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___
ORIGINALUNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUH
V
UNITED STATES SECURITIES ANDCase No.
15-11FO
EXCHANGE COMMISSION,
Respondent.
PETITION FOR REVIEW
Pursuant to Rule 15(a) of the Federal Rules of Appellate
Procedure; Section9 of the Securities Act of 1933, 15 U.S.C. 771;
and Section 706 of theAdministrative Procedure Act, 5 U.S.C. 701 et
seq., petitioner William F.Galvin, Secretary of the Commonwealth of
Massachusetts, by his attorney Maura
Healey, Attorney General of the Commonwealth of Massachusetts,
hereby
petitions this Court for review of a rule of respondent the
United States Securities
and Exchange Commission relating to the preemption of state
securities law
registration and qualification requirements for certain
Regulation A securities. The
Commission adopted this rule on March 25, 2015. The final rule
release, a copy of
VtTIA1Sf. C3ALVIN, SECRETARY OFTHE COMMONWEALTH
OFMASSACHUSETTS,
Petitioner,
MAY222rj_I
RECL!i aDMai!1&.rn
United Cotrt of AoejlgDistrict ot ugi*bia ircui
which is attached to this petition, was published in the Federal
Register on April
USCA Case #15-1150 Document #1553850 Filed: 05/22/2015 Page 1 of
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20, 2015. Amendments for Small andAdditional Issues Exemptions
Under the
Securities Act (Regulation A), 80 Fed. Reg. 21,806 (Apr. 20,
2015) (to be codified
at 17 C.F.R. parts 200, 230, 232, 239, 240, 249, & 260).
Petitioner submitted written comments on the proposed rule on
December
18, 2013 and March 24, 2014. Petitioner now asks this Court to
hold the
Commissions rule arbitrary, capricious, and otherwise not in
accordance with the
Administrative Procedure Act, the Securities Act of 1933, and
other law.
Petitioner requests vacatur of the rule and its requirements,
issuance of a
permanent injunction prohibiting the Commission from
implementing andenforcing the rule, and such other relief as the
Court deems appropriate.
Respectfully submitted,
MAURA HEALEYAttorney General of Massachusetts
(),
/
By:Seth Schofield /
D.C. Circuit Bar Roll No. 55725Robert E. TooneSookyoung
ShinAssistant Attorneys GeneralOne Ashburton PlaceBoston, MA
02108-1598(617) 727-2200seth. [email protected]
Counselfor William F. Galvin, Secretaryofthe Commonwealth
ofMassachusetts
Date: May21, 2015
2
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ATTACHMENT
United States Securities and Exchange Commission
Amendments for Small and Additional Issues ExemptionsUnder the
Securities Act (Regulation A), Final Rule
80 Fed. Reg. 21,806(Published April 20, 2015; Effective June 29,
2015)
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FEDERAL REGISTERVol. 80 Monday,No. 75 April 20, 2015
Part II
SecurWes and Exchange Commission17CFR Parts 200, 230, 232, et
al.Amendments for Small and Additional Issues Exemptions Under
theSecurities Act (Regulation A); Final Rule
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21806 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015
/Rules and Regulations
SECURITIES AND EXCHANGECOMMISSION
17 CFR Parts 200, 230, 232, 239, 240,249, and 260[Release Nos.
339741; 3474578; 392501;File No. S71 11 3]RIN 3235AL39
Amendments for Small and AdditionalIssues Exemptions Under
theSecurities Act (Regulation A)AGENCY: Securities and
ExchangeCommission.ACTION: Final rules.
SUMMARY: We are adopting amendmentsto Regulation A and other
rules andforms to implement Section 401 of theJumpstart Our
Business Startups (JOBS)Act. Section 401 of the JOBS Act
addedSection 3(b)(2) to the Securities Act of1933, which directs
the Commission toadopt rules exempting from theregistration
requirements of theSecurities Act offerings of up to $50million of
securities annually. The finalrules include issuer
eligibilityrequirements, content and filingrequirements for
offering statements,and ongoing reporting requirements forissuers
in Regulation A offerings.DATES; The final rules and formamendments
are effective on June 19,2015.
FOR FURTHER INFORMATION CONTACT:Zachary 0. Faflon, Special
Counsel;Office of Small Business Policy,Division of Corporation
Finance, at(202) 5513460; or Shehzad K. Niazi,Special Counsel;
Office of Rulemaking,Division of Corporation Finance, at(202)
5513430, U.S. Securities andExchange Commission, 100 F Street
NE.,Washington, DC 205493628.SUPPLEMENTARY INFORMATION: We
areamending Rules 251 through 263 ofRegulation A under the
Securities Act of1933 (the Securities Act).2
We are revising Form 1A,3rescinding Form 2A,4 and adoptingfour
new forms, Form 1K (annualreport), Form 1SA (semiannual
report),Form 1U (current report), and Form1Z (exit report).
Further, we are revising Rule 4a1under the Trust Indenture Act
of 1939(the Trust Indenture Act) 6 to increasethe dollar ceiling of
the exemption fromthe requirement to issue securities
17 CFR 230.251 through 230.263.215 U.S.C. 77a et seq.17 CFR
239.90.17 CFR 239.91.17 CVR 260.4a1.615 u.S.c. 77aaa et seq.
pursuant to an indenture. We are alsoamending Rule 12g51 of
theSecurities Exchange Act of 1934 (theExchange Act) to permit
issuers torely on a conditional exemption frommandatory
registration of a class ofsecurities under Section 12(g) of
theExchange Act, Rule 15c211 of theExchange Act to permit an
issuersongoing reports filed under RegulationA to satisfy a
broker-dealers obligationsto review and maintain certaininformation
about an issuers quotedsecurities, and Rule 301 10 of
theCommissions organizational rules andprovisions for delegated
authority topermit the Division of CorporationFinance to issue
notices of qualificationand deny Form iZ filings. In addition,we
are adopting a technical amendmentto Exchange Act Rule 15c211 to
updatethe outdated reference to Schedule Hof the By-Laws of the
NationalAssociation of Securities Dealers, Inc.,which is now known
as the FinancialIndustry Regulatory Authority, Inc.and to reflect
the correct rule reference.
As a result of the revisions toRegulation A, we are
adoptingconforming and technical amendmentsto Securities Act Rules
157(a),h1505(b)(2)(iii),12 and Form 8A.Additionally, we are
revising Item101(a) 13 of Regulation ST to reflectthe mandatory
electronic filing of allissuer initial filing and ongoingreporting
requirements underRegulation A. We are also revising Item101(c)(6)
of Regulation ST to removethe reference to paper filings in
aRegulation A offering, and removingand reserving Item ioi(b)(8) 16
ofRegulation ST dealing with theoptional electronic filing of Form
FXby Canadian issuers.Table of ContentsI. IntroductionII. Final
Rules and Amendments to
Regulation AA. OverviewB. Scope of Exemption1. Eligible
Issuers2. Eligible Securities3. Offering Limitations and
Secondary
Sales4. Investment Limitation5. Integration6. Treatment Under
Section 12(g)C. Offering Statement
17 CFR 240.12g51.815 U.S.C. 78a et seq.17 CFR 240.15c211. 17 CFR
200.301.1117 CFR 230.157(a).1217 CFR 230.505(b)(2)(iii).1317 CFR
232.101(a).1417 CFR 232.10 et seq.15 17 CFR 232.101(c)(6).1617 CFR
232.101(b)(8).
1. Electronic filing; Delivery Requirements2. Non-Public
Submission of Draft Offering
Statements3. Form and Content4. Continuous or Delayed Offerings
and
Offering Circular Supplements5. QualificationD. Solicitation of
Interest (Testing the
Waters)1. Proposed Rules2. Comments on Proposed Rules3. Final
RulesE. Ongoing Reporting1. Continuing Disclosure Obligations2.
Exchange Act Rule 15c211 and Other
Implications of Ongoing ReportingUnder Regulation A
3. Exchange Act Registration of RegulationA Securities
4. Exit Report on Form 1ZF. Insignificant Deviations From a
Term,
Condition or RequirementG. Bad Actor Disqualification1. Proposed
Rules2. Comments on Proposed Rules3. Final Ru)esH. Relationship
With State Securities Law1. Proposed Rules2. Comments on Proposed
Rules3. Final RulesI. Additional Considerations Related to
Smaller OfferingsJ. Transitional Guidance for Issuers
Currently Conducting Regulation AOfferings
K. Technical and Conforming AmendmentsIll. Economic Analysis
A. Broad Economic ConsiderationsB. Baseline1. Current Methods of
Raising Up to $50
Million of Capital2. Investors3. Financial IntermediariesC.
Scope of Exemption1. Eligible Issuers2. Eligible Securities3.
Offering Limitations and Secondary
Sales4. Investment Limitation5. Integration6. Treatment Under
Section 12(g)D. Offering Statement1. Electronic Filing and
Delivery2. Disclosure Format and Content3. Audited Financial
Statements4. Other Accounting Requirements5. Continuous and Delayed
Offerings6. Nonpublic Review of Draft Offering
StatementsE. Solicitation of Interest (Testing the
Waters)F. Ongoing Reporting1. Periodic and Current Event
Reporting
Requirements2. Termination and Suspension of
Reporting and Exit Reports3. Exchange Act RegistrationG.
Insignificant DeviationsH. Bad Actor DisqualificationI.
Relationship With State Securities Law
IV. Paperwork Reduction ActA. BackgroundB. Estimated Number of
Regulation A
OfferingsC. PRA Reporting and Cost Burden
Estimates
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and Regulations 21807
1. Regulation A (Form 1A and Form 2A)2. Form 1K: Annual Report3.
Form 1SA: Semiannual Report4. Form 1U: Current Reporting5. Form 1Z:
Exit Report6. Form 8A: Short Form Registration
Under the Exchange Act7. Form ID Filings8. Form FXB. Collections
of Information Are
MandatoryV. Final Regulatory Flexibility Act Analysis
A. Need for the RulesB. Significant Issues Raised by Public
CommentsC. Small Entities Subject to the RulesD. Reporting,
Recordkeeping, and Other
Compliance RequirementsE. Agency Action To Minimize Effect
on
Small EntitiesVI. Statutory Basis and Text of AmendmentsI.
Introduction
On December 18, 2013, we proposedrule and form amendments 17
toimplement Section 401 of the JumpstartOur Business Startups Act
(the JOBSAct).8 Section 401 of the JOBS Actamended Section 3(b) of
the SecuritiesAct by designating existing Section 3(b)as Section
3(b)(1), and creating newSections 3(b)(2)(5). Section
3(b)(2)directs the Commission to adopt rulesadding a class of
securities exempt fromthe registration requirements of
theSecurities Act for offerings of up to $50million of securities
within a 12-monthperiod. Sections 3(b)(2)(5) specifymandatory terms
and conditions forsuch exempt offerings and alsoauthorize the
Commission to adoptother terms, conditions, or requirementsas
necessary in the public interest andfor the protection of
investors.9 Inaddition, Section 3(b)(5) directs theCommission to
review the $50 millionoffering limit specified in Section3(b)(2)
not later than two years after theenactment of the JOBS Act and
everytwo years thereafter, and authorizes theCommission to increase
the annualoffering limit if it determines that itwould be
appropriate to do so.Accordingly, we are revising RegulationA under
the Securities Act to requireissuers conducting offerings in
relianceon Section 3(b)(2) to comply with termsand conditions
established by the
17 See Rel. No. 339497 [79 FR 3925] (Dec. 18,2013) (the
Proposing Release), available
at:http://www.sec.gov/rules/prapased/2013/33-9497.pdf
15 Public Law 112106, 126 Stat. 306.are adopting a number of
terms and
conditions for Regulation A offerings pursuant toour
discretionary authority under Sections 3(b)(2)(5). Where we have
done so, as discussed in detailin Section II. below, it is because
we find suchterms and conditions to be necessary in the
publicinterest and for the protection of investors.
Commissions rules, and, whereapplicable, to make ongoing
disclosure.II. Final Rules aird Amendments toRegulation AA.
Overview
We are adopting final rules toimplement the JOBS Act mandate
byexpanding Regulation A into two tiers:Tier 1, for securities
offerings of up to$20 million; and Tier 2, for offerings ofup to
$50 million.20 The final rules forofferings under Tier 1 and Tier 2
buildon current Regulation A and preserve,with some modifications,
existingprovisions regarding issuer eligibility,offering circular
contents, testing thewaters, and bad actor disqualification.As
proposed, and with themodifications described below, the finalrules
modernize the Regulation A filingprocess for all offerings, align
practicein certain areas with prevailing practicefor registered
offerings, create additionalflexibility for issuers in the
offeringprocess, and establish an ongoingreporting regime for
Regulation Aissuers. Under the final rules, Tier 2issuers are
required to include auditedfinancial statements in their
offeringdocuments and to file annual,semiannual, and current
reports withthe Commission. With the exception ofsecurities that
will he listed on anational securities exchange uponqualification,
purchasers in Tier 2offerings must either be accreditedinvestors,
as that term is defined in Rule501(a) of Regulation D, or be
subject tocertain limitations on their investment.The differences
between Tier 1 and Tier2 offerings are described more
fullybelow.
In developing the final rules, weconsidered the statutory
language ofJOBS Act Section 401, the JOBS Actlegislative history,
recentrecommendations of the CommissionsGovernment-Business Forum
on SmallBusiness Capital Formation,2 theAdvisory Committee on Small
andEmerging Companies,22 the EquityCapital Formation Task
Force,23comment letters received on Title IV of
20An issuer of $20 million or less of securitiescould elect to
proceed under either Tier I orTier 2.
2 of the commissionsGovernment-Business Forum on Small
BusinessCapital Formation are available at:
http://www.sec.gav/infa/smallbus/sbfarum.shtml.
22 Recommendations of the Advisory Committeeon Small and
Emerging Companies are available
at:http://www.sec.gov/infa/smallbus/acsec.shtml.
23Equity Capital Task Force, Fram the On-Rampta the Freeway:
Refueling Jab creation and Grawthby Recannecting Investors with
Small-CapCompanies, presentation to the US. Dept. ofTreasury
(November 11, 2013), available
at:http://www.equitycapitalfarmatiantaskforce.cam/.
the JOBS Act before the Commissionsproposed rules were issued in
Decemberof 2013,24 and comment letters receivedto date on the
Commissions proposedrules to implement Section 401 of theJOBS
Act.25
The key provisions of the final rulesand amendments to
Regulation Afollow: Scope of the exemptionthefinal rules: Establish
two tiers of offerings: Tier 1: Annual offering limit of $20
million, including no more than $6million on behalf of
sellingsecurityholders that are affiliates ofthe issuer.
Tier 2: Annual offering limit of $50million, including no more
than $15million on behalf of sellingsecurityholders that are
affiliates ofthe issuer.
Limit sales by selling securityholdersin an issuers initial
Regulation Aoffering and any subsequentlyqualified Regulation A
offering withinthe first 12-month period followingthe date of
qualification of the initialRegulation A offering to no more
than30% of the aggregate offering price.
Preserve the existing issuer eligibilityrequirements of
Regulation A, andalso exclude issuers that are, or havebeen,
subject to any order of theCommission pursuant to Section 12(j)of
the Exchange Act entered withinfive years before the filing of
theoffering statement and issuers that arerequired to, but that
have not, filedwith the Conimission the ongoingreports required by
the final rulesduring the two years immediatelypreceding the filing
of an offeringstatement.
Limit the amount of securities that aninvestor who is not an
accreditedinvestor under Rule 501(a) ofRegulation B can purchase in
a Tier2 offering to no more than: (a) 10% ofthe greater of annual
income or networth (for natural persons); or (b)10% of the greater
of annual revenueor net assets at fiscal year end (fornon-natural
persons). This limit willnot apply to purchases of securitiesthat
will be listed on a national
24 facilitate public input on JOBS Actrulemaking before the
issuance of rule proposals,the Commission invited members of the
public tomake their views known on various JOBS Actinitiatives in
advance of any rulemaking bysubmitting comment letters to the
CommissionsWeb site at
hup://wwwsecgov/spathght/jobsactcamments.shtml. Comment letters
received to dateon Title IV of the JOBS Act are available at:
http://www.sec.gav/comments/jabs-title-i v/jabs-titleiv.shtml.
25 The comment letters received to date inresponse to the
Proposing Release are available at:http://wwwsecgav/camments/s7-1
1-13/s71 I l3shtmL
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2015/Rules and Regulations
securities exchange uponqualification.
Exclude asset-backed securities, asdefined in Regulation AB,
from thelist of eligible securities.
Update the safe harbor fromintegration and provide guidance
onthe potential integration of offeringsconducted concurrently
with, or closein time after, a Regulation A offering.Solicitation
materials: Permit issuers to test the waters
with, or solicit interest in a potentialoffering from, the
general public eitherbefore or after the filing of the
offeringstatement, so long as any solicitationmaterials used after
publicly filing theoffering statement are preceded oraccompanied by
a preliminary offeringcircular or contain a notice
informingpotential investors where and how themost current
preliminary offeringcircular can be obtained.
Qualification, communications, andoffering process: Require
issuers and intermediaries in
the prequalification period to delivera preliminary offering
circular toprospective purchasers at least 48hours in advance of
sale unless theissuer is subject to, and current in,Tier 2 ongoing
reporting obligations.Where the issuer is subject to, andcurrent
in, a Tier 2 ongoing reportingobligation, issuers and
intermediarieswill only be required to comply withthe general
delivery requirements foroffers.
Modernize the qualification,communications, and
offeringprocesses in Regulation A to reflectanalogous provisions of
the SecuritiesAct registration process: 26 Permit issuers and
intermediaries to
satisfy their delivery requirementsas to the final offering
circularunder an access equals deliverymodel when sales are made on
thebasis of offers conducted during theprequalification period and
thefinal offering circular is filed andavailable on the
CommissionsElectronic Data Gathering, Analysisand Retrieval system
(EDGAR);
Require issuers and intermediaries,not later than two business
daysafter completion of a sale, toprovide purchasers with a copy
ofthe final offering circular or a noticewith the uniform resource
locator(URL) where the final offeringcircular may be obtained on
EDGARand contact information sufficientto notify a purchaser where
arequest for a final offering circular
26 See, e.g., Securities Offering Reform, Rel. No.338591 (July
19, 2005) [70 FR 447221.
can be sent and received inresponse; and
Permit issuers to file offeringcircular updates and
supplementsafter qualification of the offeringstatement in lieu of
post-qualification amendments in certaincircumstances, including to
providethe types of information that may beexcluded from a
prospectus underRule 430A.
Permit continuous or delayedofferings, but require issuers
incontinuous or delayed Tier 2 offeringsto be current in their
annual andsemiannual reporting obligations inorder to do so.
Permit issuers to qualify additionalsecurities in reliance on
Regulation Aby filing a post-qualificationamendment to a qualified
offeringstatement.Offering statement:
Require issuers to file offeringstatements with the
Commissionelectronically on EDGAR.
Permit the non-public submission ofoffering statements and
amendmentsfor review by Commission staff beforefiling such
documents with theCommission, so long as all suchdocuments are
publicly filed not laterthan 21 calendar days
beforequalification.
Eliminate the Model A (Question-andAnswer) disclosure format
under PartII of Form 1A.
Update and clarify Model B(Narrative) disclosure format
underPart II of Form 1A (renamed,Offering Circular), while
continuingto permit Part I of Form Si narrativedisclosure as an
alternative.
Permit real estate investment trusts(REITs) and similarly
eligiblecompanies to provide the narrativedisclosure required by
Part I of FormSli in Part II of Form 1A.
Require that offering statements bequalified by the Commission
beforesales may be made pursuant toRegulation A.
Require Tier 1 and Tier 2 issuers tofile balance sheets and
relatedfinancial statements for the twoprevious fiscal year ends
(or for suchshorter time that they have been inexistence).
Require Tier 2 issuers to includefinancial statements in their
offeringcirculars that are audited inaccordance with either the
auditingstandards of the American Institute ofCertified Public
Accountants (MCPA)(referred to as U.S. GenerallyAccepted Auditing
Standards orGAAS) or the standards of the PublicCompany Accounting
OversightBoard (PCAOB).
Require Tier 1 and Tier 2 issuers toinclude financial statements
in Form1A that are dated not more than ninemonths before the date
of non-publicsubmission, filing, or qualification,with the most
recent annual orinterim balance sheet not older thannine months. If
interim financialstatements are required, they mustcover a period
of at least six months.Ongoing reporting:
Require Tier I issuers to provideinformation about sales in
suchofferings and to update certain issuerinformation by
electronically filing aForm iZ exit report with theCoimnission not
later than 30calendar days after termination orcompletion of an
offering.
Require Tier 2 issuers to fileelectronically with the
Commissionon EDGAR annual and semiannualreports, as well as current
eventreports.
Require Tier 2 issuers to fileelectronically a special
financialreport to cover financial periodsbetween the most recent
periodincluded in a qualified offeringstatement and the issuers
firstrequired periodic report.
Permit the ongoing reports filed by anissuer conducting a Tier 2
offering tosatisfy a broker-dealers obligationsunder Exchange Act
Rule 15c2ll.
Provide that Tier 2 issuers reportingobligations under
Regulation A wouldsuspend when they are subject to theongoing
reporting requirements ofSection 13 of the Exchange Act, andmay
also be suspended underRegulation A at any time by filing aForm 1Z
exit report after completingreporting for the fiscal year in
whichan offering statement was qualified, solong as the securities
of each class towhich the offering statement relatesare held of
record by fewer than 300persons, or fewer than 1,200 personsfor
banks or bank holding companies,and offers or sales made in
reliance ona qualified Tier 2 Regulation Aoffering statement are
not ongoing. Incertain circumstances, Tier 2Regulation A reporting
obligationsmay terminate when issuers are nolonger subject to the
ongoingreporting requirements of Section 13of the Exchange Act.
Require Tier 2 issuers to include intheir first annual report
aftertermination or completion of aqualified Regulation A offering,
or intheir Form 1Z exit report,information about sales in
theterminated or completed offering andto update certain issuer
information.
Eliminate the requirement that issuersfile a Form 2A with the
Commission
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to report sales arid the termination ofsales made under
Regulation A everysix months after qualification andwithin 30
calendar days after thetermination, completion, or final saleof
securities in the offering.Exchange Act registration:
Conditionally exempt securitiesissued in a Tier 2 offering from
themandatory registration requirementsof Section 12(g) of the
Exchange Act,for so long as the issuer engages theservices of a
transfer agent that isregistered with the Commission underSection
17A of the Exchange Act,remains subject to a Tier 2
reportingobligation, is current in its annual andsemiannual
reporting at fiscal yearend, and had a public float of lessthan $75
million as of the lastbusiness day of its most recentlycompleted
semiannual period, or, inthe absence of a public float, hadannual
revenues of less than $50million as of its most recentlycompleted
fiscal year.
Permit Tier 2 issuers to use a Form 8A short form registration
statementconcurrentiy with the qualification ofa Regulation A
offering statement thatincludes Part I of Form Si or FormSil
narrative disclosure in Form 1A in order to register a class
ofsecurities under Sections 12(g) or12(b) of the Exchange Act.Bad
actor disqualification
provisions: Substantially conform the bad actor
disqualification provisions of Rule262 to Rule 5 06(d) and add
adisclosure requirement similar to Rule506(e).Application af state
securities laws:
Provide for the preemption of statesecurities law registration
andqualification requirements forsecurities offered or sold to
qualifiedpurchasers, in light of the totalpackage of investor
protectionsincluded in the final rules. Aqualified purchaser will
be defined tobe any person to whom securities areoffered or sold in
a Tier 2 offering.The Commission is required by
Section 3(b)(5) of the Securities Act toreview the Tier 2
offering limitationevery two years. In addition to revisitingthe
Tier 2 offering limitation, the staffwill also undertake to review
the Tier 1offering limitation at the same time. Thestaff also will
undertake to study andsubmit a report to the Commission nolater
than 5 years following the adoptionof the amendments to Regulation
A, onthe impact of both the Tier 1 and Tier2 offerings on capital
formation andinvestor protection. The report will
include, but not be limited to, a reviewof: (1) The amount of
capital raisedunder the amendments; (2) the numberof issuances and
amount raised by bothTier 1 and Tier 2 offerings; (3) thenumber of
placement agents and brokersfacilitating the Regulation A
offerings;(4) the number of Federal, State, or anyother actions
taken against issuers,placement agents, or brokers withrespect to
both Tier 1 and Tier 2offerings; and (5) whether anyadditional
investor protections arenecessary for either Tier 1 or Tier 2.Based
on the information contained inthe report, the Commission may
proposeto either decrease or increase theoffering limit for Tier 1,
as appropriate.B. Scope of Exemption1. Eligible Issuersa. Proposed
Rules
Section 401 of the JOBS Act does notinclude any express issuer
eligibilityrequirements. The proposed ruleswould have maintained
Regulation Asexisting issuer eligibility requirementsand added two
new categories ofineligible issuers.27 The two newcategories would
exclude issuers thatare or have been subject to any order ofthe
Commission pursuant to Section12(j) of the Exchange Act entered
withinfive years before the filing of the offeringstatement and
issuers that are requiredto, but that have not, filed with
theCommission the ongoing reportsrequired by the final rules during
thetwo years immediately preceding thefiling of an offering
statement.Additionally, we requested comment onother potential
changes to the existingissuer eligibility requirements,including
whether the exemptionshould be limited to operatingcompanies,
United States domesticissuers, or issuers that use a certainamount
of the proceeds raised in aRegulation A offering in the
UnitedStates. We also solicited comment onwhether we should extend
issuereligibility to non-Canadian foreignissuers, business
developmentcompanies as defined in Section 2(a)(48)of the
Investment Company Act of 1940
Existing Regulation A limits issuer eligibility toissuers
organized, and with a principal place ofbusiness, in the United
States or Canada, whileexcluding Exchange Act reporting
companies,investment companies, including businessdevelopment
companies, development stagecompanies that bave no specific
business plan orpurpose or have indicated that their business
planis to engage In a merger or acquisition with anunidentified
company or companies, issuers offractional undivided interests in
oil or gas rights ora similar interest In other mineral rights,
andissuers disqualified because of Rule 262, 17 CFR230.262 (2014).
See 17 CFR 230.251(al (2014).
(BDC5),le blank check companies,2e orExchange Act reporting
companies, or,alternatively, eliminate shell companiesor REITs from
the exemptive regime.b. Comments on the Proposed Rules
Commenters expressed a wide rangeof views on the proposed
issuereligibility requirements. A number ofcommenters expressed
general supportfor the proposed issuer eligibilityrequirements.3
Many commentersexpressly supported the new proposedissuer
eligibility criterion relating to therequirement to be current in
Tier 2ongoing reporting obligations.31 Onecommenter also expressly
supported theproposed exclusion of issuers subject toan order of
the Commission enteredpursuant to Section 12(j) of theExchange Act
from the list of eligibleissuers.32 Other commenters
suggestedadditional limitations on issuereligibility, including: a
requirement thatissuers be operating companies,
28 5 U.S.C. 80a2(a)(48).Blank check companies are
development
stage companies that have no specific business planor purpose or
have indicated that their businessplan is to engage in a merger or
acquisition withen unidentified company or companies. SeeSecurities
Act Rule 419(a)(2)(i), 17 CFR230.419(a)(2)(i); see olao SEC Rel.
No. 336949 [57FR 36442] (July 30, 1992), at In. so (clarifying
thatblank check companies regardless of whether theyare issuing
penny stock are precluded from relyingon Regulation Al.
ae Letter from Catherine T. Dixon, Chair, FederalRegulation of
Securities Committee, Business LawSection, American Bar
Association, April 3, 2014(ABA BLS Letter); Letter from Cabrielle
Buckley,Chair, Section of International Law, American
BarAssociation, May 14, 2014 (ABA SIL Leuer);Letter from Andrew F.
viles, Canaccord LetterCenuity Inc., March 27, 2014 (Canaccord
Letter);Letter from Pw Carey, March 24, 2014 (CareyLetter); Letter
from Kurt N. Schacht, CFA,Managing Director, Standards and
Financial MarketIntegrity, and Linda L. Rittenhuuae,
Director,Capital Markets, CFA Institute, March 24, 2014(CFA
Institute Letter); Letter from Kim Wales,Executive Board Member,
Crowdfund IntermediaryRegulatory Advocates (cFIRA), May 14,
2014(CFIRA Letter 1]; Letter from Christopher Tyrrell,chair,
Crowdfunding Intermediary RegulatoryAdvocates, February 23, 2015
(CFIRA Letter 2];Robert R. Kaplan, Jr. and T. Rhye James,
Kaplanvoekier Cunningham & Frank PLC, March 23, 2014(KvCF
Letter); Letter from William F. Calvin,Secretary, Commonwealth of
Massachusetts, March24, 2014 (Massachusetts Letter 2); Letter
fromMorrison & Foerster LLP, March 26, 2014 (MoFoLetter);
Letter from Andrea Seidt, President, NorthAmerican Securities
Administrators Association(NASAA) and Ohio Securities
Commissioner,March 24, 2014 (NASAA Letter 2); Letter fromWilliam M.
Beatty, Securities Administrator,Washington Department of Financial
Institutions,March 24, 2014 (WDFI Letter); Letter fromWilliam R.
Hambrecht, Chairman, WR HambrechtCo, March 4, 2014 (WR Hambrecht Co
Letter),
31 ABA BLS Leuer; CFA Institute Letter;Massachuseus Letter 2;
NASAA Letter 2; WDFILetter.
12CFA Institute Letter.13CFIRA Letter 1; WR Hambrecht Co
Letter
(suggesting that limiting the availability of thecontinued
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excluding shell companies and issuersof penny stock,34 and
excluding othertypes of investment vehicles, such ascommodity pools
and investment fundsthat invest in gold or virtualcurrencies.35
A few commenters recommendedallowing blank check companies
andspecial purpose acquisition companies(SPACs) to rely on
Regulation A.36 Oneof these commenters recommendedallowing blank
check companiesseeking to raise at least $10 million touse
Regulation A in the same manner asany other eligible issuer, but
suggestedthat, if a company is raising less than$10 million in a
Tier 2 offering, theCommission should implement certainadditional
requirements.37 Anothercommenter recommended allowingissuers of
fractional interests in oil andgas or other mineral rights to rely
onRegulation A based on a reasonableeligibility test to be
developed by theCommission.38 Several commentersopposed any change
to the proposedissuer eligibility requirements thatwould exclude
PElTs from participatingin Regulation A offerings.39
Othercommenters advocated expanding thecurrent categories of
eligible issuers,and specifically supported thecontinued inclusion
of Canadian
exemption to, among other things, operatingcompanies would
provide investors with moreconfidence in the offerings conducted
pursuani toRegulation Al. But aee KVCF Letter (suggesting
thatlimiting availability of the exemption to operatingcompanies
would unnecessarily limit the utility ofthe exemption).
BLS Letter; MoFo Letter.Massachusetts Letter 2.
35Gilmsn Law Letter; Letter from Mark Goldberg,Chairman,
Investment Program Association, March24, 2014 (WA Letter); Letter
from David N.Feldman, Partner, Richardson Patel LLP, January15,
2014 (Richardson Patel Letter). A SPAG is atype of blank check
company created specifically topool funds in order to finance a
merger oracquisition opportunity within a set timefrsme.
Richardson Patel Leuer (recommending that forofferings of less
than $10 million under Tier 2, therules should require that: (a)
Monies raised beplaced into escrow, minus underwriterscompensation
and 10% for offering expenses, untila reverse merger is completed;
(hI a combinationwith an operating business be completed
withinthree years; (c) full Form 10 information bedisclosed
regarding a pending reverse merger toinvestors who will have 1520
days to reconfirmtheir investment or receive their money back;
(dlthere be no requirement that a certain percentageof investors
reconfirm; and (e) accredited investorshave no limit on the
investment they make in theoffering).
35Letter from Mark Kosanke, President, RealEstate Investment
Securities Association, March 24,2014 (REISA Letter) (suggesting
that thecommission base the eligibility test on the issuerhaving en
established track record or someminimum emount of assets).
ABA BLS Letter; Letter from Gilman Law LLG,March 24, 2014
(Gilmsn Law Letter); MoFoLetter; Letter from Serenity Storage,
January 5, 2014(Serenity Storage Letter).
companies and shell companies aseligible issuers, as
proposed.4(1) Non-Canadian Foreign Issuers
Many commenters recommendedmaking non-Canadian foreigncompanies
eligible issuers underRegulation A.4 Several commenterssuggested
that the proposed approach tonon-Canadian foreign companies
isinconsistent with the treatment offoreign private issuers in
registeredofferings.42 Additionally, commentersnoted a variety of
benefits arising fromallowing foreign companies to accessthe U.S.
capital markets thoughRegulation A offerings, including
jobcreation,43 increasing the amount ofdisclosure available for
investors inforeign companies,44 encouragingdomestic exchange
listings, expandinginvestment opportunities for U.S.investors,46
and general economicbenefits.47 One commenterrecommended making all
foreign privateissuers eligible if they maintained aprincipal place
of business in theUnited States.4e Two commenters alsorecommended
permitting companies
Letter from Jonathan G. Guest, McGarter &English, LLP,
February 19, 2014 (McGarter &English Letter) (also opposing any
limitation onissuer eligibility on the bssis of wbether most of
theoffering proceeds were being used in connectionwith the issuers
operations in the United States,noting that many Gansdian issuers
would beexcluded as a result); OTC Markets Letter.
41ABA SIL Letter; Letter from Scott Kupor,Managing Partner,
Andreessen Horowitz, andJeffrey M. Solomon, Ghief Executive
Officer, Gowenand company, February 26, 2014 (Andreessen!Gowen
Letter): Letter from BOO USA, LLP, March20, 2104 (BOO Letter);
Ganaccord Letter(suggesting expanding issuer eligibility
tocompanies organized in )urisdictions with robustsecurities
regulation systems such as the UnitedKingdom and other countries in
the EuropeanUnion, Australia, and Asian markets such asSingapore
and Hong Kong); McGarter & EnglishLeuer; OTC Markets Letter;
Richardson Pstel Letter;Letter frons Michael T. Lempres, Assistant
GeneralCounsel, SVB Financial Group, March 21, 2014(SVB Financial
Letter); Letter from Bill Soby,Managing Director, Silicon Valley
Global Shares,March 24, 2014 (SVGS Letter).
42Antheessen/Gowen Letter; BOO Letter;Richardson Patel Letter.
In the context of registeredofferings, foreign private issuers may
provide scaleddisclosure if it qualifies as a smaller
reportingcompany, which is defined in Item 10(11(1) ofReguletion
SK, 17 CFR 229.10(f](1), Securities ActRule 405, 17 CFR 230.405,
and Exchange Act Rule12b2, 17 GFR 240.12b2, and rely on
otherdisclosure accommodations.
43ABA SR. Leuer; SVGS Letter (noting that high-paying jobs would
be crested by expanding globaltech companies).
44SVB Financial Letter.Andreessen/Gowen Letter; SVB
Financial
Letter.46 Andreessen/Gowen Letter; OTC Markets Letter.47ABA SIL
Letter; Andreessen/Gowen Letter;
McCarter & English Letter; SVB Financial Letter.46ABA SW
Letter.
relying on Exchange Act Rule 12g32(b)to make offerings under
Regulation A.4(2) BDCs
A number of commenters supportedmaking BDCs eligible issuers
underRegulation A.5 Most of thesecommenters noted that BDCs serve
animportant function in facilitating smallor emerging business
capital formationor in providing a bridge from the privateto public
markets.5 Several of thesecommenters recommended at leastallowing
small business investmentcompany (SBIC) licensed BDCs to usethe
exemption given the review processsuch entities are required to
undergowith the U.S. Small BusinessAdministration.52 One of
thesecommenters noted that if BDCs becomeeligible to use Regulation
A, theCommission should consider requiringthem to provide quarterly
financialdisclosure so as to enhancetransparency and provide the
marketwith critical investment information.3(3) Potential Limits on
Issuer Size
Several commenters opposed usingthe issuers size to limit
eligibility.54Two of these commenters thought thatthe $50 million
offering limit for Tier 2would already limit the utility of the
49 McGarter & English Letter; OTG Markets Letter.Rule
12g32W) generally provides foreign privateissuers with an automatic
exemption fromregistration under Section 12(g) if the issuer (i)
isnot required to file reports under Exchange ActSections 13(e) or
15(d); (ii) maintains a listing of thesubject class of securities
on one or two exchangesin non-U.S. )urisdictions that comprise more
then55% of its worldwide trading volume; and (iii)publishes in
English on its Web site certain materialitems of information. See
17 GFR 240.12g32(h).
59ABA BLS Letter; CFII{A Letter 1; Letter fromMichael Sauvante,
Executive Director,commonwealth Fund LLG, March 21,
2014(Gommonweslth Fund Letter 1); Letter fromMichael Sauvante,
Executive Director,Gommnnwealth Fund LLc, March 22,
2014(Gommonwealth Fund Letter 2); KVGF Letter;Letter from Daniel
Gorfine, Director, FinancialMarkets Policy, end Steci Warden,
ExecutiveDirector, Genter for Financial Markets, MilkenInstitute,
March 19, 2014 (Milken InstituteLetter); MoFo Letter; REISA Letter;
SBIA Letter;WR Hembrecht co Letter.
ABA BLS Letter; GFIRA Letter 1;Commonwealth Fund Letter 1;
GommonwealthFund Letter 2; KVGF Letter; Milken Institute
Letter;MoFo Letter; REISA Letter; SBIA Letter; WRHambrecht + Go
Letter.
52 Milken Institute Letter; SBIA Letter. A SBIGlicensed BDG is a
company that is licensed by theSmall Business Administration (SBA)
to operate assuch under the Small Business Investment Act
of1958.
Milken Institute Letter.54 from E. Gartier Eshsrn, Executive
Vice
President, Emerging Companies, BiotechnologyIndustry
Organization (BID), March 11, 2014 (BIDLetter); IPA Letter; Letter
from Tom Quaadman,Vice President, Center for Capital
MarketsCompetitiveness, U.S. Chamber of Coimnerce,March 24, 2014
(U.S. Chamber of CommerceLetter).
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and Regulations 21811
exemption for issuers on the basis ofissuer sizewith smaller
issuers likelybenefitting most from the exemptionand recommended
against size-basedeligibility criteria that may be difficultto
define.55 One commenter suggestedthat most issuers with a large
publicfloat would likely be subject toExchange Act reporting
requirementsand therefore would be ineligible to useRegulation A.56
Another commenternoted that a size restriction based onpublic float
would be particularlyharmful to biotechnology companies,because
they often have a public floatthat is disproportionately high
inrelation to their corporate structure,number of employees, or
revenues.57(4) Exchange Act Reporting Companies
A number of commenters supportedallowing Exchange Act
reportingcompanies to conduct offerings underRegulation A.58
Several of thesecommenters recommended allowingExchange Act
reporting companies thatare current in their reporting
obligationsto conduct Tier 2 offerings,59 with onecommenter
limiting its recommendationto companies with a non-affiliate float
ofless than $250 million.60 Threecommenters further suggested that,
ifExchange Act reporting companies arepermitted to conduct
offerings pursuantto Regulation A, Exchange Act reportingshould
satisfy any Regulation Areporting obligation.61 One suchcommenter
further suggested thatExchange Act reporting companiesshould be
required to be current in theirExchange Act reporting obligations
inorder to be eligible to rely on theexemption, in a manner that
isconsistent with Regulation A as itexisted before 1992.62c. Final
Rules
We are adopting the issuer eligibilitycriteria as proposed.
Under the finalrules, Regulation A will be limited tocompanies
organized in and with their
BI0 Letter; U.S. Chamber of commerce Letter.561PA Letter.31O
Letter.58Anr3jeessen/Cowen Letter; 310 Letter; OTC
Markets Letter; Letter from U.S. Senator Pat Roberts,May 27,
2014 (Sen. Roberts Letter); Letter fromJack H. Brier, President and
Founder, US AllianceCorporation, March 19, 2014 (US Alliance
Corp.Letter).
59Andreessen/Cowen Letter; 310 Letter; OTCMarkets Letter.
60010 Letter.6lAntheessen/Cowen Letter; CFIRA Letter 1; OTC
Markets Letter.62 CFIRA Letter 1. Before amendments to
Regulation A were adopted in 1992, Exchange Actreporting
companies were permitted to conductofferings in reliance on
Regulation A, provided theywere current in their public reporting.
See 17 CFR230.252(f) (1992).
principal place of business in theUnited States or Canada. It
will beunavailable to:
Companies subject to the ongoingreporting requirements of
Section 13 or15(d) of the Exchange Act;
companies registered or required tobe registered under the
InvestmentCompany Act of 1940 and BDCs;
blank check companies; issuers of fractional undivided
interests in oil or gas rights, or similarinterests in other
mineral rights;
issuers that are required to, but thathave not, filed with the
Commission theongoing reports required by the rulesunder Regulation
A during the twoyears immediately preceding the filingof a new
offering statement (or for suchshorter period that the issuer
wasrequired to file such reports);
issuers that are or have been subjectto an order by the
Commission denying,suspending, or revoking the registrationof a
class of securities pursuant toSection 12(j) of the Exchange Act
thatwas entered within five years before thefiling of the offering
statement; 63 and
issuers subject to bad actordisqualification under Rule
262.64
We expect that the amendments weare adopting will significantly
expandthe utility of the Regulation A offeringexemption.
Our approach in the final rules isgenerally to maintain the
issuereligibility requirements of existingRegulation A with the
limited additionof two new categories of ineligibleissuers. We
believe this approach willprovide important continuity in
theRegulation A regime as it expands in theway Congress mandated.
For thisreason, we do not believe it is necessaryto adopt final
rules to exclude issuersthat are currently eligible to
conductRegulation A offerings. Additionally, werecognize that
expanding the categoriesof eligible issuers, as suggested by
anumber of commenters, could providecertain benefits, including
increasedinvestment opportunities for investorsand avenues for
capital formation forcertain issuers. We are concerned,however,
about the implications ofextending issuer eligibility before
theCommission has the ability to assess theimpact of the changes to
Regulation Abeing adopted today. In light of thesechanges, we
believe it prudent to deferexpanding the categories of
eligibleissuers (for example, by including non-Canadian foreign
issuers, BDCs, orExchange Act reporting companies)until the
Commission has had theopportunity to observe the use of the
63 See Rule 251(b).64 See Rule 262.
amended Regulation A exemption andassess any new market
practices as theydevelop.
Additionally, we are not adoptingfurther restrictions on
eligibility at thistime. In light of the disclosurerequirements
contained in the finalrules, we do not believe that it isnecessary
to exclude additional types ofissuers, such as shell companies,
issuersof penny stock, or other types ofinvestment vehicles, from
relying on theexemption in Regulation A. At the sametime, we are
concerned aboutpotentially increased risks to investorsthat could
result from extending issuereligibility to other types of entities,
suchas blank check companies, before theCommission has the
opportunity toobserve developing market practices.We therefore
believe the prudentapproach with respect to any potentialexpansion
of issuer eligibility is to givethe Regulation A market time to
developunder rules that we are adopting today.We also do not
believe it is necessary tolimit availability of the exemption
toissuers of a certain size, as we agreewith commenters that
suggested that theannual offering limit will serve to limitthe
utility of the exemption for largerissuers in need of greater
amounts ofcapital. We further do not believe thatit is appropriate
to limit the availabilityof the exemption to operatingcompanies, as
that term would restrictavailability of the exemption to
fewerissuers than are currently eligible underRegulation A, such as
by excluding shellcompanies.
As proposed, the final rules includetwo new issuer eligibility
requirementsthat add important investor protectionsto Regulation A.
First, potential issuersmust have filed all required ongoingreports
under Regulation A during thetwo years immediately preceding
thefiling of a new offering statement (or forsuch shorter period
that the issuer wasrequired to file such reports) to remaineligible
to conduct offerings pursuant tothe rules. This requirement will
benefitinvestors by providing them with moreinformation, with
respect to issuers thathave previously made a Regulation Aoffering,
to consider when making aninvestment decision, facilitate
thedevelopment of an efficient secondarymarket in such securities,
and enhanceour ability to analyze and observe theRegulation A
market. Second, issuerssubject to orders by the Commissionentered
pursuant to Section 12(j) of theExchange Act within a five-year
periodimmediately preceding the filing of theoffering statement
will not be eligible toconduct an offering pursuant toRegulation A.
This requirement willincrease investor protection and
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compliment the exclusion of delinquentRegulation A filers
discussedimmediately above by excluding issuerswith a demonstrated
history ofdelinquent filings under the ExchangeAct from the pooi of
eligible issuersunder Regulation A.2. Eligible Securitiesa.
Proposed Rules
Section 3(b)(3) of the Securities Actlimits the availability of
any exemptionenacted under Section 3(b)(2) to equitysecurities,
debt securities, and debtsecurities convertible or exchangeableinto
equity interests, including anyguarantees of such securities. 65
Theproposed rules would have limited thetypes of securities
eligible for sale underboth Tier 1 and Tier 2 of Regulation Ato the
specifically enumerated list ofsecurities in Section 3(b)(3) and
alsowould have excluded asset-backedsecurities, as defined in
Regulation AB,from the list of eligible securities.b. Comments on
the Proposed Rules
Several commenters supported theexclusion of asset-backed
securitiesfrom the list of eligible securities.66 Onecommenter
recommended clarifyingthat warrants exercisable for equity ordebt
securities are eligible securities.67c. final Rules
We are adopting final rules that limitthe types of securities
eligible for saleunder Regulation A to the specificallyenumerated
list in Section 3(b)(3),which includes warrants andconvertible
equity securities, amongother equity and debt securities.68
Thefinal rules exclude asset-backedsecurities from the list of
eligiblesecurities. Asset-backed securities aresubject to the
provisions of RegulationAB and other rules specifically tailoredto
the offering process, disclosure, andreporting requirements for
suchsecurities. These rules were not in effectwhen Regulation A was
last updated in1992.69 We do not believe that Section
6515 U.S.C. 77c(b)(3).66 BLS Letter; Carey Letter;
Massachusetts
Letter 2; NASAA Letter 2; WDFI Letter.67ABA BLS Letter.68 See
Rule 261(c); see also Rule 405 (defining
equity security to include, among other things,warrants and
certain convertible securities). Wehave also revised the proposed
definition in Rule261(c) to clarify that all securities, rather
than justequity securities, that are convertible orexchangeable
into equity interests are eligible,subject to the other terms of
Regulation A.
66 Regulation AB, 17 CFR 229.1100 et seq., wentinto effect in
2005. See Rel. No. 338518 (Dec. 22,20041. Asset-backed securities
are defined in Rule1101(c)(1) to generally mean a security that
isprimarily serviced by the cash flows of a discretepool of
receivables or other financial asset, either
401 of the JOBS Act was enacted tofacilitate the issuance of
asset-backedsecurities.3. Offering Limitations and SecondarySalesa.
Proposed Rules
We proposed to amend Regulation Ato create two tiers of
requirements: Tier1, for offerings of up to $5 million ofsecurities
in a 12-month period; andTier 2, for offerings of up to $50
millionof securities in a 12-month period. Asproposed, issuers
could conductofferings of up to $5 million undereither Tier 1 or
Tier 2. Consistent withthe existing provisions of Regulation A,we
also proposed to permit sales byselling securityholders of up to
30% ofthe maximum offering amountpermitted under the applicable
tier ($1.5million in any 12-month period for Tier1 and $15 million
in any 12-monthperiod for Tier 2). Sales by sellingsecurityholders
under either tier wouldbe aggregated with sales by the issuerfor
purposes of calculating themaximum permissible amount ofsecurities
that may be sold during any12-month period. In addition, weproposed
to eliminate the last sentenceof Rule 25 1(b), which prohibits
affiliateresales unless the issuer has had netincome from
continuing operations in atleast one of its last two fiscal
years.b. Comments on the Proposed Rules
Commenters were generallysupportive of the proposed
offeringlimitations on primary and secondaryofferings. Many
commenters, however,suggested changes to the proposedoffering
limits for both tiers, as well asto the proposed limits on
secondarysales.(1) Offering Limitation
Several commenters recommendedthat the Commission increase the
$50million offering limitation for Tier 2.71
fixed or revolving, that by its terms converts intocash within a
finite time period.
70 As proposed, if the offering included securitiesthat were
convertible, exercisable, or exchangeablefor other securities, the
offer and sale of theunderlying securities would also be required
to bequalified and the aggregate offering price wouldinclude the
aggregate conversion, exercise, orexchange price of such
securities, regardless ofwhen they become convertible, exercisable,
orexchangeable.
71 from Salomon Kamalodine, Director,Investment Banking, B.
Riley & Co., March 24, 2014(B. Riley Letter); Letter from
William Klehm,Chairman and CEO, Fallbrook Technologies, March22,
2014 (Fallbrook Technologies Letter)(recommended raising the limit
to $75 million);OTC Markets Letter (recommended raising the limitto
$80 million); Jason Coombs, Co-founder andCEO, Public Startup
Company, Inc., March 24, 2014(Public Startup Co. Letter 1)
(recommended
As an alternative, one commenterrecommended applying the $50
millionlimit on a per offering basis rather thanon a 12-month
basis, and suggested thatthe Commission consider eliminatingthe
offering limits for certain types ofissuers, such as those that
have yet togenerate revenue. 72 Additionally, twocommenters
recommended that theCommission do more to increase theutility of
Tier 1 offerings by raising theTier 1 offering limitation to $10
millionor more in a 12-month period.73Another commenter suggested
that theCommission create a third tier inbetween Tier I and Tier 2
that wouldhave a $15 million offering limitation.7
With respect to offering limitcalculations, one
commenterrecommended that the aggregate offeringprice of the
underlying security only beincluded in the $50 million
offeringlimitation during the 12-month periodin which such security
is firstconvertible, exercisable, orexchangeab)e.75 This
commentersuggested that its recommendedapproach would accommodate
commonsmall business offering structures thatinvolve warrants
exercisable at apremium over several years.(2) Secondary Sales
Offering Limitation
Several commenters specificallysupported the proposed
limitations onsecondary sales.76 While somecommenters indicated
their support forresale limitations, they expressed apreference for
either proscribing resalesentirely78 or requiring the approval
ofthe resale offering by a majority of theissuers independent
directors upon afinding that the offering is in the bestinterests
of both the sellingsecurityholders and the issuer.7 Onecommenter
recommended prohibiting
raising the limit to $75 million); Richardson PatelLetter
(recommended raising the limit to $100million).
72 Richardson Patel Letter.73Letter from Samuel S Guzik, Guzik
and
Associates, March 24, 2014 (Guzik Letter 1)(recommended raising
the limit to at least $10million); Letter from Christopher Cole,
Senior VicePresident and Senior Regulatory Counsel,Independent
Community Bankers of America,March 25, 2014 (ICBA Letter)
(encouragedincreasing the limit from $5 million to $10million).
74Public Startup Co. Letter 1.Andreessen/Cowen Letter; cf.
Proposing
Release, In. 112.76 Massachusetts Letter 2; NASAA Letter 2;
Richardson Patel Letter; WDfI Letter.77 Massachusetts Letter 2;
NASAA Letter 2; WDFI
Letter.78 Massachusetts Letter 2; NASAA Letter 2.79NASAA Letter
2 (supporting the proposed
limits coupled with a board approval requirementin lieu of
prohibiting resales entirely); VDFI Letter(not expressing a
preference for prohibiting resalesentirely).
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resales under Regulation A entirely.80Another commenter
recommendedrequiring selling securityholders to holdthe issuers
securities for 12 monthsbefore being eligible to sell pursuant
toRegulation A, in order to distinguishbetween investors seeking to
invest in abusiness and investors simply seekingto sell to the
public for a gain.8
Many other commentersrecommended raising the resale limitsor
eliminating them entirely.82 One suchcommenter recommended
alternativelyremoving non-affiliate securityholdersfrom the resale
limitation sinceconcerns over investor informationasymmetries would
be reduced whendealing with non-affiliatesecurityholders 83 This
commenter alsorecommended that the Commissionreevaluate the need
for resale limitswithin a year of implementing the rules.Another
commenter also recommendedallowing for unlimited sales by
non-affiliate selling securityholders andfurther suggested that the
rules notaggregate such sales with issuer sales.84Two commenters
suggested thatlimitations on resales are contrary to
theCongressional intent behind theenactment of Title IV of the JOBS
Act.85(3) Rule 251(b)
Many commenters specificallysupported the proposed elimination
ofthe requirement that issuers must havehad net income from
continuingoperations in at least one of its last twofiscal years in
order for affiliate resalesto be permitted, generally noting
thatmany companies have net losses formany years, including, for
example, dueto high research and developmentcosts.86c. Final
Rules
We are adopting the proposedamendments to Regulation A
withmodifications to the Tier 1 offeringlimitation and the
secondary salesoffering limitation. We discuss theseamendments in
detail below. We arealso making a technical change to clarify
80carey Letter.81 Letter from Andrew M. Hartnett, Missouri
Commissioner of Securities, March 24, 2014 (MSLetter).
82ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter
I; Milken Institute Letter;MoFo Letter; Richardson Patel Letter;
WRHambrecht + Co Letter.
Milken Institute Letter.84 B. Riley Letter.85CF5?,,4 Letter 1;
WR Hambrecht + Co Letter
(noting that the JOBS Act contemplated an increasein the
offering threshold to $50 million, but did notlimit the percentage
that could be sold by sellingsecurityholders).
86ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter
1; Milken Institute Letter;MoFo Letter; WR Hambreclit + Co
Letter.
the description of how compliance withthe offering limitations
is calculated inRule 251(a).87Tier 1
As discussed more fully in theAdditional Considerations for
SmallerOfferings section below, we are makingchanges to the
proposed rules inresponse to comments and to increasethe utility of
Tier 1 of the Regulation Aexemption.88 Several conimenters8 anda
report on the impact of state securitieslaw requirements on
offeringsconducted under Regulation A by theU.S Government
Accountability Office(GAO), as required by Section 402 of theJOBS
Act,9 highlighted the $5 millionoffering limitation in
existingRegulation A as one of the main factorslimiting the utility
of the exemption. Incertain circumstances, fixed costsassociated
with conducting RegulationA offerings, such as legal andaccounting
fees, may serve as adisincentive to use the exemption forlower
offering amounts. We aretherefore increasing the offeringlimitation
in the final rules for Tier 1offerings in a 12-month period from
theproposed $5 million limitation to $20million. We believe that
raising theoffering limitation for Tier 1 offerings,in addition to
other changes discussedin Section 11.1. below, will increase
theutility of the exemption for smallerissuers by providing them
withadditional options for capital formationand potentially
increasing the proceedsreceived by the issuer. Consistent withthe
proportionate limitation onsecondary sales in the proposed rules,we
are also increasing the limitation onsecondary sales in Tier 1
offerings in a12-month period from the proposed $1.5million
limitation to $6 million.
87 proposed rules used the phrase aggregateoffering price for
all securities sold whendiscussing the gross proceeds resulting
from prioror anticipated sales of securities i.mder RegulationA. We
have clarified Rule 257(a)(1) to define asaggregate sales gross
proceeds within the prior 12month time frame contemplated by
Regulation A.We have also made conforming changes elsewherein the
final rules and forms.
8 Section fl.1. below,895ee, e.g., Guzik Letter 1; ICBA Letter;
Public
Startup Co. Letter 1.90Factors that May Affect Trends in
Regulation
A Offerings, GAO12839 (July 2012) (the GAOReport) (available at:
http://www.gao.gov/assets/600/5921 13.pdl). The GAO Report
concludes that itis unclear whether increasing the Regulation
Aoffering ceiling from $5 million to $50 million willimprove the
utility of the exemption.
9 Rule 251(a)(1). We intend to revisit the Tier 1offering
limitation at the same time that we arerequired by Section 3(b)(5)
of the Securities Act toreview the Tier 2 offering limitation and
willconsider whether additional investor protectionswould be
necessary if the Tier 1 offering limitationis increased.
Tier 2We are adopting the proposed $50
million Tier 2 offering limitation.92Some commenters suggested
that weraise the offering limitation to anamount above the
statutory limitationset forth in Section 3(b](2), but we donot
believe an increase is warranted atthis time. While Regulation A
hasexisted as an exemption fromregistration for some time,
todayschanges are significant. We believe thatthe final rules for
Regulation A willprovide for a meaningful addition to theexisting
capital formation options ofsmaller companies while
maintainingimportant investor protections. We areconcerned,
however, about expandingthe offering limitation of the
exemptionbeyond the level directly contemplatedin Section 3(b](2)
at the outset of theadoption of final rules. As noted abovein
Section II.B.1., the final rules do notlimit issuer eligibility on
the basis ofissuer size, as we believe that the $50million annual
offering limitation willserve to limit the utility of theexemption
for larger issuers in need ofgreater amounts of capital. Similarly,
webelieve that the more extensivedisclosure requirements associated
withExchange Act reporting are moreappropriate for larger and
generallymore complex issuers that raise moneyin the public capital
markets.3 We aretherefore concerned that an increase inthe offering
limitation at this time mayincrease risks to investors
byencouraging larger issuers to conductofferings pursuant to
Regulation A ininstances where disclosure pursuant toa registered
offering under the SecuritiesAct would be more appropriate.
The Commission is required bySection 401 of the JOBS Act to
reviewthe Section 3(b)(2) offering limitationevery two years, and
we will considerthe use of the final rules by marketparticipants as
part of that review. Wewill therefore revisit the
offeringlimitation by April 2016, as required bythe statute, with a
view to consideringwhether to increase the $50 millionoffering
limitation. We also are adoptingthe proposed $15 million limitation
onsecondary sales for Tier 2 as proposed,with a change in the
application of thelimitation for secondary sales underboth Tier 1
and Tier 2 discussed in thefollowing section.Application of the
Limitation onSecondary Sales
As noted in the Proposing Release,secondary sales are an
important part ofRegulation A. We believe that allowing
82Rule 251(a)(2). See discussion in Section Ill.C.3. below.
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selling securityholders access toavenues for liquidity will
encouragethem to invest in companies, althoughwe acknowledge that
providing forsecondary sales in any amount may giverise to certain
concerns. As highlightedby at least one commenter at the
preproposing stage, permitting somesecondary sales pursuant to
RegulationA could place investors at aninformational disadvantage
to sellingsecurityholders who have potentiallygreater access to
inside informationabout the issuer and does notnecessarily provide
capital to theissuer.94 Other commenters stated thatsuch concerns
are misplaced in thecontext of secondary sales by non-affiliates,
who generally do not haveaccess to inside information.9
We do not believe that a wholesaleprohibition on secondary
sales, assuggested by some commenters, isappropriate or necessary
for either Tier1 or Tier 2 of Regulation A. However,in order to
strike an appropriate balancebetween allowing
sellingsecurityholders continued access toavenues for liquidity in
Regulation Aand the concern that secondary offeringsdo not directly
provide new capital tocompanies and could pose the potentialrisks
to investors discussed above, thefinal rules continue to permit
secondarysales but provide additional limitationson secondary sales
in the first year. Thefinal rules limit the amount of
securitiesthat selling securityholders can sell atthe time of an
issuers first RegulationA offering and within the following
12months to no more than 30% of theaggregate offering price of a
particularoffering.96 While the final rulescontinue to provide
sellingsecurityholders with the flexibility tosell securities
during this period, webelieve that this approach to the finalrules
will help to ensure that secondarysales at the time of such
offerings willbe made in conjunction with capitalraising events by
the issuer.
Further, we are providing differentrequirements for secondary
sales byaffiliates and by non-affiliates. The finalrules limit
secondary sales by affiliatesthat occur following the expiration
ofthe first year after an issuers initialqualification of an
offering statement tono more than $6 million, in the case ofTier 1
offerings, or no more than $15million, in the case of Tier 2
offerings,over a 12-month period. Secondary salesby non-affiliates
that are made pursuant
94Letter from A. Heath Abshure, President,NASAA, April 10, 2013
(NASAA (pre-proposal)Letter).
See, eg., MiLken Institute Letter.96Rule 251(a)(3) (Additional
limitation on
secondary sales in first year).
to a qualified offering statementfollowing the expiration of the
first yearafter an issuers initial qualification ofan offering
statement will not be limitedexcept by the maximum offering
amountpermitted by either Tier 1 or TierAlthough the secondary
sales offeringamount limitation will only apply toaffiliates during
this period, consistentwith the proposal, non-affiliatesecondary
sales will be aggregated withsales by the issuer and sales by
affiliatesfor purposes of calculating compliancewith the maximum
offering amountpermissible under the respective tiers.98
We do not believe that the concernsexpressed by one commenter
aboutinformational disadvantages that mayexist with affiliate sales
are present withrespect to resales by non-affiliates. Onthe
contrary, in comparison torequirements for non-affiliate resales
ofrestricted securities after the expirationof Securities Act Rule
144 holdingperiods, we believe that Regulation Aprovides purchasers
of such securitieswith the benefit of, among other things,narrative
and financial disclosure that isreviewed and qualified by
theCommission in transactions that aresubject to Section 12(a)(2)
liability andthe antifraud provisions of Section 17 ofthe
Securities Act. 101
We also disagree with the commenterswho suggested limitations on
secondarysales are contrary to the legislativeintent behind the
enactment of Title IVof the JOBS Act. We note that Section3(b)(2)
expressly provides that theCommission may impose additionalterms,
conditions, or requirements as itdeems necessary in the public
interestand for the protection of investors.02For the reasons
discussed above, webelieve that limiting secondary sales
byaffiliates is not only consistent with thelanguage and purpose of
the statute butalso necessary in the public interest andfor the
protection of investors.Offering Limit Calculation
Under the proposal, if the offeringincluded securities that are
convertible
97Rule 251(a).98Secondary sales of shares acquired in a
Regulation A offeringwhich are freely tradableare not subject to
limitations on secondary sales,but must be resold under an
exemption fromSecurities Act registration (e.g., Section 4(a)(1),
15U.S.C. 77d(a)(1)).
99NASAA (pre-proposal) Letter.100 Rule 144, non-affiliates of an
issuer are,
among other things, permitted to resell restrictedsecurities
after the expiration of a one-year holdingperiod without
limitations or requirements as to: (i)The availability of current
public information aboutthe issuer or its securities, (ii) the
volume of resales,(iii) the manner of sale, or (iv) disclosure. See
17CFR 230.144.
101 15 U.S.C. 77](ak2), 77q.102 See Section 3(b)(2)(G), 15
U.S.C. 77c(b)(2)(G).
into, or exercisable or exchangeable for,other securities
(rights to acquirel, theoffer and sale of the underlyingsecurities
also would generally berequired to be qualified,bOa and
theaggregate offering price would includethe aggregate conversion,
exercise, orexchange price of such securities,regardless of when
they becomeconvertible, exercisable, orexchangeable.4 Consistent
with theviews of at least one commenter,5 weare concerned that the
proposedrequirement could have a greater impacton smaller issuers
than larger issuersbecause smaller issuers frequently issuerights
to acquire other securities incapital raising events. The
proposedmethod of calculating the offering limitwould presume the
exercise price ofunderlying securities that, by theirterms, may
occur at a date in the distantfuture or only upon the occurrence
ofkey events. By including all securitiesunderlying any rights to
acquire othersecurities in the offering limitcalculation, the
proposed rules couldeffectively limit the proceeds of anoffering
available to an issuer byrequiring such issuers to include in
theaggregate offering price at the time ofqualification the
securities underlyingrights to acquire that may or may notbecome
exercisable or exchangeable inthe future. We are adopting final
rulesthat will require issuers to aggregate theprice of all
securities for whichqualification is currently being
sought,including the securities underlying anyrights to acquire
that are convertible,exercisable, or exchangeable within thefirst
year after qualification or at thediscretion of the issuer. As
such, andconsistent with the treatment of rights toacquire in the
context of registeredofferings, if an offering includes rightsto
acquire other securities at a timemore than one year after
qualificationand the issuer does not otherwise seekto qualify such
underlying securities,the aggregate offering price would notinclude
the aggregate conversion,exercise, or exchange price of
theunderlying securities.106 For purposes
103 Qualification would not be required forsecurities
transactions exempt from registrationpursuant to Securities Act
Section 3(a)(9l, 15 U.S.C.77c(a)(9). Section 3(a)(9) exempts from
registrationany security exchanged by the issuer with itsexisting
security holders exclusively where nocommission or other
remuneration is paid or givendirectly or indirectly for soliciting
such exchange.
104 See note to proposed Rule 251(a).105 Andreessen/Cowen
Letter.106 See note to Rule 25 1(a). In these
circumstances, the securities underlying the rightsto acquire
would need to be separately qualifiedunder Regulation A or,
depending on thecircumstances, registered, exempt from
registration,or otherwise offered in an appropriate manner atthe
time of issuance.
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of calculating the price of underlyingsecurities that use a
pricing formula, asopposed to a known conversion price,the issuer
will be required to use themaximum estimated price for whichsuch
securities may be converted,exercised, or exchanged.107Rule
251(b)
We are adopting as proposed finalrules that eliminate the last
sentence ofRule 251(b),b08 which prohibitedaffiliate resales unless
the issuer had netincome from continuing operations in atleast one
of its last two fiscal years. Weagree with the views expressed
bycommenters that the absence of netincome, by itself, is not a
sufficientindicator of an enhanced risk thatexisting shareholders
will useinformational advantages to transfertheir holdings to the
investing publicthat would necessitate the continuedapplication of
the prohibition in thefinal rules. Further, as noted in
theProposing Release, the Commissionscurrent disclosure review
andqualification processes and enforcementprograms are
significantly moresophisticated and robust than they werewhen this
provision was added toRegulation A in its original form.109
Inaddition, the final rules being adoptedtoday include revised bad
actordisqualification provisions andadditional issuer
eligibilityrequirements aimed at limiting access tothe exemption
for market participantswith demonstrated track records of
noncompliance or abuse.4. Investment Limitation
a. Proposed Rules
Regulation A does not currently limitthe amount of securities an
investor canpurchase in a qualified Regulation Aoffering. As we
noted in the ProposingRelease, however, we recognize thatwith the
increased annual offeringlimitation provided in Section
3(b)(2)comes a risk of commensurately greaterinvestor losses.hhl To
address that riskwe proposed, among other things, tolimit the
amount of securities investorscan purchase in a Tier 2 offering to
nomore than 10% of the greater of theirannual income or their net
worth. Forthis purpose, annual income and networth would be
calculated as providedin the accredited investor definition
17 CFR 230.251(b) (2014).109 Proposing Release, at Section
11.3.3.10See discussions in Section lI.G (Bad Actor
Disqualification) below and Section II.B.1 (EligibleIssuers)
above.
111 See Proposing Release, at Section 11.B.4.
under Rule 501 of Regulation D.2Under the proposal, issuers
would berequired to make investors aware of theinvestment
limitations,h13 but wouldotherwise be able to rely on aninvestors
representation of compliancewith the proposed investment
limitationunless the issuer knew, at the time ofsale, that any such
representation wasuntrue.
b. Comments on Proposed RulesA number of commenters
generally
supported investment limitations forTier 2 offerings. These
commentersbelieved that an investment limitationwould serve as an
important investorprotection. Several commentersrecommended
revisiting the necessity ofthe limitations after a one- to three-
yeartrial period,5 and anothercommenter6 recommended extendingthe
investment limitation to Tier Iofferings to make them more
consistentwith our proposed rules for securities-based crowdfunding
transactionsconducted pursuant to Section 4(a)(6) ofthe Securities
Act.117 Somecommenters support for the proposedinvestment
limitations was conditionedon suggested changes to the
proposedrules that would require issuers to domore to ensure
compliance with thelimitations and that would imposeadverse
consequences on issuers for thefailure to do so8 One
commenterbelieved that the 10% limitation issignificantly higher
than isappropriate for all but the wealthiest,least risk averse
investors.9 Twocommenters suggested that the 10%limitation should
be aggregated acrossall Regulation A offerings instead ofbeing
applied on a per offering basis,2while one commenter
specificallyargued against such an aggregatedlimit.121
11217 CFR 230.501.113 See paragraph (a)(5) to Part H of
proposed
Form 1A.4CFA Institute Letter; EPA Letter; Letter from
Robert Kisel, Small Business Owner, March 18,2014 (Kisel Letter)
(erroneously referring to the10% limit as a 5% limit); MCS Letter;
REISA Letter;Richardson Patel Letter; WDFI Letter.
15CFIRA Letter 1; Kisel Letter; Milken InstituteLetter.
6CfA Institute Letter.117 See Crowdftriiding, Rel. No. 339470
[78 FR
66427] (Nov. 5, 2013).5CFA Institute Letter; MCS Letter; WDFI
Letter.119 Letter from Barbara Roper, Director of Investor
Protection, consumer Federation of America, March24, 2014 (CFA
Letter).
20CFA Letter (not recommending thisspecifically, but noting this
as one reason why theinvestment limit was not an adequate
substitute forstate review of Tier 2 offerings); William
A.Jacobson, clinic Professor of Law, cornell LawSchool, and
Director, Cornell Securities Law Clinic,March 24, 2014 (Cornell
Clinic Letter).
21KVCF Letter.
Numerous commenters recommendedeliminating the investment
limitationfor Tier 2 offerings.22 Several of thesecommenters
alternatively recommendedat least doubling the limit if
theprovision is not eliminated entirely.123Other commenters thought
that theinvestment limitation is unnecessary inlight of the other
investor protections forTier 2 offerings, such as the
expandeddisclosure requirements.24 Severalcommenters noted that the
limit doesnot have a statutory basis and suggestedthat it may be
contrary to Congressionalintent,25 or contrary to the
principlesunderlying federal securities law, whichfocus on fraud
prevention and fulldisclosure.126 One commenterrecommended
eliminating theinvestment limitations only if the finalrules do not
preempt state lawregistration requirements for Tier 2offerings,
arguing that the limitationsmay conflict with state
investorsuitability standards,27 while anothercommenter indicated
that investmentlimitations would be unnecessary withappropriate
state oversight, butsupported limits for retail investors instartup
companies and high-riskofferings.28 Another commenterrecommended
creating variouscategories of investor sophisticationwith
corresponding requirements andlimitations for each.29
Many commenters, including thoseboth for and against the
investmentlimit, recommended providingexceptions to the limit for
certain typesof investors, such as accreditedinvestors, or altering
the application of
122 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter;
CFIRA Letter 1; CFIRA Letter 2;Falibrook Technologies Letter;
Letter fromGroundfloor Finance, Inc., Nov. 18, 2014(Groundfloor
Letter); Heritage Letter; ICBA Letter;PA Letter; Letter from Ford
C. Ladd, Esq., May 19,2014 (Ladd Letter 2); Letter from John
Rodenrys,Executive Director R&D, Leading Biosciences,
Inc.,March 24, 2014 (Leading Biosciences Letter);Milken Institute
Letter; MoFo Letter; NASAA Letter2; Letter from Michael L. Zuppone,
Paul HastingsLLP, March 24, 2014 (Paul Hastings Letter); Letterfrom
Jason Coombs, Co-Founder and CEO, PublicStartup Company, Inc.,
April 2, 2014 (PublicStartup Co. Letter 7); SVB Financial
Letter.
23Fallbrook Technologies Letter; LeadingBiosciences Letter; ICBA
Letter.
124 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter;
MoFo Letter; Paul Hastings Letter; SVBFinancial Letter.
25ABA BLS Letter; Andreessen/Cowen Letter;CFIRA Letter 1;
Heritage Letter; MoFo Letter; WRHambrecht + Co Letter.
126 ABA BLS Letter; B. Riley Letter; HeritageLetter; Milken
Institute Letter.
127 Groimdfioor Letter.128 NASAA Letter 2.129 Cornell Clinic
Letter (recommending the tiered
investment limits in our proposed rules forsecurities-based
crowdffinding as an example).
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the limit to such types of investors.130These commenters
believed that theinvestor protections afforded by theinvestment
limit would not be necessaryfor all types of investors or in all
typesof Regulation A offerings. Someconimenters recommended
eliminatingthe investment limit for accreditedinvestors131 One such
commenterrecommended eliminating theinvestment limit generally and,
if not, atleast for institutional investors andofferings of
securities listed onsecurities exchanges.32 Severalcommenters
recommended eliminatingthe investment limit for non-naturalpersons
or institutional investors.33Other commenters
recommendedeliminating the investment limits forother types of
investors or offerings.13Two commenters noted that it would
bedifficult to apply the investment limitsto non-natural persons
(such as smallbusinesses and TEAs) if the rules use anincome or net
worth test.35 One ofthese commenters recommended that, ifthe test
applies to such investors, itshould be based on assets or
revenue.36
Many commenters explicitlysupported allowing issuers to rely on
aninvestors representation of compliance
3 ABA BLS Letter; Andreessen/Cowen Letter;canaccord Letter;
cornell clinic Letter; FalibrookTechnologies Letter; Heritage
Letter; Ladd Letter 2;Leading Biosciences Letter; Mccarter &
EnglishLetter; MCS Letter; Milken Institute Letter; MoFoLetter;
Paul Hastings Letter; Richardson Patel Letter;SVB Financial Letter;
WR Hambrecht + co Letter.
ABA BLS Letter; Andreessen/Cowen Letter;Canaccord Letter;
Falibrook Technologies Letter;Heritage Letter; Ladd Letter 2;
Leading BiosciencesLetter; McCarter & English Letter; MCS
Letter; MoFoLetter; Paul Hastings Letter; Richardson Patel
Letter;SVB Financisi Letter; cf cornell Clinic Letter(recommending
an unspecified higher limit foraccredited investors]; Milken
Institute Letter; WRHambrecht + Co Letter (supporting eliminating
theinvestment limit generally).
32Milken Institute Letter.133 BLS Letter; Canaccord Letter;
Milken
Institute Letter; Mofo Letter; WR Hamhrecht CoLetter. Several of
these commenters believed that,as proposed, the investment
limitations would notapply to non-natural persons and asked
theCommission to confirm or clarify this point.
134 Cornell Clinic Letter (creating a separate,higher limit for
institutional investors and othertypes of non-retail investors
included in theaccredited investor definition]; Heritage
Letter(eliminating the investment limit for any currentor former
investor, employee or officer of theissuer); Ladd Letter 2
(eliminating the investmentlimit for any non-accredited affiliates,
founders,employees, agents, independent contractors andowners];
Milken Institute Letter (eliminating theinvestment limit for
investors that purchase Tier 2securities on an exchange); Paul
Hastings Letter(eliminating the investment limit for
offeringsconducted by registered broker-dealers); RichardsonPatel
Letter (eliminating the investment limit forany non-individual
investor with at least $100,000in assets or $100,000 in revenue in
the previousfiscal year).
35McCarter & English Letter; Richardson PatelLetter.
36Richardson Patel Letter.
with the 10% investment limit.3 Mostof these commenters stated
that anymore rigorous verification processwould cause the
compliance costs to betoo high. One commenter
recommendedeliminating any obligation for the issuerto monitor the
10% investment limitand allowing the issuer to rely on
arepresentation by the investor that he orshe will notify the
issuer uponexceeding the 10% limit.38 Anothercommenter recommended
permitting anissuer to rely on representations from itsunderwriters
or broker-dealers as to the10% investment limit, rather thanhaving
to seek this directly frominvestors.39 This commenter believedthat
the issuers in most Tier 2 offeringswould have little direct
contact with theinvestors and that the intermediarieswould be
better positioned to assesscompliance (possibly already
havinginformation about the investorsfinances).
Several commenters disagreed withallowing investors to
representcompliance with the investmentlimitation and recommended a
standardthat would require an issuer to do moreto ensure
compliance.140 Twocommenters recommended adopting astandard
requiring issuers to takereasonable steps to verify that
thepurchasers are in compliance with the10% investment limit.141
Twocommenters recommended requiring anissuer to have a reasonable
belief orreasonable basis that it can rely on aninvestors
representation of compliancewith the 10% investment limit.142
Onesuch commenter also suggestedallowing accredited investors to
exceedthe 10% investment limit, but requiringthat the issuer take
reasonable steps toverify accredited investor status.43
Onecommenter recommended requiring aduty of inquiry so that the
issuerwould have to follow-up on any redflags. Additionally, this
commenterrecommended that the Commissioncreate an independent and
secure meansof verifying investor income or torequire a mandatory
questionnaire forindividual investors to complete before
37Fallbrook Technologies Letter; Heritage Letter;IPA Letter;
KVCF Letter; Leading Biosciences Letter;REISA Letter.
138RE1SA Letter.39KVCF Letter.140 from Paul Sigelman, President
& CEO,
Accredited Assurance, March 24, 2014 (AccreditedAssurance
Letter); CFA Letter; CFA InstituteLetter; Cornell Clinic Letter;
MCS Letter; WDFILetter.
141 Accredited Assurance Letter; WDFI Letter.142 CFA Institute
Letter; MCS Letter.
MCS Letter.144 Cornell Clinic Letter.
buying a security issued underRegulation A.c. Final Rules
We are adopting an investmentlimitation for Tier 2 offerings in
thefinal rules, with minor modificationsfrom the proposed rules. We
believe thatthe investment limitation serves as animportant
investor protection and mayhelp to mitigate the risk that with
theincreased annual offering limitationprovided in Section 3(b)(2)
comes a riskof commensurately greater investorlosses. We do not
believe that thelimitation is needed for accreditedinvestors
because investors that qualifyas accredited under our rules
satisfycertain criteria that suggest they arecapable of protecting
themselves intransactions that are exempt fromregistration under
the Securities Act.145We also do not believe that thelimitation is
necessary for investmentsin securities that will be listed on
anational securities exchange uponqualification because of the
issuerlisting requirements and the potentialliquidity that
exchanges provide toinvestors that seek to reduce theirholdings.
These both are importantinvestor protections that help tomitigate
concerns about the magnitudeof loss that could potentially result
froman investor purchasing a large amountof securities in a sinale
offering.
Under the final rules, the investmentlimitations for purchasers
in Tier 2offerings will not apply to purchaserswho qualify as
accredited investorsunder Rule 501 of Regulation D.46further,
investment limitations in a Tier2 offering will not apply to the
sale ofsecurities that will be listed on anational securities
exchange uponqualification since such issuers will berequired to
meet the listing standards of
45See Rule 501(a) of Regulation 0, 17 CFR230.501(a); see also
SECv. Ralston Purina Co., 346U.S. 119 (1953).
46See Rule 252(c)(2). Under Rule 501, naturalpersons are
accredited investors if: (1) Their incomeexceeds $200,000 in each
of the two most recentyears (or $300,000 in joint income with a
personsspouse), and they reasonably expect to reach thesame income
level in the current year; (ii] theyserve as executives or
directors of the issuer; or (iii)their net worth exceeds $1,000,000
(individual orjointly with a spouse), excluding the value of
theirprimary residence. Certain enumerated entities thatsatisfy an
asset-based test also qualify as accreditedinvestors, while others,
including regulated entitiessuch as banks and registered investment
companies,are not subject to the asset test. See 17 CFR 230.501.The
accredited investor definition is intended toencompass those
individuals and entities whosefinancial sophistication and ability
to sustain therisk of loss of investment or ability to fend
forthemselves render the protections of the SecuritiesActs
registration process unnecessary. See, e.g.,Rel. No. 336683 (Jan.
16, 1987) [52 FR 3015](Regulation 0 Revisions; Exemption for
CertainEmployee Benefit Plans).
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