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

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rules.

SUMMARY:

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

DATES:

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

We are amending Rules 251 through 263 of Regulation A under the Securities Act of 1933 (the “Securities Act”).

We are revising Form 1-A, rescinding Form 2-A, and adopting four new forms, Form 1-K (annual report), Form 1-SA (semiannual report), Form 1-U (current report), and Form 1-Z (exit report).

Further, we are revising Rule 4a-1 under the Trust Indenture Act of 1939 (the “Trust Indenture Act”) to increase the dollar ceiling of the exemption from the requirement to issue securities pursuant to an indenture. We are also amending Rule 12g5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”) to permit issuers to rely on a conditional exemption from mandatory registration of a class of securities under Section 12(g) of the Exchange Act, Rule 15c2-11 of the Exchange Act to permit an issuer's ongoing reports filed under Regulation A to satisfy a broker-dealer's obligations to review and maintain certain information about an issuer's quoted securities, and Rule 30-1 of the Commission's organizational rules and provisions for delegated authority to permit the Division of Corporation Finance to issue notices of qualification and deny Form 1-Z filings. In addition, we are adopting a technical amendment to Exchange Act Rule 15c2-11 to update the outdated reference to “Schedule H of the By-Laws of the National Association of Securities Dealers, Inc.,” which is now known as the “Financial Industry Regulatory Authority, Inc.” and to reflect the correct rule reference.

As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a), 505(b)(2)(iii), and Form 8-A. Additionally, we are revising Item 101(a) of Regulation S-T to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6) of Regulation S-T to remove the reference to paper filings in a Regulation A offering, and removing and reserving Item 101(b)(8) of Regulation S-T dealing with the optional electronic filing of Form F-X by Canadian issuers.

Table of Contents

I. Introduction

II. Final Rules and Amendments to Regulation A

A. Overview

B. Scope of Exemption

1. Eligible Issuers

2. Eligible Securities

3. Offering Limitations and Secondary Sales

4. Investment Limitation

5. Integration

6. Treatment Under Section 12(g)

C. Offering Statement

1. Electronic Filing; Delivery Requirements

2. Non-Public Submission of Draft Offering Statements

3. Form and Content

4. Continuous or Delayed Offerings and Offering Circular Supplements

5. Qualification

D. Solicitation of Interest (Testing the Waters)

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

E. Ongoing Reporting

1. Continuing Disclosure Obligations

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

3. Exchange Act Registration of Regulation A Securities

4. Exit Report on Form 1-Z

F. Insignificant Deviations From a Term, Condition or Requirement

G. Bad Actor Disqualification

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

H. Relationship With State Securities Law

1. Proposed Rules

2. Comments on Proposed Rules

3. Final Rules

I. Additional Considerations Related to Smaller Offerings

J. Transitional Guidance for Issuers Currently Conducting Regulation A Offerings

K. Technical and Conforming Amendments

III. Economic Analysis

A. Broad Economic Considerations

B. Baseline

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

2. Investors

3. Financial Intermediaries

C. Scope of Exemption

1. Eligible Issuers

2. Eligible Securities

3. Offering Limitations and Secondary Sales

4. Investment Limitation

5. Integration

6. Treatment Under Section 12(g)

D. Offering Statement

1. Electronic Filing and Delivery

2. Disclosure Format and Content

3. Audited Financial Statements

4. Other Accounting Requirements

5. Continuous and Delayed Offerings

6. Nonpublic Review of Draft Offering Statements

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

F. Ongoing Reporting

1. Periodic and Current Event Reporting Requirements

2. Termination and Suspension of Reporting and Exit Reports

3. Exchange Act Registration

G. Insignificant Deviations

H. Bad Actor Disqualification

I. Relationship With State Securities Law

IV. Paperwork Reduction Act

A. Background

B. Estimated Number of Regulation A Offerings

C. PRA Reporting and Cost Burden Estimates

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

2. Form 1-K: Annual Report

3. Form 1-SA: Semiannual Report

4. Form 1-U: Current Reporting

5. Form 1-Z: Exit Report

6. Form 8-A: Short Form Registration Under the Exchange Act

7. Form ID Filings

8. Form F-X

D. Collections of Information Are Mandatory

V. Final Regulatory Flexibility Act Analysis

A. Need for the Rules

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Basis and Text of Amendments

I. Introduction

On December 18, 2013, we proposed rule and form amendments to implement Section 401 of the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 401 of the JOBS Act amended Section 3(b) of the Securities Act by designating existing Section 3(b) as Section 3(b)(1), and creating new Sections 3(b)(2)-(5). Section 3(b)(2) directs the Commission to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period. Sections 3(b)(2)-(5) specify mandatory terms and conditions for such exempt offerings and also authorize the Commission to adopt other terms, conditions, or requirements as necessary in the public interest and for the protection of investors. In addition, Section 3(b)(5) directs the Commission to review the $50 million offering limit specified in Section 3(b)(2) not later than two years after the enactment of the JOBS Act and every two years thereafter, and authorizes the Commission to increase the annual offering limit if it determines that it would be appropriate to do so. Accordingly, we are revising Regulation A under the Securities Act to require issuers conducting offerings in reliance on Section 3(b)(2) to comply with terms and conditions established by the Commission's rules, and, where applicable, to make ongoing disclosure.

II. Final Rules and Amendments to Regulation A

A. Overview

We are adopting final rules to implement the JOBS Act mandate by expanding Regulation A into two tiers: Tier 1, for securities offerings of up to $20 million; and Tier 2, for offerings of up to $50 million. The final rules for offerings under Tier 1 and Tier 2 build on current Regulation A and preserve, with some modifications, existing provisions regarding issuer eligibility, offering circular contents, testing the waters, and “bad actor” disqualification. As proposed, and with the modifications described below, the final rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for Regulation A issuers. Under the final rules, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Rule 501(a) of Regulation D, or be subject to certain limitations on their investment. The differences between Tier 1 and Tier 2 offerings are described more fully below.

In developing the final rules, we considered the statutory language of JOBS Act Section 401, the JOBS Act legislative history, recent recommendations of the Commission's Government-Business Forum on Small Business Capital Formation, the Advisory Committee on Small and Emerging Companies, the Equity Capital Formation Task Force, comment letters received on Title IV of the JOBS Act before the Commission's proposed rules were issued in December of 2013, and comment letters received to date on the Commission's proposed rules to implement Section 401 of the JOBS Act.

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

• Establish two tiers of offerings:
• Tier 1: Annual offering limit of $20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.
• Tier 2: Annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer.
• Limit sales by selling securityholders in an issuer's initial Regulation A offering and any subsequently qualified Regulation A offering within the first 12-month period following the date of qualification of the initial Regulation A offering to no more than 30% of the aggregate offering price.
• Preserve the existing issuer eligibility requirements of Regulation A, and also exclude issuers that are, or have been, subject to any order of the Commission pursuant to Section 12(j) of the Exchange Act entered within five years before the filing of the offering statement and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement.
• Limit the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons). This limit will not apply to purchases of securities that will be listed on a national securities exchange upon qualification.
• Exclude asset-backed securities, as defined in Regulation AB, from the list of eligible securities.
• Update the safe harbor from integration and provide guidance on the potential integration of offerings conducted concurrently with, or close in time after, a Regulation A offering.

Solicitation materials:

• Permit issuers to “test the waters” with, or solicit interest in a potential offering from, the general public either before or after the filing of the offering statement, so long as any solicitation materials used after publicly filing the offering statement are preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.

Qualification, communications, and offering process:

• Require issuers and intermediaries in the prequalification period to deliver a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale unless the issuer is subject to, and current in, Tier 2 ongoing reporting obligations. Where the issuer is subject to, and current in, a Tier 2 ongoing reporting obligation, issuers and intermediaries will only be required to comply with the general delivery requirements for offers.
• Modernize the qualification, communications, and offering processes in Regulation A to reflect analogous provisions of the Securities Act registration process:

• Permit issuers and intermediaries to satisfy their delivery requirements as to the final offering circular under an “access equals delivery” model when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on the Commission's Electronic Data Gathering, Analysis and Retrieval system (EDGAR);
• Require issuers and intermediaries, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice with the uniform resource locator (URL) where the final offering circular may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent and received in response; and
• Permit issuers to file offering circular updates and supplements after qualification of the offering statement in lieu of post-qualification amendments in certain circumstances, including to provide the types of information that may be excluded from a prospectus under Rule 430A.
• Permit continuous or delayed offerings, but require issuers in continuous or delayed Tier 2 offerings to be current in their annual and semiannual reporting obligations in order to do so.
• Permit issuers to qualify additional securities in reliance on Regulation A by filing a post-qualification amendment to a qualified offering statement.

Offering statement:

• Require issuers to file offering statements with the Commission electronically on EDGAR.
• Permit the non-public submission of offering statements and amendments for review by Commission staff before filing such documents with the Commission, so long as all such documents are publicly filed not later than 21 calendar days before qualification.
• Eliminate the Model A (Question-and-Answer) disclosure format under Part II of Form 1-A.
• Update and clarify Model B (Narrative) disclosure format under Part II of Form 1-A (renamed, “Offering Circular”), while continuing to permit Part I of Form S-1 narrative disclosure as an alternative.
• Permit real estate investment trusts (REITs) and similarly eligible companies to provide the narrative disclosure required by Part I of Form S-11 in Part II of Form 1-A.
• Require that offering statements be qualified by the Commission before sales may be made pursuant to Regulation A.
• Require Tier 1 and Tier 2 issuers to file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence).
• Require Tier 2 issuers to include financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB).
• Require Tier 1 and Tier 2 issuers to include financial statements in Form 1-A that are dated not more than nine months before the date of non-public submission, filing, or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.

Ongoing reporting:

• Require Tier 1 issuers to provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the Commission not later than 30 calendar days after termination or completion of an offering.
• Require Tier 2 issuers to file electronically with the Commission on EDGAR annual and semiannual reports, as well as current event reports.
• Require Tier 2 issuers to file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer's first required periodic report.
• Permit the ongoing reports filed by an issuer conducting a Tier 2 offering to satisfy a broker-dealer's obligations under Exchange Act Rule 15c2-11.
• Provide that Tier 2 issuers' reporting obligations under Regulation A would suspend when they are subject to the ongoing reporting requirements of Section 13 of the Exchange Act, and may also be suspended under Regulation A at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement was qualified, so long as the securities of each class to which the offering statement relates are held of record by fewer than 300 persons, or fewer than 1,200 persons for banks or bank holding companies, and offers or sales made in reliance on a qualified Tier 2 Regulation A offering statement are not ongoing. In certain circumstances, Tier 2 Regulation A reporting obligations may terminate when issuers are no longer subject to the ongoing reporting requirements of Section 13 of the Exchange Act.
• Require Tier 2 issuers to include in their first annual report after termination or completion of a qualified Regulation A offering, or in their Form 1-Z exit report, information about sales in the terminated or completed offering and to update certain issuer information.
• Eliminate the requirement that issuers file a Form 2-A with the Commission to report sales and the termination of sales made under Regulation A every six months after qualification and within 30 calendar days after the termination, completion, or final sale of securities in the offering.

Exchange Act registration:

• Conditionally exempt securities issued in a Tier 2 offering from the mandatory registration requirements of Section 12(g) of the Exchange Act, for so long as the issuer engages the services of a transfer agent that is registered with the Commission under Section 17A of the Exchange Act, remains subject to a Tier 2 reporting obligation, is current in its annual and semiannual reporting at fiscal year end, and had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.
• Permit Tier 2 issuers to use a Form 8-A short form registration statement concurrently with the qualification of a Regulation A offering statement that includes Part I of Form S-1 or Form S-11 narrative disclosure in Form 1-A in order to register a class of securities under Sections 12(g) or 12(b) of the Exchange Act.

“Bad actor” disqualification provisions:

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

Application of state securities laws:

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

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

B. Scope of Exemption

1. Eligible Issuers

a. Proposed Rules

Section 401 of the JOBS Act does not include any express issuer eligibility requirements. The proposed rules would have maintained Regulation A's existing issuer eligibility requirements and added two new categories of ineligible issuers. The two new categories would exclude issuers that are or have been subject to any order of the Commission pursuant to Section 12(j) of the Exchange Act entered within five years before the filing of the offering statement and issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement. Additionally, we requested comment on other potential changes to the existing issuer eligibility requirements, including whether the exemption should be limited to “operating companies,” United States domestic issuers, or issuers that use a certain amount of the proceeds raised in a Regulation A offering in the United States. We also solicited comment on whether we should extend issuer eligibility to non-Canadian foreign issuers, business development companies as defined in Section 2(a)(48) of the Investment Company Act of 1940 (BDCs), blank check companies, or Exchange Act reporting companies, or, alternatively, eliminate shell companies or REITs from the exemptive regime.

b. Comments on the Proposed Rules

Commenters expressed a wide range of views on the proposed issuer eligibility requirements. A number of commenters expressed general support for the proposed issuer eligibility requirements. Many commenters expressly supported the new proposed issuer eligibility criterion relating to the requirement to be current in Tier 2 ongoing reporting obligations. One commenter also expressly supported the proposed exclusion of issuers subject to an order of the Commission entered pursuant to Section 12(j) of the Exchange Act from the list of eligible issuers. Other commenters suggested additional limitations on issuer eligibility, including: a requirement that issuers be “operating companies,” excluding shell companies and issuers of penny stock, and excluding other types of investment vehicles, such as commodity pools and investment funds that invest in gold or virtual currencies.

A few commenters recommended allowing blank check companies and special purpose acquisition companies (SPACs) to rely on Regulation A. One of these commenters recommended allowing blank check companies seeking to raise at least $10 million to use Regulation A in the same manner as any other eligible issuer, but suggested that, if a company is raising less than $10 million in a Tier 2 offering, the Commission should implement certain additional requirements. Another commenter recommended allowing issuers of fractional interests in oil and gas or other mineral rights to rely on Regulation A based on a “reasonable” eligibility test to be developed by the Commission. Several commenters opposed any change to the proposed issuer eligibility requirements that would exclude REITs from participating in Regulation A offerings. Other commenters advocated expanding the current categories of eligible issuers, and specifically supported the continued inclusion of Canadian companies and shell companies as eligible issuers, as proposed.

(1) Non-Canadian Foreign Issuers

Many commenters recommended making non-Canadian foreign companies eligible issuers under Regulation A. Several commenters suggested that the proposed approach to non-Canadian foreign companies is inconsistent with the treatment of foreign private issuers in registered offerings. Additionally, commenters noted a variety of benefits arising from allowing foreign companies to access the U.S. capital markets through Regulation A offerings, including job creation, increasing the amount of disclosure available for investors in foreign companies, encouraging domestic exchange listings, expanding investment opportunities for U.S. investors, and general economic benefits. One commenter recommended making all foreign private issuers eligible if they maintained a principal place of business in the United States. Two commenters also recommended permitting companies relying on Exchange Act Rule 12g3-2(b) to make offerings under Regulation A.

(2) BDCs

A number of commenters supported making BDCs eligible issuers under Regulation A. Most of these commenters noted that BDCs serve an important function in facilitating small or emerging business capital formation or in providing a bridge from the private to public markets. Several of these commenters recommended at least allowing small business investment company (SBIC) licensed BDCs to use the exemption given the review process such entities are required to undergo with the U.S. Small Business Administration. One of these commenters noted that if BDCs become eligible to use Regulation A, the Commission should consider requiring them to provide quarterly financial disclosure so as to enhance transparency and provide the market with critical investment information.

(3) Potential Limits on Issuer Size

Several commenters opposed using the issuer's size to limit eligibility. Two of these commenters thought that the $50 million offering limit for Tier 2 would already limit the utility of the exemption for issuers on the basis of issuer size—with smaller issuers likely benefitting most from the exemption—and recommended against size-based eligibility criteria that may be difficult to define. One commenter suggested that most issuers with a large public float would likely be subject to Exchange Act reporting requirements and therefore would be ineligible to use Regulation A. Another commenter noted that a size restriction based on public float would be particularly harmful to biotechnology companies, because they often have a public float that is disproportionately high in relation to their corporate structure, number of employees, or revenues.

(4) Exchange Act Reporting Companies

A number of commenters supported allowing Exchange Act reporting companies to conduct offerings under Regulation A. Several of these commenters recommended allowing Exchange Act reporting companies that are current in their reporting obligations to conduct Tier 2 offerings, with one commenter limiting its recommendation to companies with a non-affiliate float of less than $250 million. Three commenters further suggested that, if Exchange Act reporting companies are permitted to conduct offerings pursuant to Regulation A, Exchange Act reporting should satisfy any Regulation A reporting obligation. One such commenter further suggested that Exchange Act reporting companies should be required to be current in their Exchange Act reporting obligations in order to be eligible to rely on the exemption, in a manner that is consistent with Regulation A as it existed before 1992.

c. Final Rules

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

• Companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act;
• companies registered or required to be registered under the Investment Company Act of 1940 and BDCs;
• blank check companies;
• issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights;
• issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the rules under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports);
• issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement; and

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

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

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

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

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

2. Eligible Securities

a. Proposed Rules

Section 3(b)(3) of the Securities Act limits the availability of any exemption enacted under Section 3(b)(2) to “equity securities, debt securities, and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities.” The proposed rules would have limited the types of securities eligible for sale under both Tier 1 and Tier 2 of Regulation A to the specifically enumerated list of securities in Section 3(b)(3) and also would have excluded asset-backed securities, as defined in Regulation AB, from the list of eligible securities.

b. Comments on the Proposed Rules

Several commenters supported the exclusion of asset-backed securities from the list of eligible securities. One commenter recommended clarifying that warrants exercisable for equity or debt securities are eligible securities.

c. Final Rules

We are adopting final rules that limit the types of securities eligible for sale under Regulation A to the specifically enumerated list in Section 3(b)(3), which includes warrants and convertible equity securities, among other equity and debt securities. The final rules exclude asset-backed securities from the list of eligible securities. Asset-backed securities are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure, and reporting requirements for such securities. These rules were not in effect when Regulation A was last updated in 1992. We do not believe that Section 401 of the JOBS Act was enacted to facilitate the issuance of asset-backed securities.

3. Offering Limitations and Secondary Sales

a. Proposed Rules

We proposed to amend Regulation A to create two tiers of requirements: Tier 1, for offerings of up to $5 million of securities in a 12-month period; and Tier 2, for offerings of up to $50 million of securities in a 12-month period. As proposed, issuers could conduct offerings of up to $5 million under either Tier 1 or Tier 2. Consistent with the existing provisions of Regulation A, we also proposed to permit sales by selling securityholders of up to 30% of the maximum offering amount permitted under the applicable tier ($1.5 million in any 12-month period for Tier 1 and $15 million in any 12-month period for Tier 2). Sales by selling securityholders under either tier would be aggregated with sales by the issuer for purposes of calculating the maximum permissible amount of securities that may be sold during any 12-month period. In addition, we proposed to eliminate the last sentence of Rule 251(b), which prohibits affiliate resales unless the issuer has had net income from continuing operations in at least one of its last two fiscal years.

b. Comments on the Proposed Rules

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

(1) Offering Limitation

Several commenters recommended that the Commission increase the $50 million offering limitation for Tier 2. As an alternative, one commenter recommended applying the $50 million limit on a per offering basis rather than on a 12-month basis, and suggested that the Commission consider eliminating the offering limits for certain types of issuers, such as those that have yet to generate revenue. Additionally, two commenters recommended that the Commission do more to increase the utility of Tier 1 offerings by raising the Tier 1 offering limitation to $10 million or more in a 12-month period. Another commenter suggested that the Commission create a third tier in between Tier 1 and Tier 2 that would have a $15 million offering limitation.

With respect to offering limit calculations, one commenter recommended that the aggregate offering price of the underlying security only be included in the $50 million offering limitation during the 12-month period in which such security is first convertible, exercisable, or exchangeable. This commenter suggested that its recommended approach would accommodate common small business offering structures that involve warrants exercisable at a premium over several years.

(2) Secondary Sales Offering Limitation

Several commenters specifically supported the proposed limitations on secondary sales. While some commenters indicated their support for resale limitations, they expressed a preference for either proscribing resales entirely or requiring the approval of the resale offering by a majority of the issuer's independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer. One commenter recommended prohibiting resales under Regulation A entirely. Another commenter recommended requiring selling securityholders to hold the issuer's securities for 12 months before being eligible to sell pursuant to Regulation A, in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain.

Many other commenters recommended raising the resale limits or eliminating them entirely. One such commenter recommended alternatively removing non-affiliate securityholders from the resale limitation since concerns over investor information asymmetries would be reduced when dealing with non-affiliate securityholders. This commenter also recommended that the Commission reevaluate the need for resale limits within a year of implementing the rules. Another commenter also recommended allowing for unlimited sales by non-affiliate selling securityholders and further suggested that the rules not aggregate such sales with issuer sales. Two commenters suggested that limitations on resales are contrary to the Congressional intent behind the enactment of Title IV of the JOBS Act.

(3) Rule 251(b)

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

c. Final Rules

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

Tier 1

As discussed more fully in the “Additional Considerations for Smaller Offerings” section below, we are making changes to the proposed rules in response to comments and to increase the utility of Tier 1 of the Regulation A exemption. Several commenters and a report on the impact of state securities law requirements on offerings conducted under Regulation A by the U.S Government Accountability Office (GAO), as required by Section 402 of the JOBS Act, highlighted the $5 million offering limitation in existing Regulation A as one of the main factors limiting the utility of the exemption. In certain circumstances, fixed costs associated with conducting Regulation A offerings, such as legal and accounting fees, may serve as a disincentive to use the exemption for lower offering amounts. We are therefore increasing the offering limitation in the final rules for Tier 1 offerings in a 12-month period from the proposed $5 million limitation to $20 million. We believe that raising the offering limitation for Tier 1 offerings, in addition to other changes discussed in Section II.I. below, will increase the utility of the exemption for smaller issuers by providing them with additional options for capital formation and potentially increasing the proceeds received by the issuer. Consistent with the proportionate limitation on secondary sales in the proposed rules, we are also increasing the limitation on secondary sales in Tier 1 offerings in a 12-month period from the proposed $1.5 million limitation to $6 million.

Tier 2

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

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

Application of the Limitation on Secondary Sales

As noted in the Proposing Release, secondary sales are an important part of Regulation A. We believe that allowing selling securityholders access to avenues for liquidity will encourage them to invest in companies, although we acknowledge that providing for secondary sales in any amount may give rise to certain concerns. As highlighted by at least one commenter at the pre-proposing stage, permitting some secondary sales pursuant to Regulation A could place investors at an informational disadvantage to selling securityholders who have potentially greater access to inside information about the issuer and does not necessarily provide capital to the issuer. Other commenters stated that such concerns are misplaced in the context of secondary sales by non-affiliates, who generally do not have access to inside information.

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

Further, we are providing different requirements for secondary sales by affiliates and by non-affiliates. The final rules limit secondary sales by affiliates that occur following the expiration of the first year after an issuer's initial qualification of an offering statement to no more than $6 million, in the case of Tier 1 offerings, or no more than $15 million, in the case of Tier 2 offerings, over a 12-month period. Secondary sales by non-affiliates that are made pursuant to a qualified offering statement following the expiration of the first year after an issuer's initial qualification of an offering statement will not be limited except by the maximum offering amount permitted by either Tier 1 or Tier 2. Although the secondary sales offering amount limitation will only apply to affiliates during this period, consistent with the proposal, non-affiliate secondary sales will be aggregated with sales by the issuer and sales by affiliates for purposes of calculating compliance with the maximum offering amount permissible under the respective tiers.

We do not believe that the concerns expressed by one commenter about informational disadvantages that may exist with affiliate sales are present with respect to resales by non-affiliates. On the contrary, in comparison to requirements for non-affiliate resales of restricted securities after the expiration of Securities Act Rule 144 holding periods, we believe that Regulation A provides purchasers of such securities with the benefit of, among other things, narrative and financial disclosure that is reviewed and qualified by the Commission in transactions that are subject to Section 12(a)(2) liability and the antifraud provisions of Section 17 of the Securities Act.

We also disagree with the commenters who suggested limitations on secondary sales are contrary to the legislative intent behind the enactment of Title IV of the JOBS Act. We note that Section 3(b)(2) expressly provides that the Commission may impose additional terms, conditions, or requirements as it deems necessary in the public interest and for the protection of investors. For the reasons discussed above, we believe that limiting secondary sales by affiliates is not only consistent with the language and purpose of the statute but also necessary in the public interest and for the protection of investors.

Offering Limit Calculation

Under the proposal, if the offering included securities that are convertible into, or exercisable or exchangeable for, other securities (rights to acquire), the offer and sale of the underlying securities also would generally be required to be qualified, and the aggregate offering price would include the aggregate conversion, exercise, or exchange price of such securities, regardless of when they become convertible, exercisable, or exchangeable. Consistent with the views of at least one commenter, we are concerned that the proposed requirement could have a greater impact on smaller issuers than larger issuers because smaller issuers frequently issue rights to acquire other securities in capital raising events. The proposed method of calculating the offering limit would presume the exercise price of underlying securities that, by their terms, may occur at a date in the distant future or only upon the occurrence of key events. By including all securities underlying any rights to acquire other securities in the offering limit calculation, the proposed rules could effectively limit the proceeds of an offering available to an issuer by requiring such issuers to include in the aggregate offering price at the time of qualification the securities underlying rights to acquire that may or may not become exercisable or exchangeable in the future. We are adopting final rules that will require issuers to aggregate the price of all securities for which qualification is currently being sought, including the securities underlying any rights to acquire that are convertible, exercisable, or exchangeable within the first year after qualification or at the discretion of the issuer. As such, and consistent with the treatment of rights to acquire in the context of registered offerings, if an offering includes rights to acquire other securities at a time more than one year after qualification and the issuer does not otherwise seek to qualify such underlying securities, the aggregate offering price would not include the aggregate conversion, exercise, or exchange price of the underlying securities. For purposes of calculating the price of underlying securities that use a pricing formula, as opposed to a known conversion price, the issuer will be required to use the maximum estimated price for which such securities may be converted, exercised, or exchanged.

Rule 251(b)

We are adopting as proposed final rules that eliminate the last sentence of Rule 251(b), which prohibited affiliate resales unless the issuer had net income from continuing operations in at least one of its last two fiscal years. We agree with the views expressed by commenters that the absence of net income, by itself, is not a sufficient indicator of an enhanced risk that existing shareholders will use informational advantages to transfer their holdings to the investing public that would necessitate the continued application of the prohibition in the final rules. Further, as noted in the Proposing Release, the Commission's current disclosure review and qualification processes and enforcement programs are significantly more sophisticated and robust than they were when this provision was added to Regulation A in its original form. In addition, the final rules being adopted today include revised “bad actor” disqualification provisions and additional issuer eligibility requirements aimed at limiting access to the exemption for market participants with demonstrated track records of non-compliance or abuse.

4. Investment Limitation

a. Proposed Rules

Regulation A does not currently limit the amount of securities an investor can purchase in a qualified Regulation A offering. As we noted in the Proposing Release, however, we recognize that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses. To address that risk we proposed, among other things, to limit the amount of securities investors can purchase in a Tier 2 offering to no more than 10% of the greater of their annual income or their net worth. For this purpose, annual income and net worth would be calculated as provided in the accredited investor definition under Rule 501 of Regulation D. Under the proposal, issuers would be required to make investors aware of the investment limitations, but would otherwise be able to rely on an investor's representation of compliance with the proposed investment limitation unless the issuer knew, at the time of sale, that any such representation was untrue.

b. Comments on Proposed Rules

A number of commenters generally supported investment limitations for Tier 2 offerings. These commenters believed that an investment limitation would serve as an important investor protection. Several commenters recommended revisiting the necessity of the limitations after a one- to three- year trial period, and another commenter recommended extending the investment limitation to Tier 1 offerings to make them more consistent with our proposed rules for securities-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act. Some commenters' support for the proposed investment limitations was conditioned on suggested changes to the proposed rules that would require issuers to do more to ensure compliance with the limitations and that would impose adverse consequences on issuers for the failure to do so. One commenter believed that the 10% limitation is “significantly higher” than is appropriate for “all but the wealthiest, least risk averse” investors. Two commenters suggested that the 10% limitation should be aggregated across all Regulation A offerings instead of being applied on a per offering basis, while one commenter specifically argued against such an aggregated limit.

Numerous commenters recommended eliminating the investment limitation for Tier 2 offerings. Several of these commenters alternatively recommended at least doubling the limit if the provision is not eliminated entirely. Other commenters thought that the investment limitation is unnecessary in light of the other investor protections for Tier 2 offerings, such as the expanded disclosure requirements. Several commenters noted that the limit does not have a statutory basis and suggested that it may be contrary to Congressional intent, or contrary to the principles underlying federal securities law, which focus on fraud prevention and full disclosure. One commenter recommended eliminating the investment limitations only if the final rules do not preempt state law registration requirements for Tier 2 offerings, arguing that the limitations may conflict with state investor suitability standards, while another commenter indicated that investment limitations would be unnecessary with appropriate state oversight, but supported limits for retail investors in startup companies and high-risk offerings. Another commenter recommended creating various categories of investor sophistication with corresponding requirements and limitations for each.

Many commenters, including those both for and against the investment limit, recommended providing exceptions to the limit for certain types of investors, such as accredited investors, or altering the application of the limit to such types of investors. These commenters believed that the investor protections afforded by the investment limit would not be necessary for all types of investors or in all types of Regulation A offerings. Some commenters recommended eliminating the investment limit for accredited investors. One such commenter recommended eliminating the investment limit generally and, if not, at least for institutional investors and offerings of securities listed on securities exchanges. Several commenters recommended eliminating the investment limit for non-natural persons or institutional investors. Other commenters recommended eliminating the investment limits for other types of investors or offerings. Two commenters noted that it would be difficult to apply the investment limits to non-natural persons (such as small businesses and IRAs) if the rules use an income or net worth test. One of these commenters recommended that, if the test applies to such investors, it should be based on assets or revenue.

Many commenters explicitly supported allowing issuers to rely on an investor's representation of compliance with the 10% investment limit. Most of these commenters stated that any more rigorous verification process would cause the compliance costs to be too high. One commenter recommended eliminating any obligation for the issuer to monitor the 10% investment limit and allowing the issuer to rely on a representation by the investor that he or she will notify the issuer upon exceeding the 10% limit. Another commenter recommended permitting an issuer to rely on representations from its underwriters or broker-dealers as to the 10% investment limit, rather than having to seek this directly from investors. This commenter believed that the issuers in most Tier 2 offerings would have little direct contact with the investors and that the intermediaries would be better positioned to assess compliance (possibly already having information about the investor's finances).

Several commenters disagreed with allowing investors to represent compliance with the investment limitation and recommended a standard that would require an issuer to do more to ensure compliance. Two commenters recommended adopting a standard requiring issuers to take reasonable steps to verify that the purchasers are in compliance with the 10% investment limit. Two commenters recommended requiring an issuer to have a “reasonable belief” or “reasonable basis” that it can rely on an investor's representation of compliance with the 10% investment limit. One such commenter also suggested allowing accredited investors to exceed the 10% investment limit, but requiring that the issuer take reasonable steps to verify accredited investor status. One commenter recommended requiring a “duty of inquiry” so that the issuer would have to follow-up on any “red flags.” Additionally, this commenter recommended that the Commission create an independent and secure means of verifying investor income or to require a mandatory questionnaire for individual investors to complete before buying a security issued under Regulation A.

c. Final Rules

We are adopting an investment limitation for Tier 2 offerings in the final rules, with minor modifications from the proposed rules. We believe that the investment limitation serves as an important investor protection and may help to mitigate the risk that with the increased annual offering limitation provided in Section 3(b)(2) comes a risk of commensurately greater investor losses. We do not believe that the limitation is needed for accredited investors because investors that qualify as accredited under our rules satisfy certain criteria that suggest they are capable of protecting themselves in transactions that are exempt from registration under the Securities Act. We also do not believe that the limitation is necessary for investments in securities that will be listed on a national securities exchange upon qualification because of the issuer listing requirements and the potential liquidity that exchanges provide to investors that seek to reduce their holdings. These both are important investor protections that help to mitigate concerns about the magnitude of loss that could potentially result from an investor purchasing a large amount of securities in a single offering.

Under the final rules, the investment limitations for purchasers in Tier 2 offerings will not apply to purchasers who qualify as accredited investors under Rule 501 of Regulation D. Further, investment limitations in a Tier 2 offering will not apply to the sale of securities that will be listed on a national securities exchange upon qualification since such issuers will be required to meet the listing standards of a national securities exchange and become subject to ongoing Exchange Act reporting, resulting in additional investor protections.

In response to questions raised by commenters, we are clarifying that non-accredited, non-natural persons are subject to the investment limitation and should calculate the limitation based on no more than 10% of the greater of the purchaser's revenue or net assets (as of the purchaser's most recent fiscal year end). Non-accredited, natural persons must calculate the investment limitations on the basis of 10% of the greater of the purchaser's annual income or net worth (determined as provided in Rule 501 of Regulation D).

If the investor is purchasing securities that are convertible into, or exercisable or exchangeable for, other securities, if such securities are exercisable within a year or otherwise are being qualified, the investment limitation will include the aggregate conversion, exercise, or exchange price of such securities, in addition to the purchase price. We believe this is an appropriate calculation because it is consistent with the offering limit calculation for the respective tiers and because it applies investment limitations to reasonably foreseeable investment decisions (i.e., those involving securities exercisable within a year or otherwise qualified by the issuer) while reducing the risk that issuers may seek to sell large amounts of securities that are convertible, exercisable or exchangeable into other securities in the near term at a low cost in an effort to avoid the 10% limitation.

As proposed, we are adopting final rules that require issuers to notify investors of the investment limitations. Issuers may rely on a representation of compliance with the investment limitation from the investor, unless the issuer knew at the time of sale that any such representation was untrue. As we noted in the Proposing Release, we are cognizant of the privacy issues and practical difficulties associated with verifying individual income and net worth and, therefore, are not requiring investors to disclose personal information to issuers in order to verify compliance.

Some commenters suggested requiring an issuer to have a reasonable belief that it can rely on an investor's representation of compliance with the investment limitations or to take reasonable steps to verify compliance, while other commenters suggested we establish consequences for issuers (and intermediaries, when applicable) if an investor failed to comply with the limitations. At the same time, many commenters supported the proposed approach, noting the low compliance costs and the certainty it would provide issuers and their intermediaries. We believe that the rules, as adopted, will limit potential losses for non-accredited investors with respect to individual offerings, while providing certainty to, and lower compliance costs for, issuers and intermediaries.

We do not believe that additional requirements for issuers and their intermediaries, such as requiring issuers to take reasonable steps to verify an investors' compliance with the investment limitations, are necessary to protect investors in light of the total package of investor protections included in the final rules for Tier 2 offerings. We believe that additional requirements, like the ones suggested by some commenters, may have an unintended consequence of dissuading issuers from selling to non-accredited investors in Tier 2 offerings by increasing compliance uncertainties and obligations. We are therefore not adopting any additional compliance requirements with respect to investment limitations in the final rules.

While many commenters urged the Commission to eliminate or provide less restrictive investment limitations in the final rules, we believe that these requirements, as proposed and adopted, usefully augment other requirements for, and investor protections applicable to, Tier 2 offerings. As we noted in the Proposing Release, Title IV of the JOBS Act mandates certain investor protections and suggests that the Commission consider others as part of its Section 3(b)(2) rulemaking. Congress recognized in Section 3(b)(2) that investor protections beyond those expressly provided in Title IV of the JOBS Act may be necessary in the revised regulation. To that end, Section 3(b)(2)(G) indicates that the Commission may include in the expanded exemption “such other terms, conditions, or requirements. . . necessary in the public interest and for the protection of investors. . . .” Limiting the amount of securities that a non-accredited investor can purchase in a particular Tier 2 offering (other than a Tier 2 offering of securities listed on a national securities exchange) should help to mitigate concerns that such investors may not be able to absorb the potential loss of the investment and is consistent with the authority granted to the Commission in Section 3(b)(2). We further believe that setting the investment limitation at 10% of the greater of such investor's net worth/net assets and annual income/revenue, as opposed to some other percentage (e.g., 5% or 20%), is generally consistent with similar maximum investment limitations placed on investors in Title III of the JOBS Act and will help to set a loss limitation standard in such offerings.

Despite the suggestions of some commenters, we do not believe that further distinctions as to the applicability of investment limitations are appropriate among investors that do not qualify as accredited investors. On the contrary, we believe that the regulatory distinctions among accredited and non-accredited investors and the familiarity many market participants have with such terms will help to ease compliance with, and determinations about the applicability of, the investment limitations and will avoid unnecessary complexity associated with other, additional distinctions.

5. Integration

a. Proposed Rules

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

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

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

We further proposed to amend Rule 254(d) to provide that, where an issuer decides to register an offering after soliciting interest in a contemplated, but abandoned, Regulation A offering, any offers made pursuant to Regulation A would not be subject to integration with the registered offering, unless the issuer engaged in solicitations of interest in reliance on Regulation A to persons other than qualified institutional buyers (QIBs) and institutional accredited investors permitted by Section 5(d) of the Securities Act. As proposed, an issuer (and any underwriter, broker, dealer, or agent that is acting on behalf of the issuer in connection with the proposed offering) soliciting interest in a Regulation A offering to persons other than QIBs and institutional accredited investors would need to wait at least 30 calendar days between the last such solicitation of interest in the Regulation A offering and the filing of the registration statement with the Commission. The Proposing Release also provided guidance on the applicability of the integration doctrine for offerings conducted outside the scope of the safe harbor.

b. Comments on the Proposed Rules

One commenter specifically supported the proposed changes to the integration provisions of Regulation A. Another commenter objected to the proposed changes to the integration provisions and related guidance. This commenter cautioned that it would be very difficult to police compliance with these provisions and suggested that they would be used to evade regulatory requirements.

c. Final Rules

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

• Prior offers or sales of securities; or
• subsequent offers and sales of securities that are:
• Registered under the Securities Act, except as provided in Rule 255(c);
• made pursuant to Rule 701 under the Securities Act;
• made pursuant to an employee benefit plan;
• made pursuant to Regulation S;
• made pursuant to Section 4(a)(6) of the Securities Act; or
• made more than six months after completion of the Regulation A offering.

We believe that the integration safe harbor has historically provided and, as amended, will continue to provide, issuers, particularly smaller issuers whose capital needs often change, with valuable certainty as to the contours of a given offering and their eligibility for an exemption from Securities Act registration. The addition of subsequent offers or sales made pursuant to Section 4(a)(6), which is the only substantive change to the existing safe harbor being adopted today, should not significantly alter the application of the doctrine in practice. Given the unique capital formation method available to issuers and investors through Section 4(a)(6) of the Securities Act and the small dollar amounts involved, we believe that the addition to the safe harbor list of subsequent crowdfunding offers and sales conducted pursuant to such section is appropriate and will not unduly increase risks to investors. As with any exemption from registration, the burden of proof of compliance with a claimed exemption rests with the party claiming it. In our view, the benefits of providing issuers with certainty as to the scope of the integration doctrine, particularly for Regulation A, outweighs the concern expressed by one commenter that compliance with the doctrine may be difficult to enforce. In light of the broad permissible target audience of Regulation A solicitations, the potential for expanded use of solicitation materials in Regulation A discussed more fully in Section II.D. below, and the addition of similar provisions for registered offerings under Section 5(d), we believe the integration provisions in the final rule are necessary to ensure that amended Regulation A functions as a viable capital raising option for issuers.

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

We are also reaffirming the integration guidance provided in the Proposing Release, which is consistent with guidance provided by the Commission in a 2007 rule proposal on Regulation D. As noted in the Proposing Release, we believe that an offering made in reliance on Regulation A should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering. For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Regulation A, including without limitation any “testing the waters” communications. Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted, for example, under Rule 506(c), could not include in any such general solicitation an advertisement of the terms of a Regulation A offering, unless that advertisement also included the necessary legends for, and otherwise complied with, Regulation A.

6. Treatment Under Section 12(g)

a. Proposed Rules

Exchange Act Section 12(g) requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the Commission. We did not propose to exempt Regulation A securities from mandatory registration under Section 12(g), but we solicited comment on whether Regulation A securities should be granted such an exemption, either conditionally or otherwise.

b. Comments on Proposed Rules

Commenters generally expressed support for some form of exemption from the registration requirements under Section 12(g). Numerous commenters recommended exempting Regulation A securities from Section 12(g). Several of these commenters expressed concern that the Section 12(g) record holder count would decrease the utility of the Regulation A exemption by incentivizing issuers to sell to accredited investors over non-accredited investors, likely resulting in issuers electing to rely on a potentially less costly exemption, such as Rule 506 of Regulation D. These commenters also expressed concern that Section 12(g) would decrease the utility of the exemption because secondary trading in otherwise unrestricted Regulation A securities might result in issuers inadvertently crossing the Section 12(g) registration threshold. Other commenters questioned the extent to which Regulation A securities would be held in street name through brokers, which the proposal mentions as a factor that could potentially limit the impact of not proposing an exemption from Section 12(g). Some commenters suggested that the reporting regime under Tier 2 would be a sufficient means by which issuers could provide investors with current information and that therefore Exchange Act reporting would be unnecessary. Two commenters believed that the legislative history of the JOBS Act supported an exemption from Section 12(g).

Several commenters recommended changing, delaying, or conditioning the application of Section 12(g)'s registration requirements, especially the corresponding Section 13 reporting obligations that come with registration. One of these commenters recommended delaying the application of Exchange Act reporting requirements for Tier 2 issuers until the issuer's non-affiliate market capitalization reached $250 million, so long as the issuer filed reports under Regulation A. This commenter believed that non-affiliate market capitalization was a superior proxy for market interest than the thresholds under Section 12(g) and noted that the Commission uses the measure in establishing primary S-3 eligibility. Another commenter recommended exempting initial Tier 2 issuers from all or part of Exchange Act reporting obligations until the earliest of the occurrence of several events. Yet another commenter suggested exempting Tier 2 issuers from Exchange Act reporting until they reach a certain unspecified level of revenue or market capitalization. Two commenters recommended deeming Tier 2 issuers' ongoing reports under Regulation A to satisfy the issuer's Exchange Act reporting obligations for a phase-in period. One commenter recommended at least allowing for 2,000 holders of record (whether accredited or not) without being subject to Exchange Act registration requirements, while two other commenters suggested eliminating the cap of 500 non-accredited investors. One commenter conditioned its support for a conditional exemption from Section 12(g) on the Commission requiring Tier 2 issuers to remain current in their ongoing Regulation A reporting requirements.

c. Final Rules

We are adopting today final rules that exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in (as of its fiscal year end), its Regulation A periodic reporting obligations. Additionally, in order for the conditional exemption to apply, issuers are required to engage the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act. The final rules also provide that the exemption from Section 12(g) is only available to companies that meet requirements similar to those in the “smaller reporting company” definition under Securities Act and Exchange Act rules. As such, the conditional exemption in the final rules is limited to issuers that have a public float of less than $75 million, determined as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, annual revenues of less than $50 million, as of the most recently completed fiscal year. An issuer that exceeds either of the thresholds, in addition to exceeding the threshold in Section 12(g) of the Exchange Act, would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all ongoing reports due pursuant to Rule 257 during such period. Section 12(g) registration will only be required if, on the last day of the fiscal year in which the company exceeded the public float or annual revenue threshold, the company has total assets of more than $10 million and the class of equity securities is held by more than 2,000 persons or 500 persons who are not accredited investors. In such circumstances, an issuer that exceeds the thresholds in Section 12(g) and Rule 12g5-1(a)(7) would be required to begin reporting under the Exchange Act the fiscal year immediately following the end of the two-year transition period. An issuer entering Exchange Act reporting will be considered an “emerging growth company” to the extent the issuer otherwise qualifies for such status.

In determining to provide a conditional exemption from the provisions of Section 12(g), we have considered a number of factors. First, we believe the conditional exemption we are adopting today is consistent with the intent behind the original enactment of Section 12(g) to the extent it ensures that relevant information about issuers will be made routinely available to investors and the marketplace. Second, we believe the additional requirement that Regulation A issuers use a registered transfer agent will provide an important investor protection in this context. The use of a transfer agent registered under the Exchange Act, which, in the absence of a conditional exemption from the provisions of Section 12(g), would be required of issuers when they register under the Exchange Act, will provide added comfort that securityholder records and secondary trades will be handled accurately. Third, we believe that phasing out the exemption once companies grow and expand their shareholder base is consistent with the intent behind Title IV of the JOBS Act, which was enacted to facilitate smaller company capital formation. Finally, we are concerned that, as commenters suggested, the lack of an exemption from mandatory registration under the Exchange Act may undermine the utility of amended Regulation A either by discouraging use of the exemption altogether or by dissuading issuers from making sales to non-accredited investors in Regulation A offerings in an effort to avoid the application of Section 12(g).

While we believe, as we noted in the Proposing Release, that the Section 12(g) record holder threshold continues to provide an important baseline above which issuers should generally be subject to the disclosure obligations of the Exchange Act, we are persuaded that this need not be the case where an issuer is a smaller company that is subject to, and current in, its periodic reporting obligations under Tier 2 of Regulation A and engages the services of a transfer agent that is registered with the Commission under the Exchange Act. Regulation A, as amended in the final rules, requires issuers that conduct Tier 2 offerings to provide periodic disclosure to their investors and updates for certain important corporate events. While such reports provide less information than is required of an Exchange Act reporting company, we believe a conditional exemption from registration under Section 12(g) is warranted for smaller Tier 2 issuers since such companies are required to provide investors with ongoing information about themselves and the securities offered, and the ongoing reporting regime we are adopting today is more appropriately tailored for such companies. Additionally, in order to address situations where an issuer that conducts a Tier 2 offering could remain subject to its ongoing reporting requirements indefinitely and thereby avoid having to comply with Exchange Act reporting requirements regardless of the size of its shareholder base, we note that the exemption from Section 12(g) is conditional and that an issuer that does not meet its conditions, including the limitation on public float and annual revenues, will be required to register under the Exchange Act.

C. Offering Statement

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

1. Electronic Filing; Delivery Requirements

a. Proposed Rules

Consistent with the language of Section 3(b)(2)(G)(i), we proposed to require Regulation A offering statements to be filed with the Commission electronically on EDGAR. We further proposed to amend Form 1-A, but to continue to have the form consist of three parts:

• Part I: An eXtensible Markup Language (XML) based fillable form;
• Part II: A text file attachment containing the body of the disclosure document and financial statements; and
• Part III: Text file attachments, containing the signatures, exhibits index, and the exhibits to the offering statement.

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

Additionally, we proposed an access equals delivery model for Regulation A final offering circulars. Under the proposed rules, issuers would be required to include a notice in any preliminary offering circular used that would inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically. As with registered offerings, we also proposed aftermarket delivery obligations for dealers that would be satisfied if the final offering circular is filed and available on EDGAR and the appropriate notice was given by the dealer.

Consistent with prior Commission releases on the use of electronic media for delivery purposes, we proposed that “electronic-only” offerings of Regulation A securities would not be prohibited, but an issuer and its participating intermediaries would have to obtain the consent of investors to the electronic delivery of:

• The preliminary offering circular and other information, but not the final offering circular, in instances where, upon qualification, the issuer plans to sell Regulation A securities based on offers made using a preliminary offering circular; and
• all documents and information, including the final offering circular, when the issuer sells Regulation A securities based on offers conducted during the post-qualification period using a final offering circular.

We further proposed to maintain the existing requirements in Regulation A, which require dealers to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification. We proposed to update and amend Rule 251(d)(2)(i) to require issuers and participating broker-dealers to deliver only a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors. We also proposed to continue to require a final offering circular to accompany or precede any written communication that constitutes an offer in the post-qualification period.

In addition to the revised delivery requirements discussed above, we proposed to add a provision analogous to Rule 173, which would require issuers, underwriters, and dealers, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement. As proposed, the notice must include the Web site address where the final offering circular, or the offering statement of which such final offering circular is part, may be obtained on EDGAR and contact information sufficient to notify a purchaser how it may request and receive a final offering circular from the issuer.

We further proposed to allow an issuer to withdraw an offering statement, with the Commission's consent, if none of the securities that are the subject of such offering statement has been sold and such offering statement is not the subject of a Commission order temporarily suspending a Regulation A exemption. Under the proposed rules, the Commission also would be able to declare an offering statement abandoned if the offering statement has been on file with the Commission for nine months without amendment and has not become qualified. These withdrawal and abandonment procedures are similar to the ones that apply to registration statements under the Securities Act.

b. Comments on the Proposed Rules

No commenters opposed the proposed requirement that issuers be required to file offering statements and related material electronically with the Commission on EDGAR, while two commenters expressly supported such a requirement. One commenter recommended only requiring preliminary or final offering circular delivery 48 hours in advance of sale for initial public offerings and not for offerings by issuers that are already subject to Tier 2 ongoing reporting requirements. This commenter also recommended eliminating dealer offering circular delivery requirements for Tier 2 issuers that are subject to ongoing reporting.

A few commenters opposed an access equals delivery model of final offering circular delivery. These commenters raised concerns about the perceived challenge of finding these materials on EDGAR and not requiring delivery 48 hours in advance of sale in all circumstances.

One commenter recommended, in addition to requiring electronic filing on EDGAR, requiring issuers to maintain a corporate Web site where the public may access copies of all non-confidential filings in a timely manner so that investors not familiar with EDGAR may access the most complete information provided to the Commission. In addition to suggested changes to the filing process itself, several commenters encouraged the Commission to find ways to reduce the staff's review time for offering statements.

c. Final Rules

(1) Filing Requirements

We are adopting provisions for electronic filing and delivery requirements in the final rules for Regulation A substantially as proposed. We agree with commenters that support requiring electronic filing of offering and related materials and believe that this requirement will ultimately benefit issuers and investors by streamlining the offering process. As adopted, issuers must file their Regulation A offering statements with the Commission electronically on EDGAR. Further, as proposed, we are amending Form 1-A to consist of the following three parts:

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

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

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

As proposed and adopted, all other documents required to be submitted or filed with the Commission in conjunction with a Regulation A offering, such as ongoing reports, must generally be submitted or filed electronically on EDGAR. As materials will be available on EDGAR, we do not see a need to separately require issuers to maintain a corporate Web site where the public may access all non-confidential filings. Issuers may, however, elect to provide the filings on their Web site or to their EDGAR filing page. Consistent with current Regulation A, there are no filing fees associated with the Regulation A filing and qualification process.

We believe the approach to electronic filing adopted today will be both practical and useful for issuers of Regulation A securities, investors in such securities, and other market participants. Issuers will be able to maintain better control over their filing process, reduce the printing costs associated with filings, obtain immediate confirmation of acceptance of an offering statement, and ultimately save time in the qualification process. Investors will gain real-time access to the information contained in Regulation A filings. We anticipate that the efficiency of the Regulation A market should improve with the increased accessibility of information about Regulation A issuers and offerings. Additionally, as with registered offerings, electronic filing on EDGAR will allow for more efficient storing, processing, and disseminating of Regulation A filings than paper filings, which should improve the efficiency of the staff review and qualification processes.

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

We appreciate that requiring EDGAR filing will impose some new costs on issuers, as addressed more fully in the Economic Analysis section of the release. We do not, however, believe that the incremental cost associated with the EDGAR filing requirements justifies maintaining a paper-only filing requirement. On the contrary, we believe that the potential additional cost to issuers associated with the EDGAR filing requirement should be minimal and electronic filing on EDGAR would eliminate any processing delays and costs otherwise associated with the current paper filing system, such as printing or mailing costs.

(2) Delivery Requirements

We are adopting, as proposed, an access equals delivery model for Regulation A final offering circulars when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on EDGAR. The expanded use of the Internet and continuing technological developments suggest that we should update the final offering circular delivery method for Regulation A in a manner that is consistent with similar updates to delivery requirements for registered offerings. Contrary to the views of some commenters, we do not believe that access to EDGAR generally has proven to be a challenge for investors in registered offerings since the adoption of the Securities Offering Reform Release in 2005. We also do not believe that it will be a challenge for investors under Regulation A or raise investor protection concerns, particularly in light of our final delivery requirements (including, where applicable, the inclusion of hyperlinks to offering materials on EDGAR that must be provided to investors by issuers and intermediaries). Therefore, where sales of Regulation A securities occur after qualification on the basis of offers made using a preliminary offering circular, issuers and intermediaries can presume that investors have access to the Internet and may satisfy their delivery requirements for the final offering circular by filing it on EDGAR. Issuers are, however, required to include a notice in any preliminary offering circular that will inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically.

Further, as proposed, “electronic-only” offerings of Regulation A securities will be permitted under the final rules, provided that issuers and intermediaries comply with relevant Commission guidance. Specifically, in such offerings, an issuer and its participating intermediaries must obtain the consent of investors to, or otherwise be able to evidence the receipt of, the electronic delivery of:

• The preliminary offering circular and information other than the final offering circular, in instances where the issuer sells Regulation A securities based on offers made using a preliminary offering circular; and
• all documents and information, including the final offering circular, when the issuer sells Regulation A securities based on offers made during the post-qualification period using a final offering circular.

As we noted in the Proposing Release, in light of the proposed requirements for electronic delivery and in order to be consistent with requirements for registered offerings, we believe it appropriate to permit dealers, during the aftermarket delivery period, to be deemed to satisfy their final offering circular delivery requirements if such document is filed and available on EDGAR. We are amending Rule 251(d)(2)(ii) of existing Regulation A to make clear that dealers, like issuers and intermediaries, can also rely on the provisions for access equals delivery. Additionally, the amendment clarifies that a dealer can rely on access equals delivery for a final offering circular provided it complies with the requirements of Rule 251(d)(2)(ii). This clarifying amendment is necessary to avoid any confusion that the final rules could be read to impose a double delivery requirement on dealers during the aftermarket delivery period.

Separately, we are modifying the terms of Rule 251(d)(2)(ii) to make it more consistent with the dealer delivery requirements for registered offerings under Securities Act Rule 174. As proposed, the rules would have required dealers in all circumstances to deliver a copy of the current offering circular to purchasers for sales that take place within 90 calendar days after qualification. Consistent with the suggestion of one commenter, we are revising the proposed rules to more closely align the Regulation A delivery requirements with those required in Securities Act Rules 174(b) and (d). We, therefore, are adopting the proposed 90 calendar day dealer delivery requirement, but eliminating the dealer delivery requirement when the issuer is subject immediately prior to filing the offering statement to Tier 2 ongoing reporting and reducing the length of the delivery requirement to 25 calendar days after the later of the qualification date of the offering statement or the first bona fide offering of securities if the securities will be listed on a national securities exchange. As adopted, the final rules reduce dealer aftermarket delivery requirements, which should aid dealers in compliance with the final rules.

The final rules also update and amend Rule 251(d)(2)(i) to align with changes in the prospectus delivery requirements for registered offerings that have occurred since these requirements were last updated in Regulation A. We believe the delivery of the preliminary offering circular to potential investors before they make an investment decision on the basis of information provided during the prequalification period remains an important investor protection that the final rules should preserve, particularly in light of the proposed expanded use of “testing the waters” solicitation materials to include the period of time after non-public submission or filing of the offering statement, as discussed further in Section II.D. below. We also recognize that updating and amending Regulation A's offering circular delivery requirements will likely benefit market participants by minimizing discrepancies between the requirements of broker-dealers in Regulation A and registered offerings.

We therefore are amending, as proposed, Rule 251(d)(2)(i) to require issuers and participating broker-dealers to deliver only a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale only when a preliminary offering circular is used during the prequalification period to offer such securities to potential investors. To make the final rules more consistent with the requirements of Exchange Act Rule 15c2-8(b) for issuers who already provide continuous, ongoing information to investors and the market, the final rules do not require an issuer or its intermediaries to deliver a preliminary offering circular at least 48 hours in advance of sale where the issuer is already subject to a Tier 2 reporting obligation. In such instances, however, the issuer and its intermediaries will otherwise remain subject to the general delivery requirements of the rules, including compliance with the requirements for making offers pursuant to Rule 251(d)(1) and for including a preliminary offering circular in any solicitation materials used after filing the offering statement with the Commission pursuant to Rule 255. As proposed and adopted, the delivery requirements under the final rules apply to both issuers and participating broker-dealers. We believe these delivery requirements are an important investor protection that should apply to issuers in advance of sale, in addition to their intermediaries, and is consistent with current Regulation A. We are also adopting, as proposed, the requirement that a final offering circular must accompany or precede any written communications that constitute offers in the post-qualification period.

In addition to the revised delivery requirements discussed above, we are adopting, as proposed, final rules analogous to Securities Act Rule 173. Rule 251(d)(2)(ii) requires issuers and participating broker-dealers, not later than two business days after completion of the sale, to provide the purchaser with a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement. The notice must include the URL where the final offering circular, or the offering statement of which such final offering circular is part, may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent and received in response.

(3) Withdrawal of an Offering Statement

The final rules will, as proposed, permit an issuer to withdraw an offering statement, with the Commission's consent, if none of the securities that are the subject of such offering statement have been sold and such offering statement is not the subject of a Commission order temporarily suspending a Regulation A exemption. The final rules also permit, as proposed, the Commission to declare an offering statement abandoned if the offering statement has been on file with the Commission for nine months without amendment and has not become qualified. These withdrawal and abandonment procedures are similar to the ones that apply to issuers in registered offerings.

2. Non-Public Submission of Draft Offering Statements

a. Proposed Rules

We proposed to allow the non-public submission of draft offering statements by issuers of Regulation A securities. As we noted in the Proposing Release, such submissions would not be subject to the statutorily-mandated confidentiality of draft initial public offering (IPO) registration statements confidentially submitted by “emerging growth companies” under Title I of the JOBS Act. Instead, where an issuer seeks to non-publicly submit a draft offering statement, the proposal indicated it could do so in compliance with the Commission's Rule 83. We also sought comment on whether we should instead adopt a new rule relating to confidential treatment of draft offering statements in Regulation A.

Under the proposed rules, issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act would be permitted to submit to the Commission a draft offering statement for non-public review. As with the confidential submission of draft registration statements by emerging growth companies, all non-public submissions of draft offering statements would be submitted via EDGAR. The initial non-public submission, all non-public amendments thereto, and correspondence with Commission staff regarding such submissions would be required to be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement. Unlike emerging growth companies in registered offerings, which must publicly file any confidential submissions not later than 21 calendar days before a road show, the timing requirements for filing by issuers seeking qualification under Regulation A would not depend on whether or not the issuer conducts a road show.

b. Comments on Proposed Rules

Commenters were generally supportive of the proposed non-public submission process for Regulation A offerings. One commenter recommended keeping all filings confidential other than the final qualified version and possibly any interim version actually used in conjunction with solicitation materials. Another commenter recommended requiring the inclusion of a legend on non-public offering statements so that the confidentiality of such submissions would be automatic, without the need for a separate confidentiality request, while another commenter recommended treating the proposed non-public submissions the same way that draft registration statements are treated under Title I of the JOBS Act.

c. Final Rules

We are adopting rules that will, as proposed, provide for the submission of non-public draft offering statements under Regulation A. In a change from the proposal, however, the final rules do not require an issuer seeking non-public staff review of its draft offering statement to submit such draft pursuant to the Commission's Rule 83. Instead, all such draft offering statements under Rule 252(a) shall receive non-public review. The final rules only permit issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act to submit to the Commission a draft offering statement for non-public review. Consistent with the treatment of draft registration statements in registered offerings by emerging growth companies, a non-publicly submitted offering statement must be substantially complete upon submission in order for staff of the Division of Corporation Finance to begin its review. All non-public submissions of draft offering statements must be submitted via EDGAR, and the initial non-public submission, all non-public amendments thereto, and correspondence submitted by or on behalf of the issuer to the Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

We do not believe, as was suggested by at least one commenter, that requiring issuers to file only the qualified version of the offering statement and any earlier versions used in conjunction with solicitation materials would provide investors with sufficient disclosure to make informed investment decisions. Further, in light of the preemption of state securities laws registration requirements for Tier 2 offerings in the final rules, the 21 calendar day filing requirement will insure that state securities regulators are able to require first-time issuers that non-publicly submit draft offering statements to file such material with them for a minimum of 21 calendar days before any potential sales to investors in their respective states. Unlike emerging growth companies, the timing requirement for filing by issuers seeking qualification under Regulation A does not depend on whether or not the issuer conducts a road show or tests the waters in a contemplated offering before qualification.

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

While non-publicly submitted offering statements must be submitted electronically on EDGAR, the Commission and its staff will not make such offering statements publicly available on EDGAR as a matter of course. The treatment of non-public submissions in this regard is consistent with the Commission staff's approach to the public availability of draft registration statements submitted by foreign private issuers for registered offerings. As there is no statutory basis for withholding non-public submissions from production, absent an exemption from the FOIA, issuers that rely on our provisions for non-public submission should be aware that the Commission may, under certain circumstances, be compelled to provide such materials to a requesting party (or to otherwise make them publicly available) before the date on which an issuer would otherwise have been required to publicly file on EDGAR.

3. Form and Content

Section 3(b)(2)(G)(i) of the Securities Act identifies certain disclosure requirements that the Commission may require for offerings relying on the Regulation A exemption. The requirements largely coincide with the existing offering statement disclosure requirements of Form 1-A, such as financial statements, a description of the issuer's business operations, financial condition, and use of investor funds. The proposed rules, comments received on the proposed rules, and the final rules being adopted today for each of Part I, II, and III of Form 1-A are discussed in detail below.

a. Part I (Notification)

(1) Proposed Rules

Part I of Form 1-A serves as a notice of certain basic information about the issuer and its proposed offering, which also helps to confirm the availability of the exemption. As proposed, Part I of Form 1-A would be converted into an online XML-based fillable form with indicator boxes or buttons and text boxes and would be filed online with the Commission. The information would be publicly available on EDGAR, as an online data cover sheet, but not otherwise required to be distributed to investors.

(2) Comments on Proposed Rules

We received several comments with recommendations specific to certain items on Part I of Form 1-A. With respect to Item 1 of Part I, one commenter recommended defining the term “publicly traded,” eliminating the “Financial Statements” section of Item 1 of Part I or conforming it to the existing disclosures required by Item 301 of Regulation S-K, or conforming the line item descriptions in Item 1 to those in Regulation S-X. Other commenters recommended clarifying that an auditor and related fees need not be listed in Part I if audited financial statements are not included. With respect to Item 5 of Part I, another commenter supported the proposal's inclusion of checkboxes specifying the jurisdictions in which the securities are intended to be offered, while a different commenter recommended expanding the list of jurisdictions so that issuers could indicate the Canadian provinces in which they intended to conduct their offerings. With respect to Item 6 of Part I, one commenter recommended defining the term “affiliated issuer.” This commenter recommended defining the term to refer to entities controlled by the issuer, noting that otherwise it may require disclosure by parent and sister entities, which is information unrelated to the capitalization of the issuer.

Other commenters recommended including additional disclosure in Part I. Two of these commenters recommended requiring issuers to include their Web site address and the jurisdiction of their principal place of business. These commenters also objected to removing the disclosure and contact information for persons that are covered by the bad actor rules.

(3) Final Rules

With the exception of technical clarifications, we are adopting provisions for Part I as proposed. The notification in Part I of Form 1-A will require disclosure in response to the following items:

• Item 1. (Issuer Information) will require information about the issuer's identity, industry, number of employees, financial statements and capital structure, as well as contact information.

• Item 2. (Issuer Eligibility) will require the issuer to certify that it meets various issuer eligibility criteria.
• Item 3. (Application of Rule 262 (“bad actor” disqualification and disclosure)) will require the issuer to certify that no disqualifying events have occurred and to indicate whether related disclosure will be included in the offering circular (i.e., events that would have been disqualifying, but occurred before the effective date of the amendments to Regulation A).

• Item 4. (Summary Information Regarding the Offering and other Current or Proposed Offerings) will include indicator boxes or buttons and text boxes eliciting information about the offering (including whether the issuer is conducting a Tier 1 or Tier 2 offering, amount and type of securities offered, proposed sales by selling securityholders and affiliates, type of offering, estimated aggregate sales of any concurrent offerings pursuant to Regulation A, anticipated fees in connection with the offering, and the names of audit and legal service providers, underwriters, and certain others providing services in connection with the offering).
• Item 5. (Jurisdictions in Which Securities are to be Offered) will include information about the jurisdiction(s) in which the securities will be offered.
• Item 6. (Unregistered Securities Issued or Sold Within One Year) will require disclosure about unregistered issuances or sales of securities within the last year, but will not include a requirement to provide the names and identities of the persons to whom unregistered securities were issued.

We are adopting, as proposed, further changes to Part I of Form 1-A. We are eliminating Item 1 (Significant Parties) of current Part I, which requires disclosure of the names, business address, and residential address of all the persons covered by current Rule 262. Instead, we are requiring only narrative disclosure in Part II of Form 1-A when the issuer has determined that a relevant party has a disclosable, but not disqualifying, “bad actor” event. We also are eliminating Item 3 of current Part I relating to affiliate sales, because we are eliminating the current restrictions on affiliate resales under Rule 251(b). Information about the amount of expected secondary sales and the existence of affiliate sales in the offering, however, will continue to be disclosed in Item 4. Item 6 (Other Present or Proposed Offerings) and Item 9 (Use of a Solicitation of Interest Document) of current Part I will be incorporated into Item 4 (Summary Information Regarding the Offering and Other Current or Proposed Offerings). We also are eliminating Item 7 (Marketing Arrangements) and Item 8 (Relationship with Issuer of Experts Named in Offering Statement) of current Part I, as disclosure of this information is required in Part II (Offering Circular).

Some of the technical changes from the proposed rules are non-substantive procedural revisions to the form that are needed to conform the form with the technical requirements of EDGAR, while the others will, as suggested by commenters, provide clarifications to the terms and requirements of Part I.

We do not, however, believe that the additional disclosure items suggested by some commenters, such as the issuer's Web site address and the jurisdiction of the issuer's principal place of business, are necessary additional disclosures in Part I of Form 1-A. As proposed and adopted, Item 1 (Issuer Information) of Part I requires issuers to disclose the location of their principal executive offices, while Item 1 (Cover Page of Offering Circular) of Part II requires issuers to provide investors with their Web site address, if the issuer has a Web site. In light of these required disclosures, we do not believe that the additional suggested disclosure items for Part I are necessary or would provide investors with any additional relevant information about the issuer. Additionally, notwithstanding the view of some commenters, we do not believe that the disclosure requirements for the application of Rule 262 (Disqualification Provisions) in Item 3 to Part I of Form 1-A need to include descriptions and addresses of persons that trigger disqualification for several reasons. An issuer that has a disqualified person involved in its offering will not be eligible to conduct a Regulation A offering, issuers will have to certify their compliance with Rule 262, and, with the exception of the addresses of covered persons, much of the requested disclosure, as it applies to persons that would have been disqualified but whose conduct occurred before effectiveness of the final rules or have received a waiver from disqualification, will be required in Part II of the offering statement.³⁰⁵ Therefore, as proposed and adopted, the final rules for Part I of Form 1-A no longer require the disclosure of such information.

Consistent with a comment received, we are making technical amendments to the financial statement requirements of Item 1 (Issuer Information) of Part I to clarify and require the use of certain industry-specific terminology and, wherever possible, to use terminology that is consistent with Regulation S-X and GAAP. These changes are designed to minimize potential confusion on the part of issuers in the banking and insurance industries that could result from the use of more general financial accounting terminology. We disagree, however, with the suggestion that we eliminate the financial statement section. As we noted in the Proposing Release, the disclosure of this type of information will provide the Commission (and market participants) with more information about the Regulation A market as it develops to use as it considers potential changes to the regulation in the future. We also believe that the disclosure of this information will provide relevant and useful information about issuers and their offerings to investors and market participants that will help to facilitate informed investment decisions. We do not anticipate that the disclosure of financial information in response to Item 1 to Part I of Form 1-A will materially alter the compliance obligations of issuers given that the requirements draw from disclosure already required in the financial statements included in the offering circular. Additionally, we are revising Item 1 to require issuers to provide up to two email addresses to which the Commission's staff may send comment letters relating to an offering statement, rather than making this optional as proposed. The email addresses, however, will no longer be disseminated with the filings. We believe this change will result in faster reviews of offering statements by the Commission's staff. Finally, consistent with the concerns underlying a comment we received, we recognize that the use of the term “publicly traded” in the outstanding securities table of Item 1 may be confusing in the context of a Regulation A offering. Accordingly, we have revised Item 1 to only request the name of the trading center or quotation medium, if any, for outstanding securities.

Consistent with the views of several commenters, we are clarifying that in the fee table included in Item 4 of Part I (Summary Information Regarding the Offering and Other Current or Proposed Offerings), auditor fees only need to be disclosed when the issuer is providing audited financial statements because, for example, an auditor might not be used for a Tier 1 offering. This and similar items in the fee table could be left blank if not applicable and responses could be clarified in the text box following the table.

As suggested by one commenter, we are expanding the list of jurisdictions in Item 5 (Jurisdiction in Which Securities are to be Offered) so that issuers can indicate the Canadian provinces in which they intend to conduct their offerings.

Finally, in response to one comment, we are clarifying, in this release, that the scope of the term “affiliated issuer” in proposed Item 6 of Part I is only meant to include affiliates of the issuer that are issuing securities in the same offering for which qualification is currently being sought under Regulation A. We believe this clarification is necessary in the final rules in order to avoid potential confusion among issuers as to the scope of the definition, in light of the broader definition of “affiliate” as it appears in Securities Act Rule 405.

b. Part II (Offering Circular)

(1) Narrative Disclosure

(a) Proposed Rules for Narrative Disclosure

Part II (Offering Circular) in existing Form 1-A provides issuers with three options for their narrative disclosure: Model A, Model B, and Part I of Form S-1. We proposed to eliminate the Model A question-and-answer format as a disclosure option, to update and retain Model B as a disclosure option (renaming it “Offering Circular”), and to continue to permit issuers to rely on Part I of Form S-1 to satisfy the disclosure obligations of Part II of Form 1-A.

We further proposed to create new requirements for audited financial statements and for a section containing management's discussion and analysis (MD&A) of the issuer's liquidity, capital resources, and results of operations. As proposed, issuers that have not generated revenue from operations during each of the three fiscal years immediately before the filing of the offering statement would be required to describe their plan of operations for the 12 months following qualification of the offering statement, including a statement about whether, in the issuer's opinion, it will be necessary to raise additional funds within the next six months to implement the plan of operations.

Consistent with the treatment of issuers in registered offerings, we further proposed to permit issuers to incorporate by reference into Part II of Form 1-A certain items previously submitted or filed on EDGAR, regardless of whether they were provided pursuant to Regulation A disclosure requirements. As proposed, incorporation by reference would be limited to documents publicly submitted or filed under Regulation A and issuers would have to be subject to the ongoing reporting obligations for Tier 2 offerings. Issuers would be required to describe the information incorporated by reference, and include a separate hyperlink to the relevant document on EDGAR, which need not remain active after the filing of the related offering statement.

(b) Comments on Proposed Rules

Several commenters recommended against the proposed elimination of the Model A disclosure format, and instead recommended that the Commission retain an updated version of the format. Two of these commenters recommended including a Model A disclosure format that reflects the most recent version of NASAA's Form U-7. One commenter recommended retaining existing Form 1-A with minor changes until such time as the Commission and NASAA could develop an improved form. Six commenters, however, suggested that the Commission eliminate Model A and the proposed Offering Circular disclosure formats and instead recommended requiring disclosure by reference to Regulation S-K (with reduced disclosure requirements in some instances). These commenters believed that such a change would increase efficiency and comparability. One of these commenters was concerned that differences between Items 303 and 402 of Regulation S-K and the comparable disclosure requirements of the Offering Circular format might cause confusion. Two commenters recommended requiring REITs to incorporate certain of the items contained in Industry Guide 5 and Form S-11.

Several commenters had specific recommendations on disclosure requirements. Four commenters recommended that the Commission find a way to require more concise risk factor disclosure. One of these commenters recommended possibly imposing a limit on the number of risk factors or guidance to avoid repetition and emphasizing that disclosure should not be repeated throughout the offering circular. Two commenters recommended expanding the dilution disclosure requirement in the Offering Circular format's Item 4. As proposed, Item 4 only requires disclosure of any material disparity between the public offering price and the effective cash cost to insiders over the past year. These commenters recommended removing the one year restriction. One commenter recommended focusing the disclosure requirements in the offering statement on valuation assessments and a discussion of management's expectations about the company's future performance, including projections. Another commenter recommended requiring disclosure of the names of “those holding more than 20% of shares” and a description of the ownership and capital structure, including descriptions of how the exercise of rights by principal shareowners could negatively affect the purchasers of shares being offered. Two commenters recommended reducing and clarifying the disclosure obligations for executive compensation and management's discussion and analysis for smaller offerings. One commenter recommended requiring disclosure regarding the existence of a code of ethics and corporate governance principles in a manner that would encourage issuers to adopt internal controls.

(c) Final Rules for Narrative Disclosure

With the exception of clarifying changes, certain additional scaled disclosure items applicable to Tier 1 offerings, and additional guidance to issuers designed to streamline disclosure, we are adopting final rules for narrative disclosure in Form 1-A substantially as proposed. As adopted, Offering Circular disclosure in Part II of Form 1-A will cover:

• Basic information about the issuer and the offering, including identification of any underwriters and disclosure of any underwriting discounts and commissions (Item 1: Cover Page of Offering Circular);
• Table of Contents (Item 2);
• The most significant factors that make the offering speculative or substantially risky (Item 3: Summary and Risk Factors);
• Material disparities between the public offering price and the effective cash costs for shares acquired by insiders during the past year (Item 4: Dilution);
• Plan of distribution for the offering and disclosure regarding selling securityholders (Item 5: Plan of Distribution and Selling Securityholders);
• Use of proceeds (Item 6: Use of Proceeds to Issuer);
• Business operations of the issuer for the prior three fiscal years (or, if in existence for less than three years, since inception) (Item 7: Description of Business);
• Material physical properties (Item 8: Description of Property);
• Discussion and analysis of the issuer's liquidity and capital resources and results of operations through the eyes of management covering the two most recently completed fiscal years and interim periods, if required; and, for issuers that have not received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter), the plan of operations for the 12 months following qualification of the offering statement, including a statement about whether the issuer anticipates that it will be necessary to raise additional funds within the next six months (Item 9: Management's Discussion and Analysis of Financial Condition and Results of Operations);
• Identification of directors, executive officers and significant employees with a discussion of any family relationships within that group, business experience during the past five years, and involvement in certain legal proceedings during the past five years (Item 10: Directors, Executive Officers and Significant Employees);
• Group-level executive compensation disclosure for the most recent fiscal year for the three highest paid executive officers or directors with Tier 2 requiring individual disclosure of the three highest paid executive officers or directors (Item 11: Compensation of Directors and Executive Officers);
• Beneficial ownership of voting securities by executive officers, directors, and 10% owners (Item 12: Security Ownership of Management and Certain Securityholders);
• Transactions with related persons, promoters and certain control persons (Item 13: Interest of Management and Others in Certain Transactions);
• The material terms of the securities being offered (Item 14: Securities Being Offered); and
• Any events that would have triggered disqualification of the offering under Rule 262 if the issuer could not rely on the provisions in Rule 262(b)(1).

The final rules eliminate Model A as a disclosure format for Regulation A offerings, as proposed. While some commenters suggested that the Commission should preserve Model A as an additional disclosure format for Part II of Form 1-A or update existing Model A with NASAA's more recent Form U-7, we are not persuaded that a question-and-answer format should be retained in the final rules. As we noted in the Proposing Release, the Model A disclosure format has historically been used less frequently, and resulted in less-uniform disclosure and a longer time to qualification than the Model B disclosure format. We do not believe that the use of Form U-7, which is largely similar to Model A and is also in a question-and-answer format, will alter this result. While the question-and-answer disclosure format does provide issuers with additional flexibility, we believe that the Offering Circular disclosure format (formerly called Model B) and Part I of Forms S-1 or S-11 provide issuers with sufficient flexibility in choosing their disclosure format without any of the potential delays or uniform disclosure issues associated with Model A, either currently or even if it is updated with Form U-7. We are further concerned that a question-and-answer format may not best serve the interests of investors in Regulation A offerings by providing them with less-uniform disclosure in a potentially unfamiliar format. Additionally, we are concerned that a question-and-answer format may incorrectly lead issuers to believe that, despite the guidance contained in the form itself, less complete disclosure is required under this format, thereby causing unnecessary delays in the qualification process. Lastly, and particularly with respect to Tier 2 offerings, we do not believe that a question-and-answer format is appropriate for issuers and investors in larger-sized offerings that generally benefit from disclosure that is comparable between offerings in format and information disclosed. For similar reasons, we do not believe that this format is appropriate in offerings of any size by issuers that seek to foster potential trading in the secondary markets.

As proposed, the final rules will require issuers to provide disclosure in Part II of Form 1-A that follows the Offering Circular or Part I of Form S-1 disclosure format. Additionally, we agree with commenters that certain additional disclosure requirements may be appropriate for offerings by REITs and similar issuers. The final rules, therefore, also permit issuers to follow, in addition to the Offering Circular and Part I of Form S-1 formats, the form disclosure requirements of Part I of Form S-11. An issuer may, however, only use Part I of Form S-11 if the securities are eligible to be registered on that form. As proposed and adopted with respect to disclosure under Part I of Form S-1, issuers following Part I of Form S-11 may follow smaller reporting company narrative disclosure requirements if they meet the definition of that term in Securities Act Rule 405.

Contrary to the suggestions of some commenters, we are not adopting rules that would limit the number of risk factors disclosed. While we appreciate the concern that certain issuers and their advisors may take an overly cautious approach to the application of our disclosure requirements resulting in numerous risk disclosures, the decision as to the appropriate mix of information that should be disclosed to investors must be based on the particular facts and circumstances of each company. We do not believe that a limit on risk factor disclosure is an appropriate substitute for the judgments of issuers and their advisors. A form-based limitation on the number of risk factors, beyond the guidance in Item 3 of Part II, could lead to incomplete disclosure that may place investors at a higher risk of potential loss and issuers at a higher risk for potential litigation if it results in appropriate risk factors being excluded.

Further, we believe that certain other commenter concerns and suggestions as to specific narrative disclosures are already appropriately addressed by the final rules. For example, one commenter suggested that we require disclosure of the names of those holding more than 20% beneficial ownership of the issuer and a description of the issuer's ownership and capital structure, including descriptions of the exercise of rights of principal shareholders. The final rules substantially address these topics. Item 12 of the Offering Circular, as proposed and adopted, requires disclosure relating to more than 10% beneficial ownership and Item 14, which is adopted as proposed, requires disclosure of the terms of all classes of outstanding capital stock.

As adopted, the Offering Circular includes disclosure based on disclosure guidelines set forth in the Securities Act Industry Guides as well as guidance applicable to limited partnerships and limited liability companies. As suggested by commenters, in order to create more flexibility in disclosure matters for smaller issuers, we are adding a materiality threshold for disclosure as it relates to time and dollar expenditures on research and development. Additionally, the final rules require issuers to provide financial statements, which in the case of Tier 2 offerings must be audited, as well as a section on management's discussion and analysis (MD&A) of the issuer's liquidity, capital resources, and results of operations. We are amending the MD&A disclosure requirements in Item 9 to align more closely with the language in Regulation S-K that applies to domestic registrants and smaller reporting companies. Consistency with Regulation S-K in this regard may assist companies with compliance with the rules for registered offerings to the extent Tier 2 issuers eventually become Exchange Act reporting companies, while also making sure that Regulation A issuers do not have a greater disclosure obligation than registered domestic issuers. Further, consistent with the proposed rules, issuers that have not generated revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter) will be required to describe their plan of operations for the 12 months following qualification of the offering statement. For companies that have been in existence for less than three years, the final rules clarify that this disclosure requirement applies to them since inception.

The changes to the Offering Circular format adopted today will result in Offering Circular disclosure, particularly for Tier 2 offerings, more akin to what is required of smaller reporting companies in a prospectus for a registered offering. For example, the final rules require issuers in both Tier 1 and Tier 2 offerings to disclose beneficial ownership of their voting securities, as opposed to record ownership of voting and non-voting securities. With respect to transactions with related persons, promoters, and certain control persons in Tier 2 offerings, issuers will no longer be required to disclose transactions in excess of $50,000 in the prior two years (or similar transactions currently contemplated), but rather must follow the requirements for smaller reporting company disclosure of transactions during the prior two fiscal years that exceed the lesser of $120,000 or 1% of the average total assets at year end for the last two completed fiscal years. We originally proposed to apply this threshold to Tier 1 offerings also, but believe that the 1% of average total assets threshold could result in a lower disclosure threshold for smaller issuers than was otherwise required of such issuers under the existing rules. The final rules therefore preserve the related party transaction disclosure requirements of Regulation A, as they existed before the adoption of final rules today, for Tier 1 offerings so that issuers in such offerings are only required to disclose such transactions in excess of $50,000 in the prior two years (or similar transactions currently contemplated).

In addition to preserving the related party transaction disclosure threshold for Tier 1 offerings, we are adopting a change applicable to Tier 1 that will provide an additional scaled disclosure option for issuers in the Offering Circular. This change is consistent with the general views of a number of commenters that urged the Commission to consider additional potential scaling for smaller issuers generally and Tier 1 offerings in particular. The final rules alter the format of, but not the ultimate aggregate amount of information required to be disclosed in, the proposed executive compensation disclosure requirements for Tier 1 offerings. Instead of providing executive compensation data on an individual basis for the three highest paid officers or directors and on a group basis for all directors, as was proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will instead be required to disclose only group-level compensation data as it applies to the three highest paid executives or directors and all directors as a collective group, including the number of persons comprising such group, covering the period of the issuer's last completed fiscal year. In this regard, the final rules for Tier 1 offerings will continue to require the disclosure of important compensation data to investors, but on an aggregate, rather than individual, basis. The group-level disclosure format for the highest paid executives and all directors should help smaller issuers avoid some of the harm that could follow compensation disclosure of individual executives or directors to the market and competitors, especially when disclosure of such information would not necessarily be required in the context of a private placement or other exempt offering. Further, the additional requirement to disclose the total number of persons comprising any group for which group-level data is required to be disclosed will preserve the ability of investors in Tier 1 offerings to determine the average compensation paid to all persons within the group. Consistent with the suggestions of some commenters, we believe that this change to the final rules will assist smaller issuers with more appropriately tailored executive compensation disclosure requirements and will provide investors with useful information.

We do not, however, believe that further scaling of smaller issuers' MD&A is necessary under the final rules. As we noted in the Proposing Release, while the final rules provide issuers with more detailed instructions on MD&A disclosure, similar disclosure is already called for under existing requirements. The final MD&A requirements clarify existing requirements and will likely save issuers time by providing more express guidance regarding the type of information and analysis that should be included. We believe the clearer requirements will lead to improved MD&A disclosure, which will provide investors with better visibility into management's perspective on the issuer's financial condition and operations. The final provisions for MD&A disclosure in the Offering Circular, however, are not as extensive as those required under Item 303 of Regulation S-K. As proposed, the final Offering Circular format includes detailed guidance and requirements similar to Item 303 with respect to liquidity, capital resources, and results of operations, including the most significant trend information, but does not separately call for disclosure of off-balance sheet arrangements or a table of contractual obligations. Similar to smaller reporting companies in registered offerings, Regulation A issuers are required to disclose information about the issuer's results of operations for the two most recently completed fiscal years and interim periods, when applicable.

Except as noted above, the updates to the Offering Circular disclosure requirements will not result in an overall increase in an issuer's disclosure obligations. For example, as mentioned above, certain issuers will have a higher threshold for reporting related party transactions than would have previously been required under Regulation A. Additionally, Tier 1 issuers (which will likely be smaller companies) will, in comparison to the proposed rules, benefit from further scaling of related party transactions and compensation-related disclosures. Further, as proposed, all issuers will be permitted to provide more streamlined disclosure of dilutive transactions with insiders by no longer being required to present a dilution table based on the net tangible book value per share of the issuer's securities. While we disagree with commenters that suggested we should expand disclosure provisions related to dilution, the final rules, which reduce the disclosure time period from three years to one year, are consistent with their view that the disclosure of this information should not depend on when such shares were acquired. We do not believe that information regarding dilution covering more than the prior year is necessary for the smaller issuers likely to conduct Regulation A offerings, nor do we believe that a reduction in the required disclosure from three years to one year, as proposed and adopted, will negatively affect investor protection. Additionally, the final provisions for MD&A disclosure clarify existing requirements and should benefit issuers by providing more express guidance regarding the type of information and analysis that should be included, including instructions about disclosure of operating results. We believe that these clarifications should also lead to improved MD&A disclosure, which will provide investors with better visibility into management's perspective on the issuer's financial condition and results of operations. Investors, particularly in Tier 2 offerings, will also benefit from disclosure that is more consistent across issuers in both registered offerings and Regulation A offerings.

We are making one change to the disclosure requirements of Item 6 (Use of Proceeds) in the final rules. As proposed, issuers were required to disclose if any material amount of other funds are to be used in conjunction with the proceeds raised in the offering. If so, an issuer would be required to state the amounts and sources of such other funds. The final rules include these proposed provisions, but add a requirement that the issuer further provide disclosure about whether such other funds are firm or contingent. While we did not receive any comment specifically addressing this issue, where applicable, this type of information would generally be required to be disclosed as part of the staff review and comment process before qualification. We believe an express requirement in the final rules will ultimately save issuers time in the qualification process and therefore are including language addressing this issue in the final rules.

For clarity, we are moving the requirements to furnish certain supplemental information found in Item 7 (Business Description) of Part II to Form 1-A to General Instruction IV (Supplemental Information) to Form 1-A, where similar requirements are found. We believe that providing these instructions in one place will help issuers understand and comply with the process for furnishing supplemental information to the Commission. The process for furnishing supplemental information to the Commission pursuant to Form 1-A is similar to the treatment of such information in registered offerings. Additionally, since we believe it is important for the Commission to be aware of the existence—rather than the non-existence—of such reports, the final rules no longer require an issuer to inform the Commission if no such report has been prepared. Item 7 is further revised to clarify that issuers must only disclose distinctive or special characteristics of the issuer's operation or industry that are reasonably likely to have a material impact on its future financial performance.

The final rules also clarify in Item 5 (Plan of Distribution and Selling Securityholders) the calculation of selling securityholder ownership prior to an offering, which we believe will facilitate compliance with, and calculations pursuant to, this requirement. Additionally, in order to avoid potential confusion as to the scope of Items 11 and 13 to Part II of Form 1-A, the final rules make clear that issuers are required to provide disclosure for “executive officers” rather than “officers.” Contrary to the suggestion of one commenter, we do not believe that requiring disclosure regarding the existence of a code of ethics and corporate governance principles should be a required disclosure item for the types of issuers likely to conduct Regulation A offerings. While nothing in Part II of Form 1-A would prevent an issuer from providing more disclosure than is otherwise required in the form itself, we do not believe it would be appropriate to mandate this type of disclosure for all issuers because we anticipate that issuers of Regulation A securities will generally be smaller companies with less complex organizational structures. We further believe that the disclosure requirements of Part II of Form 1-A will provide investors with the information they need to adequately evaluate an issuer's business and securities.

As proposed, the final rules permit issuers to incorporate by reference into Part II of Form 1-A certain items previously submitted or filed on EDGAR. In a change from the proposed rules, issuers will be permitted to incorporate by reference any documents publicly submitted or filed on EDGAR, as opposed to being limited to documents submitted or filed pursuant to Regulation A. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Issuers following the Offering Circular disclosure model will be permitted to incorporate by reference into Items 2 through 14; issuers following the narrative disclosure in Part I of Form S-1 will be permitted to incorporate by reference into Items 3 through 11 (other than Item 11(e)) of Part I of Form S-1; issuers following the narrative disclosure in Part I of Form S-11 will be permitted to incorporate by reference into Items 3 through 26, Item 28, and Item 30 of Part I of Form S-11. The final rules require issuers to describe the information incorporated by reference, and include a separate hyperlink to the relevant document on EDGAR, which need not remain active after the filing of the related offering statement. Additionally, Form 1-A encourages issuers to cross-reference items within the form, where applicable. Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-A indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.

(2) Financial Statements

(a) Proposed Rules for Financial Statements

Part F/S of Form 1-A currently requires issuers in Regulation A offerings to provide the following financial statements prepared in accordance with U.S. GAAP:

• A balance sheet as of a date within 90 days before filing the offering statement (or as of an earlier date, not more than six months before filing, if the Commission approves upon a showing of good cause) but, for filings made more than 90 days after the end of the issuer's most recent fiscal year, the balance sheet must be dated as of the end of the fiscal year;
• statements of income, cash flows, and stockholders' equity for each of the two fiscal years preceding the date of the most recent balance sheet, and for any interim period between the end of the most recent fiscal year and the date of the most recent balance sheet;
• financial statements of significant acquired or to be acquired businesses; and
• pro forma information relating to significant business combinations.

The required financial statements may be unaudited unless the issuer has already obtained an audit for another purpose.

We proposed to generally maintain the existing financial statement requirements of current Part F/S of Form 1-A for Tier 1 offerings, while requiring Tier 2 issuers to file audited financial statements. We proposed to require all issuers to file balance sheets as of the two most recently completed fiscal year ends (or for such shorter time that they have been in existence), instead of the current requirement to file a balance sheet as of only the most recently completed fiscal year end. As proposed, financial statements for U.S.-domiciled issuers would be required to be prepared in accordance with U.S. GAAP. Additionally, however, we proposed to permit Canadian issuers to prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

As proposed, issuers conducting Tier 1 offerings would be required to follow the requirements for the form and content of their financial statements set out in Part F/S, rather than the requirements in Regulation S-X. In certain less common circumstances, however, such as for an acquired business or subsidiary guarantors, Part F/S would direct issuers conducting Tier 1 offerings to comply with certain portions of Regulation S-X, which provides guidance on the financial statements required for entities other than the issuer.

For all Tier 2 offerings, the proposed rules would require issuers to follow the financial statement requirements of Article 8 of Regulation S-X, as if the issuer conducting a Tier 2 offering were a smaller reporting company, unless otherwise noted in Part F/S. This requirement would include any financial information with respect to acquired businesses required by Rule 8-04 and 8-05 of Regulation S-X.

As proposed, issuers conducting Tier 2 offerings would be required to have their financial statements audited. As with Tier 1 offerings, the auditor of financial statements would need to be independent under Rule 2-01 of Regulation S-X and must comply with the other requirements of Article 2 of Regulation S-X, but need not be PCAOB-registered. Unlike Tier 1 issuers, issuers conducting Tier 2 offerings would be required to provide financial statements that are audited in accordance with the standards issued by the PCAOB.

Additionally, we proposed to update the Form 1-A financial statement requirements to be consistent with the proposed timetable for ongoing reporting. Under existing Regulation A, issuers are required to prepare a balance sheet as of a date not more than 90 days before filing the offering statement, or not more than six months before filing if approved by the Commission upon a showing of good cause. In practice, issuers often receive a six-month accommodation. If the financial statements are filed more than 90 days after the end of the issuer's most recently completed fiscal year, the financial statements must include that fiscal year.

We proposed to extend the permissible age of financial statements in Form 1-A to nine months, in order to permit the provision of financial statements that are updated on a timetable consistent with our proposed requirement for semiannual interim reporting. We also proposed to add a new limitation on the age of financial statements at qualification, under which an offering statement could not be qualified if the date of the balance sheet included under Part F/S were more than nine months before the date of qualification. For filings made more than three months after the end of the issuer's most recent fiscal year, the balance sheet would be required to be dated as of the end of the most recent fiscal year. For filings made more than nine months after the end of the issuer's most recent fiscal year, the balance sheet would be required to be dated no earlier than as of six months after the end of the most recent fiscal year. If interim financial statements are required, they would be required to cover a period of at least six months. In the Proposing Release, we noted that requiring issuers to file interim financial statements no older than nine months and covering a minimum of six months would have the beneficial effect of eliminating what could otherwise be a requirement for certain issuers to provide quarterly interim financial statements during the qualification process and would be consistent with the timing of our proposed ongoing reporting requirements. We proposed to generally maintain the timing requirement of existing Form 1-A concerning the date after which an issuer must provide financial statements dated as of the most recently completed fiscal year, but to change the interval from 90 calendar days to three months. While not proposed, we additionally solicited comment on whether Tier 2 issuers should be required to submit financial statements in interactive data format using the eXtensible Business Reporting Language (XBRL).

(b) Comments on Proposed Rules

We received numerous detailed suggestions from commenters on our proposed financial statement requirements for Part F/S of Form 1-A. Commenters were generally supportive of the proposed rules, but also raised concerns as to the effect some of the proposed requirements for audits in Tier 2 offerings could have on issuers and recommended clarifying revisions that would help to make the financial statements more consistent in some respects with those required in registered offerings, while also eliminating potentially confusing or inconsistent terminology.

Commenters generally supported the proposed increase to two years of balance sheets. One commenter noted that the Commission's proposal to require two years of balance sheets was appropriate, particularly in light of the existing requirement to provide statements of income, cash flows and stockholders' equity for two years. Another commenter, however, argued against two years of balance sheets for Tier 1 issuers instead of the one year required under existing Regulation A.

While commenters generally approved of the proposed rules not requiring audits for Tier 1 issuers, many recommended making changes to the proposed auditing requirements for the financial statements included in an offering. One commenter recommended not requiring audited financial statements until after the first year of operations as a “public startup company” or not at all for companies that are pre-revenue or that have paid-in capital, assets and revenues below a specified threshold. Many commenters recommended allowing Tier 1 issuers to designate financial statements as “audited” if the auditor was only independent in accordance with the rules of the AICPA and not in accordance with the Commission's auditor independence rules. These commenters noted that the proposed requirements for financial statements only to qualify as “audited” if the auditor complies with the independence standards of Article 2 of Regulation S-X, as opposed to the independence standards of the AICPA, may increase costs to smaller issuers due to the increased likelihood that an issuer would need to have their financial statements audited a second time by an auditor who was independent under Rule 2-01 of Regulation S-X. One commenter requested clarification of whether a Tier 1 issuer could voluntarily provide an audit opinion on its financial statements that was obtained for other purposes if the auditor complied with U.S. GAAS, including AICPA independence standards, but not with the Commission's independence rules. Several commenters recommended requiring Tier 1 issuers that provide unaudited financial statements to label them as unaudited.

Many commenters recommended allowing financial statements in Tier 2 offerings to be audited in accordance with either PCAOB standards or U.S. GAAS. One commenter limited its recommendation to smaller Tier 2 issuers and conditioned this recommendation on the Commission not altering the requirement that auditors be independent under Rule 2-01 of Regulation S-X. This commenter also recommended conditioning the ability to follow U.S. GAAS under Tier 2 on the issuer's showing of undue cost and impracticability in the offering statement and also limiting this relief to the issuer's initial Tier 2 offering. One commenter noted that because Regulation A issuers are not “issuers” (as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002), when the audit is performed in accordance with PCAOB standards, AICPA rules would require the audit to be compliant with both AICPA and PCAOB standards and the auditor's report would have to reference both AICPA and PCAOB standards. This commenter also noted, however, that given recent changes to the auditor's report under AICPA standards, it may not be possible for the auditor to be in compliance with both AICPA and PCAOB standards from a reporting perspective.

Additionally, two commenters expressed concern about potential confusion that could result from requiring PCAOB standards in Tier 2 offerings, but not requiring PCAOB registration. One of these commenters recommended avoiding any potential confusion by allowing for audits under U.S. GAAS in Tier 2 offerings. Another commenter stated that the issue could be resolved by requiring either the use of PCAOB-registered auditors for Tier 2 offerings or appropriate disclosure of the auditor's PCAOB registration status, noting that the disclosure option would result in lower costs to the issuer and fewer instances in which an issuer would need to have its financial statements audited a second time under PCAOB standards.

One commenter asked the Commission to clarify issues relating to transition reporting for Tier 1 issuers that have previously conducted an offering pursuant to the exemption under Section 4(a)(6) and were required to file reviewed annual financial statements. Another commenter asked the Commission to clarify the application of the audit requirements applicable to Tier 1 issuers that have audited financial statements prepared for other purposes, in light of potentially contradictory references in proposed Form 1-A to the “standards of the PCAOB” and the PCAOB auditing standards. One commenter recommended not requiring audited financials under either Tier 1 or Tier 2 for “small companies with limited revenues and assets.” Another commenter raised concerns about allowing Tier 1 issuers to include financial statements audited using U.S. GAAS and not requiring that all audits be conducted by PCAOB-registered auditors.

Many commenters recommend making other changes to the financial statement requirements not directly related to audit requirements. A number of commenters suggested allowing companies to use alternatives under U.S. GAAP for non-public business entities when preparing their financial statements, since Regulation A issuers would otherwise be considered “public business entities” under FASB standards. These commenters were concerned about the need for issuers to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities, as discussed in greater detail below. One commenter did not address this issue with respect to Tier 1, but recommended allowing the smallest Tier 2 issuers to follow alternatives under U.S. GAAP applicable to non-public business entities. One commenter recommended allowing companies to include financial statements prepared in accordance with alternatives under U.S. GAAP for non-public business entities in offerings up to a specified minimum, suggesting $10 million or $20 million. Another commenter recommended explicitly stating that Regulation A issuers are subject to “public business entity” requirements if the final rules do not provide for the use of, or a non-costly transition from, financial statements based on alternatives under U.S. GAAP for non-public business entities. One commenter limited its recommendation with respect to the applicability of alternatives under U.S. GAAP for non-public business entities to Tier 1 issuers and to entities whose financial statements are required to be included in offering statements relying on Tier 1. Another commenter noted that significant acquired businesses will qualify as “public business entities” because their financial statements are filed with the Commission. As a result, financial statements of those businesses would also need to be revised, and an issuer would potentially need to have their financial statements prepared and audited a second time under U.S. GAAP applicable to public business entities.

Several commenters recommended allowing issuers under Regulation A to defer adopting new or revised accounting standards effective for public companies if non-public business entities have a delayed effective date (similar to accommodations for emerging growth companies under Section 102(b) of the JOBS Act). Two commenters recommended either clarifying how the disclosure requirements for pro forma financial information in Part F/S for Tier 1 issuers differ from Rule 8-05 of Regulation S-X or requiring such Tier 1 issuers to follow Rule 8-05. One commenter recommended allowing companies formed within nine months of the filing date of the offering statement to provide only a discussion of their financial condition and operations since inception, rather than financial statements as of a date within nine months of the date of filing. This commenter further recommended aligning the financial statement updating requirements with the timing of periodic reports (e.g., allowing for 120 days before year end financial statements are required in the offering statement, rather than 90 days). This commenter also recommended that the Commission consider additional scaling for Regulation A offerings in the requirements concerning the financial statements of: Acquired or to-be-acquired businesses; guarantors of issuers of guaranteed securities; and, affiliates that collateralize an issuance.

Another commenter recommended that Tier 2 issuers not be subject to Rule 8-04(b)(3) of Regulation S-X when the to-be-acquired business has significant loss operations. This commenter recommended at least not applying Rule 8-04(b)(3) in situations where companies intend to eliminate the losses by dropping certain products or service lines of business that produced the loss. Another commenter recommended clarifying whether financial statements should also be dated within nine months of the qualification date of the offering statement.

One commenter made a number of specific recommendations that we clarify language in particular paragraphs of the proposed requirements for financial statements in Part F/S of Form 1-A. A different commenter indicated that proposed Form 1-A seemed to require issuers to disclose “selected financial information” and objected to any such requirement as being more onerous than the requirements otherwise applicable to smaller reporting companies.

Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB, as proposed. More generally, many commenters recommended allowing foreign issuers to use IFRS as issued by the IASB to prepare their financial statements. One commenter recommended allowing U.S. companies to use IFRS when conducting offerings in Canada. This comment was made within the context of providing U.S. companies the ability to list on a Canadian exchange without being subject to resale restrictions imposed by Regulation S. Three commenters specifically opposed adding an XBRL requirement.

(c) Final Rules for Financial Statements

As discussed more fully below, we are adopting requirements for financial statements in Part F/S of Form 1-A with changes from the proposed rules that are designed to simplify and lower the cost of compliance for issuers, while maintaining important investor protections. As proposed, the final rules require Tier 1 and Tier 2 issuers to file balance sheets and other required financial statements as of the two most recently completed fiscal year ends (or for such shorter time that they have been in existence). With the exception of the requirement to file two years of balance sheets, the final rules largely maintain the existing financial statement requirements of current Part F/S for Tier 1 offerings, while requiring Tier 2 issuers to file audited financial statements in Part F/S.

Financial statements for U.S.-domiciled issuers will be required to be prepared in accordance with U.S. GAAP, as is currently the case. Canadian issuers, however, may prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

Additionally, consistent with the suggestions of commenters and in order to be consistent with the treatment of emerging growth companies under Section 102(b)(1) of the JOBS Act, the final rules permit issuers, where applicable, to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities. In this regard, with respect to the delayed implementation of new or revised financial accounting standards, if the issuer chooses to take advantage of the extended transition period to the same extent that a “non-issuer” company is permitted to, the issuer:

• Must disclose such choice at the time the issuer files the offering statement; and
• May not take advantage of the extended transition period with respect to some standards and not others, but must apply the same choice to all standards.

However, issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings.

As proposed, the final rules require issuers conducting Tier 1 offerings to follow the requirements for the form and content of their financial statements set out in Part F/S, rather than following the requirements in Regulation S-X. However, consistent with a comment received, in certain less common circumstances, such as for an acquired business or subsidiary guarantors, Part F/S directs issuers conducting Tier 1 offerings to certain portions of Regulation S-X that provide guidance on when financial statements for entities other than the issuer are required. In Tier 1 offerings the form and content of the financial statements for those other entities also follow the requirements set out in Part F/S. We believe this guidance will assist issuers with compliance with the general requirements for financial statement disclosure in these less common circumstances and is an appropriate change in the final rules. In an effort to reduce confusion, as suggested by commenters, the final rules also direct issuers to Rule 8-05 of Regulation S-X for pro forma information disclosure requirements. Additionally, the final rules require compliance with Rule 8-06 of Regulation S-X for real estate operations acquired because real estate companies and REITs are eligible issuers.

The final rules require Tier 2 issuers to follow the financial statement requirements of Article 8 of Regulation S-X, as if the issuer were a smaller reporting company, unless otherwise noted in Part F/S. This requirement also includes any financial information required for Tier 1 offerings, as discussed above, such as acquired businesses required by Rule 8-04 and 8-05 of Regulation S-X.

As adopted, financial statements in a Tier 1 offering are not required to be audited. Consistent with the suggestions of commenters, and in order to avoid potential confusion as to the presentation of financial statements, issuers in Tier 1 offerings that do not provide audited financial statements must label their financial statements as unaudited. However, the final rules clarify that, if an issuer conducting a Tier 1 offering has already obtained an audit of its financial statements for other purposes, and that audit was performed in accordance with U.S. GAAS or the standards of the PCAOB, and the auditor followed the independence standards of either Rule 2-01 of Regulation S-X or the independence standards of the AICPA, then those audited financial statements must be filed. We believe the requirement to file already available audited financial statements will benefit investors. The auditor need not be registered with the PCAOB. While audited financial statements are not generally required to be filed for Tier 1 offerings, allowing auditors to follow the independence standards of the AICPA or Rule 2-01 of Regulation S-X is consistent with the suggestions of most commenters and will provide smaller issuers that seek to submit “audited” financial statements in Tier 1 offerings with greater flexibility in satisfying the financial statement requirements. We agree that, when available, financial statements that satisfy the financial statement requirements and that have been audited by an auditor that meets the independence standards of the AICPA should be deemed “audited” for purposes of Tier 1 offerings.

Issuers conducting Tier 2 offerings are, by contrast, required to have their financial statements audited. The auditor of financial statements being filed as part of a Tier 2 offering must be independent under Rule 2-01 of Regulation S-X and must comply with the other requirements of Article 2 of Regulation S-X, but need not be PCAOB-registered. In a change from the proposed rules, and consistent with the suggestions of commenters, the final rules require issuers conducting Tier 2 offerings to provide financial statements that are audited in accordance with either U.S. GAAS or the standards issued by the PCAOB.

As noted above, one commenter indicated that, because Regulation A issuers are not “issuers,” as defined by Section 2(a)(7) of the Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be compliant with U.S. GAAS even if the auditor has conducted the audit in accordance with PCAOB standards. Staff of the Commission consulted with the AICPA on this issue and has been advised that an audit performed by its members of an issuer conducting an offering pursuant to Regulation A would be required to comply with U.S. GAAS in accordance with the AICPA's Code of Professional Conduct. As a result, an auditor for a Regulation A issuer who is conducting its audit in accordance with PCAOB standards would also be required to comply with U.S. GAAS, and the auditor would need to comply with the reporting requirements of both the AICPA standards and the PCAOB standards. As further noted by this commenter, there may be some question as to whether an auditor can currently comply with both sets of standards when issuing its auditor's report. Commission staff also consulted with the AICPA on this issue and has been informed that the AICPA will consider taking action to address this potential conflict so that an auditor's report would be able to comply with both sets of auditing standards.

Thus, requiring issuers in Tier 2 offerings to have their financial statements audited in accordance with PCAOB standards would have the effect of requiring issuers to comply with two sets of auditing standards and potentially result in audits for Tier 2 issuers being subject to additional incremental costs than would be required for registered offerings (which are only subject to PCAOB auditing standards). To avoid such a result, the final rules permit Tier 2 issuers the option of following U.S. GAAS or the standards of the PCAOB.

We believe that providing issuers with this option could help reduce the cost of required audits in Tier 2 offerings while maintaining appropriate safeguards for investors. We believe audits conducted in accordance with U.S. GAAS provide sufficient protection for investors in Regulation A offerings, especially in light of the requirement that auditors for Tier 2 offerings must be independent under Rule 2-01 of Regulation S-X. Moreover, we believe that the flexibility adopted in the final rules is more appropriately tailored for the different types of issuers likely to conduct Tier 2 offerings because it will not only eliminate the potential that existed under the proposed rules that some issuers would need to have their financial statements audited a second time under PCAOB standards, but also continue to permit issuers, such as those that may seek concurrent registration of a class of securities under the Exchange Act, to comply with the PCAOB standards if they so choose.

An issuer that includes financial statements audited in accordance with U.S. GAAS and PCAOB standards will likely incur additional incremental costs compared with an issuer that includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefit of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs. Commission staff understands that many firms that conduct audits using PCAOB standards have developed their methodology in a manner that would comply with both sets of standards, which could help contain the costs related to complying with both U.S. GAAS and PCAOB auditing standards.

An issuer conducting a Regulation A offering that seeks to concurrently register its securities under the Exchange Act would be required to file audited financial statements that are prepared in accordance with the standards of the PCAOB by an auditor that is PCAOB-registered. The final rules therefore provide Regulation A issuers with the option to provide financial statements in Part F/S of Form 1-A that comply with correlating requirements under the Exchange Act.

The Form 1-A financial statement requirements are being further updated to be consistent with the timetable for ongoing reporting. The final rules extend the permissible age of financial statements in Form 1-A to nine months, in order to permit the provision of financial statements that are updated on a timetable consistent with our requirement for semiannual interim reporting. As proposed, the final rules add a new limitation on the age of financial statements at qualification, under which an offering statement cannot be qualified if the date of the most recent balance sheet included under Part F/S is more than nine months before the date of qualification. For filings made more than three months but no more than nine months after the end of the issuer's most recently completed fiscal year end, issuers are required to include a balance sheet as of the two most recently completed fiscal year ends. For filings made more than nine months after the end of the issuer's most recently completed fiscal year end, the balance sheet is required to be dated as of the two most recently completed fiscal year ends and an interim balance sheet must be included as of a date no earlier than six months after the end of the most recently completed fiscal year. If interim financial statements are required, they are required to cover a period of at least six months. Requiring issuers to file interim financial statements no older than nine months and covering a minimum of six months has the beneficial effect of eliminating what would otherwise be a requirement for certain issuers to provide quarterly interim financial statements during the qualification process and is consistent with the timing of the ongoing reporting requirements adopted today. We are generally maintaining the requirement of existing Form 1-A concerning the date after which an issuer must provide financial statements dated as of the most recently completed fiscal year, but are changing the interval from 90 calendar days to three months, which we believe will simplify compliance by allowing issuers to follow full months. In order to further simplify compliance with the final rules, we also revised Part F/S of Form 1-A to streamline the application of, and simplify the language in, the rules without substantively changing the required content.

Although we solicited comment on whether issuers conducting Tier 2 offerings should be required to provide their financial statements to the Commission and on their corporate Web sites in interactive data format using XBRL, we are not adopting any such requirement in the final rules. Commenters that addressed this issue opposed requiring the use of XBRL in Regulation A filings. We agree and do not believe that requiring the use of XBRL in Regulation A filings would be an appropriately tailored requirement for smaller issuers at this time.

On December 23, 2013, after we proposed rules for Regulation A, the Financial Accounting Standards Board (FASB) and Private Company Council (PCC) issued a guide for evaluating financial accounting and reporting for non-public business entities. The PCC was created in 2012 by the FASB and the Financial Accounting Foundation (FAF) to improve the standard-setting process, and provide for accounting and reporting alternatives, for non-public business entities under U.S. GAAP. As the standards for non-public business entities are new, there are currently very few distinctions between U.S. GAAP for public and non-public business entities. Over time, however, more distinctions between non-public business entity and public company accounting standards could develop.

Issuers that offer securities pursuant to Regulation A will be considered “public business entities” as defined by the FASB and, therefore, ineligible to rely on any alternative accounting or reporting standards for non-public business entities. Even though issuers of securities in a Regulation A offering fit within the definition of “public business entity,” the Commission retains the authority to determine whether or not such issuers would be permitted to rely on the developing non-public business entity standards.

The distinction between public and non-public business entity standards was not directly contemplated in the Proposing Release, as the FASB/PCC Guide was issued after the Regulation A proposal was approved by the Commission. Commenters, however, generally expressed concern about the costs associated with requiring non-public business entities (e.g., non-Exchange Act reporting companies) to follow public company U.S. GAAP accounting standards, particularly on a going forward basis. Commenters also expressed concern about the potential that an issuer would need to have its financial statements prepared and audited a second time, which would likely increase the costs associated with any previously obtained financial statements by a non-public business entity that would not comply with the financial statement requirements of an exemption that requires such issuer to follow the standards applicable to public business entities.

The final rules do not allow Regulation A issuers to use the alternatives available to non-public business entities under U.S. GAAP in the preparation of their financial statements. One of the significant factors considered by the FASB in developing its definition of “public business entity” was the number of primary users of the financial statements and their access to management. As the FASB noted, “users of private company financial statements have continuous access to management and the ability to obtain financial information throughout the year.” As the number of investors increases and the ability to influence management decreases, it is important that all investors receive or have timely access to comprehensive financial information. As a result, the Commission believes that investor protection is enhanced by Regulation A issuers providing financial statements prepared in the same manner as other entities meeting the FASB's definition of “public business entity.”

c. Part III (Exhibits)

We proposed to maintain the existing exhibit requirements in Part III of Form 1-A. Additionally, we proposed to continue to permit issuers to incorporate by reference certain information in documents filed under Regulation A that is already available on EDGAR, but also require issuers to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR. As proposed, issuers also would have to be subject to the ongoing reporting obligations for Tier 2 offerings in order to avail themselves of this accommodation.

We did not receive any comments on the proposed exhibit requirements for Part III of Form 1-A, and are adopting the proposed exhibit requirements substantially as proposed. As adopted, issuers will be required to file the following exhibits with the offering statement: Underwriting agreement; charter and by-laws; instrument defining the rights of securityholders; subscription agreement; voting trust agreement; material contracts; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; “testing the waters” materials; appointment of agent for service of process; and any additional exhibits the issuer may wish to file. In a change from the proposed requirements, however, the final rules no longer require issuers to file schedules (or similar attachments) to material contracts in all instances. As adopted, issuers are permitted to exclude schedules (or similar attachments) to material contracts if not material to an investment decision or if the material information contained in such schedules is otherwise disclosed in the agreement or the offering statement. Any material contract filed in response to Item 17, however, must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request.

We are adopting final rules that permit issuers to incorporate by reference certain information that is already available on EDGAR. In a change from the proposed rules, incorporation by reference will not be limited to documents previously filed pursuant to Regulation A and will not be limited to issuers subject to Tier 2 ongoing reporting obligations. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Issuers that seek to incorporate by reference are further required to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR. As proposed, such issuers must be subject to the ongoing reporting obligations for Tier 2 offerings. Additionally, as proposed, to the extent post-qualification amendments to offering statements must include audited financial statements, the final rules require the consent of the certifying accountant to the use of such accountant's report in connection with amended financial statements to be included as an exhibit. The final rule, however, clarifies that the requirement to file the consent of the certifying accountant only applies where the financial statements required to be filed are amended.

d. Signature Requirements

Similar to the requirement for issuers in registered offerings, we proposed to require issuers to manually sign a copy of the offering statement before or at the time of filing and retain it for a period of five years. Issuers would be required to produce the manually signed copy to the Commission, upon request. Additionally, we proposed to eliminate the requirement that, where an issuer filing a Form 1-A is a Canadian issuer, its authorized representative in the United States is required to sign the offering statement. Also, we proposed to maintain the requirement that Canadian issuers file a Form F-X to provide an express consent to service of process in connection with offerings qualified under Form 1-A. This treatment is similar to requirements for Canadian companies making filings under the multijurisdictional disclosure system.

We did not receive any comments on this aspect of the proposal, and are adopting these provisions, as proposed, in the final rules.

4. Continuous or Delayed Offerings and Offering Circular Supplements

a. Proposed Rules

Rule 251(d)(3) currently allows for continuous or delayed offerings under Regulation A if permitted by Rule 415. By reference to the undertakings of Item 512(a) of Regulation S-K, Rule 415 does not necessarily require every change in the information contained in a prospectus to a registration statement in a continuous offering to be reflected in a post-effective amendment. On the other hand, currently Regulation A requires every revised or updated offering circular in a continuous offering to be filed as an amendment to the offering statement to which it relates and to be qualified in a process similar to the Commission staff review, comment and qualification process for initial offering statements. The requalification process can be costly and time consuming for smaller issuers conducting continuous offerings of securities pursuant to Regulation A. We proposed to clarify in the rules for Regulation A the scope of permissible continuous or delayed offerings and the related concept of offering circular supplements.

Rule 415 attempts to promote efficiency and cost savings in the securities markets by allowing for the registration of certain traditional and other shelf offerings. Prior to the adoption of final rules today, Rule 251(d)(3) of Regulation A allowed for continuous or delayed offerings under Regulation A if permitted by Rule 415. When Rule 415 was adopted, the Commission recognized that certain traditional shelf offerings have been allowed by administrative practice for many years despite the absence of such a rule. Since Rule 415 only addresses registered offerings, however, the precise scope of continuous or delayed offerings under Regulation A has been unclear.

The proposed rules would clarify the scope of permissible continuous or delayed offerings under Regulation A and the related concept of offering circular supplements, and otherwise continue to allow for certain traditional shelf offerings to promote flexibility, efficiency, and to reduce unnecessary offerings costs. Further, as proposed, an issuer's ability to sell securities in a continuous or delayed offering would be conditioned on being current with the Tier 2 ongoing reporting requirements at the time of sale.

To provide clarity regarding the application of Rule 415 concepts to Regulation A offerings, we proposed to add a provision to Regulation A similar to Rule 415, but with limitations that we believed would be appropriate for Regulation A. The provision would establish time limits similar to those in Rule 415 and make conforming changes as necessary.

In the Proposing Release we proposed excluding types of shelf offerings that cannot be conducted under existing Regulation A, such as offerings requiring registration on Form F-6, offerings requiring primary eligibility to use Forms S-3 or F-3, offerings conducted by issuers ineligible to use Regulation A, as well as certain offerings that we do not currently believe would be appropriate to include in the Regulation A framework. Further, we proposed prohibiting all “at the market” offerings under Regulation A.

Additionally, as proposed, changes in the information contained in the offering statement would no longer necessarily trigger an obligation to amend. Offering circulars for continuous Regulation A offerings would, however, continue to be required to be updated annually through the filing of a post-qualification amendment. These annual post-qualification amendments would include updated financial statements and post-qualification amendments would also be required when updating the offering circular to reflect facts or events arising after qualification which, in the aggregate, represent a fundamental change in the information set forth in the offering statement.

In addition to these post-qualification amendments to the offering statement that must be qualified, we also proposed to allow issuers to use offering circular supplements in certain situations. Further, we proposed to permit issuers in continuous offerings to qualify additional securities in reliance on Regulation A by a post-qualification amendment.

We also proposed provisions similar to Rule 424 that would require issuers omitting certain information from an offering statement at the time of qualification, in reliance on proposed Rule 253(b), to file such information as an offering circular supplement no later than two business days following the earlier of the date of determination of such pricing information or the date of first use of the offering circular after qualification. Further, these proposed provisions would require offering circulars that contain substantive changes in information previously provided in the last offering circular (other than information omitted in reliance on proposed Rule 253(b)) to be filed within five business days after the date such offering circular is first used after qualification. Offering circular supplements that are not filed within the required time frames provided by the proposed rules would be required to be filed as soon as practicable after the discovery of the failure to file.

b. Comments on Proposed Rules

Commenters were generally supportive of the proposed modernization of Regulation A's offering process, in general, and the provisions for continuous or delayed offerings, in particular. Two commenters, however, recommended allowing for at the market offerings under Regulation A. Additionally, one commenter recommended allowing for at the market offerings in non-penny stocks on established trading markets. Another commenter recommended allowing for at the market offerings in securities that qualify for the actively-traded securities exceptions in Rules 101 and 102 of Regulation M. This commenter suggested that the offering amount could be determined by using the calculation set forth in Securities Act Rule 457(c) as of a specified date within five business days of qualification of the offering statement.

c. Final Rules

We believe the proposed rules sufficiently update existing rules, while providing issuers with adequate flexibility with respect to, and additional guidance on, the permissible scope of continuous or delayed Regulation A offerings and offering circular supplements. We are adopting these rules as proposed.

The final rules add Rule 251(d)(3) to Regulation A, without changes from the proposed rule. This provision is similar to Rule 415, but its scope is limited to permissible Regulation A offerings. In this regard, the final rules for Regulation A will continue to allow for certain traditional shelf offerings to promote flexibility, efficiency, and to reduce unnecessary offerings costs. The final rules will condition the ability of an issuer to sell securities in a continuous offering on being current in its annual and semiannual report filing, if required under Rule 257(b), at the time of sale. As we indicated in the Proposing Release, we believe this additional condition will not impose incremental costs on issuers, which are in any case required to update their offering statement and to file such ongoing reports, and will promote parity of information in the secondary markets.

As proposed, the final rules provide for the following types of continuous or delayed offerings:

• Securities offered or sold by or on behalf of a person other than the issuer or its subsidiary or a person of which the issuer is a subsidiary;
• securities offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of the issuer;
• securities issued upon the exercise of outstanding options, warrants, or rights;
• securities issued upon conversion of other outstanding securities;
• securities pledged as collateral; or
• securities that are part of an offering which commences within two calendar days after the qualification date, will be offered on a continuous basis, may continue to be offered for a period in excess of 30 days from the date of initial qualification, and will be offered in an amount that, at the time the offering statement is qualified, is reasonably expected to be offered and sold within two years from the initial qualification date.

Notwithstanding the suggestions of commenters regarding at the market offerings, we continue to believe that such offerings are not appropriate for Regulation A offerings, particularly at the outset of the adoption of today's amendments to the existing rules. While it is possible that a market in Regulation A securities may develop that is capable of supporting primary and secondary at the market offerings, rather than permit such offerings at the outset, we believe that any determination as to whether the exemption would be an appropriate method for such offerings should occur in the future. Further, an offering sold at fluctuating market prices may not be appropriate within the context of an exemption that is contingent upon not exceeding a maximum offering size.

Under the final rules, as proposed, changes in the information contained in the offering statement will no longer necessarily trigger an obligation to amend. Offering circulars for continuous or delayed Regulation A offerings will continue to be required to be updated, and the offering statements to which they relate requalified annually to include updated financial statements, and otherwise as necessary to reflect facts or events arising after qualification which, in the aggregate, represent a fundamental change in the information set forth in the offering statement. In addition to post-qualification amendments to the offering statement that must be qualified, the final rules also will allow issuers to use offering circular supplements in certain situations. Further, issuers in continuous offerings will be permitted to qualify additional securities in reliance on Regulation A by a post-qualification amendment.

The final rules will, as proposed, permit offering circular supplements to be used for final pricing information, where the offering statement is qualified on the basis of a bona fide price range estimate. Additionally, the final rules permit offering circulars to omit information with respect to the underwriting syndicate analogous to the provisions for registered offerings under Rule 430A. However, the final rules do not allow an issuer to omit the volume of securities (the number of equity securities or aggregate principal amount of debt securities) to be offered. The final rules also permit, as proposed, offering circular supplements to reflect a decrease in the volume of, or to change the price range of, the securities offered in reliance on a qualified offering statement under Regulation A, so long as the decrease in the volume of securities offered or change in the price range would not materially change the disclosure contained in the offering statement at qualification. Notwithstanding this provision, any decrease in the volume of securities offered and any deviation from the low or high end of the price range may be reflected in the offering circular supplement filed with the Commission if, in the aggregate, the decrease in volume and/or change in price represent no more than a 20% change from the maximum aggregate offering price calculable using the information in the qualified offering statement. Under no circumstances, however, would an issuer be able to amend its offering statement or rely on the provisions for offering circular supplements where the maximum aggregate offering price resulting from any changes in the price of the securities would exceed the offering amount limitation set forth in Rule 251(a) or if the increase in aggregate offering price would result in a Tier 1 offering becoming a Tier 2 offering.

We are also adopting as proposed provisions similar to Rule 424 that require issuers omitting certain pricing and price-related information from an offering statement at the time of qualification, in reliance on Rule 253(b), to file such information as an offering circular supplement no later than two business days following the earlier of the date of determination of such pricing information or the date of first use of the offering circular after qualification. These provisions require offering circulars that contain substantive changes (other than information omitted in reliance on Rule 253(b)) in information previously provided in the last offering circular to be filed within five business days after the date such offering circular is first used after qualification. Offering circular supplements that are not filed within the required time frames provided by the rules are required to be filed as soon as practicable after the discovery of the failure to file.

5. Qualification

Under existing Regulation A, an offering statement is generally only qualified by order of the Commission in a manner similar to a registration statement being declared effective. In such instances, the issuer includes a delaying notation on the cover of the Form 1-A stating that the offering statement shall only be qualified by order of the Commission. In order to remove a delaying notation, an issuer must file an amendment to the offering statement indicating that the offering statement will become qualified on the 20th calendar day after filing. An offering statement that does not include a delaying notation will be qualified without Commission action on the 20th calendar day after filing.

We proposed to alter the qualification process of existing Regulation A. As proposed, an offering statement could only be qualified by order of the Commission, and the process associated with the delaying notation would be eliminated. A few commenters generally supported the proposed elimination of qualification without Commission action. No commenters opposed this aspect of the proposal.

We are adopting, substantially as proposed, final rules that require Commission action before a Regulation A offering statement may be qualified. The final rules modify the proposed rules by permitting the offering statements to be declared qualified by a “notice of qualification” issued by the Division of Corporation Finance, pursuant to delegated authority, rather than requiring the Commission itself to issue an order. The notice of qualification is analogous to a notice of effectiveness in registered offerings. We are therefore amending the Commission's organization rules, as they relate to the delegated authority of the Director of the Division of Corporation Finance, to permit the Division to issue qualification orders pursuant to Regulation A. The final rules also eliminate the risk that an issuer may exclude a delaying notation either in error or in an effort to become qualified automatically without review and comment by the Commission staff. Given the electronic filing processes we are adopting, the scaled disclosure requirements for Tier 1 and Tier 2 offerings, and the preemption of state securities law registration and qualification requirements for Tier 2 offerings, we believe it is appropriate to ensure that the Commission staff has the opportunity to review and comment on an offering statement before it becomes qualified.

D. Solicitation of Interest (Testing the Waters)

1. Proposed Rules

Under Securities Act Section 3(b)(2)(E), issuers may test the waters for interest in an offering—without restriction as to the types of investors solicited—before filing an offering statement on such terms and conditions as the Commission prescribes. We proposed to permit issuers to use testing the waters solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing of solicitation materials and disclaimers. As we noted in the Proposing Release, the investor protections with respect to solicitation materials in existing Regulation A would remain in place as these materials remain subject to the antifraud and other civil liability provisions of the federal securities laws. As proposed, testing the waters materials used by an issuer or its intermediaries after publicly filing an offering statement would be required to include a current preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained. We further proposed to require issuers to publicly file their offering statements not later than 21 calendar days before qualification so that any solicitation made in the 21 calendar days before the earliest date of potential sales of securities would be conducted using the most recent version of the preliminary offering circular. The proposed rules would amend the requirements for submission or filing of solicitation materials, so that such material would be submitted or filed as an exhibit when the offering statement is either submitted for non-public review or filed (and updated for substantive changes in such material after the initial non-public submission or filing) but would no longer be required to be submitted at or before the time of first use.

As proposed, Rule 255(b) would require all soliciting materials to bear certain legends or disclaimers. Further, we did not propose to limit testing the waters to QIBs and institutional accredited investors (as is currently the case with testing the waters by emerging growth companies under Securities Act Section 5(d)).

2. Comments on Proposed Rules

Most commenters generally supported the proposed amendments to the testing the waters provisions. Several commenters, however, recommended requiring the filing of testing the waters materials prior to first use. These commenters suggested that the antifraud and other civil liability provisions of the federal securities laws are not an adequate substitute for the investor protections afforded by an advance filing requirement for solicitation materials. They further suggested that their concerns about the proposed testing the waters provisions are compounded by an access equals delivery model of final offering circular delivery. One commenter recommended allowing states to have immediate access to all testing the waters materials filed with the Commission. Another commenter recommended making the filing of testing the waters materials a condition to the exemption, while a third commenter specifically opposed that recommendation.

Two commenters recommended ensuring that any testing the waters materials that are filed with the Commission be kept confidential, at least until the offering statement is qualified. One commenter recommended removing any requirement to file testing the waters materials publicly, while another commenter recommended not requiring testing the waters materials to be filed for Tier 2 offerings. One commenter supported the use of legends on testing the waters materials or, in lieu of legends, restricting testing the waters to certain types of investors, such as QIBs and accredited investors.

Several commenters suggested that the Commission provide market participants with communication safe harbors from Section 12(a)(2) liability for regular business communications by a Regulation A issuer.

3. Final Rules

We are adopting testing the waters provisions in the final rules as proposed. Under the final rules, issuers will be permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.

The final rules require, as proposed, that testing the waters materials used by an issuer or its intermediaries after the issuer publicly files an offering statement be accompanied by a current preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained. This requirement may be satisfied by providing the URL where the preliminary offering circular or the offering statement may be obtained. Solicitation materials will remain subject to the antifraud and other civil liability provisions of the federal securities laws. Further, the final rules require issuers and intermediaries that use testing the waters materials after publicly filing the offering statement to update and redistribute such material in a substantially similar manner as such materials were originally distributed to the extent that either the material itself or the preliminary offering circular attached thereafter becomes inadequate or inaccurate in any material respect.

As discussed in Section II.C.2. above, first-time issuers that are eligible for, and elect to, non-publicly submit draft offering statements are required to publicly file their offering statements not later than 21 calendar days before qualification so that any solicitation of interest made in the 21 calendar days before the earliest date of potential sales of securities by such issuers will be conducted while potential investors have access to the most recent version of the preliminary offering circular. Additionally, in light of the preemption of state securities laws registration requirements in the final rules for Tier 2 offerings, the 21 calendar day requirement will enable state securities regulators to require such issuers to file such materials with them for a minimum of 21 calendar days before any potential sales to investors in their respective states.

As proposed, the final rules require that issuers submit or file solicitation materials 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 non-public submission or filing). However, issuers are no longer required to submit solicitation materials at or before the time of first use. The treatment of solicitation materials in Regulation A offerings is generally consistent with the Commission staff's treatment of solicitation materials used by emerging growth companies under Securities Act Section 5(d), with two exceptions that we believe will provide investors in Regulation A offerings with additional protections:

• Solicitation materials used in Regulation A offerings are required to be included with the offering statement; and

• solicitation materials used by Regulation A issuers that file an offering statement with the Commission will be publicly available as a matter of course.

Contrary to the views of commenters that suggested we keep solicitation materials confidential, or not require such materials to be filed (either publicly or at all), we believe the submission and filing requirements for solicitation materials are important elements of the final rules for the use of solicitation materials. We believe that issuers should be accountable for the content of solicitation materials and that such information must be consistent with the information contained in the offering circular. We believe that making these materials publicly available as an exhibit to the offering statement, and thereby subjecting them to staff review and comment and scrutiny by the public, will help ensure that issuers use solicitation materials with appropriate caution. However, for the reasons discussed in Section II.F. below, we do not believe that the filing of such materials should be a condition to relying on the Regulation A exemption.

We are adopting as proposed the required legends for solicitation materials. The legends provide that sales made pursuant to Regulation A are contingent upon the qualification of the offering statement. Additionally, to provide greater flexibility when using solicitation materials, the final rules eliminate, as proposed, the requirement in existing Regulation A for testing the waters materials to identify the issuer's chief executive officer, business, and products. Solicitation materials used before qualification will, therefore, be required to bear a legend or disclaimer indicating 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 offering statement is qualified; and (3) a prospective purchaser's indication of interest is non-binding. While the expansion of use of solicitation materials after filing may result in investors receiving more sales literature in marketed offerings, in such circumstances, potential investors will also be afforded more time with the preliminary offering circular before making an investment decision because, as noted above, testing the waters materials used by an issuer or its intermediaries after the issuer publicly files an offering statement must be accompanied by a current preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.

We believe the approach to solicitation materials that we are adopting today is consistent with existing Regulation A that allows issuers to test the waters and will make the use of solicitation materials more beneficial for issuers and investors. For issuers, the final rules will generally reduce compliance burdens and entirely eliminate the filing requirement for issuers that, after testing the waters, decide not to proceed with an offering. With respect to investors, we note that the final rules contain significant safeguards that should help mitigate the concerns expressed by some commenters that not requiring testing the waters materials to be submitted or filed with the Commission before first use will result in a reduction in investor protections. These include the requirements to make the most recent preliminary offering circular available with solicitation materials after filing, to redistribute solicitation materials after filing to the extent that either the material itself or the preliminary offering circular attached thereafter becomes inadequate or inaccurate in any material respect, to deliver the preliminary offering circular at least 48 hours in advance of sale if the issuer is not subject to a Tier 2 reporting obligation, to deliver the final offering circular (or a notice of the final offering circular) no later than two business days after sale in all instances, and the minimum 21 calendar day filing requirement for issuers that non-publicly submit draft offering statements as well as the continued application of the antifraud provisions of the federal securities laws. Additionally, state securities regulators have the ability under the final rules to require issuers to file with them any materials required to be filed with the Commission. From an investor protection standpoint, we also note that sales under Regulation A may occur only in connection with a qualified offering statement that is filed with the Commission and that is subject to review by the staff.

Lastly, to address the concerns of commenters regarding an issuers' ability to conduct routine communications with customers and suppliers at or near the time of a contemplated Regulation A offering, we are confirming, consistent with Rule 169's existing exemption from Sections 2(a)(10) and 5(c) of the Securities Act for regularly released factual business communications, that we do not believe such communications constitute solicitation of interest materials under Regulation A. Ultimately, whether or not a communication is limited to factual business information depends on the facts and circumstances, but issuers may generally look to the provisions of Rule 169 for guidance in making this determination in the Regulation A context. More generally, we note that factual business information means information about the issuer, its business, financial condition, products, services, or advertisement of such products or services. Factual business information generally does not include such things as predictions, projections, forecasts, or opinions with respect to valuation of a security. The approach we are taking today with respect to factual business information is consistent with the Commission's stated position on such communications for registered offerings and clarifies its application to Regulation A solicitation of interest materials.

E. Ongoing Reporting

Section 3(b)(2) of the Securities Act requires issuers to provide annual audited financial information on an ongoing basis and expressly provides that the Commission may consider whether additional ongoing reporting should be required. Specifically, Section 3(b)(4) grants the Commission authority to require issuers “to make available to investors and file with the Commission periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters, and also may provide for the suspension and termination of such a requirement with respect to that issuer.”

As we noted in the Proposing Release, we are mindful that a one-size-fits-all ongoing reporting regime may not be suitable for all types of entities and investors. In the final rules for Regulation A, we have endeavored to achieve an appropriate balance between the costs and benefits associated with the provision of ongoing information about issuers of Regulation A securities to investors in such securities and any market that develops.

1. Continuing Disclosure Obligations

a. Proposed Rules for Continuing Disclosure Obligations

Regulation A currently requires issuers to file a Form 2-A with the Commission to report sales and the termination of sales made under Regulation A every six months after qualification and within 30 calendar days after the termination, completion, or final sale of securities in the offering. We proposed to rescind Form 2-A, but to continue to require Regulation A issuers to file with the Commission electronically on EDGAR after the termination or completion of the offering the information generally disclosed in Form 2-A. As proposed, issuers conducting Tier 1 offerings would be required to provide this information on Part I of proposed Form 1-Z not later than 30 calendar days after termination or completion of the offering, while issuers conducting Tier 2 offerings have the flexibility to provide this information on either Part I of Form 1-Z at the time of filing an exit report or proposed Form 1-K as part of their annual report, whichever is filed first.

As proposed, Tier 2 issuers would be subject to a Regulation A ongoing reporting regime that would require, in addition to annual reports and summary information about a recently completed offering, semiannual reports on proposed Form 1-SA, current event reports on proposed Form 1-U, and, when eligible and electing to do so, notice to the Commission of the suspension of ongoing reporting obligations on Part II of proposed Form 1-Z. All of these reports would be filed electronically on EDGAR.

b. Comments on the Proposed Rules

We received both general comments and specific comments on the proposed forms. These comments are discussed in turn below.

General Comments

Commenters generally approved of the continuing disclosure obligations for Tier 2 offerings. One commenter noted favorably that professional fees, other costs, and the time burden associated with the proposed rules would likely be substantially lower for Regulation A issuers than for issuers subject to Exchange Act reporting. Another commenter remarked that the proposed ongoing reporting regime strikes an appropriate balance between the benefits of disclosure and costs to issuers.

Other commenters expressed general support, but also recommended changes to the semiannual reporting requirement or the content of Form 1-U. One commenter supported the general policy that it should not be easier or harder to exit the Regulation A reporting system than it would be to exit the Exchange Act reporting system. Several commenters recommended including an ongoing disclosure requirement for Tier 1 issuers, including disclosure at a level lower than what was proposed for Tier 2, ongoing disclosure with yearly audited financials, or some unspecified continuous disclosure obligation. Another commenter recommended extending continuing disclosure obligations into Tier 1, but further suggested that the Commission replace any requirement to provide audited financial statements with an affidavit from management attesting to the accuracy of the financial statements. A few commenters generally recommended reducing the disclosure burden on Tier 2 issuers. One of these commenters recommended making continuing disclosure requirements contingent upon factors other than offering size, such as whether the issuer has taken steps to foster a market in its securities. This commenter also recommended allowing issuers to either avoid ongoing reporting or to file only financial statements and a management letter regarding operations and results if, shortly after commencing the offering upon qualification, issuers have less than 300 record holders. Another commenter recommended allowing Canadian companies to rely on Rule 12g3-2(b) to avoid having to file ongoing reports under Regulation A. As an alternative, this commenter recommended allowing Canadian companies to furnish reports under cover of Form 6-K rather than using the Regulation A reports. One commenter recommended that, to the extent that the final rules allow foreign private issuers to use Regulation A, such issuers should be permitted to follow the ongoing reporting rules applicable to them in the Exchange Act context in lieu of Regulation A ongoing reporting requirements, while another commenter specifically opposed this suggestion. Another commenter recommended requiring officers, directors, and controlling shareholders of companies that offer securities under Regulation A to make ongoing disclosure of transactions in company securities, similar to reporting on Forms 3, 4, and 5 and Schedules 13D, 13G, and 13F in the registered context.

Comments on Form 1-K

One commenter recommended revising proposed Form 1-K to expressly not require the disclosure of an issuer's plan of operations, as described in Item 9(c) of Part II of Form 1-A. This commenter further recommended clarifying whether a Tier 2 issuer is required to comply with Rules 3-10, 3-16, and 8-04 of Regulation S-X in Form 1-K, in light of the reference to segmented data in Item 7(b) to Part F/S of proposed Form 1-A. This same commenter recommended that the Commission clarify whether a Tier 2 issuer is required to comply with Rule 8-04 of Regulation S-X in proposed Form 1-K, particularly with respect to probable acquisitions.

Comments on Form 1-SA

Several commenters recommended requiring or permitting quarterly reporting rather than semiannual reporting on proposed Form 1-SA. One of these commenters stated that quarterly reporting is standard in the United States and is not overly burdensome. Two other commenters stated that quarterly reporting was necessary for investor protection and to reduce the risk of insider trading. Other commenters noted that quarterly reporting might be preferred by market participants but supported a semiannual requirement.

One commenter agreed with our proposal not to require Tier 2 issuers to have their Form 1-SA financial statements reviewed by an independent accountant, particularly with respect to smaller issuers. Another commenter recommended either requiring the financial statements in Form 1-SA to be reviewed by an independent accountant or requiring issuers to disclose on Form 1-SA that the financial statements were not subject to review. Yet another commenter recommended that there be no requirement to provide Rule 3-16 of Regulation S-X financial statements or summarized financial information in semiannual reports (to align with requirements for existing registrants that are not required to include this in Form 10-Q). This commenter also recommended clarifying if the financial statements in Form 1-SA can be presented using a condensed format consistent with Rule 8-03(a) of Regulation S-X and if additional disclosure requirements of Rule 8-03(b) are applicable. This same commenter recommended removing Item 3(d) of Form 1-SA, because neither this statement nor a statement of changes in stockholders' equity is an existing requirement on Form 10-Q.

Comments on Form 1-U

Commenters made a number of suggestions regarding the current report requirements. Some commenters recommended eliminating the requirement to file Form 1-U for the smallest issuers, based on a measure such as asset size or market capitalization. Other commenters recommended extending the proposed filing requirement from four business days after the triggering event to fifteen business days after such event. Several commenters recommended changing or clarifying the “fundamental change” standard in Item 1 of proposed Form 1-U. One of these commenters expressed concerns about whether this item will be consistently interpreted and whether the use of the term “fundamental change,” in light of the use of the same term in Item 512 of Regulation S-K, would cause additional confusion. This commenter further recommended that, for contracts involving business acquisitions, the measurement of significance in this item should be limited to the investment test and the numerical threshold should be increased to at least 50% to be more consistent with the stated disclosure objective. Three commenters recommended moving to a materiality standard so as to be consistent with the standards in the anti-fraud provisions of federal securities laws, suggesting that this would help avoid confusion. One commenter recommended allowing (but not requiring) Tier 1 issuers to report material information on Form 1-U, including the financial statements of significant acquired businesses.

Other commenters suggested changes to the substance of what would need to be reported on Form 1-U. One commenter generally recommended cross-referencing existing disclosure requirements when a proposed disclosure standard is meant to be the same. For example, this commenter suggested that Form 1-U include a cross-reference to Form 8-K when disclosure requirements are meant to be the same. One commenter recommended permitting companies to disclose: (1) A change in accountants in the next periodic filing instead of reporting it on Form 1-U if the change does not involve a disagreement or reportable event (as defined in Item 304 of Regulation S-K); and (2) sales of equity securities in the next periodic filing if the price was not below that of previous primary offerings. Two of these commenters recommended eliminating the requirement to report unregistered sales of securities on Form 1-U, or to raise the reporting threshold to only cover offerings that represent at least 10% of the issuer's pre-transaction outstanding shares.

c. Final Rules for Continuing Disclosure Obligations

We are adopting rules for continuing disclosure obligations under Regulation A generally as proposed, with certain technical modifications and clarifications. The final rules eliminate Form 2-A and in its place require the disclosure of similar information pursuant to Part I of Form 1-Z for Tier 1 issuers and, depending on when the issuer's offering is terminated or completed, in either Form 1-K or Part I of Form 1-Z for Tier 2 issuers. As proposed, the respective disclosure requirements in Part I of Forms 1-K and 1-Z will include the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer. We believe that summary information and data about an issuer and its Regulation A offering is most valuable when obtained after the offering is completed or terminated. Therefore, as proposed, issuers will only be required to disclose such information after the termination or completion of the offering.

As noted in the Proposing Release, we are concerned that uniform ongoing reporting requirements for all issuers of Regulation A securities could disproportionately affect issuers in smaller offerings. For that reason, the final rules do not require any ongoing reporting for issuers conducting Tier 1 offerings, other than the disclosure of the summary information discussed above. Issuers in smaller offerings will, however, have the option to conduct a Tier 2 offering and subject themselves to ongoing reporting and other Tier 2 requirements.

The final rules for ongoing reporting for Tier 2 issuers are being adopted as proposed, except where noted below, and will require issuers to file annual reports on Form 1-K, file semiannual reports on Form 1-SA, file current event reports on Form 1-U, and provide notice to the Commission of the suspension of their ongoing reporting obligations on Part II of Form 1-Z. All reports for Tier 1 and Tier 2 offerings are required to be filed electronically on EDGAR.

As discussed above, commenters suggested that the Commission consider various potential changes to the proposed ongoing reporting requirements for Tier 2 issuers, including: Extending ongoing reporting to Tier 1 offerings with some modifications; increasing the ongoing reporting requirements for Tier 2 issuers to include analogs to Exchange Act Forms 3, 4, and 5 and beneficial ownership reporting on Schedules 13D, 13G and 13F; basing the ongoing reporting requirements on characteristics of the issuer, such as whether the issuer has taken steps to foster a secondary market; or providing different requirements for Canadian companies or foreign private issuers. Another commenter suggested that we allow issuers to either avoid ongoing reporting or to file only financial statements and a management letter regarding operations and results if, shortly after commencing the offering upon qualification, issuers have less than 300 record holders.

We do not, however, believe that the changes suggested by commenters described above are advisable at this time. Instead, we believe the approach to ongoing reporting adopted in the final rules is preferable and will support a regular flow of information about issuers conducting Tier 2 offerings, which will benefit investors in these larger offerings and also help foster the development of a secondary market in such securities, while balancing the compliance burden that would be imposed on smaller issuers. We do not believe that requiring ongoing reporting for Tier 1 issuers, other than the requirement to file a Form 1-Z upon completion or termination of the offering, is necessary for Tier 1 offerings. We believe issuers in Tier 1 offerings will be small companies whose businesses revolve around products, services, and a customer base that will likely be more local in nature than issuers in Tier 2 offerings. Further, we believe Tier 1 offerings will be conducted by issuers that are unlikely to seek the creation of a secondary trading market in their securities. In light of this, we do not believe that it is necessary to require ongoing reporting for Tier 1 issuers. Consistent with our experience under existing Regulation A, we do not believe that a lack of ongoing reporting for issuers in Tier 1 offerings will adversely affect investors that base purchasing decisions on the narrative and financial statement disclosure requirements included in the offering statement and, with respect to continuous offerings lasting for more than one year, updated annually by post-qualification amendment thereafter. Further, notwithstanding the suggestions of some commenters, we believe that adopting different ongoing reporting requirements for Canadian issuers would not be consistent with our goal to adopt a uniform reporting standard for Tier 2 issuers that provides investors with certainty as to the amount of information they can expect to receive from an issuer in a Tier 2 offering on an ongoing basis. We believe that the final rules will provide investors and potential investors with the information they need to make investment decisions and facilitate capital formation for smaller companies.

We are therefore adopting the following ongoing reporting requirements for Tier 2 offerings:

(1) Annual Reports on Form 1-K

As proposed and adopted, Form 1-K will consist of two parts: Part I (Notification) and Part II (Information to be included in the report). The contents of and requirements for Part I and Part II are, with the exception of technical amendments to the forms, amendments that are necessary to reflect corresponding changes to the required audit standards of financial statements filed under Part F/S of Form 1-A, and additional guidance designed to streamline disclosure, adopted without changes from the proposed rules.

(a) Part I (Notification)

As adopted, Part I of Form 1-K will be an online XML-based fillable form that will include certain basic information about the issuer, prepopulated on the basis of information previously disclosed in Part I of Form 1-A, which can be updated by the issuer at the time of filing. Additionally, if at the time of filing the Form 1-K an issuer has terminated or completed a qualified Regulation A offering, the issuer will be required to provide certain updated summary information about itself and such offering in Part I, including the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer.

As proposed and adopted, issuers will only be required to fill out the XML-based portion of Part I of Form 1-K that relates to the summary information about a terminated or completed offering once per offering. An issuer that elects to terminate its ongoing reporting obligation under Tier 2 of Regulation A after terminating or completing an offering, in a fiscal year other than the fiscal year in which the offering statement was qualified, but before reporting the required summary information on Form 1-K, will be required to file the summary offering information in Part I of Form 1-K by filing a Form 1-Z (exit report) that includes such information.

The summary information disclosed will facilitate analysis of Regulation A offerings by the Commission, other regulators, third-party data providers, and market participants and thereby enable the Commission and others to evaluate the use and effectiveness of Regulation A as a capital formation tool. The fillable form will enable issuers to provide the required information in a convenient medium and capture relevant data about the recently terminated or completed Regulation A offering. The required disclosure will be publicly available on EDGAR. Consistent with Part I of Form 1-A, the issuer will not be required to obtain specialty software to file Part I of Form 1-K on EDGAR.

(b) Part II (Information To Be Included in the Report)

As with Part II of Form 1-A, the final rules require that the issuer submit Part II of Form 1-K electronically as a text file attachment containing the body of the disclosure document and financial statements, formatted to be compatible with the EDGAR filing system. Part II will require issuers to disclose information about themselves and their business based on the financial statement and narrative disclosure requirements of Form 1-A.

As adopted, Item 2 to Part II of Form 1-K (Management's Discussion and Analysis of Financial Condition and Results of Operation) requires issuers, by cross-reference to the requirements of Form 1-A, to provide information for the two most recently completed fiscal years. As suggested by one commenter, we are clarifying that the Form 1-K cross-reference to the requirements of Item 9 to Part II of Form 1-A does not require issuers to include the additional MD&A disclosure required in Item 9(c) for issuers that have not received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter).

Additionally, we are revising the financial statement requirements in Item 7 to Part II of Form 1-K. As proposed, Form 1-K directed issuers to the financial statement requirements of Part F/S of Form 1-A. We are revising this portion of the form so as to include the financial statement requirements directly in Item 7 to Part II of Form 1-K. We believe this change to Item 7 will make it easier for issuers to comply by clarifying, as one commenter recommended, the specific portions of Regulation S-X relating to financial statements for entities other than the issuer that are required in Form 1-K. Additionally, since Tier 2 issuers are now permitted to file financial statements that are audited in accordance with either U.S. GAAS or the standards of the PCAOB, a corresponding change has been made to the financial statement requirements of Item 7 of Form 1-K. As proposed, the auditor of financial statements would need to be independent under Rule 2-01 of Regulation S-X and must comply with the other requirements of Article 2 of Regulation S-X, but need not be PCAOB-registered. Further, in comparison to the proposed rules, Item 7(a) no longer requires issuers to provide a list of the financial statements included in Form 1-K at the beginning of the financial statement section. We eliminated this requirement in the final rules because we do not believe that there is a need for a separate list of the financial statements at the beginning of this section, when the financial statements themselves will be labeled.

Form 1-K will permit issuers to incorporate by reference certain information previously filed on EDGAR, but will require issuers to include a hyperlink to such material on EDGAR. In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Additionally, to avoid unnecessary repetition of disclosure items, Form 1-K encourages issuers to cross-reference items within the form, where applicable. Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-K indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. Form 1-K will cover:

• Business operations of the issuer for the prior three fiscal years (or, if in existence for less than three years, since inception);
• Transactions with related persons, promoters, and certain control persons;
• Beneficial ownership of voting securities by executive officers, directors, and 10% owners;
• Identities of directors, executive officers, and significant employees, with a description of their business experience and involvement in certain legal proceedings;
• Executive compensation data for the most recent fiscal year for the three highest paid executive officers or directors;
• MD&A of the issuer's liquidity, capital resources, and results of operations covering the two most recently completed fiscal years; and
• Two years of audited financial statements.

We anticipate that issuers will generally be able to use the offering materials as a basis to prepare their ongoing disclosure.

As adopted in the final rules, Form 1-K includes requirements for financial statements prepared on the same basis, and subject to the same requirements as to audit standards and auditor independence, as the financial statements required in the Regulation A offering circular for Tier 2 offerings. Form 1-K must be filed within 120 calendar days after the issuer's fiscal year end. A manually signed copy of the Form 1-K must be executed by the issuer and related signatories before or at the time of filing and retained by the issuer for a period of five years. Issuers will be required to produce the manually signed copy to the Commission, upon request. Any amendments to the form must comply with the requirements of the applicable items and be filed under cover of Form 1-K/A.

(2) Semiannual Reports on Form 1-SA

We are adopting final rules for semiannual interim reporting for Regulation A issuers generally as proposed, with technical amendments and additional guidance designed to streamline the disclosure requirements for Tier 2 issuers and harmonize them with the requirements of issuers subject to an ongoing reporting obligation under the Exchange Act. As proposed, we continue to believe that a semiannual, rather than a quarterly, reporting requirement strikes an appropriate balance between the need to provide information to the market and the cost of compliance for smaller issuers, especially given the further flexibility provided to issuers in Form 1-U to provide quarterly information if they elect to do so. Issuers will be required to provide semiannual reports on Form 1-SA that, much like reports on Form 10-Q, consist primarily of financial statements and MD&A. Unlike Form 10-Q, however, Form 1-SA does not require disclosure about quantitative and qualitative market risk, controls and procedures, updates to risk factors, or defaults on senior securities. We do not believe such disclosure is necessary for ongoing reports under Regulation A, as we believe such disclosure is not applicable to, or appropriately tailored for, the types of issuers likely to conduct Regulation A offerings.

Consistent with the technical, specialized suggestions of several commenters, we are including provisions in Form 1-SA that will help issuers comply with the form requirements, eliminate potential confusion over such requirements, and streamline and harmonize disclosure to make the requirements for Tier 2 issuers no more onerous than, and consistent with, the ongoing disclosures required of smaller reporting companies under the Exchange Act. Specifically, the final rules:

• Add clarifying language to Item 1 (Management Discussion and Analysis of Financial Condition and Results of Operations) of Form 1-SA to indicate that compliance with this disclosure requirement only applies to the interim financial statements required by Item 3 to Form 1-SA and that, similar to our clarification of Form 1-K's requirements, issuers are not required to include the additional MD&A disclosure required by Item 9(c) of Form 1-A;

• Update the financial statement disclosure requirements of Form 1-SA to more clearly delineate the requirements for compliance with Item 3 of Form 1-SA;
• Provide that the financial statements that must be included pursuant to Item 3 may be condensed, in addition to being unaudited, and that the financial statements are not required to be reviewed;
• Amend the final form to note that additional guidance on the presentation of financial statements and footnotes and other disclosures can be found in Rule 8-03 of Regulation S-X;

• Revise the requirements of Item 3(e) of Form 1-SA to match the disclosure language contained in Rule 3-10 of Regulation S-X for smaller reporting companies;
• Delete the requirement in Item 3(d) of proposed Form 1-SA to present interim statements of changes in financial position for the period between the end of the preceding fiscal year and the end of the interim period covered by this report, and for the corresponding period of the preceding fiscal year, as this is not required of issuers under Rule 8-03 of Regulation S-X; and
• Make the ongoing reporting requirements under Item 3 of Form 1-SA more consistent with what is required of issuers subject to an ongoing reporting obligation under the Exchange Act, consistent with the suggestion of one commenter, by eliminating the line item requirements of Item 3(f) and (g), as Rule 3-16 and Rule 4-10 of Regulation S-X generally do not require the disclosure of such information other than in registration statements and annual reports.

As adopted, Form 1-SA will require disclosure of updates otherwise reportable on Form 1-U. The final rules permit issuers to incorporate by reference in Form 1-SA certain information previously filed on EDGAR, but must include a hyperlink to such material on EDGAR. In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Additionally, in a change from the proposed form that seeks to avoid unnecessary repetition of disclosure items, Form 1-SA encourages issuers to cross-reference items within the form, where applicable. Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-SA indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.

Form 1-SA must be filed within 90 calendar days after the end of the first six months of the issuer's fiscal year. The first such obligation to file will commence immediately following the most recent fiscal year for which full financial statements were included in the offering statement, or, if the offering statement included financial statements for the first six months of the fiscal year following the most recent full fiscal year, for the first six months of the following fiscal year. As proposed, a manually signed copy of the Form 1-SA must be executed by the issuer and related signatories before or at the time of filing, retained by the issuer for a period of five years, and produced by the issuer to the Commission, upon request. The final rules require, as proposed, any amendments to the form to comply with the requirements of the applicable items and be filed under cover of Form 1-SA/A.

(3) Current Reports on Form 1-U

In addition to the annual report on Form 1-K and semiannual report on Form 1-SA, the final rules require issuers to submit current reports on Form 1-U. The final rules are being adopted largely as proposed with one change and some technical amendments and additional guidance designed to ease compliance with the final rules and eliminate potential confusion as to the scope and applicability of the disclosure requirements. The final rules require issuers to submit a report on Form 1-U when it experiences one (or more) of the following events:

• Fundamental changes;

• Bankruptcy or receivership;
• Material modification to the rights of securityholders;
• Changes in the issuer's certifying accountant;
• Non-reliance on previous financial statements or a related audit report or completed interim review;
• Changes in control of the issuer;
• Departure of the principal executive officer, principal financial officer, or principal accounting officer; and
• Unregistered sales of 10% or more of outstanding equity securities.

Additionally, as proposed, Item 9 of final Form 1-U contains provisions for disclosing other events not directly required of issuers in the form. As noted above in the context of suggestions by commenters to require or permit quarterly reporting by issuers, issuers that elect to provide relevant information to the market on, for example, a quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1-U.

Notwithstanding the view of some commenters, we believe that Form 1-U should be required of all Tier 2 issuers, including smaller issuers. We believe that, on balance, the benefit of requiring a uniform base level of disclosure to investors of current event reporting for all issuers in Tier 2 offerings outweighs any potential additional compliance cost to smaller issuers. Additionally, given the inclusion of only the most significant events in the list of disclosable current events on Form 1-U, we do not anticipate that issuers, particularly smaller issuers, will on average be required to file many reports in this regard.

In a change from the proposed rules, and consistent with the suggestions of commenters, the final rules increase the threshold below which an issuer need not report unregistered sales of equity securities pursuant to Item 8 of Form 1-U from 5% to 10% of the number of shares outstanding of the class of equity securities sold. We believe that this increase in the threshold below which an issuer would not be required to report such sales remains consistent with our general approach to the final rules for Form 1-U—namely, that Form 1-U should reflect the most significant or substantial events that an issuer may experience in the interim period between the filing of the required periodic reports.

We are not amending Item 1 of Form 1-U to alter the use of the term “fundamental change,” as suggested by some commenters. We are, however, revising Instruction 2 to Item 1 to make clear that the transactions described therein are deemed to be “fundamental changes” solely for purposes of Item 1 of Form 1-U and should not be read to influence the definition of that term in other contexts. Item 1 of Form 1-U is meant to require issuers to disclose material definitive agreements, including agreements to acquire other entities, which result or would reasonably be expected to result in fundamental changes to the nature of the issuer's business or plan of operations. As Instruction 2 to Item 1 indicates, certain transactions are deemed to involve fundamental changes, and disclosure of these transactions, as prescribed by Item 1 is required. Consistent with the suggestion of one commenter, we are narrowing from the proposed rules the applicability of Instruction 2(a) so that an acquisition transaction will only result in a fundamental change for these purposes if the purchase price, as defined by U.S. GAAP and IFRS, exceeds 50% of the total consolidated assets of the issuer as of the end of the most recently completed fiscal year. We believe that this is consistent with our general goal of only requiring disclosure of significant and substantial matters that may affect an issuer's business or plan of operations. We believe that this requirement is appropriately tailored for the types of issuers likely to conduct Tier 2 offerings by providing them with important flexibility as to the determination of a “fundamental change,” while providing clear guidance that certain transactions will always trigger disclosure under Item 1.

On a related point, we continue to believe, despite the suggestions of some commenters, that a fundamental change standard for some of the disclosure requirements in Form 1-U is a more appropriately tailored standard for Tier 2 issuers than a broader materiality standard. A fundamental (as opposed to a material) change to the nature of an issuer's business includes major and substantial changes to the issuer's business or plan of operations or changes reasonably expected to result in such changes. The final rules reflect our belief that, on balance, Tier 2 issuers should only be required make disclosures in Form 1-U that reflect major and substantial changes to business plans or operations, as opposed to material events that are otherwise reportable in their periodic reports. Moreover, we do not believe that a fundamental change standard will cause confusion or raise concerns as to the applicability of other standards applicable in the anti-fraud provisions of the federal securities laws.

Additionally, we note that Item 6 of Form 1-K and Item 2 of Form 1-SA permit issuers to disclose any information required to be disclosed under Form 1-U, but not so reported. For example, if an event occurs that would, under normal circumstances, require an issuer to file a Form 1-U within four business days, but such issuer is due to file either its annual or semiannual report within that period, then the issuer may instead report such information in its periodic report.

Finally, contrary to the suggestions of some commenters, we continue to believe that the requirement to report unregistered sales of securities in Item 8 of Form 1-U will provide investors with valuable current information as to significant capital raising events by the issuer and should be disclosed in a timely manner to the market. We therefore retain this disclosure requirement in the final rules.

As adopted, Form 1-U must be filed within four business days after the occurrence of any of the triggering events, and, where applicable, will permit issuers to incorporate by reference certain information previously filed on EDGAR. Notwithstanding the suggestions of some commenters, we believe that requiring issuers to file the form within four business days, as opposed to fifteen business days, is appropriate in an ongoing reporting regime that otherwise only requires issuers to provide annual and semiannual reports. Further, we are concerned that extending the filing deadline for Form 1-U reports would make the reporting of disclosable events no longer “current.” We are therefore adopting the timing requirements, as proposed. Additionally, in a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR.

Additionally, consistent with the changes made to Form 1-K and Form 1-SA and suggestions of at least one commenter, Form 1-U encourages issuers to cross-reference items within the form, where applicable. Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-U indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification. A manually signed copy of the Form 1-U must be executed by the issuer and related signatories before or at the time of filing and retained by the issuer for a period of five years. Issuers are required to produce the manually signed copy to the Commission, upon request. Any amendments to the Form 1-U must comply with the requirements of the applicable items, and be filed under cover of Form 1-U/A.

(4) Special Financial Reports on Form 1-K and Form 1-SA

We did not receive any comment on the proposed provisions for special financial reports and are adopting them as proposed with one minor clarifying change. This report serves to close lengthy gaps in financial reporting between the financial statements included in Form 1-A and the issuer's first periodic report due after qualification of the offering statement. Where applicable, issuers conducting Tier 2 offerings must provide special financial reports analogous to those required under Exchange Act Rule 15d-2. The special financial report requires audited financial statements for the issuer's most recent fiscal year (or for the life of the issuer if less than a full fiscal year) to be filed not later than 120 calendar days after qualification of the offering statement if the offering statement does not include such financial statements. The special financial report requires semiannual financial statements for the first six months of the issuer's fiscal year, which may be unaudited, to be filed 90 calendar days after qualification of the offering statement if the offering statement does not include such financial statements and the offering statement was qualified in the second half of the issuer's current fiscal year. The special financial report must be filed under cover of Form 1-K if it includes audited year end financial statements and under cover of Form 1-SA if it includes semiannual financial statements for the first six months of the issuer's fiscal year. The financial statement and auditing requirements must follow the requirements of those forms, and the issuer must indicate on the front page of the applicable form that only financial statements are included.

(5) Reporting by Successor Issuers

We did not receive any comment on reporting by successor issuers, and we are adopting the proposed rules without change. Where in connection with a succession by merger, consolidation, exchange of securities, acquisition of assets, or otherwise, securities of an issuer that is not subject to the reporting requirements of Regulation A are issued to the holders of any class of securities of an issuer that is subject to ongoing reporting under Tier 2, the issuer succeeding to that class of securities must continue to file the reports required for Tier 2 offerings on the same basis as would have been required of the original Tier 2 issuer. The successor issuer may suspend or terminate its reporting obligations on the same basis as the original issuer under Rule 257(d).

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

Exchange Act Rule 15c2-11 governs broker-dealers' publication of quotations for securities in a quotation medium other than a national securities exchange. The Commission adopted Rule 15c2-11 in 1971 to prevent fraudulent and manipulative trading schemes that had arisen in connection with the distribution and trading of certain unregistered securities. The rule prohibits broker-dealers from publishing quotations (or submitting quotations for publication) in a “quotation medium” for covered over-the-counter securities without first reviewing basic information about the issuer, subject to certain exceptions. A broker-dealer also must have a reasonable basis for believing that the issuer information is accurate in all material respects and that it was obtained from a reliable source.

A broker-dealer can satisfy its obligations under Rule 15c2-11 if it has reviewed and maintained in its records certain specified information. The particular information that is required by the rule varies depending on the nature of the issuer and includes, among other things:

• For an issuer that has filed a registration statement under the Securities Act, a copy of the prospectus;
• for an issuer that has filed an offering statement under the Securities Act pursuant to Regulation A, a copy of the offering circular; or
• for an issuer subject to ongoing reporting under Sections 13 or 15(d) of the Exchange Act, the issuer's most recent annual report and any quarterly or current reports filed thereafter.

a. Proposed Rules

As proposed, the ongoing reports for Tier 2 offerings under Regulation A, which would update the narrative and financial statement disclosures previously provided in Form 1-A on an annual and semiannual basis, with additional provisions for current reporting, would satisfy a broker-dealer's obligations under Rule 15c2-11 to review and maintain records of basic information about an issuer and its securities. In this regard, we proposed to amend Rule 15c2-11 to permit an issuer's ongoing reports filed in a Tier 2 offering under Regulation A to satisfy a broker-dealer's obligations to review specified information about an issuer and its security before publishing a quotation for a security (or submitting a quotation for publication) in a quotation medium.

We also solicited comment on other potential effects that Tier 2 ongoing reporting under Regulation A could have under other provisions of the federal securities laws, such as whether timely ongoing Regulation A reporting under Tier 2 should constitute “adequate current public information” for purposes of paragraph (c) of Rule 144. Under this provision, issuers are required to make available adequate current public information about themselves, which, for issuers not subject to Exchange Act reporting, must include certain information described in Exchange Act Rule 15c2-11(a)(5). We also solicited comment on whether ongoing Regulation A reporting for Tier 2 offerings should satisfy the information requirements of paragraph (d)(4) of Rule 144A. Under that provision, holders of Rule 144A securities must have the right to obtain from the issuer, upon request, a very brief statement of the nature of the issuer's business and the products and services it offers, the issuer's most recent balance sheet and profit and loss and retained earnings statements, and similar financial statements for each of the two preceding fiscal years, which information must be “reasonably current.”

b. Comments on Proposed Rules

All commenters that addressed Rule 15c2-11 supported amending the rule in the manner proposed. Some commenters recommended further amending Rule 15c2-11(g) to provide that an issuer that is current in its Tier 2 obligations would be deemed to have “reasonably current” financial information, even if its most current balance sheet is as of a date up to nine months old and it has not provided other updated information. Most commenters also recommended amending Rule 144(c) to allow for ongoing reporting under Tier 2 to constitute “adequate current public information.” Other commenters recommended amending Rule 144A(d)(4) to allow for ongoing reporting under Tier 2 to satisfy the “reasonably current information” requirements of that rule. Although the proposal did not solicit comment on Rule 144(i), one commenter recommended amending this rule to allow former shell companies to rely on Rule 144 if they have been current in their ongoing reporting under Regulation A for a certain period of time and without having to file a Form 10. One commenter also supported allowing use of the Rule 144 safe harbor for former shell companies that were not previously registered under the Exchange Act and that are now selling securities under Regulation A. Another commenter requested that the Commission limit the prohibitions on reliance on Rule 144 only to Exchange Act registered issuers.

c. Final Rules

We are adopting final rules for Regulation A that, as proposed, amend Exchange Act Rule 15c2-11(a) so that an issuer's ongoing reports filed under Tier 2 will satisfy the specified information about an issuer and its security that a broker-dealer must review before publishing a quotation for a security (or submitting a quotation for publication) in a quotation medium. In addition, we are adopting, as proposed, a technical amendment to Rule 15c2-11 to amend subsection (d)(2)(i) of the rule to update the outdated reference to “Schedule H of the By-Laws of the National Association of Securities Dealers, Inc.” which is now known as the “Financial Industry Regulatory Authority, Inc.” and to reflect the correct rule reference.

We are not following the suggestions of some commenters that we adopt provisions in the final rules so that Tier 2 ongoing reports will satisfy the current information requirements of Rule 144 and Rule 144A for the entirety of an issuer's fiscal year. While commenters were generally supportive, we do not believe that the frequency of the required Tier 2 ongoing reporting merits a broad determination that such reports will constitute “adequate public information” or “reasonably current information” on a year-round basis. On the contrary, quarterly reporting is an integral part of the resale safe harbors provided for in Rule 144 and Rule 144A that contemplate the provision of ongoing and continuous information. While the semiannual reporting required under the final rules for Tier 2 offerings will result in issuers only having “reasonably current information” and “adequate current public information” for the portions of the year during which the financial statements of such issuers continue to satisfy the respective rules, we note that issuers may voluntarily submit on Form 1-U quarterly financial statements or other information necessary to satisfy the respective rule requirements. In such instances, and provided that the financial statements otherwise meet the financial statement requirements of Form 1-SA, such voluntarily provided quarterly information could satisfy the “reasonably current information” and “adequate current public information” requirements of Rule 144 and Rule 144A. An issuer that is therefore current in its semiannual reporting required under the rules and voluntarily provides quarterly financial statements on Form 1-U will have provided reasonably current and adequate current public information for the entirety of such year under Rule 144 and Rule 144A.

3. Exchange Act Registration of Regulation A Securities

Under Section 15(d) of the Exchange Act, an issuer that has had a Securities Act registration statement declared effective must comply with the periodic reporting requirements of the Exchange Act. Qualification of a Regulation A offering statement does not have the same effect. An issuer of Regulation A securities would not take on Exchange Act reporting obligations unless it separately registered a class of securities under Section 12 of the Exchange Act, or conducted a registered public offering.

An issuer registering a class of securities under Section 12 of the Exchange Act must file either a Form 10 or Form 8-A with the Commission. Form 10 is the general form for Exchange Act registration, while Form 8-A is a short-form registration statement. An issuer must use a Form 10 if, at the time it files its registration statement, it is not already subject to a Section 13 or Section 15(d) reporting obligation. An issuer may use Form 8-A if it is already subject to the provisions of either Section 13 or Section 15(d). Additionally, when an issuer that is not already subject to the provisions of either Section 13 or 15(d) plans to list its securities on a national securities exchange contemporaneously with the effectiveness of a Securities Act registration statement, the Commission staff will not object if that issuer files a Form 8-A in lieu of a Form 10 in order to avoid having the issuer restate the contents of its Securities Act registration statement in its Exchange Act registration statement.

a. Proposed Rules

As proposed, issuers conducting offerings under Regulation A that seek to list their securities on a national securities exchange or otherwise register a class of securities under the Exchange Act would be required to file a registration statement on Form 10. We solicited comment, however, on whether we should provide a simplified means for Regulation A issuers to register a class of securities under the Exchange Act, for example, by permitting such issuers to file a Form 8-A rather than a Form 10 in conjunction with, or following, the qualification of a Regulation A offering statement on Form 1-A.

We also invited comment on ways to facilitate secondary market trading in the securities of Regulation A issuers, such as by encouraging the development of “venture exchanges” or other trading venues that are focused on attracting such issuers.

b. Comments on Proposed Rules

Many commenters recommended that Regulation A issuers be allowed to use Form 8-A to register a class of securities under the Exchange Act in Tier 2 offerings. Some of these commenters limited their recommendation to when the issuer follows the requirements of Part I of Form S-1 in its offering circular. Separately, three commenters recommended allowing issuers to use a “super” Form 8-A that would require issuers to include any disclosure that is required in a Form 10, but is not included in the chosen offering circular format under Form 1-A. Several commenters suggested allowing issuers to use a Form 10 that would go effective immediately as an alternative to filing a Form 8-A. This process could be used to register securities under the Exchange Act when a simultaneous exchange listing was not contemplated. Other commenters recommended limiting the use of Form 8-A to situations contemporaneous with qualification of an offering statement, within 12 months of qualification, or after a brief time period after an offering statement is qualified. Separately, two commenters recommended that Regulation A issuers that become Exchange Act reporting companies be considered “emerging growth companies.” One commenter recommended allowing issuers to use Form 8-A but to continue using Regulation A reports until its non-affiliate market capitalization reached $250 million.

Two commenters encouraged the Commission to foster the development of venture exchanges on which Regulation A securities could be traded, while another commenter largely opposed the creation of venture exchanges.

c. Final Rules

In the final rules, and consistent with the views of many commenters, we are simplifying Exchange Act registration in connection with Regulation A offerings conducted pursuant to Tier 2 so that issuers wishing to register a class of Regulation A securities under the Exchange Act may do so by filing a Form 8-A in conjunction with the qualification of a Form 1-A. Only issuers that follow Part I of Form S-1 or the Form S-11 disclosure model in the offering circular will be permitted to use Form 8-A. An issuer registering a class of securities under the Exchange Act concurrently with the qualification of a Regulation A offering statement will become an Exchange Act reporting company upon effectiveness of the Form 8-A and, if applicable, its obligation to file ongoing reports under Regulation A will be suspended for the duration of the resulting reporting obligation under Section 13 of the Exchange Act. While some commenters suggested that we permit issuers to rely on the Form 8-A to register a class of securities for up to 12 months following the qualification of an offering statement, we believe limiting short form registration to situations in which an offering statement is being concurrently qualified will help ensure that the disclosures incorporated by reference into the Form 8-A, including financial statements contained in the offering statement are current. The final rules would not, however, prevent an issuer from registering a class of securities under the Exchange Act on Form 8-A concurrent with the re-qualification of a previously qualified offering statement.

We recognize that Exchange Act reporting requires more comprehensive ongoing reporting than the Regulation A disclosure regime, which is why facilitating issuers' entrance into the Exchange Act reporting system on Form 8-A concurrent with the qualification of a Regulation A offering statement will benefit investors. At a minimum, issuers pursuing this route to exchange listing must meet listing standards of, and be certified by, the exchange before the Form 8-A will be declared effective. In order to be approved for listing on an exchange, issuers generally must meet certain size, financial, minimum securities distribution (or liquidity), and corporate governance criteria. Additionally, in order to maintain listing on an exchange, issuers must maintain certain qualitative and quantitative continued listing standards. Therefore, in addition to the provision of ongoing Exchange Act reports, investors will benefit from the issuer's satisfaction of the exchange's initial and ongoing listing standards, and may benefit from greater liquidity for their shares as a result.

As suggested by commenters, we believe that our accommodation should be limited to instances where an issuer provides disclosure in Part II of Form 1-A that follows Part I of Form S-1 or Form S-11, instead of the Offering Circular format. While all formats require extensive disclosure that, with the exception of item numbering, is similar in many respects, we believe that an issuer entering Exchange Act reporting should provide disclosure in a manner that is generally consistent with the requirements of issuers entering the Exchange Act reporting regime through registered offerings. In this regard, we note that issuers qualifying an offering statement that follows Part I of Form S-1 or Form S-11 will, however, be required to follow the financial statement requirements of Part F/S of Form 1-A. For purposes of concurrent Exchange Act registration, the financial statements included in Form 1-A must be audited in accordance with the standards of the PCAOB by a PCAOB-registered auditor that is independent pursuant to Article 2 of Regulation S-X. After effectiveness of the Form 8-A, they will be subject to Exchange Act reporting and compliance with the financial statement requirements of Exchange Act reporting companies.

Consistent with the suggestion of commenters, we agree that issuers entering Exchange Act reporting under a qualified Regulation A offering statement and Form 8-A will be considered “emerging growth companies” to the extent the issuers otherwise qualify for such status. Issuers should base status determinations on the definition of an emerging growth company as it appears in the Securities Act and the Exchange Act.

As noted above, the Proposing Release sought comment on whether we should consider encouraging the development of venture exchanges or other trading venues to facilitate the secondary market trading of Regulation A securities. We are considering venture exchanges as a way to provide liquidity for smaller issuers, and are contemplating their use for Regulation A securities as part of that consideration.

4. Exit Report on Form 1-Z

a. Proposed Rules

(1) Summary Information on Terminated or Completed Offerings

As discussed in Section II.E.1. above, we proposed to rescind Form 2-A but to continue to require Regulation A issuers to file the information generally disclosed in Form 2-A with the Commission electronically on EDGAR. Consistent with the related portion of proposed Form 1-K, we proposed to convert the Form 2-A information into an online XML-based fillable form with indicator boxes or buttons and text boxes to be filed electronically with the Commission as Part I of proposed Form 1-Z (exit report). Issuers conducting Tier 1 offerings would be required to provide this information on Form 1-Z not later 30 calendar days after termination or completion of the offering, while issuers conducting Tier 2 offerings would be required to provide this information on Form 1-Z at the time of filing the exit report, if not previously provided on Form 1-K as part of their annual report. As proposed, the summary offering information disclosed on Form 1-Z would be publicly available on EDGAR (but not otherwise required to be distributed to investors) and would include the date the offering was qualified and commenced, the number of securities qualified, the number of securities sold in the offering, the price of the securities, any fees associated with the offering, and the net proceeds to the issuer.

(2) Termination or Suspension of Tier 2 Disclosure Obligations

We further proposed to permit a Tier 2 issuer that has filed all ongoing reports required by Regulation A for the shorter of (1) the period since the issuer became subject to such reporting obligation or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z to immediately suspend its ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified offering statement are not ongoing. In such circumstances, an issuer's obligation to continue to file ongoing reports in a Tier 2 offering under Regulation A would be suspended immediately upon the filing of a notice with the Commission on Part II of proposed Form 1-Z. A manually signed copy of the Form 1-Z would have to be executed by the issuer and related signatories before or at the time of filing and retained by the issuer for a period of five years. Issuers would be required to produce the manually signed copy to the Commission, upon request.

We further proposed that issuers' obligations to file ongoing reports in a Tier 2 offering under Regulation A would be automatically suspended upon registration of a class of securities under Section 12 of the Exchange Act or effectiveness of a registration statement under the Securities Act, such that Exchange Act reporting obligations would always supersede ongoing reporting obligations under Regulation A. If an issuer terminates or suspends its reporting obligations under the Exchange Act and the issuer is eligible to suspend its Regulation A reporting obligation by filing a Form 1-Z at that time, the ongoing reporting obligations would terminate automatically and no Form 1-Z filing would be required to terminate the issuer's Regulation A reporting obligation. If the issuer is not eligible to file a Form 1-Z at that time, it would need to recommence its Regulation A reporting with a report covering any financial period not completely covered by an effective registration statement or filed Exchange Act report.

b. Final Rules

(1) Summary Information on Terminated or Completed Offerings

The single commenter on this issue approved of the proposed requirement to file summary information after the termination or completion of a Regulation A offering under both tiers. We are adopting this requirement without changes.

(2) Termination or Suspension of Tier 2 Disclosure Obligations

We are adopting, with a change from the proposal, final rules that will permit issuers that conduct a Tier 2 offering to terminate or suspend their ongoing reporting obligations on a basis similar to the provisions that allow issuers to suspend their ongoing reporting obligations under Section 13 and Section 15(d) of the Exchange Act. As proposed, the final rules permit a Tier 2 issuer that has filed all reports required by Regulation A for the shorter of: (1) The period since the issuer became subject to such reporting obligation, or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z to immediately suspend its ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing. In a change from the proposal, in order to be consistent with Title VI of the JOBS Act, the final rules permit banks or bank holding companies to immediately suspend their ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 1,200 persons, instead of 300 persons, and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing. As proposed, an issuer's obligation to continue to file ongoing reports in a Tier 2 offering under Regulation A will be suspended immediately upon the filing of a notice to the Commission on Part II of proposed Form 1-Z. As proposed, a manually signed copy of the Form 1-Z must be executed by the issuer and related signatories before or at the time of filing and retained by the issuer for a period of five years. Issuers must produce the manually signed copy to the Commission, upon request.

We otherwise adopt the proposed rules for the termination or suspension of a Tier 2 ongoing reporting obligation as proposed and without changes.

F. Insignificant Deviations From a Term, Condition or Requirement

We did not propose any changes to the existing insignificant deviation provisions of Rule 260. Rule 260 provides that certain insignificant deviations from a term, condition or requirement of Regulation A will not result in the issuer's loss of the exemption from registration under Section 5 of the Securities Act. The provisions of Regulation A regarding issuer eligibility, offering limits, offers, and continuous or delayed offerings of Regulation A are deemed to be significant to the offering as a whole, and any deviations from these provisions result in the issuer's loss of the exemption.

One commenter generally supported the concept of allowing for insignificant deviations from the rules without the loss of the exemption. This commenter recommended that the Commission give notice of violations and allow companies to have an opportunity to cure any such violation. The commenter also recommended imposing lesser sanctions, such as fines, if less significant violations could not be cured. Another commenter recommended including deviations from the prohibitions on the timing of sales and the amounts sold to investors on the list of matters deemed significant in proposed Rule 260, noting that, in its view, it would be difficult for issuers to show a good faith and reasonable attempt was made to comply with the requirements of Rule 251(d)(2). This commenter noted that issuers, investors and state regulators need clear boundaries to know what actions will disqualify an offering from exemption and thus, with respect to the proposed provisions for Tier 2 offerings, would result in a loss of state preemption.

The final rules maintain the existing provisions for insignificant deviations, as proposed. Under the final rules, a failure to comply with a term, condition or requirement of Regulation A will not result in the loss of the exemption for any offer or sale to a particular individual or entity, if the person relying on the exemption establishes that:

(1) The failure to comply did not pertain to a term, condition or requirement directly intended to protect that particular individual or entity;

(2) The failure to comply was insignificant with respect to the offering as a whole, provided that any failure to comply with the offering limitations, issuer eligibility criteria, or requirements for offers or continuous or delayed offerings will be deemed to be significant to the offering as a whole; and

(3) A good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of Regulation A.

We believe that provisions for insignificant deviations serve an important function by allowing for certain errors that can occur in the offering process, while clearly delineating those provisions from which an issuer may not deviate. We believe the current provisions provide assurances to investors that issuers will not be able to deviate from certain fundamental requirements in the rules and avoid undue hardship that could befall issuers for inadvertent errors, such as loss of the exemption and, with respect to Tier 2 offerings, the loss of preemption of state securities law registration and qualification requirements. We are not expanding the list of provisions from which an issuer may not deviate. We note that whether a deviation from the requirements would be significant to the offering as a whole would depend on the facts and circumstances related to the offering and the deviation. We also note that in certain situations, such as in the event of pre-qualification sales, it may be difficult for issuers to establish a good faith attempt at compliance. In such circumstances, an issuer would not be able to rely on the provision.

G. Bad Actor Disqualification

1. Proposed Rules

Under Securities Act Section 3(b)(2)(G)(ii), the Commission has discretion to issue rules disqualifying certain felons and other `bad actors' from using amended Regulation A. Such rules, if adopted, must be “substantially similar” to those adopted to implement Section 926 of the Dodd-Frank Act, which requires the Commission to adopt disqualification rules for securities offerings under Rule 506 of Regulation D. The Commission adopted the disqualification provisions required by Section 926 in Rule 506(d) together with a related disclosure requirement in Rule 506(e) on July 10, 2013.

We proposed amendments to Regulation A's bad actor disqualification provisions that would make those provisions substantially similar to those adopted under Rule 506 of Regulation D. We also sought comment on the proposed disqualification rules and the categories of persons and types of events covered by the proposed rules. Additionally, we sought comment more broadly on the interpretation of the phrase “voting equity securities,” as it appears in “any beneficial owner of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power,” a category of covered persons in Rule 506(d) and the proposed disqualification provisions for Regulation A as well as our proposed rules for securities-based crowdfunding transactions.

2. Comments on Proposed Rules

In general, commenters did not oppose the proposed amendments to Regulation A's bad actor disqualification rules. Some commenters expressly supported the proposed rules. Some commenters, however, recommended changes to particular provisions of the proposal. One commenter recommended revising the look-back periods for disqualifying events to run from the time of sale, not from the time of filing of the offering statement as proposed. Another commenter recommended adding final orders of Canadian provincial regulators to the list of disqualifying events. This commenter noted that some Canadian provinces have information publicly posted on their Web sites that would facilitate the bad actor diligence process. One commenter recommended that the Commission develop an online bad actor database. Another commenter supported bad actor provisions as extensive as those under Rule 506(d). Finally, one commenter recommended defining voting equity securities for purposes of the bad actor disqualifications provisions using the definition in Rule 12b-2 of the Exchange Act.

3. Final Rules

We are adopting bad actor disqualification provisions for Regulation A, substantially as proposed with the exception of one change to further align the final rules for Regulation A with similar provisions in Rule 506(d). The covered persons and triggering events in the final rules for Regulation A are substantially the same as the covered persons and triggering events included in Rule 506(d). The covered persons include managing members of limited liability companies; compensated solicitors of investors; underwriters; executive officers and other officers participating in the offering; and beneficial owners of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power. Consistent with the bad actor disqualification rules under Rule 506(d), the final rules also include two new disqualification triggers not previously present in Regulation A: (1) Final orders and bars of certain state and other federal regulators, and (2) Commission cease-and-desist orders relating to violations of scienter-based anti-fraud provisions of the federal securities laws or Section 5 of the Securities Act. In order to clarify the scope of the term “final order” as it appears in Rule 262, we are including a definition of that term in Regulation A that is consistent with the term as it appears in Rule 501(g) of Regulation D. As adopted, a “final order” shall mean a written directive or declaratory statement issued by a federal or state agency described in Rule 262(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. We believe that creating a uniform set of bad actor triggering events should simplify due diligence, particularly for issuers that may engage in different types of exempt offerings. For this reason, consistent with the disqualification provisions of Rule 506(d), the final rules do not include final orders of Canadian provincial regulators in the list of disqualifying events.

The final disqualification rules in Regulation A also specify that an order must bar the covered person at the time of filing of the offering statement, as opposed to the requirement in Rule 506(d) that the order must bar the covered person at the time of the relevant sale. This clarification accords with the current provisions of Rule 262 and is appropriate for Regulation A because there is no filing requirement before the time of first sale in Rule 506. We are further adopting a reasonable care exception to the disqualification provisions on a basis consistent with Rule 506(d). Under the final rules, an issuer will not lose the benefit of the Regulation A exemption if it is able to show that it did not know, and in the exercise of reasonable care could not have known, of the existence of a disqualification. As proposed, and consistent with the provisions of existing Regulation A, the final rules permit issuers that are disqualified from relying on the exemption to request a waiver of disqualification from the Commission.

In the Proposing Release, we solicited comment on the interpretation of the phrase “voting equity securities,” as it appears in “any beneficial owner of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power,” a category of covered persons in Rule 506(d) and proposed Rule 262 as well as our proposed rules for securities-based crowdfunding transactions. Consistent with the views of at least one commenter, we have reconsidered our initial views on the interpretation of “voting equity securities.” We believe that it is appropriate to refine our initial interpretation, as it applies to our bad actor disqualification rules, and create a “bright-line” standard that is consistent with the definition of the term “voting securities” in Rule 405 of the Securities Act. In this regard, we believe that such a term should include only those voting equity securities which, by their terms, currently entitle the holder to vote for the election of directors. In other words, we believe the term should be read to denote securities having a right to vote that are presently exercisable. Additionally, while the ability to control or significantly influence the management or policies of the issuer may be derived in part from the power to vote for the election of directors, in order to dispel any uncertainty as to the scope of our interpretation, we believe the term “voting equity securities” should be interpreted based on the present right to vote for the election of directors, irrespective of the existence of control or significant influence.

Under the final rules, offerings that would have been disqualified from reliance on Regulation A under Rule 262 as in effect before today's amendments will continue to be disqualified. Triggering events that were not previously included in the bad actor rules for Regulation A and that pre-date effectiveness of the final rules will not cause disqualification, but instead must be disclosed on a basis consistent with Rule 506(e). Specifically, issuers will be required to indicate in Part I of Form 1-A that none of the persons described in Rule 262 are disqualified and, where applicable, that disclosure of triggering events that would have triggered disqualification, but occurred before the effective date of the Regulation A amendments, will be provided in Part II of Form 1-A.

We believe that the final rules are appropriate in light of the Section 3(b)(2)(G)(ii) mandate, the benefits of creating a more uniform set of standards for all exemptions that include bad actor disqualification, and the required disclosure in the offering circular of persons subject to events that would have triggered disqualification, but occurred before the effective date of the final rules.

H. Relationship With State Securities Law

1. Proposed Rules

Although Section 401(b) of the JOBS Act does not exempt offerings made under Section 3(b)(2) and the related rules from state law registration and qualification requirements, it added Section 18(b)(4)(D) to the Securities Act. That provision states that Section 3(b)(2) securities are covered securities for purposes of Section 18 if they are “offered or sold on a national securities exchange” or “offered or sold to a qualified purchaser, as defined by the Commission pursuant to [Section 18(b)(3)] with respect to that purchase or sale.” Section 18(b)(3) provides that “the Commission may define the term `qualified purchaser' differently with respect to different categories of securities, consistent with the public interest and the protection of investors.”

Commenters in the pre-proposal stage suggested that the cost of state securities law compliance, which they identified as an obstacle to the use of Regulation A, would discourage market participants from using the new exemption. In addition, the GAO, as required by Section 402 of the JOBS Act, conducted a study on the impact of state securities laws registration and qualification requirements on offerings conducted under Regulation A and found that state securities laws were among several central factors that may have contributed to the lack of use of Regulation A.

In light of the issues raised by commenters and in the GAO Report, as well the substantial investor protections included in the proposed rules to amend Regulation A and implement Title IV of the JOBS Act, we proposed to define the term “qualified purchaser” in a Regulation A offering to consist of: (1) All offerees in a Regulation A offering and (2) all purchasers in a Tier 2 offering. We indicated in the Proposing Release that we believed this approach would protect offerees and purchasers in Regulation A securities, while streamlining compliance and reducing transaction costs.

We proposed to preempt state securities laws registration and qualification requirements with respect to all offerees in a Regulation A offering, in order to allow issuers relying on Regulation A to communicate with potential investors about their offerings using the internet, social media, and other means of widespread communication, without concern that such communications might trigger registration requirements under state law. We further proposed to preempt state securities laws registration and qualification requirements with respect to all purchasers in a Tier 2 offering to help make Regulation A a more workable means of capital formation. We also noted our belief that the substantial investor protections embedded in the proposed rules, including issuer eligibility conditions, limitations on investment, disclosure requirements, qualification process, and ongoing reporting requirements of Tier 2, in combination, could address potential concerns that may arise as a result of preemption.

Under the proposed rules, state securities regulators would retain their authority to:

• Require the filing of any document filed with the Commission and the payment of filing fees;
• investigate and bring enforcement actions against fraudulent securities transactions and unlawful conduct by broker-dealers in such offerings; and
• enforce the filing and fee requirements by suspending the offer or sale of securities within a given state for the failure to file or pay the appropriate fee.

As noted in the Proposing Release, it was our preliminary view that the additional requirements for Tier 2 offerings would meaningfully bolster the protections otherwise embedded in Regulation A and therefore a different treatment than Tier 1 offerings is appropriate.

2. Comments on Proposed Rules

The preemption of state securities law registration and qualification requirements contemplated in the proposed “qualified purchaser” definition received an extensive amount of public commentary. Commenters were sharply divided on the need for state securities law preemption in Regulation A.

Many commenters objected to the preemption of state securities law registration and qualification requirements. The views of these commenters were based on the following arguments:

• A “qualified purchaser” means a purchaser with specialized skill, experience or knowledge.

• The qualifications of the purchaser are key, not the nature of the issuer or the offering. Thus, the proposed definition of “qualified purchaser” is contrary to the plain meaning of this term.

• The legislative history of the National Securities Markets Improvement Act of 1996 (NSMIA) suggests that definitions of “qualified purchaser” must include an investor sophistication test. The Commission made similar statements on the “qualified purchaser” definition in a 2001 Proposing Release.

• Congress considered preemption in the context of a provision to preempt offerings conducted through a broker-dealer in an early draft of Title IV of the JOBS Act, but then purposefully excluded such broad preemption from the final statute.

• The Commission's cost-benefit analysis of preemption was inadequate because it largely ignored investor protections, the benefits of state regulation, perceived resource constraints at the Commission, and preemption's impact on investor confidence in the markets.

• Although the GAO Report conducted under Section 402 of the JOBS Act cited compliance with state securities law review and qualification requirements as a factor in the lack of use of Regulation A, it also noted lengthy Commission reviews of Form 1-A filings.

• States play a unique role in regulating securities offerings due to their localized knowledge and resources, which aid in detecting fraud and facilitating issuer compliance.

• The investor protections included in the proposal do not act as an adequate substitute for state review and comment on offering statements.

• The states have adopted and implemented a new coordinated review program, designed to address many of the perceived inefficiencies associated with state registration.

Many other commenters expressed their support for preemption, as proposed. These commenters made the following arguments:

• The proposed rules provide substantial investor protections to investors.

• State securities law review of offering statements is a significant impediment to the use of Regulation A.

• The Commission has the authority to preempt state qualification and review requirements.

• States continue to have the authority to, among other things, bring anti-fraud enforcement actions and to review the publicly filed disclosure documents before sales occur.

• NASAA's coordinated review program as implemented will remain inefficient due to internal conflict, the application of merit review standards and the program's inability to bind participants in the event of disagreements among the states.

Many commenters that expressed general support for preemption, as proposed, also recommended applying it on an expanded basis. Some commenters recommended preempting state regulation of secondary trading in Regulation A securities, and some recommended preempting state regulation of Tier 1 offerings.

Alternatively, several commenters recommended possibly eliminating the Commission's review of Regulation A offerings to varying extents. Two commenters recommended eliminating the Commission's review of Tier 1 offerings. One of these commenters recommended only doing this for offerings that are “local” in nature. One commenter recommended having a single state review, in lieu of a review and qualification by the Commission, if the Commission's staff is unwilling to review Regulation A offerings “promptly with content-appropriate standards.” One commenter recommended completely eliminating the Commission's review if NASAA's coordinated review program promotes a “robust” Regulation A market.

3. Final Rules

For the reasons discussed below, we are adopting the “qualified purchaser” definition in Regulation A, substantially as proposed. In the final rules, a “qualified purchaser” for purposes of Section 18(b)(4)(D)(ii) of the Securities Act includes any person to whom securities are offered or sold in a Tier 2 offering. Because of the requirements for all Tier 2 offerings, all purchasers in Tier 2 offerings persons must be either accredited investors or persons who limit their investment amount to no more than 10% of the greater of annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons).

To address commenter concerns and avoid potential confusion as to the application of the preemption provisions in Tier 1 offerings, the final definition of “qualified purchaser” does not include offerees in Tier 1 offerings. While the final rules permit Regulation A issuers to test the waters and make offers in the pre-qualification period at the federal level, in light of the concerns raised by state regulators about the proposed rule's expanded use of solicitation materials and what we anticipate to be the generally more local nature of Tier 1 offerings, we believe it is appropriate, in this context, for the states to retain oversight over how these offerings are conducted. Although we acknowledge that this could potentially inhibit the use of solicitation materials in certain Tier 1 offerings, for these smaller, more localized offerings, we think the states should be permitted to regulate the use of solicitation materials.

Given the sharply divided views of commenters on the “qualified purchaser” definition included in the Proposing Release, we want to clarify the scope of the Commission's authority under the Securities Act to define such a term and the effect the final qualified purchaser definition will have on the continued ability of the states to regulate offers and sales within their jurisdiction. We continue to believe that the substantial investor protections embedded in the final rules for Tier 2 offerings, including the requisite qualifications of the issuer, offering, and eventual purchasers, as well as the particular characteristics associated with this category of securities, support the limited preemption of state securities laws registration and qualification requirements adopted in the final rules.

a. NSMIA and the JOBS Act

As noted above, some commenters questioned the ability of the Commission to adopt a “qualified purchaser” definition that includes any person to whom securities are offered or sold in a Tier 2 offering. These commenters suggested that a qualified purchaser definition under Section 18(b)(3) of the Securities Act must be based on attributes of the purchaser, not the nature of the issuer or offering. These commenters stated that broad preemption was contemplated in the legislative history of Title IV of the JOBS Act and expressly rejected by Congress.

Title I of the NSMIA, referred to as the “Capital Markets Efficiency Act of 1996” (the “Efficiency Act”), was, as its name suggests, enacted to promote efficiency and capital formation in the financial markets. The Efficiency Act realigned the respective responsibilities of federal and state securities regulators in the context of the dual system of securities offering registration that existed before enactment of the statute. The Efficiency Act achieved this regulatory realignment by amending Section 18 of the Securities Act to provide for exemption from state law registration and qualification requirements for certain categories of securities, defined as “covered securities.”

Section 18(b)(3) provides that “[a] security is a covered security with respect to the offer or sale of the security to qualified purchasers, as defined by the Commission by rule.” Congress stated in Section 18(b)(3) that the Commission may “define the term `qualified purchaser' differently with respect to different categories of securities, consistent with the public interest and the protection of investors.” The JOBS Act amended Section 18 by adding to its list of “covered securities” transactions involving securities that are exempt from registration pursuant to a rule or regulation adopted pursuant to Section 3(b)(2) and that are “offered or sold to a qualified purchaser, as defined by the Commission pursuant to [Section 18(b)(3)] with respect to that purchase or sale.”

By its terms, Section 18(b)(3) provides the Commission with the express authority to adopt rules that define a “qualified purchaser.” The provision does not prescribe specific criteria that the Commission must consider in determining, or the manner in which it must determine, a purchaser to be “qualified.” Furthermore, Section 18(b)(3) states that the definition of qualified purchaser may be different for different categories of securities. This means that, rather than considering the characteristics of the purchaser in isolation, the Commission may adopt a qualified purchaser definition that is also tailored to reflect the characteristics of the particular type of issuer or transaction. Further, Section 18(b)(3) does not proscribe any particular terms or characteristics that the Commission must include in any rules defining qualified purchaser with respect to a given category of securities. What it does instead is require that any rules so adopted be consistent with the public interest and the protection of investors.

Unlike Section 18(b)(3), which provides for preemption with respect to offers or sales to qualified purchasers in any context, Section 18(b)(4)(D)(ii) provides for preemption specifically with respect to transactions exempt from registration pursuant to Section 3(b)(2). As such, the preemption afforded under Section 18(b)(4)(D)(ii) necessarily encompasses the mandatory requirements for conducting an exempt offering pursuant to Section 3(b)(2). These include, among other things, that the civil liability provisions of Section 12(a)(2) must apply and that an issuer must file audited financial statements with the Commission annually. Other potential requirements left to the discretion of the Commission include provisions for ongoing reporting, bad actor disqualification, and requirements for electronic filing of offering materials.

We believe that the terms of Section 18(b)(3) and Section 18(b)(4)(D)(ii)—read in conjunction—provide the Commission with discretionary authority to adopt a “qualified purchaser” definition that reflects the particular characteristics of transactions exempt from registration pursuant to Section 3(b)(2). Thus, in determining who should be considered a qualified purchaser for purposes of the amendments to Regulation A, we have considered not only the mandatory features of Section 3(b)(2), but also many of the discretionary features contained in our final rules, such as the requirement that purchasers in Tier 2 offerings be limited to accredited investors or persons otherwise subject to specified investment limitations.

We recognize that a number of commenters disagreed with this approach. Some stated that a “qualified purchaser” definition adopted by the Commission must at a minimum be based on attributes of the purchaser, such as a person's wealth, income, or sophistication, and noted that the Commission had highlighted such factors in a 2001 Proposing Release to define a “qualified purchaser” pursuant to Section 18(b)(3). The 2001 Proposing Release, however, contemplated that state securities review and qualification requirements would be preempted in all categories of transactions to the extent that sales were made to “accredited investors.” By contrast, our rules to implement Title IV of the JOBS Act provide for preemption in the more limited circumstances in which the requirements of Section 3(b)(2) and the rules adopted thereunder are satisfied.

In the 2001 Proposing Release, we noted that certain aspects of NSMIA's legislative history suggest that a qualified purchaser definition should include investors that are sophisticated and capable of protecting themselves. In addition, we asked questions about the proposed approach to the definition and whether other potential factors mentioned in the legislative history, such as the national character of an offering, could or should bear on potential qualified purchaser definitions adopted pursuant to Section 18(b)(3).

We do not believe that the 2001 Proposing Release is inconsistent with the qualified purchaser definition for Regulation A that we are adopting today. The 2001 Proposing Release was not a Commission statement on the scope of all permissible definitions for a qualified purchaser adopted pursuant to Section 18(b)(3). Rather, it expressed a preliminary interpretive view of certain aspects of the legislative history of NSMIA in the context of a proposed rulemaking that would have equated “qualified purchaser” with the definition of an “accredited investor” for sales by any category of issuer in any type of transaction. While it may have been appropriate to focus on attributes of the purchaser when crafting a “qualified purchaser” definition that would have applied in a broad set of possible transactions, as in the 2001 Proposing Release, the definition being adopted today serves a different purpose because it applies only in Regulation A offerings. Indeed, Section 18(b)(3) contemplates that the term “qualified purchaser” can be defined “differently with respect to different categories of securities.”

The enactment of the JOBS Act in 2012, and in particular its addition of Section 18(b)(4)(D)(ii) to the Securities Act has caused us to consider the definition of qualified purchaser specifically within the context of transactions under the new Section 3(b)(2) exemption. This is a new and different context in which to consider the definition of qualified purchaser than existed at the time of the 2001 Proposing Release. In this new context, we believe that the definition of qualified purchaser that we are adopting is appropriately tailored to these transactions because, as explained above, the requirements applicable to Tier 2 offerings include numerous provisions designed to protect investors, including, among other things, a requirement that all purchasers in these offerings be either accredited investors or persons who are subject to investment limitations.

We do not agree with the commenters who assert that broad state securities law preemption was expressly rejected by Congress in Title IV of the JOBS Act. The legislative record indicates that the only form of state securities law preemption directly contemplated, but not adopted, in the drafting of Title IV of the JOBS Act was for offers and sales through a broker or dealer.

b. Section 18 of the Securities Act and the Effect of Preemption on State Securities Laws

As discussed above, some commenters expressed concern about the effect preemption would have on the ability of state securities regulators to remain actively involved in Regulation A offerings. We believe it is important to clarify the effect preemption will have on the ability of state securities regulators to continue to play a vital role in the supervision of Regulation A securities.

Under Section 18(a) of the Securities Act, no law, rule or regulation of any state requiring the registration or qualification of securities applies to a covered security or to a security that will be a covered security upon completion of the transaction. Further, with respect to a covered security, no state law, rule or regulation shall prohibit, limit, or impose, among other things, any conditions upon the use of any offering document that is prepared by or on behalf of the issuer, or, based on the merits of such offering or issuer, upon the offer or sale of any covered security.

While covered security status under Section 18 prohibits the states from requiring the registration or qualification of such securities, Section 18(c) preserves the power of the states in several important areas. Under Section 18(c), the states retain:

• The jurisdiction to investigate and bring enforcement actions with respect to fraudulent securities transactions and unlawful conduct by broker-dealers;

• the ability to require issuers to file with the states any document filed with the Commission, solely for notice purposes and the assessment of fees, together with a consent to service of process and any required fee; and

• the power to enforce the filing and fee requirements by suspending the offer or sale of securities within a given state for the failure to file or pay the appropriate fee.

As the name of the statute that added Section 18 to the Securities Act suggests, the preemption of state securities laws is about improving the “efficiency” of our capital markets by eliminating unnecessary, duplicative regulation of securities offerings at both the federal and state level. It is not about eliminating investor protections or otherwise limiting the continued involvement of the states in such offerings.

c. State Coordinated Review Program for Section 3(b)(2) Securities

Since the proposed rules to implement Title IV of the JOBS Act were issued in December 2013, NASAA has implemented a multi-state coordinated review program for Regulation A offerings, the goal of which is to reduce the state law disclosure and compliance obligations of Regulation A issuers. Under the coordinated review program, issuers are required to file Regulation A offering materials with the states via electronic mail. The administrator of the coordinated review program must then select a lead disclosure examiner and, where applicable, a lead merit examiner, which are responsible for drafting and circulating comment letters to the participating jurisdictions, and for seeking resolution of those comments with the issuer and its counsel. As enacted, the program contemplates a twenty-one business day turnaround from the time of filing of an offering statement until the issuer receives comments from the states. The coordinated review program's review protocol also modifies (or disapplies altogether) certain of NASAA statements of policy for offerings undergoing coordinated review. Where, however, an issuer elects to offer or sell Regulation A securities in at least one merit state, the coordinated review program may require the issuer to apply NASAA's statements of policy to the offering as a whole (i.e., not solely for purposes of offers or sales within such merit review state(s)).

At the proposing stage, we indicated that a number of open questions remained about the then-proposed multi-state review program. In the intervening time, many questions have been answered, largely relating to the final adoption and implementation of the program by a vast majority of the states. Other crucial questions, however, remain, such as whether the program will be able to address the concerns related to state securities law compliance identified by the GAO Report and commenters, and whether the program can continue, as contemplated, in the face of numerous filings by issuers that seek to participate in the streamlined process. As of the date of this release, we are aware of three issuers that have elected to seek qualification at the state level pursuant to the protocols of the multi-state coordinated review program. While the program, as contemplated in its enactment, could potentially reduce the state law disclosure and compliance obligations of issuers, the limited experience of issuers with the program prevents us from being able to fully evaluate it at this time. We note that Tier 1 issuers may well benefit from the coordinated review program as it continues to develop. We remain concerned, however, that, even under the coordinated review program, state securities law registration and qualification requirements would be unnecessarily duplicative for, and impose unnecessary costs on, securities issued in Tier 2 offerings. In light of the recent efforts of state securities regulators to address concerns about the costs associated with state qualification of Regulation A offering statements, however, the ongoing implementation and development of the coordinated review program, particularly as it may operate within Tier 1 offerings, may provide additional data that will aid any future evaluation of whether such a program could effectively operate within the context of larger, more national Tier 2 offerings as an alternative to preemption.

d. Application of State Securities Law in Tier 1 and Tier 2 Offerings

As we noted in the Proposing Release, in light of the issues raised by commenters and in the GAO report, we remain concerned that costs associated with state securities law compliance, even under a coordinated review program, may deter issuers from using amended Regulation A, which could significantly limit the impact of the exemption as a tool for capital formation. In considering our approach to preemption in the final rules, particularly as we evaluate what is consistent with the public interest and the protection of investors, we have taken into account the amended Regulation A regime, including the distinctions between the two tiers and in particular the additional protections provided in Tier 2 beyond the requirements of Tier 1.

In addition to certain basic requirements that are applicable to both tiers, Tier 2 issuers will be subject to significant additional requirements, some arising directly from Section 3(b)(2) and others that we have imposed through our discretionary authority under that section. For example, the financial statements that Tier 2 issuers include in their offering circulars are required to be audited, and Tier 2 issuers must file audited financial statements with the Commission annually. Tier 2 issuers also must provide ongoing reports on an annual and semiannual basis with additional requirements for interim current event updates, assuring a continuous flow of information to investors and the market. In addition, purchasers in Tier 2 offerings must be either accredited investors or subject to limitations in the amount they may invest in a single offering. Finally, as with Tier 1 offerings, Tier 2 offering statements will be filed electronically, reviewed and qualified by Commission staff, and the offerings are subject to both limitations on eligible issuers and “bad actor” disqualification provisions. In consideration of these requirements, as well as our view, as discussed in greater detail below, that Tier 2 offerings are more likely to be national rather than local in nature, we believe that preemption of state securities law registration and qualification requirements is appropriate for purchasers in these offerings.

We believe that the final rules for Regulation A create two different categories of securities for purposes of Section 18(b)(3). The requirements for Tier 1 issuers create a category of securities that is more local in character, while Tier 2 offerings involve a category of securities that is more national in character. In this regard, to the extent an issuer seeks to raise money through a public offering pursuant to Regulation A, the distinctions between the requirements for Tier 1 and Tier 2 will provide issuers with a meaningful choice at the outset between initial and ongoing offering costs and requirements.

Tier 1 issuers are not required to include audited financial statements in their offering statements, nor are they required—as contemplated by Section 3(b)(2)—to file audited financial statements with the Commission annually. They are further not subject to any ongoing reporting, beyond the requirements contained in Part I of Form 1-Z. While the final rules raise the offering limitation in Tier 1 to $20 million in a 12-month period, which we believe should increase the general utility of the tier, such offerings by virtue of the lower dollar amounts that can be raised in comparison to Tier 2 offerings, as well as the form filing requirements and the lack of ongoing reporting, will likely be conducted by a different set of issuers than those that conduct offerings pursuant to Tier 2. Specifically, we think that issuers conducting Tier 1 offerings are likely to be smaller companies whose businesses revolve around products, services, and a customer base that will more likely be located within a single state, region, or a small number of geographically dispersed states. We believe that these issuers will typically not seek or, on the basis of their business models, be able to: (i) Raise capital on a national scale; or (ii) create a secondary trading market in their Regulation A securities.

By contrast, we believe that the higher offering limitation for Tier 2 offerings, the higher costs associated with complying with the audited financial statement and ongoing reporting requirements, as well as the requirement to sell to “accredited investors” or otherwise limit the amount of securities sold to non-accredited investors, will necessitate that such offerings be offered and sold on a larger and more national scale. Additionally, an issuer electing to conduct a Tier 2 offering would likely do so, or be required by its investors to do so, in order to provide ongoing reports in a manner that will facilitate, or otherwise result in, secondary trading on a national level. While issuers conducting Regulation A offerings for less than $20 million are free to choose between the requirements of either tier, we believe that the initial and ongoing costs and limitations associated with complying with Tier 2 will provide for the natural separation of offerings into the respective tiers with issuers in more local offerings electing to comply with the less onerous requirements of Tier 1.

As noted above, some of the basic requirements of the offering statement are applicable to both tiers, and issuers of securities pursuant to either tier will remain subject to the same review and comment process by the staff of the Division of Corporation Finance before qualification. On this basis, some commenters argued that the same reasons supporting the preemption of state securities law registration requirements for Tier 2 offerings suggests that the Commission should also extend preemption to Tier 1 offerings.

The distinctions between the tiers in the final rules for purposes of the preemption of state securities law registration requirements are based only in part on the form distinctions and process requirements for issuers at the time of qualification at the federal level. The preemption of state securities law registration requirements in the final rules for Tier 2 offerings is additionally related to the inefficiencies of qualification at the state and federal level, the differing characteristics of Tier 1 and Tier 2 offerings, and the statutory purposes behind the enactment of the Efficiency Act that are served by deeming Tier 2 offerings to involve a covered class of securities.

While, as some commenters suggest, the review and qualification of Tier 1 offerings at the state level will involve inefficiencies to which Tier 2 issuers will not be subject, we believe that continued state involvement in Tier 1 offerings is consistent with the policy underlying the enactment of NSMIA that suggests that states should “generally retain their authority to regulate small, regional, or intrastate securities offerings.” As noted above, we believe that the implementation of NASAA's multi-state coordinated review program has the potential to ameliorate some of these inefficiencies. We will observe issuers' experience under the coordinated review program and amended Regulation A, and whether changes to the rule could be beneficial. We also believe that the requirements for Tier 2 offerings will advance “the development of national securities markets and eliminate the costs and burdens of duplicative and unnecessary regulation.” The absence of preemption in Tier 2 offerings would unnecessarily subject issuers in such offerings to a substantial degree of duplication between federal and state securities regulation in the qualification of offering statements, which would raise the cost of capital to issuers without providing commensurate additional protection to investors or our markets.

As noted above, under Section 18(c), the states retain authority to (1) investigate and bring enforcement actions with respect to fraudulent transactions, (2) require the filing of any documents filed with the Commission “solely for notice purposes and the assessment of any fee,” and (3) enforce filing and fee requirements by suspending offerings within a given state. We see no reason why state securities regulators could not continue to rely on the multi-state coordinated review program as a mechanism to allow Tier 2 issuers to make notice filings of their offering statements with the states consistent with Section 18(c). In this regard, notice filings of offering statements of Tier 2 issuers would be available to the states for a period of time prior to the qualification of the offering. For example, the final rules for Regulation A require an issuer that non-publicly submits its offering statement for review to the Commission to publicly file its offering statement and related documents with the Commission not less than 21 calendar days before qualification. At that time, the states would be permitted to require issuers to also make notice filings of such materials with them and to assess any filing fees under Section 18(c)(2).

I. Additional Considerations Related to Smaller Offerings

As we noted in the Proposing Release, a number of factors have influenced the use of Regulation A in the form it has taken since its last substantive update in 1992, including the process of filing the offering statement with the Commission, state securities law compliance, the types of investors businesses seek to attract, and the cost-effectiveness of Regulation A relative to other exemptions. In developing the final rules we are adopting, we have attempted to create a more efficient and effective method to raise capital under Regulation A that incorporates important investor protections. We are also cognizant of how issuers seeking to raise relatively smaller amounts of capital could consider a range of possible approaches to capital raising.

Under our proposal, offerings for up to $5 million conducted under Tier 1 would benefit from the proposed updates to Regulation A's filing and qualification processes, but the proposed amendments did not otherwise substantially alter the existing exemption for such offerings. We were mindful of the possibility that additional changes to Tier 1 could expand its use by, and thus potentially benefit, issuers conducting smaller offerings. We therefore solicited comment on additional considerations with respect to Tier 1 and a potential intermediate tier for offerings incrementally larger than Tier 1 offerings and how such offerings would affect investor protection and capital formation.

Many commenters recommended making changes to proposed Tier 1 to make it a more viable option for small business capital formation. Some of these commenters recommended preempting state regulation of Tier 1 offerings, as mentioned above. Two commenters recommended raising the offering limit of Tier 1 to $10 million or more. Several commenters recommended including an ongoing disclosure requirement for Tier 1 issuers, including disclosure at a level lower than what is required for Tier 2, ongoing disclosure with yearly audited financials, or some unspecified continuous disclosure obligation. One commenter recommended lowering the Tier 1 disclosure obligations from the current proposed requirements, particularly for offerings of $2 million or less. One commenter recommended expanding the offering limit for Tier 1 to $15 million and creating a new tier below Tier 1 with fewer disclosure requirements. Many commenters recommended changes to proposed Tier 1, but did not address preemption. Several of these commenters made recommendations with respect to the financial statement and auditing requirements in Form 1-A.

The final rules for Regulation A take into account some of the suggestions by commenters on ways to improve the requirements for smaller offerings, particularly in Tier 1. The comments we received did not reflect any consensus on the particular provisions in Tier 1 that were most in need of amendment. As noted above, we do not agree that preemption of state securities laws registration and qualification requirements is appropriate for Tier 1 offerings. Further, while some commenters suggested that preemption of state securities laws may improve the attractiveness of Tier 1 offerings, they did so on the condition that other aspects of the tier should change accordingly, such as by requiring Tier 1 issuers to provide audited financial statements in the offering statement and possibly on an ongoing basis. For the reasons discussed in Section II.C.3.b(2)(c) above, however, we have not adopted such changes in Tier 1. Alternatively, some commenters suggested that the Commission adopt a third tier either expressly or through the flexible applicability of the proposed tier requirements. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would also have potential costs. For example, a third tier may unnecessarily complicate compliance with Regulation A for smaller issuers, and could potentially confuse investors as to the type of Regulation A offering an issuer was undertaking and the type of information such investor could expect to receive as a result, thereby lessening the viability of the exemption as a whole. For this reason, we are not adopting a third or intermediate tier in Regulation A.

We are adopting certain changes in the final rules that are intended to make Tier 1 more useful for small business capital formation. As discussed above, in line with the suggestions of commenters, we have raised the offering limitation in Tier 1 to $20 million in a 12-month period, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer. With respect to the offering circular narrative disclosure requirements, we have adopted certain additional scaled disclosure requirements for Tier 1 that are intended to lessen the compliance obligations for issuers. For example, Tier 1 issuers will be required to disclose related party transactions at the thresholds in current Regulation A, as opposed to the lower thresholds in the proposed rules, and simplified executive compensation data. We are further providing issuers under both Tiers with the accommodation provided to emerging growth companies in Securities Act Section 7(a) to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities. Lastly, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards. As originally proposed, an issuer electing to provide audited financial statements in a Tier 1 offering—even though audited financial statements would not generally be required—would have had to engage the services of an auditor that followed the independence standards outlined in Article 2 of Regulation S-X. Commenters suggested that we should permit auditors of the financial statements of Tier 1 issuers to alternatively follow the independence standards of the AICPA or Article 2 of Regulation S-X. In the view of these comments, allowing auditors of Tier 1 issuer financial statements the option to follow the independence standards of the AICPA would permit more issuers to include financial statements that would be deemed audited under the requirements for Tier 1 in the first instance, thereby avoiding any fees associated with an issuer having their existing financial statements audited a second time under PCAOB standards. As noted above, we agree with commenters that this accommodation may benefit smaller issuers in Tier 1 offerings who wish to file audited final statements for purposes of the offering statement and thus are adopting this suggestion.

In the light of the changes discussed above, we believe that the final rules we are adopting will provide Tier 1 issuers with a meaningful choice within Regulation A between the costs and benefits associated with compliance with the requirements for Tier 1 and Tier 2 and therefore do not believe that an intermediate or other tier is necessary at this time.

J. Transitional Guidance for Issuers Currently Conducting Regulation A Offerings

While Regulation A has been used infrequently in recent years, there are issuers that are currently conducting, or that have filed offering statements, under the preexisting Regulation A rules. By way of transitional guidance, we are clarifying that issuers currently conducting sales of securities pursuant to a qualified Regulation A offering statement may continue to do so. Such offerings will be considered Tier 1 offerings after the effectiveness of the final rules. Qualified offering statements under the preexisting rules for Regulation A are, however, incompatible with the final requirements for Tier 2 offerings and, as discussed below, issuers that wish to transition to a Tier 2 offering will need to file a post-qualification amendment that satisfies the requirements for Tier 2.

Upon effectiveness of the final rules, issuers currently conducting Regulation A offerings under the preexisting rules must begin to comply with the final rules for Tier 1 offerings, including, for example, the requirement of electronic filing and the rules for post-qualification amendments, at the time of their next filing under Regulation A. Additionally, after effectiveness of the final rules, to the extent that issuers provided offering statements that were qualified using the Model A disclosure format of Part II of the Form 1-A, any subsequently required filing or amendment to such offering statement must be filed using a disclosure format that is permissible under the final rules for Tier 1 offerings. Model A will no longer be appropriate or permitted for post-qualification amendments of qualified offerings that pre-date effectiveness of the final rules. Lastly, an issuer that is offering securities pursuant to a qualified offering statement under the preexisting rules will, upon effectiveness of the final rules, no longer be required to file a Form 2-A, but instead be required to file a Form 1-Z with the Commission electronically upon completion or termination of the offering.

Issuers that are currently in the review process for the qualification of a Regulation A offering statement may continue to follow the preexisting rules for Regulation A until the effective date of the final rules. On or after the effective date, such an issuer will be required to comply with the final rules, including the requirements for electronic filing and, where applicable, transitioning to a disclosure format that is approved for Regulation A offerings. The issuer may also elect to proceed at that time with its offering under the final requirements for either Tier 1 or Tier 2 offerings, provided it follows the requirements for the respective tiers.

Issuers in ongoing offerings that were qualified before effectiveness of the final rules that wish to transition to a Tier 2 offering may do so by filing a post-qualification amendment that satisfies all of the requirements for Tier 2. Such issuers will transition to the requirements for Tier 2 upon qualification of the post-qualification amendment. For purposes of calculating the maximum offering amount permissible under Rule 251(a), an issuer must reduce the maximum offering amount sought to be qualified under the final rules for the respective tiers by the amount which such issuer has sold during the previous 12-month period pursuant to the preexisting rules for Regulation A.

K. Technical and Conforming Amendments

The final rules for Regulation A amend existing Rules 251-263. The amendments take into account changes to Regulation A associated with the addition of Section 3(b)(2) to the Securities Act, and the items detailed in this release.

As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a), 505(b)(2)(iii), and Form 8-A. Additionally, we are revising Item 101(a) of Regulation S-T to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6) of Regulation S-T to remove the reference to paper filings in a Regulation A offering, and removing and reserving Item 101(b)(8) of Regulation S-T dealing with the optional electronic filing of Form F-X by Canadian issuers.

III. Economic Analysis

In this section, we analyze the expected economic effects of the final rules relative to the current baseline, which is the market situation in existence today, including current methods of raising up to $50 million in capital available to potential issuers. Our analysis considers the anticipated costs and benefits for market participants affected by the final rules as well as the impact of the final rules on efficiency, competition, and capital formation relative to the baseline. This includes the likely economic effects of the specific provisions of the final rules related to the scope of the exemption, the format and contents of the offering statement, solicitation of interest, ongoing reporting, insignificant deviations, bad actor disqualification, and relationship with state securities law.

The final rules to implement Section 401 of the JOBS Act and amend Regulation A seek to promote capital formation, efficiency and competition for small companies, and provide for meaningful investor protection. We are mindful of the costs imposed by, and the benefits to be obtained from, our rules. Securities Act Section 2(b) and Exchange Act Section 3(f) require us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. Exchange Act Section 23(a)(2) requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.

The final rules include provisions mandated by the statute as well as provisions that rely on our discretionary authority. As a result, while many of the costs and benefits of the final rules stem from the statutory mandate of Title IV of the JOBS Act, certain benefits and costs are affected by the discretion we exercise in connection with implementing this mandate. For purposes of this economic analysis, we address the benefits and costs resulting from the mandatory statutory provisions and our exercise of discretion together because the two types of benefits and costs are not readily separable. We also analyze the benefits and costs of significant alternatives to the final rules that were suggested by commenters and that we considered. Many of the benefits and costs discussed below are difficult to quantify when analyzing the likely effects of the final rules on efficiency, competition, and capital formation. For example, the extent to which the amendments to Regulation A will promote future reliance by issuers on this offering method, and the extent to which future use of Regulation A will affect the use of other offering methods, is difficult to precisely estimate. Similarly, there is some uncertainty as to the effect of some of the provisions in the final rules on investor protection. Therefore, much of the discussion is qualitative in nature but, where possible, we attempted to quantify the potential costs and benefits of the final rules.

A. Broad Economic Considerations

One of the primary objectives of Section 401 was to expand the capital raising options available to smaller and emerging companies and thereby to promote capital formation within the larger economy. With this objective in mind, and as background to our analysis of the likely costs and benefits of the final rule provisions, we consider the broader impact of amended Regulation A on capital formation. As discussed below, this will depend on whether issuers that currently raise capital elect to rely on amended Regulation A in place of other offering methods and whether issuers that have been unable to raise capital, or raise enough capital, avail themselves of amended Regulation A because it is preferable over other capital rising methods otherwise available to them. To the extent that amended Regulation A provides a method of raising capital for issuers that currently have no method of doing so, it could enhance the overall level of capital formation in the economy in addition to any redistributive effect that could arise from issuers changing their capital raising methods.

The impact of the final rules on an issuer's ability to raise capital will also depend on whether new investor capital is attracted to the Regulation A market, and on whether investors reallocate existing capital among various types of offerings. Investor demand for securities offered under amended Regulation A will depend on the expected risk, return and liquidity of the offered securities, and in particular, how these characteristics compare to what investors can obtain from securities in other exempt offerings and in registered offerings. Investor demand also will depend on whether Regulation A disclosure requirements are sufficient to enable investors to evaluate the aforementioned characteristics of Regulation A offerings.

To assess the likely impact of the final rules on capital formation, we consider the features of amended Regulation A that potentially could increase the use of Regulation A by new issuers and by issuers that already rely on private and registered offerings.

The amendments to Regulation A we are adopting remove certain burdens identified by commenters and others in existing Regulation A. Offerings relying on existing Regulation A must be qualified by the states and the Commission, which also requires a review and qualification process for issuers to access capital. Amended Regulation A removes the requirement of state qualification for Tier 2 offerings, thereby eliminating the cost and other burdens of the duplicative review under existing Regulation A. Issuance costs may also be reduced, as a percentage of proceeds, by increasing the maximum offering size from $5 million annually under existing Regulation A, to $20 million for Tier 1 offerings and to $50 million for Tier 2 offerings relying on amended Regulation A.

We believe that the potential use of amended Regulation A for Tier 2 offerings depends largely on how issuers perceive, the trade-off between the costs of qualification and ongoing disclosure requirements and the benefits to issuers from access to a broad investor base, expansion of the offering size, the preemption of state securities law registration requirements and the potential for enhanced secondary market liquidity.

With respect to Tier 1 offerings, the potential use of amended Regulation A depends largely on how issuers perceive the trade-off between state review and qualification requirements, limited disclosure requirements (with potentially greater information asymmetry between issuers and investors) and the $20 million maximum offering size.

We also recognize that the level of investor protection resulting from the final rules is an important consideration that could affect the ultimate use and success of amended Regulation A. For example, if preempting state review of Tier 2 offerings, or not requiring audited financials or ongoing disclosures in Tier 1 offerings, leads to undisclosed risks or misconduct in the offering process, then investors may be unwilling to participate in those types of Regulation A offerings. On the other hand, Commission staff review of the offerings and investment limitations for Tier 2 offerings may mitigate some of these concerns for certain investors.

Many of the potential issuers of securities under amended Regulation A may be small companies, particularly early-stage and high-growth companies, seeking capital through equity-based financing because they do not have sufficient collateral or the cash flows necessary to support the fixed repayment schedule of debt financing. Currently, these companies often seek capital from institutional or accredited investors through offerings that are exempt from registration under the Securities Act or through registered public offerings. In the future, whether issuers opt to rely instead on Regulation A will depend on the perceived utility of the amended Regulation A exemption compared to: (i) Other available exemptions from registration, and (ii) registered public offerings. Below we discuss each of these considerations in turn.

Some issuers may prefer to offer securities under amended Regulation A relative to using other offering methods exempt from registration because of potentially limiting features associated with the other exemptions. In particular, securities sold pursuant to the exemptions from registration under Regulation D, which account for a significant amount of exempt offerings, are generally subject to restrictions on resale or limits on participation by non-accredited investors in ways that can limit the ability to raise capital. In contrast to Rule 506 of Regulation D, companies relying on amended Regulation A can sell securities to an unlimited number of non-accredited investors, and the securities will not be restricted securities for purposes of the federal securities laws, which will allow for a more diffuse investor base and potential liquidity benefits.

The use of amended Regulation A may also depend on whether companies considering seeking capital through an exempt offering believe that the benefits from access to a broader investor base under amended Regulation A offset the costs of qualification and, with respect to Tier 2 offerings, ongoing disclosure requirements. Other offering exemptions could remain attractive relative to amended Regulation A. For example, general solicitation is now permissible under Rule 506(c) of Regulation D. Issuers relying on Rule 506(c) to solicit offerings may now more easily reach institutional and accredited investors, making it less necessary for them to seek capital from a broader non-accredited investor base, especially if trading platforms aimed at accredited investors in privately placed securities continue to develop.

Finally, the conditional exemption from registration of a class of securities under Section 12(g) available to some Tier 2 issuers may encourage them to pursue a Regulation A offering as a means to avoid the associated costs and requirements of Exchange Act registration and reporting. This effect may be limited by the imposition of the conditions on the Section 12(g) exemption, in particular, the condition limiting the availability of the exemption to smaller companies that do not exceed certain thresholds for public float or, in the absence of float, revenues. Larger issuers of Regulation A securities or issuers using Regulation A to raise capital as part of a growth strategy, or seeking to increase liquidity through a broader investor base, may still be subject to a Section 12(g) registration requirement in the future.

The trade-offs between amended Regulation A and a registered offering are somewhat different. In a registered offering, issuers can offer the securities directly to all potential investors, without a limitation on the aggregate offering amount and with no resale restrictions. Moreover, securities issued through registered offerings often trade on national securities exchanges and can offer a degree of liquidity to investors that is generally not available for securities issued in private offerings. However, the issuance costs associated with small registered public offerings are generally a significant percentage of proceeds and issuers in registered offerings must bear the costs arising from ongoing disclosure requirements under the Exchange Act. These costs are perceived to be one of the determinants of the relatively low incidence of initial public offerings (“IPOs”) over the past decade and may be a motivating factor for potential issuers to prefer offering securities under amended Regulation A. Relative to registered public offerings, offerings under amended Regulation A will provide smaller issuers with access to sources of capital without necessarily imposing the full ongoing reporting requirements of the Exchange Act.

The use of amended Regulation A may depend on the extent to which companies considering a traditional IPO believe that amended Regulation A is a viable alternative. These potential issuers will need to assess whether the cost savings from reduced reporting requirements under amended Regulation A offset the potential reduction in secondary market liquidity compared to registered offerings that meet the listing requirements of national securities exchanges. In particular, securities listed on a national securities exchange are likely to benefit from increased liquidity as a result of greater access to potential investors and a lower level of information asymmetry due to more extensive reporting requirements. At present, only some securities issued under existing Regulation A trade over-the-counter, with the majority not known to trade in any secondary market.

The liquidity trade-off faced by issuers considering amended Regulation A relative to other exempt or registered offering methods may ultimately center on whether the ongoing reporting requirements of Tier 2 offerings can generate sufficient information for secondary markets to provide the intended liquidity benefits. Academic studies have found a close relationship between disclosure requirements and liquidity. The disclosure requirements in the final rules seek to balance the burden of disclosure requirements on issuers and the demand of investors for information by offering issuers a capital raising option with lower compliance costs while still mandating relevant information about the issuer and the securities for the market.

Overall, amended Regulation A could increase the aggregate amount of capital raised in the economy if used by private issuers that have until now been limited in their ability to raise capital through other types of exempt offerings or by smaller private issuers that seek a public market for their securities but that are not sufficiently large to bear the fixed costs of being an Exchange Act reporting company. The impact of amended Regulation A on capital formation could also be redistributive in nature by encouraging issuers to shift from one method of capital raising to another. This potential outcome may have significant net positive effects on capital formation and allocative efficiency by providing issuers with access to capital at a lower cost than alternative capital raising methods and by providing investors with additional investment opportunities.

The net effect of the final rules on capital formation will depend on whether issuers that rely on amended Regulation A do so in addition to or instead of other methods of raising capital. The effect will also depend on whether investors find Regulation A disclosure requirements and investor protections to be sufficient to evaluate the expected return and risk of such offerings and to choose between offerings reliant on Regulation A, other exempt offerings and registered offerings. Due to a lack of data, we are not able to estimate the effects of the final rules on the potential rate of substitution between alternative methods of raising capital and amended Regulation A and the overall expansion, if any, in capital raising by potential issuers eligible for amended Regulation A.

B. Baseline

As we described in the Proposing Release, the baseline for our economic analysis of amended Regulation A is market conditions as they exist today, in which issuers seeking to raise capital through securities offerings must register the offer and sale of securities under the Securities Act unless they can rely on an exemption from registration under the federal securities laws. The baseline discussion below also includes a description of investors in offerings of similar amounts and a discussion of the role of intermediaries that may be affected by the final rules.

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

Issuers seeking to raise up to $50 million over a twelve-month period are expected to be affected directly by amended Regulation A. As we described in the Proposing Release, while there are a number of factors that companies consider when determining how to raise capital, one of the primary considerations is whether to issue securities through a registered public offering or through an offering that is exempt from Securities Act registration and ongoing Exchange Act reporting requirements. The choice of offering method may depend on the size of the issuer, the type of investors the issuer seeks to attract and the amount of new capital sought. Registered offerings entail considerable initial and ongoing costs that can weigh more heavily on smaller issuers, providing incentives to remain private and to raise capital outside of public markets. To the extent that these issuance costs constrain small firms' access to capital, they may result in underinvestment in some value-generating projects and thus potentially less efficient allocation of capital to investment projects. This section describes the various currently available offering methods and the prevalence of their use.

a. Exempt Offerings

Currently, small issuers can raise capital by relying on an exemption from registration under the Securities Act, such as Section 3(a)(11), Section 4(a)(2), Regulation D, and Regulation A. Each of these exemptions, however, has requirements that may limit its utility for issuers. For example, the exemption under Securities Act Section 3(a)(11) is limited to intrastate offerings, and Regulation D offerings may limit or prohibit participation by non-accredited investors. Additionally, offerings relying on existing Regulation A require preparation of offering materials and qualification of an offering statement by the Commission and may require qualification or registration in multiple states. The table below summarizes the main features of each exemption.

While we do not have data on offerings relying on an exemption under Section 3(a)(11) or Section 4(a)(2), available data related to Regulation D and Regulation A filings allow us to gauge how frequently issuers currently use these exemptions when raising capital.

i. Regulation A Offerings

As we described in the Proposing Release, issuers rarely rely on existing Regulation A to raise capital. The chart below, from the GAO Report shows the number of filed and qualified Regulation A offerings in fiscal years 1992 to 2011.

In calendar years 2012 to 2014, 26 Regulation A offerings, excluding amendments, were qualified by the Commission.

Section 402 of the JOBS Act required the GAO to study the impact of state securities laws on Regulation A offerings. The GAO examined: (1) Trends in Regulation A filings, (2) differences in state registration of Regulation A filings, and (3) factors that may have affected the number of Regulation A filings. In its July 2012 report on Regulation A, the GAO cited four factors affecting the use of Regulation A offerings: (1) Costs associated with compliance with state securities regulations, or blue sky laws; (2) the availability of alternative offering methods exempt from registration, such as Regulation D offerings; (3) costs associated with the Commission's filing and qualification process; and (4) the type of investors businesses sought to attract.

As identified by the GAO, compliance with state securities laws is one of the factors that impacts the use of existing Regulation A. The GAO did not provide an estimate of the compliance costs. For issuers seeking to offer securities in multiple states, differences in securities laws and applicable procedures across states may result in significant legal costs and a time consuming process for issuers, which could adversely affect their efforts to raise capital in a timely and cost-effective manner. NASAA has recently initiated a Coordinated Review Program for Regulation A offerings. Only a limited number of issuers have undergone state review through this process to date, so we are unable to conclude whether it may result in lower costs or a shorter amount of review time than was the case prior to its inception.

The GAO also identified costs associated with the Commission's filing and qualification process for Regulation A offerings as another factor contributing to its limited current use. While existing Regulation A permits offerings to an unlimited number of non-accredited investors, the total offering amount must not exceed $5 million in a twelve-month period, limiting the opportunity to scale the fixed component of these costs as a percentage of proceeds.

As described above, a business that relies on Regulation A must file an offering statement with the Commission that must be qualified by Commission staff before the offering can proceed. From 2002 through 2011, Regulation A filings took an average of 228 days to qualify. Average time to qualification exceeded 300 days in 2012-2014. Factors that affect the time to qualification include the paper filing method, quality of the initial filing, time taken by the Commission staff, and time taken by the issuer to provide required information or address questions from previous correspondence with the Commission staff.

Our analysis of the Regulation A filings qualified between 2002 and 2014 shows that approximately half of the issuers operated in the financial industry and the majority of offerings involved equity securities. Offerings with affiliate sales were rare, likely due not only to the requirement of the existing Regulation A that the issuer have net income from continuing operations in the prior two years but also due to the perceptions that adverse selection concerns may limit investor demand in securities offerings with affiliate sales.

ii. Regulation D Offerings

Based on the information available to us, it appears that the most common way to issue up to $50 million of securities is pursuant to an offering under a Regulation D exemption. Eligible issuers can rely on Rule 504 to raise up to $1 million within a twelve-month period, on Rule 505 to raise up to $5 million within a twelve-month period, and on Rule 506 to raise an unlimited amount of capital. In total, based on the analysis of offering amounts reported on Form D in calendar year 2014, Regulation D offerings accounted for over one trillion dollars. Most issuers choose to raise capital by relying on Rule 506, even when their offering size would have potentially permitted reliance on Rule 504 or Rule 505. For example, in 2014, we identified 11,228 Regulation D offerings that would have been potentially eligible to be conducted under amended Regulation A. Of those, 10,671 offerings relied on Rule 506, 376 on Rule 504, and 181 on Rule 505. We summarize their characteristics in the table below.

As shown in the table above, approximately 95% of Regulation D offerings that would be eligible for amended Regulation A relied on Rule 506. A comparison of Rule 506 offerings over $20 million to those below $20 million shows that larger offerings generally had a higher number of investors and were less likely to have non-accredited investors.

Additional data on Regulation D offerings that would have been eligible for amended Regulation A exemption is provided in the graph below, which displays the offering size distribution of Rule 506 offerings and other Regulation D offerings that would have been potentially eligible for the amended Regulation A exemption in calendar year 2014. Approximately 95% of Regulation D offerings that would have been potentially eligible for amended Regulation A had offering amounts below $20 million.

Approximately seventy percent of Regulation D issuers that would be eligible for amended Regulation A declined to disclose their revenue range in their Form D filings for 2014. Of the remaining 30%, 13% reported “no revenues.” The portion of issuers with no revenues is noteworthy because it may be more difficult for issuers without regular cash flows to obtain debt financing (without collateral or a guarantee).

b. Registered Offerings

Issuers may seek to raise capital by registering the offer and sale of securities under the Securities Act. In calendar year 2014, using data from Thomson Reuters, we identified 75 IPOs and 246 seasoned equity offerings (SEOs) of up to $50 million by issuers that would have been potentially eligible for amended Regulation A.

There has been a general decline in the number of IPOs, particularly those undertaken by small firms, since the late 1990s. One possible reason behind the relatively low number of IPOs under $50 million is that public offerings may be too costly to be a viable capital raising option for smaller issuers. Fees paid to underwriters average 7% for IPOs, 5% for SEOs, and 1% for bond issuances. Issuers conducting registered public offerings also incur Commission registration fees and FINRA filing fees, legal and accounting fees and expenses, transfer agent and registrar fees, costs associated with periodic reporting requirements and other regulatory requirements and various other fees. Two surveys cited in the IPO Task Force report concluded that regulatory compliance costs of IPOs average $2.5 million initially, followed by an average ongoing cost of $1.5 million per year.

Because of the fixed-cost nature of some of the compliance-related fees associated with public offerings, compliance-related fees as a percentage of offering proceeds tend to decline as offering size increases, as illustrated in the table below. Offerings below $50 million, and especially offerings below $20 million, incur significantly higher registration, legal and accounting-related fees, as a percentage of proceeds.

In addition to compliance costs, there are other possible explanations for the trends in IPOs. A decline in public offerings also could result from macro-economic effects on investment opportunities and the cost of capital or an increase in the economies of scope from being acquired by a larger entity relative to the benefits of operating as an independent firm.

Several other trade-offs may affect an issuer's willingness to pursue an IPO. According to the IPO Task Force survey, 88% of CEOs that had completed an IPO listed “Managing Public Communications Restrictions” as one of the most significant challenges brought on by becoming a reporting company. Additionally, issuers in certain industries, such as high-technology sectors, may be sensitive to the costs of disclosure of proprietary information and may find private capital sources more attractive. Access to capital may be especially time-sensitive for the types of issuers most likely to conduct small offerings, such as startups and small businesses, rendering these issuers unwilling to go through a potentially lengthy registration process. Directors and officers of small issuers also may not want to subject themselves to the increased liability and takeover threats that come with dispersed ownership.

The cost and disclosure requirements of IPOs have been affected by the recent adoption of scaled reporting requirements for emerging growth companies (EGCs) under Title I of the JOBS Act, which can ease the compliance obligations of certain issuers in registered offerings. There is some evidence that Title I has contributed to an increase in IPO volume in 2012-2014, particularly in industries with high proprietary disclosure costs, such as biotechnology and pharmaceuticals. Some recent studies, however, suggest that the overall cost of going public for EGCs has not decreased whereas the indirect cost (e.g., IPO underpricing) has increased.

c. Private Debt Financing

Equity, including principal owner equity, accounts for a significant proportion of the total capital of a typical small business. Other sources of capital for small businesses include loans from commercial banks, finance companies and other financial institutions, and trade credit.

Borrowing is relatively costly for many early-stage issuers as they may have low revenues, irregular cash-flow projections, insufficient assets to offer as collateral and high external monitoring costs. For example, a small growth company, such as a technology or life sciences startup, without steady revenues or substantial tangible assets is likely to have trouble obtaining a loan or a line of credit from a bank because it would have difficulty proving its ability to repay. Financial institutions generally require such small business borrowers to provide collateral or a guarantee by owners, which some issuers may be unable or reluctant to provide.

2. Investors

There are currently no limitations on who can invest in existing Regulation A offerings. In considering the baseline for the amendments to Regulation A, we also examine the investors in other existing methods of raising up to $50 million in capital because the final rules we are adopting may impact an issuer's choice of offering method and the potential investor base of the offering. For example, as discussed above, while there are no limitations on the number of non-accredited investors that can invest in offerings made pursuant to Rule 504 of Regulation D and in registered public offerings, offerings made pursuant to Rule 505 and Rule 506(b) of Regulation D are limited to a maximum of 35 non-accredited investors. Issuers making offerings pursuant to Rule 506(c) of Regulation D must take reasonable steps to verify that investors are accredited investors.

While non-accredited investors can participate in Regulation D offerings, subject to limitations described above, data from Form D filings suggests that non-accredited investors are not significantly involved in Regulation D offerings of up to $50 million. Offerings involving non-accredited investors are typically smaller than those that do not involve non-accredited investors. In 2014, we estimate that approximately 152,641 investors participated in Regulation D offerings of less than $50 million by issuers that would be eligible for amended Regulation A. Such offerings had an average of 13.6 investors per offering. Approximately 8% of such offerings involved one or more non-accredited investors.

The total number of households estimated to qualify as accredited investors is substantially larger than the total number of investors reported to have participated in an unregistered offering. As of 2013, we estimated that over 9 million U.S. households qualified as accredited investors based on the net worth standard alone, approximately 8 million U.S. households qualified as accredited investors based on the income standard alone, and approximately 12.4 million U.S. households qualified based on either the income standard or the net worth standard.

3. Financial Intermediaries

Regulation A amendments may also affect financial intermediaries that may become involved in the placement and quotation of Regulation A securities. Currently, there is limited involvement of intermediaries in a Regulation A offering. However, financial intermediaries are used in certain of the other types of offerings, including registered offerings and certain exempt offerings. To the extent that the amendments to Regulation A that we are adopting today impact the number and the overall amount of capital raised in other types of offerings, financial intermediaries may be affected. For example, in registered offerings, underwriters are frequently used to identify potential investors and are primarily responsible for facilitating a successful distribution of the offered securities. While intermediaries are used less frequently in Regulation D offerings, they play a role in some offerings. We estimate that fewer than 10% of Regulation D offerings that would have been potentially eligible under amended Regulation A involved an intermediary (the estimate is based on information about sales compensation or sales compensation recipients reported in connection with the offering).

C. Scope of Exemption

1. Eligible Issuers

Consistent with the restrictions in existing Regulation A, the final rules exclude non-Canadian foreign issuers, investment companies (including BDCs), Exchange Act reporting companies, blank check companies, and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights, from relying on the exemption.

The final rules also exclude two additional categories of issuers: (i) issuers that are or have been subject to a denial, suspension, or revocation order by the Commission pursuant to Section 12(j) of the Exchange Act within the five years immediately preceding the filing of the offering statement, and (ii) issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement.

Excluding issuers that have not complied with Regulation A's ongoing reporting requirements in the two-year period immediately preceding the filing of a new offering statement will incentivize issuers that intend to rely on amended Regulation A exemption in the future to comply with its ongoing reporting requirements. Similarly, excluding issuers that were subject to a denial, suspension, or revocation order by the Commission pursuant to Section 12(j) of the Exchange Act within the five years immediately preceding the filing of the offering statement will incentivize registrants to comply with their obligations under the Exchange Act, including their ongoing reporting obligations, and will prevent issuers with a history of non-compliance from relying on Regulation A after they terminate or suspend their Exchange Act reporting obligations. At the same time, neither of these exclusions should result in additional compliance costs for issuers because they do not impose any reporting or other requirements on issuers beyond those already mandated by existing regulations.

We recognize that excluding these additional categories of issuers would have an effect on capital formation as it could prevent Regulation A offerings by issuers who otherwise might have utilized the Regulation A exemption rather than other methods of capital raising. However, to the extent that the information contained in required past reports provides investors in follow-on offerings of Regulation A securities with a more complete picture of the issuer's business and financial condition and is relevant for current investment decisions, the exclusion of issuers that are not compliant with Regulation A's reporting requirements and issuers subject to an order by the Commission pursuant to Section 12(j) should therefore enhance investor protection and the informational efficiency of prices of Regulation A securities by allowing investors to make better informed investment decisions. Moreover, we believe that these additional issuer eligibility requirements will complement each other in facilitating compliance with our rules.

To the extent that more issuers use the amended Regulation A exemption, the final rules may promote competition among eligible issuers in the market for investor capital and in the market for goods and services. The final rules may also promote competition in the product market between small issuers and larger issuers.

As suggested by some commenters, we could have expanded the categories of eligible Regulation A issuers to include non-Canadian foreign issuers, blank check companies, BDCs, and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights. These alternatives could potentially enhance capital formation and competition.

However, it may be potentially difficult and costly for investors, especially less sophisticated investors, to determine the valuation and risk of securities of non-Canadian foreign issuers, blank check companies and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights, so extending eligibility to such issuers may also decrease investor protection. To the extent that such information asymmetries are not fully mitigated by initial and ongoing Regulation A disclosure requirements, which are generally less extensive than the disclosure requirements for registered offerings, the prices of Regulation A securities of these issuers could be less informationally efficient. Along the same lines, we believe the specialized nature of capital formation and investment strategies at BDCs warrants disclosures that are more specialized than what is required by existing or amended Regulation A for a proper understanding of an investment in the securities of these types of issuers.

We also could have expanded the categories of eligible Regulation A issuers to include issuers that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act (“reporting companies”), as suggested by some commenters. Although reporting companies sometimes conduct offerings exempt from registration, we are unable to estimate the number of reporting companies that would use the amended Regulation A exemption if it were made available to them. We recognize that some reporting companies may have benefited from this alternative due to, for example, the lower costs of preparation of a Regulation A offering statement than a registration statement. Additionally, some reporting companies whose securities are not listed on a national securities exchange could potentially benefit from savings of time and dollar expenditures that may result from the state securities law preemption in Tier 2 offerings. However, because Exchange Act disclosure requirements for reporting companies are more extensive than those under amended Regulation A, reporting companies would not be able to derive the benefit of reduced ongoing reporting costs under amended Regulation A. Other commenters suggested imposing more restrictive issuer eligibility criteria, by excluding issuers that are not “operating companies” or excluding shell companies and issuers of penny stock. While these additional exclusions may create some investor protection benefits, such additional exclusions would be likely to limit capital formation and competition among small issuers, which are more likely to fall into the penny stock category, or some early-stage companies, which may not meet the definition of an “operating company.” Overall, due to the implications of extending issuer eligibility before the Commission has the ability to assess the impact of the changes to Regulation A being adopted today, we believe that it is prudent to defer consideration of potential changes to the categories of eligible issuers until we have the opportunity to observe the use of the amended Regulation A exemption and assess any new market practices as they develop.

2. Eligible Securities

Consistent with the statute, the final rules apply to offerings of equity securities, debt securities, and securities convertible or exchangeable to equity interests, for example, warrants, including any guarantees of such securities.

Similar to the proposal, the final rules exclude offerings of asset-backed securities (“ABS”) from eligibility for Regulation A. As discussed above, we believe that ABS issuers are not the intended beneficiaries of the mandated expansion of Regulation A. ABS are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure and reporting requirements for such securities, and we do not believe that Regulation A's requirements are suitable for offerings of such securities. ABS are designed to pool the risk of already-issued loans and other financial assets and, in this respect, do not constitute new capital formation. We recognize that, in certain cases, permitting ABS offerings to be conducted under Regulation A could lower the cost of capital for underlying borrowers whose loans are eventually securitized by ABS issuers and therefore indirectly facilitate capital formation. In practice, however, the vast majority of ABS offerings are much larger than the maximum allowable offering size under amended Regulation A. As a result, we believe that excluding ABS offerings from eligibility for Regulation A likely will not have a significant adverse effect on capital formation.

3. Offering Limitations and Secondary Sales

a. Offering Limitations

As explained above, the final rules introduce two tiers of offerings compared with the baseline of one tier in existing Regulation A. The tiered approach in the final rules allows us to scale regulatory requirements based on offering size, to give issuers more flexibility in raising capital under Regulation A, and to provide appropriately tailored protections for investors in each tier. Issuers seeking to raise a larger amount of capital are, among other things, required to provide more extensive initial and ongoing disclosures, but are also able to take advantage of the larger maximum offering size in Tier 2 (up to $50 million in a twelve-month period). In light of this larger maximum offering size, the final rules impose additional disclosure requirements and other provisions to provide protection to investors in Tier 2 offerings. Issuers seeking a smaller amount of capital retain the advantage of more scaled disclosures required in Tier 1 offerings but must comply with a lower offering size limit.

We recognize that the cost associated with greater disclosure requirements for offerings made under Tier 2 in amounts up to $20 million may place Tier 2 issuers at a relative competitive disadvantage as compared to issuers seeking to raise an amount below $20 million in a Tier 1 offering. Such potential competitive effects are likely to be mitigated by the ability of issuers to evaluate the trade-off between the costs associated with more extensive disclosure requirements for Tier 2 offerings and the benefit of a potentially higher securities valuation stemming from a reduction in information asymmetry between issuers and investors due to the more extensive disclosure requirements for Tier 2 offerings.

In a change from the proposal, and in line with the suggestions of some commenters, the final rules raise the Tier 1 maximum offering size from $5 million to $20 million in a twelve-month period in order to provide smaller issuers with additional flexibility to meet their financing needs. We expect the higher Tier 1 maximum offering size will facilitate capital formation under Regulation A for those issuers seeking to raise between $5 and $20 million in a twelve-month period. We expect the resulting capital formation benefits to be greater for smaller issuers for which the incremental costs of the Tier 2 disclosure regime—relative to the costs of complying with state registration—exceed the benefits of more extensive disclosure.

Compared to the baseline, the increase in the maximum offering size to $20 million for Tier 1 offerings and the creation of Tier 2 with the maximum offering size of $50 million will provide issuers with increased flexibility with regard to their offering size and should lower the burden of fixed costs associated with conducting Regulation A offerings as a percentage of proceeds. This could make amended Regulation A more cost effective and attractive to issuers than existing Regulation A, resulting in potential favorable effects on capital formation and competition. The increase in the maximum offering size could also make Regulation A attractive to a broader range of issuers, including larger issuers. This could provide investors with a broader range of investment opportunities in the Regulation A market and potentially result in a more efficient allocation of investor capital.

The increased maximum offering size could also contribute to improved liquidity for Regulation A securities, to the extent that larger issues may encourage greater breadth of equity ownership, assuming sufficient secondary market demand develops. Improved liquidity would enable investors in Regulation A offerings to unwind their investments more easily and at a lower cost, thus making such investments more attractive to potential investors. On the other hand, if investor demand for securities offered under amended Regulation A is low, this could negatively affect security prices and liquidity.

If investor demand for Regulation A securities and information about issuers is sufficient, the increase in maximum offering size could also contribute to the development of intermediation services, such as market making, and to the coverage of Regulation A securities by analysts. It is possible that an underwriting market may develop to provide Regulation A offering services, especially in larger Tier 2 offerings. The presence of these services could have a positive impact on investor participation and aftermarket liquidity of Regulation A securities, further increasing demand for such services. It is also possible, however, that investor demand for Regulation A securities will not expand sufficiently to make such services economically feasible.

Finally, the increase in the maximum offering size could result in increased competition among Regulation A issuers for investor capital. If the number of issuers seeking to raise larger amounts of capital pursuant to Regulation A increases more than the size of the accredited and non-accredited investor base, investors considering Regulation A securities will have more choice of investment opportunities in the Regulation A market, resulting in greater competition among issuers for prospective investors. Increased competition, in turn, could result in more efficient allocation of capital by investors. The intensity of competition among issuers for investor capital may not change, however, if issuers are able to attract additional numbers of accredited and non-accredited investors as the Regulation A market develops.

Alternatively, as suggested by some commenters, we could have increased the Tier 2 maximum offering size above $50 million, for example, to $75 or $100 million. This alternative could result in benefits that are similar to the benefits of the increase in the maximum offering size contained in the final rules but of a potentially larger magnitude. However, there is reason to believe that the magnitude of the increase in such benefits may be limited. In particular, although Rule 506 does not limit maximum offering size, few Regulation D offerings by issuers that would be eligible for amended Regulation A exceeded $50 million. To the extent that the current use of other types of exempt offerings is indicative of future Regulation A offerings, the alternative of raising the Tier 2 offering size above $50 million may not lead to a significant increase in the number of issuers.

However, we recognize that historical use of Regulation D may not fully represent future potential use of Regulation A, particularly to the extent that the amended rules facilitate offerings by issuers that do not currently rely on other private offering exemptions and that are seeking a broader investor base and enhanced liquidity for their issued securities. In particular, amended Regulation A may attract issuers seeking a public ownership status, and for whom a likely alternative is a registered offering. An increase in the Tier 2 offering size above $50 million could result in some issuers shifting from conducting a registered offering to conducting a Tier 2 offering. As discussed earlier, amended Regulation A may facilitate offerings that would not otherwise be conducted given the cost of registered offerings. However, it is also possible that an increase in the Tier 2 offering size above $50 million will not result in a significant number of issuers shifting from conducting a registered offering to conducting a Tier 2 offering given that the relative cost savings from a Tier 2 offering compared to a registered offering may be lower for offerings in the $50 million to $75 million range than for those below $50 million.

An increased maximum offering size for Tier 1 offerings could increase the overall amount of securities being offered to the general public that are subject to less extensive initial disclosure requirements and not subject to ongoing disclosure requirements, which may reduce the ability of investors to make informed investment decisions. However, some issuers that conduct offerings that are eligible for Tier 1 may instead choose a Tier 2 offering, for example, to take advantage of the benefits of more extensive disclosure, such as potentially greater secondary market liquidity, and the benefits of a single level of regulatory review.

An increased maximum offering size for Tier 2 Regulation A offerings could increase the overall amount of securities being offered to the general public that are subject to initial and ongoing disclosure requirements that are less extensive than the requirements for registered offerings being offered to the general public, which may result in less informed decisions by investors, thus potentially impacting investor protection. This may be partly mitigated by the investment limitations imposed on non-accredited investors in Tier 2 offerings. Further, larger issuers are more likely to conduct registered offerings, associated with the more extensive disclosure requirements of the Exchange Act. We believe that the annual offering limitation for Tier 2 will serve to limit the utility of the Regulation A exemption for larger issuers and thus will make it more likely that they will continue to raise money through registered offerings and provide the corresponding disclosure.

b. Secondary Sales

The final rules continue to permit secondary sales as part of a Regulation A offering, subject to the following conditions. The amount of securities that selling securityholders can sell at the time of an issuer's initial offering and within the following 12-month period may not exceed 30% of the aggregate offering price (offering size) of a particular offering. Following the expiration of the first 12-month period after an issuer's initial qualification of an offering statement, the amount of securities that affiliate securityholders can sell in a Regulation A offering in any 12-month period will be limited to $6 million in Tier 1 offerings and $15 million in Tier 2 offerings. After the initial 12-month period, sales by non-affiliate securityholders made pursuant to the offering statement will not be subject to a limit on secondary sales but will be aggregated with sales by the issuer and affiliates for the purposes of compliance with the maximum offering limitation for the respective tier. The final rules also eliminate the provision in the current Rule 251(b), which prohibits resales by affiliates unless the issuer has had net income from continuing operations in at least one of the last two years.

Several commenters recommended eliminating limits on sales by existing securityholders, including one commenter that recommended eliminating restrictions on sales by non-affiliate securityholders since concerns over information asymmetries between potential investors and non-affiliate securityholders would be reduced. Other commenters recommended either proscribing resales entirely or requiring the approval of the resale offering by a majority of the issuer's independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer. Another commenter recommended requiring a twelve-month holding period for selling shareholders in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain or limiting securityholders not qualifying for the twelve-month holding period to selling a fraction of their shares, such as 50%.

Whether and to what extent securityholders should be permitted to sell in a Regulation A offering involves a trade-off between enhancing liquidity for selling securityholders and limiting the potential harm to investors that could arise from such sales. The final rules attempt to balance these considerations. The trade-off between these countervailing considerations will depend in large part on whether the selling securityholder is an affiliate of the issuer. There are two concerns about sales by affiliates. One is that there is an information asymmetry between an affiliate and outside investors. In particular, an affiliate selling securityholder is likely to have an informational advantage that it may potentially utilize to the detriment of outside investors. The other concern is the alignment of incentives. With respect to affiliates, it is often argued that the incentives of company management are better aligned with other shareholders when managers hold a significant equity interest in the company. Thus, it can be important that insiders retain an ownership stake in the company to ensure that their incentives are aligned. A divestiture of the ownership stake of an affiliate owner may therefore exacerbate agency conflicts, thus suggesting that large affiliate sales can be detrimental to current and future investors.

We recognize, however, that there are benefits to be realized from permitting affiliate securityholders, such as company founders and employees, to sell in a Regulation A offering. Because entrepreneurs and other affiliates consider available exit options before participating in a new venture, permitting secondary sales increases their incentives to make the original investment, which may promote innovation and business formation. Allowing exit could also facilitate efficient reallocation of capital and talents of entrepreneurs to new ventures. Additionally, exit of a large affiliate shareholder could potentially result in a broader base of investors.

As noted above, the final rules relax the existing limitations on secondary sales by affiliates by eliminating the net income test for affiliate resales in existing Rule 251(b). We are concerned that this criterion may not be the best measure of financial health and investment opportunities for some issuers eligible for amended Regulation A and thus may inappropriately disadvantage those issuers, and their affiliates, with respect to secondary sales. In particular, this change should benefit growth and R&D-intensive issuers that may experience longer periods of negative revenues. Several commenters supported the elimination of the net income test for affiliate resales, generally noting that some issuers may have net losses for several years, including due to high R&D costs. We recognize that eliminating this criterion could lead to reduced investor protection due to insiders in Regulation A offerings being able to sell securities in issuers that have not reported net income. However, we note that the disclosures required for Regulation A offerings, as well as the overall limits on secondary sales during the initial 12-month period and subsequent limits on secondary sales by affiliates, should partly mitigate this cost.

The trade-off between enhanced liquidity and investor protection is different with respect to sales by non-affiliates, because these securityholders are less likely to have access to inside information, and their sales do not raise the incentive alignment concerns discussed above in the context of affiliate securityholders. The option to exit through a Regulation A offering provides additional liquidity to existing non-affiliate securityholders. During the initial 12-month period, the final rules enable selling securityholders to access liquidity through a Regulation A offering while ensuring that secondary sales at the time of such offerings are made in conjunction with new capital raising by the issuer. After the expiration of the initial 12-month period, the ability of non-affiliate securityholders to sell securities pursuant to a qualified Regulation A offering statement without limitation (except the maximum Regulation A offering size) should make Regulation A securities more attractive to prospective investors, which may encourage initial investment and increase capital formation. Non-affiliate securityholders who hold restricted securities purchased in reliance on another exemption will be able to sell them freely after a one-year holding period. Purchasers of the securities from such non-affiliate securityholders would not have the benefit of the more robust disclosure provisions of a Regulation A offering, where the seller will be subject to Section 12(a)(2) liability. Thus, allowing secondary sales in a Regulation A offering will provide an additional measure of protection for purchasers as compared to transactions in the secondary market. Consequently, we believe that removing restrictions on non-affiliate securityholder sales in Regulation A offerings will not have an adverse effect on investor protection.

Although secondary sales increase the liquidity for existing securityholders, since secondary sales will be aggregated with issuer sales for purposes of compliance with the maximum offering amount permissible under the respective tiers, secondary sales may reduce the maximum amount of issuer sales in a Regulation A offering. The 30% limit on secondary sales imposed during the initial 12-month period partly mitigates this potential effect.

4. Investment Limitation

Regulation A currently does not place limits on the amount of securities that may be purchased by an investor. The proposed rules included a 10% investment limit for all investors in Tier 2 offerings. Several commenters recommended providing exceptions to the limit, or altering the limit, for certain types of investors, such as accredited investors, and for securities that will be listed on an exchange upon qualification.

We recognize that there are potential investor protection benefits as well as costs from imposing investment limits in Regulation A offerings. To help balance those benefits and costs, the final rules seek to focus these limits on those investors who may be less likely to be able to fend for themselves and sustain losses. Accordingly, non-accredited investors in Tier 2 offerings will be limited to purchases of no more than 10% of the greater of annual income or net worth (for natural persons) or the greater of annual revenue or net assets (for non-natural persons), as proposed. In a change from the proposal, the final rules do not apply the investment limit to investors in Tier 2 offerings that are accredited investors as defined in Rule 501 of Regulation D. We believe that accredited investors, due to their level of income or net worth, are more likely to be able to withstand losses from an undiversified exposure to an individual offering.

We also recognize that there are costs associated with investment limits. In particular, the investment limitation could limit potential gains for non-accredited investors in Tier 2 offerings. The investment limitation could require some issuers to solicit a greater number of investors or to solicit additional accredited investors, which could impose additional costs on those issuers or limit capital formation if they are unable to attract additional investors. Despite these costs, we believe that this limitation, as tailored in the final rules, is an appropriate means of protecting investors while promoting efficiency, competition and capital formation.

The investment limitation could also lead to a more dispersed non-accredited investor base or a higher proportion of accredited investors in the investor base to the extent that the 10% threshold impacts investor participation. This could facilitate increased liquidity as there would be more investors with which to trade. More diffuse ownership could also exacerbate the shareholder collective action problem and weaken external monitoring by non-affiliated shareholders to the extent that coordination costs with other shareholders increase. We do not believe, however, that either of these outcomes is a likely consequence of the 10% investment limit.

In a change from the proposal, the final rules exclude sales of securities that will be listed on a national securities exchange upon qualification from Tier 2 investment limitations. This provision may provide additional investment opportunities for some investors and may enhance capital formation for some issuers. We do not anticipate that this provision will reduce investor protection since such issuers will be required to meet the listing standards of a national securities exchange and become subject to ongoing Exchange Act reporting, resulting in a high level of investor protection.

As an alternative to the final rules, we considered imposing more restrictive investment limitations, as suggested by various comments, including extending investment limitations to Tier 1 offerings, imposing a limit lower than 10% on “all but the wealthiest, least risk averse” investors, or imposing a 10% investment limitation across investments in all Regulation A offerings rather than applying the limitation on a per offering basis. Applying the investment limitation in Tier 1 offerings could marginally enhance investor protection, especially since these offerings will be subject to less extensive disclosure and transactional requirements. However, given that Tier 1 offerings will remain subject to state registration requirements, it is unclear whether investment limits would significantly enhance investor protection in these offerings. Moreover, adding the investment limitation in Tier 1 offerings could have an adverse effect on capital formation for the smallest Regulation A issuers, which may face greater hurdles than larger issuers in attracting a broad investor base.

The alternative of imposing a cap that is lower than 10% on “all but the wealthiest, least risk averse” investors may confer additional investor protection benefits on investors that are unable to withstand significant investment losses. However, this alternative could also limit some investors from pursuing attractive investment opportunities and limit capital formation for some issuers. Further, since risk preferences vary considerably among investors, objectively identifying “risk averse” investors in a way that is broadly applicable is a challenge. In contrast, the 10% investment limitation in the final rules that applies to all investors in a Tier 2 offering, except accredited investors, defined pursuant to Rule 501 of Regulation D, provides a standard that market participants can easily implement.

The alternative of imposing the 10% investment limitation that is aggregated across investments in all Regulation A offerings rather than applying the limitation on a per offering basis may strengthen investor protection. Because the risk profiles of different securities offerings by the same issuer are likely to be correlated, and some issuers may participate in multiple Regulation A offerings over time, such an alternative definition of the limitation may prevent a non-accredited investor from using a significant share (potentially, significantly in excess of 10%) of their net worth or income to establish a highly undiversified exposure to a single issuer. However, this alternative could also limit some investors from pursuing attractive investment opportunities and limit capital formation for issuers. Moreover, different offerings by the same issuer under Regulation A may have different risk profiles, depending on security type and class, thus for some investors, depending on their preferences, investing a larger aggregate amount in multiple offerings by the same issuer may be optimal.

Overall, while such additional restrictions may strengthen investor protection, their incremental contribution to investor protection may be small in light of other provisions of amended Regulation A. At the same time, such additional restrictions may prevent some investors from taking advantage of potentially beneficial investment opportunities and may limit the attractiveness of Regulation A to prospective issuers, reducing capital formation and competition benefits.

The final rules permit issuers to rely on an investor's representation that the investment represents no more than 10% of the greater of the investor's net worth and annual income, unless the issuer has knowledge that such representation is untrue. The ability to rely on investor representations should help mitigate potential costs that issuers could incur to comply with the investment limitation provisions. At the same time, we realize that investors might make inaccurate representations, whether intentionally or not, which could expose these investors to increased losses.

As an alternative to investor representations, we could have imposed additional requirements on the issuer to verify that investors in Tier 2 offerings are compliant with the 10% investment limit, as suggested by some commenters. Such additional provisions could strengthen investor protections. At the same time, they would likely result in a disproportionate increase in the cost of compliance, especially for smaller issuers in Tier 2 offerings, and might deter some investors from participating in such offerings due to the potential burdens of the verification process and privacy concerns.

5. Integration

The final rules provide issuers with a safe harbor from integration that, with the exception of the addition of security-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act, preserves the provisions of existing Regulation A.

We believe that the final rules provide issuers with valuable certainty as to the contours of offerings conducted before, or close in time with, Regulation A offerings. This certainty may be particularly beneficial for smaller issuers whose capital needs, and thus preferred capital raising methods, may change frequently.

As an alternative, we could have eliminated the integration safe harbor. We believe that the elimination of the safe harbor, however, would inject uncertainty into offerings conducted before, or close in time with, Regulation A offerings and would, in turn, decrease the utility of the exemption. Uncertainty as to the contours of offerings, as they relate to Regulation A, could possibly cause issuers to prefer other offering methods to Regulation A, which may have an effect on investor protection. For example, if issuers rely more on Regulation D, this alternative could result in investors receiving less information about an issuer before making an investment, thereby reducing investor protection. Instead, if issuers rely more on registered offerings, this alternative could potentially provide investors with the more extensive disclosure required of, and liability protections associated with, such offerings, although it would cause smaller issuers to incur the higher initial and ongoing costs associated with such offerings.

6. Treatment Under Section 12(g)

Existing rules currently do not exempt Regulation A securities from the requirements of Section 12(g), but the Proposing Release requested comment on whether we should adopt such an exemption. A number of commenters recommended exempting Regulation A securities from Section 12(g) of the Exchange Act, and several commenters recommended changing or delaying the application of Section 12(g). In a change from the proposed rules, the final rules exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in, its periodic Regulation A reporting obligations as of its fiscal year end, engages the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act, and had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.

The final rules are intended to provide sufficient disclosure to help investors make informed decisions while limiting the costs imposed on issuers. We believe that the initial and ongoing disclosures required for Tier 2 offerings in the final rules accomplish this objective and that the final rules also provide an appropriate balance between providing investor protection and promoting capital formation. The size of Tier 2 offerings, combined with the investment limitation and the ability to offer Tier 2 securities to the general public, may result in the number of an issuer's shareholders of record exceeding Section 12(g) thresholds. A conditional Section 12(g) exemption for small issuers of Tier 2 securities in such instances is expected to reduce the compliance cost for small issuers and facilitate capital formation and the creation of a broad investor base in offerings made pursuant to Regulation A by small Tier 2 issuers. This will benefit those small Regulation A issuers that are not seeking to list on a national securities exchange and that may find the costs of Exchange Act reporting to be too high given their size.

Regulation A offerings may be particularly attractive to small private companies whose shareholder bases are approaching the Section 12(g) registration threshold. The conditional Section 12(g) exemption may enable small private issuers of Tier 2 securities under amended Regulation A to expand their shareholder base over time, as a result of secondary market trading, to the extent that such a market develops, or through subsequent security issuances, without incurring the costs associated with reporting company status.

While the additional requirement to use a registered transfer agent will impose costs on issuers, it should provide investor protection benefits by helping to ensure that securityholder records and secondary trades will be handled accurately. As it is a conditional exemption from Section 12(g), however, issuers that are not concerned with registration under the Exchange Act, perhaps because they do not believe that Exchange Act registration will be required as a result of a Regulation A offering, would not be required to retain the services of a registered transfer agent in order to conduct a Tier 2 offering.

The final rules also include an issuer size limit in the eligibility requirements for the Section 12(g) exemption for Tier 2 offerings, consistent with providing a conditional exemption tailored to facilitate small company capital formation. The issuer size limit may make Regulation A less attractive for larger issuers and issuers anticipating growth or capital appreciation that expect to reach Section 12(g) thresholds after conducting a Tier 2 offering or subsequent secondary market trading. The two-year transition period before reporting must begin may partly mitigate some of these costs to issuers. Due to the uncertainty about the future composition of the issuer and investor base in Tier 2 offerings, we cannot determine the proportion of Tier 2 issuers whose number of shareholders of record will exceed Section 12(g) thresholds or the proportion of those issuers that will not qualify for an exemption due to their size.

Some issuers may be able to limit the number of shareholders of record by adopting a minimum investment size requirement. This may potentially limit the breadth of investor base and the availability of investment opportunities to some investors. We are not able to determine the extent to which the issuer size limit may affect overall capital formation and whether large or growth issuers will proceed with a Tier 2 offering or pursue a registered offering, a Regulation D offering or another method of financing. In addition, the issuer size limit may place at a competitive disadvantage those potential issuers that exceed the size limit but for which the costs of registration remain high, relative to potential issuers that are close to the size limit but that qualify for the Section 12(g) conditional exemption.

We recognize that there are costs associated with the conditional exemption adopted today. Under this exemption, some issuers in Tier 2 offerings with a large number of shareholders could avoid—potentially indefinitely—the comprehensive disclosure requirements of the Exchange Act, which may decrease the informational efficiency of prices and potentially result in less informed investment decisions by a larger number of investors than in the absence of a conditional Section 12(g) exemption. The issuer size limit partly mitigates this concern. For the same reasons, however, the inclusion of a conditional exemption from Section 12(g) may entice small issuers that would have otherwise generally preferred to raise capital in private offerings to enter the public markets through a Tier 2 offering pursuant to Regulation A. In this regard, the conditional exemption could increase the availability of information about companies that would otherwise remain relatively obscure in the private markets. On balance, we believe that provisions such as the initial and periodic disclosure requirements and the investment limit in Tier 2 offerings appropriately balance investor protections and issuer compliance costs while facilitating the creation of a broad investor base in Tier 2 offerings for small issuers.

We have considered the alternative of providing a conditional exemption from Section 12(g) registration that does not incorporate an issuer size limitation. Such an alternative would enable a broader class of potential Tier 2 issuers to remain exempt from Exchange Act registration. Larger Regulation A issuers could generate a more vibrant OTC trading market, providing enhanced liquidity to those issuers that may not otherwise be of sufficient size to make listing on a national market exchange cost-effective. Providing an exemption from Section 12(g) could provide incentive for these larger issuers to broaden their investor base while still providing the ongoing disclosure of the Tier 2 reporting regime. This could result in potentially beneficial effects on capital formation, competition, and informational efficiency of prices. However, such an alternative would potentially create a class of securities permanently exempt from Exchange Act registration regardless of issuer size and thus subject to less extensive disclosure requirements than public reporting companies, which may affect investor protection.

D. Offering Statement

1. Electronic Filing and Delivery

The final rules preserve the current three-part structure of Form 1-A but make various revisions and updates to the form to streamline the information included in the form. Since most of this information is already contained in other offering materials, the additional reporting burden in Part I of the Form 1-A should not entail significantly higher costs in terms of time or out-of-pocket expenses.

Under existing Regulation A, offering materials are submitted to the Commission in paper form. The final rules require electronic submission of offering materials. Electronic submission is expected to offer benefits to issuers and investors. Paper documents are difficult to process both for the Commission and for investors. Electronic filing is therefore expected to reduce processing delays and costs associated with the current paper filing system, improve the overall efficiency of the filing process for issuers, benefit investors by providing them with faster access to the offering statement, and allow offering materials to be more easily accessed and analyzed by regulators and analysts.

We anticipate that electronic access to offering materials may promote the informational efficiency of prices of Regulation A securities. Evidence, obtained from the adoption of EDGAR for 10-K filings by reporting companies, suggests that the use of EDGAR has favorably affected small investors. Moreover, the adoption of XML format for Part I of Form 1-A, which captures key information about the issuer and the offering, should allow more efficient access to information and more systematic tracking of offering details by investors, analysts, other market participants and regulators. The XML format for Part I will provide a convenient and efficient means of gathering information from issuers and transmitting it to EDGAR.

At the same time, we recognize that an electronic filing requirement may impose compliance costs on issuers, particularly, issuers that have not previously used the EDGAR system, which include filing Form ID (the application form for access codes to permit EDGAR filing) and converting filings into EDGAR format. Some of these compliance burdens will be mitigated by the savings of printing and mailing costs.

Some commenters have expressed investor protection concerns in relation to the access equals delivery model (discussed in Section II.C.1) arising from the perceived challenge of finding these materials on EDGAR and not requiring delivery 48 hours in advance of sale in all circumstances. As discussed above, we do not believe that access to EDGAR generally has proven to be a challenge for investors in registered offerings since the adoption of Securities Offering Reform in 2005, nor do we believe that it will be a challenge for investors under Regulation A or raise investor protection concerns, particularly in light of our final delivery requirements (including, where applicable, the inclusion of hyperlinks to offering materials on EDGAR that must be provided to investors by issuers and intermediaries). Additionally, given that the final offering circular delivery obligations generally affect investors only after they have made their investment decisions and that, taking into account advancements in technology and expanded use of the Internet, investors will have access to the final offering circular upon its filing, we believe that using a means other than physical delivery to satisfy the final offering circular delivery obligation will not have an adverse effect on investor protection. Overall, we believe that there will be benefits to issuers of streamlining delivery requirements for the final offering circular, consistent with similar updates to delivery requirements for registered offerings.

2. Disclosure Format and Content

Under the existing Regulation A, issuers can choose among three models for providing narrative disclosure in Part II of the offering statement: Model A, Model B, and Part I of Form S-1. Similar to the proposal, the final rules eliminate Model A but preserve Model B, with certain changes to the contents, and Part I of Form S-1.

We believe that eliminating Model A, which uses a question-and-answer format, may benefit investors by avoiding possible confusion that could result from the lack of uniformity of information presented in the question-and-answer format. Several commenters disagreed with the elimination of the Model A format, recommending that an updated version of the Model A disclosure format be retained. The Model A format may be easier to understand for non-accredited investors, who may lack the sophistication to analyze information presented in alternative disclosure formats. Compared to other formats, the Model A format might also result in lower costs of initial preparation of the offering statement, including, in some instances, lessen the need to retain outside securities counsel. While a question-and-answer format may lower the cost of initial preparation, it often requires more substantive revisions after filing and before qualification, in order for the disclosure to sufficiently address the form requirements. We believe that most of the benefits associated with the lower cost of initial preparation are negated subsequently during the qualification process. Consequently, we are not persuaded that there are sufficient benefits to retaining the Model A format.

The changes to Model B include updated disclosure requirements, including a new section containing management discussion and analysis of the issuer's liquidity, capital resources and business operations. While these updates may impose costs on the issuer, they are expected to increase investor protection and informational efficiency of prices by providing important information to investors. The updated disclosure requirements are, however, generally designed to assist issuers with more guidance as to the required disclosures that, while they may increase the cost to issuers associated with the initial preparation of the offering circular, should lower the overall cost of, and time to, qualification, when the process is considered in its entirety. Overall, we believe that the availability of two alternative disclosure formats—a revised Model B format and Part I of Form S-1—provides sufficient flexibility to issuers in choosing their disclosure format while preserving the benefits of disclosure of relevant information to prospective investors.

Some commenters suggested eliminating all three disclosure formats and instead creating a new disclosure format similar to Part I of Form S-1 that would reference Regulation S-K requirements (with reduced disclosure requirements in some instances). Another commenter recommended reducing the disclosure requirements for offerings of $2 million or less, while another suggested increasing disclosure requirements as an issuer grows in size and complexity. We recognize that scaling the disclosure requirements for Form 1-A, as suggested by commenters, could ease compliance costs for Regulation A issuers. However, additional scaling of disclosure requirements within tiers may reduce the comparability of disclosures within the same tier and result in pricing inefficiencies.

3. Audited Financial Statements

The final rules require issuers conducting Tier 2 offerings to include audited financial statements in their offering materials. Audited financial statements should provide investors in Tier 2 offerings with greater confidence in the accuracy and quality of the financial statements of issuers seeking to raise larger amounts of capital. This, in turn, could benefit issuers by lowering the cost of capital or increasing the amount of capital supplied by investors.

We recognize that audited financial statements could also entail significant costs to issuers, and that the costs of an audit could discourage the use of Tier 2 offerings. Based on data from registered IPOs below $50 million in 2014 by issuers that would have been potentially eligible for amended Regulation A, average total accounting fees amounted to 1.65% of gross offering proceeds, where reported separately.

The final rules require issuers in Tier 2 offerings to include audited financial statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB), as suggested by some commenters. We expect this provision in the final rules to provide issuers with flexibility that may help contain issuer compliance costs, compared to requiring financial statements that are audited in accordance with the standards of the PCAOB. As noted above, because AICPA rules would require an audit of a Regulation A issuer conducted in accordance with PCAOB standards to also comply with U.S. GAAS, an issuer who includes financial statements audited in accordance with PCAOB standards will likely incur additional incremental costs compared with an issuer who includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefits of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs.

As an alternative, we could have not required the audited financial statements until after the first year of operation as a “public startup company” or indefinitely for issuers that are pre-revenue or that have paid-in capital, assets and revenues below a modest threshold, as suggested by commenters. While this alternative may decrease issuer compliance costs, it may also lower the accuracy of information provided to investors in Tier 2 offerings, resulting in reduced investor protection. The large offering limit in Tier 2 offerings may make some of the fixed costs of an audit relatively less burdensome. In addition, we note that smaller issuers may opt to forgo the cost of an audit and elect a Tier 1 offering or a Regulation D offering, which does not require audited financial statements.

On the other hand, other commenters advised the Commission to require audited financial statements for Tier 1 offerings. While we acknowledge that requiring audited statements is likely to result in stronger investor protections due to reduced likelihood of fraudulent financial statements being presented, this alternative would likely place a relatively greater burden on smaller issuers due to the fixed-cost nature of some of the audit costs. Also, given the relatively low maximum offering size for Tier 1, this could result in Tier 1 offerings becoming not cost-effective.

4. Other Accounting Requirements

The final rules permit Canadian issuers to prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This is expected to benefit Canadian issuers that currently use IFRS as issued by the IASB by helping such issuers contain compliance costs associated with Regulation A offerings, compared to requiring Canadian issuers to prepare financial statements in accordance with U.S. GAAP. Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB.

5. Continuous and Delayed Offerings

The final rules explicitly allow for continuous or delayed offerings. As a result, it is now clear that eligible issuers have greater flexibility to select the timing of their offerings. Such flexibility is expected to benefit issuers by allowing them to adjust their capital raising based on macro-economic factors or company conditions. These factors should facilitate financing decisions and capital market efficiency. For example, existing research on Rule 415 offerings in the registered offering market shows that costs of intermediation in shelf offerings, and consequently the cost of raising equity through shelf registration, are lower than through traditional registration. The final rules condition the ability to sell securities in a continuous or delayed Tier 2 offering on being current with ongoing reporting requirements at the time of sale. This should not impose incremental costs on eligible issuers as they already file periodic updates and amendments.

The final rules restrict all “at the market” secondary offerings. Existing Regulation A prohibited primary “at the market” offerings, but did not necessarily restrict such offerings by selling securityholders. Some commenters suggested allowing such offerings, including primary offerings by the issuer. We recognize that not allowing secondary “at the market” offerings may limit flexibility for those issuers that are uncertain about the offering price that will attract sufficient investor demand. However, the benefit of the new restriction as it applies to secondary sales is that it helps ensure that issuers do not lose their Regulation A exemption due to unanticipated market factors by inadvertently offering securities in an amount that exceeds the offering limitation. Future offerings made in reliance on the final rules may provide more information to determine whether a robust market capable of supporting “at the market” offerings develops and whether the Regulation A exemption could be an appropriate method for such offerings in the future.

6. Nonpublic Review of Draft Offering Statements

Under the final rules, issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act will be permitted to submit to the Commission a draft offering statement for non-public review, so long as all such documents are publicly filed not later than 21 calendar days before qualification. The option of non-public submission of a draft offering statement is expected to reduce the barriers to entry for issuers using Regulation A. In this regard, a potential issuer could reduce the amount of time between disclosing possibly sensitive information to its competitors in its offering statement and the related sale of its securities. Furthermore, companies that are tentative about conducting an offering could start the qualification process and then abandon the offering any time before the initial public filing without receiving the related stigma in the market. To the extent that this accommodation lowers the barriers to entry, it may encourage capital formation and competition. Moreover, we do not believe that the option of draft offering statement submission will significantly affect investor protection. Disclosure requirements are unchanged for issuers that elect the option of non-public submission of draft offering statement. The initial non-public statement, all non-public statement amendments, and all correspondence with Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

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

Under existing Regulation A, testing the waters is permitted only until the offering statement is filed with the Commission, and solicitation material is required to be filed prior to or concurrent with first use. The final rules permit issuers to test the waters and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing information and disclaimers. Under the final rules, testing the waters materials will be required to be included as an exhibit to the offering statement at the time of initial submission or filing with the Commission, and updated thereafter.

In general, allowing issuers to gauge interest through expanded testing the waters will reduce uncertainty about whether an offering could be completed successfully. Allowing solicitation prior to filing enables issuers to determine market interest in their securities before incurring the costs of preparing and filing an offering statement. If after testing the waters, the issuer is not confident that it will attract sufficient investor interest, the issuer can consider alternate methods of raising capital and thereby avoid the costs of an unsubscribed or under-subscribed offering. Allowing testing the waters at any time prior to qualification of the offering statement, rather than only prior to filing of the offering statement with the Commission, may increase the likelihood that the issuer will raise the desired amount of capital. This option may 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. This provision may attract certain issuers—those that may be uncertain about the prospects of raising investor capital—to consider using amended Regulation A when they might not otherwise, thus potentially promoting competition for investor capital as well as capital formation in the Regulation A market.

Expanding the permissible use of testing the waters communications could also increase the type and extent of information available to investors, which could lead to more efficient prices for the offered securities. The final rules permit testing the waters for an expanded period of time compared to the baseline. As a result, it may be easier for investors to become aware of a larger and more diverse set of investment opportunities in private offerings, which may allow these investors to more efficiently allocate their capital. The net effect could be to enhance both capital formation and allocative efficiency. Further, requiring issuers using testing the waters solicitations after the offering statement is publicly filed to provide the offering statement with the testing the waters materials (or provide information about where it can be accessed), and to update it and redistribute updates in the event of material changes, will allow investors to make informed investment decisions.

We recognize that there may also be potential costs associated with expanding the use of testing the waters communications. If the contents of the offering circular differ substantively from the material distributed through testing the waters communications, and if investors rely on testing the waters materials, this may lead investors to make less informed investment decisions. Some commenters were concerned that the expanded use of permissible testing the waters may facilitate misleading statements to investors and may lead to a heightened risk of fraud. We believe, however, that this potential investor protection concern is mitigated by the application of Section 12(a)(2) liability to Regulation A offerings and the general anti-fraud provisions of the federal securities laws.

We considered the alternative, suggested by some commenters, of requiring submission and review of testing the waters materials before or concurrent with first use, rather than at the time the offering statement is submitted for non-public review or filed, which could aid regulators in detecting fraudulent solicitation of interest communications, potentially resulting in investor protection benefits. However, requiring initial submission and review of testing the waters materials prior to their use could dissuade issuers, particularly smaller or less experienced issuers, from engaging in testing the waters communications, thereby undermining many of the benefits of permitting such communications discussed above.

We also considered the views of other commenters who suggested we relax some of the proposed requirements for the use of testing the waters. For example, we could have treated the solicitation materials as non-public when filed with the Commission, at least until the offering statement is qualified, or removed the requirement for public filing of solicitation materials for all Regulation A offerings or for Tier 2 offerings. 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 will be low. We recognize that permitting issuers to file the solicitation materials non-publicly with the Commission could reduce the indirect costs of some issuers by limiting the ability of the issuer's competitors to discover information about the issuer.

However, we note that this information may become available to competitors in any event through the solicitation process and removing the requirement to publicly file the materials may 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 may fail to compare the statements in the solicitation materials against the offering circular. On balance, we believe that the final rule's requirements governing the use of testing the waters communications appropriately balance the goals of providing flexibility to issuers and protection to investors.

F. Ongoing Reporting

Currently, Regulation A issuers do not have ongoing reporting obligations. The final rules prescribe an ongoing reporting regime for issuers that conduct Tier 2 offerings that requires, in addition to annual reports on Form 1-K, semiannual reports on Form 1-SA, current event reporting on Form 1-U, and notice to the Commission of the suspension of ongoing reporting obligations on Form 1-Z.

These reporting requirements will have benefits and costs. These reporting requirements should strengthen investor protection and decrease the extent of information asymmetries between issuers and investors in the Regulation A market, relative to existing Regulation A. Requiring ongoing disclosures for Tier 2 offerings will provide investors with periodically updated information, allowing them to identify investment opportunities best suited for their level of risk tolerance and re-evaluate the issuer's prospects through time, resulting in better informed investment decisions and improved allocative efficiency of capital. By standardizing the content, timing, and format of these disclosures, the amendments to Regulation A will make it easier for investors to compare information across issuers, both within and outside of the new Regulation A market.

The additional reporting requirements for Tier 2 offerings increase the availability of public information that can be used for valuing securities. A reduction in information risk due to improvements in disclosure can lower the issuer's cost of capital. Because there are no resale restrictions, some securities issued in amended Regulation A offerings are likely to be quoted on the OTC market, and required ongoing disclosure requirements will provide investors with updated information about their underlying value, and as a result, lower the inherent asymmetric information risks associated with trading in this market. The enhanced information environment should facilitate more informationally efficient pricing and better liquidity for amended Regulation A securities. Tier 2 ongoing disclosure requirements should also provide timely and relevant issuer information at a lower cost to broker-dealers that initiate quotations and make markets in these securities. Increased secondary market liquidity can make securities more attractive to prospective investors, which can promote capital formation. Hence, there may be significant benefits for capital formation from the ongoing reporting requirements in the final rules.

Although reporting obligations for Tier 2 issuers are less extensive than for reporting companies, we recognize that they will still result in a significant direct cost of compliance. One commenter estimated the qualification and reporting costs of a Tier 2 issuer to be approximately $400,000 in the first year and $200,000 annually thereafter (per issuer). For the purposes of the PRA, we estimate that compliance with the requirements of Forms 1-K, 1-SA, and 1-U for issuers with an ongoing reporting obligation under Regulation A will result in an aggregate annual burden of 115,351 hours of in-house personnel time and an aggregate annual cost of $13,450,272 for the services of outside professionals.

In addition to the direct costs of preparing the mandatory disclosures, issuers of securities in Tier 2 offerings will be subject to indirect disclosure costs of revealing to their competitors and other market participants information about their business not previously required to be disclosed. These disclosures can inform the issuer's competitors about the issuer's strategic decisions regarding investment, financing, management and other aspects of business. For issuers seeking to reduce such costs of disclosure, Rule 506(c) of Regulation D could be more appealing. Based on the scope of disclosures required, an issuer's combination of direct and indirect costs of disclosure is likely to be lowest for a Regulation D Rule 506 offering, followed by a Tier 1 offering, a Tier 2 offering and, finally, a registered public offering.

We evaluate below the different provisions of the ongoing reporting requirements and the alternatives we have considered.

1. Periodic and Current Event Reporting Requirements

Currently, Regulation A issuers do not have ongoing reporting obligations. Tier 2 issuers in a Regulation A offering will have periodic and current event reporting obligations under the final rules. As noted above, these ongoing reporting requirements will result in both direct and indirect costs to Tier 2 issuers.

Commenters made various suggestions for expanding the ongoing disclosure requirements for Tier 2 issuers. For example, several commenters suggested we require quarterly reporting instead of semi-annual reporting. Another commenter suggested we require officers, directors and controlling shareholders of issuers that offer securities under Regulation A to make ongoing disclosure of transactions in company securities, similar to reporting on Forms 3, 4 and 5 and Schedules 13D, 13G and 13F in the registered securities context. While additional requirements that would bring the Tier 2 disclosure obligations closer to the reporting company disclosure obligations are likely to have informational efficiency and investor protection benefits, they are also likely to make Regulation A more costly and less attractive to prospective issuers and may not promote capital formation as much as the final rules.

Other commenters recommended reducing the continuing disclosure burden on Tier 2 issuers or making continuing disclosure requirements contingent upon factors other than offering tier, such as whether the issuer has taken steps to foster a market in its securities. These alternatives would likely reduce compliance costs for Tier 2 issuers; however, they also may cause investors to have less information upon which to make investment decisions, resulting in weaker investor protections and less informationally efficient prices.

Other commenters recommended requiring ongoing disclosures for issuers in Tier 1 offerings, including disclosures at a level lower than is required for Tier 2, ongoing disclosure with yearly audited financials, or some unspecified continuous disclosure obligation. Such alternatives, particularly if accompanied by the requirement of audited financial statements, would increase the availability and quality of financial information provided to investors in Tier 1 offerings and strengthen investor protection by enabling investors to make better informed decisions. However, due to the fixed component of disclosure costs, and the likely smaller size of Tier 1 offerings relative to Tier 2 offerings, such requirements may limit capital formation and place Tier 1 issuers at a competitive disadvantage relative to Tier 2 issuers. We note that small issuers that value informational efficiency gains from ongoing disclosures above the cost of such disclosures have the option of conducting a Tier 2 offering.

2. Termination and Suspension of Reporting and Exit Reports

The final rules permit issuers in Tier 2 offerings that have filed all periodic and current reports required by Regulation A for a specified period to suspend their ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing. For banks or bank holding companies, the termination threshold is fewer than 1,200 persons, consistent with Title VI of the JOBS Act. The option to cease reporting could be beneficial, especially for issuers that do not seek secondary market liquidity and for smaller issuers that find the costs of compliance with the ongoing disclosure requirements to be a relatively greater burden. At the same time, the option might be costly for investors because it will decrease the amount of information available about the issuer, making it more difficult to monitor the issuer and accurately price its securities or to find a trading venue that will allow liquidation of the investment. The public availability of information in bank regulatory filings is expected to mitigate some of these effects for bank issuers undertaking Regulation A offerings. Termination of reporting also might make it easier for inside shareholders to use an informational advantage to the detriment of minority outside investors.

The final rules require Tier 1 issuers to notify the Commission upon completion of their offerings by filing Form 1-Z (exit report). Issuers in Tier 2 offerings will be required to provide this information on Form 1-Z at the time of filing the exit report, if they have not previously provided this information on Form 1-K as part of their annual report. Form 1-Z contains limited summary information about the issuer and the completed offering and, therefore, should not impose substantial additional compliance costs on the issuer. The enhanced availability of Form 1-Z information is likely to benefit investors and facilitate evaluation of Regulation A market activity. For example, this information should allow the Commission and others to assess whether issuers have been able to raise the projected amount of capital in Regulation A offerings. We recognize, however, that, since information about the completed offering has value to an issuer's competitors, its disclosure may also impose an indirect cost on issuers.

3. Exchange Act Registration

Generally, an issuer of Regulation A securities would not be subject to Exchange Act reporting obligations unless it separately registers a class of securities under Section 12 of the Exchange Act or conducts a registered public offering. This results in significantly lower costs of periodic reporting for Regulation A issuers relative to reporting companies.

The final rules permit issuers seeking to register a class of Regulation A securities under the Exchange Act to do so by filing a Form 8-A in conjunction with the qualification of a Form 1-A that follows Part I of Form S-1 or the Form S-11 disclosure model in the offering circular. In some circumstances this option may provide more flexibility, for instance, with respect to testing the waters, to issuers seeking to register a class of securities. The obligation to file ongoing reports in a Tier 2 offering is automatically suspended upon registration of a class of securities under Section 12 of the Exchange Act or registration of an offering of securities under the Securities Act. Given that Exchange Act reporting obligations are more extensive than those of Regulation A, the entry of such issuers into the Exchange Act reporting system upon qualification of a Regulation A offering statement is expected to have a beneficial effect on investor protection and informational efficiency of prices. While registration pursuant to the Exchange Act is likely to impose additional costs on issuers, only issuers that opt into such registration are affected. As a result, we anticipate that only those issuers for whom the perceived benefits of registration justify the accompanying costs will elect to use this provision.

G. Insignificant Deviations

Under the final rules, offerings with “certain insignificant deviations from a term, condition or requirement” of Regulation A remain exempt from registration. This is the same as the rules in existing Regulation A. As a result, the only change from the baseline is that these rules will likely apply to a greater number of offerings due to the expanded availability of amended Regulation A. Further, as in existing Regulation A, the final rules explicitly classify as significant those deviations that are related to issuer eligibility, aggregate offering price, offers and continuous or delayed offerings. This provision benefits investors by providing certainty about the provisions from which the issuer may not deviate without losing the exemption. At the same time, it enables issuers to continue to rely on the exemption and obtain its capital formation benefits even if they have an “insignificant deviation” from the final rules. This provision may be especially beneficial for issuers with limited experience with Regulation A offerings as their limited experience may make them more susceptible to an inadvertent error. In this way, the provision may encourage more issuers to engage in Regulation A transactions and thereby facilitate capital formation.

H. Bad Actor Disqualification

The final rules amend Rule 262 to include bad actor disqualification provisions in substantially the same form as adopted under Rule 506(d). The final rules specify that the covered person's status is tested at the time of filing of the offering statement. Consistent with the disqualification provisions of Rule 506(d), the final rules add two new disqualification triggers to those in existing Regulation A: Commission cease-and-desist orders relating to violations of scienter-based anti-fraud provisions of the federal securities laws or Section 5 of the Securities Act and the final orders and bars of certain state and other federal regulators. While these provisions may impose an incremental cost on issuers and other covered persons relative to the cost imposed by the disqualification provisions of existing Regulation A, they should strengthen investor protection from potential fraud.

If one of these new triggering events occurred prior to the effective date of the final rules, the event will not cause disqualification, but instead must be disclosed on a basis consistent with Rule 506(e). This approach will not preclude the participation of bad actors whose disqualifying events occurred prior to the effective date of the final rules, which could expose investors to the risks that arise when bad actors are associated with an offering. These risks to investors may be partly mitigated since investors will have access to relevant information that could inform their investment decisions. Disclosure of triggering events may also make it more difficult for issuers to attract investors, and issuers may experience some or all of the impact of disqualification as a result. Some issuers may, accordingly, choose to exclude involvement by prior bad actors to avoid such disclosures.

We expect that the bad actor disqualification provisions in the final rules will lead most issuers to restrict bad actor participation in Regulation A offerings, which could help reduce the potential for fraud in these types of offerings and thus strengthen investor protection compared with an alternative of not including bad actor disqualification provisions. If disqualification standards lower the risk premium associated with the risk of fraud due to the presence of bad actors in securities offerings, they could also reduce the cost of capital for issuers that rely on amended Regulation A. In addition, the requirement that issuers determine whether any covered persons are subject to disqualification might reduce the need for investors to do their own investigations and could therefore increase efficiency.

The disqualification provisions also impose costs on issuers and covered persons. Issuers that are disqualified from using amended Regulation A may experience an increased cost of capital or a reduced availability of capital, which could have negative effects on capital formation. In addition, issuers may incur costs related to seeking disqualification waivers from the Commission and replacing personnel or avoiding the participation of covered persons who are subject to disqualifying events. Issuers also might incur costs to restructure their share ownership to avoid beneficial ownership of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power, by individuals subject to disqualifying events.

As discussed above, the final rules also provide a reasonable care exception on a basis consistent with Rule 506(d). We anticipate that the reasonable care exception would result in benefits and costs, compared with an alternative of not providing a reasonable care exception. For example, a reasonable care exception could facilitate capital formation by encouraging issuers to proceed with Regulation A offerings in situations in which issuers otherwise might have been deterred from relying on Regulation A if they risked potential liability under Section 5 of the Securities Act for unknown disqualifying events. This exception also could increase the potential for fraud, compared with an alternative of not providing a reasonable care exception, by limiting issuers' incentives to determine whether bad actors are involved with their offerings. We also recognize that some issuers might incur costs associated with conducting and documenting their factual inquiry into possible disqualifications. The rule's flexibility with respect to the nature and extent of the factual inquiry required could allow an issuer to tailor its factual inquiry as appropriate to its particular circumstances, thereby potentially limiting costs.

One commenter recommended revising the look-back periods for disqualifying events to run from the time of sale rather than the time of filing of the offering statement. These changes would relax the bad actor disqualification standard, by allowing bad actors to participate in Regulation A offerings during the qualification process. We believe that timing application of the bad actor disqualification rules to the time of filing of the offering statement, as opposed to the time of qualification, is therefore more appropriate under the final rules.

I. Relationship With State Securities Law

The final rules preempt state registration and qualification requirements for Tier 2 offerings but preserve these requirements for Tier 1 offerings, consistent with state registration of Regulation A offerings of up to $5 million under existing Regulation A.

The GAO Report found that compliance with state securities review and qualification requirements was one of the factors that appeared to have influenced the infrequent use of Regulation A by small businesses. Various commenters supporting preemption of state securities laws in the final rules noted that state review of offering statements is a significant impediment to the use of Regulation A and that the process of qualification in multiple states will remain inefficient despite NASAA's implementation of a coordinated review program. More broadly, commenters as well as the GAO Report indicated that the existing regime of federal and state qualification has been a significant disincentive to the use of Regulation A for capital raising. With respect to time and compliance costs associated with state qualification, we believe preemption will likely reduce issuers' costs, although we lack comprehensive, independent data to estimate the precise amount. Only a few commenters provided specific monetary estimates of cost components. One commenter indicated that a revenue-generating business seeking to conduct a debt or equity offering under existing Regulation A can produce a conforming offering statement for state and federal review for approximately $50,000. According to another commenter, an issuer seeking state registration in 50 states would incur $80,000 to $100,000 in legal fees.

As one commenter noted, “[t]he challenges posed by the necessity of responding to both federal and state reviews and coordinating overlapping but potentially inconsistent comments and approvals have helped to make the existing Regulation A scheme unworkable for most smaller companies.” Preemption of state securities review and qualification requirements for Tier 2 offerings will eliminate the burdens of responding to multiple reviews and thus provide for a more streamlined review process than exists under existing Regulation A. We expect that this, in turn, will make Tier 2 a more attractive capital raising option for issuers than existing Regulation A. Accordingly, we believe that by eliminating the requirement for state qualification, the final rules' preemption for Tier 2 offerings will result in greater use of amended Regulation A and thereby facilitate capital formation.

We recognize that commenters were divided on the issue of preemption, and those who objected to preemption of state securities review and qualification requirements cited benefits of state review. These include additional investor protection benefits arising from the localized knowledge and resources of state regulators that may aid in detecting fraud and facilitating issuer compliance. Some of these commenters also noted that the launch of NASAA's coordinated review program could streamline state review of offerings among participating states.

We acknowledge that the preemption of state qualification for Tier 2 offerings may have an impact on investor protection by eliminating one level of government review. In addition, merit-based review of offerings undertaken by some states may, in some cases, provide a level of investor protections different from the disclosure-based review undertaken by the Commission. State regulators may also have a better knowledge of local issuers, which could help in detecting fraud, especially in offerings by small, localized issuers. If investors require higher returns because of a perceived increase in the risk of fraud as a result of preemption, issuers may face a higher cost of capital. We are unable to predict how the amendments to Regulation A will affect the incidence of fraud that may arise in Regulation A offerings.

Several factors could mitigate these potential impacts. First, under Section 18(c), the states retain the ability to require the filing with them of any documents filed with the Commission and to investigate and bring enforcement actions with respect to fraudulent transactions. Second, we believe that amended Regulation A provides substantial protections to purchasers in Tier 2 offerings. Under the final rules, a Regulation A offering statement will continue to provide substantive narrative and financial disclosures about the issuer. Further, the final rules require offering statements to be qualified by the Commission before an issuer can conduct sales. Additional investor protections would be afforded by Regulation A's limitations on eligible issuers and bad actor disqualification provisions. The final rules for Tier 2 offerings provide further protection by requiring audited financial statements in the offering circular, ongoing reporting, and an investment limitation for purchasers who do not qualify as accredited investors.

The anticipated costs and benefits of state preemption will depend on key offering characteristics and issuer disclosure requirements. In particular, smaller offerings with a narrow investor base, such as those expected to be conducted under Tier 1, are more likely to be concentrated in fewer states and to benefit from geographic-specific information of state regulators as part of the review process. In contrast, larger offerings that seek a broader investor base, such as those expected to be conducted under Tier 2, are more likely to span multiple states. For Tier 2 offerings, the additional disclosure, audited financial statements, and transactional requirements relative to Tier 1 offerings are expected to provide an additional layer of investor protection, thus reducing the need for, and the expected benefits of, state review. State preemption for Tier 2 offerings should lower the compliance burdens imposed on issuers, and partly offset the costs of the increased disclosure and transactional requirements.

In general, we expect that issuers in Tier 1 offerings will face significantly lower offering costs as a result of not being subjected to the requirements of audited financial statements and ongoing reporting in the final rules. For these offerings, the local knowledge of state regulators is anticipated to add value to the review process to the extent that the issuer and the investor base are more likely to be localized. Thus, state qualification is more likely to have incremental investor protection benefits in Tier 1 offerings relative to Tier 2 offerings. Moreover, to the extent that Tier 1 offerings are more likely to be concentrated in fewer states, the cost of complying with state review procedures is likely to be diminished for these types of offerings.

Some commenters also pointed to the increased burden on Commission resources as a cost of state preemption. Compared with the baseline of the existing Regulation A, we anticipate a possible increase in the burden on Commission resources as a result of the increase in the Regulation A maximum offering size and other provisions intended to make Regulation A more attractive to prospective issuers. However, we believe this increase would also occur under the alternative of no state preemption for Tier 2 offerings. While state review of Tier 2 offerings could potentially confer incremental investor protection benefits to the extent a thorough Commission staff review is constrained by the increased burden on agency resources, overall we do not believe this effect will be substantial.

As an alternative to preemption for Tier 2 offerings, we considered the option of state qualification by one state or a subset of states or the option of state review under NASAA's coordinated review program. According to one commenter, the coordinated review program creates value by defining concrete service standards regarding the timeliness of various steps of the qualification process and by introducing more legal certainty. According to another commenter, the coordinated review program will eliminate costs of identifying and addressing individual state requirements and will provide an expedient registration process. We recognize that the coordinated review process ultimately may reduce processing time and streamline certain state requirements for issuers registering in multiple states when compared to independent review conducted by individual states. To date, however, we are aware of only a few issuers that have utilized the coordinated review process, so currently there is limited evidence available to us to evaluate the effectiveness and timeliness of coordinated review, especially in the event that more potential Regulation A issuers seek state qualification under this process. While it is possible that the coordinated review process may reduce costs for issuers as compared to individual state review and qualification, it would add cost and complexity for issuers seeking an exemption under amended Regulation A when compared to Commission review and qualification alone. To the extent that disclosure or merit review (if applicable to one of the participating jurisdictions in which the issuer is seeking to offer securities) standards of participating jurisdictions impose more extensive requirements on the issuer than Commission rules, some issuers may incur additional compliance expense or require additional time to address comments. In light of the recent efforts of state securities regulators to address concerns about the cost of state review and qualification of Regulation A offerings, however, the ongoing implementation and development of the coordinated review program, particularly as it may operate within Tier 1 offerings, may, in the future, provide additional data that will aid our future evaluation of whether such a program could effectively operate within the context of larger, more national Tier 2 offerings.

We believe the final rules strike appropriate balance between mitigating cost and time demands on issuers and providing investor protections.

IV. Paperwork Reduction Act

A. Background

Certain provisions of the final rules contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA). We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA and its implementing regulations. While several commenters provided qualitative comments on the possible costs of the proposed rules and amendments, we did not receive comments on our PRA analysis and thus are adopting our estimates substantially as proposed, except as otherwise noted herein. The titles for the collections of information are:

(1) “Regulation A (Form 1-A and Form 2-A)” (OMB Control Number 3235-0286);

(2) “Form 1-K” (OMB Control Number 3235-0720);

(3) “Form 1-SA” (OMB Control Number 3235-0721);

(4) “Form 1-U” (OMB Control Number 3235-0722);

(5) “Form 1-Z” (OMB Control Number 3235-0723);

(6) “Form 8-A” (OMB Control Number 3235-0056);

(7) “Form ID” (OMB Control Number 3235-0328); and

(8) “Form F-X” (OMB Control Number 3235-0379).

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. We applied for OMB control numbers for the new collections of information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each new collection, as specified above. Responses to these new collections of information would be mandatory for issuers raising capital under Regulation A.

The hours and costs associated with preparing disclosure, filing forms, and retaining records constitute reporting and cost burdens imposed by the collections of information. In deriving estimates of these hours and costs, we recognize that the burdens likely will vary among individual issuers based on a number of factors, including the stage of development of the business, the amount of capital an issuer seeks to raise, and the number of years since inception of the business. We believe that some issuers will experience costs in excess of the average and some issuers may experience less than the average costs.

B. Estimated Number of Regulation A Offerings

Data regarding current market practices may help identify the potential number of offerings that will be conducted in reliance on the final rules. We estimate that there are currently approximately 26 Regulation A offering statements filed by issuers per year. While it is not possible to predict with certainty the number of offering statements that will be filed by issuers relating to offerings made in reliance on amended Regulation A, for purposes of this PRA analysis, we estimate that the number will be 250 offerings statements per year. We base this estimate on (i) the current approximate number of annual Form 1-A filings under the existing rules, plus (ii) 65 percent of the estimated number of registered offering of securities that would have been eligible to be conducted under Regulation A, plus (iii) an additional 16 offerings that either would not otherwise occur or would have been conducted in reliance on another exemption from Securities Act registration, such as Regulation D. For purposes of this PRA analysis, we assume that each offering statement for a unique Regulation A offering that is filed represents a unique issuer, such that approximately 250 issuers are estimated to conduct Regulation A offerings each year under the final rules.

C. PRA Reporting and Cost Burden Estimates

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

Currently, Regulation A requires issuers to file a Form 1-A: Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds with the Commission. Regulation A has one administrative burden hour associated with it, while current Form 1-A is estimated to take approximately 608 hours to prepare and Form 2-A is estimated to take approximately 12 hours to prepare. We do not anticipate that the one administrative burden hour associated with Regulation A will change as a result of the final rules. As discussed more fully below, we believe the burden hours associated with Form 1-A will change, while Form 2-A and the associated burden hours are eliminated as a result of today's proposal.

Under the final rules, an issuer conducting a transaction in reliance on Regulation A will be able to conduct either a Tier 1 offering or a Tier 2 offering. In either case, a Regulation A issuer will continue to be required to file with the Commission specified disclosures on a Form 1-A: Offering Statement. An issuer will also be required to file amendments to Form 1-A to address comments from Commission staff and to disclose material changes in the disclosure previously provided to the Commission or investors. In light of the electronic filing requirements for Regulation A offering materials discussed above, issuers are no longer required to file a manually signed copy of Form 1-A with the Commission. Issuers are, however, required to manually sign a copy of the offering statement before or at the time of non-public submission or filing that must be retained by the issuer for a period of five years and produced to the Commission, upon request. As issuers are currently required to manually sign the Form 1-A and file it with the Commission, we do not anticipate that the Form 1-A retention requirement adopted in the final rules will alter an issuer's compliance burden. As adopted, Form 1-A is similar to existing Form 1-A. In some instances, Form 1-A, contains fewer disclosure items than existing Form 1-A (e.g., Part I (Notification) of Form 1-A does not require disclosure of “Affiliate Sales”; Part II (Offering Circular) of Form 1-A requires a description of the issuer's business for a period of three years, rather than five years). Part II of Form 1-A no longer permits disclosure in reliance on the Model A disclosure format, but directs issuers to follow the provisions of Model B (renamed “Offering Circular”), Part I of Form S-1, or, where applicable, Part I of Form S-11. In other instances, Form 1-A contains more disclosure items than existing Form 1-A (e.g., Part I of Form 1-A requires additional disclosure of certain summary information regarding the issuer and the offering; Part II of Form 1-A requires more detailed management discussion and analysis of the issuer's liquidity and capital resources and results of operations). Form 1-A requires disclosure similar to that required in a Form S-1 registration statement for registered offerings under the Securities Act, but with fewer disclosure items (e.g., it requires less disclosure about the compensation of officers and directors, and less detailed management discussion and analysis of the issuer's liquidity and capital resources and results of operations) and, under certain circumstances, Form 1-A does not require issuers to file audited financial statements.

We expect that issuers relying on Regulation A for Tier 1 offerings of up to $20 million in a 12-month period will largely be at a similar stage of development to issuers relying on existing Regulation A and will therefore not experience an increased compliance burden with Form 1-A. Given the increased annual offering amount limit of $50 million for Tier 2 offerings, however, we expect that issuers conducting such offerings pursuant to Regulation A may be at a more advanced stage of development than issuers offering securities under Tier 1. In such cases, the complexity of the required disclosure and, in turn, the burden of compliance with the requirements of Form 1-A may be greater for some issuers than for issuers relying on existing Form 1-A. We believe that the burden hours associated with amended Form 1-A will be greater than the current estimated 608 burden hours per response but will not be as great as the current estimated 972.32 burden hours per response for Form S-1. We therefore estimate that the total burden to prepare and file Form 1-A, as adopted today, including any amendments to the form, will increase on average across all issuers in comparison to existing Form 1-A to approximately 750 hours. We estimate that the issuer will internally carry 75 percent of the burden of preparation and that outside professionals retained by the issuer at an average cost of $400 per hour will carry 25 percent.

We estimate that compliance with the requirements of a Form 1-A will require 187,500 burden hours (250 offering statements × 750 hours/offering statement) in aggregate each year, which corresponds to 140,625 aggregated hours carried by the issuer internally (250 offering statements × 750 hours/offering statement × 0.75) and aggregated costs of $18,750,000 (250 offering statements × 750 hours/offering statement × 0.25 × $400) for the services of outside professionals. As stated above, we estimate that the proposed amendments to Regulation A will not change the one administrative burden hour associated with the review of Regulation A and will require 250 burden hours (250 offering statements × one hour/offering statement) in aggregate each year, which corresponds to 187 aggregated hours carried by the issuer internally (250 offering statements × 0.75) and aggregated costs of $25,000 (250 offering statements × one hour/offering statement × 0.25 × $400) for services of outside professionals. When combined with the estimates for Form 1-A, the administrative burden hour results in an estimated total compliance burden of 751 hours per offering statement and an estimated annual compliance burden of 187,750 hours (250 offering statements × 751 hours/offering statement) and aggregated costs of $18,775,000 (250 offering statements × 751 hours/offering statement × 0.25 × $400).

2. Form 1-K: Annual Report

Under the final rules, any issuer that conducts a Tier 2 offering pursuant to Regulation A is required to file an annual report with the Commission on Form 1-K: Annual Report. A manually signed copy of Form 1-K must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to the Commission. We do not anticipate that the requirement to retain a manually signed copy of Form 1-K will affect an issuer's compliance burden. We believe the compliance burden associated with disclosure provided in Form 1-K will be less than the compliance burden associated with reporting required under Exchange Act Sections 13 or 15(d). We also believe the burden is more analogous to the compliance burden attendant to Form 1-A. Unlike the disclosure required in Form 1-A, however, offering-specific disclosure in Form 1-K is not required. Additionally, under certain circumstances, an issuer will be required to disclose information similar to the information previously required of issuers on Form 2-A. Unlike the disclosure previously required on Form 2-A, however, an issuer is not required to provide disclosure about the use of proceeds. We estimate that the burden to prepare and file a Form 1-K will be less than that required to prepare and file a Form 1-A. We estimate that compliance with Form 1-K will result in a burden of 600 hours per response. We further estimate that 75 percent of the burden of preparation will be carried by the issuer internally and that 25 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. While we do not know the exact number of issuers that will conduct Tier 2 offerings in reliance on amended Regulation A, we estimate 75 percent of all issuers filing a Form 1-A (or 188 issuers, 250 issuers × .75) will conduct Tier 2 offerings, enter the Regulation A ongoing reporting regime and therefore be required to file Form 1-K.

We estimate that compliance with the requirements of Form 1-K for issuers with an ongoing reporting obligation under Regulation A will require 112,800 burden hours (188 issuers × 600 hours/issuer) in the aggregate each year, which corresponds to 84,600 hours carried by the issuer internally (188 issuers × 600 hours/issuer × 0.75) and costs of $11,280,000 (188 issuers × 600 hours/issuer × 0.25 × $400) for the services of outside professionals.

3. Form 1-SA: Semiannual Report

Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A will be required to file a semiannual report with the Commission on Form 1-SA: Semiannual Report. A manually signed copy of the Form 1-SA must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to the Commission. We do not anticipate that the requirement to retain a manually signed copy of the Form 1-SA will affect an issuer's compliance burden. Issuers must provide semiannual updates on Form 1-SA, which, like a Form 10-Q, consists primarily of financial statements and MD&A. Unlike Form 10-Q, Form 1-SA does not require disclosure regarding quantitative and qualitative market risk or controls and procedures. We estimate, however, that on balance the reduction in burden attributable to eliminating these two items in Form 1-SA will be offset by the increased burden associated with requiring financial statement disclosure covering six months, rather than three months. We therefore believe the per response compliance burden of Form 1-SA will be similar to the compliance burden for issuers filing a Form 10-Q under the Exchange Act. Therefore, for purposes of this PRA analysis, we estimate that the burden to prepare and file a Form 1-SA will equal the burden to prepare and file Form 10-Q, which we have previously estimated as 187.43 hours per response. Unlike Form 1-K, Form 1-SA does not require the provision of audited financial statements. We therefore believe, in comparison to Form 1-K, issuers filing a Form 1-SA will be able to prepare more of the required disclosures internally. Accordingly, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour.

We estimate that compliance with the requirements of Form 1-SA for issuers with an ongoing reporting obligation under Regulation A will require 35,237 burden hours (188 issuers × 187 hours/issuer/filing × 1 filing/year) in the aggregate each year, which corresponds to 29,952 hours carried by the issuer internally (188 issuers × 187 hours/issuer/filing × 1 filing/year × 0.85) and costs of $2,113,872 (188 issuers × 187 hours/issuer/filing × 1 filing/year × 0.15 × $400) for the services of outside professionals.

4. Form 1-U: Current Reporting

Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A is required to promptly file current reports on Form 1-U with the Commission. A manually signed copy of the Form 1-U must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to Commission. We do not anticipate that the requirement to retain a manually signed copy of the Form 1-U will affect an issuer's compliance burden. Issuers are required to file such reports in the event they experience certain corporate events, much the same way as issuers subject to an ongoing reporting obligation under the Exchange Act file current reports on Form 8-K. The requirement to file a Form 1-U, however, will be triggered by significantly fewer corporate events than those that trigger a reporting requirement on a Form 8-K, and the form itself will be slightly less burdensome for issuers to fill out. Thus, the frequency of filing the required disclosure and the burden to prepare and file a Form 1-U will be considerably less than for Form 8-K. We estimate that the burden to prepare and file each current report will be 5 hours. While we do not know for certain how often an issuer would experience a corporate event that would trigger a current report filing on Form 1-U, we estimate that many issuers may not experience a corporate event that triggers reporting, while others may experience multiple events that trigger reporting. On average, we estimate that an issuer will be required to file one current report annually. Therefore, we estimate that an issuer's compliance with Form 1-U will result in an annual aggregate burden of 5 hours (1 current report annually × 5 hours per current report) per issuer.

As with Form 1-SA, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. We estimate that compliance with the requirements of Form 1-U will require 940 burden hours (188 issuers × 1 current report annually × 5 hours per current report) in aggregate each year, which corresponds to 799 hours carried by the issuer internally (188 issuers × 5 hours/issuer/year × 0.85) and costs of $56,400 (188 issuers × 5 hours/issuer/year × 0.15 × $400) for the services of outside professionals.

5. Form 1-Z: Exit Report

Under the final rules, all Regulation A issuers are required to file a notice under cover of Form 1-Z: Exit Report. Issuers conducting Tier 1 offerings will be required to file Part I of Form 1-Z that discloses information similar to the information previously required of issuers on Form 2-A. Issuers conducting Tier 2 offerings will also be required to disclose the same information as issuers conducting Tier 1 offerings in Part I of Form 1-Z, unless previously reported by the issuer on Form 1-K. Issuers conducting Tier 2 offerings will also be required to complete Part II of Form 1-Z in order to notify investors and the Commission that it will no longer file and provide annual reports pursuant to the requirements of Regulation A. In Tier 2 offerings, an issuer's obligations to file ongoing reports could be terminated at any time after completion of reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers and sales made in reliance on a qualified offering statement are not ongoing. A manually signed copy of the Form 1-Z must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to Commission. We do not anticipate that the requirement to retain a manually signed copy of the Form 1-Z will affect an issuer's compliance burden. We estimate that all of the issuers conducting Tier 1 offerings (63 issuers, 250 total estimated issuers × 0.25) and 50 percent of issuers conducting Tier 2 offerings (94 issuers, 188 issuers with an ongoing reporting obligation × 0.50) will file a Form 1-Z in the second fiscal year after qualification of the offering statement (157 total issuers, 63 + 94). Although we believe that the vast majority of issuers subject to ongoing reporting under Regulation A will qualify for termination in the second fiscal year after qualification, we believe that only half or 50 percent of such issuers will actually choose to terminate their reporting obligations. An issuer may have many reasons for continuing its reporting obligations, such as a desire to facilitate continued quotations in the over-the-counter (OTC) markets pursuant to revisions to Exchange Act Rule 15c2-11.

The Form 1-Z is similar to the Form 15 that issuers file to provide notice of termination of the registration of a class of securities under Exchange Act Section 12(g) or to provide notice of the suspension of the duty to file reports required by Exchange Act Sections 13(a) or 15(d). Therefore, we estimate that compliance with the Form 1-Z will result in a similar burden as compliance with Form 15 that is, a burden of 1.50 hours per response. We estimate that 100% of the burden will be carried by the issuer internally. We estimate that compliance with Form 1-Z will result in a burden of 235.5 hours (157 issuers filing Form 1-Z × 1.50 hours/issuer) in the aggregate.

6. Form 8-A: Short Form Registration Under the Exchange Act

Under the final rules, Regulation A issuers in Tier 2 offerings that elect to list securities offered pursuant to a qualified offering statement on a national securities exchange or that seek to register the class of securities offered pursuant to a qualified offering statement under the Exchange Act may do so by filing a Form 8-A (short form) registration statement with the Commission. In such circumstances, an issuer will be required to comply with the form requirements of Form 8-A, which will generally allow issuers to incorporate by reference in the form information provided in the related Form 1-A. While we do not know the exact number of issuers conducting Tier 2 offerings that will seek to register a class of securities under the Exchange Act at or near the time of qualification of an offering statement, for purpose of this PRA analysis, we estimate 2 percent of all issuers filing a Form 1-A (or 5 issuers, 250 issuers × .02) will elect to register a class of securities under the Exchange Act and file a Form 8-A.

The final rules do not alter the burden hour per response of Form 8-A, but rather amend the existing Form 8-A to permit issuers in Tier 2 offerings to rely on the form. Therefore, we estimate that compliance with the Form 8-A will not change as a result of the final rules, a burden of 3 hours per response. We estimate that compliance with Form 8-A by issuers conducting a Tier 2 offering will result in a burden of 15 hours (5 issuers filing Form 8-A × 3 hours/issuer) in aggregate each year. We estimate that 100% of the burden will be carried by the issuer internally.

7. Form ID Filings

Under the final rules, an issuer will be required to file specified disclosures with the Commission on EDGAR. We anticipate that many issuers relying on Regulation A for the first time will not have previously filed an electronic submission with the Commission and so will need to file a Form ID. Form ID is the application form for access codes to permit filing on EDGAR. The final rules will not change the form itself, but we anticipate that the number of Form ID filings will increase due to an increase in issuers relying on Regulation A. For purposes of this PRA analysis, we estimate that 75 percent of the issuers who seek to offer and sell securities in reliance on amended Regulation A will not have previously filed an electronic submission with the Commission and will, therefore, be required to file a Form ID. As noted above, we estimate that approximately 250 issuers per year will seek to offer and sell securities in reliance on Regulation A, which corresponds to approximately 188 additional Form ID filings. We estimate that 100% of the burden will be carried by the issuer internally. As a result, we estimate the additional annual burden will be approximately 28.20 hours (188 filings × 0.15 hours/filing).

8. Form F-X

Under the final rules, Canadian issuers are required to file a Form F-X, which furnishes to the Commission a written irrevocable consent and power of attorney at the time of filing the offering statement required by Rule 252. It is used to appoint an agent for service of process by Canadian issuers eligible to use Regulation A, issuers registering securities on Forms F-8 or F-10 under the Securities Act or filing periodic reports on Form 40-F under the Exchange Act, as well as in certain other circumstances.

The final rules will not change Form F-X itself, but will amend the rules to allow for the form to be filed electronically for offerings under Regulation A. Canadian companies are the only type of issuer that will be required to use this form under the final rules and we estimate that 100% of the burden will be carried by the issuer internally. We estimate that approximately 2 percent of issuers utilizing amended Regulation A will be Canadian companies (or 5 responses, 250 issuers × 0.02) resulting in an annual burden of approximately 10 hours (2 hours per response × 5 responses).

D. Collections of Information Are Mandatory

The collections of information required under Rules 251 through 263 will be mandatory for all issuers seeking to rely on the Regulation A exemption. Responses on Form 1-A, Form 1-K, Form 1-SA, Form 1-U and Form 1-Z will not be kept confidential, although an issuer may request confidential treatment for non-publicly submitted offering materials, or any portion thereof, for which it believes an exemption from the FOIA exists. It is anticipated that most material not subject to a confidential treatment request will be made public when the offering is qualified. A Form 1-A that is non-publicly submitted by an issuer and later abandoned before being publicly filed with the Commission and responses on Form ID will, however, remain non-public, absent a request for such information under the Freedom of Information Act.

V. Final Regulatory Flexibility Act Analysis

This Final Regulatory Flexibility Analysis has been prepared in accordance with the Regulatory Flexibility Act, 5 U.S.C. 603. It relates to the following:

• Amendments to Rule 157(a), Rules 251 through 263 of Regulation A, Rule 505 of Regulation D, Form 1-A, Form 8-A, Rule 30-1 of the Commission's organizational rules, Rule 4a-1 under the Trust Indenture Act, Rule 12g5-1 and Rule 15c2-11 under the Exchange Act, and Item 101 of Regulation S-T;
• new Forms 1-K, 1-SA, 1-U, and 1-Z; and
• the rescission of Form 2-A.

An Initial Regulatory Flexibility Analysis (IRFA) was prepared in accordance with the Regulatory Flexibility Act and included in the Proposing Release.

A. Need for the Rules

The rule amendments, new forms, and rescission of Form 2-A are designed to implement the requirements of Section 3(b)(2) of the Securities Act and to make certain conforming changes based on our amendments to Regulation A. Section 3(b)(2) directs the Commission to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period, subject to various additional terms and conditions set forth in Section 3(b)(2) or as provided for by the Commission as part of the rulemaking process.

Our primary objective is to implement Section 401 of the JOBS Act by expanding and updating Regulation A in a manner that makes public offerings of up to $50 million less costly and more flexible while providing a framework for regulatory oversight to protect investors. In so doing, we have crafted a revision of Regulation A that both promotes small company capital formation and provides for meaningful investor protection. We believe that issuers, particularly small businesses, benefit from having a wide range of capital-raising strategies available to them, and that an expanded and updated Regulation A could serve as a valuable option that augments the exemptions from registration more frequently relied upon, thereby facilitating capital formation for small businesses.

B. Significant Issues Raised by Public Comments

In the Proposing Release, we requested comment on every aspect of the IRFA, including the number of small entities that would be affected by the proposed amendments, the existence or nature of the potential impact of the proposals on small entities discussed in the analysis, and how to quantify the impact of the proposed rules. We did not receive any comments specifically addressing the IRFA. We did, however, receive comments from members of the public on matters that could potentially impact small entities. These comments are discussed at length by topic in the corresponding subsections of Section II. above.

While the proposed rules contemplated that small entities would be able to elect to proceed under the requirements of either Tier 1 or Tier 2, as discussed more fully below, an entity considered a small business under our rules would only be required to file ongoing reports under Regulation A if it elected to conduct a Tier 2 offering. The following discussion therefore focuses on the suggestions of commenters, as they relate to the proposed and final requirements for Tier 1 offerings, which is the tier most likely to be relied upon by small entities.

Many commenters recommended making changes to proposed rules that, in their view, would make Regulation A a more viable capital raising option for smaller issuers. Some commenters recommended improving the utility of Regulation A for smaller issuers by preempting state regulation of Tier 1 offerings. Others, however, opposed preemption for all Regulation A offerings. Some commenters recommended that we adopt a third tier, either expressly or through fleixble applicability of the proposed tier requirements. Some commenters suggested that raising the offering limit of Tier 1 from $5 million to $10 million or more would make Tier 1 more useful, while others recommended including various forms of ongoing disclosure at a level lower than what was proposed to be required for Tier 2. One commenter suggested reducing the Tier 1 narrative disclosure obligations, particularly for offerings of $2 million or less, so that such requirements would be more appropriately tailored for smaller issuers. Several commenters made recommendations with respect to the financial statement and auditing requirements in Form 1-A, as they relate to the requirements for Tier 1.

The final rules for Regulation A take into account some of the suggestions by commenters on ways to make Tier 1 more useful for small entities. For example, the final rules raise the offering limit of Tier 1 to $20 million. Also, with respect to the offering circular narrative disclosure requirements, we have adopted certain additional scaled disclosure requirements for Tier 1 that are intended to lessen the compliance obligations for smaller issuers. We are further providing issuers under both tiers with the accommodation provided to emerging growth companies in Securities Act Section 7(a) to use the extended transition periods applicable to private companies for complying with new or revised accounting standards under U.S. GAAP. Additionally, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards.

As noted in Section II.H.3. above, however, we do not agree with the position of some commenters that preemption of state securities laws registration and qualification requirements is necessary or appropriate for Tier 1 offerings. We note that some commenters who suggested that preemption of state securities laws may improve the attractiveness of Tier 1 offerings did so on the condition that other aspects of the tier should change accordingly, namely requiring Tier 1 issuers to provide audited financial statements in the offering statement and possibly on an ongoing basis. For the reasons discussed in Section II.D.3.b(2)(c). above, we have not adopted such changes in Tier 1.

Additionally, as noted in Section II.I. above, we do not believe that the creation of a third tier, as suggested by some commenters, would meaningfully alter a smaller entity's options for capital formation under Regulation A. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would have potential costs. For example, a third tier may unnecessarily complicate compliance with Regulation A for smaller entities, and could potentially confuse investors as to the type of Regulation A offering an issuer was undertaking and the type of information such investor could expect to receive as a result, thereby lessening the viability of the exemption as a whole. For this reason, we are not adopting a third or intermediate tier in Regulation A.

In the light of the changes discussed above, we believe that the final rules we are adopting today provide smaller issuers with an appropriately tailored regulatory regime that takes into account the needs of small entities to have a viable capital formation option in Regulation A, while maintaining appropriate investor protections.

C. Small Entities Subject to the Rules

For purposes of the Regulatory Flexibility Act, under our rules, an issuer (other than an investment company) is a “small business” or “small organization” if it has total assets of $5 million or less as of the end of its most recent fiscal year and is engaged or proposing to engage in an offering of securities which does not exceed $5 million.

While Regulation A is available for offerings of up to $50 million in securities in a 12-month period, only offerings up to $5 million in securities in a 12-month period will constitute offerings by small entities under the definition set forth above. It is difficult to predict the number of small entities that will use Regulation A due to the many variables included in the amendments. Nevertheless, we believe that the final rules for Regulation A will increase the overall number of Regulation A offerings of $5 million or less due to the ability to non-publicly submit draft offering statements for review by the Commission's staff, the expanded use of solicitation of interest materials, the ability to electronically file and transmit offering statements and offering circulars, the potential for preemption of state regulatory review if the issuer elects to conduct a Tier 2 offering, and other significant changes summarized in Section II. above.

Regulation A is currently limited to offerings with an aggregate offering price and aggregate sales of $5 million or less. From 2009 through 2014, 158 issuers filed offering statements and 36 offering statements were qualified by the Commission, or an average of approximately six qualified offering statements per year. Of the 36 offering statements that were qualified, 28 included financial statements indicating that the issuer had total assets of $5 million or less (as of the most recent balance sheet included in such issuer's offering statement at the time of qualification), or an average of approximately five qualified offering statements per year in which the issuer indicated it had total assets of $5 million or less. Based on these data, and for the reasons discussed above, we believe that at least five small businesses will conduct offerings under Regulation A per year.

D. Reporting, Recordkeeping, and Other Compliance Requirements

As discussed above in Section II., the final rules include reporting, recordkeeping and other compliance requirements. In particular, the final rules impose certain reporting requirements on issuers offering and selling securities in a transaction relying on the exemption provided by Section 3(b) and Regulation A. The final rules require that issuers relying on the exemption file with the Commission certain information specified in Form 1-A about the issuer and the offering, including the issuer's contact information; use of proceeds from the offering; price or method for calculating the price of the securities being offered; business and business plan; property; financial condition and results of operations; directors, officers, significant employees and certain beneficial owners; material agreements and contracts; and past securities sales. Such issuers are also required to provide information on the material factors that make an investment in the issuer speculative or risky; dilution; the plan of distribution for the offering; executive and director compensation; conflicts of interest and related party transactions; and financial statements. Similar to existing Regulation A, for Tier 1 offerings, Form 1-A does not require the financial statements to be audited unless the issuer has already had them audited for another purpose.

As discussed above in Section II.E.1.c., issuers conducting Tier 2 offerings are also required to file annual reports on new Form 1-K, semiannual updates on new Form 1-SA, current event reporting on new Form 1-U, and to provide notice to the Commission of the termination of their ongoing reporting obligations on new Form 1-Z.

An issuer subject to the Tier 2 periodic and current event reporting described above is required to provide information annually on Form 1-K, including the issuer's business and business plan; conflicts of interest and related party transactions; executive and director compensation; financial condition and results of operations; and audited financial statements. The semiannual update on Form 1-SA consists primarily of unaudited, interim financial statements for the issuer's first two fiscal quarters and information regarding the issuer's financial condition and results of operations. The current event reporting on Form 1-U requires issuers to disclose certain major developments, including changes of control; changes in the principal executive officer and principal financial officer; fundamental changes in the nature of business; material transactions or corporate events; unregistered sales of five percent or more of outstanding equity securities; changes in the issuer's certifying accountant; and non-reliance on previous financial statements.

Form 1-Z is required for issuers in both Tier 1 and Tier 2 offerings to report summary information about a completed or terminated Regulation A offering. Issuers conducting Tier 2 offerings also will be subject to the additional provision in Form 1-Z that relates to the voluntary termination of an issuer's continuous reporting obligations under Tier 2; however, we expect its use by small entities will be limited.

Although we estimated in the Proposing Release that approximately 188 issuers would enter the proposed Tier 2 ongoing reporting regime every year, we believe that very few small businesses will do so. A small business under our rules will only be required to file ongoing reports under Regulation A if it elects to conduct a Tier 2 offering.

E. Agency Action To Minimize Effect on Small Entities

The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objective of our proposals, while minimizing any significant adverse impact on small entities. In connection with the final amendments and rules, we considered the following alternatives: (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation or simplification of compliance and reporting requirements under the rule for small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rules, or any parts of the rules, for small entities.

We considered whether it is necessary or appropriate to establish different compliance or reporting requirements, timetables, or to clarify, consolidate, or simplify compliance and reporting requirements under the final rules for small entities. We have made several changes from the proposal that may reduce compliance burdens on small entities. For example, in response to public comment, the final rules provide for the further scaling of disclosure items pertaining to executive compensation and related party transactions for entities offering securities pursuant to Tier 1, which are likely to be smaller entities.

With respect to using performance rather than design standards, we used performance standards to the extent appropriate under the statute. For example, issuers have the flexibility to customize the presentation of certain disclosures in their offering statements.

We also considered whether there should be an exemption from coverage of the rules, or any parts of the rules, for small entities. As discussed above, we are adopting different compliance reporting requirements for issuers that qualify $20 million or less in securities annually under Tier 1. Those issuers, which are more likely to be small entities, are not subject to ongoing reporting requirements and the requirement to provide audited financial statements, although such entities retain the flexibility to comply with more rigorous initial and ongoing compliance obligations if they so choose. While audited financial statements are not a Tier 1 requirement, in comparison to the proposed rules, the final rules provide certain additional flexibility as to the independence standards required to be followed by auditors of financial statements for issuers of less than $20 million that conduct Tier 1 offerings—to the extent an issuer elects to provide audited financial statements—by allowing such auditors to comply with the independence standards of either the AICPA or Article 2 of Regulation S-X. We believe that further distinctions in compliance requirements for Form 1-A users beyond the different sets of requirements for Tier 1 and Tier 2 issuers may lead to investor confusion or reduced investor confidence in Regulation A offerings, especially considering that the disclosure requirements are already less than what is required by Form S-1 for registered offerings. Further, we anticipate that the burden for preparing a Form 1-A should be less for companies at an earlier stage of development and with less extensive operations that are likely to be small entities. For these reasons, we believe that small entities should be covered by the final rules to the extent specified above.

VI. Statutory Basis and Text of Amendments

The amendments and forms contained in this document are being adopted under the authority set forth in Sections 3(b), 19 and 28 of the Securities Act of 1933, as amended, Sections 12, 15, 23(a) and 36 of the Securities Exchange Act of 1934, as amended, and Section 304 of the Trust Indenture Act of 1939, as amended.

List of Subjects

17 CFR Part 200

• Administrative practice and procedure
• Authority delegations (Government agencies)
• Organization and functions (Government agencies)

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

• Reporting and recordkeeping requirements
• Securities

In accordance with the foregoing, title 17, chapter II of the Code of Federal Regulations is amended as follows:

PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS

1. The authority citation for part 200 is revised to read in part as follows:

Authority: 15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1, 78d-2, 78o-4, 78w, 78 ll (d), 78mm, 80a-37, 80b-11, 7202, and 7211 et seq., unless otherwise noted.

2. Section 200.30-1 is amended by:

a. Revise paragraphs (b)(2) and (3); and

b. Add paragraph (b)(4).

The revisions and addition read as follows:

PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

3. The authority citation for part 230 is revised 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, 78 l, 78m, 78n, 78o, 78o-7 note, 78t, 78w, 78 ll (d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted.

4. In § 230.157, paragraph (a) is revised to read as follows:

5. Sections 230.251 through 230.263 are revised to read as follows:

6. Section 230.505(b)(2)(iii)(A) and (B) are revised to read as follows:

PART 232—REGULATION S-T—GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS

7. The authority citation for part 232 is revised to read in part as follows:

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78 l, 78m, 78n, 78o(d), 78w(a), 78 ll, 80a-6(c), 80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.

8. Section 232.101 is amended by:

a. Revising paragraph (a)(1)(vii), (xv), and (xvi), and (c)(6);

b. Adding paragraph (a)(1)(xvii); and

c. Removing and reserving paragraph (b)(8).

The revisions and addition read as follows:

PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

9. The authority citation for part 239 is revised to read in part 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), 78 ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

10. Amend Form 1-A (referenced in § 239.90) by revising it to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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 et seq.). 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 $50 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 $15 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.

II. Preparation, Submission and Filing of the Offering Statement.

An offering statement must be prepared by all persons seeking exemption under the provisions of Regulation A. Parts I, II and III must be addressed by all issuers. Part II, which relates to the content of the required offering circular, provides alternative formats, of which the issuer must choose one. General information regarding the preparation, format, content, and submission or filing of the offering statement is contained in Rule 252. Information regarding non-public submission of the offering statement is contained in Rule 252(d). Requirements relating to the offering circular are contained in Rules 253 and 254. The offering statement must be submitted or filed with the Securities and Exchange Commission in electronic format by means of the Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR) in accordance with the EDGAR rules set forth in Regulation S-T (17 CFR part 232) for such submission or filing.

III. Incorporation by Reference and Cross-Referencing.

An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Cross-referencing within the offering statement is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Incorporation by reference and cross-referencing are subject to the following additional conditions:

(a) The use of incorporation by reference and cross-referencing in Part II of this Form is limited to the following items:

(1) Items 2-14 of Part II if following the Offering Circular format;

(2) Items 3-11 (other than Item 11(e)) of Form S-1 if following the Part I of Form S-1 format; or

(3) Items 3-26, 28, and 30 of Form S-11 if following the Part I of Form S-11 format.

(b) Descriptions of where the information incorporated by reference or cross-referenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All descriptions of where information incorporated by reference can be found must be accompanied by a hyperlink to the incorporated document on EDGAR, which hyperlink need not remain active after the filing of the offering statement. Inactive hyperlinks must be updated in any amendment to the offering statement otherwise required.

(c) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Incorporating information into the financial statements from elsewhere is not permitted. Information shall not be incorporated by reference or cross-referenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing.

(d) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.

IV. Supplemental Information.

The information specified below must be furnished to the Commission as supplemental information, if applicable. Supplemental information shall not be required to be filed with or deemed part of the offering statement, unless otherwise required. The information shall be returned to the issuer upon request made in writing at the time of submission, provided that the return of such information is consistent with the protection of investors and the provisions of the Freedom of Information Act [5 U.S.C. 552] and the information was not filed in electronic format.

(a) A statement as to whether or not the amount of compensation to be allowed or paid to the underwriter has been cleared with the Financial Industry Regulatory Authority (FINRA).

(b) Any engineering, management, market, or similar report referenced in the offering circular or provided for external use by the issuer or by a principal underwriter in connection with the proposed offering. There must also be furnished at the same time a statement as to the actual or proposed use and distribution of such report or memorandum. Such statement must identify each class of persons who have received or will receive the report or memorandum, and state the number of copies distributed to each such class along with a statement as to the actual or proposed use and distribution of such report or memorandum.

(c) Such other information as requested by the staff in support of statements, representations and other assertions contained in the offering statement or any correspondence to the staff.

Correspondence appropriately responding to any staff comments made on the offering statement must also be furnished electronically. When applicable, such correspondence must clearly indicate where changes responsive to the staff's comments may be found in the offering statement.

PART I—NOTIFICATION

The following information must be provided in the XML-based portion of Form 1-A available through the EDGAR portal and must be completed or updated before uploading each offering statement or amendment thereto. The format of Part I shown below may differ from the electronic version available on EDGAR. The electronic version of Part I will allow issuers to attach Part II and Part III for filing by means of EDGAR. All items must be addressed, unless otherwise indicated.

☐ No changes to the information required by Part I have occurred since the last filing of this offering statement.

ITEM 1. Issuer Information

Exact name of issuer as specified in the issuer's charter:

Jurisdiction of incorporation/organization:

Year of incorporation:

CIK:

Primary Standard Industrial Classification Code:

I.R.S. Employer Identification Number:

Total number of full-time employees:

Total number of part-time employees:

Contact Information

Address of Principal Executive Offices:

Telephone:(__)

Provide the following information for the person the Securities and Exchange Commission's staff should call in connection with any pre-qualification review of the offering statement:

Name:

Address:

Telephone: (__)

Provide up to two email addresses to which the Securities and Exchange Commission's staff may send any comment letters relating to the offering statement. After qualification of the offering statement, such email addresses are not required to remain active:

Financial Statements

Industry Group (select one): ☐ Banking ☐ Insurance ☐ Other

Use the financial statements for the most recent fiscal period contained in this offering statement to provide the following information about the issuer. The following table does not include all of the line items from the financial statements. Long Term Debt would include notes payable, bonds, mortgages, and similar obligations. To determine “Total Revenues” for all companies selecting “Other” for their industry group, refer to Article 5-03(b)(1) of Regulation S-X. For companies selecting “Insurance,” refer to Article 7-04 of Regulation S-X for calculation of “Total Revenues” and paragraphs 5 and 7(a) for “Costs and Expenses Applicable to Revenues”.

[If “Other” is selected, display the following options in the Financial Statements table:]

Balance Sheet Information

Cash and Cash Equivalents:

Investment Securities:

Accounts and Notes Receivable:

Property, Plant and Equipment (PP&E):

Total Assets:

Accounts Payable and Accrued Liabilities:

Long Term Debt:

Total Liabilities:

Total Stockholders' Equity:

Total Liabilities and Equity:

Income Statement Information

Total Revenues:

Costs and Expenses Applicable to Revenues:

Depreciation and Amortization:

Net Income:

Earnings Per Share—Basic:

Earnings Per Share—Diluted:

[If “Banking” is selected, display the following options in the Financial Statements table:]

Balance Sheet Information

Cash and Cash Equivalents:

Investment Securities:

Loans:

Property and Equipment:

Total Assets:

Accounts Payable and Accrued Liabilities:

Deposits:

Long Term Debt:

Total Liabilities:

Total Stockholders' Equity:

Total Liabilities and Equity:

Income Statement Information

Total Interest Income:

Total Interest Expense:

Depreciation and Amortization:

Net Income:

Earnings Per Share—Basic:

Earnings Per Share—Diluted:

[If “Insurance” is selected, display the following options in the Financial Statements table:]

Balance Sheet Information

Cash and Cash Equivalents:

Total Investments:

Accounts and Notes Receivable:

Property and Equipment:

Total Assets:

Accounts Payable and Accrued Liabilities:

Policy Liabilities and Accruals:

Long Term Debt:

Total Liabilities:

Total Stockholders' Equity:

Total Liabilities and Equity:

Income Statement Information

Total Revenues:

Costs and Expenses Applicable to Revenues:

Depreciation and Amortization:

Net Income:

Earnings Per Share—Basic:

Earnings Per Share—Diluted:

[End of section that varies based on the selection of Industry Group]

Name of Auditor (if any):

Outstanding Securities

ITEM 2. Issuer Eligibility

☐ Check this box to certify that all of the following statements are true for the issuer(s):

• Organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia.
• Principal place of business is in the United States or Canada.
• Not subject to section 13 or 15(d) of the Securities Exchange Act of 1934.
• Not a development stage company that either (a) has no specific business plan or purpose, or (b) has indicated that its business plan is to merge with an unidentified company or companies.
• Not an investment company registered or required to be registered under the Investment Company Act of 1940.
• Not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights.
• Not issuing asset-backed securities as defined in Item 1101(c) of Regulation AB.
• Not, and has not been, subject to any order of the Commission entered pursuant to Section 12(j) of the Exchange Act (15 U.S.C. 78 l (j)) within five years before the filing of this offering statement.
• Has filed with the Commission all the reports it was required to file, if any, pursuant to Rule 257 during the two years immediately before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports).

ITEM 3. Application of Rule 262

☐ Check this box to certify that, as of the time of this filing, each person described in Rule 262 of Regulation A is either not disqualified under that rule or is disqualified but has received a waiver of such disqualification.

☐ Check this box if “bad actor” disclosure under Rule 262(d) is provided in Part II of the offering statement.

ITEM 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings

Check the appropriate box to indicate whether you are conducting a Tier 1 or Tier 2 offering:

☐ Tier 1 ☐ Tier 2

Check the appropriate box to indicate whether the annual financial statements have been audited:

☐ Unaudited ☐ Audited

Types of Securities Offered in this Offering Statement (select all that apply):

☐ Equity (common or preferred stock)

☐ Debt

☐ Option, warrant or other right to acquire another security

☐ Security to be acquired upon exercise of option, warrant or other right to acquire security

☐ Tenant-in-common securities

☐ Other (describe)______

Does the issuer intend to offer the securities on a delayed or continuous basis pursuant to Rule 251(d)(3)?

Yes ☐ No ☐

Does the issuer intend this offering to last more than one year?

Yes ☐ No ☐

Does the issuer intend to price this offering after qualification pursuant to Rule 253(b)?

Yes ☐ No ☐

Will the issuer be conducting a best efforts offering?

Yes ☐ No ☐

Has the issuer used solicitation of interest communications in connection with the proposed offering?

Yes ☐ No ☐

Does the proposed offering involve the resale of securities by affiliates of the issuer?

Yes ☐ No ☐

Number of securities offered:______

Number of securities of that class already outstanding:______

The information called for by this item below may be omitted if undetermined at the time of filing or submission, except that if a price range has been included in the offering statement, the midpoint of that range must be used to respond. Please refer to Rule 251(a) for the definition of “aggregate offering price” or “aggregate sales” as used in this item. Please leave the field blank if undetermined at this time and include a zero if a particular item is not applicable to the offering.

Price per security: $______

The portion of the aggregate offering price attributable to securities being offered on behalf of the issuer:

$______

The portion of the aggregate offering price attributable to securities being offered on behalf of selling securityholders:

$______

The portion of aggregate offering attributable to all the securities of the issuer sold pursuant to a qualified offering statement within the 12 months before the qualification of this offering statement:

$______

The estimated portion of aggregate sales attributable to securities that may be sold pursuant to any other qualified offering statement concurrently with securities being sold under this offering statement:

$______

Total: $______ (the sum of the aggregate offering price and aggregate sales in the four preceding paragraphs).

Anticipated fees in connection with this offering and names of service providers:

CRD Number of any broker or dealer listed:______

Estimated net proceeds to the issuer: $______

Clarification of responses (if necessary):______

ITEM 5. Jurisdictions in Which Securities are to be Offered

Using the list below, select the jurisdictions in which the issuer intends to offer the securities:

[List will include all U.S. and Canadian jurisdictions, with an option to add and remove them individually, add all and remove all.]

Using the list below, select the jurisdictions in which the securities are to be offered by underwriters, dealers or sales persons or check the appropriate box:

☐ None

☐ Same as the jurisdictions in which the issuer intends to offer the securities.

[List will include all U.S. and Canadian jurisdictions, with an option to add and remove them individually, add all and remove all.]

ITEM 6. Unregistered Securities Issued or Sold Within One Year

☐ None

As to any unregistered securities issued by the issuer or any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a) Name of such issuer.

(b) (1) Title of securities issued

(2) Total amount of such securities issued

(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer

(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.

(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

(e) Indicate the section of the Securities Act or Commission rule or regulation relied upon for exemption from the registration requirements of such Act and state briefly the facts relied upon for such exemption:_________

PART II — INFORMATION REQUIRED IN OFFERING CIRCULAR

(a) Financial statement requirements regardless of the applicable disclosure format are specified in Part F/S of this Form 1-A. The narrative disclosure contents of offering circulars are specified as follows:

(1) The information required by:

(i) the Offering Circular format described below; or

(ii) The information required by Part I of Form S-1 (17 CFR 239.11) or Part I of Form S-11 (17 CFR 239.18), except for the financial statements, selected financial data, and supplementary financial information called for by those forms. An issuer choosing to follow the Form S-1 or Form S-11 format may follow the requirements for smaller reporting companies if it meets the definition of that term in Rule 405 (17 CFR 230.405). An issuer may only use the Form S-11 format if the offering is eligible to be registered on that form;

The cover page of the offering circular must identify which disclosure format is being followed.

(2) The offering circular must describe any matters that would have triggered disqualification under Rule 262(a)(3) or (a)(5) but for the provisions set forth in Rule 262(b)(1);

(3) The legend required by Rule 253(f) of Regulation A must be included on the offering circular cover page (for issuers following the S-1 or S-11 disclosure models this legend must be included instead of the legend required by Item 501(b)(7) of Regulation S-K);

(4) For preliminary offering circulars, the legend required by Rule 254(a) must be included on the offering circular cover page (for issuers following the S-1 or S-11 disclosure models, this legend must be included instead of the legend required by Item 501(b)(10) of Regulation S-K); and

(5) For Tier 2 offerings where the securities will not be listed on a registered national securities exchange upon qualification, the offering circular cover page must include the following legend highlighted by prominent type or in another manner:

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov .

(b) The Commission encourages the use of management's projections of future economic performance that have a reasonable basis and are presented in an appropriate format. See Rule 175, 17 CFR 230.175.

(c) Offering circulars need not follow the order of the items or the order of other requirements of the disclosure form except to the extent otherwise specifically provided. Such information may not, however, be set forth in such a fashion as to obscure any of the required information or any information necessary to keep the required information from being incomplete or misleading. Information requested to be presented in a specified tabular format must be given in substantially the tabular format specified. For incorporation by reference, please refer to General Instruction III of this Form.

OFFERING CIRCULAR

Item 1. Cover Page of Offering Circular

The cover page of the offering circular must be limited to one page and must include the information specified in this item.

(a) Name of the issuer.

Instruction to Item 1(a):

If your name is the same as, or confusingly similar to, that of a company that is well known, include information to eliminate any possible confusion with the other company. If your name indicates a line of business in which you are not engaged or you are engaged only to a limited extent, include information to eliminate any misleading inference as to your business. In some circumstances, disclosure may not be sufficient and you may be required to change your name. You will not be required to change your name if you are an established company, the character of your business has changed, and the investing public is generally aware of the change and the character of your current business.

(b) Full mailing address of the issuer's principal executive offices and the issuer's telephone number (including the area code) and, if applicable, Web site address.

(c) Date of the offering circular.

(d) Title and amount of securities offered. Separately state the amount of securities offered by selling securityholders, if any. Include a cross-reference to the section where the disclosure required by Item 14 of Part II of this Form 1-A has been provided;

(e) The information called for by the applicable table below as to all the securities being offered, in substantially the tabular format indicated. If necessary, you may estimate any underwriting discounts and commissions and the proceeds to the issuer or other persons.

If the securities are to be offered on a best efforts basis, the cover page must set forth the termination date, if any, of the offering, any minimum required sale and any arrangements to place the funds received in an escrow, trust, or similar arrangement. The following table must be used instead of the preceding table.

Instructions to Item 1(e):

1. The term “commissions” includes all cash, securities, contracts, or anything else of value, paid, to be set aside, disposed of, or understandings with or for the benefit of any other persons in which any underwriter is interested, made in connection with the sale of such security.

2. Only commissions paid by the issuer in cash are to be indicated in the table. Commissions paid by other persons or any form of non-cash compensation must be briefly identified in a footnote to the table with a cross-reference to a more complete description elsewhere in the offering circular.

3. Before the commencement of sales pursuant to Regulation A, the issuer must inform the Commission whether or not the amount of compensation to be allowed or paid to the underwriters, as described in the offering statement, has been cleared with FINRA.

4. If the securities are not to be offered for cash, state the basis upon which the offering is to be made.

5. Any finder's fees or similar payments must be disclosed on the cover page with a reference to a more complete discussion in the offering circular. Such disclosure must identify the finder, the nature of the services rendered and the nature of any relationship between the finder and the issuer, its officers, directors, promoters, principal stockholders and underwriters (including any affiliates of such persons).

6. The amount of the expenses of the offering borne by the issuer, including underwriting expenses to be borne by the issuer, must be disclosed in a footnote to the table.

(f) The name of the underwriter or underwriters.

(g) Any legend or information required by the law of any state in which the securities are to be offered.

(h) A cross-reference to the risk factors section, including the page number where it appears in the offering circular. Highlight this cross-reference by prominent type or in another manner.

(i) Approximate date of commencement of proposed sale to the public.

(j) If the issuer intends to rely on Rule 253(b) and a preliminary offering circular is circulated, provide (1) a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered or (2) a bona fide estimate of the principal amount of the debt securities offered. The range must not exceed $2 for offerings where the upper end of the range is $10 or less and 20% if the upper end of the price range is over $10.

Instruction to Item 1(j):

The upper limit of the price range must be used in determining the aggregate offering price for purposes of Rule 251(a).

Item 2. Table of Contents

On the page immediately following the cover page of the offering circular, provide a reasonably detailed table of contents. It must show the page numbers of the various sections or subdivisions of the offering circular. Include a specific listing of the risk factors section required by Item 3 of Part II of this Form 1-A.

Item 3. Summary and Risk Factors

(a) An issuer may provide a summary of the information in the offering circular where the length or complexity of the offering circular makes a summary useful. The summary should be brief and must not contain all of the detailed information in the offering circular.

(b) Immediately following the Table of Contents required by Item 2 or the Summary, there must be set forth under an appropriate caption, a carefully organized series of short, concise paragraphs, summarizing the most significant factors that make the offering speculative or substantially risky. Issuers should avoid generalized statements and include only factors that are specific to the issuer.

Item 4. Dilution

Where there is a material disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons for shares acquired by them in a transaction during the past year, or that they have a right to acquire, there must be included a comparison of the public contribution under the proposed public offering and the average effective cash contribution of such persons.

Item 5. Plan of Distribution and Selling Securityholders

(a) If the securities are to be offered through underwriters, give the names of the principal underwriters, and state the respective amounts underwritten. Identify each such underwriter having a material relationship to the issuer and state the nature of the relationship. State briefly the nature of the underwriters' obligation to take the securities.

Instructions to Item 5(a):

1. All that is required as to the nature of the underwriters' obligation is whether the underwriters are or will be committed to take and to pay for all of the securities if any are taken, or whether it is merely an agency or the type of best efforts arrangement under which the underwriters are required to take and to pay for only such securities as they may sell to the public. Conditions precedent to the underwriters' taking the securities, including market outs, need not be described except in the case of an agency or best efforts arrangement.

2. It is not necessary to disclose each member of a selling group. Disclosure may be limited to those underwriters who are in privity of contract with the issuer with respect to the offering.

(b) State briefly the discounts and commissions to be allowed or paid to dealers, including all cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the securities.

(c) Outline briefly the plan of distribution of any securities being issued that are to be offered through the selling efforts of brokers or dealers or otherwise than through underwriters.

(d) If any of the securities are to be offered for the account of securityholders, identify each selling securityholder, state the amount owned by the securityholder prior to the offering, the amount offered for his or her account and the amount to be owned after the offering. Provide such disclosure in a tabular format. At the bottom of the table, provide the total number of securities being offered for the account of all securityholders and describe what percent of the pre-offering outstanding securities of such class the offering represents.

Instruction to Item 5(d):

The term “securityholder” in this paragraph refers to beneficial holders, not nominee holders or other such holders of record. If the selling securityholder is an entity, disclosure of the persons who have sole or shared voting or investment power must be included.

(e) Describe any arrangements for the return of funds to subscribers if all of the securities to be offered are not sold. If there are no such arrangements, so state.

(f) If there will be a material delay in the payment of the proceeds of the offering by the underwriter to the issuer, the salient provisions in this regard and the effects on the issuer must be stated.

(g) Describe any arrangement to (1) limit or restrict the sale of other securities of the same class as those to be offered for the period of distribution, (2) stabilize the market for any of the securities to be offered, or (3) withhold commissions, or otherwise to hold each underwriter or dealer responsible for the distribution of its participation.

(h) Identify any underwriter that intends to confirm sales to any accounts over which it exercises discretionary authority and include an estimate of the amount of securities so intended to be confirmed.

Instruction to Item 5:

Attention is directed to the provisions of Rules 10b 9 [17 CFR 240.10b-9] and 15c2-4 [17 CFR 240.15c2-4] under the Securities Exchange Act of 1934. These rules outline, among other things, antifraud provisions concerning the return of funds to subscribers and the transmission of proceeds of an offering to a seller.

Item 6. Use of Proceeds to Issuer

State the principal purposes for which the net proceeds to the issuer from the securities to be offered are intended to be used and the approximate amount intended to be used for each such purpose. If the issuer will not receive any of proceeds from the offering, so state.

Instructions to Item 6:

1. If any substantial portion of the proceeds has not been allocated for particular purposes, a statement to that effect must be made together with a statement of the amount of proceeds not so allocated.

2. State whether or not the proceeds will be used to compensate or otherwise make payments to officers or directors of the issuer or any of its subsidiaries.

3. For best efforts offerings, describe any anticipated material changes in the use of proceeds if all of the securities being qualified on the offering statement are not sold.

4. If an issuer must provide the disclosure described in Item 9(c) the use of proceeds and plan of operations should be consistent.

5. If any material amounts of other funds are to be used in conjunction with the proceeds, state the amounts and sources of such other funds and whether such funds are firm or contingent.

6. If any material part of the proceeds is to be used to discharge indebtedness, describe the material terms of such indebtedness. If the indebtedness to be discharged was incurred within one year, describe the use of the proceeds arising from such indebtedness.

7. If any material amount of the proceeds is to be used to acquire assets, otherwise than in the ordinary course of business, briefly describe and state the cost of the assets. If the assets are to be acquired from affiliates of the issuer or their associates, give the names of the persons from whom they are to be acquired and set forth the basis used in determining the purchase price to the issuer.

8. The issuer may reserve the right to change the use of proceeds, so long as the reservation is prominently disclosed in the section where the use of proceeds is discussed. It is not necessary to describe the possible alternative uses of proceeds unless the issuer believes that a change in circumstances leading to an alternative use of proceeds is likely to occur.

Item 7. Description of Business

(a) Narrative description of business.

(1) Describe the business done and intended to be done by the issuer and its subsidiaries and the general development of the business during the past three years or such shorter period as the issuer may have been in business. Such description must include, but not be limited to, a discussion of the following factors if such factors are material to an understanding of the issuer's business:

(i) The principal products and services of the issuer and the principal market for and method of distribution of such products and services.

(ii) The status of a product or service if the issuer has made public information about a new product or service that would require the investment of a material amount of the assets of the issuer or is otherwise material.

(iii) If material, the estimated amount spent during each of the last two fiscal years on company-sponsored research and development activities determined in accordance with generally accepted accounting principles. In addition, state, if material, the estimated dollar amount spent during each of such years on material customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques.

(iv) The total number of persons employed by the issuer, indicating the number employed full time.

(v) Any bankruptcy, receivership or similar proceeding.

(vi) Any legal proceedings material to the business or financial condition of the issuer.

(vii) Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business.

(2) The issuer must also describe those distinctive or special characteristics of the issuer's operation or industry that are reasonably likely to have a material impact upon the issuer's future financial performance. Examples of factors that might be discussed include dependence on one or a few major customers or suppliers (including suppliers of raw materials or financing), effect of existing or probable governmental regulation (including environmental regulation), material terms of and/or expiration of material labor contracts or patents, trademarks, licenses, franchises, concessions or royalty agreements, unusual competitive conditions in the industry, cyclicality of the industry and anticipated raw material or energy shortages to the extent management may not be able to secure a continuing source of supply.

(b) Segment Data. If the issuer is required by generally accepted accounting principles to include segment information in its financial statements, an appropriate cross-reference must be included in the description of business.

(c) Industry Guides. The disclosure guidelines in all Securities Act Industry Guides must be followed. To the extent that the industry guides are codified into Regulation S-K, the Regulation S-K industry disclosure items must be followed.

(d) For offerings of limited partnership or limited liability company interests, an issuer must comply with the Commission's interpretive views on substantive disclosure requirements set forth in Securities Act Release No. 6900 (June 17, 1991).

Item 8. Description of Property

State briefly the location and general character of any principal plants or other material physical properties of the issuer and its subsidiaries. If any such property is not held in fee or is held subject to any major encumbrance, so state and briefly describe how held. Include information regarding the suitability, adequacy, productive capacity and extent of utilization of the properties and facilities used in the issuer's business.

Instruction to Item 8:

Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and should not be given.

Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations

Discuss the issuer's financial condition, changes in financial condition and results of operations for each year and interim period for which financial statements are required, including the causes of material changes from year to year or period to period in financial statement line items, to the extent necessary for an understanding of the issuer's business as a whole. Information provided also must relate to the segment information of the issuer. Provide the information specified below as well as such other information that is necessary for an investor's understanding of the issuer's financial condition, changes in financial condition and results of operations.

(a) Operating results. Provide information regarding significant factors, including unusual or infrequent events or transactions or new developments, materially affecting the issuer's income from operations, and, in each case, indicating the extent to which income was so affected. Describe any other significant component of revenue or expenses necessary to understand the issuer's results of operations. To the extent that the financial statements disclose material changes in net sales or revenues, provide a narrative discussion of the extent to which such changes are attributable to changes in prices or to changes in the volume or amount of products or services being sold or to the introduction of new products or services.

Instruction to Item 9(a):

1. The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (A) matters that would have an impact on future operations that have not had an impact in the past, and (B) matters that have had an impact on reported operations that are not expected to have an impact upon future operations.

2. Where the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the issuer's businesses as a whole. If the causes for a change in one line item also relate to other line items, no repetition is required and a line-by-line analysis of the financial statements as a whole is not required or generally appropriate. Issuers need not recite the amounts of changes from year to year which are readily computable from the financial statements. The discussion must not merely repeat numerical data contained in the consolidated financial statements.

3. When interim period financial statements are included, discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided. Discuss any material changes in the issuer's results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year.

(b) Liquidity and capital resources. Provide information regarding the following:

(1) the issuer's liquidity (both short and long term), including a description and evaluation of the internal and external sources of liquidity and a brief discussion of any material unused sources of liquidity. If a material deficiency in liquidity is identified, indicate the course of action that the issuer has taken or proposes to take to remedy the deficiency.

(2) the issuer's material commitments for capital expenditures as of the end of the latest fiscal year and any subsequent interim period and an indication of the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments.

(c) Plan of Operations. Issuers (including predecessors) that have not received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter) must describe, if formulated, their plan of operation for the 12 months following the commencement of the proposed offering. If such information is not available, the reasons for its unavailability must be stated. Disclosure relating to any plan must include, among other things, a statement indicating whether, in the issuer's opinion, the proceeds from the offering will satisfy its cash requirements or whether it anticipates it will be necessary to raise additional funds in the next six months to implement the plan of operations.

(d) Trend information. The issuer must identify the most significant recent trends in production, sales and inventory, the state of the order book and costs and selling prices since the latest financial year. The issuer also must discuss, for at least the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the issuer's net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

Item 10. Directors, Executive Officers and Significant Employees

(a) For each of the directors, persons nominated or chosen to become directors, executive officers, persons chosen to become executive officers, and significant employees, provide the information specified below in substantially the following tabular format:

(1) Provide the month and year of the start date and, if applicable, the end date. To the extent you are unable to provide specific dates, provide such other description in the table or in an appropriate footnote clarifying the term of office. If the person is a nominee or chosen to become a director or executive officer, it must be indicated in this column or by footnote.

(2) For executive officers and significant employees that are working part-time, indicate approximately the average number of hours per week or month such person works or is anticipated to work. This column may be left blank for directors. The entire column may be omitted if all those listed in the table work full time for the issuer.

In a footnote to the table, briefly describe any arrangement or understanding between the persons described above and any other persons (naming such persons) pursuant to which the person was or is to be selected to his or her office or position.

Instructions to Item 10(a):

1. No nominee or person chosen to become a director or person chosen to be an executive officer who has not consented to act as such may be named in response to this item.

2. The term “executive officer” means the president, secretary, treasurer, any vice president in charge of a principal business function (such as sales, administration, or finance) and any other person who performs similar policy making functions for the issuer.

3. The term “significant employee” means persons such as production managers, sales managers, or research scientists, who are not executive officers, but who make or are expected to make significant contributions to the business of the issuer.

(b) Family relationships. State the nature of any family relationship between any director, executive officer, person nominated or chosen by the issuer to become a director or executive officer or any significant employee.

Instruction to Item 10(b):

The term “family relationship” means any relationship by blood, marriage, or adoption, not more remote than first cousin.

(c) Business experience. Give a brief account of the business experience during the past five years of each director, executive officer, person nominated or chosen to become a director or executive officer, and each significant employee, including his or her principal occupations and employment during that period and the name and principal business of any corporation or other organization in which such occupations and employment were carried on. When an executive officer or significant employee has been employed by the issuer for less than five years, a brief explanation must be included as to the nature of the responsibilities undertaken by the individual in prior positions to provide adequate disclosure of this prior business experience. What is required is information relating to the level of the employee's professional competence, which may include, depending upon the circumstances, such specific information as the size of the operation supervised.

(d) Involvement in certain legal proceedings. Describe any of the following events which occurred during the past five years and which are material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the issuer:

(1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; or

(2) Such person was convicted in a criminal proceeding (excluding traffic violations and other minor offenses).

Item 11. Compensation of Directors and Executive Officers

(a) Provide, in substantially the tabular format indicated, the annual compensation of each of the three highest paid persons who were executive officers or directors during the issuer's last completed fiscal year.

(b) Provide the aggregate annual compensation of the issuer's directors as a group for the issuer's last completed fiscal year. Specify the total number of directors in the group.

(c) For Tier 1 offerings, the annual compensation of the three highest paid persons who were executive officers or directors and the aggregate annual compensation of the issuer's directors may be provided as a group, rather than as specified in paragraphs (a) and (b) of this item. In such case, issuers must specify the total number of persons in the group.

(d) Briefly describe all proposed compensation to be made in the future pursuant to any ongoing plan or arrangement to the individuals specified in paragraphs (a) and (b) of this item. The description must include a summary of how each plan operates, any performance formula or measure in effect (or the criteria used to determine payment amounts), the time periods over which the measurements of benefits will be determined, payment schedules, and any recent material amendments to the plan. Information need not be included with respect to any group life, health, hospitalization, or medical reimbursement plans that do not discriminate in scope, terms or operation in favor of executive officers or directors of the issuer and that are available generally to all salaried employees.

Instructions to Item 11:

1. In case of compensation paid or to be paid otherwise than in cash, if it is impracticable to determine the cash value thereof, state in a note to the table the nature and amount thereof.

2. This item is to be answered on an accrual basis if practicable; if not so answered, state the basis used.

Item 12. Security Ownership of Management and Certain Securityholders

(a) Include the information specified in paragraph (b) of this item as of the most recent practicable date (stating the date used), in substantially the tabular format indicated, with respect to voting securities beneficially owned by:

(1) all executive officers and directors as a group, individually naming each director or executive officer who beneficially owns more than 10% of any class of the issuer's voting securities;

(2) any other securityholder who beneficially owns more than 10% of any class of the issuer's voting securities as such beneficial ownership would be calculated if the issuer were subject to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934.

(b) Beneficial Ownership Table:

(1) The address given in this column may be a business, mailing, or residential address. The address may be included in an appropriate footnote to the table rather than in this column.

(2) This column must include the amount of equity securities each beneficial owner has the right to acquire using the manner specified in Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. An appropriate footnote must be included if the column heading does not sufficiently describe the circumstances upon which such securities could be acquired.

(3) This column must use the amounts contained in the two preceding columns to calculate the percent of class owned by such beneficial owner.

Item 13. Interest of Management and Others in Certain Transactions

(a) Describe briefly any transactions or any currently proposed transactions during the issuer's last two completed fiscal years and the current fiscal year, to which the issuer or any of its subsidiaries was or is to be a participant and the amount involved exceeds $50,000 for Tier 1 or the lesser of $120,000 and one percent of the average of the issuer's total assets at year end for the last two completed fiscal years for Tier 2, and in which any of the following persons had or is to have a direct or indirect material interest, naming the person and stating his or her relationship to the issuer, the nature of the person's interest in the transaction and, where practicable, the amount of such interest:

(1) Any director or executive officer of the issuer;

(2) Any nominee for election as a director;

(3) Any securityholder named in answer to Item 12(a)(2);

(4) If the issuer was incorporated or organized within the past three years, any promoter of the issuer; or

(5) Any immediate family member of the above persons. An “immediate family member” of a person means such person's child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or any person (other than a tenant or employee) sharing such person's household.

Instructions to Item 13(a):

1. For purposes of calculating the amount of the transaction described above, all periodic installments in the case of any lease or other agreement providing for periodic payments must be aggregated to the extent they occurred within the time period described in this item.

2. No information need be given in answer to this item as to any transaction where:

(a) The rates of charges involved in the transaction are determined by competitive bids, or the transaction involves the rendering of services as a common or contract carrier at rates or charges fixed in conformity with law or governmental authority;

(b) The transaction involves services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services;

(c) The interest of the specified person arises solely from the ownership of securities of the issuer and the specified person receives no extra or special benefit not shared on a pro-rata basis by all of the holders of securities of the class.

3. This item calls for disclosure of indirect as well as direct material interests in transactions. A person who has a position or relationship with a firm, corporation, or other entity which engages in a transaction with the issuer or its subsidiaries may have an indirect interest in such transaction by reason of the position or relationship. However, a person is deemed not to have a material indirect interest in a transaction within the meaning of this item where:

(a) the interest arises only (i) from the person's position as a director of another corporation or organization (other than a partnership) that is a party to the transaction, or (ii) from the direct or indirect ownership by the person and all other persons specified in paragraphs (1) through (5) of this item, in the aggregate, of less than a 10 percent equity interest in another person (other than a partnership) that is a party to the transaction, or (iii) from both such position and ownership;

(b) the interest arises only from the person's position as a limited partner in a partnership in which the person and all other persons specified in paragraphs (1) through (5) of this item had an interest of less than 10 percent; or

(c) the interest of the person arises solely from the holding of an equity interest (unless the equity interest confers management rights similar to a general partner interest) or a creditor interest in another person that is a party to the transaction with the issuer or any of its subsidiaries and the transaction is not material to the other person.

4. Include the name of each person whose interest in any transaction is described and the nature of the relationships by reason of which such interest is required to be described. The amount of the interest of any specified person must be computed without regard to the amount of the profit or loss involved in the transaction. Where it is not practicable to state the approximate amount of the interest, the approximate amount involved in the transaction must be disclosed.

5. Information must be included as to any material underwriting discounts and commissions upon the sale of securities by the issuer where any of the specified persons was or is to be a principal underwriter or is a controlling person, or member, of a firm which was or is to be a principal underwriter. Information need not be given concerning ordinary management fees paid by underwriters to a managing underwriter pursuant to an agreement among underwriters, the parties to which do not include the issuer or its subsidiaries.

6. As to any transaction involving the purchase or sale of assets by or to any issuer or any subsidiary, otherwise than in the ordinary course of business, state the cost of the assets to the purchaser and, if acquired by the seller within two years before the transaction, the cost to the seller.

7. Information must be included in answer to this item with respect to transactions not excluded above which involve compensation from the issuer or its subsidiaries, directly or indirectly, to any of the specified persons for services in any capacity unless the interest of such persons arises solely from the ownership individually and in the aggregate of less than 10 percent of any class of equity securities of another corporation furnishing the services to the issuer or its subsidiaries.

(b) If any expert named in the offering statement as having prepared or certified any part of the offering statement was employed for such purpose on a contingent basis or, at the time of such preparation or certification or at any time thereafter, had a material interest in the issuer or any of its parents or subsidiaries or was connected with the issuer or any of its subsidiaries as a promoter, underwriter, voting trustee, director, officer or employee, describe the nature of such contingent basis, interest or connection.

Item 14. Securities Being Offered

(a) If capital stock is being offered, state the title of the class and furnish the following information regarding all classes of capital stock outstanding:

(1) Outline briefly: (i) dividend rights; (ii) voting rights; (iii) liquidation rights; (iv) preemptive rights; (v) conversion rights; (vi) redemption provisions; (vii) sinking fund provisions; (viii) liability to further calls or to assessment by the issuer; (ix) any classification of the Board of Directors, and the impact of classification where cumulative voting is permitted or required; (x) restrictions on alienability of the securities being offered; (xi) any provision discriminating against any existing or prospective holder of such securities as a result of such securityholder owning a substantial amount of securities; and (xii) any rights of holders that may be modified otherwise than by a vote of a majority or more of the shares outstanding, voting as a class.

(2) Briefly describe potential liabilities imposed on securityholders under state statutes or foreign law, for example, to employees of the issuer, unless such disclosure would be immaterial because the financial resources of the issuer or other factors are such as to make it unlikely that the liability will ever be imposed.

(3) If preferred stock is to be offered or is outstanding, describe briefly any restriction on the repurchase or redemption of shares by the issuer while there is any arrearage in the payment of dividends or sinking fund installments. If there is no such restriction, so state.

(b) If debt securities are being offered, outline briefly the following:

(1) Provisions with respect to interest, conversion, maturity, redemption, amortization, sinking fund or retirement.

(2) Provisions with respect to the kind and priority of any lien securing the issue, together with a brief identification of the principal properties subject to such lien.

(3) Material affirmative and negative covenants.

Instruction to Item 14(b):

In the case of secured debt there must be stated: (i) the approximate amount of unbonded property available for use against the issuance of bonds, as of the most recent practicable date, and (ii) whether the securities being issued are to be issued against such property, against the deposit of cash, or otherwise.

(c) If securities described are to be offered pursuant to warrants, rights, or convertible securities, state briefly:

(1) the amount of securities issuable upon the exercise or conversion of such warrants, convertible securities or rights;

(2) the period during which and the price at which the warrants, convertible securities or rights are exercisable;

(3) the amounts of warrants, convertible securities or rights outstanding; and

(4) any other material terms of such securities.

(d) In the case of any other kind of securities, include a brief description with comparable information to that required in (a), (b) and (c) of Item 14.

Part F/S

(a) General Rules

(1) The appropriate financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the offering statement and included in the offering circular that is distributed to investors.

(2) Unless the issuer is a Canadian company, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, 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.

(3) The issuer may elect to delay complying with any new or revised financial accounting standard until the date that a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(a)) is required to comply with such new or revised accounting standard, if such standard also applies to companies that are not issuers. Issuers electing such extension of time accommodation must disclose it at the time the issuer files its offering statement and apply the election to all standards. Issuers electing not to use this accommodation must forgo this accommodation for all financial accounting standards and may not elect to rely on this accommodation in any future filings.

(b) Financial Statements for Tier 1 Offerings

(1) The financial statements prepared pursuant to this paragraph (b), including (b)(7), need not be prepared in accordance with Regulation S-X.

(2) The financial statements prepared pursuant to paragraph (b), including (b)(7), need not be audited. If the financial statements are not audited, they shall be labeled as “unaudited”. However, if an audit of these financial statements is obtained for other purposes and that audit was performed in accordance with either U.S. generally accepted auditing standards or the Standards of the Public Company Accounting Oversight Board by an auditor that is independent pursuant to either the independence standards of the American Institute of Certified Public Accountants (AICPA) or Rule 2-01 of Regulation S-X, those audited financial statements must be filed, and an audit opinion complying with Rule 2-02 of Regulation S-X must be filed along with such financial statements. The auditor may, but need not, be registered with the Public Company Accounting Oversight Board.

(3) Consolidated Balance Sheets. Age of balance sheets at filing and at qualification:

(A) If the filing is made, or the offering statement is qualified, more than three months but no more than nine months after the most recently completed fiscal year end, include a balance sheet as of the two most recently completed fiscal year ends.

(B) If the filing is made, or the offering statement is qualified, more than nine months after the most recently completed fiscal year end, include a balance sheet as of the two most recently completed fiscal year ends and an interim balance sheet as of a date no earlier than six months after the most recently completed fiscal year end.

(C) If the filing is made, or the offering statement is qualified, within three months after the most recently completed fiscal year end, include a balance sheet as of the two fiscal year ends preceding the most recently completed fiscal year end and an interim balance sheet as of a date no earlier than six months after the date of the most recent fiscal year end balance sheet that is required.

(D) If the filing is made, or the offering statement is qualified, during the period from inception until three months after reaching the annual balance sheet date for the first time, include a balance sheet as of a date within nine months of filing or qualification.

(4) Statements of comprehensive income, cash flows, and changes in stockholders' equity. File consolidated statements of income, cash flows, and changes in stockholders' equity for each of the two fiscal years preceding the date of the most recent balance sheet being filed or such shorter period as the issuer has been in existence. If a consolidated interim balance sheet is required by (b)(3) above, consolidated interim statements of income and cash flows shall be provided and must cover at least the first six months of the issuer's fiscal year and the corresponding period of the preceding fiscal year.

(5) Interim financial statements. Interim financial statements may be condensed as described in Rule 8-03(a) of Regulation S-X. The interim income statements must be accompanied by a statement that in the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included.

(6) Oil and Gas Producing Activities. Issuers engaged in oil and gas producing activities must follow the financial accounting and reporting standards specified in Rule 4-10 of Regulation S-X.

(7) Financial Statements of Other Entities. The circumstances described below may require you to file financial statements of other entities in the offering statement. The financial statements of other entities must be presented for the same periods as if the other entity was the issuer as described above in paragraphs (b)(3) and (b)(4) unless a shorter period is specified by the rules below. The financial statement of other entities shall follow the same audit requirement as paragraph (b)(2) of this Part F/S.

(i) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3-10 of Regulation S-X.

(ii) Financial Statements of Affiliates Whose Securities Collateralize an Issuance. Financial statements for an issuer's affiliates whose securities constitute a substantial portion of the collateral for any class of securities being offered must be presented as required by Rule 3-16 of Regulation S-X.

(iii) Financial Statements of Businesses Acquired or to be Acquired. File the financial statements required by Rule 8-04 of Regulation S-X.

(iv) Pro Forma Financial Information. If financial statements are presented under paragraph (b)(7)(iii) above, file pro forma information showing the effects of the acquisition as described in Rule 8-05 of Regulation S-X.

(v) Real Estate Operations Acquired or to be Acquired. File the financial information required by Rule 8-06 of Regulation S-X.

Instructions to paragraph (b) in Part F/S:

1. Issuers should refer to Rule 257(b)(2) to determine whether a special financial report will be required after qualification of the offering statement.

2. If the last day that the financial statements included in the offering statement can be accepted, according to the age requirements of this item falls on a Saturday, Sunday, or holiday, such offering statement may be filed on the first business day following the last day of the specified period.

3. As an alternative, an issuer may—but need not—elect to comply with the provisions of paragraph (c).

(c) Financial Statement Requirements for Tier 2 Offerings

(1) In addition to the general rules in paragraph (a), provide the financial statements required by paragraph (b) of this Part F/S, except the following rules should be followed in the preparation of the financial statements:

(i) The issuer and, when applicable, other entities for which financial statements are required, must comply with Article 8 of Regulation S-X, as if it was conducting a registered offering on Form S-1, except the age of interim financial statements may follow paragraphs (b)(3)-(4) of this Part F/S.

(ii) Audited financial statements are required for Tier 2 offerings for the issuer and, when applicable, for financial statements of other entities. However, interim financial statements may be unaudited.

(iii) The audit must be conducted in accordance with either U.S. Generally Accepted Auditing Standards or the standards of the Public Company Accounting Oversight Board (United States) and the report and qualifications of the independent accountant shall comply with the requirements of Article 2 of Regulation S-X. Accounting firms conducting audits for the financial statements included in the offering circular may, but need not, be registered with the Public Company Accounting Oversight Board.

PART III—EXHIBITS

Item 16. Index to Exhibits

(a) An exhibits index must be presented at the beginning of Part III.

(b) Each exhibit must be listed in the exhibit index according to the number assigned to it under Item 17 below.

(c) For incorporation by reference, please refer to General Instruction III of this Form.

Item 17. Description of Exhibits

As appropriate, the following documents must be filed as exhibits to the offering statement.

1. Underwriting agreement—Each underwriting contract or agreement with a principal underwriter or letter pursuant to which the securities are to be distributed; where the terms have yet to be finalized, proposed formats may be provided.

2. Charter and bylaws—The charter and bylaws of the issuer or instruments corresponding thereto as currently in effect and any amendments thereto.

3. Instruments defining the rights of securityholders—

(a) All instruments defining the rights of any holder of the issuer's securities, including but not limited to (i) holders of equity or debt securities being issued; (ii) holders of long-term debt of the issuer, and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed.

(b) The following instruments need not be filed if the issuer agrees to file them with the Commission upon request: (i) instruments defining the rights of holders of long-term debt of the issuer and all of its subsidiaries for which consolidated financial statements are required to be filed if such debt is not being issued pursuant to this Regulation A offering and the total amount of such authorized issuance does not exceed 5% of the total assets of the issuer and its subsidiaries on a consolidated basis; (ii) any instrument with respect to a class of securities that is to be retired or redeemed before the issuance or upon delivery of the securities being issued pursuant to this Regulation A offering and appropriate steps have been taken to assure such retirement or redemption; and (iii) copies of instruments evidencing scrip certificates or fractions of shares.

4. Subscription agreement—The form of any subscription agreement to be used in connection with the purchase of securities in this offering.

5. Voting trust agreement—Any voting trust agreements and amendments.

6. Material contracts

(a) Every contract not made in the ordinary course of business that is material to the issuer and is to be performed in whole or in part at or after the filing of the offering statement or was entered into not more than two years before such filing. Only contracts need be filed as to which the issuer or subsidiary of the issuer is a party or has succeeded to a party by assumption or assignment or in which the issuer or such subsidiary has a beneficial interest. Schedules (or similar attachments) to material contracts may be excluded if not material to an investment decision or if the material information contained in such schedules is otherwise disclosed in the agreement or the offering statement. The material contract filed must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request.

(b) If the contract is such as ordinarily accompanies the kind of business conducted by the issuer and its subsidiaries, it is made in the ordinary course of business and need not be filed unless it falls within one or more of the following categories, in which case it must be filed except where immaterial in amount or significance: (i) any contract to which directors, officers, promoters, voting trustees, securityholders named in the offering statement, or underwriters are parties, except where the contract merely involves the purchase or sale of current assets having a determinable market price, at such market price; (ii) any contract upon which the issuer's business is substantially dependent, as in the case of continuing contracts to sell the major part of the issuer's products or services or to purchase the major part of the issuer's requirements of goods, services or raw materials or any franchise or license or other agreement to use a patent, formula, trade secret, process or trade name upon which the issuer's business depends to a material extent; (iii) any contract calling for the acquisition or sale of any property, plant or equipment for a consideration exceeding 15% of such fixed assets of the issuer on a consolidated basis; or (iv) any material lease under which a part of the property described in the offering statement is held by the issuer.

(c) Any management contract or any compensatory plan, contract or arrangement including, but not limited to, plans relating to options, warrants or rights, pension, retirement or deferred compensation or bonus, incentive or profit sharing (or if not set forth in any formal document, a written description) is deemed material and must be filed except for the following: (i) ordinary purchase and sales agency agreements; (ii) agreements with managers of stores in a chain organization or similar organization; (iii) contracts providing for labor or salesperson's bonuses or payments to a class of securityholders, as such; (iv) any compensatory plan, contract or arrangement that pursuant to its terms is available to employees generally and that in operation provides for the same method of allocation of benefits between management and non-management participants.

7. Plan of acquisition, reorganization, arrangement, liquidation, or succession—Any material plan of acquisition, disposition, reorganization, readjustment, succession, liquidation or arrangement and any amendments thereto described in the offering statement. Schedules (or similar attachments) to these exhibits must not be filed unless such schedules contain information that is material to an investment decision and that is not otherwise disclosed in the agreement or the offering statement. The plan filed must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request.

8. Escrow agreements—Any escrow agreement or similar arrangement which has been executed in connection with the Regulation A offering.

9. Letter re change in certifying accountant—A letter from the issuer's former independent accountant regarding its concurrence or disagreement with the statements made by the issuer in the current report concerning the resignation or dismissal as the issuer's principal accountant.

10. Power of attorney—If any name is signed to the offering statement pursuant to a power of attorney, signed copies of the power of attorney must be filed. Where the power of attorney is contained elsewhere in the offering statement or documents filed therewith, a reference must be made in the index to the part of the offering statement or document containing such power of attorney. In addition, if the name of any officer signing on behalf of the issuer is signed pursuant to a power of attorney, certified copies of a resolution of the issuer's board of directors authorizing such signature must also be filed. A power of attorney that is filed with the Commission must relate to a specific filing or an amendment thereto. A power of attorney that confers general authority may not be filed with the Commission.

11. Consents—

(a) Experts: The written consent of (i) any accountant, counsel, engineer, geologist, appraiser or any persons whose profession gives authority to a statement made by them and who is named in the offering statement as having prepared or certified any part of the document or is named as having prepared or certified a report or evaluation whether or not for use in connection with the offering statement; (ii) the expert that authored any portion of a report quoted or summarized as such in the offering statement, expressly stating their consent to the use of such quotation or summary; (iii) any persons who are referenced as having reviewed or passed upon any information in the offering statement, and that such information is being included on the basis of their authority or in reliance upon their status as experts.

(b) All written consents must be dated and signed.

12. Opinion re legality—An opinion of counsel as to the legality of the securities covered by the Offering Statement, indicating whether they will when sold, be legally issued, fully paid and non-assessable, and if debt securities, whether they will be binding obligations of the issuer.

13. “Testing the waters” materials—Any written communication or broadcast script used under the authorization of Rule 255. Such materials need not be filed if they are substantively the same as materials previously filed with the offering statement.

14. Appointment of agent for service of process—A Canadian issuer must file Form F-X.

15. Additional exhibits—

(a) Any non-public, draft offering statement previously submitted pursuant to Rule 252(d) and any related, non-public correspondence submitted by or on behalf of the issuer.

(b) 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.

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of ____, State of ____, on ____ (date).

(Exact name of issuer as specified in its charter)_______

By (Signature and Title)_______

This offering statement has been signed by the following persons in the capacities and on the dates indicated.

(Signature)_______

(Title)_______

(Date)_______

Instructions to Signatures:

1. The offering statement must be signed by the issuer, its principal executive officer, principal financial officer, principal accounting officer, and a majority of the members of its board of directors or other governing body. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the offering statement, except where an executive officer signs on behalf of the issuer.

2. The offering statement must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this section.

3. The name and title of each person signing the offering statement must be typed or printed beneath the signature.

Note:

The text of Form 1-A will not appear in the Code of Federal Regulations.

11. Revise § 239.91 to read as follows:

12. Add Form 1-K (referenced in § 239.91) to read as follows:

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-K

GENERAL INSTRUCTIONS

A. Rules as to Use of Form 1-K.

(1) This Form shall be used for annual reports pursuant to Rule 257(b)(1) of Regulation A (§§ 230.251-230.263).

(2) Annual reports on this Form shall be filed within 120 calendar days after the end of the fiscal year covered by the report.

(3) This Form also shall be used for special financial reports filed pursuant to Rule 257(b)(2)(i)(A) of Regulation A. Such special financial reports shall be filed and signed in the manner set forth in this Form, but otherwise need only provide Part I and the financial statements required by Rule 257(b)(2)(i)(A). Special financial reports filed using this Form shall be filed within 120 calendar days after the qualification date of the offering statement.

B. Preparation of Report.

(1) Regulation A contains certain general requirements that are applicable to reports on any form, including amendments to reports. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form.

(2) This Form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report.

(3) Except where information is required to be given for the fiscal year or as of a specified date, it shall be given as of the latest date reasonably practicable.

(4) References in this Form to the items in Form 1-A are to the items set forth in Part II and Part III of Form 1-A, not Part I.

(5) In addition to the information expressly required to be included in this Form, there shall be added such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

C. Signature and Filing of Report.

(1) The report must be filed with the Commission in electronic format by means of the Commission's Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) in accordance with the EDGAR rules set forth in Regulation S-T (17 CFR part 232).

(2) The report must be signed by the issuer, its principal executive officer, principal financial officer, principal accounting officer, and at least a majority of the members of its board of directors or other governing body. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the report, except where an executive officer signs on behalf of the issuer.

(3) The report must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this paragraph.

D. Incorporation by Reference and Cross-Referencing.

(1) An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Cross-referencing within the report is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Descriptions of where the information incorporated by reference or cross-referenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All descriptions of where information incorporated by reference can be found must be accompanied by a separate hyperlink to the incorporated document on EDGAR. A hyperlink need not remain active after the filing of the report, except that amendments to the report must update any hyperlinks referred to in the amendment that are inactive.

(2) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Information shall not be incorporated by reference or cross-referenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing. Incorporating information into the financial statements from elsewhere is not permitted.

(3) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.

PART I

NOTIFICATION

The following information must be provided in the XML-based portion of Form 1-K available through the EDGAR portal and must be completed or updated before uploading each offering statement or amendment thereto. The format of Part I shown below may differ from the electronic version available on EDGAR. The electronic version of Part I will allow issuers to attach Part II for filing by means of EDGAR. All items must be addressed, unless otherwise indicated.

This Form 1-K is to provide an ☐ Annual Report OR ☐ Special Financial Report for the fiscal year ended______

Exact name of issuer as specified in the issuer's charter:______

Jurisdiction of incorporation/organization:______

I.R.S. Employer Identification Number:______

Address of Principal Executive Offices:

Phone: (_)

Title of each class of securities issued pursuant to Regulation A:

Summary Information Regarding Prior Offerings and Proceeds

The following information must be provided for any Regulation A offering that has terminated or completed prior to the filing of this Form 1-K, unless such information has been previously reported in a manner permissible under Rule 257. If such information has been previously reported, check this box ☐and leave the rest of Part I blank.

Commission File Number of the offering statement:______

Date of qualification of the offering statement:______

Date of commencement of the offering:______

Amount of securities qualified to be sold in the offering:______

Amount of securities sold in the offering:______

Price per security: $______

The portion of aggregate sales attributable to securities sold on behalf of the issuer: $_______

The portion of aggregate sales attributable to securities sold on behalf of selling securityholders: $_______

Fees in connection with this offering and names of service providers:

CRD Number of any broker or dealer listed:______

Net proceeds to the issuer: $______

Clarification of responses (if necessary):______

PART II

INFORMATION TO BE INCLUDED IN REPORT

Item 1. Business

Set forth the information required by Item 7 of Form 1-A.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Set forth the information required by Item 9(a), (b) and (d) of Form 1-A for the most recent two completed fiscal years.

Item 3. Directors and Officers

Set forth the information required by Items 10 and 11 of Form 1-A.

Item 4. Security Ownership of Management and Certain Securityholders

Set forth the information required by Item 12 of Form 1-A.

Item 5. Interest of Management and Others in Certain Transactions

Set forth the information required by Item 13 of Form 1-A.

Item 6. Other Information

Set forth any information required to be disclosed in a report on Form 1-U during the last six months of the fiscal year covered by this Form 1-K, but not reported, whether or not otherwise required by this Form 1-K. If disclosure of such information is made under this item, it need not be repeated in a report on Form 1-U that would otherwise be required to be filed with respect to such information or in a subsequent report on Form 1-U.

Item 7. Financial Statements

(a) The appropriate audited financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the Form 1-K.

(b) Unless the issuer is a Canadian company, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, 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 the auditor's report must include an opinion on whether the financial statements comply with IFRS as issued by the IASB.

(c) The audit of the financial statements must be conducted in accordance with either U.S. Generally Accepted Auditing Standards or the standards of the Public Company Accounting Oversight Board (United States) and the report and qualifications of the independent accountant shall comply with the requirements of Article 2 of Regulation S-X. Accounting firms conducting audits for the financial statements may, but need not, be registered with the Public Company Accounting Oversight Board.

(d) Balance Sheet. There shall be filed an audited consolidated balance sheet as of the end of each of the most recent two fiscal years.

(e) Statements of income, cash flows, and changes in stockholders' equity. File audited consolidated statements of income, cash flows, and changes in stockholders' equity for each of the two fiscal years preceding the date of the most recent balance sheet being filed or such shorter period as the issuer has been in existence.

(f) Oil and Gas Producing Activities. Issuers engaged in oil and gas producing activities must follow the financial accounting and reporting standards specified in Rule 4-10 of Regulation S-X.

(g) Financial Statements of Other Entities. The circumstances described below may require you to file financial statements of other entities. The financial statements of other entities must be presented for the same periods as the issuer's financial statements described above in paragraphs (d) and (e) unless a shorter period is specified by the rules below.

(1) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3-10 of Regulation S-X.

(2) Financial Statements of Affiliates Whose Securities Collateralize an Issuance. Financial statements for an issuer's affiliates whose securities constitute a substantial portion of the collateral for any class of securities being offered must be presented as required by Rule 3-16 of Regulation S-X.

Item 8. Exhibits

(a) An exhibits index must be presented immediately preceding the first signature page of the report.

(b) File, as exhibits to this Form, the exhibits required by Form 1-A, except for the exhibits required by paragraphs 1, 12, and 13 of Item 17.

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Exact name of issuer as specified in its charter)

By (Signature and Title)

Date

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.

By (Signature and Title)

Date

By (Signature and Title)

Date

Note:

The text of Form 1-K will not appear in the Code of Federal Regulations.

13. Add § 239.92 to read as follows:

14. Add Form 1-SA (referenced in § 239.92) to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-SA

[ ] SEMIANNUAL REPORT PURSUANT TO REGULATION A or

[ ] SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A

For the fiscal semiannual period ended

(Exact name of issuer as specified in its charter)

State or other jurisdiction of incorporation or organization

(I.R.S. Employer Identification No.)

(Full mailing address of principal executive offices)

(Issuer's telephone number, including area code)

GENERAL INSTRUCTIONS

A. Rules as to Use of Form 1-SA.

(1) This Form shall be used for semiannual reports pursuant to Rule 257(b)(3) of Regulation A (§§ 230.251-230.263).

(2) Semiannual reports on this Form shall be filed within 90 calendar days after the end of the semiannual period covered by the report.

(3) This Form also shall be used for special financial reports filed pursuant to Rule 257(b)(2)(i)(B) of Regulation A. Such special financial reports shall be filed and signed in the manner set forth in this Form, but otherwise need only provide the cover page and financial statements required by Rule 257(b)(2)(i)(B). Special financial reports filed using this Form shall be filed within 90 calendar days after the qualification date of the offering statement.

B. Preparation of Report.

(1) Regulation A contains certain general requirements that are applicable to reports on any form, including amendments to reports. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form.

(2) This Form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report.

(3) In addition to the information expressly required to be included in this Form, there shall be added such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

C. Signature and Filing of Report.

(1) The report must be filed with the Commission in electronic format by means of the Commission's Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) in accordance with the EDGAR rules set forth in Regulation S-T (17 CFR part 232).

(2) The report must be signed by the issuer, its principal executive officer, principal financial officer and principal accounting officer. If a signature is by a person on behalf of any other person, evidence of authority to sign must be filed with the report, except where an executive officer signs on behalf of the issuer.

(3) The report must be signed using a typed signature. Each signatory to the filing must also manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in the filing. Such document must be executed before or at the time the filing is made and must be retained by the issuer for a period of five years. Upon request, the issuer must furnish to the Commission or its staff a copy of any or all documents retained pursuant to this paragraph.

D. Incorporation by Reference and Cross-Referencing.

(1) An issuer may incorporate by reference to other documents previously submitted or filed on EDGAR. Cross-referencing within the report is also encouraged to avoid repetition of information. For example, you may respond to an item of this Form by providing a cross-reference to the location of the information in the financial statements, instead of repeating such information. Descriptions of where the information incorporated by reference or cross-referenced can be found must be specific and must clearly identify the relevant document and portion thereof where such information can be found. For exhibits incorporated by reference, this description must be noted in the exhibits index for each relevant exhibit. All such descriptions of where information incorporated by reference can be found must be accompanied by a separate hyperlink to the incorporated document on EDGAR. A hyperlink need not remain active after the filing of the report, except that amendments to the report must update any hyperlinks referred to in the amendment that are inactive.

(2) Reference may not be made to any document if the portion of such document containing the pertinent information includes an incorporation by reference to another document. Incorporation by reference to documents not available on EDGAR is not permitted. Information shall not be incorporated by reference or cross-referenced in any case where such incorporation would render the statement or report incomplete, unclear, or confusing. Incorporating information into the financial statements from elsewhere is not permitted.

(3) If any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.

INFORMATION TO BE INCLUDED IN REPORT

Item 1. Management's Discussion and Analysis of Financial Condition and Results of Operations

Set forth the information required by Item 9(a), (b), and (d) of Form 1-A for the interim period for which financial statements are required by Item 3 below.

Item 2. Other Information

Set forth any information required to be disclosed in a report on Form 1-U during the semiannual period covered by this Form 1-SA, but not reported, whether or not otherwise required by this Form 1-SA. If disclosure of such information is made under this item, it need not be repeated in a report on Form 1-U that would otherwise be required to be filed with respect to such information or in a subsequent report on Form 1-U.

Item 3. Financial Statements

The appropriate financial statements set forth below of the issuer, or the issuer and its predecessors or any businesses to which the issuer is a successor must be filed as part of the Form 1-SA.

Unless the issuer is a Canadian company, financial statements must be prepared on a consolidated basis in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a Canadian company, 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 as issued by the IASB, such compliance must be explicitly and unreservedly stated in the notes to the financial statements.

The financial statements included pursuant to this item may be condensed, unaudited, and are not required to be reviewed. For additional guidance on presentation of the financial statements refer to Rule 8-03(a) of Regulation S-X. The financial statements must include the following:

(a) An interim consolidated balance sheet as of the end of the six month period covered by this report and a balance sheet as of the end of the preceding fiscal year. An interim balance sheet as of the end of the corresponding six month interim period of the preceding fiscal year need not be provided unless necessary for an understanding of the impact of seasonal fluctuations on the issuer's financial condition.

(b) Interim consolidated statements of income must be provided for the six month interim period covered by this report and for the corresponding period of the preceding fiscal year. Income statements must be accompanied by a statement that in the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included.

(c) Interim statements of cash flows must be provided for the six month interim period covered by this report and for the corresponding period of the preceding fiscal year.

(d) Footnote and other disclosures should be provided as needed for fair presentation and to ensure that the financial statements are not misleading. Refer to Rule 8-03(b) of Regulation S-X for examples of disclosures that may be needed.

(e) Financial Statements of Guarantors and Issuers of Guaranteed Securities. Financial statements of a subsidiary that issues securities guaranteed by the parent or guarantees securities issued by the parent must be presented as required by Rule 3-10 of Regulation S-X, except that the periods presented are those required by this item and the financial statements need not be audited.

Item 4. Exhibits

(a) An exhibits index must be presented immediately preceding the first signature page of the report.

(b) File, as exhibits to this Form, the exhibits required by Form 1-A, except for the exhibits required by paragraphs 1, 12, and 13 of Item 17.

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Exact name of issuer as specified in its charter)

By (Signature and Title)

Date

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.

By (Signature and Title)

Date

By (Signature and Title)

Date

Note:

The text of Form 1-SA will not appear in the Code of Federal Regulations.

15. Add § 239.93 to read as follows:

16. Add Form 1-U (referenced in § 239.92) to read as follows:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-U

CURRENT REPORT PURSUANT TO REGULATION A

Date of Report (Date of earliest event reported)