial information, whether about themselves or their limited
partners. Issuers are often reluctant to ask for such information as
well, particularly where the net worth of the prospective investor
is not in material doubt.'').
\168\ See CrowdCheck Letter (noting that ``not all platforms and
intermediaries are set up to accept all the forms of verification
included in the safe harbors for 506(c)''). See also AngelList
Letter (noting conflicting interpretations and uncertainty among
issuers' counsel regarding verification of smaller private funds
that meet the definition of ``accredited investor'' under Rule
501(a)(8) because each equity investor is accredited).
---------------------------------------------------------------------------
Some commenters on the Concept Release suggested eliminating the
verification requirement altogether.\169\ One commenter suggested
eliminating the verification requirement for offerings that involve a
placement agent, investment adviser or other regulated institution to
act as a gatekeeper.\170\ Other commenters recommended self-
certification as a reasonable method to establish and verify accredited
investor status.\171\ Another commenter suggested adding a verification
method based on a high minimum investment amount to the non-exclusive
list of verification methods.\172\
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\169\ See SIFMA Letter.
\170\ See NYSBA Letter.
\171\ See IPA Letter. See also letter from Joseph L. Schocken
dated September 24, 2019 (``J. Schocken Letter'').
\172\ See Wyrick Robbins Letter.
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We are proposing to add a new item to the non-exclusive list in
Rule 506(c) that would allow an issuer to establish that an investor
for which the issuer previously took reasonable steps to verify as an
accredited investor remains
[[Page 17981]]
an accredited investor as of the time of a subsequent sale if the
investor provides a written representation to that effect and the
issuer is not aware of information to the contrary. We believe that
this new method would reduce the cost and burden of verification for
issuers that may opt to engage in more than one Rule 506(c) offering
over time. Investors' privacy concerns may also be alleviated, because
they would not be asked to repeatedly provide financially sensitive
information to the issuer, while the risk of investor harm would be
mitigated by the pre-existing relationship between the issuer and such
investor.
In addition, in light of the comments received, we believe it would
be helpful to reaffirm and update the Commission's prior guidance with
respect to the principles-based method for verification, and in
particular what may be considered ``reasonable steps'' to verify an
investor's accredited investor status. We believe that this additional
information may lessen concerns that an issuer's method of verification
may be second guessed by regulators or other market participants
without regard to the analysis performed by the issuer in making the
determination, and encourage more issuers to rely on additional
verification methods tailored to their specific facts and
circumstances. This in turn may help reduce the costs and privacy
concerns associated with the current non-exclusive list.
The principles-based method was intended to provide issuers with
significant flexibility in deciding the steps needed to verify a
person's accredited investor status and to avoid requiring them to
follow uniform verification methods that may be ill-suited or
unnecessary to a particular offering or purchaser in light of the facts
and circumstances.\173\ The Commission has previously indicated, and we
continue to believe, that the following factors are among those an
issuer should consider when using this principles-based method of
verification:
---------------------------------------------------------------------------
\173\ See Rule 506(c) Adopting Release, at Section II.B.1.
---------------------------------------------------------------------------
The nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
The amount and type of information that the issuer has
about the purchaser; and
The nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.\174\
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\174\ See id. at Section II.B.3.a. In that release, the
Commission stated that ``[a]fter consideration of the facts and
circumstances of the purchaser and of the transaction, the more
likely it appears that a purchaser qualifies as an accredited
investor, the fewer steps the issuer would have to take to verify
accredited investor status, and vice versa. For example, if the
terms of the offering require a high minimum investment amount and a
purchaser is able to meet those terms, then the likelihood of that
purchaser satisfying the definition of accredited investor may be
sufficiently high such that, absent any facts that indicate that the
purchaser is not an accredited investor, it may be reasonable for
the issuer to take fewer steps to verify or, in certain cases, no
additional steps to verify accredited investor status other than to
confirm that the purchaser's cash investment is not being financed
by a third party.'' Id. In addition, the Commission stated that the
means through which the issuer publicly solicits purchasers may be
relevant in determining the reasonableness of the steps taken to
verify accredited investor status. For example, ``[a]n issuer that
solicits new investors through a website accessible to the general
public, through a widely disseminated email or social media
solicitation, or through print media, such as a newspaper, will
likely be obligated to take greater measures to verify accredited
investor status than an issuer that solicits new investors from a
database of pre-screened accredited investors created and maintained
by a reasonably reliable third party.'' Id.
---------------------------------------------------------------------------
We are not proposing to codify the list of factors that the
Commission has previously identified as being among those an issuer
should consider when using the principles-based method of verification.
While we believe that this list of factors remains appropriate, there
is no exclusive list of factors to be considered.
We are of the view that, in some circumstances, the reasonable
steps determination may not be substantially different from an issuer's
development of a ``reasonable belief'' for Rule 506(b) purposes. For
example, an issuer's receipt of a representation from an investor as to
his or her accredited status could meet the ``reasonable steps''
requirement if the issuer reasonably takes into consideration a prior
substantive relationship with the investor or other facts that make
apparent the accredited status of the investor. That same
representation from an investor may not meet the ``reasonable steps''
requirement if the issuer has no other information available to it
about the investor or has information that does not support the view
that the investor was an accredited investor.\175\
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\175\ We caution issuers that we continue to believe that an
issuer will not be considered to have taken reasonable steps to
verify accredited investor status if it, or those acting on its
behalf, require only that a person check a box in a questionnaire or
sign a form, absent other information about the purchaser indicating
accredited investor status.
---------------------------------------------------------------------------
Request for Comment
34. We note that the vast majority of Regulation D issuers continue
to raise capital through Rule 506(b) offerings. Are issuers hesitant to
rely on Rule 506(c) (as suggested by the data on amounts raised under
that exemption \176\) as compared to other exemptions? If so, why? Is
the requirement to take reasonable steps to verify accredited investor
status having an impact on the willingness of issuers to use Rule
506(c)?
---------------------------------------------------------------------------
\176\ See supra Section I.B.1.
---------------------------------------------------------------------------
35. Should we provide an additional method of verification, as
proposed, that would allow an issuer to establish that an investor that
the issuer has previously verified remains an accredited investor as of
the time of sale, so long as the investor provides a written
representation to that effect to the issuer and the issuer is not aware
of information to the contrary? If so, should we impose a time limit on
this method of verification, and if so, how long should that time limit
be?
36. Is additional guidance for reasonable steps needed? Would
further guidance provide more clarity? Should we eliminate the
requirement to take reasonable steps to verify accredited investor
status in specified circumstances? If so, which circumstances? Should
the verification requirements be eliminated altogether, as suggested by
some commenters? Would legislative changes be necessary or helpful?
37. Should we consider rescinding the non-exclusive list of
reasonable verification methods? Should we consider mandating the items
on the list as the exclusive methods for verification?
38. Are there additional or alternative verification methods that
we should include in the non-exclusive list of reasonable verification
methods that would make issuers more willing to use Rule 506(c) or
would better address investor protection? For example, should we
provide a non-exclusive list of reasonable verification methods that
would apply to the verification of an entity's accredited investor
status? Should we add as a specific verification method for either
natural persons or entities with investments of a large minimum amount,
accompanied by written confirmation that investment is not financed by
a third party? If so, what minimum investment amount would be
appropriate for natural persons or for IAIs?
39. The Commission has proposed to amend the definition of
accredited investor to include new categories of natural persons and
institutions.\177\ Are there additional verification methods
[[Page 17982]]
that we should include in the non-exclusive list of reasonable
verification methods in light of these proposed changes?
---------------------------------------------------------------------------
\177\ See Amending the ``Accredited Investor'' Definition.
Release No. 33-10734 (Dec. 18, 2019) [85 FR 2574] (Jan. 15, 2020)
(``Accredited Investor Definition Proposing Release'').
---------------------------------------------------------------------------
D. Harmonization of Disclosure Requirements
We are proposing amendments to the financial statement information
requirements in Regulation D to align them with the disclosure
requirements in Regulation A. Currently, when non-accredited investors
are participating in an offering under Rule 506(b), the issuer
conducting the offering must furnish specified financial statement
information, along with non-financial information, to non-accredited
investors a reasonable time prior to the sale of the securities and
must provide these investors with the opportunity to ask questions and
receive answers about the offering.\178\ Similarly, issuers conducting
offerings pursuant to Regulation A are required to provide certain
financial statement and non-financial information to investors. The
financial statement information requirements in Regulation D, however,
differ from those in Regulation A. This difference results in many
cases in an issuer being required to provide financial statements in a
Rule 506(b) offering that are more burdensome to prepare than the
financial statements that would be required in a Regulation A offering
of comparable size.
---------------------------------------------------------------------------
\178\ See Rule 502(b)(2)(v).
---------------------------------------------------------------------------
We are also proposing to simplify the requirements for Regulation A
and establish greater consistency between Regulation A and registered
offerings by permitting Regulation A issuers to: (a) File certain
redacted exhibits using the simplified process previously adopted for
registered offerings and Exchange Act filings; \179\ (b) make draft
offering statements and related correspondence available to the public
via EDGAR to comply with the requirements of Securities Act Rule
252(d), rather than requiring them to be filed as exhibits to qualified
offering statements; (c) incorporate financial statement information by
reference to other documents filed on EDGAR; and (d) to have post-
qualification amendments declared abandoned. In particular, the exhibit
requirements for registered and Regulation A offerings were previously
aligned, but have diverged due to subsequent rule changes, while the
expansion of the incorporation by reference provision in Form 1-A
allows for the further alignment of Form 1-A with the Form S-1
registration statement. Furthermore, in light of the Supreme Court
decision in Food Marketing Institute v. Argus Leader Media,\180\ we are
also proposing to revise the standard used throughout our rules that
allow redaction of information from certain exhibits, as adopted in the
FAST Act Modernization Release.
---------------------------------------------------------------------------
\179\ See FAST Act Modernization and Simplification of
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674]
(Apr. 2, 2019) (``FAST Act Modernization Release''), at Section
II.A.2.
\180\ See 139 S.Ct. 2356 (2019).
---------------------------------------------------------------------------
1. Rule 502(b) of Regulation D
We are proposing to amend the financial information requirements in
Rule 502(b) for Regulation D offerings by non-reporting companies that
include non-accredited investors to align with the disclosure required
in offerings pursuant to Regulation A. Specifically, for Regulation D
offerings of up to $20 million in securities, issuers would no longer
be required to comply with the requirements of paragraph (c) of Part F/
S of Form 1-A and provide audited financial statements and would be
required to comply with the requirements of paragraph (b) of part F/S
of Form 1-A, which applies to Tier 1 Regulation A offerings. For
Regulation D offerings of greater than $20 million in securities,
issuers would be required to provide audited financial statements and
comply with the requirements of Regulation S-X similar to Tier 2
Regulation A offerings.\181\ Rule 506(b) limits the number of non-
accredited investors that may participate in a Regulation D offering to
35, and we estimate that in 2019 fewer than 5 percent of Rule 506(b)
offerings included non-accredited investors.\182\ We believe that by
aligning the disclosure requirements in Rule 502(b) with those in
Regulation A, additional issuers may be willing to include non-
accredited investors in their offerings pursuant to Rule 506(b), which
would expand investment opportunities for those investors.
---------------------------------------------------------------------------
\181\ For the sake of clarity, we are not proposing that issuers
must comply with the other ongoing non-financial statement
disclosure requirements in Tier 2 Regulation A offerings, and this
proposal is limited only to harmonization of the financial statement
disclosure requirements outlined in the offering circular itself.
\182\ See supra note 94 (estimating that, in 2019, only 4.45
percent of Rule 506(b) offerings by issuers other than pooled
investment funds included non-accredited investors). Based on
available data, issuers reported non-accredited investors as
participating in only six percent of Rule 506(b) offerings in each
of 2015, 2016, 2017, and 2018. See Concept Release, at Section II.
---------------------------------------------------------------------------
Currently, when non-accredited investors are participating in an
offering pursuant to Rule 506(b), the issuer conducting the offering
must furnish to non-accredited investors the information required by
Rule 502(b) \183\ a reasonable time prior to the sale of securities and
provide those investors with the opportunity to ask questions and
receive answers about the offering.\184\ The information required to be
furnished to non-accredited investors is limited to information that is
material to an understanding of the issuer, its business, and the
securities being offered, and the examples of information that would
satisfy this requirement vary depending on the size of the offering and
the nature of the issuer.\185\
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\183\ See Rule 502(b)(2)(i) through (vii).
\184\ See Rule 502(b)(2)(v). If an issuer limits participation
in its Rule 506(b) offering to accredited investors, Rule 506(b)
does not require the issuer to provide substantive disclosure to
those accredited investors. However, if the issuer provides any
additional information to accredited investors, the issuer shall
furnish to any non-accredited purchaser a brief description in
writing of any material written information concerning the offering
that has been provided by the issuer to any accredited investor but
not previously delivered to such non-accredited purchaser. See 17
Rule 502(b)(2)(iv). Issuers and funds conducting private accredited
investor-only offerings pursuant to Rule 506(b) often provide all
purchasers, including accredited investors, with information about
the issuer in view of the antifraud provisions of the federal
securities laws. See Note to Rule 502(b).
\185\ See Rule 502(b)(2)(i) through (vii).
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If the issuer is not subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the issuer must furnish the
non-financial statement information required by Part II of Form 1-
A\186\ (if the issuer is eligible to use Regulation A) \187\ or Part I
of a Securities Act registration statement on a form that the issuer
would be eligible to use.\188\
---------------------------------------------------------------------------
\186\ 17 CFR 239.90.
\187\ See infra Section II.F for a discussion of the Regulation
A eligibility requirements.
\188\ See Rule 502(b)(2)(i)(A).
---------------------------------------------------------------------------
Table 7 summarizes the current financial statement requirements of
Rule 502(b) for an issuer not subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act.\189\
---------------------------------------------------------------------------
\189\ See Rule 502(b)(2)(i)(B). A foreign private issuer, as
defined in 17 CFR 230.405 that is eligible to use Form 20-F [17 CFR
249.220f] must disclose the same kind of information required to be
included in an Exchange Act registration statement on a form that
the issuer would be eligible to use. The financial statements must
be audited only to the extent that such information would be
required to be audited under Rule 502(b) for issuers not subject to
the reporting requirements of Section 13 or 15(d) of the Exchange
Act. See Rule 502(b)(2)(i)(C).
[[Page 17983]]
Table 7--Current Rule 502(b) Financial Statement Requirements
[Non-reporting issuer]
----------------------------------------------------------------------------------------------------------------
Financial statement Age of financial
Offering size information required statements Audit required
----------------------------------------------------------------------------------------------------------------
Up to $2 million..................... Information required in Balance sheet must be Yes, but only the
Article 8 of dated within 120 days issuer's balance sheet
Regulation S-X. of the start of the must be audited.
offering.
Up to $7.5 million................... Audited financial Balance sheet must be Yes, but if an issuer,
statement information dated within 120 days other than a limited
required in Form S-1 of the start of the partnership, cannot
for smaller reporting offering. obtain audited
companies. financial statements
without unreasonable
effort or expense,
then only the issuer's
balance sheet must be
audited.
Over $7.5 million.................... Audited financial Balance sheet must be Yes, but if an issuer
statement information dated within 120 days other than a limited
that would be required of the start of the partnership, cannot
in a registration offering. obtain audited
statement filed under financial statements
the Securities Act on without unreasonable
the form that the effort or expense,
issuer would be then only the issuer's
entitled to use. balance sheet must be
audited.
----------------------------------------------------------------------------------------------------------------
If the issuer is subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the issuer must furnish to investors
either:
Its annual report to shareholders for the most recent
fiscal year \190\ and the definitive proxy statement filed in
connection with that annual report; \191\ or
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\190\ The annual report must meet the requirements of Rules 14a-
3 or 14c-3 under the Exchange Act (17 CFR 240.14a-3 or 17 CFR
240.14c-3).
\191\ See Rule 502(b)(2)(ii)(A). If requested by the purchaser
in writing, the issuer must also provide a copy of the issuer's most
recent Form 10-K [17 CFR 249.310] under the Exchange Act.
---------------------------------------------------------------------------
[squ] The most recently filed annual report on Form 10-K \192\ or
registration statement.\193\
---------------------------------------------------------------------------
\192\ 17 CFR 249.310.
\193\ The registration statement may be a registration statement
on Form S-1 [17 CFR 239.11], Form S-11 [17 CFR 239.18], or Form 10
[17 CFR 249.10], or for foreign private issuers, Form 20-F [17 CFR
249.220f.] or Form F-1 [17 CFR 239.31]. See Rule 502(b)(2)(ii)(B).
In addition, the issuer must provide any information required to be
filed by the issuer since the distribution or filing of the report
or registration statement and a brief description of the securities
being offered, the use of the proceeds from the offering, and any
material changes in the issuer's affairs that are not disclosed in
the documents furnished. See Rule 502(b)(2)(ii)(C).
---------------------------------------------------------------------------
The financial statement information that an issuer must provide to
non-accredited investors participating in an offering pursuant to Rule
506(b) is broadly similar to the disclosure required under Regulation
A.\194\ Table 8 summarizes the financial information issuers conducting
a Regulation A offering are required to provide under Part F/S of Form
1-A.
---------------------------------------------------------------------------
\194\ See Rule 251(a)(1).
Table 8--Current Regulation A Financial Statement Requirements
----------------------------------------------------------------------------------------------------------------
Financial statement Age of financial
Offering size information required statements Audit required
----------------------------------------------------------------------------------------------------------------
Up to $20 million (Tier 1)........... Consolidated balance Not more than nine No, unless issuer has
sheets of the issuer months before the date already obtained an
for the two previous of non-public audit for another
fiscal year ends (or submission, filing or purpose.
for such shorter time qualification, with
that the issuer has the most recent annual
been in existence), or interim balance
Consolidated statements sheet not older than
of comprehensive nine months.
income, cash flows,
and stockholders'
equity of the issuer;
and.
Financial statements of
guarantors and issuers
of guaranteed
securities, affiliates
whose securities
collateralize an
issuance, significant
acquired or to be
acquired businesses
and real estate
operations, and pro
forma information
relating to
significant business
combinations..
[[Page 17984]]
Up to $50 million (Tier 2)........... Audited financial Not more than nine Yes.
statements in months before the date
compliance with of non-public
Article 8 of submission, filing or
Regulation S-X *. qualification, with
the most recent annual
or interim balance
sheet not older than
nine months.
----------------------------------------------------------------------------------------------------------------
* Interim financial statements for a Tier 2 Regulation A offering need not be audited and may comply with the
same timing and age requirements as those provided in connection with Tier 1 Regulation A offerings. See
paragraph (c) in Part F/S of Form 1-A [17 CFR 239.90].
In the Concept Release, the Commission requested comment on both
the current information requirements in Rule 506(b) and the financial
information requirements in Rule 502(b). Specifically, the Commission
asked if it should align the requirements in Rule 502(b) with those of
another type of exempt offering, or consider eliminating or scaling the
financial information requirements. In response, several commenters
stated that the financial statement requirements of Rule 502(b) are
generally overly burdensome to issuers and provided a range of
suggestions for revising the requirements. Specifically, one commenter
stated that the disclosure requirements ``result in zero non-Accredited
Investors being able to participate'' in private offerings and
suggested a general ``downward adjustment'' in such requirements.\195\
This sentiment was echoed by several other commenters, one of whom said
that the ``information requirements for non-accredited investors
frequently deter issuers from allowing such investors to participate in
exempt offerings,'' while another highlighted the ``risk and
uncertainty'' of attempting to comply with such disclosure
requirements.\196\ A few commenters noted that the disclosure
requirements in Rule 502(b) are ``burdensome.'' \197\
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\195\ See Letter from Island Mountain Development Group dated
September 24, 2019.
\196\ See CoinList Letter; and AngelList Letter. See also letter
from Rosebud Economic Development Corporation dated September 24,
2019; Davis Polk Letter; and letter from Ropes & Gray LLP dated
September 24, 2019. Further, another commentator highlighted
``issuers' justifiable fear of exposing themselves to the risk of
liability if required to provide specific information to purchasers,
and . . . the substantial professional service fees related to
providing information disclosures,'' as reasons for the lack of non-
accredited investor participation in offerings. See letter from
Robert Anderson, Samantha Prince, John Neil Conkle, and Sarah Zomaya
dated September 24, 2019. Yet another commenter highlighted the
substantial cost to issuers of preparing a Rule 506(b) disclosure
document for an offering including even a single non-accredited
investor. See letter from Joe Wallin et al. dated September 23,
2019.
\197\ See Letter from the Committee on Capital Markets
Regulation dated September 19, 2019; and letter from Iownit Capital
Markets, Inc. dated September 24, 2019 (``Iownit Letter'').
---------------------------------------------------------------------------
Some commenters stated that the Commission should consider scaling
the disclosure requirements depending on the amount of securities being
offered, eliminating or scaling the information requirements to the
extent that non-accredited investors are advised by a financial
professional affiliated with a registered broker-dealer or employed by
a registered investment adviser, and/or modifying the information
requirement for early stage issuers, similar to the scaled disclosure
requirement available to smaller reporting companies in registered
offerings.\198\ One commenter stated that overall financial disclosure
and reporting requirements should reflect the type of company and size
and type of offering, such that small issuers conducting smaller
offerings would not be held to the same standard as larger companies
raising larger amounts of capital.\199\ A few commenters suggested
harmonizing the Rule 502(b) disclosure requirements for non-accredited
investors with those in Form 1-A for offerings exempt from registration
pursuant to Regulation A.\200\
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\198\ See NYSBA Letter; and ABA Letter.
\199\ See AOIP Letter.
\200\ See CrowdCheck Letter; and letter from Bybel Rutledge LLP,
dated September 24, 2019.
---------------------------------------------------------------------------
Conversely, one commenter supported requiring mandatory disclosures
in offerings under Rule 506 to both accredited and non-accredited
investors.\201\ Another commenter suggested that the information
requirements in Rule 506(b) should be privately negotiated and
indicated that, with respect to non-accredited investors, the
information requirements have not caused ``significant problems.''
\202\
---------------------------------------------------------------------------
\201\ See Letter from Xavier Becerra, California Attorney
General, et al., dated September 24, 2019 (``State Attorneys General
Letter'').
\202\ See Letter from The Heritage Foundation, dated September
24, 2019.
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After considering the comments received, we are proposing to amend
Rule 502(b)'s requirements governing the financial information that
non-reporting companies must provide non-accredited investors
participating in Regulation D offerings to align with the financial
information that issuers must provide investors in Regulation A
offerings.\203\ For offerings of $20 million or less, Rule
502(b)(2)(i)(B)(1) would refer such issuers to paragraph (b) of part F/
S of Form 1-A, which applies to Tier 1 Regulation A offerings. For
offerings of greater than $20 million, Rule 502(b)(2)(i)(B)(2) would
refer issuers to paragraph (c) of part F/S of Form 1-A, which applies
to Tier 2 Regulation A offerings. This amendment would have the effect
of eliminating the current Rule 502(b) provisions that permit an
issuer, other than a limited partnership, that cannot obtain audited
financial statements without unreasonable effort or expense, to provide
only the issuer's audited balance sheet.\204\
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\203\ We are not proposing to amend the current Rule 502(b)
disclosure requirements with respect to issuers that are subject to
the reporting requirements of the Exchange Act because the required
information is generally already prepared by the issuer and
available in order to comply with its Exchange Act reporting
obligations and the disclosure of such information in connection
with a Rule 506(b) offering is a negligible burden.
\204\ See Rule 502(b)(2)(i)(B)(2) and (3).
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In addition, under the proposed amendments, a foreign private
issuer that is not an Exchange Act reporting company would be required
to provide financial statement disclosure consistent with the
Regulation A requirements.\205\ The foreign private issuer would be
permitted to provide financial statements prepared in accordance with
either U.S. GAAP or
[[Page 17985]]
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB). For business
combinations and exchange offers, we are proposing that an issuer that
is not an Exchange Act reporting company would provide financial
statements consistent with the Regulation A requirements.
---------------------------------------------------------------------------
\205\ See proposed Rule 502(b)(2)(B). The term ``foreign private
issuer'' means any foreign issuer, other than a foreign government,
that does not meet the following criteria as of the last business
day of its most recently completed second fiscal quarter: (i) More
than 50 percent of the outstanding voting securities of such issuer
are directly or indirectly owned of record by residents of the
United States; and (ii) any of the following: (a) The majority of
the executive officers or directors are United States citizens or
residents; (b) more than 50 percent of the assets of the issuer are
located in the United States; or (c) the business of the issuer is
administered principally in the United States. See 17 CFR 230.405.
---------------------------------------------------------------------------
We believe the proposed information requirements would
appropriately provide investors with material financial disclosure
about the issuer, enabling informed investment decisions. We
acknowledge that Tier 1 of Regulation A limits the sum of all cash and
other consideration to be received for the securities being offered
plus the gross proceeds for all securities sold pursuant to other
offering statements within the 12-month period before the start of and
during the current Regulation A offering, which differs from Regulation
D because it does not include any such lookback period.\206\ However,
aligning the financial statement information requirements in Rule
502(b) with those in Regulation A would establish greater uniformity in
the financial statement information requirements applicable to exempt
offerings, permitting issuers to more readily prepare for a variety of
types of exempt offerings and therefore avail themselves of the most
appropriate exemption from Securities Act registration for their
particular facts and circumstances, which may lower their cost of
capital. Although the information disclosed pursuant to Rule 502(b) is
not filed in a disclosure document with the Commission, the information
disclosed is subject to the anti-fraud provisions of the federal
securities laws and remains so under this proposal.
---------------------------------------------------------------------------
\206\ See Rule 251(a)(1).
---------------------------------------------------------------------------
Request for Comment
40. Are the current financial statement information requirements in
Rule 506(b) appropriate or should they be modified to align the
information requirements contained in Rule 502(b) applicable to non-
reporting companies with those of Regulation A, as proposed? How would
aligning such requirements affect capital raising under Rule 506(b)?
Would there be investor protection concerns regarding any reduction in
information required to be provided to non-accredited investors? Should
we retain the current Rule 502(b) provisions that permit an issuer,
other than a limited partnership, that cannot obtain audited financial
statements without unreasonable effort or expense, to provide only the
issuer's audited balance sheet?
41. Should we allow the use of financial statements consistent with
Regulation A in offerings by non-reporting foreign private issuers and
in business combinations and exchanges by non-reporting issuers, as
proposed? Are there any unique considerations in these circumstances
that would warrant a different approach?
42. Regulation Crowdfunding permits issuers to raise up to a
maximum aggregate amount of $1,070,000 through crowdfunding offerings
in any 12-month period, with financial statement requirements that vary
based on the size of the offering. Should we consider aligning the Rule
502(b) financial information requirements for non-reporting issuers
with those of Regulation Crowdfunding, or some combination of the
requirements in Regulation A and Regulation Crowdfunding?
43. As proposed, non-reporting issuers conducting an offering of up
to $20 million would be subject to the Regulation A Tier 1 financial
information requirements, and issuers conducting an offering above that
amount would be subject to the Regulation A Tier 2 financial
information requirements. As an alternative, should we consider
requiring issuers conducting offerings above $50 million or $75 million
to comply with the financial information requirements applicable to
smaller reporting companies under Article 8 of Regulation S-X?
44. Should we modify the Rule 502(b) financial information
requirement in some other way? If so, how should it be amended?
45. Should we also amend the non-financial disclosure requirements
in Rule 502(b)?
46. Should we, as proposed, retain the current Rule 502(b)
disclosure requirements for Exchange Act reporting companies? If not,
what should those requirements be?
47. Should the fact that Regulation A limits the amount of proceeds
to be raised in a 12-month period before the start of and during an
ongoing offering, while Regulation D does not include any such lookback
period, impact the financial information requirements?
2. Confidential Information Standard
In March 2019, the Commission adopted amendments to several rules
and forms that require registrants to file material contracts as
exhibits to their disclosure documents.\207\ The amendments in the FAST
Act Modernization Release permit registrants to redact provisions or
terms of exhibits required to be filed if those provisions or terms are
both (i) not material and (ii) would likely cause competitive harm to
the registrant if publicly disclosed. The ``competitive harm''
requirement was patterned on the standard then being used by the U.S.
Circuit Court of Appeals for the District of Columbia \208\ to define
what information was confidential under Exemption 4 of the Freedom of
Information Act (``FOIA''), which protects ``trade secrets and
commercial or financial information obtained from a person [if they
are] privileged or confidential.'' \209\
---------------------------------------------------------------------------
\207\ See e.g., FAST Act Modernization Release, at text
accompanying notes 45-73 (amending paragraphs (b)(2)(ii) and
(b)(10)(iv) of Item 601 of Reg. S-K).
\208\ See National Parks and Conservation Association v. Morton,
498 F.2d 765 (D.C. Cir. 1974); and National Parks and Conservation
Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976).
\209\ 5 U.S.C. 552(b)(4).
---------------------------------------------------------------------------
In June 2019, the Supreme Court rejected the Circuit Court's
longstanding test for determining what information was confidential
under Exemption 4 and adopted a new definition of ``confidential'' that
does not include a competitive harm requirement.\210\ The Supreme Court
stated that ``[a]t least where commercial or financial information is
both customarily and actually treated as private by its owner and
provided to the government under an assurance of privacy, the
information is `confidential' within the meaning of Exemption 4.''
\211\ We are proposing to adjust our exhibit filing requirements as
adopted in the FAST Act Modernization Release by removing the
competitive harm requirement and replacing it with a standard more
closely aligned with the Supreme Court's definition of
``confidential.'' Under the proposed amendments, information may be
redacted from material contracts if it is the type of information that
the issuer both customarily and actually treats as private and
confidential, and which is also not material.\212\ As discussed
[[Page 17986]]
below, we are also proposing to use this new standard in the proposed
exhibit requirements in Item 17 of Part III of Form 1-A.
---------------------------------------------------------------------------
\210\ Food Marketing Institute v. Argus Leader Media, 139 S.Ct.
2356 (2019).
\211\ Id. at 2366.
\212\ We are proposing changes to the following rules and forms
to update the standard: Item 601(b)(2) and (10) of Regulation S-K
[17 CFR 229.601(b)(2) and (10)]; Form S-6 [17 CFR 239.16]; Form N-14
[17 CFR 239.23]; Form 20-F [17 CFR 249.220f]; Form 8-K [17 CFR
249.308]; Form N-1A [17 CFR 239.15A and 17 CFR 274.11A]; Form N-2
[17 CFR 239.14 and 17 CFR 274.11a-1]; Form N-3 [17 CFR 239.17a and
17 CFR 274.11b]; Form N-4 [17 CFR 239.17b and 17 CFR 274.11c]; Form
N-5 [17 CFR 239.24 and 17 CFR 274.5]; Form N-6 [17 CFR 239.17c and
17 CFR 274.11d]; and Form N-8B-2 [17 CFR 274.12].
---------------------------------------------------------------------------
Request for Comment
48. We are proposing to amend our rules and forms to replace the
competitive harm standard with new language based on the Supreme
Court's definition of ``confidential.'' Are there other changes we
should make to our rules and forms in light of the Supreme Court
decision?
3. Proposed Amendments To Simplify Compliance With Regulation A
In our review of the exempt offering framework, we identified
several areas where compliance with Regulation A is more complex or
difficult than for registered offerings and may not lead to greater
investor protection. We are proposing to simplify Regulation A by
aligning it with the rules for registered offerings regarding the
redaction of confidential information in material contracts, permitting
draft offering statements to be made public on EDGAR, permitting
incorporation by reference on Form 1-A, and permitting the declaration
of a post-qualification amendment as abandoned. Because these changes
would not reduce the disclosure available to investors, but would
simply harmonize the requirements for Regulation A offering statements
with those already in effect for registered offerings, we do not
believe there would be any negative implications for investor
protection.
a. Redaction of Confidential Information in Certain Exhibits
We propose amending Item 17 of Form 1-A, which requires the filing
of certain documents as exhibits to Regulation A disclosure
documents,\213\ to provide companies with the option to file redacted
material contracts \214\ and plans of acquisition, reorganization,
arrangement, liquidation, or succession,\215\ consistent with the
recent amendments to Items 601(b)(2) and (10) of Regulation S-K.
Companies would still have the option to file such exhibits pursuant to
the existing confidential treatment application process, which would
remain unchanged.
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\213\ The exhibit requirements in Forms 1-K (Item 8) and 1-SA
(Item 4) require companies to file as exhibits to those forms the
exhibits required by Form 1-A, except for the exhibits required by
paragraphs 1, 12, and 13 of Item 17.
\214\ See Item 17.6 of Form 1-A.
\215\ See Item 17.7 of Form 1-A.
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Currently, if a company wishes to redact immaterial confidential
information included in a material contract or plan of acquisition,
reorganization, arrangement, liquidation, or succession required to be
filed as an exhibit to Regulation A disclosure documents, the company
must apply for confidential treatment of that information. More
specifically, the company must submit a detailed application to the
Commission that identifies the particular text for which confidential
treatment is sought, a statement of the legal grounds for the
exemption, and an explanation of why, based on the facts and
circumstances of the particular case, disclosure of the information is
unnecessary for the protection of investors. Commission staff evaluates
and grants or denies the request.
As described in Section II.D.2 above, in March 2019, the Commission
amended several rules and forms to permit registrants to file redacted
documents without applying for confidential treatment.\216\ The rules
currently require registrants to mark the exhibit index to indicate
that portions of the exhibit or exhibits have been omitted, include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and would be competitively harmful if
publicly disclosed, and indicate with brackets where the information
has been omitted from the filed version of the exhibit.\217\ Redacted
exhibits are subject to compliance reviews by the staff. The process
for filing redacted exhibits was not extended to Regulation A offerings
at that time. As such, Regulation A issuers are still compelled to
submit an application for confidential treatment in order to redact
immaterial confidential information from material contracts and plans
of acquisition, reorganization, arrangement, liquidation, or
succession.
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\216\ See FAST Act Modernization Release, at text accompanying
notes 45-73 (amending paragraphs (b)(2)(ii) and (b)(10)(iv) of Item
601 of Reg. S-K).
\217\ 17 CFR 229.601(b)(2) and (b)(10)(iv).
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As proposed, a new instruction would be added to Item 17 of Form 1-
A that would apply to paragraphs 6 and 7 of that item. This instruction
would include similar procedures to the recent amendments to Items
601(b)(2) and (10) of Regulation S-K for filing redacted material
contracts or plans of acquisition, reorganization, arrangement,
liquidation, or succession. Commission staff would continue to review
Forms 1-A filed in connection with Regulation A offerings and
selectively assess whether redactions from exhibits appear to be
limited to information that meets the appropriate standard.\218\ Upon
request, companies would be expected to promptly provide supplemental
materials to the staff similar to those currently required, including
an unredacted copy of the exhibit and an analysis of why the redacted
information is both not material and the type of information that the
company both customarily and actually treats as private and
confidential. Pursuant to Rule 83, companies would be permitted to
request confidential treatment of this supplemental information while
it is in the staff's possession. If the company's supplemental
materials do not support its redactions, the staff may request that the
company file an amendment that includes some, or all, of the previously
redacted information, similar to the process the staff currently
follows for confidential treatment requests in connection with
Regulation A offerings. After completing its review of the supplemental
materials, the Commission or its staff would return or destroy them at
the request of the company, as applicable.
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\218\ As noted in Section II.D.2 above, we are proposing to
amend the standard for redaction of information under this
streamlined process, which currently requires that the redactions
from exhibits be limited to information that is not material and
that would cause competitive harm if publicly disclosed. We are
proposing that the amended standard be patterned on the Supreme
Court's language set out in Food Marketing Institute.
---------------------------------------------------------------------------
Request for Comment
49. Should we amend the Regulation A exhibit filing requirements as
proposed? Is there any reason not to extend this simplified
confidential treatment application process to Regulation A issuers? Do
our proposed amendments raise any investor protection concerns?
b. Amendment to Form 1-A Item 17.17(a) Requirement
We are proposing to amend Item 17.17(a) of Form 1-A to harmonize
the procedures for publicly filing draft Regulation A offering
statements with those for draft Securities Act registration statements.
Instead of requiring documents previously submitted for non-public
review by the staff and related, non-public correspondence to be filed
as exhibits to a publicly filed offering statement, issuers conducting
offerings exempt from registration pursuant to Regulation A would be
able to make such documents available to the public via EDGAR to comply
with the requirements of Securities Act Rule 252(d).
[[Page 17987]]
Today, issuers that are conducting Regulation A offerings are
permitted to submit non-public draft offering statements and amendments
for review by the Commission staff if they have not previously sold
securities pursuant to (i) a qualified offering statement under
Regulation A or (ii) an effective Securities Act registration
statement.\219\ Such issuers are also welcome to submit related non-
public correspondence to the Commission staff for review
confidentially. Current rules require that these non-public offering
statements, amendments and correspondence be publicly filed as an
exhibit to a publicly filed offering statement at least twenty-one
calendar days prior to the qualification of the offering
statement.\220\ Similarly, an EGC may, prior to its initial public
offering date, submit a draft registration statement and amendments to
the Commission for non-public review by the staff.\221\ However, unlike
issuers submitting Regulation A offering statements for non-public
review, there is no corresponding Securities Act rule or item requiring
registration statements and amendments confidentially submitted by EGCs
to be filed as an exhibit to a publicly filed registration statement.
Instead issuers satisfy their public filing requirement by logging into
their EDGAR account, selecting materials previously submitted non-
publicly, and releasing them for public dissemination.\222\ We propose
deleting paragraph (a) of paragraph 17 so that issuers would no longer
be required to file the non-public offering statements and related
amendments and correspondence as exhibits. Instead, Regulation A
issuers would be permitted to make previously non-public documents
available to the public on EDGAR using the same process as issuers
conducting a registered offering. We believe that this change would
simplify the process of moving from a draft offering statement to a
publicly filed document for issuers conducting Regulation A offerings,
and would save both time and money for such issuers. In addition,
because all previously submitted offering statements and related
amendments and correspondence would be available to the public on
EDGAR, rather than attached as exhibits to a given offering statement,
this change should make it easier for investors to learn about the
company and the Regulation A offering itself, furthering their ability
to make informed investment decisions.
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\219\ 17 CFR 230.252(d).
\220\ Item 17, paragraph 17(a) of Form 1-A [17 CFR 239.90] and
17 CFR 230.252(d).
\221\ Section 6(e)(1) of the Securities Act.
\222\ See related announcement by the Division of Corporation
Finance, Draft Registration Statements to be Submitted and Filed on
EDGAR, Sept. 26, 2012, available at https://www.sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
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Request for Comment
50. Should we, as proposed, amend Form 1-A to allow non-public
draft offering statements, amendments and related non-public
correspondence to be made publicly available through the use of the
EDGAR system, rather than requiring issuers to file such documents as
exhibits to a publicly filed offering statement?
c. Incorporation by Reference of Previously Filed Financial Statements
in Form 1-A for Regulation A Offerings
We are proposing to permit issuers to incorporate previously filed
financial statements by reference into a Regulation A offering
circular. The ability to incorporate financial statements by reference
to Exchange Act reports filed before the effective date of a
registration statement is permitted on Form S-1, subject to certain
conditions.\223\ Specifically, General Instruction VII of Form S-1
permits registrants that meet certain eligibility standards \224\ to
incorporate by reference the information required by Item 11 of Form S-
1, which includes information about the registrant, such as, among
other things, financial statement information meeting the requirements
of Regulation S-X.\225\ Regulation A issuers, however, are required to
include the issuer's financial statements, prepared in accordance with
the applicable requirements of Tier 1 or Tier 2 of Regulation A, in
their Regulation A offering circular that is distributed to
investors.\226\
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\223\ See General Instruction VII to Form S-1 [17 CFR 239.11].
\224\ These criteria include, but are not limited to, that the
registrant: (i) Is subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, (ii) has filed all reports
and other materials required to be filed by Sections 13(a), 14, or
15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports and materials), (iii) has filed an annual report required
under Section 13(a) or Section 15(d) of the Exchange Act for its
most recently completed fiscal year and (iv) is not, and during the
past three years neither it nor any of its predecessors was: (a) A
blank check company; (b) a shell company, other than a business
combination related shell company; or (c) offering penny stock. The
registrant must make its periodic and current reports filed pursuant
to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference pursuant to Item 11A or Item 12 of Form S-
1 readily available and accessible on a website maintained by or for
the registrant and containing information about the registrant.
\225\ See Item 12 to Form S-1 [17 CFR 239.11].
\226\ See General Rule (a) to Part F/S of Form 1-A [17 CFR
239.90].
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In order to be able to incorporate previously filed financial
statements by reference into an offering circular filed pursuant to
Regulation A, we propose that, similar to the requirements in
connection with Form S-1, issuers must satisfy several criteria. As
proposed, issuers that have a reporting obligation under Rule 257 or
the Exchange Act must be current in their reporting obligations. In
addition, issuers would be required to make incorporated financial
statements readily available and accessible on a website maintained by
or for the issuer, and disclose in the offering statement that such
financial statements will be provided upon request.\227\
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\227\ General Instruction III(b) of Form 1-A [17 CFR 239.90]
requires the inclusion of a hyperlink in the offering circular to
material incorporated by reference which would include an issuer's
previously filed financial statements on EDGAR.
---------------------------------------------------------------------------
Issuers conducting ongoing offerings would need to continue to file
post-qualification amendments to Form 1-A annually to include the
financial statements, either filed with such post-qualification
amendment or incorporated by reference to a previously filed periodic
or current report, that would be required to be included in a Form 1-A
as of such date.\228\ In addition, issuers would remain liable for such
financial statements under Section 12(a)(2) of the Securities Act to
the same extent as if they had been filed rather than incorporated by
reference.
---------------------------------------------------------------------------
\228\ 17 CFR 230.252(f)(2)(i).
---------------------------------------------------------------------------
Several commenters on the Concept Release supported allowing
incorporation by reference of the issuer's previously filed financial
statements into the Form 1-A.\229\ The ability to incorporate
previously filed financial statement information by reference should
decrease the existing filing burdens, allowing Regulation A issuers to
more easily satisfy their ongoing disclosure requirements. In addition,
although allowing incorporation by reference of previously filed
financial statements into an offering circular in connection with
offerings pursuant to Regulation A could increase the search time for
potential investors as those investors would need to separately access
the financial statements, we believe the impact of the proposal on
investors would be mitigated by the ready
[[Page 17988]]
availability of the information, particularly through the required
hyperlink in the offering statement.
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\229\ See CoinList Letter; CrowdCheck Letter; and letter from
Goodwin Procter LLP, dated September 24, 2019 (``Goodwin Letter'').
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Request for Comment
51. Should we amend Form 1-A to allow incorporation by reference of
an issuer's previously filed financial statements, as proposed? How
would such an amendment affect investors? Would this cause any increase
in costs for issuers, such as in connection with consent fees from
auditors?
52. Should the ability to incorporate financial statements into an
offering circular by reference to previously filed documents be
conditioned on eligibility requirements, similar to those currently
applicable to issuers using Form S-1, as proposed? Are there other
eligibility requirements we should consider? Should the ability to
incorporate by reference financial statements into an offering circular
be limited to previously filed financial statements as proposed or
extended to include forward incorporation by reference to future
financial statements under Regulation A?
53. Should we allow forward incorporation by reference in
Regulation A offerings? In order to forward incorporate Exchange Act
reports into a registration statement on Form S-1, a smaller reporting
company must be current in its reporting obligations by having filed an
annual report for its most recently completed fiscal year and all
required Exchange Act reports and materials during the 12 months
immediately preceding the Form S-1 filing (or such shorter period that
the smaller reporting company was required to file such reports and
materials). The smaller reporting company must also make its
incorporated Exchange Act reports and other materials readily available
and accessible on a website maintained by or for the issuer, and
disclose in the prospectus that such materials will be provided upon
request. If we were to permit forward incorporation by reference in
Regulation A offerings, should issuers be required to meet similar
requirements? Should issuers using forward incorporation by reference
still be required to file an annual post-qualification amendment to
their Form 1-A to include updated financial statements as well as to
reflect a fundamental change in the information set forth in the
offering statement?
d. Amendment to Abandonment Provision of Regulation A
We are proposing to amend the abandonment provisions of Rule 259(b)
to permit the Commission to declare a post-qualification amendment to
an offering statement abandoned, consistent with Rule 479,\230\ the
rule applicable to registered offerings.
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\230\ 17 CFR 230.479.
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The current rule only permits the Commission to declare an offering
statement abandoned, and we believe there are situations where it would
be appropriate for the Commission to have the ability to declare a
specific post-qualification amendment abandoned, instead of the entire
offering statement. For example, we have observed some issuers
attempting to use post-qualification amendments for separate classes of
securities that are not otherwise being offered under the offering
statement. If an issuer failed to qualify a post-qualification
amendment for such a separate class, but otherwise was in compliance
with all of its Regulation A obligations, we believe it would be
appropriate for the Commission to have the ability to declare that
specific post-qualification amendment abandoned so as to avoid
potential investor confusion arising from the presence of the
unqualified post-qualification amendment on EDGAR.
Request for Comment
54. Should we, as proposed, amend Rule 259(b) to permit the
Commission to declare a post-qualification amendment to an offering
statement, abandoned, consistent with the rule applicable to registered
offerings? Should we also provide notice to the issuer and a waiting
period prior to declaring a post-qualification amendment abandoned, as
is specified in Rule 479?
E. Offering and Investment Limits
As part of our broad review of the exempt offering framework, we
examined the offering and investment limits established under
Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D.
These rules were developed with smaller issuers in mind to provide
exemptions from Securities Act registration and ongoing Exchange Act
reporting for securities offerings that comply with the respective
exemptions. The exemptions set forth a variety of requirements and
investor protections, including limits on the amount of securities that
may be offered and sold under the exemptions. Regulation A and
Regulation Crowdfunding also include limits on how much an individual
may invest. While these rules were each developed to provide exemptive
relief to smaller issuers, the exemptive limits vary considerably among
the rules and may not reflect current capital raising trends.\231\
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\231\ The Commission's Office of the Advocate for Small Business
Capital Formation noted in its 2019 Annual Report that companies are
seeking increased capital to fund early-stage operations, noting for
example that average seed funding increased from $1.3 million in
2010 to $5.7 million in 2018. See Annual Report for Fiscal Year
2019: Office of the Advocate for Small Business Capital Formation,
available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf.
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In the Concept Release, the Commission discussed Regulation A,
Regulation Crowdfunding, and Rule 504 and requested comment on the
rules generally and their respective exemptive limits.\232\ In
connection with that discussion, the Commission estimated that
approximately $2.9 trillion of new capital was raised through exempt
offering channels in 2018.\233\ However, of this amount, less than $3
billion (0.1 percent) was raised under Regulation A, Regulation
Crowdfunding, and Rule 504.\234\ After considering the comments
received, and based on our review of the current rules, we believe that
increasing the offering and investment limits of these rules and better
harmonizing the exemptions with each other could improve investor
access to these markets and issuers' ability to raise capital. The
following table summarizes the proposed changes to the offering and
investor limits.
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\232\ See Concept Release, at Sections II.C, II.D, and II.F.
\233\ See Concept Release, at Section II.
\234\ See Table 2 of the Concept Release estimating the amounts
raised under Regulation A ($736 million), Rule 504 ($2 billion), and
Regulation Crowdfunding ($55 million). Preliminary estimates from
2019 similarly reflect limited capital raising under the rules with
$1.042 billion raised under Regulation A, $228 million under Rule
504 and $62 million under Regulation Crowdfunding.
[[Page 17989]]
Table 9--Proposed Changes to Offering and Investment Limits
----------------------------------------------------------------------------------------------------------------
Offering limits Investment limits
---------------------------------------------------------------------------
Current Proposed
rules rules Current rules Proposed rules
(million) (million)
----------------------------------------------------------------------------------------------------------------
Regulation A: Tier 1................ $20 $20 None................... None.
Regulation A: Tier 2................ 50 75 Accredited investors: Accredited investors:
No limits. No limits.
Non-Accredited Non-Accredited
Investors: Limits Investors: Limits
based on the greater based on the greater
of an income or net of an income or net
worth standard. worth standard.
Regulation Crowdfunding............. 1.07 5 All investors: Limits Accredited investors:
based on the lesser of No limits.
an income or net worth Non-Accredited
standard. Investors: Limits
based on the greater
of an income or net
worth standard.
Rule 504 of Regulation D............ 5 10 None................... None.
----------------------------------------------------------------------------------------------------------------
1. Regulation A
In 2015, the Commission adopted final rules to implement Section
401 of the JOBS Act by creating two tiers of Regulation A offerings:
Tier 1, for offerings that do not exceed $20 million in a 12-month
period; and Tier 2, for offerings that do not exceed $50 million in a
12-month period.\235\ The Commission is required by Section 3(b)(5) of
the Securities Act to review the Tier 2 offering limit every two years.
---------------------------------------------------------------------------
\235\ See 2015 Regulation A Release. See also supra Section
I.B.2.
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In the 2015 Regulation A Release, the Commission noted that some
commenters suggested that the Commission raise the proposed $50 million
Tier 2 offering limit to an amount above the statutory limit set forth
in Section 3(b)(2); however, the Commission did not believe an increase
was warranted at the time.\236\ The Commission explained that, while
Regulation A had existed as an exemption from registration for some
time, the 2015 amendments were significant. Accordingly, the Commission
believed that the 2015 amendments would provide for a meaningful
addition to the existing capital formation options of smaller issuers
while preserving important investor protections. The Commission also
expressed concern about expanding the offering limit of the exemption
beyond the level directly contemplated in Section 3(b)(2) at the outset
of the adoption of the amendments.
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\236\ See 2015 Regulation A Release, at text accompanying note
93.
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Since adoption of the 2015 amendments, the Commission has continued
to receive feedback on, and consider further enhancements to,
Regulation A. For example, the 2017 and 2018 Small Business Forums
recommended that the Commission increase the maximum offering amount
under Tier 2 of Regulation A from $50 million to $75 million.\237\
Similarly, a 2017 report by the Department of the Treasury also
recommended that the Tier 2 offering limit be increased to $75
million.\238\ In 2018, to implement changes mandated by Congress in the
Economic Growth Act, the Commission amended Regulation A to permit
Exchange Act reporting companies to rely on the exemption.\239\ Most
recently, in the Concept Release, the Commission requested comment on
whether to increase the Regulation A offering limit. Comments were
mixed, with some commenters supporting an increase in the offering
limit \240\ and others opposing an increase.\241\
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\237\ See 2018 Forum Report; and 2017 Forum Report.
\238\ See A Financial System That Creates Economic
Opportunities--Capital Markets (October 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury Report'').
\239\ See the 2018 Regulation A Release.
\240\ See, e.g., NYSBA Letter (supporting raising the threshold
to $75 million); CrowdCheck Letter (supporting raising the threshold
to $100 million); Goodwin Letter (supporting raising the threshold
to $100 million); letter from OTC Markets dated September 24, 2019
(supporting raising the threshold and noting the 2017 and 2018 Small
Business Forum and 2017 Treasury Report recommendations to raise the
threshold to $75 million); and IPA Letter (supporting raising the
threshold to $100 million).
\241\ See, e.g., State Attorneys General Letter; Davis Polk
Letter; letter from the Council of Institutional Investors dated
October 3, 2019 (expressing its belief that the Commission should
not broaden or expand Regulation A without compelling evidence that
the change would benefit long term investors and the capital
markets); letter from Consumer Federation of America dated October
1, 2019 (``Consumer Federation Letter'') (suggesting that expansion
of Regulation A has been bad for investors and markets); letter from
Healthy Markets Association dated September 30, 2019 (``Healthy
Markets Letter'') (suggesting amended Regulation A has been bad for
investors and should be curtailed or eliminated); and NASAA Letter
(generally rejecting expansion of the availability of private
offerings and recommending more oversight by state regulators).
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Our Divisions of Corporation Finance and Economic and Risk Analysis
conducted a 2020 Regulation A Lookback Study and Offering Limit Review
Analysis (``2020 Regulation A Review'') as required by the 2015
Regulation A Release.\242\ The 2020 Regulation A Review takes into
consideration Regulation A market activity from the 2015 amendments
through December 2019; public comment following the 2015 amendments and
the Concept Release; and evidence from industry reports, the Small
Business Forums, and other public sources. During this period, $2.4
billion was reported raised by 183 issuers in ongoing and closed
offerings, including $230 million in Tier 1 and $2.2 billion in Tier 2
offerings.\243\ While the 2015 amendments have stimulated the
Regulation A offering market, aggregate Regulation A financing levels
remain modest relative to traditional IPOs and the Regulation D
market.\244\ The 2020 Regulation A Review notes that these financing
levels are likely related to a combination of factors, including the
pool of issuers and investors drawn to the market under
[[Page 17990]]
existing conditions; the availability to issuers of attractive private
placement alternatives without an offering limit; the availability to
investors of attractive investment alternatives outside of Regulation A
with a more diversified pool of issuers; limited intermediary
participation and a lack of traditional underwriting; and a lack of
secondary market liquidity.\245\
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\242\ See https://www.sec.gov/smallbusiness/exemptofferings/rega/2020Report. At the time of adoption of the 2015 amendments, the
Commission stated that the staff would study and submit a report to
the Commission no later than five years following the adoption of
the amendments on the impact of both Tier 1 and Tier 2 offerings on
capital formation and investor protection. See 2015 Regulation A
Release. The report includes a review of: The amount of capital
raised under the amendments; the number of issuances and amount
raised by both Tier 1 and Tier 2 offerings; the number of placement
agents and brokers facilitating the Regulation A offerings; the
number of federal, state, or any other actions taken against
issuers, placement agents, or brokers with respect to both Tier 1
and Tier 2 offerings; and whether any additional investor
protections appear necessary for either Tier 1 or Tier 2.
\243\ Over this time period issuers sought $11.2 billion across
487 offerings, of which 382 were qualified offering statements
seeking up to $9.1 billion. See 2020 Regulation A Review.
\244\ See 2020 Regulation A Review.
\245\ See id.
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The 2020 Regulation A Review estimates that approximately 10
percent of issuers in Tier 2 offerings have reached the $50 million
offering limit across completed and ongoing offerings.\246\ Although
most issuers have not exhausted the existing Tier 2 offering limit, we
believe there are compelling reasons to consider raising that limit.
First, a higher offering limit, such as $75 million, may enhance
capital formation for those Regulation A issuers that have exhausted
existing offering limits.\247\ Further, while the offering limit
represents one factor in the use of Regulation A, issuers may choose to
forgo Regulation A if the offering limit is too low for their financing
needs. Evidence from public commentary since the 2015 amendments
indicates that a higher offering limit may help attract a larger and
potentially more seasoned pool of issuers and intermediaries \248\ or
institutional investors to the Regulation A market.\249\ In addition, a
higher offering limit may make Regulation A offerings more attractive
to Exchange Act reporting companies, which may be more established
companies.
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\246\ See id. at Table 4.
\247\ Based on the available data, such issuers were almost
exclusively real estate issuers. See 2020 Regulation A Review.
\248\ See 2020 Regulation A Review, at Section F.1. However, as
noted in the Regulation A review, the staff lacks data that would
allow it to assess how a specific offering limit increase would
affect the size and composition of the pool of prospective issuers,
intermediaries, and investors in the Regulation A market.
\249\ See NYSBA Letter suggesting that many institutional
investors do not want to participate in smaller offerings where
their holdings will constitute a disproportionately large percentage
of the outstanding securities.
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Having considered the recent data, the 2020 Regulation A Review,
feedback that the Commission received in response to the Concept
Release and Small Business Forums, and in order to facilitate use of
Tier 2 Regulation A offerings, we are proposing to increase the maximum
offering amount under Tier 2 of Regulation A from $50 million to $75
million.\250\ Consistent with the Commission's approach to limitations
on secondary sales when adopting the Regulation A amendments, we are
also proposing to increase the maximum offering amount for secondary
sales under Tier 2 of Regulation A from $15 million to $22.5
million.\251\ Although some commenters suggested raising the offering
limit to $100 million,\252\ we believe that raising the maximum
offering amount to $75 million would provide an incremental approach to
increasing the threshold to a level that would permit issuers that have
exhausted existing offering limits to seek more capital under
Regulation A and may help attract a larger pool of issuers and
intermediaries to the Regulation A market.\253\ In addition, we believe
that the issuer eligibility requirements, content and filing
requirements for offering statements, and ongoing reporting
requirements for issuers in Tier 2 Regulation A offerings would
continue to provide appropriate protections for investors at this
higher offering limit.
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\250\ We are not proposing to raise the threshold for Tier 1
offerings at this time. While the Commission has received feedback
from market participants and commenters seeking an increase in the
Tier 2 offering limit, these commenters did not seek an increase in
the Tier 1 limit.
\251\ The Commission observed in the Regulation A amendments
proposing and adopting releases that selling security holder access
to Regulation A has historically been an important part of the
exemptive scheme. See Amendments for Small and Additional Issues
Exemptions Under Section 3(b) of the Securities Act, Release No. 33-
9497 (Dec. 18, 2013) [79 FR 3925 (Jan. 23, 2014)], at Section
II.B.3; and 2015 Regulation A Adopting Release, at Section II.B.3.c.
Consistent with existing and historical provisions of Regulation A,
we are proposing to continue to permit secondary sales under
Regulation A up to 30 percent of the maximum offering amount
permitted under the applicable tier.
\252\ See IPA Letter; and Goodwin Letter.
\253\ Adjusted for inflation since enactment of the JOBS Act in
April 2012, the staff estimates that the Tier 2 offering limit would
be $55.845 million as of December 31, 2019. See infra note 411. We
note that adjusting the existing offering limit for inflation would
largely maintain the status quo and likely would not attract
additional institutional investors, intermediaries, or traditional
underwriters to the Regulation A market.
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Given the significant additional requirements for Tier 2 offerings,
including the requirement to provide audited financial statements, the
ongoing reporting requirements, and the investment limits for non-
accredited investors, the Commission expected Tier 2 offerings to be
national rather than local in nature.\254\ While issuers in Tier 2
offerings are required to qualify offerings with the Commission before
sales can be made pursuant to Regulation A, they are not required to
register or qualify their offerings with state securities regulators.
Section 18 of the Securities Act generally provides for preemption of
state law registration and qualification requirements for ``covered
securities.'' \255\ Section 18(b)(4)(D) of the Securities Act further
provides that securities issued pursuant to Section 3(b)(2) of the
Securities Act are covered securities if they are listed, or will be
listed, on a national securities exchange or if they are offered or
sold to a ``qualified purchaser,'' \256\ which the Commission has
defined to include any person to whom securities are offered or sold in
a Tier 2 offering.\257\ We propose to rely on our authority under
Section 18 of the Securities Act to continue to preempt Tier 2
offerings from state securities law registration and qualification
requirements, as we expect that these offerings would continue to be
more national in nature under the proposed amendments.
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\254\ See 2015 Regulation A Release, at text accompanying note
830.
\255\ See 15 U.S.C. 77r(c).
\256\ See 15 U.S.C. 77r(b)(4)(D).
\257\ See 17 CFR 230.256.
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2. Rule 504
Rule 504 of Regulation D provides an exemption for eligible issuers
\258\ from registration under the Securities Act for the offer and sale
of up to $5 million of securities in a 12-month period.\259\ In 2016,
the Commission amended Rule 504 to raise the aggregate amount of
securities an issuer may offer and sell in any 12-month period from $1
million to $5 million, which is the maximum amount statutorily allowed
under Securities Act Section 3(b)(1).\260\ As discussed in the 2016
adopting release amending Rule 504, while a few commenters \261\ and
the 2015 Small Business Forum \262\ recommended that the Commission
increase the Rule 504 offering limit to $10 million, the Commission
determined not to use its exemptive authority under Section 28 of the
Securities Act to raise the maximum offering amount above $5 million at
that time.
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\258\ Issuers that are required to file reports under Exchange
Act Section 13(a) or 15(d); investment companies; blank check
companies; and issuers that are disqualified under Rule 504's ``bad
actor'' disqualification provisions are not eligible to use Rule
504.
\259\ See Rule 504.
\260\ See Intrastate and Regional Offerings Release. In light of
the increased offering threshold under Rule 504, the Commission
repealed Rule 505. Most issuers previously using Rule 505 are able
to conduct an offering up to $5 million under Rule 504.
\261\ See id. at note 272.
\262\ See Final Report of the 2015 SEC Government-Business Forum
on Small Business Capital Formation (November 2015), available at
https://www.sec.gov/info/smallbus/gbfor34.pdf (``2015 Forum
Report'').
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From 2009 through 2019, two percent of the capital raised in
Regulation D offerings under $5 million by companies other than pooled
investment funds was offered under Rule 504 (and under Rule
[[Page 17991]]
505, prior to its repeal), and 98 percent of the capital raised was
offered under Rule 506.\263\ Figure 1 and Figure 2 show the trends in
new offerings and capital raised under Rules 504 and 505 (including
pooled investment funds) during 2009-2019.\264\
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\263\ See Concept Release, at note 37 and accompanying text.
\264\ Aggregate amounts shown here have been revised to cap
several outliers identified in the Form D data on Rule 504 reported
proceeds at the offer limit to address data noise.
[GRAPHIC] [TIFF OMITTED] TP31MR20.000
[GRAPHIC] [TIFF OMITTED] TP31MR20.001
The figures show that the number of new offerings and the capital
reported raised has remained flat or declined since the adoption of the
changes in 2016. This data suggests that the higher threshold limits
have not encouraged more issuers to conduct new offerings under the
Rule 504 exemption, although those using the exemption are able to
raise more capital in each offering and in the aggregate.
[[Page 17992]]
In the Concept Release, the Commission requested comment on whether
to increase the Rule 504 offering limit. One commenter supported
increasing the limit to the current level,\265\ while a few others
opposed increasing the limit.\266\ In addition, several commenters
expressed concern generally with creation and expansion of exemptions
and exceptions from the federal securities laws and broadly recommended
against such action without further study.\267\
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\265\ See letter from Conserve Financial, Inc., dated September
1, 2019 (supporting increasing the limit, but mistakenly
recommending an increase from $1 million to the current $5 million
offer limit).
\266\ See, e.g., PIABA Letter; and NASAA Letter (recommending
Rule 504 be preserved in its current form).
\267\ See Consumer Federation Letter; Healthy Markets Letter;
and State Attorneys General Letter.
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Given the limited number of issuers that have used amended Rule 504
to raise capital, we believe it may be appropriate to revisit the
Commission's decision in 2016 not to raise the offering limit to $10
million, as several commenters suggested at that time.\268\ In
considering the appropriate offering limit, we have been mindful of the
significant investor protections that accompany a Rule 504 offering.
Specifically, Rule 504 is not available to a development stage company
that either has no specific business plan or purpose or has indicated
that its business plan is to engage in a merger or acquisition with an
unidentified company.\269\ Also, unless certain conditions are
met,\270\ issuers relying on Rule 504 may not use general solicitation
or general advertising to market the securities, and purchasers in a
Rule 504 offering will receive securities that are subject to the
resale limitations in Rule 502(d).\271\ If the conditions in Rule
504(b)(1)(i) through (iii) are met, any non-accredited investors will
receive substantive disclosure documents made in accordance with state
law. In addition, ``bad actor'' disqualification and disclosure
requirements apply.\272\ Finally, Rule 504 offerings, like other exempt
offerings, are subject to the federal antifraud provisions.
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\268\ See Exemptions to Facilitate Intrastate and Regional
Securities Offerings, Release. No. 33-9973 (Oct. 30, 2015) [80 FR
69786 (Nov. 10, 2015)], at Section III.B.2.
\269\ See Rule 504(a)(3).
\270\ See Rule 504(b)(1)(i) through (iii). General solicitation
and general advertising are permitted and the resale limitations in
Rule 502(d) do not apply if the issuer offers and sells the
securities exclusively under state laws that require registration
and the public filing and delivery to investors of a substantive
disclosure document before sale; or in one or more states that do
not have a provision requiring registration or the public filing and
delivery of a disclosure document before sale under certain
conditions. In states that do not have a provision requiring
registration or the public filing and delivery requirements, general
solicitation and general advertising are permitted so long as: The
securities have been registered in at least one other state that
provides for such registration, public filing, and delivery before
sale; the issuer offers and sells securities in that other state
under those provisions; and the issuer delivers to all purchasers in
any state the disclosure documents mandated by the state in which it
registered the securities; or exclusively in a state according to an
exemption in such state that permits general solicitation and
advertising, so long as sales are made only to accredited investors.
\271\ See Rule 502(d).
\272\ See Rule 504(b)(3); see also Intrastate and Regional
Offerings Release, at Section III.B.3.
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Based on the recent data, feedback that we received, and in order
to facilitate the use of Rule 504, we are proposing to use our general
exemptive authority under Securities Act Section 28 to raise the
maximum offering amount under Rule 504 from $5 million to $10 million.
We believe that raising the threshold would permit issuers to seek more
capital at a lower marginal cost than under the current rule and may
encourage regional multistate offerings and the use of state
coordinated review programs, resulting in more issuers conducting
offerings under the exemption, which would further increase investment
opportunities for investors and the amount of capital raised under Rule
504.
3. Regulation Crowdfunding
The Commission adopted Regulation Crowdfunding in 2015.\273\
Regulation Crowdfunding provides an exemption from registration for
certain crowdfunding transactions that raise up to $1.07 million in a
12-month period. To qualify for the exemption, transactions must meet a
number of statutory requirements, including limits on the amount an
issuer may raise, limits on the amount an individual may invest and a
requirement that the transactions be conducted through an intermediary
that is registered as either a broker-dealer or a ``funding portal.''
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\273\ See Crowdfunding Adopting Release.
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In 2019, the Commission staff undertook a study of the available
information on the capital formation and investor protection impacts of
Regulation Crowdfunding and summarized quantitative information, where
it was available to the staff, as well as qualitative observations of
Commission staff and FINRA staff, and input from market participants
regarding their experience with Regulation Crowdfunding.\274\
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\274\ See Report to the Commission: Regulation Crowdfunding
(June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf (``2019 Regulation Crowdfunding Report'').
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The study found that during the considered period, while the market
exhibited growth from 292 offerings initiated in the first year after
adoption to over 500 offerings in the second year, the number of
offerings and the total amount of funding were relatively modest.\275\
From May 16, 2016 through December 31, 2018 approximately 1,351
offerings were initiated under Regulation Crowdfunding and 519 were
completed.\276\ These offerings raised $108 million for issuers. In
contrast, over the same period approximately 12,700 issuers relied on
Regulation D to conduct offerings of up to $1.07 million (the 12-month
limit under Regulation Crowdfunding), totaling approximately $4.5
billion.\277\
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\275\ See id.
\276\ See id. at 15.
\277\ See Concept Release, at Section II.F.4.
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The study also found that the typical offering during the
considered period was small and raised less than the 12-month offering
limit.\278\ Of the offerings that were reported as completed based on a
review of progress updates on Form C-U, as of December 2019, Commission
staff estimated that the average offering raised approximately $213,678
and that just under 30 issuers reported raising at least $1.07 million
over the considered period (aggregating multiple offerings for issuers
that conducted more than one offering). Despite few issuers meeting the
offering limit, we have received feedback from market participants and
observers supporting a higher offering limit and note that the offering
limit may not reflect current capital raising trends.\279\ In addition,
some intermediaries suggested that, while few offerings reach the
current limit, many issuers choose not to utilize the crowdfunding
exemption because the limit is too low.\280\ In contrast, one
intermediary stated that the current $1.07 million offering limit is
appropriate, noting that most offerings are well below that level, and
another intermediary indicated that few potential issuers have
expressed interest in raising amounts above the limit.\281\
---------------------------------------------------------------------------
\278\ See 2019 Regulation Crowdfunding Report, at Section I.
\279\ See, e.g., 2017 Treasury Report, at 41 (recommending
``increasing the limit on how much can be raised over a 12-month
period from $1 million to $5 million, as it will potentially allow
companies to lower the offering costs per dollar raised''); 2017
Forum Report, at 18 (recommending a $5 million limit); and 2019
Forum Report (recommending that the Commission ``raise the maximum
limit on the overall deal.''). See also supra note 231 citing
average seed funding increasing from $1.3 million in 2010 to $5.7
million in 2018.
\280\ See 2019 Regulation Crowdfunding Report, at 37.
\281\ Id.
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[[Page 17993]]
Regulation Crowdfunding also limits the amount individual investors
are allowed to invest to no more than $107,000 across all Regulation
Crowdfunding offerings over the course of a 12-month period. In
addition, individual investors are further limited below $107,000 to:
The greater of $2,200 or five percent of the lesser of the
investor's annual income or net worth, if either of an investor's
annual income or net worth is less than $107,000; or
Ten percent of the lesser of his or her annual income or
net worth, if both annual income and net worth are equal to or more
than $107,000.\282\
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\282\ See Rule 100(a)(2).
Information on amounts invested by an average investor or the number of
investors per offering is not available for the full sample of
Regulation Crowdfunding offerings. However, information on offerings
from one intermediary from May 2016 through September 2018 provides
some insight into the typical investment size, investor composition,
and number of investors in crowdfunding offerings.\283\ In the sample,
accredited investors comprised approximately nine percent of investors
and accounted for approximately 40 percent of amounts invested in
funded offerings.\284\ Information provided by this and other
intermediaries indicates that amounts invested did not generally reach
investment limits.\285\
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\283\ This information is not required to be reported in
progress updates, but the intermediary was able to provide
information on approximately 31,500 unique crowdfunding investors in
this sample that used the platform during the considered period. See
2019 Regulation Crowdfunding Report, at III.C.2.b.
\284\ See 2019 Regulation Crowdfunding Report, at Section
III.C.2.b.
\285\ See id. For investors where data on annual income and net
worth was available, the amounts invested over the entire considered
period did not reach investments limits. Data from intermediaries
reflected that the average investment per issuer was generally less
than $1,000; however, the staff was unable to determine whether
these investors also invested in crowdfunding offerings through
other crowdfunding platforms. Thus, these estimates are likely to
represent a lower bound on average investment amounts.
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A number of market participants and observers have expressed
concerns about the investment limits.\286\ The 2018 Small Business
Forum recommended that the Commission increase the investment limits
for all investors,\287\ and the 2017, 2018, and 2019 Small Business
Forums, the SEC Small Business Capital Formation Advisory Committee,
and the 2017 Treasury Report all recommended that the investment limits
not apply to accredited investors, who face no such limits under other
exemptions.\288\ Alternatively, some market participants recommended
basing the limits on the greater of the investor's net worth or income,
noting that the accredited investor definition only requires the
investor to meet either the net worth or the income standard.\289\ This
change would be similar to Regulation A, where accredited investors are
not limited in the amount of securities they may purchase and other
investors are limited to purchasing in a Tier 2 offering no more than:
(a) Ten percent of the greater of annual income or net worth (for
natural persons); or (b) ten percent of the greater of annual revenue
or net assets at fiscal year-end (for non-natural persons).\290\
---------------------------------------------------------------------------
\286\ See, e.g., 2017 Treasury Report; and 2018 Forum Report.
\287\ See 2018 Forum Report.
\288\ See, e.g., 2017 Treasury Report, at 41; 2018 Forum Report;
2017 Forum Report, at 17; Recommendation of the SEC Small Business
Capital Formation Advisory Committee regarding Regulation
Crowdfunding (Dec. 13, 2019), available at https://www.sec.gov/spotlight/sbcfac/recommendation-regulation-crowdfunding.pdf (``2019
Small Business Advisory Committee Recommendation on Crowdfunding'').
See also 2015 Forum Report (recommending increasing the investment
limit for accredited investors). In conjunction with removing the
investment limits for individual accredited investors, the 2018
Small Business Forum recommended verification of accredited investor
status.
\289\ See id.
\290\ See 17 Rule 251(d)(2)(i)(C). This limit does not, however,
apply to purchases of securities that will be listed on a national
securities exchange upon qualification.
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In the Concept Release, the Commission requested comment on whether
to increase the Regulation Crowdfunding offering limit and investment
limits.\291\ Numerous commenters supported raising the offering
limit,\292\ while some opposed an increase.\293\ Several commenters
additionally supported eliminating the investment limit for accredited
investors,\294\ while a few also opposed changing the investment
limit.\295\ Comments were mixed regarding whether to calculate the
investment limit based on either income or net worth, with some
commenters supporting,\296\ and others opposing \297\
[[Page 17994]]
changes to the investment limit calculations.
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\291\ See Concept Release, at Section II.F.
\292\ See, e.g., AOIP Letter (recommending raising the threshold
to $10 million and suggesting there is negative selection bias as
quality companies seeking larger amounts of capital are discouraged
by the lower threshold); letter from Hamilton & Associates Law
Group, P.A. dated August 15, 2019; Wefunder Letter (recommending a
$5 million offering limit); Republic Letter (recommending raising
the limit to $10 or $5 million and suggesting the current limits
impair the utility of Regulation Crowdfunding, discourage issuers
from using the exemption and negatively impact the ability of
portals to sustain their business); Indemnis et al. Letter; CCMC
Letter (suggesting the low upper limit discourages issuers and
recommending a $5 million offering limit); A. Schwartz Letter
(recommending a $5 million offering limit); letter from Herwig
Konings, et al. dated September 24, 2019 (``H. Konings et al.
Letter'') (recommending a $5 million offering limit); CCA Letter
(recommending a $20 million offering limit in place of Regulation A
Tier I offerings); MainVest Letter (recommending a $5 million
offering limit and supporting financial review for companies raising
over $500,000 and an audit for those that have raised at least
$500,000); Silicon Prairie Letter (recommending the offering limit
be the maximum of the other exemptions); 2019 Small Business
Advisory Committee Recommendation on Crowdfunding; and Rep. McHenry
Letter.
\293\ See Consumer Federation Letter (opposing any expansion
prior to the Commission examining non-compliance and remedying
deficiencies in the crowdfunding markets); and Healthy Markets
Letter (urging the Commission to pause the creation and expansion of
exemptions and exceptions to the federal securities laws). See also
State Attorneys General Letter (recommending that before making any
modifications to the current exemptions, the Commission gather data
on issuer and investor outcomes as well as retail investor demand
for exempt offerings, and analyze how the current framework is
impacting each of those categories); NASAA Letter (recommending not
expanding the market without corresponding regulations that will
increase protections for investors); and CrowdCheck Letter.
\294\ See, e.g., AOIP Letter; Wefunder Letter; Republic Letter
(recommending intermediaries being required to take reasonable steps
to verify accredited investor status); Indemnis et al. Letter; A.
Schwartz Letter; C. Bilger Letter; Davis Polk Letter; CCA Letter;
Rep. McHenry Letter; 2019 Small Business Advisory Committee
Recommendation on Crowdfunding; and CrowdCheck Letter. See also
letter from Startup Practicum at the University of Miami School of
Law (``Startup Practicum Letter'') (recommending higher limits for
accredited investors); and MainVest Letter (recommending a $250,000
investment limit).
\295\ See Consumer Federation Letter; Healthy Markets Letter;
and State Attorneys General Letter.
\296\ See, e.g., AOIP Letter (recommending the elimination of
cumulative investment limits); Republic Letter (recommending using
the greater of two thresholds and applying the limits on a per
offering basis); C. Bilger Letter; CCA Letter; MainVest Letter
(noting investor confusion regarding the investor limits and
supporting mirroring the logic for requirements for investor
accreditation and providing more investors access to investment
opportunities); and 2019 Small Business Advisory Committee
Recommendation on Crowdfunding (recommending investment limits apply
on a per investment basis rather than annual limits, and calculating
limits based upon the greater of income or net worth). See also
Indemnis et al. Letter (not specifically addressing this issue, but
recommending raising the limits and applying the limits on a per
offerings basis); CCMC Letter (not specifically addressing the
issue, but supporting raising the current limits); A. Schwartz
Letter (recommending an individual investment limit of $5,000 per
investment as a simplification of the current rule that does not
seek sensitive financial information); Davis Polk Letter
(recommending harmonizing limits on investment amounts for non-
accredited investors across all exempt offerings); and Silicon
Prairie Letter (recommending raising the limits for non-accredited
investors to $10,000 or the use of a suitability test).
\297\ See, e.g., Startup Practicum Letter (supporting the
current limits for non-accredited investors); Wefunder Letter
(suggesting that the focus should be on issuer quality, not
investment limits, but recommending rationalizing the limits with
other exemptions, such as using the Regulation A Tier 2 limit for
non-accredited investors). See also Consumer Federation Letter;
Healthy Markets Letter; State Attorneys General Letter; and H.
Konings, et al. Letter (both supporting the current investor limits,
and suggesting that they could be simplified to a single $25,000
investor yearly limit or a tiered cap base on income).
---------------------------------------------------------------------------
Based on our consideration of the available data, our staff's 2019
Regulation Crowdfunding Report, the feedback that we received on the
Concept Release and from Small Business Forums and the Small Business
Capital Formation Advisory Committee, and in order to facilitate use of
Regulation Crowdfunding for capital raising, we are proposing to: (1)
Raise the issuer offering limits in Regulation Crowdfunding; and (2)
increase the investment limits by no longer applying those limits to
accredited investors and allowing investors to rely on the greater of
their income or net worth in calculating their investment limit.
We are proposing to use our general exemptive authority under
Securities Act Section 28 to raise the offering limit in Regulation
Crowdfunding from $1.07 million to $5 million. Securities Act Section
4(a)(6) currently sets the maximum offering limit at $1.07 million
($1.0 million adjusted to reflect changes in the Consumer Price
Index).\298\ While over 500 offerings were completed pursuant to
Regulation Crowdfunding in the first year and a half that the exemption
was available, market participants have expressed concern that the
vitality of the market and the number of offerings is being constrained
by the $1.07 million offering limit. We believe that permitting larger
offerings under Regulation Crowdfunding may encourage more issuers to
use the exemption and additionally would lower the offering costs per
dollar raised for issuers. In so doing, these amendments would provide
issuers with greater access to investment capital and investors in
Regulation Crowdfunding offerings with more investment opportunities.
At the same time, we believe raising the offering limit would be
consistent with investor protection because existing Regulation
Crowdfunding requirements, including the intermediary requirements and
the eligibility, disclosure, and ongoing reporting requirements for
issuers would continue to provide appropriate investor protections at
this higher offering limit.
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\298\ See 15 U.S.C. 77d(a)(6) and 15 U.S.C. 77d-1(h). See also
Rule 100(a)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------
Regulation Crowdfunding's financial statement requirements are
based on the amount offered and sold in reliance on the exemption
within the preceding twelve month period, with progressively increasing
requirements and involvement of outside accountants as offering size
increases.\299\ While we are proposing to increase the overall offering
limits, we do not believe that it is necessary to adjust or increase
the financial statement requirements at this time. Any offerings in
excess of the current $1,070,000 offering limit would continue to be
subject to the financial statement requirements of Rule 201(t)(3). We
believe that this standard, which (1) requires the provision of audited
financial statements similar to the requirements for other exempt
offerings with higher offering limits and (2) currently applies to
issuers offering more than $535,000 of their securities, would be
sufficient for offerings subject to the increased $5 million offering
limit.
---------------------------------------------------------------------------
\299\ See Rule 201(t) of Regulation Crowdfunding.
---------------------------------------------------------------------------
We are also proposing to increase the investment limits for
investors in Regulation Crowdfunding offerings.\300\ First, we are
proposing to no longer apply any investment limits to accredited
investors. When the Commission considered investment limits for Tier 2
Regulation A offerings, it determined that such limitations were
unnecessary for accredited investors because these individuals satisfy
certain criteria that suggest they are capable of protecting themselves
in transactions that are exempt from registration under the Securities
Act.\301\ For similar reasons, we believe that investment limits for
accredited investors under Regulation Crowdfunding are unnecessary.
Accordingly, we believe it would be appropriate in the public interest
and consistent with the protection of investors to treat accredited
investors under Regulation Crowdfunding in the same manner as other
exempt offerings.
---------------------------------------------------------------------------
\300\ Consistent with the current approach to investment limits,
an issuer would be able to rely on efforts that an intermediary is
required to undertake in order to determine that the investor is an
accredited investor, or that the aggregate amount of securities
purchased by an investor does not cause the investor to exceed the
investment limits, provided that the issuer does not have knowledge
that the investor had exceeded, or would exceed, the investment
limits as a result of purchasing securities in the issuer's
offering. See Instruction 3 to Rule 100(a)(2) of Regulation
Crowdfunding.
\301\ See 2015 Regulation A Release, at note 145 and
accompanying text.
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Second, we are proposing to amend the Regulation Crowdfunding
calculation method for the investment limits for non-accredited
investors to allow them to rely on the greater of their annual income
or net worth. Currently, Regulation Crowdfunding imposes a limit that
is the lesser of a percentage of the investor's annual income or net
worth subject to an absolute maximum of $107,000.\302\ When adopting
Regulation Crowdfunding, the Commission considered whether to use a
``greater of'' or ``lesser of'' standard for the exemption's investment
limits and determined to use the ``lesser of'' standard at that time
due to concerns about investors incurring unaffordable losses.\303\ By
contrast, when the Commission considered investment limits for Tier 2
Regulation A offerings, it determined to permit investors to look to a
percentage of the greater of their annual income or net worth.\304\ At
that time, the Commission indicated that limiting the amount of
securities that a non-accredited investor can purchase in a particular
Tier 2 offering should help to mitigate concerns that such investors
may not be able to absorb the potential loss of the investment and that
a limitation based on a percentage of the greater of such investor's
net worth/net assets and annual income/revenue is generally consistent
with similar maximum investment limitations placed on investors in
Title III of the JOBS Act and would help set a loss limitation standard
in such offerings.\305\
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\302\ Rule 100(a)(2) of Regulation Crowdfunding is based on the
requirement in Section 4(a)(6) that provides an exemption where the
aggregate amount sold to an investor by an issuer does not exceed a
given percentage of the annual income or net worth of such investor.
The statutory language does not expressly provide that the investor
use the lesser of annual income or net worth.
\303\ See Crowdfunding Adopting Release, at Section II.A.2.c.
\304\ See Rule 251(d)(2)(i)(C)(2); and 2015 Regulation A
Release, at Section II.B.4.
\305\ See Section 301 of the JOBS Act; and 2015 Regulation A
Release, at notes 161 and 162 and accompanying text.
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The proposed amendment would conform Regulation Crowdfunding with
Tier 2 of Regulation A and use a consistent approach to mitigate
concerns regarding the ability of investors to absorb losses incurred
in offerings conducted in reliance on the two exemptions. While the
Commission used a ``lesser of'' standard when initially implementing
the rule, in light of our experience with Regulation Crowdfunding since
its adoption and the concerns of commenters that the existing
investment limits may be hampering the utility of the exemption,\306\
we now believe it is appropriate to consider a less restrictive
approach. By permitting investors to use the greater of the income or
net worth threshold, investors would have more flexibility in making
their investment decisions. Moreover, we are not aware
[[Page 17995]]
of evidence since Regulation Crowdfunding's adoption to indicate this
market requires a more stringent approach to investment limits than
other exemptive regimes.\307\
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\306\ See, e.g., Republic Letter; CCA Letter; and MainVest
Letter.
\307\ See 2019 Regulation Crowdfunding Report, at Section
III.C.3.
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Request for Comment
55. Should we, as proposed, increase the Regulation A Tier 2
offering limit from $50 million to $75 million? Is another limit more
appropriate, such as $100 million? What are the appropriate
considerations in determining a maximum offering size? In connection
with an increase, should we consider additional investor protections,
such as aligning standards for when an amendment to an offering
statement is required with those in registered offerings? Should we
instead simply adjust the offering limit for inflation?
56. Should we increase the Regulation A Tier 1 offering limit?
Alternatively, we note that there is significant overlap between Rule
504 and Regulation A Tier 1 offerings. Should the threshold for Rule
504 be raised to $20 million such that Rule 504 might serve as a
replacement for Regulation A Tier 1 offerings? If so, should we
eliminate Tier 1 of Regulation A?
57. Would increasing the maximum offering size encourage more
issuers to undertake Regulation A offerings? Would it attract more
institutional investors to the market?
58. Would increasing the maximum offering size increase the risk to
investors? Is there any data available that shows an increase or
decrease in fraudulent activity in the Regulation A market as a result
of the 2015 or 2018 amendments?
59. Should we, as proposed, increase the Rule 504 offering limit
from $5 million to $10 million? Is another limit more appropriate?
Would the increased offering limit encourage more regional multistate
offerings and state coordinated review programs? Are there additional
investor protections we should consider in connection with an increase?
60. Should we, as proposed, increase the Regulation Crowdfunding
offering limit from $1.07 million to $5 million? Is another limit more
appropriate? Would increasing the limit encourage more issuers to use
Regulation Crowdfunding? Are there additional investor protections we
should consider in connection with the increase?
61. In conducting our review and analysis of exempt offerings, we
and our staff relied on data collected from filings with the Commission
and third party data sources.\308\ In order to better analyze the
exempt offering markets, should we consider ways to enhance compliance
with Form D filing requirements?
---------------------------------------------------------------------------
\308\ See supra notes 12 and 13.
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62. Should we remove investment limits for accredited investors in
Regulation Crowdfunding offerings as proposed? If so, should we require
verification of accredited investor status, as suggested by several
commenters? Should the limits be modified in some other way?
63. Should we amend the method for calculating the investment
limits for non-accredited investors in Regulation Crowdfunding to allow
those investors to rely on the greater of their annual income or net
worth as proposed? Is there any evidence to suggest that a more
restrictive approach to investment limits is warranted for Regulation
Crowdfunding offerings? Should we align the non-accredited investor
limits in Regulation Crowdfunding with those in Regulation A Tier 2?
64. The 2017 and 2018 Small Business Forums recommended that the
Commission amend Regulation Crowdfunding requirements for debt
offerings and small offerings under $250,000, such as by limiting the
ongoing reporting obligations to actual investors instead of the
general public, and scaling the requirements to reduce accounting,
legal and other costs of the offering. Further, the 2019 Small Business
Forum recommended that the Commission should provide an exemption for
investments of less than $25,000 for up to 35 non-accredited investors,
where all investors have access to the same disclosures about the
issuer. Should we consider creating a ``micro-offering'' tier of
Regulation Crowdfunding consistent with these recommendations? If so,
should that micro-offering exemption be limited to offerings of debt
securities conducted through an intermediary, but with no specific
disclosure requirements? Would an aggregate offering limit be
appropriate, such as $250,000, as recommended by the 2017 and 2018
Small Business Forums? Should such a micro-offering be available to
non-accredited investors? If so, should there be a limit on the number
of non-accredited investors that may participate? Should there be any
limit on how much a person can invest in any one offering or in all
such offerings during a specified time period?
65. Should we extend federal preemption to secondary sales of
Regulation A or Regulation Crowdfunding securities, for example, by
expanding the definition of ``qualified purchaser''? Several Small
Business Forums, as well as the Commission's Advisory Committee on
Small and Emerging Companies, have recommended that the Commission
provide blue sky preemption for secondary trading of securities issued
under Tier 2 of Regulation A.\309\ Should we preempt state securities
registration or other requirements applicable to secondary sales of all
securities initially issued in a Tier 2 Regulation A offering? Should
we preempt state securities registration or other requirements
applicable to secondary trading of securities only of Regulation A Tier
2 issuers that are current in their ongoing reports? Should we
similarly preempt state securities registration or other requirements
applicable to secondary trading of securities of initially issued in a
Regulation Crowdfunding offering? Should such preemption only apply if
the Regulation Crowdfunding issuer is current in its ongoing reports?
What other steps should we consider to improve secondary trading
liquidity of securities exempt from registration under Regulation A or
Regulation Crowdfunding?
---------------------------------------------------------------------------
\309\ See 2019 Forum Report (recommending federal preemption for
all resales of securities sold in a Regulation A Tier 2 offering,
provided that the issuer is current in its Tier 2 reporting); 2018
Forum Report; 2017 Forum Report; 2016 Forum Report; 2015 Forum
Report; Final Report of the 2014 SEC Government-Business Forum on
Small Business Capital Formation (May 2015), available at http://www.sec.gov/info/smallbus/gbfor33.pdf (``2014 Forum Report'');
Advisory Committee on Small and Emerging Companies: Recommendations
Regarding Secondary Market Liquidity for Regulation A, Tier 2
Securities (May 15, 2017) available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-051517-secondary-liquidityrecommendation.pdf. The 2017 Treasury Report also
recommended that state securities regulators update their
regulations to exempt from state registration and qualification
requirements secondary trading of securities issued under Tier 2 of
Regulation A or, alternatively, that the Commission use its
authority to preempt state registration requirements for such
transactions.
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F. Regulation Crowdfunding and Regulation A Eligibility
The Commission's exempt offering framework includes eligibility
restrictions. Specific eligibility restrictions excluding certain types
of entities or activities by issuers apply to both Regulation A\310\
and Regulation
[[Page 17996]]
Crowdfunding,\311\ respectively. While Regulation Crowdfunding does not
restrict the types of securities eligible to be sold under the
exemption, the types of securities eligible for sale under Regulation A
are limited to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.\312\ Regulation A also specifically
excludes asset-backed securities.\313\
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\310\ See 17 CFR 230.251(b). Regulation A is not available to:
Issuers that are organized in or have their principal place of
business outside of the United States or Canada; investment
companies registered or required to be registered under the
Investment Company Act or 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; or issuers subject to ``bad actor'' disqualification
under 15 CFR 230.262.
\311\ Section 4A specifically excludes: Non-U.S. issuers;
issuers that are required to file reports under Exchange Act Section
13(a) or 15(d); certain investment companies; and other issuers that
the Commission, by rule or regulation, determines appropriate. See
15 U.S.C. 77d-1. Regulation Crowdfunding further excludes: Issuers
disqualified under disqualification provisions that are
substantially similar to those in Rule 506(d); issuers that have
failed to comply with the annual reporting requirements under
Regulation Crowdfunding during the two years immediately preceding
the filing of the offering statement; and blank check companies. See
17 CFR 227.100(b).
\312\ See 17 CFR 230.261.
\313\ See Rule 251 (providing that only ``eligible securities''
can be offered or sold under Regulation A) and Rule 261 (defining
``eligible securities''). An asset-backed security generally means a
security that is primarily serviced by the cash flows of a discrete
pool of receivables or other financial assets, either fixed or
revolving, that by their terms convert into cash within a finite
time period, plus any rights or other assets designed to assure the
servicing or timely distributions of proceeds to the security
holders. See 17 CFR 229.1101(c).
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We are proposing amendments to the eligibility restrictions in
Regulation Crowdfunding and Regulation A. We are proposing to amend
Regulation Crowdfunding to permit the use of certain special purpose
vehicles to facilitate investing in Regulation Crowdfunding issuers,
and to limit the securities eligible to be sold under Regulation
Crowdfunding. We are additionally proposing to amend Regulation A to
harmonize its eligibility restrictions by excluding Exchange Act
registrants that are delinquent in their Exchange Act reporting
obligations from relying on the exemption.
Table 10 below summarizes the proposed changes to the eligible
issuers and securities under Regulation Crowdfunding and Regulation A:
Table 10--Summary of Proposed Changes to Eligibility Under Regulation Crowdfunding and Regulation A
----------------------------------------------------------------------------------------------------------------
Eligible issuers Eligible securities
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Current rules Proposed rules Current rules Proposed rules
----------------------------------------------------------------------------------------------------------------
Regulation Crowdfunding......... Excludes special Permits No limits on types Securities limited
purpose vehicles. crowdfunding of securities. to:
vehicles. Equity
securities.
Debt
securities.
Securities
convertible or
exchangeable for
equity interests.
Guarantees of any
of the above-
listed
securities.
Regulation A.................... Excludes issuers Excludes issuers Securities limited No change.
that have not that have not to:.
filed required filed required Equity
reports in the reports in the securities..
two prior years two prior years Debt
under Regulation under Regulation securities..
A. A or Section 13
or 15(d) of the Securities
Exchange Act. convertible or
exchangeable for
equity interests..
Guarantees of any
of the above-
listed
securities..
----------------------------------------------------------------------------------------------------------------
1. Regulation Crowdfunding Eligible Issuers
Section 4A(f)(3) of the Securities Act prohibits investment
companies, as defined in the Investment Company Act (or companies that
are excluded from the definition of an investment company under section
3(b) or 3(c) of the Investment Company Act), from using the Regulation
Crowdfunding exemption.\314\ As a result, issuers may not use special
purpose vehicles that invest in a single company (``SPVs'') that are
investment companies (or companies that are excluded from the
definition of an investment company under section 3(b) or 3(c) of the
Investment Company Act) to conduct Regulation Crowdfunding offerings.
Thus, an investor purchasing securities in an offering under Regulation
Crowdfunding must hold the securities in his or her own name, which, as
discussed below, can create certain practical impediments to issuers'
use of the exemption. When adopting Regulation Crowdfunding, the
Commission did not create, as suggested by some commenters, an
exception to this statutory prohibition that would have allowed a
single purpose fund organized to invest in, or lend money to, a single
company, to use Regulation Crowdfunding.\315\ In explaining its
decision, the Commission stated that the primary purpose of Section
4(a)(6) is to facilitate capital formation by early stage companies
that might not otherwise have access to capital, and expressed its
belief that investment companies did not constitute the type of issuer
that Section 4(a)(6) and Regulation Crowdfunding were intended to
benefit.\316\
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\314\ See Section 4A(f)(3) of the Securities Act [17 CFR
227.100(b)(3)].
\315\ See Crowdfunding Adopting Release, at 71397.
\316\ Id.
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Since the adoption of Regulation Crowdfunding, the Commission has
received comments and recommendations from a variety of sources,
including certain of the annual Small Business Forums,\317\ the 2017
Treasury Report,\318\ and the Small Business Capital Formation Advisory
[[Page 17997]]
Committee \319\ on the potential benefits of allowing an SPV to conduct
a crowdfunding offering. In particular, public feedback has indicated
that allowing the use of such vehicles could address concerns
associated with managing the potentially large number of direct
investors that could result from a crowdfunding offering, as those
investments would be held through a single purpose entity.
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\317\ See 2017 Forum Report. See also 2014 Forum Report
(commenting on the proposing release for Regulation Crowdfunding).
\318\ See 2017 Treasury Report.
\319\ See 2019 Small Business Capital Formation Advisory
Committee Recommendation on Crowdfunding (recommending eligible
investors be allowed to invest through special purpose vehicles).
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The 2017 Small Business Forum recommended that the Commission
consider promoting simplification of the capitalization table of
Regulation Crowdfunding issuers by allowing the use of SPVs to
aggregate investors with appropriate conditions.\320\ Similarly, the
2017 Treasury Report recommended allowing the use of SPVs advised by a
registered investment adviser, which may mitigate crowdfunding issuers'
concerns about vehicles having an unwieldy number of shareholders and
surpassing the registration thresholds of Section 12(g).\321\ However,
the 2017 Treasury Report also recognized that it is critical to ensure
appropriate investor protections if any changes are made to Regulation
Crowdfunding, given the participation of non-accredited investors. In
light of risks that SPVs may weaken investors' ability to avail
themselves of protections available to direct investors, as well as
potential conflicts of interest between the issuer, lead investors, and
other investors, the 2017 Treasury Report recommended that any
rulemaking in this area prioritize: (1) Alignment of interests between
a lead investor and the other investors participating in the SPV; (2)
regular dissemination of information from the issuer; and (3) minority
voting protections with respect to significant corporate actions.\322\
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\320\ See 2017 Forum Report.
\321\ See 2017 Treasury Report.
\322\ See id. (noting that SPVs could potentially facilitate the
type of syndicate investing model that has developed in accredited
investor platforms, whereby a lead investor conducts due diligence,
pools the capital of other investors, and receives carried interest
compensation).
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In connection with the 2019 Regulation Crowdfunding Report, the
staff received similar feedback from market participants regarding
certain issues that may be discouraging companies from raising capital
through the exemption. As discussed in the 2019 Regulation Crowdfunding
Report, some intermediaries have told the staff that many issuers have
elected not to pursue an offering under Regulation Crowdfunding
because, without an SPV, a large number of investors on an issuer's
capitalization table can be unwieldy and potentially impede future
financing. These intermediaries frequently noted that allowing SPVs to
participate in Regulation Crowdfunding offerings may encourage use of
the exemption because it would help the issuer manage the size of its
capitalization table. Similarly, some intermediaries have reported that
issuers may be hesitant to offer voting rights to investors in
offerings under this exemption because of the logistical challenges of
seeking any required shareholder vote. In addition, several market
participants pointed to the other potential investor protections that
an SPV structure could provide. For example, some commenters noted that
an SPV could allow small investors to invest alongside a sophisticated
lead investor who may negotiate better terms, protect against dilution
by negotiating during subsequent financings, mentor the issuer, and
represent smaller investors on the board.
Many of these views were echoed by commenters on the Concept
Release. For example, several commenters stated that private companies
do not use Regulation Crowdfunding to raise capital because the
capitalization table becomes unwieldy with several hundred investors,
and it is difficult to obtain consent or approval from hundreds of
investors as it relates to governance issues, strategic decisions, and
later financing rounds.\323\ These commenters urged the Commission to
permit issuers to raise capital under Regulation Crowdfunding through
an SPV to address these concerns.\324\ Some commenters suggested that
the Commission require a registered investment adviser to manage the
SPV to provide protection for the SPV's investors.\325\ In contrast,
one commenter opposed allowing crowdfunding issuers to use SPVs,
stating that because the dollar value of typical crowdfunding
transactions is small, there would not be enough money available to pay
an SPV manager, or the fees paid would need to come immediately from
the principal investment.\326\ This commenter also stated that the SPV
approach would make it difficult or impossible for crowdfunding
investors to exercise their basic rights under state corporation laws,
including voting for company directors, voting on material
transactions, rights of access to corporate records, and appraisal
rights.
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\323\ See Iownit Letter; Rep. McHenry Letter; Wefunder Letter;
AOIP Letter; MainVest Letter; and J. Schocken Letter.
\324\ See AOIP Letter (noting that the use of an SPV can
streamline communications with investors, allow for a single entry
on the issuer's capitalization table, and allow for better
management of investor rights to assure no excessive dilution takes
place); Wefunder Letter; CCA Letter (``If the goal of some of these
issuers is to be acquired, then having a shareholder table that is
easy to manage would facilitate some of these acquisitions. An SPV
would be beneficial and have no downside since investors still
retain their voting rights.''); Rep. McHenry Letter; NYSBA Letter;
and CrowdCheck Letter. See also supplemental letter from Wefunder,
dated January 15, 2020 (suggesting the use of voting trusts as a
type of SPV solution for Regulation Crowdfunding offerings).
\325\ See CrowdCheck Letter. See also NASAA Letter
(``crowdfunding funds could open the door to greater use of
crowdfunding by issuers and investors. Those corresponding investor
protections should require that any such funds be managed by a
registered investment adviser, issue a single class of securities,
be limited to investing in only a single crowdfunding offering, and
maintain certain mandatory disclosure obligations.'').
\326\ See letter from William F. Galvin, Secretary of the
Commonwealth of Massachusetts, dated September 24, 2019 (``MA
Secretary Letter'').
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After considering this feedback, we are proposing a new exclusion
under the Investment Company Act for limited-purpose vehicles
(``crowdfunding vehicles'') that function solely as conduits to invest
in businesses raising capital through the vehicle under Regulation
Crowdfunding. Proposed Rule 3a-9 under the Investment Company Act would
exclude from the definition of ``investment company'' under that Act a
crowdfunding vehicle that meets conditions designed to require that it
function as a conduit for investors to invest in a business that seeks
to raise capital through a crowdfunding vehicle.\327\ As a result, SPVs
meeting the definition of a crowdfunding vehicle would be able to
utilize Regulation Crowdfunding.
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\327\ See proposed Rule 3a-9(a). A crowdfunding vehicle
complying with the proposed rule would not be an investment company
as defined in the Investment Company Act or an entity that is
excluded from the definition of investment company by section 3(b)
or section 3(c) of that Act, and would therefore not be precluded
from relying on Regulation Crowdfunding by Section 4A(f)(3) of the
Securities Act. See Rule 100(b)(3) of Regulation Crowdfunding [17
CFR 227.100(b)(3)].
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Because the rule we are proposing would not be aimed at allowing
investment companies or similar issuers to raise capital, but rather,
solely at facilitating crowdfunding offerings by eligible issuers, we
believe this approach would be consistent with the intent of Section
4(a)(6). Specifically, under the proposed rule, a crowdfunding vehicle
would serve merely as a conduit for investors to invest in a single
underlying issuer and would not have a separate business purpose. As
discussed below, our proposed approach would allow investors in a
crowdfunding vehicle to achieve the same economic exposure,
[[Page 17998]]
voting power, and ability to assert state and federal law rights, and
receive the same disclosures under Regulation Crowdfunding, as if they
had invested directly in the underlying issuer (``crowdfunding
issuer'') in an offering made under Regulation Crowdfunding. This
approach also would allow the crowdfunding issuer to maintain a
simplified capitalization table and, by reducing the administrative
complexities associated with a large and diffuse shareholder base,\328\
may encourage crowdfunding issuers to offer voting rights, or other
terms not currently offered as frequently to investors.
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\328\ Shifting the administrative burden from the crowdfunding
issuer to the crowdfunding vehicle would, for example, allow a third
party (such as a funding portal) to more easily be engaged to handle
the burden.
---------------------------------------------------------------------------
A crowdfunding issuer would be defined as a company \329\ that
seeks to raise capital as a co-issuer in an offering with a
crowdfunding vehicle that complies with all of the requirements under
Section 4(a)(6) of the Securities Act and Regulation Crowdfunding.\330\
We propose to define a crowdfunding vehicle as an issuer \331\ formed
by or on behalf of a crowdfunding issuer for the purpose of conducting
an offering under Section 4(a)(6) of the Securities Act as a co-issuer
with the crowdfunding issuer, which offering is controlled by the
crowdfunding issuer. Because the crowdfunding vehicle would only be a
conduit for the crowdfunding issuer--and taking into account the
significant limitations on the nature and scope of the crowdfunding
vehicle's activities under the proposed rule--we believe that the
crowdfunding vehicle would function as a means for the crowdfunding
issuer to raise capital rather than an independent investment vehicle
that would need to be subject to regulation under the Investment
Company Act to protect its investors. Moreover, because the
crowdfunding vehicle's business would consist only of the purchase of
securities of the crowdfunding issuer, and would use the sale of its
own securities to make such purchases, the crowdfunding issuer and the
crowdfunding vehicle would be co-issuers under the Securities Act,
meaning each would be deemed to be the maker of any statements by the
crowdfunding vehicle and any material misstatements or omissions with
respect to the offering.\332\
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\329\ Under the Investment Company Act, a company means a
corporation, a partnership, an association, a joint-stock company, a
trust, a fund, or any organized group of persons whether
incorporated or not; or any receiver, trustee in a case under title
11 of the United States Code or similar official or any liquidating
agent for any of the foregoing, in his capacity as such. 15 U.S.C.
80-2(a)(8).
\330\ As co-issuers, the crowdfunding issuer and crowdfunding
vehicle would be jointly relying on Regulation Crowdfunding for the
combined offering of the crowdfunding issuer's securities and the
crowdfunding vehicle's securities.
\331\ Under the Investment Company Act, an issuer means every
person who issues or proposes to issue any security, or has
outstanding any security which it has issued. 15 U.S.C. 80-2(a)(22).
\332\ See, e.g., 17 CFR 230.140.
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As co-issuers, the crowdfunding issuer and the crowdfunding vehicle
would be required to jointly file a Form C, providing all of the
required Form C disclosure with respect to (i) the offer and sale of
the crowdfunding issuer's securities to the crowdfunding vehicle and
(ii) the offer and sale of the crowdfunding vehicle's securities to
investors.\333\ For example, the Form C would be required to include
the crowdfunding issuer's financial statements. By jointly filing a
Form C describing both transactions and providing disclosure about both
co-issuers, investors would be provided all information necessary to
analyze both their direct investment in the crowdfunding vehicle and
the terms of the crowdfunding vehicle's investment in the crowdfunding
issuer.\334\ This approach also would allow investors to review the
entire business of the crowdfunding issuer and crowdfunding vehicle in
one location (avoiding any confusion that could arise if the
crowdfunding vehicle and crowdfunding issuer provided separate
disclosure on the separate transactions, for example, on separate Forms
C).
---------------------------------------------------------------------------
\333\ We are proposing to amend Rule 201 of Regulation
Crowdfunding and Form C to require disclosure about the co-issuer in
the offering statement. Because the crowdfunding vehicle is only
acting as a conduit for the crowdfunding issuer, we do not believe
that the individual investment limitations under Regulation
Crowdfunding should apply to transfer of the securities from the
crowdfunding issuer to the crowdfunding vehicle.
\334\ See 17 CFR 227.201(m) (requiring a description of the
ownership and capital structure of the issuer, including ``a summary
of the differences between [the offered] securities and each other
class of security of the issuer''). If a crowdfunding issuer also
wanted to offer its own securities directly to investors pursuant to
Regulation Crowdfunding, it would have to file a separate Form C
with respect to that offering.
---------------------------------------------------------------------------
The conditions we are proposing for crowdfunding vehicles are
intended to address any specific investor protection concerns raised by
a vehicle that acts as a conduit for investments in a crowdfunding
issuer. First, the proposed rule includes several conditions designed
to require that the crowdfunding vehicle serve only as a conduit for
investors to invest in the crowdfunding issuer. Specifically, the
crowdfunding vehicle:
Must be organized and operated for the sole purpose of
acquiring, holding, and disposing of securities issued by a single
crowdfunding issuer and raising capital in one or more offerings made
in compliance with Regulation Crowdfunding; \335\
---------------------------------------------------------------------------
\335\ See proposed Rule 3a-9(a)(1).
---------------------------------------------------------------------------
Would not be permitted to borrow money and would be
required to use the proceeds of the securities it sells solely to
purchase a single class of securities of a single crowdfunding issuer;
\336\
---------------------------------------------------------------------------
\336\ See proposed Rule 3a-9(a)(2).
---------------------------------------------------------------------------
Would be permitted to issue only one class of securities
in one or more offerings under Regulation Crowdfunding in which the
crowdfunding vehicle and the crowdfunding issuer are deemed to be co-
issuers under the Securities Act; \337\
---------------------------------------------------------------------------
\337\ See proposed Rule 3a-9(a)(3).
---------------------------------------------------------------------------
Would be required to obtain a written undertaking from the
crowdfunding issuer to fund or reimburse the expenses associated with
the crowdfunding vehicle's formation, operation, or winding up, and the
crowdfunding vehicle would not be permitted to receive other
compensation.\338\
---------------------------------------------------------------------------
\338\ See proposed Rule 3a-9(a)(4).
---------------------------------------------------------------------------
In addition, any compensation paid to any person operating the
crowdfunding vehicle must be paid solely by the crowdfunding
issuer.\339\ These conditions collectively would require the
crowdfunding vehicle to act as a conduit by limiting the scope of the
activities in which the crowdfunding vehicle could engage and limiting
the compensation it could receive.
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\339\ Id. We preliminarily believe that a crowdfunding vehicle
complying with the proposed rule would not be a broker as defined in
Section 3(a)(4) of the Exchange Act or a dealer as defined in
Section 3(a)(5) of the Exchange Act. If, however, a crowdfunding
vehicle or a person operating the crowdfunding vehicle engages in
activities beyond the limited scope described above, they may need
to consider whether they would be required to register under Section
15(a) of the Exchange Act. See, e.g., SEC v. Helms, No. 13-cv-01036,
2015 WL 5010298, at *17 (W.D. Tex. Aug. 21, 2015) (``In determining
whether a person `effected transactions [within the meaning of
Section 3(a)(4)],' courts consider several factors, such as whether
the person: (1) Solicited investors to purchase securities, (2) was
involved in negotiations between the issuer and the investor, and
(3) received transaction-related compensation.'') (citing cases
initiated by the Commission). In the context of a dealer, a key
consideration in determining whether a person qualifies as a dealer
has been the regularity with which it engages in securities
transactions. See, e.g., Eastside Church of Christ v. Nat'l Plan,
Inc., 391 F.2d 357, 361-62 (5th Cir. 1968) (an entity that purchased
many securities for its own account as part of its regular business
and sold some of them was deemed a dealer).
---------------------------------------------------------------------------
These conditions also would prevent a crowdfunding vehicle from
bearing any of the costs associated with its formation, operation, or
winding up. We
[[Page 17999]]
believe it is appropriate for the crowdfunding issuer to bear these
costs because the crowdfunding issuer and all of its investors would
benefit from the ability to maintain a simplified capitalization table.
In addition, if a crowdfunding vehicle could use offering proceeds or
the assets held by the vehicle to cover its own expenses or the costs
of any person operating the crowdfunding vehicle, this could result in
investors obtaining different economic exposure if they were to invest
through a crowdfunding vehicle rather than investing in the
crowdfunding issuer directly.
Second, the proposed rule includes several conditions designed to
provide investors in the crowdfunding vehicle with the same economic
exposure, voting power, and Regulation Crowdfunding disclosures as if
the investors had invested directly in the crowdfunding issuer.
The crowdfunding vehicle would be required to maintain the same
fiscal year end as the crowdfunding issuer.\340\ This condition is
designed to align the Regulation Crowdfunding reporting requirements of
the crowdfunding issuer and crowdfunding vehicle, and avoid any
confusion that might arise if the two entities provided investors with
disclosure covering different fiscal periods. The crowdfunding vehicle
also would be required to maintain a one-to-one relationship between
the number, denomination, type and rights of crowdfunding issuer
securities it owns and the number, denomination, type and rights of its
securities outstanding.\341\ This condition is designed to provide an
investor in the crowdfunding vehicle the same economic exposure as if
he or she had invested directly in the crowdfunding issuer.
---------------------------------------------------------------------------
\340\ See proposed Rule 3a-9(a)(5).
\341\ See proposed Rule 3a-9(a)(6).
---------------------------------------------------------------------------
The crowdfunding vehicle similarly would be required to seek
instructions from its investors with regard to two matters: (i) The
voting of the crowdfunding issuer securities it holds; and (ii)
participating in tender or exchange offers or similar transactions
\342\ conducted by the crowdfunding issuer.\343\ The crowdfunding
vehicle would be required to vote the crowdfunding issuer securities,
and participate in tender or exchange offers or similar transactions,
only in accordance with instructions from the investors in the
crowdfunding vehicle.\344\ This condition is designed to provide each
investor in the crowdfunding vehicle the same voting power as if the
investor had invested in the crowdfunding issuer directly. It also
would allow investors to participate in certain important transactions
related to the crowdfunding issuer securities should they arise.
---------------------------------------------------------------------------
\342\ An example of a similar transaction would be the
opportunity to sell alongside the crowdfunding issuer in an offer of
the crowdfunding issuer securities.
\343\ See proposed Rule 3a-9(a)(7).
\344\ See id.
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The crowdfunding vehicle would receive all of the disclosures and
other information required under Regulation Crowdfunding from the
crowdfunding issuer and would then be required promptly to provide such
disclosures and information to the investors and potential investors in
the crowdfunding vehicle's securities and to the relevant
intermediary.\345\ Investors would therefore receive the same
disclosures required under Regulation Crowdfunding about a crowdfunding
issuer whether they invested in the issuer directly or through a
crowdfunding vehicle.
---------------------------------------------------------------------------
\345\ See proposed Rule 3a-9(a)(8). See, e.g., Rule 201 of
Regulation Crowdfunding [17 CFR 227.201].
---------------------------------------------------------------------------
Finally, we recognize that, absent a contrary condition in the
proposed rule, there could be certain differences in an investor's
rights under state and federal law when an investor invests in a
crowdfunding vehicle as opposed to directly in a crowdfunding issuer. A
direct investor as a shareholder of record, for example, could have
rights of access to corporate records or appraisal rights under state
law that might not be available to an investor that holds his or her
investment indirectly through another entity.\346\ We are therefore
proposing to require a crowdfunding vehicle to provide to each investor
the right to direct the crowdfunding vehicle to assert the rights under
state and federal law that the investor would have if he or she had
invested directly in the crowdfunding issuer.\347\ We are also
requiring that the crowdfunding vehicle provide to each investor any
information that it receives from the crowdfunding issuer as a
shareholder of record of the crowdfunding issuer.\348\ These conditions
are designed to provide shareholders the ability to assert the same
rights under state and federal law regardless of whether they invest
directly in a crowdfunding issuer or through a crowdfunding vehicle.
These conditions would also require the crowdfunding vehicle to provide
its investors with any information they would have received if they had
invested directly in a crowdfunding issuer so that the investors would
have the information that may be necessary to determine whether to
direct the crowdfunding vehicle to assert any rights under state or
federal law.
---------------------------------------------------------------------------
\346\ See, e.g., MA Secretary Letter.
\347\ See proposed Rule 3a-9(a)(9).
\348\ Id.
---------------------------------------------------------------------------
In addition to these conditions, we also considered proposing to
require that a registered investment adviser manage the crowdfunding
vehicle, as suggested by some commenters and the 2017 Treasury
Report.\349\ We are not proposing this requirement, however, because
the proposed rule's conditions are designed to limit the crowdfunding
vehicle's activities to that of acting solely as a conduit to hold the
securities of the crowdfunding issuer without the ability for
independent investment decisions to be made on behalf of the
crowdfunding vehicle. We are also concerned that, given the relatively
small amount of capital that can be raised through Regulation
Crowdfunding, it would not be economically feasible to require a
registered investment adviser in light of the fees and other expenses
associated with such a requirement.
---------------------------------------------------------------------------
\349\ See Iownit Letter; NASAA Letter; CrowdCheck Letter; and
2017 Treasury Report.
---------------------------------------------------------------------------
Request for Comment
66. Should we permit crowdfunding issuers to use crowdfunding
vehicles as proposed? Would this approach encourage crowdfunding
issuers to offer voting rights or other advantageous terms to
investors?
67. Should we require registered investment advisers to manage
crowdfunding vehicles? Would there be a role for a registered
investment adviser in light of the limited activities in which a
crowdfunding vehicle could engage? Would registered investment advisers
find it practical to serve a role with respect to a crowdfunding
vehicle? Should we require an exempt reporting adviser to manage
crowdfunding vehicles? Should we allow investment advisers to form
funds for non-accredited investors that invest in multiple crowdfunding
issuers?
68. The proposed rule includes several conditions designed to
require that the crowdfunding vehicle serve the sole purpose of acting
as a conduit for investors to invest in the crowdfunding issuer. Are
these conditions appropriate? Should a crowdfunding vehicle be
permitted to engage in a broader range of activities? For example,
should the rule provide that a crowdfunding vehicle must redeem or
offer to repurchase its securities if there is a liquidity event at the
crowdfunding issuer? If so, how should the rule accommodate these
activities? Are there
[[Page 18000]]
other purposes for which the crowdfunding vehicle should be permitted
to receive compensation or use offering proceeds? Should a crowdfunding
issuer be required to pay the expenses associated with the formation,
operation, or winding up of the crowdfunding vehicle? Should anyone
else bear these costs? Should any compensation paid to any person
operating the crowdfunding vehicle be paid solely by the crowdfunding
issuer? Should we include any additional restrictions? Are there any
other issues that could arise if we allow the use of crowdfunding
vehicles in Regulation Crowdfunding offerings, as proposed? Would
legislative changes be necessary or beneficial to permit crowdfunding
vehicles to engage in a broader range of activities, pay compensation
to any person operating the crowdfunding vehicle, or include any
additional restrictions on the operations of the crowdfunding vehicle?
69. The proposed rule includes several conditions designed to
provide investors in the crowdfunding vehicle the same economic
exposure, voting power, and Regulation Crowdfunding disclosures as if
the investors had invested directly in the crowdfunding issuers. Are
these conditions appropriate? Should a crowdfunding vehicle be allowed
to issue multiple classes of securities in the event that the
crowdfunding issuer has multiple classes of securities? Would
legislative changes be necessary or beneficial to permit a crowdfunding
vehicle to issue multiple classes of securities? Should the
crowdfunding vehicle and the crowdfunding issuer be deemed co-issuers
for purposes of the Securities Act, including that Act's antifraud and
liability provisions?
70. Would the proposed requirement that the crowdfunding vehicle
maintain a one-to-one relationship between the number, denomination,
type and rights of crowdfunding issuer securities it owns and the
number, denomination, type and rights of crowdfunding vehicle
securities outstanding provide an investor in the crowdfunding vehicle
the same economic exposure as if he or she had invested directly in the
crowdfunding issuer? Are there any changes we should make to achieve
this objective more effectively or to address the manner in which a
crowdfunding vehicle may hold crowdfunding issuer securities? For
example, in the case of a stock-split by a crowdfunding issuer, should
we permit a crowdfunding vehicle to maintain its current capitalization
structure on the condition that it otherwise maintain the same economic
exposure for its beneficial owners to the stock-split securities of the
crowdfunding issuer?
71. The crowdfunding vehicle would be required to seek instructions
from its investors with regard to two matters: (i) The voting of the
crowdfunding issuer securities it holds; and (ii) participating in
tender or exchange offers or similar transactions conducted by the
crowdfunding issuer. The crowdfunding vehicle would be required to vote
the crowdfunding issuer securities, and participate in tender or
exchange offers or similar transactions, only in accordance with
instructions from the investors in the crowdfunding vehicle. Would
these requirements effectively pass-through any voting rights
associated with securities issued by crowdfunding issuers and the
ability to participate in tender or exchange offers or similar
transactions? Should the rule refer to additional types of
transactions? Would these requirements impact an issuer's willingness
to use a crowdfunding vehicle, as the issuer would still indirectly be
required to obtain consent or approval from numerous investors?
Operationally, how would crowdfunding vehicles comply with this
condition? Should the rule provide that a crowdfunding issuer may
obtain proxies or investors' pre-approval with respect to certain (or
all) matters? Should the rule provide more flexibility? For example,
should the rule permit a crowdfunding vehicle to disclose to its
investor at the time of its initial offering that the vehicle will cast
all of its votes in accordance with the instructions of a majority of
its security holders, rather than using pass-through voting as
proposed? Would legislative changes be necessary or beneficial to
provide the crowdfunding vehicles additional flexibility with respect
to voting rights and the distribution of information?
72. Upon receiving all of the disclosures and other information
required under Regulation Crowdfunding from the crowdfunding issuer,
the crowdfunding vehicle would then be required promptly to provide
such disclosures and information to the investors and potential
investors in the crowdfunding vehicle's securities and to the relevant
intermediary. Would these requirements address any concerns about
investors and potential investors in a crowdfunding vehicle receiving
regular information from the crowdfunding issuers?
73. The crowdfunding vehicle would be required to provide to each
investor (i) the right to direct the crowdfunding vehicle to assert the
rights under state and federal law that the investor would have if he
or she had invested directly in the crowdfunding issuer and (ii) any
information that it receives from the crowdfunding issuer as a
shareholder of record of the crowdfunding issuer. Would this
effectively preserve state and federal law rights for shareholders and
provide shareholders with the necessary information to determine
whether to direct the crowdfunding vehicle to assert such rights? Is
this condition appropriate for crowdfunding vehicles which, unlike
collective investment vehicles generally, would serve the specific and
limited purpose of functioning solely as conduits to invest in
businesses raising capital through the vehicle under Regulation
Crowdfunding? Operationally, how would crowdfunding vehicles comply
with this condition in practice? In lieu of this condition, would a
crowdfunding vehicle's disclosure to investors in writing of any
differences that its investors would experience by investing indirectly
in the crowdfunding issuer through the crowdfunding vehicle
sufficiently address any concerns about a crowdfunding vehicle
affecting an investor's rights under state or federal law?
74. Should we, as proposed, require crowdfunding issuers and
crowdfunding vehicles to jointly file a Form C? Alternatively, should
we require that each file a separate Form C or only require the
crowdfunding vehicle to file a Form C? What would be the advantages and
disadvantages of requiring separate Forms C to be filed? Should the
application of the Regulation Crowdfunding offering limit be revised in
light of the requirement to jointly file a Form C?
75. The proposed rule would require a crowdfunding issuer that is
offering securities through a crowdfunding vehicle to file a separate
Form C if it wanted to also directly offer its securities to investors.
Should we instead permit such a crowdfunding issuer to offer its
securities directly to investors on the same Form C the crowdfunding
vehicle uses to offer its securities? If so, are there any restrictions
or disclosure obligations we should implement to avoid investor
confusion? What issues could arise if crowdfunding issuers were allowed
to simultaneously offer on Form C in this way?
76. A crowdfunding vehicle may constitute a single record holder
for purposes of Section 12(g), rather than treating each of the
crowdfunding vehicle's investors as record holders as would be the case
if they had invested in the crowdfunding issuer directly. Is this
treatment appropriate? Should each investor in the crowdfunding vehicle
be
[[Page 18001]]
treated as a separate record holder for purposes of Section 12(g)?
Would legislative changes be necessary or beneficial to address the
treatment of the crowdfunding vehicle under Section 12(g)?
77. Should the Commission further address the status of a
crowdfunding vehicle complying with the proposed rule for purposes of
the definition of broker under Section 3(a)(4) of the Exchange Act or
dealer under Section 3(a)(5) of the Exchange Act, and persons operating
such crowdfunding vehicle?
2. Regulation Crowdfunding Eligible Securities
We are proposing to limit the types of securities that may be
offered and sold in reliance on Regulation Crowdfunding. Unlike
Regulation A, which limits the types of securities eligible for sale to
equity securities, debt securities, and securities convertible or
exchangeable to equity interests, including any guarantees of such
securities,\350\ Regulation Crowdfunding does not restrict the type of
security that may be offered and sold in reliance on the exemption. As
a result, issuers using Regulation Crowdfunding have offered and sold a
number of non-traditional securities.\351\ One type of non-traditional
security that has caused concern is the ``Simple Agreement for Future
Equity,'' or SAFE.\352\ The offer and sale of these kinds of securities
to retail investors in an exempt offering could result in harm to
investors who may face challenges in analyzing and valuing such
securities, or who may be confused by the descriptions of such
securities on the funding portals. These kinds of securities may also
create confusion for retail investors who may not understand the
differences between these securities and traditional common stock. Such
confusion could lead to investor dissatisfaction, which in turn may
jeopardize the reputation of the Regulation Crowdfunding market.
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\350\ See 17 CFR 230.261.
\351\ Other types of non-traditional securities that have been
offered and sold under Regulation Crowdfunding include Simple
Agreements for Future Tokens and certain revenue sharing agreements.
See infra Section IV.C.6.b for further information about security
types in Regulation Crowdfunding.
\352\ See SEC Office of Investor Education and Advocacy,
Investor Bulletin: Be Cautious of SAFEs in Crowdfunding (May 9,
2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes. A SAFE is an agreement to provide investors with
a future equity stake in the issuer if certain triggering events
occur. SAFEs are not an equity interest or common stock of an
issuer. Rather, they are convertible into such equity only upon the
occurrence of a triggering event specifically enumerated in the
agreement, such as when the issuer is acquired, merges with another
company, or conducts an initial public offering. As such, SAFEs are
specifically controlled by the terms of the agreement between the
issuer and the investors and unlike common stock do not confer all
of the rights and entitlements provided under state corporation law,
such as voting rights or appraisal rights. See also FINRA, ``Be
Safe--5 Things You Need to Know About SAFE Securities and
Crowdfunding,'' available at https://www.finra.org/investors/insights/safe-securities.
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As a result, we are proposing to amend Regulation Crowdfunding to
harmonize the rule with Regulation A and limit the types of securities
that may be offered under the exemption to correspond with the eligible
securities provision of Regulation A. Thus, the types of securities
eligible for sale in an offering under Regulation Crowdfunding would be
limited to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.\353\ We preliminarily believe that such
a limitation is consistent with the nature of the crowdfunding
exemption. We understand that the popularity of SAFEs and similar
security types in Regulation Crowdfunding offerings may be in part due
to a desire by issuers to avoid a complicated capitalization table.
However, we believe that the proposed amendment permitting crowdfunding
vehicles to use Regulation Crowdfunding discussed above may more
appropriately alleviate that concern.
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\353\ Certain securities that may not have all of the
characteristics traditionally associated with equity or debt
securities, such as tokens, may qualify as Regulation A eligible
securities, depending on the particular facts and circumstances. If
adopted, we believe the proposed amendment to eligible securities
under Regulation Crowdfunding would be applied in the same manner.
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Request for Comment
78. Should we harmonize the limitations on the types of eligible
securities issuable under Regulation Crowdfunding with Regulation A as
proposed? If so, what would be the effect on issuers, investors, and
the market of limiting these categories of securities? In the
alternative, should we modify Regulation Crowdfunding only to exclude
particular security types, such as SAFEs?
79. If the popularity of SAFEs is in part due to a desire by
issuers to avoid a complicated capitalization table, would our proposed
amendments permitting crowdfunding vehicles to use Regulation
Crowdfunding appropriately alleviate that concern? Are there other
reasons why issuers issue SAFEs or other security types in Regulation
Crowdfunding offerings that we should be aware of when considering
whether to exclude particular security types?
3. Regulation A Eligibility Restrictions for Delinquent Exchange Act
Filers
Regulation A includes an eligibility requirement that an issuer
conducting a Regulation A offering must have filed with the Commission
all reports required to be filed, if any, pursuant to Rule 257 during
the two years before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports).\354\
Now that issuers that are subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act are permitted to conduct
Regulation A offerings, we are proposing to amend Regulation A to
include a similar eligibility requirement covering Exchange Act
reports. As proposed, companies that do not file all the reports
required to have been filed by Sections 13 or 15(d) of the Exchange Act
in the two-year period preceding the filing of an offering statement
would be ineligible to conduct a Regulation A offering.\355\
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\354\ 17 CFR 230.251(b)(7). Rule 257 requires issuers conducting
Tier 2 offerings to comply with certain ongoing and periodic
reporting requirements.
\355\ If an issuer is delayed in filing a report, it would need
to become current in its reports over the last two years in order to
become eligible again.
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Because Exchange Act registrants are not required to file reports
pursuant to Rule 257, the existing eligibility provision does not
expressly require those registrants to have filed their Exchange Act
reports in order to rely on Regulation A. The proposed change would
hold Exchange Act reporting companies to the same standard as repeat
Regulation A issuers. This requirement would benefit investors by
ensuring that they have access to historical financial and non-
financial statement disclosure about Exchange Act reporting companies
that are conducting Regulation A offerings and may facilitate the
development of an efficient secondary market for the securities they
purchase in Regulation A offerings. Furthermore, because they are
already required to file such reports, the proposed requirement would
not increase the burden of making a Regulation A offering for Exchange
Act reporting companies or companies that were Exchange Act reporting
companies within the two years prior to making a Regulation A offering.
Request for Comment
80. Should we amend Regulation A as proposed to include an
eligibility requirement that requires Exchange Act reporting companies
to be current in their Exchange Act reporting for the two years before
filing an offering statement?
[[Page 18002]]
G. Bad Actor Disqualification Provisions
The Commission's exempt offering framework includes rules
disqualifying certain covered persons, including felons and other ``bad
actors'' from relying on Regulation A, Regulation Crowdfunding, and
Regulation D to offer and sell securities. While the disqualification
provisions are substantially similar,\356\ the look-back period for
determining whether a covered person is disqualified differs between
Regulation D and the other exemptions. We are proposing to harmonize
the bad actor disqualification provisions in Rule 506(d) of Regulation
D, Rule 262(a) of Regulation A and Rule 503(a) of Regulation
Crowdfunding by adjusting the look-back requirements in Regulation A
and Regulation Crowdfunding to include the time of sale in addition to
the time of filing.
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\356\ Section 3(b)(2)(G)(ii) of the Securities Act [15 U.S.C.
77c(b)(2)(G)(ii)] provides the Commission with authority to issue
bad actor disqualification rules under Regulation A that are
``substantially similar'' to those adopted for securities offerings
under Rule 506 of Regulation D pursuant to Section 926 of the Dodd-
Frank Act. See 2015 Regulation A Release; Disqualification of
Felons, Other ``Bad Actors'' from Rule 506 Offerings, Release No.
33-9414 (July 10, 2013) [78 FR 44729 (July 24, 2013)] (``Rule 506(d)
Final Release''); and Crowdfunding Adopting Release.
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Under Regulation D \357\ a disqualification occurs if: (1) A
covered person is involved in the offering; (2) that covered person is
subject to one or more of the disqualifying events in Rule 506(d); and
(3) the disqualifying event occurs within the look-back period provided
by the regulation.\358\ For Regulation D, the look-back period is
measured from the time of the sale of securities in the relevant
offering. For Rule 262(a) of Regulation A and Rule 503(a) of Regulation
Crowdfunding, the look-back period is measured from the time the issuer
files an offering statement.\359\
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\357\ The disqualification provisions in Rule 506(d) also apply
to Rule 504. See 17 CFR 230.504(b)(3).
\358\ See 17 CFR 230.506(d)(1)(i) through (viii).
\359\ Rule 503(a) provides look-back language based on ``the
filing of the offering statement'' or ``the filing of the
information required by section 4A(b) of the Securities Act'' on
Form C. See 17 CFR 227.503. While the disqualification events in
Securities Act Rule 262 and Regulation Crowdfunding Rule 503 are
generally tied to the filing of an offering statement, Rule
262(a)(6) and Rule 503(a)(6) are not. See 17 CFR 230.262(a)(6); and
17 CFR 227.503(a)(6).
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We believe that it is important to look to both the time of filing
of the offering document and the time of the sale with respect to
disqualifying bad actors from participating in an offering.\360\
Otherwise, there is an increased likelihood that investors may
unknowingly participate in securities offerings involving offering
participants who have engaged in fraudulent activities or violated
securities or other laws or regulations. We note, for example, that in
the context of a continuous or delayed offering under Regulation A
where the look-back is generally measured from the time of filing of
the offering statement, a covered person under Rule 262 could
potentially offer and sell securities under Regulation A after the
filing of the offering statement and until the issuer is required to
file a post-qualification amendment to the offering statement, despite
the occurrence of an event during that time frame that otherwise would
constitute a disqualifying event if it occurred prior to the filing of
the offering statement.
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\360\ This may be particularly true for regulating the conduct
of promoters connected with an issuer throughout an ongoing
offering.
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Under Regulation A, if a covered person triggers one of the
disqualifying events in Rule 262, the Commission may suspend reliance
on the Regulation A exemption through Rule 258, which requires a notice
and hearing opportunity for the issuer prior to the suspension becoming
permanent. Furthermore, if a covered person triggers one of the
disqualifying events, the issuer may need to consider whether it must
suspend the offering until it files a post-qualification amendment to
reflect a fundamental change in the information set forth in the most
recent offering statement or post-qualification amendment.\361\
Regulation Crowdfunding, which similarly measures the look-back from
the time of filing of the offering statement, does not have a
suspension provision, similar to Regulation A, but similarly requires
an issuer to amend the offering statement to disclose material changes,
additions, or updates to information that it provides to investors for
offerings that have not been completed or terminated.\362\
Nevertheless, in certain circumstances, periods of time may exist
during Regulation A and Regulation Crowdfunding offerings between the
filing of the offering statement and the next required filing where an
offering could continue despite an event that would have constituted a
disqualifying event at the time of filing.
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\361\ See Rule 252(f)(2).
\362\ See Rule 203(a)(2).
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The disqualification provisions in Regulation A and Regulation
Crowdfunding were intended to be ``substantially similar'' to those in
Regulation D.\363\ We believe that further harmonizing these provisions
by using the same disqualification look-back period would simplify
compliance and due diligence for issuers and would improve investor
protections by further limiting the role of ``bad actors'' in exempt
offerings.\364\ Specifically, we propose to add ``or such sale'' to any
look-back references that refer to the time of filing, such as the
``filing of the offerings statement,'' ``such filing,'' or ``the filing
of the information required by Section 4A(b) of the Securities Act'' in
Rule 262(a) and Rule 503(a).
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\363\ See 2015 Regulation A Release; and Crowdfunding Adopting
Release. Section 302(d) of the JOBS Act requires the Commission to
establish disqualification provisions under which an issuer would
not be eligible to offer securities pursuant to Section 4(a)(6) and
an intermediary would not be eligible to effect or participate in
transactions pursuant to Section 4(a)(6). Section 302(d)(2)
specifies that the disqualification provisions must be
``substantially similar'' to the ``bad actor'' disqualification
provisions contained in Rule 262 of Regulation A. As noted above,
the disqualification provisions under Regulation A are required to
be ``substantially similar'' to those adopted for securities
offerings under Rule 506. See supra note 356.
\364\ See 2015 Regulation A Release, at Section II.G. In
adopting the 2015 Regulation A amendments, the Commission stated
that a uniform set of bad actor triggering events would simplify due
diligence, particularly for issuers that may engage in different
types of exempt offerings.
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Additionally, in order to reflect the offering statement filing
requirement before the first Regulation Crowdfunding sale, and more
closely track the requirement in Rule 262(a) of Regulation A, we
propose including ``any promoter connected with the issuer in any
capacity at the time of filing, any offer after filing, or such sale''
in Rule 503(a). Rule 503(a) currently only covers promoters connected
with the issuer in any capacity ``at the time of such sale,'' making it
possible that a promoter that previously engaged in fraudulent
activities or violated securities or other laws or regulations, could
be involved in offering activities under Regulation Crowdfunding so
long as such promoter is not connected with the issuer in any capacity
at the time of sale.
In adopting the disqualification provisions under Regulation D, the
Commission was cognizant of the monitoring costs associated with Rule
506(d)'s disqualification provisions in an ongoing offering. The
Commission therefore adopted an exception from disqualification for
offerings where the issuer establishes that it did not know and, in the
exercise of reasonable care, could not have known that a
disqualification existed. The Commission was particularly aware of the
costs of monitoring beneficial owners of 20 percent or more of the
issuer's outstanding voting securities.\365\
[[Page 18003]]
At the time, the Commission clarified that, for ongoing offerings, the
issuer's reasonable care duty to monitor covered persons generally
``includes updating the factual inquiry'' on a periodic basis.\366\ For
Regulation A and Regulation Crowdfunding, however, monitoring covered
beneficial owners may pose different challenges than for Regulation D
offerings because shares sold under Regulation A are potentially freely
tradable immediately following an investor's initial purchase, and
shares sold under Regulation Crowdfunding are generally freely tradable
after a holding period. In recognition of the additional monitoring
burdens associated with Regulation A and Regulation Crowdfunding
offerings, we are proposing to retain the current look-back period
applicable to covered beneficial owners in Regulation A and Regulation
Crowdfunding rather than amending it to start at the time of sale. We
are not aware of any investor protection concerns that have arisen with
respect to the current look-back period for beneficial owners.
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\365\ Rule 506(d) Final Release, at Section II.B.
\366\ Id. at Section II.D.2.
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These proposed amendments would not alter the availability of the
existing reasonable care exception, an issuer's ability to seek a
waiver from disqualification from the Commission, or the exception
applicable when a court or regulatory authority advises in writing that
disqualification should not arise.\367\ Nonetheless, with respect to
the latter provision, we propose to amend Rule 262(b)(3) and Rule
503(b)(3), which currently provide that a court's or regulatory
authority's advice with respect to the disqualifying effect of an
order, judgment or decree may occur after the time of ``the filing of
the offering statement,'' in the case of Regulation A, or ``the filing
of the information required by section 4A(b) of the Securities Act,''
in the case of Regulation Crowdfunding. The proposed added language
would accord with the parallel look-back language in Rule
506(d)(2)(iii) of Regulation D by replacing the references in Rules
262(b)(3) and 503(b)(3) with ``before the relevant sale.''
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\367\ 17 CFR 230.262(b)(3).
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Request for Comment
81. Should we revise the bad actor look-back provisions in Rule
262(a) of Regulation A and Rule 503(a) of Regulation Crowdfunding as
proposed?
82. Should we keep any of the current bad actor look-back
provisions centered on the time of filing rather than the time of sale
as we are proposing to do for 20 percent beneficial owners? Should we
do the same for any covered persons other than 20 percent beneficial
owners?
83. Instead of disqualifying Regulation A or Regulation
Crowdfunding issuers affected by disqualifying events that first arise
or occur during an ongoing offering, should we allow such issuers to
continue the offering but require them to disclose the disqualifying
event, and provide investors with the option to cancel their investment
commitments and obtain a refund of invested funds? Would such an option
be difficult for issuers to administer?
84. Should we, as proposed, revise the language in Rule 503(a) to
more closely track the requirement in Rule 262(a) of Regulation A by
including ``any promoter connected with the issuer in any capacity at
the time of filing, any offer after filing, or such sale''?
85. Are there any anticipated additional costs of verifying the bad
actor status of covered persons under Rule 262(a) and Rule 503(a) with
a look-back period based on the time of sale instead of the time of
filing? If so, would those costs be significant to the average issuer
in Regulation A and Regulation Crowdfunding offerings?
III. General Request for Comment
We request and encourage any interested person to submit comments
regarding the proposed rules and amendments that are the subject of
this release, potential additions or changes to these proposals, and
other matters that may have an effect on the proposals. With regard to
any comments, we note that such comments are of particular assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments.
IV. Economic Analysis
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(b) of the Securities Act,\368\ Section 3(f)
of the Exchange Act,\369\ and Section 2(c) of the Investment Company
Act \370\ require us, when engaging in rulemaking that requires us to
consider or determine whether an action is necessary or appropriate in
(or, with respect to the Investment Company Act, consistent with) the
public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation. In addition, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the effects on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\371\
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\368\ 15 U.S.C. 77b(b).
\369\ 15 U.S.C. 78c(f).
\370\ 15 U.S.C. 80a-2(c).
\371\ 15 U.S.C. 78w(a)(2).
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We have considered the economic effects of the proposed amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from this proposal, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the proposed amendments, we provide a
qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
We request comment from the points of view of all interested
parties. With regard to any comments, we note that such comments are of
greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
A. Broad Economic Considerations
The proposed amendments would simplify, harmonize, and improve
certain aspects of the Commission's exempt offering framework,
including Regulation D, Regulation A, Regulation Crowdfunding, and
other related rules. The proposed amendments build on changes to the
federal securities laws brought about by the JOBS Act, as well as many
other developments in the securities laws, capital markets, and
communication technologies since the adoption of Regulation D in 1982.
By providing a more streamlined and consistent exempt offering
framework, the proposed amendments are expected to promote capital
formation through exempt offerings (either by existing issuers or by
issuers that would not have otherwise pursued a securities offering),
expanding such issuers' ability to pursue positive net present value
investment and growth opportunities. The proposed amendments may also
address current uncertainties in the ability to use exempt offerings
prior to, or concurrent with, registered offerings, which could ease
the path for some issuers to a registered offering. In
[[Page 18004]]
addition, the increased flexibility afforded by the proposed amendments
could enable issuers to optimize their offering strategy and reduce
their external financing costs, enabling such issuers to fund a broader
range of investment projects. We recognize, however, that the proposed
amendments might lead to some substitution between different exempt
offering methods or between registered offerings and exempt offerings,
which would moderate the aggregate effects of the amendments on new
capital formation.
Amendments to certain provisions of Regulation A, Regulation
Crowdfunding, and Rule 504 intended to facilitate compliance and raise
offering limits are expected to make these exemptions more cost-
effective and attractive to a broader range of issuers than they are
today. The resulting composition of the issuers that would rely on
these exemptions remains unclear. One possibility is that the amended
exemptions would draw a larger and more diversified set of issuers,
including issuers with high-growth potential and associated high
financing needs that might otherwise forgo these exemptions in light of
the existing, lower limits. The higher offering limits also might make
the amended exemptions more attractive to financial intermediaries that
presently might be unwilling to partake in such offerings because fixed
costs of participating in such a fund raising, such as the costs of due
diligence, might be too high in proportion to the potential
compensation, and because the pool of issuers seeking financing in
these market segments today might not be sufficiently large or
diversified to attract intermediaries. Another possibility is that the
proposed amendments could make these exemptions more attractive to
issuers seeking to avoid more stringent requirements that would apply
to other offering structures. We lack the data, or a methodological
approach, to disentangle these competing effects. Importantly, even if
adverse selection increased somewhat in some segments of the exempt
market under the proposed amendments, the investor protections
applicable to each exemption would remain as significant safeguards
against the risk of losses for less sophisticated investors.
Some of the proposed amendments could expand non-accredited
investor access to investment opportunities, including:
Proposed changes to increase investment limits for non-
accredited investors in Regulation Crowdfunding offerings;
Provisions expanding integration safe harbors for Rule 506
offerings, potentially enabling more frequent offerings involving non-
accredited investors; and
Provisions that potentially make Rule 504, Regulation A,
and Regulation Crowdfunding, which do not limit the number of non-
accredited investors, more attractive to prospective issuers through
increased offering limits, the eligibility of crowdfunding vehicles
under Regulation Crowdfunding, and modifications to certain Regulation
A disclosure requirements.
Expanded access to exempt securities could enable non-accredited
investors to allocate capital across a broader range of
opportunities.\372\ Several factors make it difficult to assess the net
effects of the proposed amendments would have on the participation in
exempt offerings
[[Page 18005]]
and efficiency of capital allocation by non-accredited investors:
---------------------------------------------------------------------------
\372\ As noted by several commenters, comprehensive data on the
investment returns resulting from investments in exempt offerings is
scarce due to the scaled disclosure requirements and a lack of a
secondary trading market. See State Attorneys General Letter; letter
from Philip A. Feigin dated August 21, 2019; letter from Elizabeth
D. de Fontenay et al. dated September 24, 2019; letter from Rick A.
Fleming, Investor Advocate of the Commission, dated July 11, 2019;
and letter from Better Markets, Inc. dated September 24, 2019
(``Better Markets Letter''). Available evidence focuses on returns
of hedge funds and private equity funds. Comprehensive, market-wide
data on the returns of private investments is not available due to a
lack of required disclosure, the voluntary nature of disclosure of
performance information by private funds, and the very limited
nature of secondary trading in these securities. Academic studies
have focused on private fund returns, acknowledging limitations and
biases in the available data. As an important caveat, risk-adjusted
returns obtained by large institutional investors in private
placements may not be an accurate representation of the returns that
would be obtained by non-accredited investors. Research has examined
(i) private equity returns (see, e.g., Steven N. Kaplan & Antoinette
Schoar, Private Equity Performance: Returns, Persistence, and
Capital Flows, 60 J. Fin. 1791 (2005); Andrew Metrick & Ayako
Yasuda, Venture Capital and Other Private Equity: A Survey, 17 Eur.
Fin. Mgmt. 619 (2011); Christian Diller & Christoph Kaserer, What
Drives Private Equity Returns? Fund Inflows, Skilled GPs, and/or
Risk?, 15 Eur. Fin. Mgmt. 643 (2009); Robert S. Harris et al.,
Financial Intermediation in Private Equity: How Well Do Funds of
Funds Perform?, 129 J. Fin. Econ. 287 (2018); Robert S. Harris, Tim
Jenkinson, & Steven N. Kaplan, Private Equity Performance: What Do
We Know?, 69 J. Fin. 1851 (2014); and Kasper Nielsen, The Return to
Direct Investment in Private Firms: New Evidence on the Private
Equity Premium Puzzle, 17 Eur. Fin. Mgmt. 436 (2011)); (ii) VC
performance (see, e.g., John H. Cochrane, The Risk and Return of
Venture Capital, 75 J. Fin. Econ. 3 (2005); Arthur Korteweg & Stefan
Nagel, Risk[hyphen]Adjusting the Returns to Venture Capital, 71 J.
Fin. 1437 (2016); and Axel Buchner, Abdulkadir Mohamed, & Armin
Schwienbacher, Does Risk Explain Persistence in Private Equity
Performance?, 39 J. Corp. Fin. 18 (2016)); and (iii) hedge fund
returns (see, e.g., William Fung & David A. Hsieh, Hedge Fund
Benchmarks: A Risk-Based Approach, Fin. Analysts J., Sept./Oct.
2004, at 65; William Fung & David A. Hsieh, Measurement Biases in
Hedge Fund Performance Data: An Update, Fin. Analysts J., May/June
2009, at 36; Manuel Ammann, Otto R. Huber, & Markus Schmid,
Benchmarking Hedge Funds: The Choice of the Factor Model (Working
Paper, 2011); Zheng Sun, Ashley W. Wang, & Lu Zheng, Only Winners in
Tough Times Repeat: Hedge Fund Performance Persistence over
Different Market Conditions, 53 J. Fin. & Quantitative Analysis 2199
(2018); Charles Cao et al., What Is the Nature of Hedge Fund Manager
Skills? Evidence from the Risk-Arbitrage Strategy, 51 J. Fin. &
Quantitative Analysis 929 (2016); Vikas Agarwal, T. Clifton Green, &
Honglin Ren, Alpha or Beta in the Eye of the Beholder: What Drives
Hedge Fund Flows?, 127 J. Fin. Econ. 417 (2018); Jakub Jurek and
Erik Stafford, The Cost of Capital for Alternative Investments, 70
J. Fin. 2185 (2015); Turan G. Bali, Stephen J. Brown, & Mustafa O.
Caglayan, Systematic Risk and the Cross Section of Hedge Fund
Returns, 106 J. Fin. Econ. 114 (2012); Turan G. Bali, Stephen J.
Brown, & Mustafa O. Caglayan, Macroeconomic Risk and Hedge Fund
Returns, 114 J. Fin. Econ. 1 (2014); Andrea Buraschi, Robert
Kosowski, & Fabio Trojani, When There Is No Place to Hide:
Correlation Risk and the Cross-Section of Hedge Fund Returns, 27
Rev. Fin. Stud. 581 (2014); Ravi Jagannathan, Alexey Malakhov, &
Dmitry Novikov, Do Hot Hands Exist Among Hedge Fund Managers? An
Empirical Evaluation, 65 J. Fin. 217 (2010); Andrea Buraschi, Robert
Kosowski, & Worrawat Sritrakul, Incentives and Endogenous Risk
Taking: A Structural View on Hedge Fund Alphas, 69 J. Fin. 2819
(2014); Ronnie Sadka, Liquidity Risk and the Cross-Section of Hedge-
Fund Returns, 98 J. Fin. Econ. 54 (2010); and Ilia D. Dichev & Gwen
Yu, Higher Risk, Lower Returns: What Hedge Fund Investors Really
Earn, 100 J. Fin. Econ. 248 (2011)).
Comprehensive data on angel investment returns, entrepreneur
returns on investment of their own funds and savings in starting a
private business, and returns of investors in the crowdfunding
market is lacking. A few studies we have identified have used small,
selected samples, sometimes from foreign markets, which do not
generalize to the entire U.S. market. See, e.g., Vincenzo Capizzi,
The Returns of Business Angel Investments and Their Major
Determinants, 17 Venture Cap. 271 (2015) (using a small sample of
Italian data); and Colin M. Mason & Richard T. Harrison, Is It Worth
It? The Rates of Return from Informal Venture Capital Investments,
17 J. Bus. Venturing 211 (2002) (using a small UK sample).
Investments through AngelList and similar platforms allow accredited
investors to make VC-like investments in startups. The returns
generated by such investments have been a topic of debate in the
literature. See, e.g., Olga Itenberg & Erin E. Smith, Syndicated
Equity Crowdfunding: The Trade-Off Between Deal Access and Conflicts
of Interest (Simon Bus. Sch., Working Paper No. FR 17-06, Mar.
2017). See also, e.g., Elisabeth Mueller, Returns to Private
Equity--Idiosyncratic Risk Does Matter!, 15 Rev. Fin. 545 (2011);
Thomas Astebro, The Returns to Entrepreneurship, in Oxford Handbook
of Entrepreneurial Finance (Douglas Cumming ed. 2012); and Thomas J.
Moskowitz & Annette Vissing-J[oslash]rgensen, The Returns to
Entrepreneurial Investment: A Private Equity Premium Puzzle?, 92 Am.
Econ. Rev. 745 (2002) (``Moskowitz and Vissing-J[oslash]rgensen'').
For instance, Moskowitz and Vissing-J[oslash]rgensen examine the
returns to investing in U.S. nonpublicly traded equity and find
that, although entrepreneurial investment is extremely concentrated,
the returns to private equity are no higher than the returns to
public equity. They attribute the willingness of households to
invest substantial amounts in a single privately held firm with a
seemingly far worse risk-return trade-off to large nonpecuniary
benefits, a preference for skewness, or overestimated probability of
survival.
---------------------------------------------------------------------------
The amendments might lead to substitution between exempt
offering methods that allow non-accredited investors or between
registered offerings and exempt offerings, leaving the aggregate set of
investment opportunities for non-accredited investors little changed.
For instance, some commenters expressed concern that facilitating
capital raising through exempt offerings might incrementally contribute
to the ongoing decline in U.S. registered offerings, which might limit
the overall set of investment opportunities available to non-accredited
investors and decrease the aggregate amount of information available to
investors.\373\ Even if that were the case, expanded access to capital
allowing issuers to meet their financing needs at a lower cost would
enhance the efficiency of capital allocation to growth opportunities,
with the resulting benefits for economic growth, competition, and
capital markets as a whole. Importantly, we do not expect the proposed
amendments to deter a significant proportion of the issuers that are
large and mature enough to be on the cusp of going public from pursuing
a public offering. Such issuers likely already have a developed network
of angel investors and/or backing from venture capitalists on which
they can rely to raise the necessary amount of financing today. Thus,
such issuers' decision to go public is likely driven more by the
benefits of being a public reporting company (relative to the cost of
being public). Rather, we believe that the amendments might have the
most significant effects on smaller growth issuers that presently lack
sufficient access to financing that they require to develop their
business model and gain scale. Such issuers may face significant
financing constraints and lack an established network of angel
investors or venture capital backing and may be too early in their
lifecycle to be a candidate for a public offering. Thus, if the added
flexibility contained in the amendments allows some of these small
issuers to raise enough external financing to develop their business
model and scale up to a point where they may become viable candidates
for a public offering, the amendments might diversify the pool of
prospective issuers that are able to conduct a registered offering,
which could result in a higher number of IPOs in the future.
---------------------------------------------------------------------------
\373\ See, e.g., Better Markets Letter (opining that ``if the
Commission enacts some of the ideas it is contemplating in this
Concept Release, the US investors will have fewer public companies
to invest in, the securities markets will have more companies with
illiquid securities, and price discovery will suffer.'') and Healthy
Markets Letter (opining that ``the available evidence suggests that
instead of promoting efficient allocations of capital and protecting
investors, the proposals outlined by the Concept Release will
increase the number of companies and amount of capital in the
private markets on one hand, while further eroding the number and
quality of public companies on the other.'').
---------------------------------------------------------------------------
Issuers might remain unwilling to undertake exempt
offerings with non-accredited investors (e.g., due to a preference for
institutional and angel investors that bring connections and expertise
in addition to capital; capitalization table concerns in light of
subsequent financing plans \374\ or Section 12(g) registration
thresholds; costs of investor relations with small investors; or risks
of proprietary information disclosure due to the presence of multiple
small investors; or general solicitation). Issuers with worse prospects
that are unable to attract capital from large investors, which
undertake more monitoring and screening, might be overrepresented among
exempt offerings focused on non-accredited investors. This mechanism
might contribute to quality sorting in an expanded set of investment
opportunities in exempt offerings to non-accredited investors.
---------------------------------------------------------------------------
\374\ See, e.g., supra Section II.F.
---------------------------------------------------------------------------
Non-accredited investors might choose not to participate
in exempt offerings (e.g., due to illiquidity, high transaction costs,
search costs, high information asymmetries and due diligence costs,
high investment minimums that preclude the desired level of
diversification for small investors, agency problems due to minority
stakes, etc.).
The resulting efficiency of portfolio allocations of non-
accredited investors also would depend on the level of investor
sophistication in obtaining and analyzing information in a setting
where issuers provide less disclosure compared to registered
offerings.\375\
---------------------------------------------------------------------------
\375\ In Modern Portfolio Theory, constraining the set of
investment opportunities yields a potentially inferior optimal
portfolio. See, e.g., Zvi Bodie, Alex Kane, & Alan J. Marcus,
Investments (10th ed. 2013) (``Bodie et al. 2013''). However, the
presence of information frictions due to a lack of investor
sophistication might reverse this general prediction and result in
lower portfolio risk-adjusted returns. See, generally, surveys in
Nicholas Barberis & Richard Thaler, A Survey of Behavioral Finance,
in Handbook of the Economics of Finance (Vol. 1B) (George M.
Constantinides, Milton Harris, & Rene M. Stulz eds., 1st ed. 2003),
at 1053; and Brad Barber & Terrance Odean, The Behavior of
Individual Investors, in Handbook of the Economics of Finance (Vol.
2B) (George M. Constantinides, Milton Harris, & Rene M. Stulz eds.,
1st ed. 2013), at 1533. See also, e.g., William N. Goetzmann & Alok
Kumar, Equity Portfolio Diversification, 12 Rev. Fin. 433 (2008)
(finding that ``U.S. individual investors hold under-diversified
portfolios, where the level of under-diversification is greater
among younger, low-income, less-educated, and less-sophisticated
investors. The level of under-diversification is also correlated
with investment choices that are consistent with over-confidence,
trend-following behavior, and local bias. . .Under-diversification
is costly to most investors, but a small subset of investors under-
diversify because of superior information.''); Shlomo Benartzi &
Richard H. Thaler, Heuristics and Biases in Retirement Savings
Behavior, J. Econ. Persp., Summer 2007, at 81; Warren Bailey, Alok
Kumar, & David Ng, Behavioral Biases of Mutual Fund Investors, 102
J. Fin. Econ. 1 (2011) (examining ``the effect of behavioral biases
on the mutual fund choices of a large sample of US discount
brokerage investors using new measures of attention to news, tax
awareness, and fund-level familiarity bias, in addition to
behavioral and demographic characteristics of earlier studies.
Behaviorally biased investors typically make poor decisions about
fund style and expenses, trading frequency, and timing, resulting in
poor performance. Furthermore, trend chasing appears related to
behavioral biases, rather than to rationally inferring managerial
skill from past performance. Factor analysis suggests that biased
investors often conform to stereotypes that can be characterized as
Gambler, Smart, Overconfident, Narrow Framer, and Mature.''); Anders
Anderson, Trading and Under-Diversification, 17 Rev. Fin. 1699
(2013) (documenting ``a link between trading and diversification by
using detailed trading records from a Swedish discount broker
matched with individual tax records. Diversification is measured by
the investors' stake size, defined as the fraction of their risky
financial wealth invested in individual stocks through the broker
under study. High-stake investors have concentrated portfolios,
trade more, and achieve lower trading performance. They share
several features with those who trade excessively, namely lower
income, wealth, age, and education, suggesting that they lack
investment expertise. The results directly imply that trading losses
in the cross-section are mainly borne by those who can least afford
them.''); and Hans-Martin von Gaudecker, How Does Household
Portfolio Diversification Vary with Financial Literacy and Financial
Advice?, 70 J. Fin. 489 (2015) (finding that ``[n]early all
households that score high on financial literacy or rely on
professionals or private contacts for advice achieve reasonable
investment outcomes. Compared to these groups, households with
below-median financial literacy that trust their own decision-making
capabilities lose an expected 50 bps on average. All group
differences stem from the top of the loss distribution.'').
We note that the level of investor sophistication and due
diligence capabilities might improve with investing experience,
which investors might not have been able to develop under the
baseline, although evidence is mixed on the effectiveness of
learning among individual investors. See, e.g., Lubos Pastor &
Pietro Veronesi, Learning in Financial Markets, 1 Ann. Rev. Fin.
Econ. 361 (2009) (surveying literature on learning); Maximilian
Koestner et al., Do Individual Investors Learn from Their Mistakes?,
87 J. Bus. Econ. 669 (2017); Amit Seru, Tyler Shumway, & Noah
Stoffman, Learning by Trading, 23 Rev. Fin. Stud. 705 (2010)
(finding ``evidence of two types of learning: some investors become
better at trading with experience, while others stop trading after
realizing that their ability is poor. A substantial part of overall
learning by trading is explained by the second type'' and noting
that ``ignoring investor attrition, the existing literature
significantly overestimates how quickly investors become better at
trading.''); Stefan Muhl & T[otilde]nn Talpsepp, Faster Learning in
Troubled Times: How Market Conditions Affect the Disposition Effect,
68 Q. Rev. Econ. & Fin. 226 (2018) (using Estonian data and finding
that learning, particularly learning by doing, is enhanced during
bad times); and Tarvo Vaarmets, Kristjan Liivam[auml]gi, &
T[otilde]nn Talpsepp, How Does Learning and Education Help to
Overcome the Disposition Effect?, 23 Rev. Fin. 801 (2019)
(evaluating how investor learning reduces disposition effect using
Estonian data and finding heterogeneity in learning ability). But
see, e.g., Yao-Min Chiang et al., Do Investors Learn from
Experience? Evidence from Frequent IPO Investors, 24 Rev. Fin. Stud.
1560 (2011) (presenting evidence of IPO investors in Taiwan that
``individuals become unduly optimistic after receiving good
returns.'').
---------------------------------------------------------------------------
[[Page 18006]]
Irrespective of their individual level of sophistication,
non-accredited investors might potentially benefit from the positive
spillovers of the monitoring and screening efforts of any participating
accredited investors that have more extensive due diligence expertise.
However, non-accredited investors that tend to hold minority stakes
might need to perform additional due diligence, given potential
differences in the payoffs obtained by accredited versus non-accredited
investors.\376\
---------------------------------------------------------------------------
\376\ Such differences might be due to differences in terms of
securities. For instance, downside protection and anti-dilution
options may be negotiated by large investors with greater bargaining
power. See Healthy Markets Letter (commenting that investors' rights
in private placements are ``left to the bargaining power of the
parties'' which limits the rights of smaller investors); and NASAA
Letter (commenting that ``investors are not treated equally'' in
private markets). For example, one study has analyzed data on
contractual provisions in PIPEs and documented significant variation
in the use of downside protection terms. See Matthew T. Billett,
Redouane Elkamhi, & Ioannis V. Floros, The Influence of Investor
Identity and Contract Terms on Firm Value: Evidence from PIPEs, 24
J. Fin. Intermediation 564 (2015). See also David J. Brophy, Paige
P. Ouimet, & Clemens Sialm, Hedge Funds as Investors of Last
Resort?, 22 Rev. Fin. Stud. 541 (2009) (showing that hedge funds
investing in PIPEs as ``investors of last resort'' protect
themselves by requiring substantial discounts, negotiating repricing
rights, and entering into short positions of the underlying stocks);
and Susan Chaplinsky & David Haushalter, Financing Under Extreme
Risk: Contract Terms and Returns to Private Investments in Public
Equity, 23 Rev. Fin. Stud. 2789 (2010) (examining control rights and
other contractual terms in PIPE transactions with financially
constrained issuers). We recognize that evidence from PIPEs need not
generalize to non-reporting companies that account for the majority
of private placement issuers. However, because Form D does not
provide disclosure of contractual terms and private placement
memoranda from Regulation D or Section 4(a)(2) offerings are not
required to be filed, data on the terms obtained by various
investors in private placements is generally not available.
Studies have also documented terms negotiated in VC contracts.
See, e.g., Steven N. Kaplan & Per Stromberg, Characteristics,
Contracts, and Actions: Evidence from Venture Capitalist Analyses,
59 J. Fin. 2177 (2004) (documenting the use of redemption rights,
liquidation rights, and antidilution provisions in VC contracts);
and Paul A. Gompers et al., How do Venture Capitalists Make
Decisions?, 135 J. Fin. Econ. 169 (2020) (surveying 885
institutional VCs at 681 firms and documenting various VC practices,
including the use of various deal terms, such as anti-dilution
protection (which gives the VC more shares if the company raises a
future round at a lower price), pro rata rights (which give
investors the right to participate in the next round of funding),
liquidation preferences (which give investors a seniority position
in liquidation), participation rights (which allow VC investors to
combine upside and downside protection so that VC investors first
receive their downside protection and then share in the upside), and
redemption rights (which give investors the right to redeem their
securities, or demand from the company the repayment of the original
amount)).
We further recognize that differences in payoffs of different
investor types can be fair compensation for value added by the
expertise, advice, governance, and network connections contributed
by large investors. See also Karen H. Wruck & YiLin Wu,
Relationships, Corporate Governance, and Performance: Evidence from
Private Placements of Common Stock, 15 J. Corp. Fin. 30 (2009)
(concluding that PIPEs are more likely to create value when they are
associated with increased monitoring and strong governance by PIPE
investors).
Other potential benefits resulting from a large investor's
control of an issuer include the investor's ability to enter a
governance relationship with the issuer or otherwise have input into
corporate decisions that reduce the value of such issuer but
increase the value of other issuers in which a large investor also
has a stake.
---------------------------------------------------------------------------
Finally, any potential effects of the proposed amendments
on the risks to non-accredited investors should be assessed in the
context of the existing economic and market conditions, which allow
such investors to establish other financial exposures that might
involve a high level of risk or require extensive due diligence, both
as part of the securities market (e.g., leveraged investments in
individual listed securities; short positions; holdings of registered
securities of foreign, small-cap, and over-the-counter (OTC) issuers;
and holdings of registered nontraded securities, including REITs and
structured notes) and outside of the securities market (e.g., holdings
of futures, foreign exchange, real estate, individual small businesses,
peer-to-peer lending, and other personal financial transactions that
may entail high risk or leverage). Thus, some of the new capital
invested in exempt offerings by non-accredited investors under the
proposed amendments might have otherwise been allocated to other assets
with high risk or extensive due diligence requirements.
Some of the proposed amendments affect the same offerings and
issuers or have mutually reinforcing or partly offsetting effects,
which makes it more difficult to draw conclusions about the net effects
of the proposed amendments package as a whole. For example, it is
difficult to predict how the amendments that expand, simplify, and
increase the uniformity of integration safe harbors will affect issuer
reliance on individual exemptions. Nevertheless, we expect that these
proposed integration amendments would overall facilitate capital
formation by harmonizing requirements and providing additional
flexibility to issuers seeking an exemption from registration or
transitioning to a registered offering. As another example, the effects
of the amendments to provisions regarding eligible security types and
eligible categories of issuers in Regulation Crowdfunding might
interact. To the extent that reliance on SAFEs is driven by
capitalization table concerns, the proposed narrowing of the eligible
security types, which would exclude SAFEs from Regulation Crowdfunding,
might have minimal effects on issuers if crowdfunding vehicles become
eligible under Regulation Crowdfunding as proposed. Furthermore, the
proposed amendments relaxing investment limits and raising offering
limits in Regulation Crowdfunding might result in mutually reinforcing
benefits for capital formation. In a related vein, the proposed
amendments to raise offering limits for individual offering exemptions
might lead to increased substitution between exemptions. Finally, we
recognize that the proposed amendments to exemptions that are currently
little used might have limited aggregate economic effects in absolute
terms even if the relative changes to the rate of use of those
exemptions are substantial.
In a recent release, the Commission has proposed to amend and
expand the accredited investor definition.\377\ If adopted, those
amendments would affect the economic impacts of the amendments proposed
here. In particular, some of the effects of the changes to the exempt
offerings proposed here that are intended to facilitate exempt offering
financing under Regulation D (e.g., expanded integration provisions) or
under other exemptions (e.g., exempting accredited investors from the
investment limits under Regulation Crowdfunding) might have relatively
greater economic effects if issuers can offer securities to an expanded
pool of accredited investors as contemplated by the proposed accredited
investor definition amendments. In turn, some of the anticipated
effects of the proposed changes to facilitate exempt offerings to non-
accredited investors (e.g., amendments to the disclosure requirements
for sales to non-accredited investors under Rule 506(b); expanded
offering limits under Rule 504, Regulation A, and Regulation
Crowdfunding; and test-the-waters provisions for Regulation
Crowdfunding) might have relatively smaller economic effects if issuers
can
[[Page 18007]]
access an expanded accredited investor pool as contemplated by the
proposed accredited investor definition amendments, and thus become
less reliant on offerings to non-accredited investors.
---------------------------------------------------------------------------
\377\ See Accredited Investor Definition Proposing Release.
---------------------------------------------------------------------------
B. Baseline
We examine the economic effects of the proposed amendments relative
to the baseline, which comprises the existing regulatory requirements
(described in detail in Section I above) and market practices related
to exempt offerings (described below).
Generally, the parties affected by the proposed amendments include
current and prospective issuers and investors in exempt offerings. To
the extent that the proposed amendments affect how issuers choose
between registered and exempt offerings, the proposed amendments also
might affect issuers and investors in the registered offering market.
In cases where intermediaries are involved in exempt offerings and
either receive transaction-based compensation or perform some of the
offering-related or compliance functions on behalf of issuers,
intermediaries would also be affected by the proposed amendments. In
particular, Regulation Crowdfunding requires offerings to be conducted
through an intermediary's online platform. Thus, to the extent that the
amendments affect Regulation Crowdfunding offering activity, they are
expected to have direct effects on all crowdfunding intermediaries. In
other instances, the effects of the proposed amendments on
intermediaries might be more limited (e.g., intermediaries might verify
investor status for issuers under Rule 506(c), be authorized by some
issuers to test-the-waters with investors prior to an offering, or be
drawn to the Regulation A market if they find that the proposed
increase in the offering limit makes the underwriting role more cost-
effective).
Table 11 \378\ summarizes recent data on the Regulation D market.
---------------------------------------------------------------------------
\378\ This table includes offerings by pooled investment funds.
Information on Regulation D offerings, including offerings under
Rule 504 and Rule 506, is based on staff analysis of data from Form
D filings on EDGAR. The amount raised is based on the amounts
reported as ``Total amount sold'' in all Form D filings (new filings
and amendments) on EDGAR. Subsequent amendments to a new filing were
treated as incremental fundraising and recorded in the calendar year
in which the amendment was filed. It is likely that the reported
data on Regulation D offerings underestimates the actual amount
raised through these offerings. First, Rule 503 of Regulation D
requires issuers to file a Form D no later than 15 days after the
first sale of securities, but a failure to file the notice does not
invalidate the exemption. Accordingly, it is possible that some
issuers do not file Form D for offerings relying on Regulation D.
Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10 percent.
Table 11--Offerings Under Regulation D in 2019
----------------------------------------------------------------------------------------------------------------
Rule 504 Rule 506(b) Rule 506(c)
----------------------------------------------------------------------------------------------------------------
Number of New Offerings............. 476.................... 24,636................. 2,269.
Amount Reported Raised.............. $0.2 billion........... $1,491.9 billion....... $66.3 billion.
----------------------------------------------------------------------------------------------------------------
As can be seen from Table 11, Rule 506(b) dominates the market for
exempt securities offerings. Amounts raised under Rule 506(b) also
exceeded the amounts raised in the registered market, estimated to be
$1.2 trillion in 2019.\379\
---------------------------------------------------------------------------
\379\ See supra Section II.E.. For a discussion of trends in the
Regulation D markets, see also Concept Release; and Scott Bauguess,
Rachita Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.:
An Analysis of the Market for Unregistered Securities Offerings,
2009-2017 (U.S. Sec. and Exch. Comm'n, DERA White Paper, Aug. 1,
2018), available at https://www.sec.gov/dera/staff-papers/white-papers/dera_white_paper_regulation_d_082018.
---------------------------------------------------------------------------
Table 12 \380\ summarizes amounts sought and reported raised in
offerings under Regulation Crowdfunding since its inception.\381\
---------------------------------------------------------------------------
\380\ See supra note 12. Issuers that have not raised the target
amount or not filed a report on Form C-U are not included in the
estimate of proceeds.
\381\ For a discussion of the Regulation Crowdfunding market,
see also 2019 Regulation Crowdfunding Report.
Table 12--Regulation Crowdfunding Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2019
----------------------------------------------------------------------------------------------------------------
Aggregate
Number Average Median (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings..... 2,003 $63,791 $25,000 $126.9
Maximum amount sought in initiated offerings.... 2,003 599,835 535,000 1,174.2
Amounts reported as raised in completed 795 213,678 106,900 169.9
offerings......................................
----------------------------------------------------------------------------------------------------------------
Given the offering limits, crowdfunding is used primarily by
relatively small issuers. Table 13 \382\ presents data on the
characteristics of issuers in crowdfunding offerings.\383\
---------------------------------------------------------------------------
\382\ See supra note 12. The estimates are based on data from
Form C or the latest amendment to it, excluding withdrawals.
\383\ See also 2019 Regulation Crowdfunding Report.
Table 13--Characteristics of Issuers in Regulation Crowdfunding
Offerings, May 16, 2016-December 31, 2019
------------------------------------------------------------------------
Average Median
------------------------------------------------------------------------
Age in years............................ 2.9 1.8
Number of employees..................... 5.3 3.0
Total assets............................ $455,280 $29,982
[[Page 18008]]
Total revenues.......................... $325,481 $0
------------------------------------------------------------------------
Based on information in new Form C filings, the median crowdfunding
offering was by an issuer that was incorporated approximately two years
prior to the offering and employed about three people. The median
issuer had total assets of approximately $30,000 and no revenues (just
over half of the offerings were by issuers with no revenues).
Approximately ten percent of offerings were by issuers that had
attained profitability in the most recent fiscal year prior to the
offering.
Table 14 \384\ summarizes amounts sought and reported raised in
offerings under Regulation A since the effective date of the 2015
Regulation A amendments.\385\
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\384\ See supra note 12. The estimates include post-
qualification amendments, and exclude abandoned or withdrawn
offerings. See also 2020 Regulation A Review.
\385\ See also Figures 1 and 2 in the 2020 Regulation A Review,
which provide a graphic depiction of the data conveyed in Table 14.
Table 14--Regulation A Offering Amounts and Reported Proceeds in $ Million, June 19, 2015-December 31, 2019
----------------------------------------------------------------------------------------------------------------
Tiers 1 & 2 Tier 1 Tier 2
----------------------------------------------------------------------------------------------------------------
All Filed Offerings:
Aggregate dollar amount sought... $11,170.2 million...... $1,101.5 million....... $10,068.6 million.
Number of offerings.............. 487.................... 145.................... 342.
Average dollar amount sought..... $22.9 million.......... $7.6 million........... $29.4 million.
Offerings Qualified by Commission
Staff:
Aggregate dollar amount sought... $9,094.8 million....... $759.0 million......... $8,335.8 million.
Number of offerings.............. 382.................... 105.................... 277.
Average dollar amount sought..... $23.8 million.......... $7.2 million........... $30.1 million.
Capital Reported Raised:
Aggregate dollar amount reported $2,445.9 million....... $230.4 million......... $2,215.6 million.
raised.
Number of issuers reporting 183.................... 39..................... 144.
proceeds.
Average dollar amount reported $13.4 million.......... $5.9 million........... $15.4 million.
raised.
----------------------------------------------------------------------------------------------------------------
As can be seen, Tier 2 accounted for the majority of Regulation A
offerings (70 percent of filed and 73 percent of qualified offerings),
amounts sought (90 percent of amounts sought in filed offerings and 9
percent of amounts sought in qualified offerings), and reported
proceeds (91 percent) during this period.
Because reliance on integration safe harbors is not required to be
disclosed, we lack a way to reliably quantify the pool of issuers and
offerings that would be affected by the proposed approach to
integration. Nevertheless, some indication of the scope of issuers
affected by integration provisions may come from indirect sources: In
2019, based on the analysis of Form D filings, we estimate that
approximately 1,256 issuers other than pooled investment funds filed
more than one Form D (excluding amendments) and an additional 258
issuers filed one new Form D and either had a registration statement
declared effective, had a Regulation A offering statement qualified, or
filed a new or amended Form C. Many private placements, however, rely
on Section 4(a)(2) rather than on the Regulation D safe harbor. We lack
data on Section 4(a)(2) offerings due to the absence of filing or
disclosure requirements associated with this statutory exemption. Also,
for issuers filing forms for multiple offerings, in most cases we
cannot reliably determine if, and when, proceeds were raised or the
offering closed, or whether the specific offerings were eventually
subject to integration or not. For instance, a closeout filing on Form
D is not required, making it difficult to know when the offering closed
or how much was raised. Similarly, proceeds data for Regulation A and
Regulation Crowdfunding can be lagged or incomplete.
C. Economic Effects of the Proposed Amendments
1. Integration
We are proposing to revise the framework relating to the
integration analysis. As discussed in greater detail in Section II.A,
the proposed amendments would update and expand existing integration
provisions to provide greater uniformity and flexibility to issuers
regarding integration of offerings.
Considered together, the proposed amendments are expected to
facilitate compliance and promote greater consistency and uniformity
across exemptions, and thus promote the use of exemptions by issuers
that undertake multiple offerings.
Benefits
The proposed amendments expand and simplify the integration
framework, provide greater uniformity in integration tests applicable
across offering types, and in many cases shorten the period of time
that issuers must wait between offerings to rely on a safe harbor from
integration. The proposed amendments are expected to reduce the cost of
compliance with the integration requirements for issuers. In
particular, we expect that the reduction in the safe harbor period from
six months to 30 days would facilitate compliance for issuers that
might need to adjust their financing strategy as a result of evolving
business circumstances, growing financing needs, or an inability to
attract sufficient capital through a single offering method. A six-
month waiting period between consecutive offerings, or the need to
assess whether consecutive
[[Page 18009]]
offerings can be treated as separate offerings or whether they must be
integrated, can significantly limit such issuers' ability to raise
sufficient capital or react to dynamic business conditions. Similarly,
expanding the bright-line safe harbors from integration to a broader
set of offering types is expected to reduce the costs for issuers
seeking to raise capital through multiple offering exemptions. Overall,
greater emphasis in the integration analysis on whether a particular
offering satisfies the registration requirements or conditions of the
specific exemption, as proposed, is expected to reduce integration-
specific compliance efforts. The proposed amendments are expected to
reduce the costs of compliance with the provisions of the exemptions
for issuers that conducted an offering before, or close in time with,
another offering, especially in light of the expansion of capital
raising options following the JOBS Act. The resulting decrease in
compliance costs might encourage additional issuers to pursue one or
more exempt offerings or to pursue a private placement and a registered
offering.
The proposed amendments are expected to be particularly beneficial
to young, financially constrained, or high-growth issuers whose capital
needs, and thus preferred capital raising methods, may change more
frequently. The flexibility may be especially valuable in cases where
one or more of the exempt offerings conducted by an issuer is subject
to offering limits, as well as in cases where an issuer conducts
multiple offerings that are subject to different solicitation,
disclosure, offering size, or investor requirements. Overall, this
flexibility may promote capital formation and enable issuers to
optimize their financing strategy so as to attain a lower overall cost
of capital while raising the required amount of external financing.
The benefits of the proposed amendments to issuers discussed above
also are expected to accrue to the shareholders of those issuers by
enhancing shareholder value, particularly if the increased flexibility
in accessing external financing enables issuers to more efficiently
pursue high-growth investment opportunities.
We recognize that the benefits of the proposed rules may be limited
in a range of circumstances:
In cases where the proposed amendments are codifying
existing guidance, to the extent that the market has already developed
practices aligned with the existing guidance, the effects of the
proposed amendments relative to the baseline would be limited;
Given that the vast majority of exempt offerings, and the
capital raised through such offerings, relies on Rule 506(b) under
Regulation D (or Section 4(a)(2)), the benefits of expanding the
integration safe harbors for other types of offerings under the
proposed amendments could be limited; \386\ and
---------------------------------------------------------------------------
\386\ We recognize that other amendments we are proposing today
might increase the use of Rule 506(c), Rule 504, Regulation A, and
Regulation Crowdfunding.
---------------------------------------------------------------------------
Rule 506(b) offerings do not have offering limits, and
most do not involve non-accredited investors, thus a change in
integration provisions is unlikely to affect issuers that continue to
engage in such offerings in practice because such issuers would likely
be able to meet all of their financing needs without having to conduct
multiple offerings and would not have to resort to other offering types
that permit greater non-accredited investor participation.\387\
---------------------------------------------------------------------------
\387\ We recognize that the amendments we are proposing today to
non-accredited investor disclosure requirements might increase the
incidence of non-accredited investors in Rule 506(b) offerings.
---------------------------------------------------------------------------
Costs
The proposed amendments could result in additional financing being
raised from non-accredited investors without registration
requirements.\388\ The disclosure requirements of all of these
exemptions are less extensive than the requirements associated with a
registered offering, which may in some cases lead to a weakening of
investor protections. Another potential concern is that a decrease in
the integration of multiple offerings might result in inadvertent
overlaps in solicitation of investors for offerings with different
communications provisions. For example, Rule 506(b) and Section 4(a)(2)
offerings that do not allow general solicitation may be preceded by
offerings relying on exemptions that allow general solicitation (such
as Regulation Crowdfunding, Regulation A, or Rule 506(c)), which could
condition the market for the subsequent private placement offering.
This may potentially increase risks to any non-accredited investors
participating in the subsequent private placement offering if such
investors rely on the information communicated through general
solicitation because private placement offerings do not afford the same
investor protections as, for instance, Regulation A and Regulation
Crowdfunding.
---------------------------------------------------------------------------
\388\ For example, conducting a Rule 506(b) offering and a
Regulation A or Regulation Crowdfunding offering may enable an
issuer to reach a broader non-accredited investor base and/or raise
a greater amount of non-accredited investor capital. Certain
exemptions (Regulation Crowdfunding, Regulation A Tier 2) also
conditionally exempt securities offered under the respective
exemption from the number of shareholders of record for purposes of
Section 12(g).
---------------------------------------------------------------------------
We anticipate a number of factors would mitigate these potential
costs. The proposed amendments do not alter the substantive
requirements of individual offering methods, including ones relating to
investor protection. In addition, the proposed amendments would more
closely align issuer efforts to comply with integration provisions and
requirements of the respective exemptions, including, importantly, the
provisions deemed important for investor protection in the context of
each respective exemption. Moreover, nothing in the proposed amendments
would enable a scheme to evade the requirements of the respective
exemption or, in the context of registered offerings, the registration
and gun jumping provisions of the Securities Act. In this regard,
proposed Rule 152 specifies that the safe harbors are not available to
any issuer for any transaction or series of transactions that, although
in technical compliance with the rule, is part of a plan or scheme to
evade the registration requirements of the Securities Act. Further,
issuers would remain prohibited from using general solicitation in a
Rule 506(b) offering, through any means, irrespective of the proposed
integration amendments.
The proposed amendments contain several other safeguards that are
expected to minimize potential costs to investors. The provision in
proposed Rule 152(a)(1)--that an issuer who is conducting or has
conducted an offering that permits general solicitation (``Offering
1'') and is conducting a concurrent offering or has conducted a
subsequent offering that does not permit general solicitation
(``Offering 2'') must have a reasonable belief, based on the facts and
circumstances, that the prospective investors in Offering 2 were not
solicited through general solicitation from Offering 1 or that the
investors established a substantive relationship with the issuer prior
to the commencement of the offering not permitting general
solicitation--is expected to minimize the effect of possible
solicitation overlaps for multiple offerings. This provision would
bolster existing solicitation restrictions in the individual exemptions
and focus the integration analysis on issuer compliance with
solicitation restrictions. Further, proposed Rule 152(a)(2) specifying
that an issuer conducting an exempt offering for which general
solicitation is permitted concurrently with an offering under another
exemption for which
[[Page 18010]]
general solicitation is permitted must include appropriate legends in
its general solicitation would provide notice to investors and thereby
help minimize potential confusion about the offering method, reducing
the risk of uninformed investor decisions as a result of reliance on
preliminary information contained in such solicitations.
The proposed safe harbors from integration are designed to minimize
potential risks to investors. The 30-day period in the first proposed
safe harbor is expected to minimize inadvertent overlaps between
offerings and investor solicitation for different offerings while
providing issuers greater flexibility to adjust their financing
strategy as a result of evolving circumstances. Moreover, the proposed
safe harbor would provide that if an offering that does not permit
general solicitation follows a registered offering or an exempt
offering that permits general solicitation, the investors in the
private offering either must not have been solicited through the use of
the registration statement or the prior general solicitation or must
have developed a substantive relationship with the issuer prior to the
commencement of the private offering. In addition, the proposed
amendment to Rule 506(b) providing that where an issuer conducts more
than one offering under Rule 506(b), the number of non-accredited
investors purchasing in all such offerings within 90 calendar days of
each other would be limited to 35 is expected to address the concern
that failure to integrate multiple such offerings could result in sales
to a large number of non-accredited investors.
The second proposed safe harbor concerns offerings under Rule 701
or Regulation S. As discussed above, Rule 701 offerings involve
compensation agreements with employees and other parties with a pre-
existing relationship with the issuer, and thus excluding such
offerings from integration is not likely to raise meaningful investor
protection concerns. The proposed amendments would permit an issuer
conducting an offering with general solicitation to undertake a
Regulation S offering using general solicitation so long as the general
solicitation activity is not undertaken for the purpose of conditioning
the U.S. market for any of the securities being offered in reliance on
Regulation S. The proposed amendments also would require a Regulation S
issuer that engages in general solicitation activity to prohibit
resales to U.S. persons of the Regulation S securities for a period of
six months from the date of sale except to QIBs or IAIs (which are
expected to have the financial sophistication and ability to sustain
the risk of loss of investment or fend for themselves). We expect these
provisions would strengthen protections for United States investors
from the risk of flowback of such securities to the United States.
The third proposed safe harbor concerns offerings for which a
Securities Act registration statement has been filed following a
completed or terminated private placement. Because private placements
would continue to restrict general solicitation, the impact on
investors in the private placement, most of which are deemed to have
the financial sophistication and ability to sustain the risk of loss of
investment or fend for themselves, is likely to be minimal. In turn,
because private placements do not permit general solicitation, and
because the extensive registration requirements would apply to the
registered offering, it is unlikely to have any impact on investors in
the registered offering. The third proposed safe harbor also provides
that a registered offering would not be integrated if made subsequent
to a completed or terminated exempt offering for which general
solicitation is permitted but that was either limited to QIBs and IAIs
or took place more than 30 days prior to the offering. This is similar
to current Rule 147(h), Rule 147A(h), and Rule 255(e) of Regulation A.
Because of the extensive protections built into the registration
requirements and the 30-day waiting period that would apply if a
solicitation involved investors other than QIBs or IAIs, the proposed
safe harbor is unlikely to have adverse impacts on investors in the
registered offering. In cases where solicitation was limited to QIBs
and IAIs, due to the sophistication of those investors, we do not
believe that the lack of a 30-day waiting period in the proposed
integration safe harbor would meaningfully affect investor protection.
The proposal is also consistent with Securities Act Section 5(d) and
Rule 163B, which allow solicitation of QIBs and IAIs at any time prior
to a registered offering.
The fourth proposed safe harbor extends the approach in Regulation
A and Rules 147 and 147A and in the guidance regarding Regulation
Crowdfunding to exclude any prior offer or sale from integration with
offers and sales under Rule 147, Rule 147A, Regulation Crowdfunding,
Rule 504(b)(1)(i), (ii), or (iii), and Rule 506(c). The disclosure and
substantive requirements of these exemptions should minimize potential
costs to investors from not integrating these offerings with prior
offers and sales.
We believe these proposed amendments appropriately calibrate the
effort required on the part of issuers to address potential overlaps
between multiple offerings by the same issuer that may raise investor
protection concerns. Overall, because the proposed amendments require
that issuers continue to meet the conditions of each exemption they are
relying upon, and because investor protection provisions of each
exemption as well as general anti-fraud provisions would continue to
apply, we believe that the proposed amendments would not have
significant adverse effects on investor protection.
We recognize that issuers seeking to rely on one or more of the
proposed integration provisions would incur costs of analyzing the
facts and circumstances of the contemplated offerings and/or the
respective integration safe harbors. While we believe that the proposed
amendments substantially simplify and streamline the integration safe
harbors, we recognize that some issuers might find that navigating the
amended integration framework requires additional time and effort.
Because the integration safe harbors would remain voluntary, we expect
that issuers would only rely on the safe harbors if such reliance might
reduce their compliance costs. This would not affect all issuers. For
instance, new entrants to the market would have to conduct this
analysis presently, with more a more confusing and difficult to
navigate integration framework.
Effects on Efficiency, Competition, and Capital Formation
The proposed integration provisions are expected to increase
capital formation through exempt offerings and to enable issuers to
combine financing under different exemptions more optimally as part of
their financing strategy. However, the net capital formation benefits
may be modest to the extent that issuers currently can avoid the need
for multiple offerings (e.g., by relying on a single Rule 506(b)
offering with no, or few, non-accredited investors but seeking a larger
amount of financing).
It is unclear how the proposed integration amendments would affect
competition for investor capital. To the extent the proposed amendments
might reduce issuer compliance costs associated with accessing a
broader range of offering exemptions (e.g., multiple JOBS Act
exemptions), competition for investor capital in those market segments
might increase. However, net effects on overall competition for
investor capital might be limited to the extent that issuers
[[Page 18011]]
reallocate between offering exemptions or additional investor capital
is drawn to these markets under the proposed amendments.
As discussed above, the amendments might offer the greatest
benefits to smaller issuers that have varying financing needs or to
issuers that need to rely on multiple offering exemptions to meet their
financing needs (e.g., because they lack an established accredited
investor network to support financing exclusively through Rule 506(b)
and need to rely on non-accredited investors or general solicitation).
By streamlining and harmonizing integration safe harbors, the
proposed amendments are expected to improve the efficiency of an
issuer's compliance efforts, particularly for issuers conducting
multiple offerings.
Reasonable Alternatives
As an alternative, we could propose a uniform safe harbor with a
time period other than 30 days (e.g., 15, 45, 60, 75, or 90 days).
Compared to the proposed amendments, the alternative of a universal
safe harbor with a shorter (longer) time period than proposed would
reduce (increase) the likelihood that multiple offerings would be
integrated and, accordingly, reduce (increase) issuer costs of
compliance. Compared to the proposed amendments, the alternative of a
safe harbor with a shorter (longer) time period than proposed would
provide issuers with greater (lower) flexibility in tailoring their
capital raising strategy to changing financing needs and market
conditions. Compared to the proposed amendments, such an alternative
also could increase (reduce) the number of instances where issuers
improperly divide a single plan of financing into multiple offerings.
The proposed amendments would replace the five factor test. As
another alternative, we could codify the use of the five factor test
for all analyses of integration. Compared to the proposed amendments,
such an alternative could be more successful in identifying instances
where issuers improperly divide what is economically a single offering
into multiple offerings to avoid exemption limitations. However, it
also would result in additional costs for issuers and reduced
flexibility to combine multiple offering methods.
Request for Comment
86. Would the proposed amendments facilitate issuer compliance and
enhance their ability to access capital markets and meet their
financing needs?
87. Would an alternative integration approach achieve greater
capital formation benefits? If so, which one? Would it impose
additional costs?
88. Would the proposed approach to integration allow issuers to
reduce their compliance costs or other costs of raising capital? Would
the proposed approach to integration facilitate transition to a
registered offering for issuers that previously relied on offering
exemptions? Would the proposed approach to integration allow issuers to
transition more easily among offering exemptions?
89. Which categories of issuers would benefit the most from the
proposed approach to integration? Would the proposed approach to
integration benefit smaller and younger issuers and promote
competition?
90. Would there be costs to investors as a result of the proposed
approach to integration? What would those costs be? What categories of
investors would be most affected? What factors could mitigate such
costs? Would an alternative integration safe harbor or guideline reduce
costs to investors? If so, which one?
91. What would be the costs and benefits of shortening the period
in the integration safe harbor to 30 days, as proposed? What would be
the economic effects of an alternative time period, such as 15, 45, 60,
or 90 days? What would be the economic effects of eliminating the
waiting period entirely?
2. General Solicitation and Offering Communications
a. ``Demo Days'' and Similar Events
As discussed in greater detail in Section II.B.1 above, we are
proposing to add certain ``demo day'' communications to the list of
communications that would not be deemed general solicitation.
Benefits
The proposed amendments to Rule 148 specify that certain limited
``demo day'' activities would not be deemed general solicitation. These
events are generally organized by a group or entity (such as a
university, angel investors, an accelerator, or an incubator) that
invites issuers to present their businesses to potential investors,
with the aim of securing investment. These amendments are expected to
benefit issuers by expanding the range of options for communicating
about their business with prospective investors without incurring the
cost of restrictions associated with general solicitation and by
allowing them to more efficiently access potential investors. These
benefits may be relatively more pronounced for small and emerging
issuers that may not have a sufficient existing angel investor network
to rely on in a Rule 506(b) or Section 4(a)(2) offering.
Costs
We do not expect significant costs to investors due to the proposed
amendments specifying that certain limited ``demo day'' activities
would not be deemed general solicitation because the proposed exclusion
significantly restricts permissible activities of ``demo day''
sponsors. In particular, under the proposed amendment, the sponsor of
the seminar or meeting would not be allowed to make investment
recommendations or provide investment advice to attendees of the event;
engage in any investment negotiations between the issuer and investors
attending the event; charge attendees of the event any fees, other than
reasonable administrative fees; receive any compensation for making
introductions between event attendees and issuers or for investment
negotiations between such parties; or receive any compensation with
respect to the event that would require registration of the sponsor as
a broker-dealer or an investment advisor. These restrictions are
expected to mitigate the risk that investors would be improperly
induced into an investment as a result of misleading information or
sales pressure from financially incentivized ``demo day'' sponsors.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments are expected to make it easier for issuers
to participate in ``demo days'' without incurring the costs of
restrictions associated with general solicitation. To the extent that
the proposed amendments encourage some additional issuers to
participate in demo days, and such participation facilitates their
efforts to raise capital, issuers might realize capital formation
benefits. Overall, the effects of the amendments on efficiency,
competition, and capital formation are expected to be modest because
issuers may offer securities to the same individuals and groups other
than through a demo day.
Reasonable Alternatives
As an alternative, we could have proposed a definition of general
solicitation that would either narrow or expand the scope of
communications that constitute general solicitation. The alternative of
narrowing (expanding) the scope of communications that constitute
general solicitation, either through changes to the examples of
[[Page 18012]]
communications that constitute general solicitation or through a
definition of general solicitation, would provide greater (lower)
flexibility to issuers with regard to the manner of communicating
offers of securities and reaching prospective investors, potentially
expanding (limiting) the ability of issuers that lack an established
network of investors with whom they have a pre-existing relationship to
raise capital through an exempt offering. Narrowing (expanding) the
scope of communications that constitute general solicitation also could
expose investors, including non-accredited investors, to more (fewer)
offers of securities from prospective issuers. Additional offers of
securities might reduce investor search costs for investors eligible
and seeking to invest in the offerings of issuers that engage in
solicitation, enabling investors to potentially make more informed
decisions and allocate capital more efficiently to a broader range of
investment opportunities, and vice versa. The alternative of providing
a specific definition of general solicitation might incrementally
reduce the compliance costs of issuers to determine whether
communications that fall outside the list of provided examples
constitute general solicitation. However, this alternative could
decrease the flexibility for issuers to consider all relevant facts and
circumstances in determining whether a particular communication
constitutes general solicitation.
As another alternative, we could simplify the existing framework
for all exempt offerings by deregulating offers, thus eliminating
general solicitation restrictions, and focusing the requirements on
sales.\389\ This alternative would significantly expand the options for
pre-offering and offering-related communications, giving issuers
greater flexibility and reducing costs compared to the proposed
amendments, some of which expand pre-offering communications but impose
additional conditions (such as filing and legending). However, by
shifting the investor protections to requirements for sales and anti-
fraud provisions, this alternative might result in increased risk of
confusion among those investors that rely on information in offers and
fail to compare the information in offers to disclosures required in
conjunction with a sale.
---------------------------------------------------------------------------
\389\ See CrowdCheck Letter.
---------------------------------------------------------------------------
Request for Comment
92. What are the economic effects of the proposed ``demo day''
amendments? Would the proposed amendments encourage greater reliance on
''demo days''? Would the proposed amendment benefit issuers and
investors?
93. Should we prescribe a definition of general solicitation that
either narrows or broadens the scope of that term? If so, how should we
define the term, and what would be the economic effects of adopting
such a definition?
b. Offering Communications
As discussed in greater detail in Section II.B.2 above, we are
proposing a generic testing-the-waters exemption that would permit an
issuer to use testing-the-waters materials for an offer of securities
prior to making a determination as to the exemption under which the
offering may be conducted. In connection with this exemption, we are
proposing to require that the generic solicitation materials be made
publicly available as an exhibit to the offering materials filed with
the Commission, if the Regulation A or Regulation Crowdfunding offering
is commenced within 30 days of the generic solicitation. Further, if
the issuer sells securities under Rule 506(b) within 30 days of the
generic solicitation to non-accredited investors, the issuer would be
required to provide such investors with any written communication used
under the proposed generic testing-the-waters exemption. We are also
proposing to expand permissible offering communications under
Regulation Crowdfunding by permitting testing-the-waters prior to
filing a Form C with the Commission. Under the proposed rule, issuers
would be required to use legends and to include any solicitation
materials as an exhibit to Form C that is filed with the Commission.
The economic effects of the proposed amendments would be limited to
the extent that issuers are reluctant to test-the-waters in reliance on
the proposed amendments, for example, as a result of the proposed
filing requirements or applicable state restrictions.
Benefits
In general, allowing issuers to gauge interest through expanded
testing-the-waters is expected to reduce uncertainty about whether an
offering could be completed successfully. Allowing solicitation prior
to filing would enable issuers to determine market interest in their
securities before incurring the costs of preparing and filing an
offering statement. Testing-the-waters before filing can reduce the
risk of a failed offering and the associated reputational costs. If,
after testing-the-waters, the issuer is not confident that it would
attract sufficient investor interest, the issuer could consider
modifying offering plans or the target amount of the offering,
reconsidering the contemplated offering structure and terms, postponing
the offering, or exploring alternative methods of raising capital. This
option might be useful for smaller issuers, especially early stage
issuers, first-time issuers, issuers in lines of business characterized
by a considerable degree of uncertainty, and other issuers with a high
degree of information asymmetry. The ability to engage in testing-the-
waters communications might attract certain issuers--those that may be
uncertain about the prospects of raising investor capital--to consider
using an exempt offering, thus potentially promoting competition for
investor capital as well as capital formation. Importantly, the
proposed amendments could benefit issuers that find after testing-the-
waters that their offering is unlikely to be successful and choose not
to proceed with an offering, thus saving disclosure preparation and
filing costs (including, where applicable, the cost of review or audit
of financial statements by an independent accountant), lowering the
risk of disclosure of potentially sensitive proprietary information to
competitors and mitigating the reputational cost from a failed
offering.
The proposed amendments to enable issuers to engage in generic
test-the-waters communications prior to determining the specific
exemption type might provide additional flexibility to gauge market
interest that is likely to be especially valuable for smaller, less
well known issuers that may lack an accurate understanding of
prospective investor demand for their securities. Similarly, the
proposed amendments to permit issuers to solicit investor interest,
orally or in writing, in Regulation Crowdfunding offerings are expected
to benefit issuers by enabling them to gauge investor interest in a
prospective Regulation Crowdfunding offering before incurring the full
costs of preparing and filing an offering circular.
The requirement in the proposed test-the-waters exemptions to
include legends is expected to provide notice to investors of the
preliminary nature of these communications. We propose to require
issuers that proceed with an offering under Regulation A or Regulation
Crowdfunding after testing-the-waters to include as exhibits to the
offering statement any written materials used in a generic test-the-
waters communication within 30 days prior to the filing of a Regulation
A or Regulation Crowdfunding offering statement. We also propose to
require issuers to include as exhibits any
[[Page 18013]]
Regulation Crowdfunding test-the-waters materials. Combined, these
requirements are expected to provide informational benefits to
investors and allow them to compare the solicitation materials with the
offering statement disclosures, leading to potentially more informed
investment decisions. The proposed requirement to provide materials
used for a generic test-the-waters solicitation to any non-accredited
investors in a Rule 506(b) offering that occurs within 30 days of such
solicitation is expected to incrementally enhance the ability of
investors in the offering to make informed decisions.
The proposed amendments expanding communications permissible under
Regulation Crowdfunding after the filing of Form C are expected to
benefit issuers by allowing greater flexibility to communicate with
prospective investors about the offering. Being able to communicate
with prospective investors outside the communications channels provided
by the online crowdfunding platform is expected to facilitate the
efforts of issuers to solicit prospective investors and advertise the
offering, potentially resulting in a higher rate of offering success
and more capital formation, particularly for lesser known, small
issuers. Oral off-portal communications about the terms of the offering
might incrementally reduce costs of searching for information about
offering terms for some prospective investors (e.g., investors that may
have prior knowledge of, or be customers of, the issuer) that would
prefer to find out about offering terms without first reviewing the
crowdfunding platform's website and communications channels. Should
such prospective investors decide to invest in an offering, they would
still have to do so through the portal and would have access therein to
the filed offering materials, other offering information, and investor
education materials required by Regulation Crowdfunding. Communications
intended to drive traffic to the intermediary's website, and therefore
to the issuer's offering, would continue to be governed by the
Regulation Crowdfunding advertising restrictions.
Costs
We recognize that there might also be potential costs associated
with expanding the use of testing-the-waters communications in
connection with a contemplated Regulation Crowdfunding offering or
another exempt offering. If the contents of the offering circular
differ substantively from the material distributed through test-the-
waters communications, and if investors rely on test-the-waters
materials when making investment decisions, this might lead investors
to make less informed investment decisions. For example, if the
information conveyed through test-the-waters communications is an
incomplete representation of the risk of an offering, and if investors
fail to read the subsequent offering circular before making the
investment decision, they might make a less informed investment
decision. These investor costs might be exacerbated to the extent that
investors in Regulation Crowdfunding offerings are likely to be small
and relatively less sophisticated and thus less equipped to process
information contained in test-the-waters communications.
These potential investor protection concerns are expected to be
alleviated by several factors:
The application of the anti-fraud provisions of the
federal and state securities laws; \390\
---------------------------------------------------------------------------
\390\ Test-the-waters communications under Regulation
Crowdfunding would be treated as offers of securities, similar to
test-the-waters communications under Regulation A, Section 5(d), and
the recently adopted Rule 163B.
---------------------------------------------------------------------------
For issuers that proceed with a Regulation Crowdfunding
offering:
[cir] The availability of an offering circular, allowing investors
to review disclosures compliant with Regulation Crowdfunding prior to
investing;
[cir] The proposed requirement that written test-the-waters
materials be included as an exhibit to Form C, allowing the public and
Commission staff to review written solicitation materials and compare
them to the contents of the offering circular;
[cir] The availability of investor education materials required to
be provided by crowdfunding intermediaries before investing; and
[cir] The continued application of other provisions of Regulation
Crowdfunding, including ones expected to provide additional investor
protection, such as investment limits, offering limits, crowdfunding
intermediary requirements, periodic reporting requirements, and issuer
eligibility restrictions; and
The reputational incentives of issuers and intermediaries,
as well as the risk of litigation (particularly for issuers and
intermediaries that have assets and that engage in test-the-waters
communications).
Further, concerns about costs of expanding test-the-waters
communications to investors should be considered in the context of the
baseline. Investors in Regulation Crowdfunding offerings today might
perform an incomplete analysis of the offering risks if they base their
investment decision on the promotional video or summary information
from the crowdfunding platform's campaign page and fail to review the
entire contents of the offering materials. Low investment minimums
(many around $100, and some as low as $25) might make it optimal for
investors to allocate a limited amount of time to due diligence
regarding prospective crowdfunding investments. While some unscrupulous
issuers might seek to disseminate misleading information through test-
the-waters communications, such issuers or intermediaries already could
engage in misleading communications today, and such misleading offering
communications would remain in violation of the anti-fraud provisions
of the federal securities laws.
The proposed amendments to Rule 204 of Regulation Crowdfunding
expanding the ability to advertise the ongoing offering and discuss it
in off-portal oral and written communications with prospective
investors might similarly result in some investors receiving incomplete
information about the offering from the issuer, and, if such investors
fail to review the offering circular and other filed offering
materials, potentially making less well informed investment decisions.
Several factors are expected to mitigate potential costs to
investors due to expanded off-portal communications under the proposed
amendments:
The availability of the offering circular containing
disclosures compliant with Regulation Crowdfunding prior to investing,
as well as the continued applicability of Rule 204 requirements, such
as the requirement to include a link directing the potential investor
to the intermediary's platform where the Form C disclosure document is
available;
The application of anti-fraud provisions of federal and
state securities laws;
The availability of investor education materials required
to be provided by funding portals;
The other provisions of Regulation Crowdfunding, including
ones expected to provide additional investor protection, such as
investment limits, offering limits, crowdfunding intermediary
requirements, periodic reporting requirements, and issuer eligibility
restrictions, continue to apply; and
The reputational incentives of issuers, as well as the
risk of litigation (for issuers with assets).
The proposed amendments that allow issuers to engage in testing-
the-waters prior to determining the specific
[[Page 18014]]
exemption type might lead to investor confusion with regard to the
regulatory framework applicable to the contemplated offering,
particularly for non-accredited investors that may be less
sophisticated. However, for issuers that proceed with an exempt
offering, the investor protections of the respective exemption would
continue to apply. Importantly, because investors would be able to
review the offering circular that clearly delineates the exemption
relied upon for issuers that proceed with a Regulation A or Regulation
Crowdfunding offering, investors are expected to receive the disclosure
necessary to reach an informed investment decision. Furthermore, should
an issuer elect to proceed with a Regulation A or Regulation
Crowdfunding offering within 30 days of a generic testing-the-waters
communication, the test-the-waters materials must be filed as an
exhibit to the offering statement, enabling investors and the
Commission staff to review test-the-waters materials and compare them
against the disclosures in the offering statement. In cases where an
issuer decides to proceed with a Rule 506(c) offering after testing-
the-waters, non-accredited investors that might have received
solicitations would remain restricted from participation in a Rule
506(c) offering.
For issuers that choose not to proceed with a Rule 506(c),
Regulation A, or Regulation Crowdfunding offering following testing-
the-waters for an exempt offering conducted under the proposed
amendments, but that choose instead to undertake an exempt offering
under an exemption that does not permit general solicitation, the
proposed amendments are not expected to have significant effects on
investors in such a private placement or registered offering.
Restrictions specific to private placements, including a restriction on
general solicitation for a Rule 506(b) or a Section 4(a)(2) offering
would continue to apply in that case. In cases of issuers proceeding
with a registered offering, gun jumping provisions of the Securities
Act and other investor protections associated with registered offerings
(including staff review, Section 11 liability, disclosure requirements
in the registration statement, and Exchange Act reporting requirements)
would continue to apply.
Because the use of test-the-waters communications would remain
voluntary under the proposed amendments, we anticipate that issuers
would elect to rely on test-the-waters communications only if the
benefits anticipated by issuers justify the expected costs. Issuers
that elect to test-the-waters under the proposed amendments might incur
costs, including direct costs of identifying prospective investors and
developing test-the-waters solicitation materials; indirect costs of
potential disclosure of proprietary information to solicited investors;
and in some instances, potential legal costs associated with liability
arising from test-the-waters communications with prospective investors.
We note that issuers that proceed with an exempt offering without
testing-the-waters similarly might incur costs of searching and
soliciting investors, either on their own or through an intermediary.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments to expand permissible testing-the-waters
prior to exempt offerings are expected to facilitate capital formation
for small issuers by giving prospective issuers that might not
otherwise consider an exempt offering a low-cost method of assessing
investor interest in a potential offering and efficiently adjusting
their financing strategy to reflect information about market demand.
These effects are expected to be particularly significant for issuers
contemplating Regulation Crowdfunding offerings that presently have to
incur the compliance costs of preparing and filing Form C and the risk
of disclosure of proprietary information to competitors, as well as the
reputational risk of a failed offering, and do not have a cost-
effective way of gauging investor demand. Similarly, the proposed
amendments to expand permissible issuer communications in Regulation
Crowdfunding offerings might promote capital formation in the
Regulation Crowdfunding market by allowing issuers to more effectively
reach prospective investors as part of marketing the offering and to
more efficiently structure the offering based on feedback from
prospective investors. Combined, these amendments might make it easier
for the smallest issuers with low investor recognition and limited or
no securities offering experience to access the Regulation Crowdfunding
market or issue securities pursuant to another offering exemption,
resulting in potential positive effects on competition. To the extent
that these amendments result in switching of issuers between offering
exemptions, the net effects on capital allocation might be modest.
However, in that scenario some issuers might still benefit from a lower
cost of capital if they are able to obtain preliminary information that
helps them to identify the most cost-effective offering method and
terms that are likely to attract sufficient investor demand.
Reasonable Alternatives
The proposed amendments permit test-the-waters communications in
connection with Regulation Crowdfunding offerings prior to the filing
of Form C. As an alternative, we could permit test-the-waters
communications both before and after the filing of Form C.\391\ This
alternative would provide greater flexibility to issuers compared to
the proposed amendments, potentially increasing the likelihood that the
issuer would raise the desired amount of capital. This option might be
most useful for smaller and early stage issuers. This alternative might
also require investors to expend additional effort to compare test-the-
waters communications after the filing of an offering statement with
the filed offering statement disclosures. However, the incremental
economic effects of this alternative on investors and issuers might be
limited because of the advertising permitted under Rule 204 and because
the incremental costs of filing test-the-waters materials might
discourage the use of testing-the-waters after the filing of Form C
under this alternative.
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\391\ Under Regulation A, testing-the-waters is permitted before
and after the filing of Form 1-A before the qualification of Form 1-
A. However, differently from Regulation Crowdfunding, Regulation A
issuers are not able to accept investor commitments between the
filing and the qualification of Form 1-A. Under Regulation
Crowdfunding, issuers may accept investor commitments upon the
filing of Form C because Commission qualification is not applicable
to Form C. Thus, permitting test-the-waters communications before
the filing of Form C would be more consistent with the test-the-
waters communications permissible under Regulation A, before
investor commitments may be accepted.
---------------------------------------------------------------------------
We are proposing to extend the filing requirement to written test-
the-waters communications for issuers that proceed with a Regulation
Crowdfunding offering, consistent with the requirements of Rule 255 of
Regulation A. As an alternative, we could allow test-the-waters
communications prior to a contemplated Regulation Crowdfunding offering
but not impose a filing requirement. As another alternative, we could
waive the filing requirement for test-the-waters communications prior
to any exempt offering, including a Regulation A offering. Issuers that
have elected to use testing-the-waters communications have already
incurred the cost of preparing the materials, so the incremental direct
cost of the requirement to file the materials with the Commission would
be relatively low. We recognize that this
[[Page 18015]]
alternative could reduce the indirect costs of some issuers by limiting
the ability of the issuer's competitors to discover information about
the issuer or the costs associated with requesting confidential
treatment for the proprietary portions of the information. However, we
note that this information may become available to competitors in any
event through the solicitation process or as part of the offering
materials (to the extent that the offering materials contain similar
information). Furthermore, removing the requirement to publicly file
the materials for issuers that proceed with an offering might result in
adverse effects on the protection of investors to the extent that it
may facilitate fraudulent statements by issuers to all or a selected
group of investors that might fail to compare the statements in the
solicitation materials against the offering circular. This
consideration is especially salient because test-the-waters
communications under Rule 255 and under the proposed amendments could
be directed at any investor, including non-accredited investors. On
balance, we believe that the proposed rule's requirements governing the
use of test-the-waters communications appropriately balance the goals
of providing flexibility to issuers and protection to investors.
We are proposing to permit test-the-waters communications about a
contemplated exempt offering for issuers that have not yet narrowed
their offering plans to a specific exemption, so long as the test-the-
waters materials contain required legends and, should an issuer proceed
with an exempt offering under Regulation A or Regulation Crowdfunding
within 30 days, that written test-the-waters communications be filed.
As an alternative, we could have proposed permitting test-the-waters
communications in conjunction with a contemplated exempt offering that
does not currently permit such communications, but required the issuer
to have determined and to specify in a legend the offering exemption
that would be used. Compared to the proposal, by informing solicited
investors about the contours of the exempt offering that is being
contemplated, this alternative could potentially increase the utility
of the information in the solicitation to prospective investors (e.g.,
whether the offering would be open to non-accredited investors, and if
it is, whether investment limits or other requirements apply). However,
because small and early stage issuers might be testing-the-waters to
gauge their optimal offering strategy, including how much capital might
in principle be raised (and thus, whether a Regulation A offering, or
for instance, a Regulation Crowdfunding offering, is more cost-
effective), such an alternative would significantly limit the
flexibility of issuers to obtain valuable information from pre-offering
communications. It also may not result in meaningful investor
protection benefits compared to the proposed amendments in light of the
legending requirements, anti-fraud provisions, and, for issuers that
proceed with an offering, the exhibit filing requirements and other
investor protections specific to the respective exemption the issuer
uses.
We are proposing to amend Rule 204 to state that oral
communications with prospective investors are permitted once the Form C
is filed, so long as the communications comply with the requirements of
Rule 204. As an alternative, we could expand Rule 204 further,
broadening the range of terms an issuer may advertise or not
restricting the scope of issues that may be addressed in offering
advertisements. Such an alternative would provide greater flexibility
to issuers to advertise the offering to prospective investors, which
might increase the likelihood of offering success and yield capital
formation benefits. However, such an alternative might increase
information processing challenges for investors--particularly less
sophisticated investors--that might incur greater effort to compare the
more extensive advertising content with the offering statement
disclosure, or if they are unable to validate the extended advertising
content against the offering statement disclosure, potentially be at
risk of less informed investment decisions.
Request for Comment
94. Would extending the option to test-the-waters about a
contemplated Regulation Crowdfunding offering, as proposed, benefit
issuers? If so, how? Would it impose costs on investors? If so, which
costs? How could such costs be mitigated?
95. Would extending the option to test-the-waters about a
contemplated exempt offering, as proposed, for issuers still
determining the offering exemption they plan to rely on, benefit
issuers? Which issuers would benefit the most from such an extension?
Would it impose costs on investors? If so, which costs? How could such
costs be mitigated?
96. Which factors might increase the utility of the proposed
amendments to issuers?
97. What would be the economic effects of the alternative of
permitting test-the-waters communications for Regulation Crowdfunding
issuers without a filing requirement? Would it result in costs to
investors?
98. Would issuers benefit from the proposed amendments specifying
that oral communications are permitted in Regulation Crowdfunding
offerings once the Form C is filed? What would be the costs and
benefits of the alternative of expanding the scope of permissible
advertising or not limiting the scope of permissible advertising?
3. Rule 506(c) Verification Requirements
As discussed in Section II.C above, to address some of the concerns
about challenges and costs associated with accredited investor status
verification in Rule 506(c) offerings, the proposed amendments would
add a new item to the non-exclusive list in Rule 506(c) that would
allow an issuer (or those acting on its behalf) to establish that an
investor remains an accredited investor as of the time of sale if the
issuer (or those acting on its behalf) previously took reasonable steps
to verify that investor as an accredited investor, the investor
provides a written representation to that effect to the issuer (or
those acting on its behalf), and the issuer (or those acting on its
behalf) is not aware of information to the contrary.
Benefits
The proposed addition to the non-exclusive list in Rule 506(c)
concerning verification of investors for which the issuer previously
took reasonable steps to very accredited investor status is expected to
reduce the cost of verification for issuers that may opt to engage in
more than one Rule 506(c) offering over time with potential repeat
investors. This new method also may help reduce the risk of harm to
investors from continually having to provide financially sensitive
information to the issuer (or those acting on its behalf) when the
additional investor protection benefits of doing so are limited given
the pre-existing relationship between the issuer (or those acting on
its behalf) and such investors.
Costs
Generally, because the proposed amendment represents an incremental
revision to the principles-based approach to verification already
incorporated in Rule 506(c), the costs of the proposed amendment are
expected to be modest. However, we recognize that some previously
verified investors that lose accredited investor status over time might
provide written
[[Page 18016]]
representations that they are accredited investors, and if issuers are
not aware of information to the contrary, such issuers might sell
securities to those non-accredited investors under Rule 506(c). As
noted above, we expect these risks would be mitigated by the pre-
existing relationship between the issuer (or those acting on its
behalf) and such investors.
Effects on Efficiency, Competition, and Capital Formation
Generally, because the proposed amendments represent an incremental
revision to the principles-based approach to verification already
incorporated in Rule 506(c), the anticipated effects of the proposed
amendments on efficiency, competition, and capital formation are
expected to be modest.
Reasonable Alternatives
We are proposing amendments to the existing non-exclusive list of
verification methods. As an alternative, we could rescind the non-
exclusive list. Compared to the proposed amendments, this alternative
could reduce costs for some issuers that presently feel constrained to
use one of the listed verification methods, even though other, less
costly methods may be better suited for their particular facts and
circumstances. However, the effects of eliminating the non-exclusive
list might be limited if issuers that presently rely on the listed
verification methods continue to do so under a more principles-based
approach.
We have proposed to allow issuers to establish that a previously
verified investor remains accredited if the investor provides a
representation to that effect and the issuer is not aware of
information to the contrary. As an alternative, we could allow issuers
to make such a determination only for a specific period of time, after
which an issuer must verify investor status again to account for
potential changes in investor income or net worth. This alternative
would result in greater costs, relative to the proposed amendments,
stemming from more frequent verification of investor status for repeat
purchasers of the issuer's securities. At the same time, this
alternative could reduce the likelihood of investors that previously
were accredited but subsequently exited accredited investor status
(e.g., due to a change in income or net worth) and thus may have a
lower ability to incur the risks of a Rule 506(c) offering becoming
purchasers in a Rule 506(c) offering.
Request for Comment
99. What are the economic effects of the alternative of rescinding
the non-exclusive list of verification methods?
100. What are the economic effects of the alternative of allowing
issuers to establish that a previously verified purchaser remains an
accredited investor, provided that an investor makes a written
representation to that effect, on a time-limited, rather than
indefinite, basis?
4. Disclosure Requirements
a. Required Disclosures to Non-Accredited Investors in Rule 506(b)
Offerings
The proposed amendments to Rule 502(b) would scale financial
disclosure requirements for non-reporting companies that sell to non-
accredited investors under Rule 506(b) generally to align those
requirements with the disclosures required for offerings under Tier 1
and Tier 2 of Regulation A, which also allows sales to non-accredited
investors.
Benefits
The proposed amendments to the Rule 502(b) disclosure requirements
for sales to non-accredited investors would lower the burden of
preparing financial disclosures, particularly the costs of audited
financial statements, for issuers in Rule 506(b) offerings up to $20
million that would no longer be subject to those requirements.\392\ We
do not have information on the costs of an audit in Rule 506(b)
offerings involving sales to non-accredited investors. As a proxy, we
consider audit costs reported by Regulation A Tier 2 issuers and
smaller reporting company issuers. Based on Regulation A Tier 2
offerings qualified from June 2015 through December 2019, the average
(median) audit cost, where reported, was $29,015 ($12,319). Based on
information from Audit Analytics, the average (median) audit fees,
where available, for reporting companies with market capitalization up
to $75 million were $321,695 ($83,000) for years ending in 2018 or
2019.\393\ We recognize that these costs may differ from the costs
incurred by issuers in Rule 506(b) offerings to non-accredited
investors. We estimate that in 2019 among new Rule 506(b) offerings by
non-reporting issuers other than pooled investment funds seeking up to
$20 million, only 4.6 percent (565 out of 12,404) had at least one non-
accredited investor.\394\
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\392\ See, e.g., letter from McCarter & English LLP dated
September 24, 2019 (stating that the ``[t]he [Rule 506(b)] exemption
imposes significant disclosure requirements for issuances made to
such non-accredited investors, which, when combined with the
relatively low number of permitted non-accredited investors, makes
this particular facet of the Rule 506(b) exemption impracticable in
the vast majority of private placement transactions and therefore
little-used.'').
\393\ Data on audit fees for years ending in 2019 is incomplete
and reflects data as recorded in Audit Analytics as of February 20,
2020.
\394\ This estimate is based on the analysis of Form D data in
initial Form D filings with reported offer size, excluding pooled
investment fund issuers and reporting issuers. Reporting issuers are
identified based on 2019 filings of annual reports or amendments to
them. Most Rule 506(b) offerings had no or few non-accredited
investors. See supra note 94.
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Lowering costs of sales to non-accredited investors under Rule
506(b) might expand access to capital for some issuers that are not
able to obtain sufficient external financing through other methods or
through sales of securities to accredited investors only under Rule
506(b). Compliance cost savings in the offering process and expanded
access to external financing are expected to enhance shareholder value
and thus benefit the issuer's existing shareholders.
As a result of lower disclosure costs, some issuers in Rule 506(b)
offerings that presently do not sell securities to non-accredited
investors might be more willing to sell securities to non-accredited
investors, which could increase the number of issuers subject to the
amendments compared to the estimates above. If the amendments result in
more issuers selling securities to non-accredited investors under Rule
506(b), those non-accredited investors could benefit from an expanded
set of investment opportunities, which might allow them to allocate
their capital more efficiently. These benefits might be attenuated if
the increase in sales to non-accredited investors under Rule 506(b) is
driven by issuers switching from Rule 504, Regulation A, or Regulation
Crowdfunding offerings, which also accept non-accredited investors, to
Rule 506(b), resulting in little change in the set of investment
opportunities available to non-accredited investors. It is difficult to
predict whether any increase in sales to non-accredited investors under
Rule 506(b) as a result of the proposed amendments would involve the
participation of additional non-accredited investors in Rule 506(b)
offerings or greater participation by existing non-accredited investors
in other issuers' Rule 506(b) offerings. Due to the limited data
disclosed about investors on Form D, we cannot estimate the number of
unique non-accredited purchasers in such offerings because a single
investor may be a
[[Page 18017]]
purchaser in multiple Rule 506(b) offerings in a given year.
Costs
The proposed amendments to scale and streamline Rule 502(b)
requirements regarding disclosures applicable to sales to non-
accredited investors, particularly the repeal of the requirement to
provide audited balance sheets in offerings up to $20 million, could
result in less informed investor decisions by some non-accredited
investors. For instance, to the extent that audited financial
statements are valuable for informed investment decisions,\395\ scaled
disclosures in offerings of up to $20 million might cause some non-
accredited investors to incorrectly value the offered securities and to
make less well informed investment decisions. Further, the proposed
elimination of audit requirements for disclosures to non-accredited
investors in Rule 506(b) offerings of up to $20 million might encourage
some issuers with relatively higher information risk to sell securities
to non-accredited investors given the absence of investment limits in
such offerings. The requirement that non-accredited investors must
satisfy the knowledge and experience standard of Rule 506(b)(2)(ii) in
order to be eligible to participate in an offering under such rule is
expected to mitigate some of these costs. Further, in the aggregate
these costs to investors are expected to be limited by the cap on the
number of non-accredited investors that can participate in a Rule
506(b) offering.
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\395\ See, e.g., Erik Boyle & Melissa Lewis-Western, The Value-
Add of an Audit in a Post-SOX World (Working Paper, Apr. 2018)
(finding that an audit continues to be associated with reduced
financial statement error at public companies post-SOX and that the
size of the effect is economically significant); Petro Lisowsky &
Michael Minnis, The Silent Majority: Private U.S. Firms and
Financial Reporting Choices (Univ. of Chi. Booth Sch. of Bus.,
Research Paper No. 14-01, Apr. 12, 2018) (finding that ``[n]early
two-thirds [of private firms] do not produce audited GAAP financial
statements. Moreover, while firms with external capital are more
likely to produce audited GAAP statements, we find that thousands of
firms with external debt and dispersed ownership do not. Equity and
trade credit are potentially more important factors than debt in
affecting private firms' production of audited GAAP reports.
Finally, young, high growth firms lacking tangible assets are
significantly more likely to produce audited GAAP reports relative
to established firms with physical assets, suggesting that audited
financial reports play an important information role in capital
allocation when business activity is less verifiable.''); Michael
Minnis, The Value of Financial Statement Verification in Debt
Financing: Evidence from Private U.S. Firms, 49 J. Acct. Res. 457
(2011) (showing the value of audited financial statements for
private debt pricing); David W. Blackwell, Thomas R. Noland, & Drew
B. Winters, The Value of Auditor Assurance: Evidence from Loan
Pricing, 36 J. Acct. Res. 57 (1998) (finding cost of debt reductions
in a small sample of small private firms with audited financial
statements); and Jeong[hyphen]Bon Kim et al., Voluntary Audits and
the Cost of Debt Capital for Privately Held Firms: Korean Evidence,
28 Contemp. Acct. Res. 585 (2011) (confirming the result in a Korean
sample). See also Ciao-Wei Chen, The Disciplinary Role of Financial
Statements: Evidence from Mergers and Acquisitions of Privately Held
Targets, 57 J. Acct. Res. 391 (2019) (examining ``whether requiring
the disclosure of audited financial statements disciplines managers'
mergers and acquisitions (M&As) decisions'' and finding that ``the
disclosure of private targets' financial statements is associated
with better acquisition decisions . . . [and] that this disciplining
effect of disclosure is more pronounced when monitoring by outside
capital providers is more difficult and costly'').
However, two studies using survey data from the Federal
Reserve's Survey of Small Business Finances do not find that an
audit is significantly associated with a lower interest rate in
small privately held firms. See Kristian D. Allee & Teri Lombardi
Yohn, The Demand for Financial Statements in an Unregulated
Environment: An Examination of the Production and Use of Financial
Statements by Privately-Held Small Businesses, 84 Acct. Rev. 1
(2009); and Gavin Cassar, Christopher D. Ittner, & Ken S.
Cavalluzzo, Alternative Information Sources and Information
Asymmetry Reduction: Evidence from Small Business Debt, 59 J. Acct.
& Econ. 242 (2015).
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In evaluating the investor costs of the proposed amendments, we
consider the baseline, which includes similarly scaled requirements for
financial disclosures required to be made to non-accredited investors
in Regulation A Tier 1 and Regulation Crowdfunding offerings of the
same size. However, those offering types are associated with certain
additional provisions intended to protect non-accredited investors,
which are not afforded to non-accredited purchasers in Rule 506(b)
offerings (e.g., Commission qualification and state registration of
Regulation A Tier 1 offerings, offering statement disclosure
requirements in Regulation A and Regulation Crowdfunding offerings, as
well as investment limit, periodic disclosure, and funding portal
requirements in Regulation Crowdfunding offerings). If non-accredited
investors remain infrequently represented in Rule 506(b) offerings, the
aggregate impacts of the proposed amendments on costs to investors may
be limited. However, the aggregate impacts of the proposed amendments
on investor protection could be amplified if the scaled requirements
encourage additional issuers to accept non-accredited investors in Rule
506(b) offerings.
Effects on Efficiency, Competition, and Capital Formation
If scaled financial statement disclosures lead to more non-
accredited investor offerings under Rule 506(b), and if such investors
contribute additional capital the issuers would not have otherwise
raised from accredited investors in the offering, the proposed
amendments might incrementally promote capital formation through Rule
506(b). If non-accredited investor capital drawn to Rule 506(b)
offerings under the proposed amendments is mostly reallocated from
other offerings to non-accredited investors (e.g., registered offerings
or offerings under Regulation A, Regulation Crowdfunding, Rule 504,
Rule 147/147A, etc.), the net effects on aggregate capital formation
might be limited. However, in that instance, issuers might benefit
under the proposed amendments if non-accredited investor offerings
under Rule 506(b) enable them to obtain a lower cost of capital (e.g.,
because of lower compliance costs in Rule 506(b) offerings, even after
providing disclosures to non-accredited investors, or because non-
accredited investors in Rule 506(b) offerings provide better financing
terms).
Streamlining disclosure requirements in Rule 506(b) offerings with
non-accredited investors to be more aligned with those under Regulation
A is expected to make compliance more efficient for those issuers that
undertake these types of offerings along with Rule 506(b) offerings to
non-accredited investors.
The proposed amendments also may incrementally increase the
availability of Rule 506(b) offerings that allow non-accredited
investors, potentially enabling more efficient allocation of capital of
non-accredited investors among investment alternatives that are
otherwise unavailable to them. While non-accredited investors can
participate in other exempt offerings, Rule 506(b) offerings account
for the largest share of the exempt offerings market and draw issuers
that typically do not participate in Regulation A or Regulation
Crowdfunding offerings. The majority of Rule 506(b) offerings are by
issuers that are not reporting companies. While non-accredited
investors can invest in registered offerings, in most cases issuers in
registered offerings have a different profile than issuers in private
placements.\396\ Expanding opportunities
[[Page 18018]]
for investment in operating company and exempt investment fund
offerings under Rule 506(b) might allow non-accredited investors to
construct a more efficient portfolio.\397\ However, as discussed above,
the proposed amendments also might in some cases result in less
informed investment decisions, lowering the efficiency of capital
allocation.
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\396\ Investors in public firms can access more extensive
disclosures and rely on the protections of the Securities Act
registration and Exchange Act reporting regimes. Listed public firms
are more likely to have analyst coverage, which may provide
additional information to investors.
Past academic studies comparing private and publicly listed
firms arrive at somewhat mixed conclusions about investment and
innovation behavior of such firms. For example, one study finds that
public firms' patents rely more on existing knowledge, are more
exploitative, and are less likely in new technology classes, while
private firms' patents are broader in scope and more exploratory.
See Huasheng Gao, Po-Hsuan Hsu, & Kai Li, Innovation Strategy of
Private Firms, 53 J. Fin. & Quantitative Analysis 1 (2018). See also
Daniel Ferreira, Gustavo Manso, & Andr[eacute] C. Silva, Incentives
to Innovate and the Decision to Go Public or Private, 27 Rev. Fin.
Stud. 256 (2014) (showing, in a theoretical model, that private
ownership creates incentives for innovation). Another study shows
that public firms in external finance dependent (but not in internal
finance dependent) industries spend more on R&D and generate a
better patent portfolio than their private counterparts. See Viral
Acharya & Zhaoxia Xu, Financial Dependence and Innovation: The Case
of Public versus Private Firms, 124 J. Fin. Econ. 223 (2017). A
different U.S. study finds that listed firms invest less and are
less responsive to changes in investment opportunities compared to
observably similar, matched private firms, especially in industries
in which stock prices are particularly sensitive to current
earnings. See John Asker, Joan Farre-Mensa, & Alexander Ljungqvist,
Corporate Investment and Stock Market Listing: A Puzzle?, 28 Rev.
Fin. Stud. 342 (2015). But see Naomi E. Feldman et al., The Long and
the Short of It: Do Public and Private Firms Invest Differently?
(Working Paper, 2019) (finding that public firms invest more in
long-term assets--particularly innovation--than private firms). See
also Vojislav Maksimovic, Gordon M. Phillips, & Liu Yang, Do Public
Firms Respond to Investment Opportunities More than Private Firms?
The Impact of Initial Firm Quality (Nat'l Bureau of Econ. Research,
Working Paper No. 24104, Dec. 2017) (finding that public firms
respond more to demand shocks after their IPO and are more
productive than their matched private counterparts, particularly in
industries that are capital intensive and dependent on external
financing); and Sandra Mortal & Natalia Reisel, Capital Allocation
by Public and Private Firms, 48 J. Fin. & Quantitative Analysis 77
(2013) (a cross-country study showing that public listed firms take
better advantage of growth opportunities than private firms,
although the differential only exists in countries with well-
developed stock markets).
Some studies also find that private and public firms differ in
their financing, cash, and payout decisions, cost of capital, and
other characteristics. See, e.g., Kim P. Huynh, Teodora Paligorova,
& Robert Petrunia, Debt Financing in Private and Public Firms, 14
Annals Fin. 465 (2018); Huasheng Gao, Jarrad Harford, & Kai Li,
Determinants of Corporate Cash Policy: Insights from Private Firms,
109 J. Fin. Econ. 623 (2013); Sandra Mortal, Vikram Nanda, & Natalia
Reisel, Why Do Private Firms Hold Less Cash than Public Firms?
International Evidence on Cash Holdings and Borrowing Costs, J.
Banking & Fin. (in-press, 2019); Roni Michaely & Michael R. Roberts,
Corporate Dividend Policies: Lessons from Private Firms, 25 Rev.
Fin. Stud. 711 (2012); Menachem Abudy, Simon Benning, & Efrat Shust,
The Cost of Equity for Private Firms, 37 J. Corp. Fin. 431 (2016);
Ilan Cooper & Richard Priestley, The Expected Returns and Valuations
of Private and Public Firms, 120 J. Fin. Econ. 41 (2016); and Serkan
Akguc, Jongmoo Jay Choi, & Suk-Joong Kim, Do Private Firms Perform
Better than Public Firms? (Working Paper, 2015).
\397\ In portfolio theory, constraining the set of investment
opportunities yields a potentially inferior optimal portfolio. See,
e.g., Bodie et al. 2013, supra note 375. However, the presence of
information frictions due to a lack of investor sophistication might
reverse this general prediction and result in lower portfolio risk-
adjusted returns. See supra note 375.
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The incremental economic effects of the proposed amendments to non-
accredited investor disclosures in Rule 506(b) offerings discussed
above might be modest, relative to the baseline, for several reasons:
(i) while non-accredited investors are not subject to investment limits
in Rule 506(b) offerings, their participation in Rule 506(b) offerings
remains highly limited by the restriction that no more than 35
investors participate and that such investors must meet the knowledge
and experience standard of the rule; (ii) non-accredited investors may
be unwilling to participate in the majority of Rule 506(b) offerings
because of the higher due diligence and transaction costs, potentially
higher investment minimums which may be inconsistent with optimal
diversification in their portfolio, and significantly lower liquidity
involved in private placements due to transferability restrictions and
a highly limited secondary market; (iii) issuers may be unwilling to
accept non-accredited investors in Rule 506(b) offerings for reasons
other than the cost of disclosures (e.g., a preference to attract
accredited investors that may be able to bring a larger amount of
capital and business expertise, an unwillingness to expand the
capitalization table that may make future angel investors or VCs less
interested in providing funding to the issuer, an unwillingness to
increase the number of non-accredited investors that may draw the
issuer incrementally closer to the Section 12(g) registration
threshold, or concerns about investor relations and risk of litigation
involving less informed investors); and (iv) even though required
disclosures to non-accredited investors would be scaled under the
proposed amendments, the direct and indirect costs of such disclosures
(such as risks of disclosure of proprietary information to a broader
range of investors) might discourage issuers from selling to non-
accredited investors in Rule 506(b) offerings.
Reasonable Alternatives
We are proposing to repeal audit requirements for Rule 506(b)
offerings of up to $20 million involving non-accredited investors. As
an alternative, we could repeal audit requirements for all Rule 506(b)
offerings, irrespective of offer size. As compared to the proposal,
this alternative would result in additional compliance cost savings for
issuers in Rule 506(b) offerings with sales to non-accredited investors
and might induce additional Rule 506(b) issuers to accept non-
accredited investors. However, the relative benefits of compliance cost
savings under this alternative might have a more limited impact in
larger offerings. Further, such an alternative could increase costs to
non-accredited investors as a result of less well informed investment
decisions, particularly if non-accredited investors, which are not
subject to investment limits in Rule 506(b), invest significant amounts
in large Rule 506(b) offerings without the benefit of audited financial
statements. Limitations on the number and types of non-accredited
investors that are eligible to participate in Rule 506(b) offerings (no
more than 35 non-accredited investors are allowed to participate and
such investors must possess sophistication) would limit the aggregate
costs to non-accredited investors under this alternative. Such an
alternative would also be inconsistent with the requirements applicable
to other larger offerings available to non-accredited investors,
including larger offerings under Regulation A Tier 2 and registered
offerings, both of which require audited financial statements.
We are proposing not to require audited financial statement
disclosures for sales to non-accredited investors in Rule 506(b)
offerings of up to $20 million by non-reporting issuers, irrespective
of how much capital is invested by non-accredited purchasers. As
another alternative, we could propose not to require audited financial
statement disclosures in Rule 506(b) offerings by non-reporting issuers
that have up to $20 million in sales to non-accredited investors. On
the one hand, this alternative would reduce costs for non-reporting
issuers with limited sales to non-accredited investors under Rule
506(b). On the other hand, each non-accredited investor that is a
purchaser in such an offering may incur a potentially significant loss
of information and increase in due diligence costs, which do not depend
on the amount of capital committed by other non-accredited investors to
this offering.
As another alternative, rather than scale disclosure requirements
in Rule 506(b) offerings by non-reporting issuers of up to $20 million
with sales to non-accredited investors, we could waive the requirements
for disclosures to non-accredited investors altogether. This
alternative would result in significantly lower compliance costs for
issuers and could encourage more issuers to sell securities to non-
accredited investors under Rule 506(b). However, the loss of
information to non-accredited investors could significantly reduce
their ability to allocate capital in an informed
[[Page 18019]]
manner, particularly because a lack of a secondary trading market in
many cases precludes effective price discovery through other sources.
Alternatively, we could require issuers to provide the same disclosures
to non-accredited investors if they provide any disclosures, such as a
private placement memorandum, to accredited investors. While such a
provision could significantly lower non-accredited investor information
risk and due diligence costs in some cases, without dramatically
increasing issuer costs (because they already would have to incur many
of the direct costs to provide the disclosure to accredited investors),
non-accredited investors might suffer a significant loss of information
in cases where the issuer's disclosures to accredited investors are
limited. The existing requirement that the non-accredited investor
satisfy the knowledge and experience standard of Rule 506(b)(2)(ii), as
well as the continued application of the anti-fraud provisions of the
federal securities laws, might mitigate some of the investor protection
risks under this alternative.
We are proposing to extend the disclosure requirements of
Regulation A Tier 2 for sales to non-accredited investors by non-
reporting issuers under Rule 506(b), irrespective of the size of the
Rule 506(b) offering above $20 million. As an alternative, we could
propose to extend the financial statement requirements of Regulation A
Tier 2 to sales to non-accredited investors in offerings under Rule
506(b) up to $75 million (the proposed Regulation A Tier 2 offer
limit), and continue to apply the existing financial statement
disclosure requirements (that are aligned with the financial statement
disclosure requirements applicable to registration statements) to Rule
506(b) offerings exceeding $75 million that include sales to non-
accredited investors. Compared to the proposed amendments, this
alternative might increase compliance costs for non-reporting issuers
seeking to raise over $75 million under Rule 506(b) and sell securities
to non-accredited investors. At the same time, these financial
statement disclosures may lower the risk of less informed investment
decisions by non-accredited investors in such offerings compared to the
proposal, particularly for small and pre-revenue issuers with large
financing needs. However, the impact of this alternative may be modest
because relatively few offerings would be affected by this alternative
compared to the proposal. We estimate that in 2019 there were
approximately 383 offerings under Rule 506(b) by non-reporting issuers
other than pooled investment funds with offer sizes in excess of $75
million (excluding undefined offer sizes), of which approximately 12
(3.1 percent) offerings involved non-accredited investors.\398\ This
alternative might also decrease the willingness of non-reporting
issuers to accept non-accredited investors in Rule 506(b) offerings
exceeding $75 million, resulting in potentially fewer investment
opportunities for non-accredited investors compared to the proposal.
---------------------------------------------------------------------------
\398\ This estimate is based on the analysis of Form D data for
initial Form D filings during 2018 by issuers other than pooled
investment funds and reporting issuers. Reporting issuers are
identified based on 2018 filings of annual reports or amendments to
them.
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Request for Comment
101. What would be the benefits of scaling disclosure requirements
for sales to non-accredited purchasers in Rule 506(b) offerings by non-
reporting issuers, as proposed? Would the proposed amendments encourage
additional non-reporting issuers to sell securities to non-accredited
investors in Rule 506(b) offerings? Would sophisticated non-accredited
investors participating in such offerings incur costs as a result of
the amendments waiving the audit requirements in offerings up to $20
million?
102. What would be the costs and benefits of the alternative of
extending scaled disclosure requirements to non-reporting issuers in
Rule 506(b) offerings up to $75 million that involve sales to non-
accredited investors?
103. What would be the costs and benefits of alternative approaches
to reducing the costs of disclosures to non-accredited purchases in
Rule 506(b) offerings, such as conditioning the disclosure requirement
on the number or amount of sales to non-accredited investors rather
than aggregate offering size or waiving the audit requirement
irrespective of offering size? Would such alternative approaches result
in additional investment opportunities for sophisticated non-accredited
investors? Would such alternative approaches result in a decrease in
investor protection? What additional investor protections (such as
investment limits) would effectively mitigate potential costs to
investors in this scenario?
b. Simplification of Disclosure Requirements in Regulation A Offerings
The proposed amendments would extend to Regulation A issuers
certain accommodations presently available to reporting companies,
namely: (1) The option to redact confidential information from material
contracts and certain other agreements filed as exhibits without a need
to submit a confidential treatment request; and (2) the option of
incorporating by reference financial statement information into
Regulation A offering statements. The proposed amendments also would
eliminate the requirement to file a draft offering statement as a
separate exhibit with Form 1-A and would instead enable automated
public dissemination of the draft offering statement through EDGAR,
similar to the framework in place for registered offerings. In
addition, the proposed amendments would permit the Commission to
declare an offering statement, or a post-qualification amendment to
such offering statement, abandoned, consistent with the rule applicable
to registered offerings.
Benefits
The proposed amendments extending to Regulation A issuers the
option to redact confidential information from material contracts and
certain other agreements filed as exhibits without a need to submit a
confidential treatment request, provided that information is not
material and is the type of information that the issuer both
customarily and actually treats as private and confidential, are
expected to reduce disclosure costs for Regulation A issuers and
expedite the filing process by eliminating the need to file a
confidential treatment application and the associated cost. This
accommodation is currently available to reporting companies pursuant to
amendments recently adopted in the FAST Act Modernization Release.
Submitting a confidential treatment request requires a filer to prepare
a detailed application to the Commission that identifies the particular
text for which confidential treatment is sought, a statement of the
legal grounds for the exemption, and an explanation of why, based on
the facts and circumstances of the particular case, disclosure of the
information is unnecessary for the protection of investors. If the
Commission staff issues comments on the application, the filer might
need to revise and resubmit the application. These requirements impose
direct compliance costs on filers, for instance, in the form of legal
counsel costs. For filers not willing or not able to incur such costs,
inclusion of confidential information of proprietary value in a
material contract or similar exhibit that is filed publicly can result
in significant indirect costs due to the disclosure of sensitive
information to potential
[[Page 18020]]
competitors. While under the proposed amendments, filers would still
need to determine whether information they are redacting is material,
they would not need to follow the confidential treatment application
process.
Based on EDGAR filings analysis, we have identified 11 issuers in
qualified Regulation A offerings that have also filed confidential
treatment applications as of December 2019. We lack data to determine
how many of those filers had filed confidential treatment applications
with regard to information that could be redacted under the proposed
amendments. In general, more than 90 percent of the confidential
treatment requests granted by the Commission in fiscal year 2018 were
made in reliance on the exemption concerning competitive harm. It is
also difficult to gauge how many filers had proprietary information in
material contracts or similar exhibits but opted not to file a
confidential treatment request due to legal and other costs of
preparing such a request. One commenter on the FAST Act Modernization
rulemaking estimated that legal fees for confidential treatment
requests ranged from $35,000 to over $200,000,\399\ while another
commenter estimated that attorneys and paralegals at the company spend
an average of 80 hours each quarter preparing redacted exhibits and
related confidential treatment requests.\400\ According to another
commenter, the cost savings of streamlining the confidential treatment
process are expected to be relatively more impactful for smaller filers
because such companies have a lower threshold for determining whether a
contract is material and therefore required to be filed publicly, as
well as for companies in industries that are associated with more
confidential treatment requests, such as biotechnology.\401\ We
generally expect similar cost savings from extending this accommodation
to Regulation A issuers.
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\399\ See FAST Act Modernization Release, at note 341.
\400\ See FAST Act Modernization Release, at note 342. Under the
proposed amendments, filers would still need to prepare redacted
exhibits and in some cases filers would incur costs to respond to a
staff request to demonstrate that redacted information was not
material.
\401\ See FAST Act Modernization Release, at note 343 and
accompanying text.
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Similarly, the proposed amendments extending to Regulation A
issuers the option of incorporation by reference of previously filed
financial statement information into the offering statement, consistent
with the current rules applicable to registered securities offerings
filed on Form S-1, are expected to incrementally reduce Form 1-A
preparation costs.
The proposed amendments that would enable automated dissemination
of draft offering statements in lieu of the existing exhibit filing
requirement, consistent with the process of dissemination of draft
registration statements, are expected to incrementally reduce filer
effort to prepare the offering statement and promote greater efficiency
of the filing process and regulatory harmonization.
Similarly, the proposed amendments that would permit the Commission
to declare an offering statement, or a post-qualification amendment to
such offering statement, abandoned, consistent with the rule applicable
to registered offerings, are expected to promote greater regulatory
harmonization and to incrementally promote efficiency of the filing
process in cases where only a post-qualification amendment, rather than
the entire offering, is abandoned. The proposed amendments are expected
to benefit investors by reducing potential investor confusion arising
from the presence of the unqualified post-qualification amendment on
EDGAR.
Costs
The extension of the option to redact confidential information from
material contracts filed as exhibits to Regulation A filings is not
expected to result in a significant loss of information to investors
because of the condition that any information being omitted not be
material. Filers electing to rely on this accommodation would still
need to incur costs to determine that information meets the standard
for redaction, as they do today when they file a confidential treatment
request, but they would not incur the cost of preparing a confidential
treatment application.\402\ One potential cost of the proposed
amendments to Regulation A investors is that information might be
redacted by filers that would not otherwise be afforded confidential
treatment by the staff. However, based on previous experience and a
review of confidential treatment applications by reporting companies,
we believe that such instances would be rare.\403\
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\402\ Filers may be asked by the Commission staff to provide on
a supplemental basis an unredacted copy of the exhibit and provide
an analysis of why the redacted information is not material and
would likely cause it competitive harm if publicly disclosed, which
might result in additional costs.
\403\ See FAST Act Modernization Release, at Section VI.D.2.
---------------------------------------------------------------------------
The proposed amendment to allow Regulation A issuers to rely on
incorporation by reference of financial statement information from
previously filed periodic reports could marginally increase search time
for potential investors. Instead of having all the information
available in one location, investors may need to separately access the
incorporated reports in order to price the offered security. However,
the inclusion of hyperlinks should facilitate the retrieval of such
information by investors. As a result, any increase in the costs to
investors of assembling and assimilating necessary information is
expected to be minimal. We do not have data to assess if, and to what
extent, the Form 1-A revision would be burdensome to investors.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments extending certain disclosure accommodations
presently available to reporting companies to Regulation A issuers are
expected to have an incremental beneficial effect on capital formation
under Regulation A by reducing disclosure and compliance costs required
to undertake a Regulation A offering. If lower compliance costs
encourage new issuers, particularly smaller issuers with less
compliance experience that might not have otherwise been able to access
external financing, to raise capital under Regulation A, the proposed
amendments might, on the margin, have a favorable effect on
competition. Compliance cost savings might have relatively greater
benefits for smaller issuers to the extent that compliance costs
involved in the preparation of disclosures being omitted or subject to
forward incorporation include a fixed component.
To the extent that the proposed amendments might marginally reduce
the amount of information available to investors such that the ability
to make informed investment decisions is affected for the typical
investor, the proposed amendments might result in less efficient
capital allocation and, for Regulation A securities with a secondary
market (e.g., OTC-quoted Regulation A securities), less informationally
efficient security prices in the secondary market.
Reasonable Alternatives
The proposed amendments would permit Regulation A issuers to
incorporate previously filed financial statements by reference.
[[Page 18021]]
As an alternative, we could also permit forward incorporation by
reference on Form 1-A with the same conditions as the ones for forward
incorporation by reference available to smaller reporting companies on
Form S-1. Forward incorporation by reference allows an issuer to
automatically incorporate by reference periodic and current reports
filed subsequent to the qualification of the registration statement.
This would result in compliance cost savings for Regulation A issuers
and allow for greater regulatory harmonization and more uniformity in
disclosure requirements applicable to different categories of offerings
by small issuers. Forward incorporation by reference would eliminate
the need for Regulation A issuers to update information in a qualified
Form 1-A filing that has become stale or is incomplete and file post-
qualification amendments solely related to updating information from
periodic reports, thereby reducing compliance costs.\404\ By avoiding
the need to file certain post-qualification amendments, under this
alternative Regulation A issuers might be able to move more quickly and
at a lower cost to raise capital when favorable market conditions
occur. Forward incorporation by reference, however, could increase
investor search costs and eliminate the benefit of staff review of
post-qualification amendments. Because issuers with a relatively higher
level of information risk--for instance, issuers not current in their
reports, blank check companies, shell companies (other than business
combination related shell companies), and penny stock issuers, as well
as issuers whose reports are not available on a website maintained by
or for the issuer--would be ineligible for forward incorporation under
this alternative, the increase in investor information gathering costs
under this alternative might be small.
---------------------------------------------------------------------------
\404\ We lack data for a reliable estimate of the number of
affected issuers because it is difficult to determine which of the
post-qualification filings solely update information from periodic
reports versus other information, such as offering price, amount
sought, offering deadline, as well as financial information. Based
on the analysis of EDGAR filings from June 2015 through December
2019, we estimate that the average (median) issuer in a qualified
Regulation A offering has filed 1.7 (0) post-qualification
amendments.
---------------------------------------------------------------------------
The proposed disclosure simplification amendments would apply to
all Regulation A issuers. As an alternative, we could propose to extend
the provisions only to Regulation A issuers that are reporting
companies. This alternative would be generally consistent with the
treatment of reporting companies in registered offerings. It would
decrease the potential for loss of information available to Regulation
A investors about material contracts and similar agreements and
marginally reduce their costs of retrieving financial statement
information from previously filed periodic reports that are
incorporated by reference for issuers other than reporting companies.
However, this alternative also would decrease the benefits of the rule,
compared to the proposal.\405\
---------------------------------------------------------------------------
\405\ The change to permit Exchange Act registrants to use
Regulation A was adopted in December 2018 and approximately 17
Exchange Act registrants sought to use Regulation A to conduct an
offering in 2019, of which 11 of those offerings were qualified.
---------------------------------------------------------------------------
Request for Comment
104. Would Regulation A issuers benefit from the proposed option to
redact certain information from material contracts and similar
agreements? What would be the costs to investors and other market
participants, if any?
105. Would Regulation A issuers benefit from the proposed option to
incorporate previously filed financial statements by reference? What
would be the costs to investors and other market participants, if any?
106. What would be the costs and benefits of the alternative of
allowing Regulation A issuers to rely on forward incorporation by
reference, subject to the conditions imposed on SRC issuers that rely
on forward incorporation by reference in Form S-1?
5. Offering and Investment Limits
a. Offering Limits Under Regulation A, Regulation Crowdfunding, and
Rule 504
The proposed amendments would raise the 12-month offering limit for
Regulation Crowdfunding, presently set at $1.07 million, to $5 million;
the 12-month offering limit for Regulation A Tier 2, presently set at
$50 million, to $75 million, with the associated revision of the 12-
month offering limit for sales by existing affiliate security holders
from $15 million to $22.5 million; and the 12-month offering limit for
Rule 504, presently set at $5 million, to $10 million.
We can gain some insight into the likely capital formation benefits
of a higher offering limit from repeat issuers that have raised
multiple rounds of financing under the capped offering exemptions. Some
of those issuers might have had to raise financing over multiple years
because of the existing offering limits. Table 15 examines total
proceeds per issuer reported raised during 2016-2019.
Table 15--Capital Raising During 2016-2019 by Repeat Issuers Using
Offering Exemptions Proposed To Be Amended
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Regulation A issuers 14.
that raised at least $50 million.
Average (median) amount reported $13.4 million ($5.0 million).
raised.
Number of Rule 504 issuers other 7.
than pooled investment funds that
raised at least $5 million.
Average (median) amount reported $384,200 ($100,000).
raised.
Number of Regulation Crowdfunding 51 (27).
issuers that raised at least $1.0
million ($1.07 million).
Average (median) amount reported $213,678 ($106,900).
raised.
------------------------------------------------------------------------
Some of the existing issuers under the exemptions proposed to be
amended have conducted other types of offerings that are not subject to
offering limits. Information about offering sizes in Rule 506 can
provide additional insights for the review of the offering limits for
Regulation A, Regulation Crowdfunding, and Rule 504.\406\ Generally,
however, we do not know whether those issuers used Rule 506 because the
offering limits of the exemptions proposed to be amended were too low
for their needs or because other types of offerings were optimal for
their capital raising strategy for other reasons. Table 16 shows the
capital raising under Rule 506 in 2019 by
[[Page 18022]]
issuers using offering exemptions proposed to be amended.\407\
---------------------------------------------------------------------------
\406\ We focus on Rule 506 offerings due to data limitations.
First, reporting companies are ineligible under Rule 504.
Additionally, we have identified only one Regulation Crowdfunding
issuer that has undertaken a registered offering as of December 31,
2019. Finally, very few Regulation A issuers have undertaken a
registered offering during this period, resulting in a lack of
reliable data on such issuers' registered offering proceeds. From
June 19, 2015 through December 31, 2019, we have identified 14
issuers in qualified Regulation A offerings that had a registration
statement declared effective, based on the analysis of EDGAR
filings. These were issuers that proceeded to list on an exchange
after their Regulation A offering and then sought follow-on
financing through a registered offering.
\407\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.
Table 16--Capital Raising Under Rule 506 in 2019 by Issuers Using
Offering Exemptions Proposed To Be Amended
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Regulation A issuers 34.
raising under Rule 506.
Average (median) amount reported $5.8 million ($0.2 million).
raised under Rule 506 per issuer.
Number of Rule 504 issuers 110.
raising under Rule 506.
Average (median) amount reported $1.4 million ($0.3 million).
raised under Rule 506 per issuer.
Number of Regulation Crowdfunding 139.
issuers raising financing under
Rule 506.
Average (median) amount reported $2.4 million ($0.2 million).
raised under Rule 506 per issuer.
------------------------------------------------------------------------
Evidence in Tables 15 and 16 suggests that most issuers that rely
on Regulation A, Regulation Crowdfunding, and Rule 504 tend to raise
amounts of financing, both under these exemptions and when they raise
financing under Rule 506, which has no offering limit, that are below
the existing offering limits. As an important caveat, this inference is
based on the pool of issuers attracted to these offering exemptions
with the provisions that are in place today. It is likely that issuers
with larger financing needs would forgo the exemptions with offering
limits that are too low for their financing needs. Expanding the
offering limits as proposed thus might attract additional issuers to
these exemptions.
It is difficult to predict how many new issuers would be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the proposed
offering limits. Because of potential unobservable differences in
issuer characteristics, comparisons presented below are intended purely
as illustrative examples and not as estimates of the amounts that would
be raised under Regulation A, Regulation Crowdfunding, and Rule 504 if
the offering limits are amended as proposed. Table 17 \408\ examines
the use of other securities offering methods by issuers that raised
amounts above the existing limits but below the proposed offering limit
thresholds, some of which might consider the amended exemptions. We
consider (1) Rule 506 and registered offerings for purposes of
analyzing alternative offering limit thresholds under Regulation A; (2)
Regulation A, Rule 504, and Rule 506 offerings for purposes of
analyzing alternative offering limit thresholds under Regulation
Crowdfunding; and (3) Regulation A and Rule 506 offerings for purposes
of analyzing alternative offer limit thresholds under Rule 504. For low
offering limit thresholds, we do not consider registered offering
activity as registered offerings are not likely to be a cost-effective
alternative for such issuers. Information on amounts raised under
Section 4(a)(2), Section 3(a)(11), and Rules 147/147A is not available
to us.
---------------------------------------------------------------------------
\408\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.
Table 17--Evaluation of Proposed Amendments to Offering Limits Based on
Evidence From Select Other Securities Offering Methods in 2019
------------------------------------------------------------------------
------------------------------------------------------------------------
Regulation A: Proposed offering limit increase from $50 million to $75
million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $50
million and up to $75 million:
Rule 506 \a\........................................ 171
Registered offerings \b\............................ 57
------------------------------------------------------------------------
Rule 504: Proposed offering limit increase from $5 million to $10
million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $5
million and up to $10 million:
Regulation A \c\.................................... 10
Rule 506 \d\........................................ 1,618
------------------------------------------------------------------------
Regulation Crowdfunding: Proposed offering limit increase from $1.07
million to $5 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $1.07
million and up to $5 million:
Regulation A \e\.................................... 13
Rule 504 \f\........................................ 55
Rule 506\ g\........................................ 4,004
------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and
blank checks and limit the exemption to U.S. and Canadian issuers, so
for comparability pooled investment funds and issuers outside the U.S.
and Canada are excluded from the Rule 506 proceeds used in this
estimate. Reporting companies are eligible to rely on Regulation A
under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in
SDC Platinum for U.S. public offerings of equity, debt, and
convertible securities with issue dates in 2019, excluding withdrawn,
postponed, and rumored offerings, asset-backed securities offerings,
blank check issuers, investment fund issuers, and issuers outside the
U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds
reported in 2019 are considered, as opposed to cumulative proceeds
reported from June 2015 through the end of the period. Rule 504
eligibility criteria exclude Exchange Act reporting companies, so for
comparability reporting companies are excluded from the Regulation A
proceeds used in this estimate.
[[Page 18023]]
\d\ Rule 504 eligibility criteria exclude Exchange Act reporting
companies, so for comparability we exclude reporting companies from
Rule 506 proceeds used in this estimate. Reporting companies are
identified based on annual reports or amendments to them filed in
2019. For comparability with other analyses, although pooled
investment funds are eligible to rely on Rule 504, we focus on
operating companies and exclude pooled investment funds.
\e\ For purposes of this table, only incremental Regulation A proceeds
reported in 2019 are considered, as opposed to cumulative proceeds
reported from June 2015 through December 2019. Regulation Crowdfunding
eligibility criteria limit the exemption to U.S. issuers and exclude
Exchange Act reporting companies, so for comparability non-U.S.
issuers and reporting companies are excluded from the Regulation A
proceeds used in this estimate.
\f\ Regulation Crowdfunding eligibility criteria exclude investment
companies and Exchange Act reporting companies and limit the exemption
to U.S. issuers, so for comparability pooled investment funds and non-
U.S. issuers are excluded from Rule 504 proceeds used in this
estimate. Reporting companies are ineligible under Rule 504.
\g\ Regulation Crowdfunding eligibility criteria exclude investment
companies and Exchange Act reporting companies and limit the exemption
to U.S. issuers, so for comparability pooled investment funds,
reporting companies, and non-U.S. issuers are excluded from Rule 506
proceeds used in this estimate. Reporting companies are identified
based on annual reports or amendments to them filed in 2019.
Evidence from Table 17 indicates that most of the Rule 506 activity
by the types of issuers that would be eligible to take advantage of the
proposed offering limits was concentrated at lower offering limit
thresholds. Although there are relatively few Rule 506 or registered
offerings in the $50 million to $75 million range, those numbers were
comparable with the relatively modest absolute numbers of Regulation A
offerings and thus might suggest potential for a significant percentage
jump in Regulation A activity under the proposed offering limit. As a
crucial caveat, issuers choosing to rely on Rule 506 or registered
offerings today might be inherently different from the types of issuers
that might find Regulation A attractive under the proposed offering
limit. Importantly, we recognize that historical use of other offering
methods may not fully represent potential future use of the exemptions
being amended, particularly if the amended rules facilitate offerings
by issuers that might not currently rely on securities offerings. We
lack data or a methodology that would allow us to predict how many new
issuers that would not have otherwise undertaken any securities
offering would be drawn to Regulation Crowdfunding, Regulation A, and
Rule 504 under the proposed offering limits. Finally, the economic
effects of the proposed amendments are expected to be limited in cases
of issuers seeking and raising amounts of financing below existing, or
amended, offering limits.
Benefits
The proposed amendments to raise Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 offering limits might increase the potential
for capital formation in those markets by enabling existing issuers
that are approaching offering limits to raise larger amounts of
financing, as well as by drawing new issuers that may be deterred by
relatively low offering limits today. The benefits under the proposed
approach are expected to be partly attenuated to the extent that some
issuers drawn to the amended exemptions might be switching from other
securities offering methods; however, such issuers might still be able
to optimize their financing strategy and lower their cost of capital.
Amendments that increase the offering limits of Regulation A Tier
2, Regulation Crowdfunding, and Rule 504 also might improve the
composition of the pool of issuers relying on these exemptions. The
amended exemptions could draw a larger and more diversified set of
issuers with high growth potential that may require financing in excess
of the existing limits. Today such startups might forgo an exemption
with an offering limit in favor of a Rule 506 offering, which does not
cap the offer amount. A broader and more diversified range of
investment opportunities might benefit investors in these market
segments, particularly non-accredited investors that seek exposure to
private companies but are constrained from participation in private
placements. The amended offering limits also might make the exemptions
more attractive to a broader range of intermediaries. Some
intermediaries might be deterred from participating in these markets
today by fixed costs (e.g., due diligence, compliance, crowdfunding
platform operation, etc.) in proportion to potential transaction-based
compensation.
Costs
The proposed amendments to raise Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 offering limits might increase aggregate
potential investor losses in those offerings. Amendments that increase
the offering limits of Regulation A Tier 2, Regulation Crowdfunding,
and Rule 504 could make the exemptions more attractive to issuers that
are unable to meet more restrictive requirements applicable to larger
offerings today, resulting in higher-risk issuers potentially being
overrepresented among the issuers relying on the amended exemptions.
For example, some issuers seeking up to $5 million that are unable to
meet state or Commission qualification requirements under Regulation A
would instead be able to offer $5 million, rather than only $1.07
million, under Regulation Crowdfunding, which does not require state or
Commission review prior to sales.\409\ As another example, some issuers
seeking up to $75 million in an offering and also seeking to avoid the
more extensive periodic reporting, beneficial ownership reporting,
proxy disclosure, and Regulation FD requirements associated with being
a public reporting company would be able to forgo registration and
offer up to $75 million, rather than $50 million, under Regulation A.
Issuers seeking up to $75 million and also seeking to avoid
restrictions on test-the-waters communications with individual
investors and unlisted companies seeking to avoid blue sky restrictions
on primary offers and sales might also find Regulation A Tier 2 to be
relatively more attractive than a registered offering under the
proposed amendments. These investor costs are expected to be partly
mitigated by the investor protection provisions of each exemption, as
well as by the continued application of the anti-fraud provisions of
federal and state securities laws and the role of reputational
incentives of issuers and, if applicable, intermediaries, in these
offerings.
---------------------------------------------------------------------------
\409\ See also, e.g., Mercer Bullard (2019) Crowdfunding's
Culture of Noncompliance: An Empirical Analysis, 24 Lewis & Clark L.
Rev. (forthcoming).
---------------------------------------------------------------------------
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments to the Regulation Crowdfunding, Regulation
A, and Rule 504 offering limits are expected to increase capital
formation in those markets and to provide issuers that cannot meet
their financing needs under existing exemptions with a means of raising
external financing and potentially lowering their cost of capital
(e.g., as a result of economies of scale and fixed cost of initiating
an offering), resulting in more efficient allocation of
[[Page 18024]]
capital to growth opportunities. The capital formation effects of the
proposed amendments are expected to be partly attenuated if issuers
raise amounts of financing below amended offering limits or if some of
the capital raised under the amended exemptions would have been
otherwise raised through other securities offering methods, such as
Rule 506. As another example, raising the Regulation Crowdfunding
offering limit might draw some of the issuers that would have otherwise
sought between $1.07 and $5 million under Rule 504 or Regulation A. As
a further example, raising the Rule 504 offering limit might draw some
issuers that would have otherwise used Regulation A to raise up to $10
million in a regional offering.
As discussed above, these amendments might enable some issuers to
delay or forgo a registered offering, thereby avoiding the associated
costs of Exchange Act registration and being a public reporting
company. For example, the higher offering limits for the three
discussed exemptions, combined with the proposed amendments expanding
the integration safe harbors, might allow a broader range of issuers to
raise capital from non-accredited investors to meet their financing
needs without registration. As a result some of these non-accredited
investors might receive less disclosure and face lower liquidity of
their holdings. However, this possibility must be weighed against the
baseline conditions in which those issuers might have relied on Rule
506, which significantly limits non-accredited investor access and, for
non-accredited investors that invest, restricts resales and limits the
ability to obtain current information about the issuer. Under the
baseline, those same issuers on the margin between a Regulation A and a
registered offering might have alternatively registered their
securities but not listed on an exchange in a traditional public
offering (due to cost, small size, lack of underwriter or institutional
investor interest, etc.). As a result, their securities would have no
secondary market or be quoted over-the-counter, which would afford only
marginal benefits, if any, of liquidity and information availability
compared to, for instance, a Regulation A Tier 2 offering.
If the amended offering limits draw additional issuers to these
exemptions, which accept an unlimited number of non-accredited
investors, the proposed amendments could expand the set and nature of
investable opportunities for non-accredited investors seeking exposure
to companies that have not yet registered an offering. Depending on how
the additional investor capital drawn to the affected markets compares
to the amount of additional financing sought by issuers in these
markets under the amendments, the amendments might affect competition
among issuers for investor capital. By promoting access to external
financing for smaller issuers, the proposed amendments might increase
product market competition among small issuers and between small
issuers and more established industry firms.
Reasonable Alternatives
We are proposing to raise the 12-month offering limits for
Regulation A from $50 million to $75 million; for Rule 504, from $5
million to $10 million; and for Regulation Crowdfunding, from $1.07
million to $5 million. As an alternative, we could have proposed
different offering limits. For example, we could have proposed smaller
increases in the offering limits, such as an adjustment to the existing
offering limits to reflect the rate of inflation since the enactment of
the JOBS Act in April 2012.\410\ As another alternative, we could have
proposed larger increases in the offering limits.\411\ Compared to the
proposed amendments, a higher (lower) offering limit could make an
offering under the exemption more (less) cost-effective for issuers
(and if applicable, intermediaries) facing fixed offering and due
diligence costs, resulting in larger (smaller) capital formation
benefits. Compared to the proposed amendments, a higher (lower)
offering limit could draw a larger (smaller) pool of additional issuers
to the respective segment of the exempt market and potentially expand
investment opportunities for non-accredited investors seeking exposure
to issuers that have not yet registered their securities. The net
impacts of these alternatives on capital formation, investor
protection, and competition could be limited if most of the incremental
offering activity under these alternatives is due to issuers switching
between various offering methods. Even if most of the additional
issuers under these alternatives would have otherwise raised financing
through another offering method, such issuers might still be able to
benefit from a lower cost of capital under the alternative of increased
offering limits. The net impacts of the alternative would be further
attenuated to the extent that the majority of issuers continue to raise
amounts below the offering limits.\412\ As a caveat, similar to the
discussion above, existing data on issuers approaching the offering
limits may not be representative of the amounts that would be raised if
a different pool of issuers or investors is drawn to the respective
market segment under alternative offering limits.
---------------------------------------------------------------------------
\410\ The Regulation A offering limit has not been adjusted for
inflation since the enactment of the JOBS Act. Between April 2012,
when the JOBS Act was enacted, and December 2019, the rate of CPI
inflation was 11.7 percent according to BLS data. Adjusting for
inflation would yield a Regulation A limit of $55.845 million ($50
million x 1.1169).
The Regulation Crowdfunding offering limit was last adjusted for
inflation in April 2017. Between April 2017 and December 2019, the
rate of CPI inflation was 5.09 percent, according to BLS data.
Adjusting for inflation would yield a Regulation Crowdfunding
offering limit of $1.124 million ($1.07 million x 1.0509).
The Rule 504 offering limit was raised to $5 million in October
2016. Between October 2016 and December 2019, the rate of CPI
inflation was 6.31 percent. Adjusting for inflation would yield a
Rule 504 offering limit of $5.316 million ($5 million x 1.0631).
\411\ For instance, some commenters have suggested raising the
Regulation A offering limit to $100 million. See, e.g., Goodwin
Letter (recommending a $100 million limit); and CrowdCheck Letter
(noting that life sciences companies would benefit from a $100
million limit).
\412\ For example, the average (median) Regulation Crowdfunding
offering reported proceeds of $213,678 ($106,900) between the
inception of Regulation Crowdfunding (May 16, 2016) through December
31, 2019; the average (median) Regulation A issuer reported raising
$13.4 million ($5.0 million) between the effective date of 2015
Regulation A amendments (June 19, 2015) and December 31, 2019; the
average (median) Rule 504 issuer (excluding pooled investment funds)
reported raising a total of $386,162 ($100,000) across Rule 504
offerings in 2016 through 2019.
---------------------------------------------------------------------------
It is difficult to predict how many new issuers that would not have
otherwise engaged in a securities offering would be drawn to the
respective exempt market segment under these alternatives, compared to
the proposed offering limits. Table 18 below examines the use of
alternative securities offering methods that are most likely to be
relied upon by issuers that raise amounts above existing offering
limits but below several alternative offering limit thresholds to
illustrate the potential number of additional issuers that presently
utilize other offering methods that do not have a cap but that might
see the amended exemption as an option under these alternatives. The
caveats and footnotes that accompany Table 17 continue to apply.
[[Page 18025]]
Table 18--Evaluation of Alternatives to the Proposed Offering Limits
Using Evidence From Capital Raising in 2019 Through Select Other
Securities Offering Methods
------------------------------------------------------------------------
Evaluation of alternative Regulation A offering limits
-------------------------------------------------------------------------
Number of issuers that Number of issuers in Number of issuers in
raised above $50 million and offerings under Rule registered offerings
up to: 506 \a\ \b\
------------------------------------------------------------------------
$55.845 million (inflation 51 17
adjustment)................
$60 million................. 85 29
$70 million................. 144 46
$75 million (proposed 171 57
offering limit)............
$80 million................. 198 72
$90 million................. 231 90
$100 million................ 270 122
$110 million................ 298 143
$120 million................ 315 151
$125 million................ 325 162
------------------------------------------------------------------------
Evaluation of alternative Rule 504 offering limits
-------------------------------------------------------------------------
Number of issuers that Number of issuers Number of issuers in
raised above $5 million and in offerings under offerings under
up to: Rule 506 \f\ Regulation A \g\
------------------------------------------------------------------------
$5.316 million (inflation 152 0
adjustment)................
$6 million.................. 464 2
$7 million.................. 834 4
$8 million.................. 1,166 7
$9 million.................. 1,377 8
$10 million (proposed 1,618 10
offering limit)............
$15 million................. 2,315 16
$20 million................. 2,695 18
$25 million................. 2,974 19
------------------------------------------------------------------------
Evaluation of alternative Regulation Crowdfunding offering limits
-----------------------------------------------------------------------------------------------------------------
Number of issuers Number of issuers Number of issuers in
Number of issuers that raised above $1.07 in offerings under in offerings under offerings under
million and up to: Rule 504 \e\ Rule 506 \f\ Regulation A \g\
----------------------------------------------------------------------------------------------------------------
$1.124 million (inflation adjustment)........... 2 104 0
$2 million...................................... 31 1,542 2
$3 million...................................... 44 2,662 7
$4 million...................................... 51 3,388 10
$5 million (proposed offering limit)............ 55 4,004 13
$6 million...................................... ................... 4,454 15
$7 million...................................... ................... 4,813 17
$8 million...................................... ................... 5,127 20
$9 million...................................... ................... 5,333 21
$10 million..................................... ................... 5,567 23
$15 million..................................... ................... 6,233 29
$20 million..................................... ................... 6,604 31
----------------------------------------------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and blank checks and limit the exemption to
U.S. and Canadian issuers, so for comparability pooled investment funds and issuers outside the U.S. and
Canada are excluded from the Rule 506 proceeds used in this estimate. Reporting companies are eligible to rely
on Regulation A under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in SDC Platinum for U.S. public offerings
of equity, debt, and convertible securities with issue dates in 2019, excluding withdrawn, postponed, and
rumored offerings, asset-backed securities offerings, blank check issuers, investment fund issuers, and
issuers outside the U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
opposed to cumulative proceeds reported from June 2015 through the end of the period. Rule 504 eligibility
criteria exclude Exchange Act reporting companies, so for comparability reporting companies are excluded from
the Regulation A proceeds used in this estimate.
\d\ Rule 504 eligibility criteria exclude Exchange Act reporting companies, so for comparability we exclude
reporting companies from Rule 506 proceeds used in this estimate. Reporting companies are identified based on
annual reports or amendments to them filed in 2019. For comparability with other analyses, although pooled
investment funds are eligible to rely on Rule 504, we focus on operating companies and exclude pooled
investment funds.
\e\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
opposed to cumulative proceeds reported from June 2015 through December 2019. Regulation Crowdfunding
eligibility criteria limit the exemption to U.S. issuers and exclude Exchange Act reporting companies, so for
comparability non-U.S. issuers and reporting companies are excluded from the Regulation A proceeds used in
this estimate.
\f\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds and non-U.S.
issuers are excluded from Rule 504 proceeds used in this estimate. Reporting companies are ineligible under
Rule 504.
\g\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds, reporting
companies, and non-U.S. issuers are excluded from Rule 506 proceeds used in this estimate. Reporting companies
are identified based on annual reports or amendments to them filed in 2019.
[[Page 18026]]
After considering these alternatives, we believe that the proposed
offering limits are most likely to provide meaningful capital formation
benefits and increased access to investment opportunities to investors
while representing a balanced approach to expansion of the respective
offering exemptions.
We are proposing to amend the Regulation A Tier 2 offering limit
but not the Tier 1 offering limit. As an alternative, we could amend
the Tier 1 offering limit. For example, we could raise the Tier 1
offering limit proportionately to the proposed increase in the Tier 2
offering limit, by 50 percent, from $20 million to $30 million. The
economic effects of this alternative are similar to the ones considered
above. A higher (lower) Tier 1 offering limit could draw more (fewer)
issuers to Tier 1 of Regulation A. Some of the additional issuers drawn
to Tier 1 under this alternative might be switching from Tier 2 or
other exempt offering methods, which might limit the net impact on
capital formation.\413\ Even in that case, some issuers switching from
Tier 2 or other offering methods might be able to decrease their cost
of capital.
---------------------------------------------------------------------------
\413\ For example, from June 2015 through December 2019, we have
identified seven Tier 2 issuers that reported raising between $20
million and $30 million in financing under Regulation A and that
could become newly eligible to raise the same amount of financing
under Tier 1, if it were amended under this alternative. However,
they also might not choose to switch to Tier 1 if they find Tier 2
to be more attractive (e.g., due to preemption of state review or
greater confidence and easier path to quotation on the upper tiers
of the OTC market in the presence of periodic reports required by
Tier 2). For example, from June 2015 through December 2019, we
estimate that 112 Tier 2 issuers reported raising up to $20 million
in financing under Regulation A even though that amount would have
made them eligible to use Tier 1 as well. Further, some issuers
might still prefer Tier 2 because it allows issuers to undertake an
offering with a higher maximum offering amount, which provides
issuers with flexibility to raise more capital without having to
undergo a re-qualification (e.g., if market conditions improve) even
if the average issuer's proceeds do not reach the amount sought.
---------------------------------------------------------------------------
We are proposing to raise the Rule 504 offering limit, which
further increases potential redundancies between Regulation A Tier 1
and Rule 504. As an alternative, we could eliminate one of these two
offering exemptions after amending the other one as proposed (e.g.,
eliminate Rule 504, or eliminate Regulation A Tier 1 and raise the Rule
504 offering limit to $20 million). Such an alternative might
contribute to regulatory simplification. However, it also might be
disruptive for those issuers that rely upon the exemption eliminated or
find it to be cost-effective for their financing strategy (e.g., a lack
of Commission review or extensive Commission disclosure requirements in
Rule 504 offerings or the higher offering limit of Regulation A Tier
1).
We have proposed to increase the Regulation Crowdfunding offering
limit to make the offering process more cost-effective and to promote
capital formation under this exemption. However, we have not proposed
to amend the Regulation Crowdfunding thresholds for different tiers of
financial statement requirements, which govern the required standard of
financial statement review, and accordingly, costs. As an alternative,
we could raise such thresholds, for instance, in proportion to the
proposed increase in the offering limit: $500,000 for reviewed
financial statements (in lieu of $107,000); $2.5 million for audited
financial statements for follow-on offerings (in lieu of $535,000); and
$5 million for audited financial statements for initial offerings (in
lieu of $1.07 million).\414\ As another alternative, we could waive
certain other disclosure requirements (e.g., progress updates and/or
annual reports) for the lower tier of crowdfunding offerings (e.g.,
offerings up to $250,000 or $1 million) to make crowdfunding offerings
more cost-effective for the smallest issuers, many of which have not
yet begun generating revenue and might not have enough liquid assets or
access to loans to cover the compliance costs of a Regulation
Crowdfunding offering. Scaling disclosure requirements for Regulation
Crowdfunding offerings under these alternatives could attract a larger
set of early stage issuers that seek to raise small amounts of capital
to Regulation Crowdfunding while providing a degree of independent
verification of accounting quality for larger crowdfunding offerings in
a more cost-effective manner than with an audit.\415\ Scaling
disclosure requirements under this alternative, however, would result
in information loss to investors, potentially contributing to less well
informed investment decisions, greater risk of investment losses, and
less efficient allocation of capital. Moreover, this alternative could
attract issuers of greater risk to the lower crowdfunding offering
tier, which could undermine future capital raising in that market tier.
---------------------------------------------------------------------------
\414\ See, e.g., Wefunder Letter (recommending a $1 million
threshold for reviewed financial statements and a $5 million
threshold for audited financial statements).
\415\ See, e.g., Brad A. Badertscher et al., Verification
Services and Financial Reporting Quality: Assessing the Potential of
Review Procedures (Simon Bus. Sch., Working Paper No. FR 17-17, July
2018) (``[B]oth reviews and audits yield significantly better
reporting quality scores and lower cost of debt than zero-
verification compilations. However, model-based reporting quality
scores of reviews and audits are indistinguishable statistically, on
average. Regarding broader economics, we find that relative to
compilations, reviews yield more than half the added interest rate
benefit associated with an audit, at considerably less than half the
added cost. Overall, our results suggest reviews may provide a cost-
effective verification alternative to audits, and the potential of
analytical procedures warrants more attention by audit researchers
and regulators.'')
---------------------------------------------------------------------------
Request for Comment
107. What are the economic effects of the proposed increases to the
offering limits under Regulation A, Regulation Crowdfunding, and Rule
504? What are the likely effects of the proposed changes on issuers,
investors, and other market participants? Which categories of issuers
are most likely to benefit from the proposed changes? Are the proposed
changes likely to change the pool of issuers drawn to these offering
exemptions? Are the proposed changes likely to affect intermediaries in
these markets?
108. Are the proposed changes to Regulation A, Regulation
Crowdfunding, and Rule 504 offering limits likely to promote capital
formation? Would the proposed changes improve access to capital for new
issuers that are presently unable to access securities markets, or
would the proposed changes mainly result in switching of issuers
between offering methods? Would the proposed changes be likely to allow
issuers to decrease their cost of raising capital under these
exemptions?
109. What alternative offering limits should we consider for
Regulation A Tier 2, Regulation Crowdfunding, and Rule 504, relative to
the proposed limits of $75 million, $5 million, and $10 million,
respectively? For example, should we instead consider adjusting those
limits for inflation? What would be the economic effects of such a
change on issuers, investors, and other market participants?
110. Should we consider the alternative of also amending the
Regulation A Tier 1 offering limits? If so, what would be the economic
effects of such a change on issuers, investors, and other market
participants?
111. Would the offering limits as proposed to be revised introduce
redundancies (for instance, between Rule 504 and Regulation A Tier 1)?
If so, how should we address those redundancies? For example, should we
eliminate any of the existing exemptions to promote greater
harmonization? What would be the economic effects of such changes on
issuers, investors, and other market participants?
[[Page 18027]]
112. What would be the costs and benefits of the alternative of
scaling up financial statement thresholds in Regulation Crowdfunding in
proportion to the proposed change in the offering limit (from $107,000,
$535,000, and $1.07 million to $500,000, $2.5 million, and $5 million,
respectively)?
113. What would be the costs and benefits of the alternative of
waiving certain disclosure requirements (e.g., review and/or audit of
financial statements, progress updates, and periodic reports) for
issuers in the smallest Regulation Crowdfunding offerings (e.g., up to
$1 million)?
b. Investment Limits Under Regulation Crowdfunding
We are proposing to increase Regulation Crowdfunding investment
limits.\416\ The amended limits would be based on the greater of,
rather than the lower of, an investor's annual income or net worth and
would only apply to non-accredited investors.
---------------------------------------------------------------------------
\416\ See supra Section II.E.3.
---------------------------------------------------------------------------
Benefits
The proposed amendments to Regulation Crowdfunding investment
limits would increase the amounts that can be invested by a given
investor, potentially resulting in greater capital formation or lower
aggregate costs of soliciting investors and investor relations. The
proposed amendments also would allow some investors, particularly non-
accredited investors with a significant disparity between income and
net worth and accredited investors, to invest a larger amount in
crowdfunding securities. Relaxing such investment restrictions might
enable some of those investors to reach more efficient investment
allocations in their portfolios as well as realize enhanced upside from
investing in successful early stage companies. Given the investment
minimums established by the issuer for each offering, some investors
might be able to invest in a larger number of crowdfunding issuers,
resulting in greater diversification within the crowdfunding category
of their portfolio (but not necessarily within the portfolio overall)
under the proposed amendments to the investment limits.
Accredited investors in particular are expected to possess the
capability to evaluate larger crowdfunding investments and the ability
to bear resulting financial risk. Thus, allowing such investors to
invest a larger amount in crowdfunding offerings, if desired, might
enable them to allocate their capital more efficiently. Allowing
accredited investors to invest in crowdfunding issuers without a
limitation also might create stronger incentives to perform due
diligence and screening before a crowdfunding investment as well as to
continue to monitor the issuer's activities after investing, relative
to investors that only commit a nominal amount of capital. Under the
baseline, accredited investors are not subject to investment
limitations in offerings under Regulation A and Regulation D offerings
or in private placements. It is therefore possible that some accredited
investors would simply reallocate capital between holdings of
securities issued under other exemptions, including, in some cases,
securities of the same issuer issued under other exemptions (for
instance, in cases of side-by-side Regulation Crowdfunding/Rule 506(c)
offerings). It is also possible that accredited investors investing
large amounts might continue to prefer private placements, even if
Regulation Crowdfunding investment limits are amended, because private
placements allow accredited investors greater bargaining power to
negotiate more favorable terms with issuers. In addition, private
placements result in fewer information spillovers than Regulation
Crowdfunding offerings (e.g., depending on the platform, small
investors may be able to observe large investments, and thus free-ride
on large investors' screening and due diligence efforts).
We lack the data to assess how many investors may be affected by
the proposed amendments to Regulation Crowdfunding investment limits,
in part because investor information generally is not available and is
not required to be disclosed in the course of an offering or upon
completion of an offering. Based on a subset of data made available by
one crowdfunding intermediary,\417\ among non-accredited investors with
available information on annual income and net worth, revising the
investment limits as proposed could increase the investment limit by 98
percent for the median non-accredited investor in that subset. In
addition, approximately nine percent of investors in the examined
subset of data were accredited and thus would no longer be subject to
investment limits under the proposed amendments. The economic effects
of the proposed amendments would be mitigated to the extent that
investors might invest amounts below the investment limits.\418\ We
cannot determine whether these results are representative of the
distribution of investors on other funding portals or during other time
periods, or how that distribution may change under the proposed
amendments if new investors are drawn to Regulation Crowdfunding.
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\417\ See 2019 Regulation Crowdfunding Report, at notes 91-93
and accompanying text. Information on amounts invested by an average
investor or the number of investors per offering is not available
for the full sample of Regulation Crowdfunding offerings.
Information on offerings from one intermediary from May 2016 through
September 2018 provides some insight into the typical investment
size, investor composition, and number of investors in crowdfunding
offerings. For purposes of these estimates, we exclude investments
redirected to a Rule 506(c) offering; offerings that were not funded
(i.e., were either canceled or ongoing) or had missing data;
observations where an investor made but subsequently withdrew the
commitments, yielding a cumulative investment of zero; and investor
observations with missing accredited investor status.
\418\ See 2019 Regulation Crowdfunding Report, at 40 (``For most
investors with available data on annual income and net worth
(approximately 30% of investors in offerings funded on the
platform), cumulative amounts invested during the entire considered
period (almost 2.5 years) through this intermediary's platform did
not reach the investment limit, with fewer than 10% of investors on
the platform investing amounts exceeding their 12-month investment
limit over the entire 2.5-year period. According to information
provided by another intermediary respondent to the look-back survey,
the median (average) crowdfunding investment through its platform
was $1,335 ($500), with investors making an average of 2.7
investments and approximately 40% of investors making two or more
investments. According to information provided by a different
intermediary respondent, the average investment was approximately
$992, and investors made an average of 1.5 investments. Based on
available data, we are unable to determine whether these investors
also invested in crowdfunding offerings through other crowdfunding
platforms; thus, these estimates are likely to represent a lower
bound on average investment amounts.'').
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Costs
The proposed amendments to Regulation Crowdfunding investment
limits may increase the magnitude of investor losses if some investors
inefficiently increase portfolio allocations to the crowdfunding
category resulting in under-diversification. In particular, relaxing
investment limits might enable some less sophisticated investors to
make larger investments in crowdfunding securities based on an
incomplete assessment of information about those securities, with the
resulting potential for increased investor losses. The resulting
increased risk of investor losses might be relatively more costly for
investors with a decreased ability to bear risk due to their more
limited income or net worth. However, other investor protection
provisions of Regulation Crowdfunding, such as issuer disclosure
requirements and investor education and other intermediary
requirements, might partly mitigate these risks to investors.
[[Page 18028]]
Further, such potential costs of the proposed amendments should be
weighed against the baseline, which includes provisions generally
allowing non-accredited investors to invest unlimited amounts in listed
and unlisted registered securities and in Regulation A Tier 1
securities,\419\ as well as up to ten percent of the higher of income
or net worth in each offering of Regulation A Tier 2 securities, which
also may result in considerable risk to investor portfolios.
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\419\ In contrast to Regulation Crowdfunding securities, sales
and offers of unlisted registered securities and Regulation A Tier 1
securities are subject to state registration requirements,
including, in some states, merit review.
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The proposed amendments removing investment limits for accredited
investors in Regulation Crowdfunding offerings are not expected to
result in significant costs to investors given that accredited
investors generally have the capacity to fend for themselves and
greater ability to withstand financial losses. Because accredited
investors are not subject to investment limitations in offerings under
Regulation A and in private placements, they may simply reallocate
capital between holdings of securities issued under other exemptions.
It is also possible that accredited investors investing large amounts
might continue to prefer private placements, as discussed above.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments relaxing Regulation Crowdfunding investment
limits might incrementally promote capital formation through Regulation
Crowdfunding, particularly for issuers that might be attractive to
accredited investors or non-accredited investors who have a greater
disparity between income and net worth (e.g., retired investors with
high net worth relative to income or young investors with high income
relative to savings). The net impacts of the proposed amendments on
aggregate capital formation might be limited to the extent that some of
the issuers and investors, and some of the financing raised, could be
reallocated from other offering methods that either do not have
investment limits (e.g., some of the accredited investors in Regulation
Crowdfunding offerings under the proposed amendments might be switching
from Rule 506 or Regulation A offerings) or that have less stringent
investment limits (e.g., some of the non-accredited investors in
Regulation Crowdfunding offerings under the proposed amendments might
be switching from Regulation A offerings). On the one hand, raising
investment limits might allow some investors, particularly accredited
investors and more sophisticated non-accredited investors, that were
previously constrained by existing investment limits to attain a more
efficient portfolio allocation. On the other hand, for some less
sophisticated investors, relaxing investment limits might enable an
inefficiently high exposure to crowdfunding investments resulting in
overall under-diversification in their portfolios.
If the proposed amendments increase the participation of accredited
investors in Regulation Crowdfunding offerings, the average intensity
of monitoring and screening of issuers by investors might increase as a
result, with potential positive spillovers for small investors that
lack the expertise and incentives to engage in comparable monitoring
and screening. This might lead to greater alignment of valuations in
Regulation Crowdfunding offerings with underlying fundamental values
and overall greater efficiency of capital allocation in this market.
Depending on how the additional investor capital drawn to
Regulation Crowdfunding compares to the amount of additional financing
sought by issuers in these markets after the amendments, the amendments
might affect competition among issuers for investor capital.
Reasonable Alternatives
We are proposing to revise Regulation Crowdfunding investment
limits for non-accredited investors (to be based on the greater of,
rather than the lesser of, an investor's net worth or annual income)
and to rescind the investment limits for accredited investors, similar
to Tier 2 of Regulation A. As an alternative, we could make other
changes to Regulation Crowdfunding investment limits to increase the
utility of the exemption to issuers and to expand access of non-
accredited investors to startup investment opportunities. For example,
one alternative would be to align the Regulation Crowdfunding
investment limits fully with those of Regulation A Tier 2 (i.e., to
define the limit per offering as 10 percent of the greater of net worth
or annual income instead of the two-tier 5 percent/10 percent limit for
all Regulation Crowdfunding offerings an investor invests during a
given twelve-month period). Compared to the proposed amendments, this
alternative would expand investment limits, particularly for non-
accredited investors with lower income and net worth and for investors
that participate in multiple Regulation Crowdfunding offerings, which
might potentially increase capital formation benefits relative to the
proposed amendments, as well as expand non-accredited investor access
to startup investment opportunities. However, this alternative also
might result in increased magnitude of investor losses per investor and
an inefficient decrease in diversification for some non-accredited
investors, compared to the proposal.
As another alternative, we could increase or lower the numerical
thresholds in investment limits under Regulation Crowdfunding. For
example, we could scale up the $2,200 numerical threshold in the
investment limit in proportion to the proposed increase in the offering
limit (from $2,200 to $11,000). This alternative would increase
(decrease) capital formation benefits while increasing (decreasing) the
magnitude of potential investor losses per non-accredited investor,
particularly for non-accredited investors with a low income and net
worth, compared to the proposal.
Request for Comment
114. What would be the economic effects of the proposed changes to
the Regulation Crowdfunding investment limits? Would the proposed
changes to remove the limits on accredited investors benefit issuers
and investors? Would the proposed changes to use the greater of, rather
than the lesser of, standard with respect to a non-accredited
investor's net worth or annual income benefit issuers and investors?
Are the proposed changes likely to promote capital formation? Would the
proposed changes impose costs on issuers, investors, and other market
participants?
115. What would be the economic effects of the alternative
amendments to Regulation Crowdfunding investment limits, such as
adjusting the investment limit thresholds in proportion to the
adjustment in the offering limit; using different (lower or higher)
numerical thresholds for non-accredited investor investment limits; or
aligning non-accredited investor investment limits with those in
Regulation A Tier 2? Would such alternatives benefit issuers,
investors, and other market participants? Would such alternatives
impose costs on issuers, investors, and other market participants? What
alternative investment limit amendments should we consider, and what
would be the economic effects of those alternatives?
[[Page 18029]]
6. Eligibility Requirements in Regulation Crowdfunding and Regulation A
a. Eligibility of Crowdfunding Vehicles Under Regulation Crowdfunding
The Commission is proposing a new rule under the Investment Company
Act that would allow crowdfunding issuers to raise capital through a
crowdfunding vehicle. Such crowdfunding vehicles would be formed by or
on behalf of the underlying crowdfunding issuer to serve merely as a
conduit for investors to invest in the crowdfunding issuer and would
not have a separate business purpose. This approach is designed to
allow investors in the crowdfunding vehicle to achieve the same
economic exposure, voting power, and ability to assert state and
federal law rights, and receive the same disclosures under Regulation
Crowdfunding, as if they had invested directly in the underlying
crowdfunding issuer in an offering made under Regulation Crowdfunding.
Benefits
The proposed rule would benefit issuers by enabling them to
maintain a simplified capitalization table after a crowdfunding
offering (versus having an unwieldy number of shareholders), which can
make issuers more attractive to future VC and angel investors, and by
reducing the administrative complexities associated with a large and
diffuse shareholder base. Several commenters have indicated that these
factors may have contributed to the relatively modest use of the
Regulation Crowdfunding exemption since its adoption.\420\ A
crowdfunding vehicle may constitute a single record holder for purposes
of Section 12(g), rather than treating each of the crowdfunding
vehicle's investors as record holders as would be the case if they had
invested in the crowdfunding issuer directly. An issuer's use of a
crowdfunding vehicle therefore could allow crowdfunding issuers to
raise capital in certain circumstances without being required to
register under Section 12(g).\421\
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\420\ See 2017 Treasury Report; 2017 Forum Report; Iownit
Letter; Rep. McHenry Letter; Wefunder Letter; AOIP Letter; MainVest
Letter; and J. Schocken Letter. See also Rep. McHenry Letter (with
respect to later financing rounds). The SPV structure has been
successfully adopted as an option in crowdfunding offerings in other
countries. See, e.g., Robert Wardrop & Tania Ziegler, A Case of
Regulatory Evolution--A Review of the UK Financial Conduct
Authority's Approach to Crowdfunding, CESifo DICE Rep., June 2016,
at 23 (referencing the use of SPVs in real-estate crowdfunding in
the UK). Today, SPVs are allowed to participate in Rule 506
offerings without limitation.
\421\ However, securities issued pursuant to Regulation
Crowdfunding are conditionally exempted from the record holder count
under Section 12(g) if the following conditions are met: The issuer
(i) is current in its ongoing annual reports required pursuant to
Regulation Crowdfunding; (ii) has total assets as of the end of its
last fiscal year of $25 million or less; and (iii) has engaged the
services of a transfer agent registered with the Commission. Thus,
the concern about exceeding the Section 12(g) thresholds would be
most pronounced for Regulation Crowdfunding issuers whose assets,
including funds raised in the offering, might exceed $25 million.
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Some early stage issuers with high growth potential that have a
chance of attracting VC funding in the future may avoid conducting an
offering under Regulation Crowdfunding due to concerns about their
capitalization table. By alleviating these concerns, the proposed rule
might encourage additional issuers with high growth potential to
consider pursuing an offering under Regulation Crowdfunding. Because
these issuers might presently offer securities only to accredited
investors or a few non-accredited investors through offerings under
Rule 506 or through other private placement offerings, the proposed
rule might benefit non-accredited investors by expanding their access
to investment opportunities in startups with high growth potential that
are early in their lifecycle.
As discussed in Section II.F.1 above, the use of a crowdfunding
vehicle would be subject to certain conditions designed to ensure that
investors attain the same economic exposure, voting power, and ability
to assert state and federal law rights, and receive the same
disclosures under Regulation Crowdfunding, as if they had invested
directly in the crowdfunding issuer in an offering made under
Regulation Crowdfunding, thereby minimizing any potential adverse
effects for investors of permitting such an offering structure. The
crowdfunding vehicle and the crowdfunding issuer also would be co-
issuers in the offering, with the resulting joint liability for offers
and sales.
The required transparency and single-purpose nature of the
crowdfunding vehicle, combined with the continued application of the
substantive and disclosure requirements of Regulation Crowdfunding and
the anti-fraud provisions of the federal and state securities laws, are
expected to provide significant investor protections for crowdfunding
vehicle investors under the proposed rule.
Costs
The use of crowdfunding vehicles could result in additional
offering costs. The costs of forming and operating the crowdfunding
vehicle would be incurred by the crowdfunding issuer, which could
decrease the overall economic benefits of the offering for all
shareholders and for investors in the crowdfunding vehicle. However, to
the extent that the crowdfunding vehicle could yield benefits for the
crowdfunding issuer, including expanded potential for future funding
rounds due to reduced capitalization table concerns and greater
efficiency of administration of a large and diffuse investor base,
these economic benefits of a crowdfunding vehicle could offset the
additional costs. The balance of these tradeoffs is likely to vary
depending on the issuer's offering experience, potential for raising
follow-on financing from a large investor, costs associated with the
creation and administration of the crowdfunding vehicle, and the number
of small investors participating in the crowdfunding offering. Because
the use of the crowdfunding vehicle structure would be voluntary, we
expect issuers would use a crowdfunding vehicle only where the issuer
determined that the benefits justify the costs.
If the crowdfunding vehicle is administered by an external entity
on behalf of the issuer, the associated fees might depend on other
business between the external administrator and the issuer. On the one
hand, administration fees might be reduced in instances where an issuer
obtains a bundle of other services related to the offering from the
external administrator or where an administrator seeks future business
of the issuer related to other offerings. On the other hand,
administration fees might be increased to compensate for discounted
fees for other services related to this or other offerings. Several
factors are expected to mitigate concerns about administration fees.
Competition among external service providers might put downward
pressure on such fees. The requirement that crowdfunding vehicle costs
be incurred by the crowdfunding issuer rather than the crowdfunding
vehicle ensures a degree of alignment of interests of crowdfunding
vehicle investors and the crowdfunding issuer with respect to
crowdfunding vehicle costs. The highly limited scope of permissible
activities of the crowdfunding vehicle, as proposed, would further
limit potential discretion related to fees.
As discussed above, the proposed conditions for the use of
crowdfunding vehicles are expected to minimize agency conflicts
incremental to a
[[Page 18030]]
crowdfunding vehicle.\422\ The crowdfunding vehicle structure is not
expected to significantly affect information processing costs for
investors, compared to a direct crowdfunding offering, because of the
transparency and single-purpose nature of the crowdfunding vehicle, as
well as the provisions designed to ensure that crowdfunding vehicle
investors receive the same disclosures under Regulation Crowdfunding,
as if they had invested directly in the crowdfunding issuer.
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\422\ Small investors in a direct crowdfunding offering might
face agency conflicts today. However, we do not expect the proposed
amendments would result in significant additional agency conflicts
for investors in crowdfunding vehicle offerings.
---------------------------------------------------------------------------
Effects on Efficiency, Competition, and Capital Formation
The proposed rule is expected to enhance capital formation by
making Regulation Crowdfunding more attractive to issuers. If the
incremental financing is largely due to issuers switching from other
securities offering methods to Regulation Crowdfunding, the net impact
of the proposed amendments on the aggregate amount of capital formation
might be minimal. However, the proposed amendments might affect the
cost of capital. By giving crowdfunding issuers the flexibility to
conduct a crowdfunding offering via a crowdfunding vehicle, the
proposed rule might make crowdfunding offerings to individual investors
more attractive to a broader range of issuers, enabling such issuers to
diversify their financing strategy at an early stage of their operation
and in some cases potentially obtain a lower cost of capital or greater
amounts of capital than they would otherwise. The amendments might be
especially beneficial for crowdfunding businesses with high growth
potential by helping them attract institutional investors or other
large investors in the future, thus enabling a potentially more
efficient financing and growth strategy.
Further, the ability to use a crowdfunding vehicle might expand the
investment opportunities available to non-accredited investors and, as
a result, potentially affect the efficiency of their capital
allocation. If the proposed amendments draw additional issuers that
would have otherwise considered only private placements to Regulation
Crowdfunding, broader access to those investment opportunities could
enable non-accredited investors to allocate their capital more
efficiently.
The proposed amendments might promote competition. By making
Regulation Crowdfunding attractive to a broader subset of small
issuers, the proposed amendments are expected to incrementally broaden
access to funding for small and early stage issuers, many of which have
not participated in other securities offerings and are otherwise highly
financially constrained. Expanding access to capital for small and
early stage issuers might, on the margin, encourage new entry and
promote competition between small issuers and more established industry
competitors. The aggregate effects of the proposed amendments on
competition among prospective issuers for investor capital are
difficult to predict and would depend on the relative effects of the
proposed amendments on issuer and investor willingness to participate
in Regulation Crowdfunding offerings.
Reasonable Alternatives
As an alternative, we could require that a registered investment
adviser manage the crowdfunding vehicle, as suggested by some
commenters and the 2017 Treasury Report.\423\ Under this alternative,
investors in crowdfunding vehicles could benefit because an investment
adviser is a fiduciary subject to the requirements of the Investment
Advisers Act and regulations thereunder. The proposed rule's
conditions, however, are designed to limit the crowdfunding vehicle's
activities to that of acting as a conduit to hold the securities of the
crowdfunding issuer without the ability for independent investment
decisions to be made on behalf of the crowdfunding vehicle. Any
incremental benefits of this alternative to investors therefore could
be limited. In addition, given the relatively small amount of capital
that can be raised through Regulation Crowdfunding, it may not be
economically feasible to require a registered investment adviser to
manage the crowdfunding vehicle.
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\423\ See Iownit Letter; NASAA Letter; and CrowdCheck Letter.
See also 2017 Treasury Report.
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As another alternative, we could allow crowdfunding vehicles but
remove some of the requirements in the proposed rule, such as the
restrictions on the permissible activities and other provisions
intended to provide the investor with the same economic exposure,
rights, and disclosures as they would have if they invested in a direct
Regulation Crowdfunding offering or the requirement that crowdfunding
vehicle costs be borne by the crowdfunding issuer. Removing these
restrictions would increase the flexibility for issuers in structuring
their crowdfunding offering and potentially make Regulation
Crowdfunding more attractive as a capital raising option. However, it
also could lead to agency conflicts and weaken investor protections for
crowdfunding vehicle investors, compared to the proposed rule's
conditions. Some of these additional costs to investors might be partly
mitigated by the substantive and disclosure requirements of Regulation
Crowdfunding, however, and might be compensated in the form of higher
returns.
Similarly, we could modify some of conditions in the proposed rule
so that an investor in a crowdfunding vehicle would still achieve the
same economic exposure, and receive the same disclosures, as if he or
she had invested in the crowdfunding issuer directly, while providing
greater flexibility for crowdfunding vehicles and their investors to
determine other aspects of the crowdfunding vehicle's operations. For
example, rather than requiring a crowdfunding vehicle to vote and
participate in tender or exchange offers or similar transactions only
in accordance with the instructions it receives from its investors, we
could allow a crowdfunding vehicle and its investors to determine these
matters. A crowdfunding vehicle, for example, could disclose to its
investors at the time of its initial offering that the vehicle will
cast all of its votes in accordance with the instructions of a majority
of its security holders. Another example would be to permit a
crowdfunding vehicle and its investors to determine how the
crowdfunding vehicle will exercise any rights under state or federal
law, rather than providing each investor the ability to assert those
rights as proposed.
These and similar modifications would provide additional
flexibility for crowdfunding vehicles and the crowdfunding issuers
using the vehicles to raise capital. If this greater flexibility would
result in additional offerings under Regulation Crowdfunding, this
could provide capital formation benefits to issuers and benefit
investors by providing additional investment options. These and similar
modifications could, however, result in offering terms that may be less
advantageous for investors relative to the proposal. The net benefits
and costs to investors would therefore depend on the extent to which a
more flexible approach would result in additional Regulation
Crowdfunding offerings relative to the proposed rule and the terms of
those offerings.
Request for Comment
116. What would be the costs and benefits of extending eligibility
under
[[Page 18031]]
Regulation Crowdfunding to crowdfunding vehicles as proposed?
117. What would be the costs and benefits of the alternative of
imposing additional conditions on crowdfunding vehicles? What would be
the costs and benefits of the alternative of eliminating or revising
some of the proposed conditions?
b. Security Types Eligible Under Regulation Crowdfunding
The proposed amendments would narrow the types of securities
eligible under Regulation Crowdfunding to debt securities, equity
securities, and debt securities convertible or exchangeable into equity
securities, including guarantees of such securities, to harmonize the
provisions of Regulation Crowdfunding regarding eligible security types
with those of Regulation A. Other types of securities would be excluded
from eligibility under the proposed amendments. For example, Simple
Agreements for Future Equity (SAFE) securities would no longer be
eligible under Regulation Crowdfunding.
Benefits
The proposed amendments limiting the scope of securities eligible
under Regulation Crowdfunding are expected to strengthen investor
protection in some instances, to the extent that investors in
Regulation Crowdfunding offerings may have less sophistication and
resources to analyze novel security types with complex payoff
structures that may pose significant valuation challenges.\424\
Further, by providing greater uniformity in security types available in
Regulation Crowdfunding offerings and conforming the types of
securities eligible under Regulation Crowdfunding to those presently
eligible under Regulation A, the proposed amendments are expected to
make it easier for investors to compare securities offered by different
issuers under Regulation Crowdfunding, as well as potentially compare
securities offered under Regulation Crowdfunding with those offered
under Regulation A, facilitating better informed investment decisions.
These benefits of the proposed amendments to Regulation Crowdfunding
investors might be limited for those investors that already take
advantage of the existing disclosures required by Regulation
Crowdfunding (including a description of the terms of securities and
the valuation method used). Further, the continued application of other
Regulation Crowdfunding investor protection provisions (including other
offering circular and periodic disclosure requirements, investment
limits, investor education, and other crowdfunding intermediary
requirements) might reduce the overall benefits of these amendments for
investors.
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\424\ See U.S. Securities and Exchange Commission Office of the
Investor Advocate, Report on Activities for Fiscal Year 2016,
available at https://www.sec.gov/advocate/reportspubs/annual-reports/sec-investor-advocate-report-on-activities-2016.pdf; Jamie
Ostrow, Buyer Beware: Securities Are Not Always What They Seem . . .
, CrowdCheck Blog, Aug. 27, 2018, available at https://www.crowdcheck.com/blog/buyer-beware-securities-are-not-always-what-they-seem; and Joseph M. Green & John F. Coyle, Crowdfunding and the
Not-So-Safe SAFE, 102 Va. L. Rev. 168 (2016). But see Jack Wroldsen,
Crowdfunding Investment Contracts, 11 Va. L. & Bus. Rev. 543 (2017).
See also U.S. Securities and Exchange Commission, Investor Bulletin:
Be Cautious of SAFEs in Crowdfunding, available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes.
See also Andrew Stephenson, Compliance with Reg CF: When Failure
Becomes Fraud, CrowdCheck Blog, Apr. 23, 2018, available at https://www.crowdcheck.com/blog/compliance-reg-cf-when-failure-becomes-fraud; and FINRA, Be Safe--5 Things You Need to Know About SAFE
Securities and Crowdfunding, available at http://www.finra.org/investors/highlights/5-things-you-need-know-about-safe-securities-and-crowdfunding.
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Costs
The proposed amendments limiting the scope of securities eligible
under Regulation Crowdfunding might impose costs on issuers. Limiting
the flexibility to offer the types of securities that are most
compatible with their desired capital structure and financing needs and
most advantageous given the issuer's assessment of market conditions
might cause such issuers to incur a higher cost of capital or forgo a
Regulation Crowdfunding offering. It is difficult to predict what share
of issuers that rely on security types, such as SAFEs, that would no
longer be eligible under Regulation Crowdfunding would change the
security type but continue to rely on Regulation Crowdfunding versus
switching to an offering method that does not limit security types
(such as Regulation D or a Section 4(a)(2) offering) or forgo a
securities offering altogether. Existing data on Regulation
Crowdfunding offerings suggests that a significant share of issuers
relied on security types other than debt and equity.
We estimate that from inception of Regulation Crowdfunding in May
2016 through December 2019: \425\
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\425\ See supra note 12. These estimates are based on data from
Form C or the latest amendment to it, excluding withdrawn offerings.
Equity is comprised of common and preferred equity (including
partnership/membership units and interests). Approximately a third
of Regulation Crowdfunding offerings were by issuers organized as
limited liability companies or as partnerships. Debt is comprised of
straight and convertible debt. Analysis of XML data from Form C does
not allow a granular breakdown of debt security types. In addition,
some of the revenue share agreements remaining in the ``other
security type'' category may have quasi-debt features. SAFEs are
identified by keyword from ``other security type description.''
Anecdotal review suggests that some equity and debt offerings were
denoted as ``other'' in the form. Where detected, such instances
were re-classified manually based on the ``other security type
description'' field. Examples of ``other'' are, for instance,
tokens, simple agreement for future tokens (``SAFTs''), and revenue
participation agreements.
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Equity accounted for 46 percent of the number of offerings
and 41 percent of the aggregate target amount sought;
Debt accounted for 31 percent of the number of offerings
and 33 percent of the aggregate target amount sought; and
SAFEs accounted for 21 percent of the number of offerings
and 24 percent of the aggregate target amount sought.
The remainder comprised securities not elsewhere classified (e.g.,
revenue participation agreements and miscellaneous tokens).
However, if some of these issuers previously relied on SAFEs as a
means of simplifying their capitalization table, the proposed
crowdfunding vehicle provisions might reduce demand for SAFEs and
mitigate the incremental impact of the proposed amendments to eligible
security types. To the extent that the range of security types
permitted under the proposed amendments provides sufficient flexibility
to most issuers with respect to selecting debt and equity features and
voting and non-voting securities, and to the extent that security
payoff structures are priced efficiently by the market, the effects of
limiting security types as proposed on issuer cost of financing might
be limited.
Some investors might incur costs under the proposed amendments,
particularly investors that relied on existing disclosures about the
terms of offered securities to accurately value such securities and
that found securities with payoff structures other than equity or debt
optimal for their investment strategy. Those investors might opt for
offerings under other exemptions or might have to adjust their
investment strategy to focus on eligible security types.
Effects on Efficiency, Competition, and Capital Formation
Limiting the scope of eligible types of securities is likely to
limit capital formation under Regulation Crowdfunding for some issuers
that otherwise would undertake the offering of excluded types of
securities. If some of these issuers switch to a type of securities
permitted under the proposed
[[Page 18032]]
amendments, or offer the excluded type of securities using another
offering method, such as Regulation D, the net impact of the proposed
amendments on the aggregate amount of capital formation might be
minimal. However, reducing issuer flexibility with respect to security
design in Regulation Crowdfunding offerings might cause some Regulation
Crowdfunding issuers to incur a higher cost of capital.
The proposed amendments might yield efficiencies for investors by
making it easier to analyze and compare payoff structures of securities
across different offerings, potentially enabling investors to allocate
their capital more efficiently. However, for some investors that have a
sufficient ability to analyze the excluded types of securities and that
seek to include those securities in their portfolio, the proposed
amendments might limit the set of available investment opportunities
and as a result, potentially affect the efficiency of their capital
allocation.
The aggregate effects of the proposed amendments on competition
among prospective issuers for investor capital are difficult to predict
and would depend on the relative effects of the proposed amendments on
issuer and investor willingness to participate in Regulation
Crowdfunding. On the one hand, if the proposed amendments lead issuers
to exit the Regulation Crowdfunding market, the extent of competition
for investor capital in that market segment might be reduced. On the
other hand, if the proposed amendments draw more investors to the
Regulation Crowdfunding market by making comparisons across offerings
incrementally easier, the effects on competition might be offset. The
reallocation of issuers of excluded securities types to the Regulation
D or other market segments might mitigate such effects.
Reasonable Alternatives
The proposed amendments would conform the security types eligible
under Regulation Crowdfunding to those of Regulation A. As an
alternative, we could make other modifications to the range of security
types permissible in Regulation Crowdfunding offerings. For example, we
could amend Regulation Crowdfunding to exclude only particular security
types (such as SAFEs or SAFTs) that might be difficult to value for
small investors. The costs and benefits of this alternative, compared
to the proposal, would depend on several factors: Reliance on the
excluded security type today; costs to issuers of using another
offering exemption, such as Regulation D, to offer the excluded
security type; costs to issuers of using a different security type
under Regulation Crowdfunding; and the level of sophistication of
investors in analyzing information and valuing excluded types of
securities. As a further caveat, provisions proscribing highly
specialized security designs might have limited long-term economic
effects in the presence of financial innovation, whereby issuers and
intermediaries might develop security designs that share some but not
all features of the excluded security type and thus comply with the
restriction. We believe that the proposed amendments would provide
sufficient capital structure flexibility for the majority of issuers
while enhancing comparability of payoff structures across Regulation
Crowdfunding offerings.
Request for Comment
118. How would the proposed amendments to eligible security types
affect Regulation Crowdfunding issuers, investors, and other market
participants?
119. What would be the costs and benefits of a different set of
eligible security types?
c. Excluding Delinquent Reporting Companies From Eligibility Under
Regulation A
The proposed amendments would exclude reporting companies that are
not current in periodic reports required under Section 13 or 15(d) of
the Exchange Act from using Regulation A. This exclusion would be
consistent with the exclusion from eligibility under Regulation A of
issuers that are not subject to Exchange Act reporting and that have
not filed required Regulation A periodic reports for the last two
years.
Benefits
The proposed amendments to make reporting companies that are not
current in periodic reports required under Section 13 or 15(d) of the
Exchange Act ineligible under Regulation A are expected to promote
investor protection and benefit investors by ensuring the availability
of information about issuers required in periodic Exchange Act reports
to Regulation A investors and thus enabling better informed investment
decisions. Excluding companies that are subject to, but not current in,
Exchange Act reporting obligations from eligibility under Regulation A
may reduce the average level of information asymmetry about Regulation
A issuers and incrementally increase investor interest in securities
offered in this market.
To the extent that the effects of the proposal are driven by
reallocation of reporting companies that are current in reporting
obligations from registered offerings to Regulation A, the effects may
be minimal. As a caveat, the use of Regulation A by reporting companies
has been modest to date,\426\ which may attenuate the effects of
changes to reporting company eligibility under Regulation A. By
extending similar requirements regarding being current in periodic
reports that presently apply in follow-on Regulation A offerings to
reporting companies in initial Regulation A offerings, the proposed
amendments would increase uniformity in eligibility requirements across
different categories of Regulation A issuers and could reduce potential
for investor confusion.
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\426\ See supra note 406.
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Costs
The proposed amendments to limit the ability of issuers that are
not current in periodic reports required under Section 13 or 15(d) of
the Exchange Act to raise capital under Regulation A might lead to
higher financing costs or reduced ability to raise the required
financing for such issuers.
Effects on Efficiency, Competition, and Capital Formation
The proposed amendments to make reporting companies that are not
current in periodic reports required under Section 13 or 15(d) of the
Exchange Act ineligible under Regulation A might, on the margin, limit
capital formation by those issuers. At the same time, by ensuring more
timely availability of information in periodic reports to prospective
Regulation A investors, the proposed amendments are expected to
facilitate better informed decisions and more efficient allocation of
investor capital in Regulation A offerings, and, for Regulation A
securities with a secondary market, more informationally efficient
security prices. In turn, if the amendments help alleviate investor
concerns about adverse selection in the Regulation A market, the
proposed amendments might promote greater investor interest in
Regulation A securities, increasing aggregate capital formation in the
Regulation A market.
These effects on capital formation and efficiency of capital
allocation might be modest if the proposed amendments mainly result in
a reallocation of delinquent reporting company issuers between
Regulation A and other offering methods. We lack the ability to
quantify the extent of such potential switching
[[Page 18033]]
between offering methods as a result of the proposed amendments.
Reasonable Alternatives
As an alternative, we could have required filers to have filed in a
timely manner all reports required to be filed during the prior 12
months, consistent with Form S-3 and F-3 requirements.\427\ This
alternative may benefit investors by incentivizing reporting companies
that use Regulation A to provide timely periodic disclosures. However,
we continue to believe that this alternative might increase costs and
decrease the ability of reporting companies that have failed to timely
file Exchange Act reports during the lookback period to raise follow-on
Regulation A Tier 2 financing.\428\ Further, such conditions are not
imposed on issuers that are not subject to Exchange Act reporting
obligations and that seek to offer Regulation A securities. Overall,
relative to the proposed amendments, we do not expect the effects of
this alternative to be significant given the other incentives that
reporting companies have to remain current in their Exchange Act
reports (e.g., greater secondary market liquidity, not being delisted
from an exchange or downgraded to a lower OTC market tier, future
eligibility for a streamlined registration process, reduced legal
liability, and a reputation for transparency).
---------------------------------------------------------------------------
\427\ See General Instruction I.A.3 to Form S-3 [17 CFR 239.13];
and General Instruction I.A.2 to Form F-3 [17 CFR 239.33].
\428\ See 2018 Regulation A Release, at Section IV.B.c.2.
---------------------------------------------------------------------------
Request for Comment
120. What would be the costs and benefits of excluding reporting
companies that are not current in Exchange Act reporting obligations
from eligibility under Regulation A, as proposed?
121. What would be the costs and benefits of imposing additional
Regulation A eligibility conditions on issuers that are subject to
Exchange Act periodic reporting obligations, such as timeliness in
periodic reporting?
7. Bad Actor Disqualification Provisions
The disqualification provisions of Regulation A and Regulation
Crowdfunding currently differ from the disqualification provisions in
Rule 506(d) in defining the lookback period for the disqualification
event through the time of the filing, rather than through the time of
sale. As a result, in certain circumstances, periods of time may exist
during Regulation A and Regulation Crowdfunding offerings where an
offering continues despite an event that would have constituted a
disqualifying event at the time of filing.\429\ In order to harmonize
the disqualification provisions of Regulation A and Regulation
Crowdfunding with those of Rule 506(d) of Regulation D, we propose to
specify that a disqualifying event that occurs at any time during an
offering, not only prior to the filing, would disqualify the bad actor
from further involvement in the offering. However, to reduce the cost
for issuers of monitoring disqualification events that may affect
beneficial owners during an ongoing offering, differently from the
disqualification provision of Rule 506(d), we are proposing to retain
the disqualification lookback period through the time of filing, rather
than through the time of sale, for disqualification events affecting
beneficial owners.
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\429\ As discussed in Section II.G above, under Regulation A, if
a covered person triggers one of the disqualifying events in Rule
262, the Commission is able to suspend reliance on the Regulation A
exemption through Rule 258, which requires a notice and hearing
opportunity for the covered person. Furthermore, if a covered person
triggers one of the disqualifying events, the issuer may need to
consider whether it must suspend the offering until it files a post-
qualification amendment to reflect a fundamental change in the
information set forth in the most recent offering statement or post-
qualification amendment. Regulation Crowdfunding, which similarly
measures the lookback from the time of filing of the offering
statement, does not have a suspension provision, similar to
Regulation A, but similarly requires an issuer to amend the offering
statement to disclose material changes, additions, or updates to
information that it provides to investors for offerings that have
not been completed or terminated.
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Benefits
By providing greater uniformity in the bad actor disqualification
provisions across Rule 506(d), Rule 262(a), and Rule 503(a), the
proposed amendments might facilitate compliance for issuers,
particularly issuers that undertake different types of exempt offerings
over time. The proposed amendments might further benefit issuers by
reducing or even eliminating the need to undergo a potentially lengthy
and costly Rule 258 suspension process in the event of a disqualifying
event occurring after the filing. By preserving the existing ``through
date of filing'' lookback period provision with respect to
disqualifying events involving beneficial owners, the proposed
amendments are expected to give issuers leeway to raise capital while
managing disqualification monitoring costs.
The proposed amendments are expected to strengthen investor
protection in cases of disqualifying events occurring after the
initiation of an offering. This benefit is expected to be most salient
for issuers in continuous offerings, which may span multiple months and
years. For example, from June 2015 (when the 2015 Regulation A
amendments raising the offering limit to $50 million took effect)
through December 2019, based on the analysis of Form 1-A data, we
estimate that approximately 80 percent of qualified Regulation A
offerings were conducted on a continuous basis. Based on the analysis
of Form C data from inception of Regulation Crowdfunding through
December 2019, we estimate that the average (median) duration of a
Regulation Crowdfunding offering was approximately four months (three
months).
Costs
The proposed amendments to the disqualification provisions might
impose costs on issuers and covered persons. Issuers that are
disqualified from an ongoing Regulation A or Regulation Crowdfunding
offering as a result of a disqualification event occurring after filing
might experience an increased cost of capital or a reduced availability
of capital, which could have negative effects on capital formation. By
subjecting additional issuers to the potential for disqualification in
the event of a disqualification event affecting a covered person (other
than a beneficial owner) after the offering has commenced, the proposed
amendments might cause some issuers to discontinue an offering,
resulting in a failure to raise the required capital after some costs
of preparing an offering statement or marketing an offering have
already been incurred. The proposed amendments also might lead some
issuers to incur additional due diligence costs and potentially modify
their policies and procedures to reduce the odds of a disqualifying
event during an ongoing offering (e.g., replacing personnel or avoiding
the participation of covered persons, other than beneficial owners, who
are subject, or might become subject, to disqualifying events after
filing). These additional costs of monitoring disqualification events
in ongoing offerings are expected to be somewhat mitigated by the
carve-out for events affecting the beneficial owner category of covered
persons, which would remain subject to the existing lookback period
(defined based on the date of filing) under the proposed amendments. In
addition, issuers might incur costs related to seeking disqualification
waivers from the Commission.
[[Page 18034]]
Effects on Efficiency, Competition, and Capital Formation
As discussed above, the proposed amendments might cause some
issuers whose covered persons (other than beneficial owners) become
subject to a disqualification event after filing to discontinue an
offering, resulting in decreased capital formation for such issuers.
Additional costs of monitoring disqualification events might
incrementally increase the compliance costs associated with conducting
an offering under Regulation A or Regulation Crowdfunding. For
Regulation Crowdfunding issuers, intermediaries might incur
incrementally higher due diligence costs as well, insofar as the
monitoring of disqualification triggers is not already a part of the
intermediary's measures to reduce the risk of fraud.
We expect that the incrementally more stringent bad actor
disqualification provisions in the proposed rules would lead most
issuers to take additional steps to monitor disqualification events
after filing and restrict the participation of covered persons (other
than beneficial owners) in ongoing Regulation A and Regulation
Crowdfunding offerings, which could incrementally help reduce the
potential for fraud in these types of offerings and thus strengthen
investor protection. To the extent that more stringent bad actor
disqualification requirements under the proposed amendments, on the
margin, increase investor interest in these offerings, overall capital
formation in the Regulation A and Regulation Crowdfunding markets may
increase. If the proposed amendments to the disqualification lookback
period alleviate some of the concerns about adverse selection in the
Regulation A and Regulation Crowdfunding markets and thus lower the
risk premium associated with the risk of fraud due to the presence of
bad actors in these markets, they could also reduce the cost of capital
for issuers that rely on these offering exemptions.
Reasonable Alternatives
As an alternative, instead of disqualifying Regulation A or
Regulation Crowdfunding issuers affected by disqualifying events during
an ongoing offering, we could allow such issuers to continue the
offering but require the disclosure of a disqualifying event and the
option for investors to cancel their investment commitments and obtain
a refund of invested funds. This alternative might reduce costs for
some issuers affected by a disqualification trigger in the course of an
ongoing offering. However, it also might result in costs to investors
if investors fail to review the disclosure of a disqualifying event
occurring after commencement of an offering. This alternative also
would not be consistent with the disqualification provisions in Rule
506(d), which might introduce confusion for issuers and investors that
participate in multiple offerings conducted pursuant to different
securities exemptions.
The proposed amendments preserve the definition of the lookback
period (using the time of filing as a basis) with respect to
disqualification events affecting covered persons that are beneficial
owners. As an alternative, we could extend the amended lookback period
definition (continuing through the time of sale) with respect to
disqualification events affecting all covered persons, including
beneficial owners. Compared to the proposal, this alternative might
incrementally strengthen investor protection to the extent that the
types of disqualification events that affect beneficial owners after
filing in continuous Regulation A or Regulation Crowdfunding offerings
pose conflicts of interest or other significant risks to investors.
However, compared to the proposal, this alternative might result in the
exclusion of some issuers whose beneficial owners become subject to a
disqualification trigger after filing from eligibility to conduct an
offering. To minimize this risk, issuers might incur increased costs of
monitoring potential disqualification events affecting beneficial
owners under this alternative. Issuers also might incur costs to
restructure their share ownership to avoid beneficial ownership of 20
percent or more of the issuer's outstanding voting equity securities,
calculated on the basis of voting power, by individuals that may become
subject to disqualifying events after filing.
Request for Comment
122. What would be the costs and benefits of extending the
disqualification lookback to the time of sale in Regulation A and
Regulation Crowdfunding offerings as proposed?
123. What would be the costs and benefits of the alternative of
extending the disqualification lookback to the time of sale for all
covered persons, including beneficial owners, in Regulation A and
Regulation Crowdfunding offerings?
V. Paperwork Reduction Act
A. Summary of the Collection of Information
Certain provisions of our rules and forms that would be affected by
the proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\430\ The Commission is submitting the proposed amendments to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\431\ The hours and costs associated with preparing and
filing the forms constitute reporting and cost burdens imposed by each
collection of information. An agency may not conduct or sponsor, and a
person is not required to comply with, a collection of information
unless it displays a currently valid OMB control number. Compliance
with the information collections is mandatory. Responses to the
information collections are not kept confidential and there is no
mandatory retention period for the information disclosed. The titles
for the affected collections of information are: \432\
---------------------------------------------------------------------------
\430\ See 44 U.S.C. 3501 et seq.
\431\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\432\ As discussed in Section II.D.2 above, we are proposing to
revise the confidential information standard used in our exhibit
filing requirements to provide that information may be redacted if
it is both not material and the type that the registrant treats as
private or confidential. A number of collections of information
could be affected by this proposed amendment, including Form 10-K
(OMB Control No. 3235-0063), Form 10-Q (OMB Control No. 3235-0070),
Form 8-K (OMB Control No. 3235-0060), Form S-1 (OMB Control No.
3235-0065), and Form 10 (OMB Control No. 3235-0064); as well as Form
S-6 (OMB Control No. 3235-0184); Form N-14 (OMB Control No. 3235-
0336); Form 20-F (OMB Control No. 3235-0288); Form F-1 (OMB Control
No. 3235-0258); Form N-1A (OMB Control No. 3235-0307); Form N-2 (OMB
Control No. 3235-0026); Form N-3 (OMB Control No. 3235-0316); Form
N-4 (OMB Control No. 3235-0318); Form N-5 (OMB Control. No. 3235-
0169); Form N-6 (OMB Control No. 3235-0503); and Form N-8B-2 (OMB
Control No. 3235-0186). We preliminarily believe that the proposed
standard would not change the paperwork burden associated with these
collections of information because the revised standard would be
applied in similar circumstances and in a similar way as the current
standard.
---------------------------------------------------------------------------
``Regulation A (Form 1-A)'' (OMB Control No. 3235-0286);
``Regulation D'' (a proposed new collection of
information);
``Regulation D Rule 504(b)(3)--Felons and Other Bad Actors
Disclosure Statement'' (OMB Control No. 3235-0746);
``Regulation D Rule 506(e) Felons and Other Bad Actors
Disclosure Statement'' (OMB Control No. 3235-0705);
``Form D'' (OMB Control No. 3235-0076); and
[[Page 18035]]
``Form C'' (OMB Control No. 3235-0307).
We are proposing to combine the existing collections of information
for Rule 504(b)(3), Rule 506(e), and Form D in a new collection of
information that covers all of the PRA compliance burdens for
Regulation D. The regulations and forms listed above were adopted under
the Securities Act and set forth filing and disclosure requirements
associated with exempt offerings. A description of the proposed
amendments, including the need for the information and its proposed
use, as well as a description of the likely respondents, can be found
in Section II above, and a discussion of the economic effects of the
proposed amendments can be found in Section IV above.
B. Summary of the Effects on the Collections of Information
PRA Table 1 \433\ summarizes the estimated effects of the proposed
amendments on the paperwork burdens associated with the affected
collections of information listed in Section V.A.
---------------------------------------------------------------------------
\433\ We do not believe that the proposed amendments with
respect to the use of general solicitation in exempt offerings,
integration of offerings, harmonization of bad actor
disqualification provisions in Regulation A and Regulation
Crowdfunding with those in Regulation D, excluding Exchange Act
registrants that are delinquent filers from relying on Regulation A
or increasing the investment limits under Regulation Crowdfunding
would substantially or materially modify the number of new filings
or the burdens for those filings. We also do not believe that the
proposed limits on the types of securities offered under Regulation
Crowdfunding would substantially or materially modify the number of
Form C filings or the burdens for those filings due to the proposed
amendments to allow for the use of crowdfunding vehicles.
PRA Table 1--Estimated Paperwork Burden Effects of the Proposed
Amendments
------------------------------------------------------------------------
Affected
Proposed amendments and effects collections of Estimated net
information effect
------------------------------------------------------------------------
Regulation D:
Provide a new collection 5 hour
of information to encompass Regulation D compliance
disclosure required by (including Form burden per
Regulation D, including the D, Rule 502(b), response to the
following: Rule 504(b)(3), new collection
and Rule 506(e)). of information
*.
[cir] Financial statement and
non-financial statement
information and delivery
requirements, including the
proposed requirement to
provide the purchaser with
generic solicitation of
interest materials (Rule
502(b)); and.
[cir] Felon and bad actor
disclosure requirements
(Rules 504(b)(3)) and 506(e).
Regulation A:
Requiring the filing of Form 1-A. 2 hour
generic solicitation of interest net decrease in
materials. Estimated burden compliance
increase: 0.5 hours per form. burden per form.
Simplifying compliance .................. 25
with Regulation A by conforming additional
certain requirements with responses.
similar requirements for
registered offerings (including
permitting the redaction of
confidential information in
certain exhibits; permitting
incorporation by reference of
financial statements in the
offering circular; and
simplifying the requirements for
making non-public documents
available to the public on
EDGAR). Estimated burden
decrease: 2.5 hours per form.
We estimate that the
increase in offering limit would
increase the number of filings
on Form 1-A by 25.**.
Regulation Crowdfunding:
Requiring the filing of Form C... 1 hour
generic solicitation of interest net increase in
materials and solicitations of compliance
interest under proposed Rule burden per form.
206; and requiring disclosure
about a co-issuer on Form C when
an SPV is used. Estimated burden
increase: 1 hour per form.
We believe that .................. 55
increasing the offering limits additional
under Regulation Crowdfunding responses.
would not affect the burden
estimate per form, but we
estimate that the increase in
the offering limit would
increase the number of filings
on Form C by 55.***.
------------------------------------------------------------------------
* We estimate that there is no net effect on the current burden hours
per response relating to Regulation D as a result of the proposed
amendments. However, as discussed above, we are proposing to establish
a single collection of information for Regulation D to encompass all
of the associated paperwork burdens, including the existing burdens
associated with Form D, Rule 504(b)(3), and Rule 506(e). As a result,
the new collection of information for Regulation D would reflect an
increase from the aggregated burdens for the existing Form D, Rule
504(b)(3) and Rule 506(e) collections of information. See PRA Table 5
below.
** There were 125 Regulation A offerings filed in 2019. Although it is
not possible to predict with any degree of certainty the increase in
the number of Regulation A offerings following the proposed
amendments, we estimate for purposes of the PRA an approximate 20
percent increase in the number of new Regulation A offerings resulting
in 25 additional respondents. It is possible that the increase in the
offering limit may also increase the number of Form 1-K, Form 1-SA,
Form 1-U, and Form 1-Z filings. However, due to uncertainties
regarding whether any increase in Tier 2 offerings would be conducted
by Exchange Act reporting companies, we are not proposing an increase
in the number of responses for the associated collections of
information at this time.
*** The number of Regulation Crowdfunding offerings has increased to 552
offerings in the second full year since effectiveness of the rules.
Although it is not possible to predict with any degree of certainty
the increase in the number of Regulation Crowdfunding offerings
following the proposed amendments, we estimate for purposes of the PRA
an approximate 10 percent increase in the number of new Regulation
Crowdfunding offerings resulting in 55 additional respondents.
C. Incremental and Aggregate Burden and Cost Estimates
Below we estimate the incremental and aggregate changes in
paperwork burden as a result of the proposed amendments. These
estimates represent the average burden for all issuers, both large and
small. In deriving our estimates, we recognize that the burdens will
likely vary among individual issuers based on a number of factors,
including the nature of their business. We believe that the proposed
amendments would change the frequency of responses to the existing
[[Page 18036]]
collections of information and the burden per response.
The burden estimates were calculated by adding the estimated
additional responses to the existing estimated responses and
multiplying the estimated number of responses by the estimated average
amount of time it would take an issuer to prepare and review disclosure
required under the proposed amendments. For purposes of the PRA, the
burden is to be allocated between internal burden hours and outside
professional costs. PRA Table 2 \434\ sets forth the percentage
estimates we typically use for the burden allocation for each
collection of information and the estimated burden allocation for the
proposed new collection of information for Regulation D. We also
estimate that the average cost of retaining outside professionals is
$400 per hour.\435\
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\434\ Here and in the tables below, we derived current estimated
burdens and burden allocations for Regulation D using the estimates
for Form D, Rule 504(b)(3), and Rule 506(e).
\435\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several registrants, law firms, and
other persons who regularly assist registrants in preparing and
filing reports with the Commission.
PRA Table 2--Estimated Burden Allocation for Specified Collections of
Information
------------------------------------------------------------------------
Outside
Collection of information Internal (%) professionals
(%)
------------------------------------------------------------------------
Forms 1-A, C............................ 75 25
Regulation D............................ 25 75
------------------------------------------------------------------------
PRA Table 3 \436\ below illustrates the incremental change to the
total annual compliance burden of affected forms, in hours and in
costs, as a result of the proposed amendments' estimated effect on the
paperwork burden per response.
---------------------------------------------------------------------------
\436\ The estimated reductions in Columns (C), (D) and (E) are
rounded to the nearest whole number.
PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Burden hour Change in Change in Change in
Number of affect per burden hours Change in company professional professional
Collection of information estimated current for current hours for current hours for current costs for current
affected affected affected affected affected affected
responses response responses responses responses responses
(A) \a\ (B) (C) = (A) x (D) = (C) x 0.75 (E) = (C) x 0.25 (F) = (E) x $400
(B)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A....................................... 204 (2) (408) (306) (102) ($40,800)
Form C......................................... 5,907 1 5907 4,430 1,477 590,800
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The number of estimated affected responses is based on the number of responses in the Commission's current OMB PRA filing inventory plus the number
of additional responses we estimate as a result of the proposed amendments (30 responses for Form 1-A, and 55 responses for Form C). The OMB PRA
filing inventory represents a three-year average.
The table below illustrates the incremental change to the total
annual compliance burden of affected forms, in hours and in costs, as a
result of the proposed amendments' estimated effect on the number of
responses.
PRA Table 4--Calculation of the Change in Burden Estimates as a Result of Change in Number of Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change
-----------------------------------------------------------------------------------------------------------
Collection of information Estimated
Current annual Current Current cost additional Change in company Change in
responses burden hours burden responses hours professional costs
(A) (B) (C) (D) (E) = ((B)/(A)) x (F) = ((C)/(A)) x
(D) (D)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A.................................... 179 98,396 $13,111,912 25 13,742 $1,932,390
Form C...................................... 5,852 214,928 28,500,000 55 2,020 267,857
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following tables summarize the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
proposed amendments. Column (D) of PRA Table 5 includes additional
responses estimated as a result of the proposed amendments.
[[Page 18037]]
PRA Table 5--Requested Paperwork Burden Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Requested change in burden
--------------------------------------------------------------------------------------------------------------------------------------
Collection of information Number of Change in Change in
Current annual Current Current cost affected company Professional Annual Burden hours Cost burden
responses burden hours burden responses hours Costs responses
(A) (B) (C) (D) (E) \aa\ (F) \bb\ (G) (H) = (B) + (I) = (C) +
(E) (F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 1-A................................................. 179 98,396 $13,111,912 204 13,436 $1,891,590 204 111,832 $15,003,502
Form C................................................... 5,852 214,928 28,500,000 5,907 6,450 858,657 5,907 221,378 29,358,657
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\aa\ From Column (D) in PRA Table 3 and Column (E) in PRA Table 4.
\bb\ From Column (F) in PRA Table 3.
PRA Table 6 summarizes the requested paperwork burden for the new
Regulation D collection of information, including the estimated total
reporting burdens and costs, under the proposed amendments. The
estimates for this proposed new collection of information include the
existing burden estimated for Form D, Rule 504(b)(3), and Rule 506(e),
as well as other burdens resulting from the implementation of
Regulation D. For purposes of the PRA, we estimate that new Regulation
D will entail a 5 hour compliance burden per response with 26,000
annual responses (derived from the current 26,000 annual responses for
Form D.\437\
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\437\ We expect the amendments providing an additional method to
verify an investor's accredited investor status and increasing the
offering limit under Rule 504 could lead to additional Rule 506(c)
or Rule 504 offerings. However, as discussed in Section IV above,
some of these offerings may be conducted by issuers switching from
other Regulation D exemptions. Additionally, some of the issuers
conducting the additional Regulation A or Regulation Crowdfunding
offerings may be switching from Regulation D offerings. Because it
is difficult to predict the net impact of the proposed amendments on
the overall number of Regulation D responses, we are not adjusting
the current estimate of 26,000 responses at this time.
PRA Table 6--Requested Paperwork Burden for the New Collection of Information
----------------------------------------------------------------------------------------------------------------
Requested paperwork burden
------------------------------------------------------------
Collection of information Annual
responses Burden hours Cost burden
(A) (A) x 5 x (0.25) (A) x 5 x (0.75) x $400
----------------------------------------------------------------------------------------------------------------
Regulation D....................................... 26,000 32,500 $39,000,000
----------------------------------------------------------------------------------------------------------------
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
Evaluate the accuracy of our assumptions and estimates of
the burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549, with reference to File No. S7-05-20. Requests for
materials submitted to OMB by the Commission with regard to the
collection of information requirements should be in writing, refer to
File No. S7-05-20 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington DC
20549. OMB is required to make a decision concerning the collection of
information requirements between 30 and 60 days after publication of
the proposed amendments. Consequently, a comment to OMB is best assured
of having its full effect if the OMB receives it within 30 days of
publication.
VI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA),\438\ the Commission must advise OMB as to whether
the proposed amendments constitute a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
---------------------------------------------------------------------------
\438\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more (either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
Request for Comment
We request comment on whether the proposed amendments would be a
``major rule'' for purposes of SBREFA. In particular, we request
comment on the potential effect of the proposed amendments on the U.S.
economy on an annual basis; any potential increase in costs or prices
for consumers or individual industries; and any potential effect on
competition, investment or innovation. Commenters are requested
[[Page 18038]]
to provide empirical data and other factual support for their views to
the extent possible.
VII. Initial Regulatory Flexibility Analysis
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') \439\ requires the agency to prepare and make
available for public comment an Initial Regulatory Flexibility Analysis
(``IRFA'') that will describe the impact of the proposed rule on small
entities.\440\ This IRFA relates to proposed amendments or additions to
the rules and forms described in Section II above.
---------------------------------------------------------------------------
\439\ 5 U.S.C. 601 et seq.
\440\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposed Action
The proposed amendments are intended simplify, harmonize, and
improve certain aspects of the exempt offering framework to promote
capital formation while maintaining or enhancing important investor
protections. The proposed amendments also seek to address gaps and
complexities in the exempt offering framework that may impede access to
investment opportunities for investors and capital for issuers. The
reasons for, and objectives of, the proposed amendments are discussed
in more detail in Section II above.
B. Legal Basis
The amendments contained in this release are being proposed under
the authority set forth in the Securities Act, particularly, Sections
3, 4, 4A, 19 and 28 thereof; the Exchange Act, particularly, Sections
3, 10(b), 12, 15, 17, 23(a) and 36 thereof; and the Investment Company
Act, particularly Sections 6(c), 8, 24, 30, 38, and 45; and Public Law
112-106, secs. 301-305, 126 Stat. 306 (2012).
C. Small Entities Subject to the Proposed Rules
The proposed amendments would affect issuers that are small
entities. The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.''
\441\[thinsp]For purposes of the RFA, under 17 CFR 230.157, an issuer,
other than an investment company, is a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year and is engaged or proposing to
engage in an offering of securities not exceeding $5 million. Under 17
CFR 270.0-10, an investment company, including a business development
company, is considered to be a small entity if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year.
---------------------------------------------------------------------------
\441\ [thinsp]5 U.S.C. 601(6).
---------------------------------------------------------------------------
The proposed amendments are expected to promote capital formation
through exempt offerings and create additional flexibility for issuers.
Because the proposed amendments would affect all issuers conducting
offerings exempt from registration under the Securities Act, which
includes companies not subject to ongoing reporting obligations under
the Exchange Act, Regulation A, or Regulation Crowdfunding, it is
difficult to estimate the number of issuers that qualify as small
entities that would be eligible to rely on the proposed
amendments.\442\
---------------------------------------------------------------------------
\442\ In particular, as discussed in Section IV above, due to
the large number of offerings in reliance on the offering exemptions
in Regulation D relative to other offering exemptions affected by
the proposed amendments, most of which are conducted by issuers that
are not subject to Exchange Act, Regulation A, or Regulation
Crowdfunding reporting requirements, Regulation D issuers are likely
to continue to comprise a significant share of the small entities
affected by the proposed amendments. However, we do not have
information on the assets of such issuers, which is required for an
estimate of small entities for purposes of the RFA definition,
because this information is not required by Form D and because such
issuers may not be subject to ongoing reporting requirements.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
If adopted, the proposed amendments would apply to small entities
to the same extent as other entities, irrespective of size. Therefore,
we expect that the nature of any benefits and costs associated with the
proposed amendments to be similar for large and small entities.
Accordingly, we refer to the discussion of the proposed amendments'
economic effects on all affected parties, including small entities, in
Section IV above.\443\ Consistent with that discussion, we anticipate
that the economic benefits and costs likely could vary widely among
small entities based on a number of factors, such as the nature and
conduct of their businesses, including their capital raising decisions,
which makes it difficult to project the economic impact on small
entities with precision. Compliance with the proposed amendments may
require the use of professional skills, including accounting and legal
skills.
---------------------------------------------------------------------------
\443\ We also discuss the estimated compliance burden associated
with the proposed amendments for purposes of the PRA in Section V
above.
---------------------------------------------------------------------------
Many of the proposed amendments are expected to be of greatest
benefit to the capital raising efforts of small entities that may lack
an existing network of angel and VC funders and appear to face the
greatest constraints in obtaining external financing. Examples of this
include: Amendments to integration principles that are intended to
facilitate multiple offerings, including offerings with general
solicitation; amendments expanding investment limits and issuer
eligibility under Regulation Crowdfunding; amendments tailoring the
requirements for non-accredited investor sales under Rule 506(b); and
amendments expanding the offering limits for Regulation Crowdfunding,
Rule 504, and Regulation A. In addition, certain of the rules that we
propose to amend, such as Regulation Crowdfunding and Rule 504, have
eligibility requirements and other restrictions that increase the
likelihood that such rules would be relied upon by small businesses
that are seeking to raise relatively small amounts of capital without
incurring the costs of conducting a registered offering.
Although many of the proposed amendments are expected to be of
greatest benefit to the capital raising efforts of small entities, we
acknowledge that any costs of the proposed amendments borne by the
affected entities, such as those related to compliance with the
proposed amendments, or the implementation or restructuring of internal
systems needed to adjust to the proposed amendments, could have a
proportionally greater effect on small entities, as they may be less
able to bear such costs relative to larger entities. For example, the
proposed amendments to the bad actor disqualification provisions \444\
could cause some small entities to incur additional due diligence costs
or modify their offerings to reduce the possibility of a disqualifying
event (e.g., replacing personnel or avoiding the participation of
covered persons, other than beneficial owners, who are subject, or
might become subject, to disqualifying events after filing). Similarly,
small entities electing to use the proposed generic or Regulation
Crowdfunding testing-the-waters provisions \445\ might incur costs,
such as those related to preparing the testing-the-waters materials.
These potential costs would be borne equally by all issuers, regardless
of size.
---------------------------------------------------------------------------
\444\ See supra Section II.G.
\445\ See supra Section II.B.
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[[Page 18039]]
E. Duplicative, Overlapping, or Conflicting Federal Rules
We do not believe the proposed amendments would duplicate, overlap,
or conflict with other federal rules.
F. Significant Alternatives
The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse impact
on small entities. In connection with the proposed amendments, we
considered the following alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
The proposed amendments generally would simplify, harmonize, and
improve certain aspects of the exempt offering framework to promote
capital formation, including for offering exemptions used by and
designed primarily for small entities. Thus, we do not think it is
necessary to exempt small entities from all or part of these
requirements.
Several of the offering exemptions that we have proposed to amend
(e.g., Regulation A and Regulation Crowdfunding) already contain
different compliance or reporting requirements that take into account
the resources of the smaller entities that are likely to utilize these
exemptions. In addition, certain of our proposals clarify, consolidate,
or simplify compliance and reporting requirements under our rules,
which should benefit small entities in particular. For example, we are
proposing amendments to the financial statement information
requirements in Regulation D to align them with the disclosure
requirements in Regulation A. We are also proposing several amendments
to simplify compliance with Regulation A, such as the redaction of
confidential information in certain exhibits, harmonizing the
procedures for publicly filing draft Regulation A offering statements
with those for draft Securities Act registration statements, and
permitting issuers to incorporate previously-filed financial statements
by reference into a Regulation A offering statement. Finally, we are
proposing revisions to Regulation Crowdfunding and rules under the
Investment Company Act intended to help reduce administrative
complexities that some issuers may encounter under Regulation
Crowdfunding.
With respect to using performance rather than design standards, we
note that several of the proposed amendments concern rules that use
principles-based approaches that are more akin to performance
standards. For example, we are proposing a general principle of
integration that would require an issuer to consider the particular
facts and circumstances of each offering, including whether the issuer
can establish that each offering either complies with the registration
requirements of the Securities Act, or that an exemption from
registration is available for the particular offering.
G. Request for Comment
We encourage the submission of comments with respect to any aspect
of this IRFA. In particular, we request comments regarding:
The number of small entities that may be affected by the
proposed amendments;
The existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis;
How the proposed amendments could further lower the burden
on small entities; and
How to quantify the impact of the proposed amendments.
Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Comments
will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed amendments are adopted, and will
be placed in the same public file as comments on the proposed
amendments themselves.
Statutory Authority and Text of Proposed Rule Amendments
The amendments contained in this release are being proposed under
the authority set forth in the Securities Act (15 U.S.C. 77a et seq.),
particularly, Sections 3, 4, 4A, 19 and 28 thereof; the Exchange Act
(15 U.S.C. 78a et seq.), particularly, Sections 3, 10(b), 12, 15, 17,
23(a) and 36 thereof; the Investment Company Act (15 U.S.C. 80a-1 et
seq.), particularly Sections 6(c), 8, 24, 30, 38, and 45; and Pub. L.
112-106, secs. 301-305, 126 Stat. 306 (2012).
List of Subjects
17 CFR Part 227
Crowdfunding, Reporting and recordkeeping requirements, Securities.
17 CFR Part 229
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 230
Administrative practice and procedure, Advertising, Confidential
business information, Investment companies, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 249
Administrative practice and procedure, Brokers, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 270
Administrative practice and procedure, Confidential business
information, Fraud, Investment companies, Life insurance, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 274
Administrative practice and procedure, Electronic funds transfer,
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out above, the Commission proposes to amend
title 17, chapter II of the Code of Federal Regulations, as follows:
PART 227--REGULATION CROWDFUNDING, GENERAL RULES AND REGULATIONS
0
1. The authority citation for part 227 continues to read as follows:
Authority: 15 U.S.C. 77d, 77d-1, 77s, 77z-3, 78c, 78o, 78q,
78w, 78mm, and Pub. L. 112-106, secs. 301-305, 126 Stat. 306 (2012).
0
2. Amend Sec. 227.100 by:
0
a. Revising paragraphs (a)(1) and (2); and
0
b. Adding paragraphs (b)(7) and (e).
The revisions and additions read as follows:
Sec. 227.100 Crowdfunding exemption and requirements.
(a) * * *
(1) The aggregate amount of securities sold to all investors by the
issuer in reliance on section 4(a)(6) of the Securities Act (15 U.S.C.
77d(a)(6)) during the 12-month period preceding the date of such offer
or sale, including the securities offered in such transaction, shall
not exceed $5,000,000;
(2) Where the purchaser is not an accredited investor (as defined
in Rule
[[Page 18040]]
501 (Sec. 230.501 of this chapter)), the aggregate amount of
securities sold to such an investor across all issuers in reliance on
section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) during the
12-month period preceding the date of such transaction, including the
securities sold to such investor in such transaction, shall not exceed:
(i) The greater of $2,200, or 5 percent of the greater of the
investor's annual income or net worth, if either the investor's annual
income or net worth is less than $107,000; or
(ii) 10 percent of the greater of the investor's annual income or
net worth, not to exceed an amount sold of $107,000, if both the
investor's annual income and net worth are equal to or more than
$107,000;
* * * * *
(b) Applicability. * * *
(7) Are not equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.
* * * * *
(e) Integration with other offerings. To determine whether offers
and sales should be integrated, please see Rule 152 (Sec. 230.152 of
this chapter).
0
3. Amend Sec. 227.201 by:
0
a. Revising the introductory text;
0
b. Removing the word ``and'' at the end of paragraph (x);
0
c. Removing the period at the end of paragraph (y) and adding in its
place ``; and''; and
0
d. Adding paragraph (z).
The revisions and addition read as follows:
Sec. 227.201 Disclosure requirements.
An issuer offering or selling securities in reliance on section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) and in accordance
with section 4A of the Securities Act (15 U.S.C. 77d-1) and this part,
and any co-issuer jointly offering or selling securities with such an
issuer in reliance on the same, must file with the Commission and
provide to investors and the relevant intermediary the following
information:
* * * * *
(z) Any written communication or broadcast script provided in
accordance with Sec. 227.206 or, if within 30 days of the initial
filing of the offering statement, Sec. 230.241 of this chapter.
* * * * *
0
4. Amend Sec. 227.204 by revising paragraphs (a) and (b)(1) to read as
follows:
Sec. 227.204 Advertising.
(a) An issuer may not, directly or indirectly, advertise the terms
of an offering made in reliance on section 4(a)(6) of the Securities
Act (15 U.S.C. 77d(a)(6)), except for oral or written communications
that meet the requirements of paragraph (b) of this section or Sec.
227.206.
* * * * *
(b) * * *
(1) A statement that the issuer is conducting an offering pursuant
to section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), the
name of the intermediary through which the offering is being conducted,
and information (including a link in any written communications)
directing the potential investor to the intermediary's platform;
* * * * *
0
5. Add Sec. 227.206 to read as follows:
Sec. 227.206 Solicitations of interest and other communications.
(a) Solicitation of interest. At any time before the filing of an
offering statement, an issuer may communicate orally or in writing to
determine whether there is any interest in a contemplated securities
offering. Such communications are deemed to be an offer of a security
for sale for purposes of the antifraud provisions of the federal
securities laws. No solicitation or acceptance of money or other
consideration, nor of any commitment, binding or otherwise, from any
person is permitted until the offering statement is filed.
(b) Conditions. The communications must:
(1) State that no money or other consideration is being solicited,
and if sent in response, will not be accepted;
(2) State that no offer to buy the securities can be accepted and
no part of the purchase price can be received until the offering
statement is filed; and
(3) State that a person's indication of interest involves no
obligation or commitment of any kind.
(c) Indications of interest. Any written communication under this
rule may include a means by which a person may indicate to the issuer
that such person is interested in a potential offering. This issuer may
require the name, address, telephone number, and/or email address in
any response form included pursuant to this paragraph (c).
0
6. Amend Sec. 227.503 by revising paragraphs (a) and (b)(3) to read as
follows:
Sec. 227.503 Disqualification provisions.
(a) Disqualification events. No exemption under this section
4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) shall be available
for a sale of securities if the issuer; any predecessor of the issuer;
any affiliated issuer; any director, officer, general partner or
managing member of the issuer; any beneficial owner of 20 percent or
more of the issuer's outstanding voting equity securities, calculated
on the basis of voting power; any promoter connected with the issuer in
any capacity at the time of filing, any offer after filing, or such
sale; any person that has been or will be paid (directly or indirectly)
remuneration for solicitation of purchasers in connection with such
sale of securities; or any general partner, director, officer or
managing member of any such solicitor:
(1) Has been convicted, within 10 years before the filing of the
offering statement or such sale (or five years, in the case of issuers,
their predecessors and affiliated issuers), of any felony or
misdemeanor:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser,
funding portal or paid solicitor of purchasers of securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the information required by section 4A(b) of the Securities Act (15
U.S.C. 77d-1(b)) or such sale that, at the time of such filing or sale,
restrains or enjoins such person from engaging or continuing to engage
in any conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser,
funding portal or paid solicitor of purchasers of securities;
(3) Is subject to a final order of a state securities commission
(or an agency or officer of a state performing like functions); a state
authority that supervises or examines banks, savings associations or
credit unions; a state insurance commission (or an agency or officer of
a state performing like functions); an appropriate federal banking
agency; the U.S. Commodity Futures Trading Commission; or the National
Credit Union Administration that:
(i) At the time of the filing of the information required by
section 4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) or such sale,
bars the person from:
(A) Association with an entity regulated by such commission,
authority, agency or officer;
[[Page 18041]]
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative or deceptive conduct
entered within ten years before such filing of the offering statement
or such sale;
Instruction to paragraph (a)(3). Final order shall mean a written
directive or declaratory statement issued by a federal or state agency,
described in Sec. 227.503(a)(3), under applicable statutory authority
that provides for notice and an opportunity for hearing, which
constitutes a final disposition or action by that federal or state
agency.
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Exchange Act (15 U.S.C. 78o(b) or 78o-
4(c)) or Section 203(e) or (f) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-3(e) or (f)) that, at the time of the filing of the
information required by section 4A(b) of the Securities Act (15 U.S.C.
77d-1(b)) or such sale:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer, investment adviser or funding
portal;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the information required by section 4A(b) of
the Securities Act (15 U.S.C. 77d-1(b)) or such sale that, at the time
of such filing or sale, orders the person to cease and desist from
committing or causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the federal
securities laws, including without limitation Section 17(a)(1) of the
Securities Act (15 U.S.C. 77q(a)(1)), Section 10(b) of the Exchange Act
(15 U.S.C. 78j(b)) and 17 CFR 240.10b-5, section 15(c)(1) of the
Exchange Act (15 U.S.C. 78o(c)(1)) and Section 206(1) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-6(1)) or any other rule or
regulation thereunder; or
(ii) Section 5 of the Securities Act (15 U.S.C. 77e);
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or Regulation A (17 CFR
230.251 through 230.263 of this chapter) offering statement filed with
the Commission that, within five years before the filing of the
information required by section 4A(b) of the Securities Act (15 U.S.C.
77d-1(b)) or such sale, was the subject of a refusal order, stop order,
or order suspending the Regulation A exemption, or is, at the time of
such filing or sale, the subject of an investigation or proceeding to
determine whether a stop order or suspension order should be issued; or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
information required by section 4A(b) of the Securities Act (15 U.S.C.
77d-1(b)) or such sale, or is, at the time of such filing or sale,
subject to a temporary restraining order or preliminary injunction with
respect to conduct alleged by the United States Postal Service to
constitute a scheme or device for obtaining money or property through
the mail by means of false representations.
Instruction to paragraph (a): With respect to any beneficial owner
of 20 percent or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power, the issuer is
required to determine whether a disqualifying event has occurred only
as of the time of filing of the offering statement and not from the
time of such sale.
(b) * * *
(3) If, before the filing of the information required by section
4A(b) of the Securities Act (15 U.S.C. 77d-1(b)) or such sale, the
court or regulatory authority that entered the relevant order, judgment
or decree advises in writing (whether contained in the relevant
judgment, order or decree or separately to the Commission or its staff)
that disqualification under paragraph (a) of this section should not
arise as a consequence of such order, judgment or decree; or
* * * * *
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
7. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c),
80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350;
sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
* * * * *
0
8. Amend Sec. 229.601 by revising paragraphs (b)(2)(ii) and
(b)(10)(iv) to read as follows:
Sec. 229.601 (Item 601) Exhibits.
* * * * *
(b) * * *
(2) * * *
(ii) The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (b)(2) of this Item if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit or exhibits have been omitted and include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and is the type that the registrant
treats as private or confidential. The registrant also must include
brackets indicating where the information is omitted from the filed
version of the exhibit. If requested by the Commission or its staff,
the registrant must promptly provide on a supplemental basis an
unredacted copy of the exhibit and its materiality and privacy or
confidentiality analyses. Upon evaluation of the registrant's
supplemental materials, the Commission or its staff may require the
registrant to amend its filing to include in the exhibit any previously
redacted information that is not adequately supported by the
registrant's analyses. The registrant may request confidential
treatment of the supplemental material submitted under this paragraph
(b)(2)(ii) pursuant to Rule 83 (Sec. 200.83 of this chapter) while it
is in the possession of the Commission or its staff. After completing
its review of the supplemental information, the
[[Page 18042]]
Commission or its staff will return or destroy it if the registrant
complies with the procedures outlined in Rules 418 or 12b-4 (Sec.
230.418 or 240.12b-4 of this chapter).
* * * * *
(10) * * *
(iv) The registrant may redact specific provisions or terms of
exhibits required to be filed by this paragraph (b)(10) if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit or exhibits have been omitted and include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and is the type that the registrant
treats as private or confidential. The registrant also must include
brackets indicating where the information is omitted from the filed
version of the exhibit. If requested by the Commission or its staff,
the registrant must promptly provide on a supplemental basis an
unredacted copy of the exhibit and its materiality and privacy or
confidentiality analyses. Upon evaluation of the registrant's
supplemental materials, the Commission or its staff may require the
registrant to amend its filing to include in the exhibit any previously
redacted information that is not adequately supported by the
registrant's analyses. The registrant may request confidential
treatment of the supplemental material submitted under this paragraph
(b)(10)(iv) pursuant to Rule 83 (Sec. 200.83 of this chapter) while it
is in the possession of the Commission or its staff. After completing
its review of the supplemental information, the Commission or its staff
will return or destroy it if the registrant complies with the
procedures outlined in Rules 418 or 12b-4 (Sec. 230.418 or 240.12b-4
of this chapter).
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
9. The authority citation for part 230 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, secs. 201(a), 401, 126 Stat.
313 (2012), unless otherwise noted.
* * * * *
Section 230.502 is also issued under 15 U.S.C. 80a-8, 80a-29,
80a-30.
* * * * *
0
10. Amend Sec. 230.147 by revising paragraph (g) and removing
paragraph (h) to read as follows:
Sec. 230.147 Intrastate offers and sales.
* * * * *
(g) Integration with other offerings. To determine whether offers
and sales should be integrated, please see Rule 152 (Sec. 230.152).
0
11. Amend Sec. 230.147A by revising paragraph (g) and removing
paragraph (h) to read as follows:
Sec. 230.147A Intrastate sale exemption.
* * * * *
(g) Integration with other offerings. To determine whether offers
and sales should be integrated, please see Rule 152 (Sec. 230.152).
0
12. Add Sec. 230.148 to read as follows:
Sec. 230.148 Exemption from general solicitation or general
advertising.
A communication will not be deemed to constitute general
solicitation or general advertising if made in connection with a
seminar or meeting by a college, university, or other institution of
higher education, local government, nonprofit organization, or angel
investor group, incubator, or accelerator sponsoring the seminar or
meeting, provided that:
(a) No advertising for the seminar or meeting references a specific
offering of securities by the issuer;
(b) The sponsor of the seminar or meeting does not:
(1) Make investment recommendations or provide investment advice to
attendees of the event;
(2) Engage in any investment negotiations between the issuer and
investors attending the event;
(3) Charge attendees of the event any fees, other than reasonable
administrative fees;
(4) Receive any compensation for making introductions between event
attendees and issuers or for investment negotiations between such
parties; and
(5) Receive any compensation with respect to the event that would
require registration of the sponsor as a broker or a dealer under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or an
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C.
80b-1 et seq.); and
(c) The type of information regarding an offering of securities by
the issuer that is communicated or distributed by or on behalf of the
issuer in connection with the event is limited to a notification that
the issuer is in the process of offering or planning to offer
securities, the type and amount of securities being offered, and the
intended use of proceeds of the offering.
Instruction to Sec. 230.148: For purposes of this subsection, the
term ``angel investor group'' means a group of accredited investors
that holds regular meetings and has written processes and procedures
for making investment decisions, either individually or among the
membership of the group as a whole, and is neither associated nor
affiliated with brokers, dealers, or investment advisers.
0
13. Revise Sec. 230.152 to read as follows:
Sec. 230.152 Integration.
This section provides a general principle of integration and non-
exclusive safe harbors from integration of registered and exempt
offerings. Because of the objectives of this rule and the policies
underlying the Act, these safe harbors are not available to any issuer
for any transaction or series of transactions that, although in
technical compliance with the rule, is part of a plan or scheme to
evade the registration requirements of the Act.
(a) General principle of integration. If the safe harbors in
paragraph (b) of this section do not apply, in determining whether two
or more offerings are to be treated as one for the purpose of
registration or qualifying for an exemption from registration under the
Act, offers and sales will not be integrated if, based on the
particular facts and circumstances, the issuer can establish that each
offering either complies with the registration requirements of the Act,
or that an exemption from registration is available for the particular
offering. In making this determination:
(1) For an exempt offering for which general solicitation is not
permitted, offers and sales will not be integrated with other offerings
if the issuer has a reasonable belief, based on the facts and
circumstances, that:
(i) The purchasers in each exempt offering were not solicited
through the use of general solicitation; or
(ii) The purchasers in each exempt offering established a
substantive relationship with the issuer (or person acting on the
issuer's behalf) prior to the commencement of the offering not
permitting general solicitation; and
(2) For an exempt offering permitting general solicitation that
includes information about the material terms of a concurrent offering
under another exemption also permitting general solicitation, the
offering materials must include the necessary legends for, and
[[Page 18043]]
otherwise comply with, the requirements of each exemption.
(b) Safe harbors: No integration analysis under paragraph (a) of
this section is required, if any of the following non-exclusive safe
harbors apply:
(1) Any offering made more than 30 calendar days before the
commencement of any other offering, or more than 30 calendar days after
the termination or completion of any other offering, will not be
integrated, provided that for an exempt offering for which general
solicitation is not permitted, the purchasers either:
(i) Were not solicited through the use of general solicitation; or
(ii) Established a substantive relationship with the issuer prior
to the commencement of the offering for which general solicitation is
not permitted;
(2) Offers and sales made in compliance with Rule 701 (Sec.
230.701), pursuant to an employee benefit plan, or in compliance with
Regulation S (Sec. Sec. 230.901 through 230.906) will not be
integrated with other offerings;
(3) An offering for which a registration statement under the Act
has been filed will not be integrated if it is made subsequent to:
(i) A terminated or completed offering for which general
solicitation is not permitted;
(ii) A terminated or completed offering for which general
solicitation is permitted made only to qualified institutional buyers
and institutional accredited investors; or
(iii) An offering for which general solicitation is permitted that
terminated or completed more than 30 calendar days prior to the
commencement of the registered offering; or
(4) Offers and sales made in reliance on an exemption for which
general solicitation is permitted will not be integrated if made
subsequent to any prior terminated or completed offering.
(c) For purposes of this section, an offering would be deemed to be
terminated or completed if:
(1) Made in reliance on Section 15 U.S.C. 77d(a)(2) (4(a)(2)),
Regulation D (Sec. Sec. 230.501 through 230.508), or Rules 147 (Sec.
230.147) or 147A (Sec. 230.147A), on the later of the date:
(i) The issuer entered into a binding commitment to sell securities
under the offering (subject only to conditions outside of the
investor's control); or
(ii) The issuer and its agents ceased efforts to make further
offers to sell the issuer's securities;
(2) Made in reliance on Regulation A (Sec. Sec. 230.251 through
230.263), on the:
(i) Withdrawal of an offering statement under Rule 259(a) (Sec.
230.259(a));
(ii) Filing of a Form 1-Z (Sec. 239.94 of this chapter) with
respect to that offering;
(iii) Declaration by the Commission that the offering statement has
been abandoned under Rule 259(b) (Sec. 230.259(b)); or
(iv) Third anniversary of the initial qualification date of the
offering statement, in the case of continuous or delayed offerings;
(3) Made in reliance on Regulation Crowdfunding, on the deadline of
the offering identified in the offering materials pursuant to Rule
201(g) (Sec. 227.201(g) of this chapter), or indicated by the
Regulation Crowdfunding intermediary in any notice to investors
delivered under Rule 304(b) (Sec. 227.304(b) of this chapter);
(4) Made in reliance on a filed registration statement:
(i) On the withdrawal of the registration statement after the
Commission grants such application under Rule 477 (Sec. 230.477);
(ii) On the filing of an amendment or supplement to the
registration statement indicating that the registered offering has been
terminated or completed and the deregistering of any unsold securities
if required by Item 512(a)(3) of Regulation S-K (Sec. 229.512(a)(3) of
this chapter);
(iii) On the entry of an order of the Commission declaring that the
registration statement has been abandoned under Rule 479 (Sec.
230.479); or
(iv) As set forth in Rule 415(a)(5) (Sec. 230.415(a)(5)).
Sec. 230.155 [Removed and Reserved]
0
14. Remove and reserve Sec. 230.155.
0
15. Add Sec. 230.241 to read as follows:
Sec. 230.241 Solicitations of interest.
(a) Solicitation of interest. At any time before making a
determination as to the exemption from registration under the Act under
which an offering of securities will be conducted, an issuer or any
person authorized to act on behalf of an issuer may communicate orally
or in writing to determine whether there is any interest in a
contemplated securities offering. Such communications are deemed to be
an offer of a security for sale for purposes of the antifraud
provisions of the federal securities laws. No solicitation or
acceptance of money or other consideration, nor of any commitment,
binding or otherwise, from any person is permitted until the issuer
makes a determination as to the exemption to be relied upon and the
offering, meeting the requirements of the exemption, is commenced.
(b) Conditions. The communications must state that:
(1) The issuer is considering an offering of securities exempt from
registration under the Act, but has not determined a specific exemption
from registration the issuer intends to rely upon for the subsequent
offer and sale of the securities;
(2) No money or other consideration is being solicited, and if sent
in response, will not be accepted;
(3) No offer to buy the securities can be accepted and no part of
the purchase price can be received until the issuer determines the
exemption under which the offering is intended to be conducted and,
where applicable, the filing, disclosure, or qualification requirements
of such exemption are met; and
(4) A person's indication of interest involves no obligation or
commitment of any kind.
(c) Indications of interest. Any written communication under this
rule may include a means by which a person may indicate to the issuer
that such person is interested in a potential offering. The issuer may
require the name, address, telephone number, and/or email address in
any response form included pursuant to this paragraph (c).
0
16. Amend Sec. 230.251 by revising paragraphs (a)(2), (b)(7), and (c)
to read as follows:
Sec. 230.251 Scope of exemption.
* * * * *
(a) * * *
(2) Tier 2. Offerings pursuant to Regulation A in which the sum of
the aggregate offering price and aggregate sales does not exceed
$75,000,000, including not more than $22,500,000 offered by all selling
security holders that are affiliates of the issuer (``Tier 2
offerings'').
* * * * *
(b) * * *
(7) Has filed with the Commission all reports required to be filed,
if any, pursuant to Rule 257 (Sec. 230.257) or pursuant to Section 13
or 15(d) of the Exchange Act (15 U.S.C. 78m or 15 U.S.C. 78o) during
the two years before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports); and
* * * * *
(c) Integration with other offerings. To determine whether offers
and sales should be integrated, please see Rule 152 (Sec. 230.152).
* * * * *
[[Page 18044]]
Sec. 230.255 [Amended]
0
17. Amend Sec. 230.255 by removing paragraph (e).
0
18. Amend Sec. 230.259 by revising paragraph (b) to read as follows:
Sec. 230.259 Withdrawal or abandonment of offering statements.
* * * * *
(b) Abandonment. When an offering statement, or a post-
qualification amendment to such statement, has been on file with the
Commission for nine months without amendment and has not become
qualified, the Commission may, in its discretion, declare the offering
statement or post-qualification amendment abandoned. If the offering
statement has been amended, or if the post-qualification amendment has
been amended, the nine-month period shall be computed from the date of
the latest amendment.
0
19. Amend Sec. 230.262 by revising paragraphs (a) and (b)(3) to read
as follows:
Sec. 230.262 Disqualification provisions.
(a) Disqualification events. No exemption under this Regulation A
(Sec. Sec. 230.251 through 230.346) shall be available for a sale of
securities if the issuer; any predecessor of the issuer; any affiliated
issuer; any director, executive officer, other officer participating in
the offering, general partner or managing member of the issuer; any
beneficial owner of 20 percent or more of the issuer's outstanding
voting equity securities, calculated on the basis of voting power; any
promoter connected with the issuer in any capacity at the time of
filing, any offer after qualification, or such sale; any person that
has been or will be paid (directly or indirectly) remuneration for
solicitation of purchasers in connection with such sale of securities;
any general partner or managing member of any such solicitor; or any
director, executive officer or other officer participating in the
offering of any such solicitor or general partner or managing member of
such solicitor:
(1) Has been convicted, within ten years before the filing of the
offering statement or such sale (or five years, in the case of issuers,
their predecessors and affiliated issuers), of any felony or
misdemeanor:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(2) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before the filing of
the offering statement or such sale that, at the time of such filing or
such sale, restrains or enjoins such person from engaging or continuing
to engage in any conduct or practice:
(i) In connection with the purchase or sale of any security;
(ii) Involving the making of any false filing with the Commission;
or
(iii) Arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, investment adviser or paid
solicitor of purchasers of securities;
(3) Is subject to a final order (as defined in Rule 261 (Sec.
230.261)) of a state securities commission (or an agency or officer of
a state performing like functions); a state authority that supervises
or examines banks, savings associations, or credit unions; a state
insurance commission (or an agency or officer of a state performing
like functions); an appropriate federal banking agency; the U.S.
Commodity Futures Trading Commission; or the National Credit Union
Administration that:
(i) At the time of the filing of the offering statement or such
sale, bars the person from:
(A) Association with an entity regulated by such commission,
authority, agency, or officer;
(B) Engaging in the business of securities, insurance or banking;
or
(C) Engaging in savings association or credit union activities; or
(ii) Constitutes a final order based on a violation of any law or
regulation that prohibits fraudulent, manipulative, or deceptive
conduct entered within ten years before such filing of the offering
statement or such sale;
(4) Is subject to an order of the Commission entered pursuant to
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15
U.S.C. 78o(b) or 78o-4(c)) or section 203(e) or (f) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at the time of
the filing of the offering statement or such sale:
(i) Suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer or investment adviser;
(ii) Places limitations on the activities, functions or operations
of such person; or
(iii) Bars such person from being associated with any entity or
from participating in the offering of any penny stock;
(5) Is subject to any order of the Commission entered within five
years before the filing of the offering statement or such sale that, at
the time of such filing or sale, orders the person to cease and desist
from committing or causing a violation or future violation of:
(i) Any scienter-based anti-fraud provision of the federal
securities laws, including without limitation section 17(a)(1) of the
Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-
5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(c)(1)) and section 206(1) of the Investment Advisers Act of 1940
(15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
(ii) Section 5 of the Securities Act of 1933 (15 U.S.C. 77e).
(6) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a registered national
securities exchange or a registered national or affiliated securities
association for any act or omission to act constituting conduct
inconsistent with just and equitable principles of trade;
(7) Has filed (as a registrant or issuer), or was or was named as
an underwriter in, any registration statement or offering statement
filed with the Commission that, within five years before the filing of
the offering statement or such sale, was the subject of a refusal
order, stop order, or order suspending the Regulation A exemption, or
is, at the time of such filing or such sale, the subject of an
investigation or proceeding to determine whether a stop order or
suspension order should be issued; or
(8) Is subject to a United States Postal Service false
representation order entered within five years before the filing of the
offering statement or such sale, or is, at the time of such filing or
such sale, subject to a temporary restraining order or preliminary
injunction with respect to conduct alleged by the United States Postal
Service to constitute a scheme or device for obtaining money or
property through the mail by means of false representations.
Instruction to paragraph (a): With respect to any beneficial owner
of 20 percent or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power, the issuer is
required to determine whether a disqualifying event has occurred only
as of the time of filing of the offering statement and not from the
time of such sale.
(b) * * *
[[Page 18045]]
(3) If, before the filing of the offering statement or the relevant
sale, the court or regulatory authority that entered the relevant
order, judgment or decree advises in writing (whether contained in the
relevant judgment, order or decree or separately to the Commission or
its staff) that disqualification under paragraph (a) of this section
should not arise as a consequence of such order, judgment or decree; or
* * * * *
0
20. Amend Sec. 230.502 by:
0
a. Revising paragraph (a);
0
b. Removing the Note following paragraph (a);
0
c. Revising paragraph (b)(2)(i)(B); and
0
d. Adding paragraph (b)(2)(viii).
The revisions and addition read as follows:
Sec. 230.502 General conditions to be met.
* * * * *
(a) Integration. To determine whether offers and sales should be
integrated, please see Rule 152 (Sec. 230.152).
(b) * * *
(2) * * *
(i) * * *
(B) Financial statement information--(1) Offerings up to
$20,000,000. The financial statement information required by paragraph
(b) of Part F/S of Form 1-A. Such financial statement information must
be prepared in in accordance with generally accepted accounting
principles in the United States (US GAAP). If the issuer is a foreign
private issuer, such financial statements must be prepared in
accordance with either US GAAP or International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards
Board (IASB). If the financial statements comply with IFRS, such
compliance must be explicitly and unreservedly stated in the notes to
the financial statements and if the financial statements are audited,
the auditor's report must include an opinion on whether the financial
statements comply with IFRS as issued by the IASB.
(2) Offerings over $20,000,000. The financial statement information
required by paragraph (c) of Part F/S of Form 1-A (referenced in Sec.
239.90 of this chapter). If the issuer is a foreign private issuer,
such financial statements must be prepared in accordance with either US
GAAP or IFRS as issued by the IASB. If the financial statements comply
with IFRS, such compliance must be explicitly and unreservedly stated
in the notes to the financial statements and the auditor's report must
include an opinion on whether the financial statements comply with IFRS
as issued by the IASB.
* * * * *
(viii) At a reasonable time prior to the sale of securities to any
purchaser that is not an accredited investor in a transaction under
Sec. 230.506(b), the issuer shall provide the purchaser with any
written communications used under the authorization of Rule 241 within
30 days of the such sale.
* * * * *
0
21. Amend Sec. 230.504, by revising the section heading, paragraph
(b)(2), and the instruction to paragraph (b)(2) to read as follows:
Sec. 230.504 Exemption for limited offerings and sales of securities
not exceeding $10,000,000.
* * * * *
(b) * * *
(2) The aggregate offering price for an offering of securities
under this Sec. 230.504, as defined in Sec. 230.501(c), shall not
exceed $10,000,000, less the aggregate offering price for all
securities sold within the twelve months before the start of and during
the offering of securities under this Sec. 230.504 or in violation of
section 5(a) of the Securities Act.
Instruction to paragraph (b)(2): If a transaction under Sec.
230.504 fails to meet the limitation on the aggregate offering price,
it does not affect the availability of this Sec. 230.504 for the other
transactions considered in applying such limitation. For example, if an
issuer sold $10,000,000 of its securities on January 1, 2020, under
this Sec. 230.504 and an additional $500,000 of its securities on July
1, 2020, this Sec. 230.504 would not be available for the later sale,
but would still be applicable to the January 1, 2020, sale.
* * * * *
0
22. Amend Sec. 230.506 by:
0
a. Revising paragraph (b)(2)(i);
0
b. Removing the word ``or'' from the end of paragraph (c)(2)(ii)(B)(2);
0
c. Removing the ``.'' and adding in its place ``;'' at the end of
paragraph (c)(2)(ii)(C)(4);
0
d. Removing the ``.'' and adding in its place ``; or'' at the end of
paragraph (c)(2)(ii)(D);
0
e. Adding paragraph (c)(2)(ii)(E); and
0
f. Revising the heading to Instructions to paragraph (c)(2)(ii)(A)
through (D) of this section.
The revisions and addition read as follows:
Sec. 230.506 Exemption for limited offers and sales without regard to
dollar amount of offering.
* * * * *
(b) * * *
(2) * * *
(i) Limitation on number of purchasers. There are no more than, or
the issuer reasonably believes that there are no more than, 35
purchasers of securities from the issuer in offerings under this
section in any 90 calendar day period.
* * * * *
(c) * * *
(2) * * *
(ii) * * *
(E) In regard to any person that the issuer has previously verified
as an accredited investor in accordance with this paragraph (c)(2)(ii),
so long as the issuer is not aware of information to the contrary,
obtaining a written representation from such person at the time of sale
that he or she qualifies as an accredited investor.
Instructions to paragraph (c)(2)(ii)(A) through (E) of this
section: * * *
* * * * *
0
23. Amend Sec. 230.902 by revising paragraph (c)(1) and adding
paragraph (c)(3)(ix) to read as follows:
Sec. 230.902 Definitions.
* * * * *
(c) * * *
(1) Except as specified in this section, ``directed selling
efforts'' means any activity undertaken for the purpose of, or that
could reasonably be expected to have the effect of, conditioning the
market in the United States for any of the securities being offered in
reliance on this Regulation S (Sec. Sec. 230.901 through 230.906, and
Preliminary Notes). Such activity includes placing an advertisement in
a publication ``with a general circulation in the United States'' that
refers to the offering of securities being made in reliance upon this
Regulation S.
* * * * *
(3) * * *
(ix) Activity undertaken in connection with offers or sales under
an exemption from registration under the Act that involves general
solicitation or general advertising, provided that such activity is not
undertaken for the purpose of conditioning the market in the United
States for any of the securities being offered in reliance on this
Regulation S.
* * * * *
0
24. Add Sec. 230.906 to read as follows:
Sec. 230.906 General solicitation; transfer restrictions.
An issuer that engages in activity in connection with offers or
sales under an exemption from registration under the Act that is deemed
to not be ``directed selling efforts'' pursuant Sec. 230.902(c)(3)(ix)
may concurrently
[[Page 18046]]
make offers or sales in reliance on this Regulation S (Sec. Sec.
230.901 through 230.906, and Preliminary Notes). However, securities
acquired from the issuer, a distributor, or any of their respective
affiliates in such Regulation S offering are not permitted to be resold
to a U.S. person or for the account or benefit of a U.S. person for a
period of six months from the date of sale, except to qualified
institutional buyers, as defined in Sec. 230.144A, or accredited
investors that are institutions, as defined in Sec. 230.501(a).
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
25. The authority citation for part 239 continues to read as follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m,78n, 78o(d), 78o-7 note, 78u-5, 78w(a),
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24,
80a-26, 80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106,
126 Stat. 312, unless otherwise noted.
* * * * *
0
26. Amend Form S-6 (referenced in Sec. 239.16) by revising Additional
Instruction 3 of ``Instructions as to Exhibits'' to read as follows:
Note: The text of Form S-6 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-6
* * * * *
Instructions as to Exhibits
* * * * *
Additional Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (9) of section IX of Form N-
8B-2 (Exhibits) if the registrant customarily and actually treats that
information as private or confidential and if the omitted information
is not material. If it does so, the registrant should mark the exhibit
index to indicate that portions of the exhibit have been omitted and
include a prominent statement on the first page of the redacted exhibit
that certain identified information has been excluded from the exhibit
because it is both not material and the type that the registrant treats
as private or confidential. The registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the registrant's supplemental materials,
the Commission or its staff may require the registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the registrant's analyses. The
registrant may request confidential treatment of the supplemental
material submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
27. Amend Form N-14 (referenced in Sec. 239.23) by revising
Instruction 3 to Item 16 to read as follows:
Note: The text of Form N-14 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-14
* * * * *
Item 16. Exhibits
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (13) of this Item if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the registrant treats as private or
confidential. The registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the registrant's analyses. The registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
28. Amend Form 1-A (referenced in Sec. 239.90) by:
0
a. Revising General Instruction I;
0
b. Revising General Instruction III(a);
0
c. Revising paragraphs 13 and 17 of Part III, Item 17; and
0
d. Adding an instruction at the end of Part III, Item 17.
The revisions and addition read as follows:
Note: The text of Form 1-A does not, and this amendment will
not, appear in the Code of Federal Regulations.
FORM 1-A
REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933
GENERAL INSTRUCTIONS
I. Eligibility Requirements for Use of Form 1-A.
This Form is to be used for securities offerings made pursuant to
Regulation A (17 CFR 230.251 through 230.263). Careful attention should
be directed to the terms, conditions and requirements of Regulation A,
especially Rule 251, because the exemption is not available to all
issuers or for every type of securities transaction. Further, the
aggregate offering price and aggregate sales of securities in any 12-
month period is strictly limited to $20 million for Tier 1 offerings
and $75 million for Tier 2 offerings, including no more than $6 million
offered by all selling securityholders that are affiliates of the
issuer for Tier 1 offerings and $22.5 million by all selling
securityholders that are affiliates of the issuer for Tier 2 offerings.
Please refer to Rule 251 of Regulation A for more details.
* * * * *
III. Incorporation by Reference and Cross-Referencing.
* * * * *
(a) The use of incorporation by reference and cross-referencing in
Part II of this Form:
(1) Is limited to the following items:
[[Page 18047]]
(A) Items 2-14 of Part II and Part F/S if following the Offering
Circular format;
(B) Items 3-11 of Form S-1 if following the Part I of Form S-1
format; or
(C) Items 3-28, and 30 of Form S-11 if following the Part I of Form
S-11 format;
(2) May only incorporate by reference previously submitted or filed
financial statements if the issuer meets the following requirements:
(A) The issuer has filed with the Commission all reports and other
materials required to be filed, if any, pursuant to Rule 257 (Sec.
230.257 of this chapter) or by Sections 13(a), 14 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports
and other materials);
(B) the issuer makes the financial statement information that is
incorporated by reference pursuant to this item readily available and
accessible on a website maintained by or for the issuer; and
(C) the issuer must state that it will provide to each holder of
securities, including any beneficial owner, a copy of the financial
statement information that have been incorporated by reference in the
offering statement upon written or oral request, at no cost to the
requester, and provide the issuer's website address, including the
uniform resource locator (URL) where the incorporated financial
statements may be accessed.
* * * * *
Part III--Exhibits
* * * * *
Item 17. Description of Exhibits
* * * * *
13. ``Testing-the-waters'' materials--Any written communication or
broadcast script used under the authorization of Rule 241 within 30
days of the initial filing of the offering statement, and any written
communication or broadcast script used under the authorization of Rule
255. Materials used under the authorization of Rule 255 need not be
filed if they are substantively the same as materials previously filed
with the offering statement.
* * * * *
17. Additional exhibits--Any additional exhibits which the issuer
may wish to file, which must be so marked as to indicate clearly the
subject matters to which they refer.
* * * * *
Instruction to Item 17:
The issuer may redact specific provisions or terms of exhibits
required to be filed by paragraph 6 or 7 of this Item, if the issuer
customarily and actually treats that information as private or
confidential and if the omitted information is not material. If it does
so, the issuer should mark the exhibit index to indicate that portions
of the exhibit have been omitted and include a prominent statement on
the first page of the redacted exhibit that certain identified
information has been excluded from the exhibit because it is both not
material and is the type that the registrant treats as private or
confidential. The issuer also must include brackets indicating where
the information is omitted from the filed version of the exhibit. If
requested by the Commission or its staff, the issuer must promptly
provide on a supplemental basis an unredacted copy of the exhibit and
its materiality and privacy or confidentiality analyses. Upon
evaluation of the issuer's supplemental materials, the Commission or
its staff may require the issuer to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the issuer's analyses. The issuer may request confidential
treatment of the supplemental material submitted under paragraphs 6 or
7 pursuant to Rule 83 (Sec. 200.83 of this chapter) while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it if the registrant complies with the procedures
outlined in Rule 418 (Sec. 230.418 of this chapter).
* * * * *
0
29. Amend Form C (referenced in Sec. 239.900) by:
0
a. Adding items to the Cover Page after ``website of the Issuer,''
0
b. Revising General Instruction I;
0
c. Revising Instruction 1 to the Signature; and
0
d. Revising the introductory paragraphs in the Optional Question and
Answer Format for an Offering Statement; and
0
e. Revising Question 11 in the Optional Question and Answer Format for
an Offering Statement.
The addition and revisions to read as follows:
Note: The text of Form C does not, and this amendment will not,
appear in the Code of Federal Regulations.
Form C
Under The Securities Act of 1933
* * * * *
Is there a co-issuer? __ yes __ no. If yes,
Name of co-issuer: __________
Leal status of co-issuer:
Form: __________
Jurisdiction of Incorporation/Organization: __________
Date of organization: __________
Physical address of co-issuer: _______
Website of co-issuer: ________
* * * * *
GENERAL INSTRUCTIONS
I. Eligibility Requirements for Use of Form C
This Form shall be used for the offering statement, and any related
amendments and progress reports, required to be filed by any issuer
offering or selling securities in reliance on the exemption in
Securities Act Section 4(a)(6) and in accordance with Section 4A and
Regulation Crowdfunding (Sec. Sec. 227.100 through 227.503). The term
``issuer'' includes any co-issuer jointly offering or selling
securities with an issuer in reliance on the exemption in Securities
Act Section 4(a)(6) and in accordance with Securities Act Section 4A
and Regulation Crowdfunding (Sec. Sec. 227.100 through 227.503) This
Form also shall be used for an annual report required pursuant to Rule
202 of Regulation Crowdfunding (Sec. 227.202 of this chapter) and for
the termination of reporting required pursuant to Rule 203(b)(2) of
Regulation Crowdfunding (Sec. 227.203(b)(2) of this chapter). Careful
attention should be directed to the terms, conditions and requirements
of the exemption.
* * * * *
SIGNATURES
* * * * *
Instructions.
1. The form shall be signed by the issuer, its principal executive
officer or officers, its principal financial officer, its controller or
principal accounting officer and at least a majority of the board of
directors or persons performing similar functions. If there is a co-
issuer, the form shall also be signed by the co-issuer, its principal
executive officer or officers, its principal financial officer, its
controller or principal accounting officer and at least a majority of
the board of directors or persons performing similar functions.
* * * * *
OPTIONAL QUESTION AND ANSWER FORMAT FOR AN OFFERING STATEMENT
Respond to each question in each paragraph of this part. Set forth
each
[[Page 18048]]
question and any notes, but not any instructions thereto, in their
entirety. If disclosure in response to any question is responsive to
one or more other questions, it is not necessary to repeat the
disclosure. If a question or series of questions is inapplicable or the
response is available elsewhere in the Form, either state that it is
inapplicable, include a cross-reference to the responsive disclosure,
or omit the question or series of questions. The term ``issuer'' in
these questions and answers includes any ``co-issuer'' jointly offering
or selling securities with the issuer in reliance on the exemption in
Securities Act Section 4(a)(6) and in accordance with Securities Act
Section 4A and Regulation Crowdfunding (Sec. Sec. 227.100 through
227.503). Any information provided with respect to the issuer should
also be separately provided with respect to any co-issuer.
Be very careful and precise in answering all questions. Give full
and complete answers so that they are not misleading under the
circumstances involved. Do not discuss any future performance or other
anticipated event unless you have a reasonable basis to believe that it
will actually occur within the foreseeable future. If any answer
requiring significant information is materially inaccurate, incomplete
or misleading, the Company, its management and principal shareholders
may be liable to investors based on that information.
* * * * *
11. (a) Did the issuer make use of any written communication or
broadcast script for testing-the-waters either (i) under the
authorization of Rule 241 within 30 days of the initial filing of the
offering statement, or (ii) under the authorization of Rule 206? If so,
provide copies of the materials used.
(b) How will the issuer complete the transaction and deliver
securities to the investors?
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
30. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
Section 240.220f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *
Section 249.308 is also issued under 15 U.S.C. 80a-29 and 80a-
37.
* * * * *
0
31. Amend Form 20-F (referenced in Sec. 249.220f) by revising the
second, third and fourth paragraphs following instruction 4.(a)(ii)
under ``Instructions as to Exhibits,'' and prior to the note, to read
as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
FORM 20-F
* * * * *
INSTRUCTIONS AS TO EXHIBITS
* * * * *
4. (a) * * *
(ii) completes a transaction that had the effect of causing it to
cease being a public shell company.
The only contracts that must be filed are those to which the
registrant or a subsidiary of the registrant is a party or has
succeeded to a party by assumption or assignment or in which the
registrant or such subsidiary has a beneficial interest.
The registrant may redact specific provisions or terms of exhibits
required to be filed by this Form 20-F if the registrant customarily
and actually treats that information as private or confidential and if
the omitted information is not material. If it does so, the registrant
should mark the exhibit index to indicate that portions of the exhibit
or exhibits have been omitted and include a prominent statement on the
first page of the redacted exhibit that certain identified information
has been excluded from the exhibit because it is both not material and
is the type that the registrant treats as private or confidential. The
registrant also must include brackets indicating where the information
is omitted from the filed version of the exhibit. If requested by the
Commission or its staff, the registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its
materiality and privacy or confidentiality analyses. Upon evaluation of
the registrant's supplemental materials, the Commission or its staff
may require the registrant to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the registrant's analyses. The registrant may request
confidential treatment of the supplemental material submitted under
this instruction pursuant to Rule 83 (Sec. 200.83 of this chapter)
while it is in the possession of the Commission or its staff. After
completing its review of the supplemental information, the Commission
or its staff will return or destroy it if the registrant complies with
the procedures outlined in Rules 418 or 12b-4 (Sec. 230.418 or
240.12b-4 of this chapter).
* * * * *
0
32. Amend Form 8-K (referenced in Sec. 249.308) by revising
Instruction 6 under Item 1.01 to read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
FORM 8-K
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
Section 1--Registrant's Business and Operations
Item 1.01 Entry Into a Material Definitive Agreement
* * * * *
Instructions.
* * * * *
6. To the extent a material definitive agreement is filed as an
exhibit under this Item 1.01, the registrant may redact specific
provisions or terms of the exhibit if the registrant customarily and
actually treats that information as private or confidential and if the
omitted information is not material, provided that the registrant
intends to incorporate by reference this filing into its future
periodic reports or registration statements, as applicable, in
satisfaction of Item 601(b)(10) of Regulation S-K. If it does so, the
registrant should mark the exhibit index to indicate that portions of
the exhibit have been omitted and include a prominent statement on the
first page of the redacted exhibit that certain identified information
has been excluded from the exhibit because it is both not material and
is the type that the registrant treats as private or confidential. The
registrant also must include brackets indicating where the information
is omitted from the filed version of the exhibit. If requested by the
Commission or its staff, the registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its
materiality and privacy or confidentiality analyses. Upon evaluation of
the registrant's supplemental materials, the Commission or its staff
may require the registrant to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the registrant's analyses. The registrant may request
confidential treatment of the supplemental material submitted under
this instruction
[[Page 18049]]
pursuant to Rule 83 (Sec. 200.83 of this chapter) while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it if the registrant complies with the procedures
outlined in Rules 418 or 12b-4 (Sec. 230.418 or 240.12b-4 of this
chapter).
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
33. The authority citation for part 270 continues to read as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2020), unless
otherwise noted;
* * * * *
0
34. Add Sec. 270.3a-9 to read as follows:
Sec. 270.3a-9 Crowdfunding vehicle.
(a) Notwithstanding section 3(a) of the Act, a crowdfunding vehicle
will be deemed not to be an investment company if the vehicle:
(1) Is organized and operated for the sole purpose of acquiring,
holding, and disposing of securities issued by a single crowdfunding
issuer and raising capital in one or more offerings made in compliance
with Regulation Crowdfunding;
(2) Does not borrow money and uses the proceeds from the sale of
its securities solely to purchase a single class of securities of a
single crowdfunding issuer;
(3) Issues only one class of securities in one or more offerings
under Regulation Crowdfunding in which the crowdfunding vehicle and the
crowdfunding issuer are deemed to be co-issuers under the Securities
Act (15 U.S.C. 77a et seq.);
(4) Receives a written undertaking from the crowdfunding issuer to
fund or reimburse the expenses associated with its formation,
operation, or winding up, receives no other compensation, and any
compensation paid to any person operating the vehicle is paid solely by
the crowdfunding issuer;
(5) Maintains the same fiscal year-end as the crowdfunding issuer;
(6) Maintains a one-to-one relationship between the number,
denomination, type and rights of crowdfunding issuer securities it owns
and the number, denomination, type and rights of its securities
outstanding;
(7) Seeks instructions from the holders of its securities with
regard to:
(i) The voting of the crowdfunding issuer securities it holds and
votes the crowdfunding issuer securities only in accordance with such
instructions; and
(ii) Participating in tender or exchange offers or similar
transactions conducted by the crowdfunding issuer and participates in
such transactions only in accordance with such instructions;
(8) Receives, from the crowdfunding issuer, all disclosures and
other information required under Regulation Crowdfunding and the
crowdfunding vehicle promptly provides such disclosures and other
information to the investors and potential investors in the
crowdfunding vehicle's securities and to the relevant intermediary; and
(9) Provides to each investor the right to direct the crowdfunding
vehicle to assert the rights under state and federal law that the
investor would have if he or she had invested directly in the
crowdfunding issuer and provides to each investor any information that
it receives from the crowdfunding issuer as a shareholder of record of
the crowdfunding issuer.
(b) For purposes of this section:
(1) Crowdfunding issuer means a company that seeks to raise capital
as a co-issuer in an offering by a crowdfunding vehicle that complies
with all of the requirements under Section 4(a)(6) of the Securities
Act (15 U.S.C. 77d(a)(6)) and Regulation Crowdfunding.
(2) Crowdfunding vehicle means an issuer formed by or on behalf of
a crowdfunding issuer for the purpose of conducting an offering under
section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) as a co-
issuer with the crowdfunding issuer, which offering is controlled by
the crowdfunding issuer.
(3) Regulation Crowdfunding means the regulations set forth in 17
CFR 227.100 through 227.503.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
35. The authority citation for part 274 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a 24, 80a-26, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
36. Amend Form N-5 (referenced in Sec. Sec. 239.24 of this chapter and
274.5) by revising Instruction 3 in ``Instructions as to Exhibits'' to
read as follows:
Note: The text of Form N-5 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-5
Registration Statement of Small Business Investment Company Under the
Securities Act of 1933 and the Investment Company Act of 1940*
* * * * *
Instructions as to Exhibits
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph 9 of this Item if the
registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the registrant treats as private or
confidential. The registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the registrant's analyses. The registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the registrant complies with the procedures
outlined in Rule 418 under the Securities Act of 1933 [17 CFR 230.418].
* * * * *
0
37. Amend Form N-1A (referenced in Sec. Sec. 239.15A of this chapter
and 274.11A) by:
0
a. Amending the last sentence of Instruction 2 to Item 28 by replacing
``registrant'' with ``Registrant'';
0
b. Amending Instruction 3 to Item 28 by replacing ``registrant'' with
``Registrant''; and
[[Page 18050]]
0
c. Revising Instruction 4 to Item 28. The revisions read as follows:
Note: The text of Form N-1A does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-1A
* * * * *
Item 28. Exhibits
* * * * *
Instructions
* * * * *
4. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph (h) of this Item if the
Registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the Registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the Registrant's supplemental materials, the
Commission or its staff may require the registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the Registrant's analyses. The Registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 4 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
38. Amend Form N-2 (referenced in Sec. Sec. 239.14 of this chapter and
274.11a-1) by:
0
a. Amending the last sentence of Instruction 4 to Item 25.2 by
replacing ``registrant'' with ``Registrant'';
0
b. Amending Instruction 5 to Item 25.2 by replacing ``registrant'' with
``Registrant''; and
0
c. Revising Instruction 6 to Item 25.2.
The revisions read as follows:
Note: The text of Form N-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-2
* * * * *
Item 25. Financial Statements and Exhibits
* * * * *
2. Exhibits:
* * * * *
Instructions
* * * * *
6. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraph k. of this Item if the
Registrant customarily and actually treats that information as private
or confidential and if the omitted information is not material. If it
does so, the Registrant should mark the exhibit index to indicate that
portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the Registrant's supplemental materials, the
Commission or its staff may require the Registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the Registrant's analyses. The Registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 6 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
39. Amend Form N-3 (referenced in Sec. Sec. 239.17a of this chapter
and 274.11b) by revising Instruction 5 to Item 29(b) to read as
follows:
Note: The text of Form N-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-3
* * * * *
Item 29. Financial Statements and Exhibits
* * * * *
(b) Exhibits:
* * * * *
Instructions
* * * * *
5. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (9) and (11) of this Item
if the Registrant customarily and actually treats that information as
private or confidential and if the omitted information is not material.
If it does so, the Registrant should mark the exhibit index to indicate
that portions of the exhibit have been omitted and include a prominent
statement on the first page of the redacted exhibit that certain
identified information has been excluded from the exhibit because it is
both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating
where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must
promptly provide on a supplemental basis an unredacted copy of the
exhibit and its materiality and privacy or confidentiality analyses.
Upon evaluation of the Registrant's supplemental materials, the
Commission or its staff may require the Registrant to amend its filing
to include in the exhibit any previously redacted information that is
not adequately supported by the Registrant's analyses. The Registrant
may request confidential treatment of the supplemental material
submitted under this Instruction 5 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
40. Amend Form N-4 (referenced in Sec. Sec. 239.17b of this chapter
and 274.11c)
[[Page 18051]]
by revising Instruction 5 to Item 24(b) to read as follows:
Note: The text of Form N-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-4
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
(b) Exhibits:
* * * * *
Instructions
* * * * *
5. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (7) and (8) of this Item if
the Registrant customarily and actually treats that information as
private or confidential and if the omitted information is not material.
If it does so, the Registrant should mark the exhibit index to indicate
that portions of the exhibit or exhibits have been omitted and include
a prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and the type that the Registrant treats
as private or confidential. The Registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
Registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the Registrant's supplemental materials,
the Commission or its staff may require the Registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the Registrant's analyses. The
Registrant may request confidential treatment of the supplemental
material submitted under this Instruction 5 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
41. Amend Form N-6 (referenced in Sec. Sec. 239.17c of this chapter
and 274.11d) by revising Instruction 3 to Item 26 to read as follows:
Note: The text of Form N-6 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-6
* * * * *
Item 26. Exhibits
* * * * *
Instructions:
* * * * *
3. The Registrant may redact specific provisions or terms of
exhibits required to be filed by paragraphs (g) and (j) of this Item if
the Registrant customarily and actually treats that information as
private. If it does so, the Registrant should mark the exhibit index to
indicate that portions of the exhibit have been omitted and include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and the type that the Registrant treats
as private or confidential. The Registrant also must include brackets
indicating where the information is omitted from the filed version of
the exhibit. If requested by the Commission or its staff, the
Registrant must promptly provide on a supplemental basis an unredacted
copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the Registrant's supplemental materials,
the Commission or its staff may require the Registrant to amend its
filing to include in the exhibit any previously redacted information
that is not adequately supported by the Registrant's analyses. The
Registrant may request confidential treatment of the supplemental
material submitted under this Instruction 3 pursuant to rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the
possession of the Commission or its staff. After completing its review
of the supplemental information, the Commission or its staff will
return or destroy it, if the Registrant complies with the procedures
outlined in rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
0
42. Amend Form N-8B-2 (referenced in Sec. 274.12) by revising
Instruction 3 to ``IX Exhibits'' to read as follows:
Note: The text of Form N-8B-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form N-8B-2
Registration Statement of Unit Investment Trusts Which Are Currently
Issuing Securities
* * * * *
IX
EXHIBITS
* * * * *
Instructions:
* * * * *
3. The registrant may redact specific provisions or terms of
exhibits required to be filed by A(9) if the registrant customarily and
actually treats that information as private. If it does so, the
registrant should mark the exhibit index to indicate that portions of
the exhibit have been omitted and include a prominent statement on the
first page of the redacted exhibit that certain identified information
has been excluded from the exhibit because it is both not material and
the type that the registrant treats as private or confidential. The
registrant also must include brackets indicating where the information
is omitted from the filed version of the exhibit. If requested by the
Commission or its staff, the registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its
materiality and privacy or confidentiality analyses. Upon evaluation of
the registrant's supplemental materials, the Commission or its staff
may require the registrant to amend its filing to include in the
exhibit any previously redacted information that is not adequately
supported by the registrant's analyses. The registrant may request
confidential treatment of the supplemental material submitted under
this Instruction 3 pursuant to rule 83 of the Commission's
Organizational Rules [17 CFR 200.83] while it is in the possession of
the Commission or its staff. After completing its review of the
supplemental information, the Commission or its staff will return or
destroy it, if the registrant complies with the procedures outlined in
rule 418 under the Securities Act [17 CFR 230.418].
* * * * *
By the Commission.
Dated: March 4, 2020.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-04799 Filed 3-30-20; 8:45 am]
BILLING CODE 8011-01-P