the JOBS Act, Georgetown Law Journal, pp. 12-002.
---------------------------------------------------------------------------

g. Liability Under Section 12(a)(2)
    Consistent with current Regulation A, sellers of securities under
Regulation A as proposed to be amended would be subject to liability to
investors under Section 12(a)(2) for any offer or sale by means of an
offering circular or an oral communication that includes a material
misleading statement or material misstatement of fact. We believe that
this would continue to benefit investors by encouraging issuers and
selling securityholders to truthfully disclose all relevant facts
associated with an offering, which in turn would allow potential
investors to better assess the merits of the offering and make informed
decisions. We do not expect this requirement to impose any significant
costs beyond the liability already incurred by current Regulation A
issuers.

    In the context of registered transactions, Section 11 liability
applies not only to the issuer and underwriter but also, in certain
circumstances, to other specified persons, including the accountants,
attorneys and other experts involved in preparing the registration
statement. In contrast, Section 12(a)(2) liability applies by its terms
only to sellers, and does not extend to ``those who merely assist in
another's solicitation efforts.'' \622\ Therefore, we anticipate that
auditors and placement agents may not demand as much compensation for
bearing the legal risks associated with participation in Regulation A
offerings as they would for offerings subject to Section 11 liability.
We recognize, however, that Section 12(a)(2) liability may result in
lower levels of scrutiny by such intermediaries and may therefore
expose investors to additional risks.
---------------------------------------------------------------------------

    \622\ Pinter v. Dahl 486 U.S. 622 (1988), at 651 fn. 21.
---------------------------------------------------------------------------

3. Offering Statement
    We are proposing a number of modifications to the offering
statement required under Regulation A. Under current Regulation A,
offering materials are submitted to the Commission in paper form. We
are proposing to require electronic submission of offering materials so
that these materials can more easily be made available to the public.
    As discussed in detail above, electronic submission has numerous
benefits to issuers and investors. For example, electronic filing
allows offering materials to be more easily accessed and analyzed by
regulators, investors, and financial market researchers. We anticipate
the effect of providing electronic access to offering materials to the
public will promote liquidity and pricing efficiency for the issued
securities. We also recognize that electronic filing on EDGAR may
impose costs on issuers, as discussed below.
    We also are proposing a number of modifications to Form 1-A
intended to streamline the type of information included in the offering
circular. In general, we are proposing to maintain Form 1-A's three-
part structure and to make various revisions and updates to the form.
For Part I, the substantive additions to Regulation A items are: issuer
eligibility, bad actor disqualification and disclosure, and a summary
of key issuer financial information and offering details. 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.
    Regulation A issuers currently are required to file their offering
statements on paper. Paper documents are difficult to process both for
the Commission and for investors, analysts, and other researchers. The
proposed rules require issuer and offering details in Part I of Form 1-
A to be reported in XML format that once filed with the Commission will
be machine readable. This format will allow for more efficient reviews
and the systematic tracking of offering particulars by investors,
regulators, and other market participants such as financial market data
aggregators.
    The rule also proposes eliminating one of the three alternate
models for providing narrative disclosure under Part II of the offering
statement. Currently, issuers can choose between Model A (for issuers
that are corporations only), Model B, and Part 1 of Form S-1 as
described in the release. Elimination of Model A, wherein issuers
provided disclosure in a question-and-answer format, is unlikely to
affect most issuers, as historically, only about 20% of issuers have
elected to use Model A. Eliminating Model A also addresses regulators'
concerns about possible confusion that could result from the lack of
uniformity of information presented in the question-and-answer in the
format. Issuers continue to have the option of using Form S-1.
    The proposed changes to Model B include statutorily required
disclosures and a section containing management discussion and analysis
of the issuer's liquidity, capital resources, and business operations.
As discussed in more detail below, these additional items may impose
costs on the issuer, while providing important information to
investors.
    Consistent with JOBS Act requirements with regard to ongoing
reporting by Regulation A issuers, we are proposing to require offering
materials to include audited financial statements, but only for issuers
conducting a Tier 2 offering. The benefits of audited financial
statements should provide investors with greater confidence in the
accuracy and quality of the financial statements of issuers seeking to
raise larger amounts of capital. We understand that audited financial
statements could entail significant costs to issuers, and that the
costs of an audit may discourage the use of Regulation A as proposed to
be amended. Based on a compilation of data submitted by reporting
companies, the average cost of an audit for offerings of less than $50
million is approximately $114,000.\623\ Additionally, the proposed
rules do not require that the auditor be PCAOB registered, which could
reduce the cost of an audit for some issuers.
---------------------------------------------------------------------------

    \623\ See Audit Analytics, Auditor-Fees, available at http://www.auditanalytics.com/0002/audit-data-company.php. The auditor fee
database contains fee data disclosed by SEC reporting companies in
electronic filings since January 1, 2001.
---------------------------------------------------------------------------

    The proposed amendments also include a limitation on the age of
financial statements at the time of qualification or filing (on these
dates, financial statement data must not be older than nine months).
This provision ensures that qualification is based on information that
closely reflects a company's current financial condition. The
additional costs from these changes are somewhat mitigated by decreases
in disclosure requirements regarding the issuer's business and
transactions with related persons. The higher level of disclosure
would, however, enable investors to have better information for making
their investment decisions.
    The proposed rules would also allow for continuous or delayed
offerings of eligible securities by an eligible issuer under Regulation
A, on a basis analogous to shelf registration under Rule 415 for
registered offerings, although acquisition shelves would not be
permitted under Regulation A. Unlike existing Regulation A, the
proposed rules also restrict at-the-market shelf offerings. Issuers
would need to update their offering circulars annually and after the
second fiscal quarter, the same timetable as is proposed to apply for
ongoing reporting requirements.
    The current Regulation A rules allow for continuous or delayed
offerings under Rule 415, but Rule 415 only discusses registered
offerings, which may have caused confusion in its application to
Regulation A. The provisions in Regulation A as proposed explicitly
allow for continuous or delayed offerings and would provide greater
clarity. It would now be clear that eligible issuers would have greater
flexibility to select the timing of their offerings based on
macroeconomic conditions such as interest rates and market volatility,
or other company specific factors that may contribute to a successful
offering.\624\ Issuers would not have to wait for the Commission or a
state regulator to complete what can sometimes be a lengthy review
process. These factors should contribute to more timely financing
decisions and higher capital market efficiency. For example,

existing research for 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, is
lower than through traditional registration.\625\
---------------------------------------------------------------------------

    \624\ Bayless, Mark and Susan Chaplinsky, 1996, ``Is there a
window of opportunity for seasoned equity issuance?'' Journal of
Finance 51, 253-278.
    \625\ Bethel, Jennifer and Laurie Krigman, ``Managing the Cost
of Issuing Common Equity: The Role of Registration Choice'',
Quarterly Journal of Finance and Accounting, 47 (4) (2008), pp. 57-
85.
---------------------------------------------------------------------------

    Excluding at the market offerings will avoid situations where sales
at fluctuating market prices result in a breach of the offering ceiling
or the cap on secondary sales. Issuers could thus avoid losing their
exemption under Regulation A due to unanticipated market factors. While
eligible issuers have to file periodic updates and amendments as
described above, they have the flexibility to file only a supplement to
the offering circular if there were no fundamental changes. Hence, the
cost to issuers of having the flexibility to make a continuous or
delayed offering could be minimal.
4. Solicitation of Interest (``Testing the Waters'')
    Consistent with Title IV of the JOBS Act, the proposed rules permit
issuers to ``test the waters'' by soliciting interest in the offering.
Regulation A issuers would be allowed to use all forms of
communications with all potential investors in these communications.
Under current 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.
Under the proposal, testing the waters would be permitted both before
and after filing of the offering statement, and testing the water
materials would be required to be filed with the Commission at the time
of initial submission of the offering statement, and would be updated
thereafter.
    In general, allowing issuers to gauge interest through testing the
waters may reduce uncertainty regarding whether an offering could be
completed successfully. If after testing the waters, the issuer is not
confident that it will attract sufficient investment, the issuer can
consider alternate methods of raising capital and thereby avoid the
costs of an unsubscribed or under-subscribed offering. 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.
    By expanding the permissible scope of testing the waters, the
proposed rules could have several benefits. In particular, allowing
issuers to advertise their intention to raise capital prior to
qualification of the offering statement could decrease the time
required to raise the desired amount of capital. This option may be
useful for smaller companies, especially early-stage companies, which
may find it too costly to solicit through intermediaries. Thus, at
least for some companies, the proposed rules could lead to lower search
costs and therefore lower issuance costs. The expansion of testing the
waters could also increase the type and extent of information available
to investors, which could lead to more efficient prices for the offered
securities.
    In addition, to the extent that the proposed rules permit testing
the waters for an expanded period of time, investors who previously
found it difficult to find investment opportunities in private
offerings may be able to find and potentially invest in a larger and
more diverse pool of investment opportunities, allowing investors to
more efficiently allocate their capital. The net effect would be to
enhance both capital formation and allocative efficiency. Further,
requiring issuers to attach the offering statement to their testing the
waters materials (or providing information about where it can be
accessed) would allow investors to be fully aware of the details of the
offering material in a timely manner that would support sound
investment decisions.
    We recognize that there would also be potential costs associated
with expanding the use of testing the waters. In particular, to the
extent that testing the waters increases under the proposed rules, the
proposed rules could result in increased levels of inappropriate and
potentially fraudulent activity, because solicitation of these
offerings can be directed towards all investors, including non-
accredited and unsophisticated investors. To some extent, these costs
are mitigated by the application of Section 12(a)(2) and the general
antifraud provisions of the federal securities laws. By expanding the
scope of permissible testing the waters, the proposed amendments could
also lead to investor confusion about how to process the different
disclosure materials they receive. For example, investors already aware
of an impending offering through testing the waters materials may
neglect to read the offering circular, which could be substantively
different from the material distributed when testing the waters.
    The Commission could require submission of testing the waters
materials before or concurrent with first use, allowing regulators to
better assess how testing the waters is used to gauge investor interest
prior to filing of the offering statement. Requiring initial submission
of testing the waters materials could increase costs for issuers that
decide not to proceed with the offering after testing the waters.
Requiring submission before filing the offering circular could decrease
issuers' willingness to test the waters and could potentially limit the
overall reliance on Regulation A. Any additional solicitation materials
that could result from requiring early submission would also lead to an
increase in the amount of material available for investors about the
offering, which could increase confusion and the costs incurred by
investors evaluating their investment opportunities.
5. Ongoing Reporting Requirements
    Requiring limited ongoing disclosure could improve investor
decision-making and ultimately benefit issuers by improving the price
efficiency of securities issued through an amended Regulation A
offering, to the extent that secondary markets for these securities
develop. Ongoing financial disclosures and mandatory disclosures of key
material events would allow existing and potential future investors to
periodically update their expectations of the issuer's prospects and
act accordingly. By standardizing the content, timing, and form of
these disclosures, the proposed amendments would make it easier for
investors to compare information across issuers than if disclosure
decisions were otherwise left to voluntary, bilateral arrangements
between issuers and investors, as would be the case without mandatory
disclosures. Hence, the proposed amendments to require ongoing
disclosure under Regulation A would eliminate many potential
differences in disclosures between issuers that could otherwise impair
the capital allocation decisions of investors,\626\ particularly to the
extent that such securities trade in OTC markets.
---------------------------------------------------------------------------

    \626\ See, e.g., Luigi Zingales (2009), The Future of Securities
Regulation, Journal of Accounting Review, Vol 47, pp. 391-425.
---------------------------------------------------------------------------

    More generally, the proposed ongoing disclosure requirements should
result in fewer information asymmetries between issuers and their
investors than currently exist for securities offered under the
existing Regulation A or other exempt offering methods. The enhanced
disclosure requirements should help improve the ability of investors
with different risk preferences to identify investment opportunities
best suited for

their risk tolerance. They will provide investors with a useful
benchmark with which to evaluate the performance of other companies,
both within and outside of the proposed Regulation A market. This
enhanced information environment should improve the allocative
efficiency of capital and facilitate the subsequent transfer of issued
securities in secondary markets, allowing for more efficient pricing
and liquidity.\627\
---------------------------------------------------------------------------

    \627\ See Graham, J., C. Harvey and S. Rajgopal (2005), The
Economic Implications of Corporate Financial Reporting. Journal of
Accounting and Economics 40, pp. 3-73; Durnev, A., R. Morck and B.
Yeung (2003), Value Enhancing Capital Budgeting and Firm-Specific
Stock Returns Variation, Journal of Finance 59, pp. 65-106.
---------------------------------------------------------------------------

    In addition to the direct costs of preparing the mandatory
disclosures, issuers of securities in a Regulation A offering under the
proposed rules would be subject to potential indirect disclosure costs
by revealing to their competitors and other market participants
information about their business not previously required to be
disclosed.\628\ For these issuers, ongoing reporting requirements under
Regulation A may render alternative offering methods more appealing,
such as Rule 506(c) of Regulation D, which allows general solicitation
but does not impose any ongoing disclosure requirements.
---------------------------------------------------------------------------

    \628\ Campbell, Tim S (1979), ``Optimal investment financing
decisions and the value of confidentiality.'' Journal of Financial
and Quantitative Analysis, pp. 913-924.
---------------------------------------------------------------------------

    Nonetheless, the indirect costs of increased disclosures are
present for any issuer seeking improved liquidity through access to
public capital markets and a broader investor base that includes
unaccredited investors. Enhanced disclosure is likely to improve the
liquidity of the securities of Regulation A issuers in the secondary
market, particularly for securities that are traded in the OTC
market.\629\ As discussed above, there is a positive feedback effect
from increased liquidity, whereby increased trading engenders more
accurate pricing by incorporating a greater number of investors' views.
More accurate pricing, in turn, encourages greater investor
participation and greater liquidity, and provides investors with more
accurate information. Increased price efficiency can also facilitate a
lower cost of capital by lessening the discount investors otherwise
place on illiquid securities and securities for which there is
increased risk of asymmetric information. Hence, there would be
significant indirect effects of improving capital formation.
---------------------------------------------------------------------------

    \629\ Ang, A., Shtauber, A., & Tetlock, P. (2011). Asset Pricing
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of
Financial Studies, forthcoming.
---------------------------------------------------------------------------

a. Periodic Reporting Requirements
    Currently, Regulation A issuers do not have ongoing reporting
obligations. Under the proposed amendments, issuers that conducted Tier
2 offerings would be required to provide annual audited financial
statements on Form 1-K. The Commission is further proposing that
issuers that conducted Tier 2 offerings provide a semi-annual update on
Form 1-SA and current event reporting on Form 1-U. These proposed
requirements are more extensive, in terms of breadth and frequency,
than those for current Regulation A offerings and those for other
exempt offerings.\630\ The proposed additional disclosures are intended
to reduce the information asymmetries between companies that conduct
Tier 2 offerings and their potential investors, both at the time of the
offering, through the disclosure document, and on an ongoing basis, via
ongoing reporting. While we considered whether we should require
certain additional disclosures to be provided in structured data
format, the proposed rules do not require these disclosures to be
machine readable. Not requiring structured data should help to limit
costs to issuers while still providing meaningful information to
investors. While not requiring a structured data format could limit the
ability for investors, academics, regulators and other market
participants to analyze firms relying on Regulation A, as proposed to
be amended, we do not believe it is advisable to impose such a
requirement on issuers relying on the exemption.
---------------------------------------------------------------------------

    \630\ Small private companies, such as those that might consider
a Regulation A offering, typically do not disclose information as
frequently or as extensively as public companies, if at all.
Moreover, unlike public companies, small private companies are not
required to have their financial statements audited or to hire an
independent third party to certify the information disclosed.
---------------------------------------------------------------------------

b. Current Event Reporting Requirements
    As discussed above, in addition to the proposed annual and semi-
annual reporting requirements, the proposed rules include several
event-based disclosure requirements, similar to the event-based
reporting of reporting companies on Form 8-K. These events, like the
ongoing financial performance of a company, can be important
determinants in an investor's capital allocation decision. The direct
cost of reporting these events is often minimal, particularly to the
extent that the disclosed information is simply the announcement of a
new development, such as the sale of an unregistered security. Of the
26 relevant current reporting items on Form 8-K, listed in the table
below, eleven are proposed to be required to be reported, in whole or
in part, by issuers that conducted Tier 2 offerings.

------------------------------------------------------------------------
                          Description of event
     8-K Item No.         triggering reporting    Proposed  Regulation A
                               obligation               requirement
------------------------------------------------------------------------
             Section 1--Registrant's Business and Operations
------------------------------------------------------------------------
Item 1.01.............  Entry into a Material     Sometimes.
                         Definitive Agreement.
Item 1.02.............  Termination of a          Sometimes.
                         Material Definitive
                         Agreement.
Item 1.03.............  Bankruptcy or             Yes.
                         Receivership.
Item 1.04.............  Mine Safety--Reporting    No.
                         of Shutdowns and
                         Patterns of Violations.
------------------------------------------------------------------------
                    Section 2--Financial Information
------------------------------------------------------------------------
Item 2.01.............  Completion of             Sometimes.
                         Acquisition or
                         Disposition of Assets.
Item 2.02.............  Results of Operations     No.
                         and Financial Condition.
Item 2.03.............  Creation of a Direct      No.
                         Financial Obligation or
                         an Obligation under an
                         Off-Balance Sheet
                         Arrangement of a
                         Registrant.
Item 2.04.............  Triggering Events That    No.
                         Accelerate or Increase
                         a Direct Financial
                         Obligation or an
                         Obligation under an Off-
                         Balance Shelf
                         Arrangement.
Item 2.05.............  Costs Associated with     No.
                         Exit or Disposal
                         Activities.

Item 2.06.............  Material Impairments....  No.
------------------------------------------------------------------------
                Section 3--Securities and Trading Markets
------------------------------------------------------------------------
Item 3.01.............  Notice of Delisting or    N/A.
                         Failure to Satisfy a
                         Continued Listing Rule
                         or Standard; Transfer
                         of Listing.
Item 3.02.............  Unregistered Sales of     Yes.
                         Equity Securities.
Item 3.03.............  Material Modification to  Yes.
                         Rights of Security
                         Holders.
------------------------------------------------------------------------
   Section 4--Matters Related to Accountants and Financial Statements
------------------------------------------------------------------------
Item 4.01.............  Changes in Registrant's   Yes.
                         Certifying Accountant.
Item 4.02.............  Non-Reliance on           Yes.
                         Previously Issued
                         Financial Statements or
                         a Related Audit Report
                         or Completed Interim
                         Review.
------------------------------------------------------------------------
             Section 5--Corporate Governance and Management
------------------------------------------------------------------------
Item 5.01.............  Changes in Control of     Yes.
                         Registrant.
Item 5.02.............  Departure of Directors    Sometimes.\631\
                         or Certain Officers;
                         Election of Directors;
                         Appointment of Certain
                         Officers; Compensatory
                         Arrangements of Certain
                         Officers.
Item 5.03.............  Amendments to Articles    No.
                         of Incorporation or
                         Bylaws; Change in
                         Fiscal Year.
Item 5.04.............  Temporary Suspension of   No.
                         Trading Under
                         Registrant's Employee
                         Benefit Plans.
Item 5.05.............  Amendments to the         No.
                         Registrant's Code of
                         Ethics, or Waiver of a
                         Provision of the Code
                         of Ethics.
Item 5.06.............  Change in Shell Company   No.
                         Status.
Item 5.07.............  Submission of Matters to  No.
                         a Vote of Security
                         Holders.
Item 5.08.............  Shareholder Director      No.
                         Nominations.
------------------------------------------------------------------------
                Section 6--Asset-Backed Securities (N/A)
                           Sections 7-9--Other
------------------------------------------------------------------------
Item 7.01.............  Regulation FD Disclosure  No.
Item 8.01.............  Other Events............  Optional.
Item 9.01.............  Financial Statements and  Sometimes.
                         Exhibits.
------------------------------------------------------------------------

    We have chosen to require the reporting of key current events based
on our assessment of their potential usefulness to investors in these
types of offerings and issuers and based on the suggestions of
commenters. For instance, we are proposing to require the disclosure of
certain events that directly affect the rights of securityholders
(Items 3.02 and 3.03). Because sales of securities provide important
information about an issuer's capital structure and could dilute
existing shareholders, these events can have direct securities pricing
implications. We are also proposing to require issuers to disclose
changes in their certifying accountant or non-reliance on previously
issued financial statements or a related audit report (Items 4.01 and
4.02). We believe that these items are relevant information for
investors who rely on the information made available to them through
the issuer's periodic reporting, and it is important for investors to
know if financial statements could be incorrect or compromised in some
way.
---------------------------------------------------------------------------

    \631\ Form 1-U focuses on officers, as discussed in the release.
---------------------------------------------------------------------------

    We also propose requiring disclosure of certain meaningful
corporate events. Bankruptcy (Item 1.03) can have direct effects on
valuation as it changes a number of obligations of the issuer,\632\ the
fiduciary duties of executive officers and directors,\633\ and can
potentially call into question the claims of existing securities to
issuer assets and cash flows.\634\ Similarly, reorganizations, such as
takeovers (Item 5.01), debt restructuring and mergers (Items 1.01,
1.02, and 2.01), change companies' obligations and organizational
structure in ways that can have a material impact on security prices.
---------------------------------------------------------------------------

    \632\ For example, the automatic stay provision suspends
contractual obligations.
    \633\ Firms nearing the ``zone of insolvency'' have a
responsibility to maximize ``enterprise value'', which is generally
not the same as firm value, as it can include the value of providing
employment, among other things.
    \634\ Renegotiation plans are subject to approval from a
majority of owners of the ``fulcrum'' security which can be
difficult to determine.
---------------------------------------------------------------------------

    Finally, we propose requiring the disclosure of changes in issuer
management, which can have direct implications on the issuer's future
prospects and security prices.\635\ Therefore we believe disclosure of
management changes would benefit investors.
---------------------------------------------------------------------------

    \635\ Murphy, Kevin J., and Jerold L. Zimmerman (1993),
Financial performance surrounding CEO turnover. Journal of
Accounting and Economics 16.1 pp. 273-315.
---------------------------------------------------------------------------

c. Termination or Suspension of Reporting Requirements
    The proposed rules allow for a termination or suspension of an
issuer's ongoing reporting obligations if the number of record holders
of the class of securities to which the Regulation A offering statement
relates falls below 300 persons or suspension 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.
    For Tier 2 issuers, which are subject to substantial ongoing
reporting requirements, the option for suspending or terminating the
Regulation A reporting obligations could be beneficial, especially for
issuers that are not seeking secondary market liquidity, and smaller
issuers for which the fixed costs of complying with the ongoing
disclosure requirements would weigh more heavily.\636\ The option to
suspend or terminate periodic reporting might be costly for investors
because it would 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 would allow liquidation of
the investment. Suspension or termination of reporting might
particularly adversely affect minority investors if the lack of current
financial or other material information, and/or the presence of large
inside or affiliate shareholders could make it easier for controlling
shareholders to expropriate capital from minority investors. In most
cases we propose to require Tier 2 issuers to notify the Commission
upon suspension or termination of reporting requirements through Form
1-Z, which for Tier 2 issuers, will request information regarding the
reason for the suspension or termination. To the extent that ongoing
reporting is suspended due to registration of a class of securities
under the Exchange Act, investors may benefit from enhanced reporting
under the Exchange Act requirements.
---------------------------------------------------------------------------

    \636\ See Request for Comment 90 above (seeking comment on,
among other things, whether we should exempt some issuers from
ongoing reporting on the basis of whether such issuer has taken
steps to foster a secondary market for their securities).
---------------------------------------------------------------------------

    Although Tier 1 issuers are not subject to periodic and current
event reporting requirements, we propose to require issuers of Tier 1
offerings to notify the Commission of their terminated reporting
obligation using Form 1-Z upon completion of the offering. Under the
proposed rules, Form 1-Z would take the place of Form 2-A, which is
currently required upon completion of a Regulation A offering. For Tier
1 issuers, Form 1-Z will require issuers to provide updated information
regarding some features of the completed offering, such as the final
proceeds raised net of fees.\637\ This information will allow the
Commission to monitor whether issuers can reliably raise the projected
amount of capital in Regulation A offerings. Form 1-Z would elicit
limited summary information about the completed offering and the
issuer, would not require any additional information from issuers that
would not have been forecasted and provided in the offering materials
of Tier 1 issuers and, therefore, should not impose substantial
additional costs on the issuer.
---------------------------------------------------------------------------

    \637\ We do not propose to require notification of the
completion of a Tier 2 offering as the information will be included
in other ongoing reporting materials required from issuers of Tier 2
offerings.
---------------------------------------------------------------------------

6. Bad Actor Disqualification
    We propose to amend Rule 262 to include bad actor disqualification
provisions in substantially the same form recently adopted under Rule
506(d), but without the categories of covered persons specific to fund
issuers, which are not proposed to be eligible to use Regulation
A.\638\ We believe that the proposed disqualification provisions are
not likely to impose significant incremental costs on issuers and other
covered persons because the proposed rules are substantially similar to
the disqualification provisions under existing Regulation A and other
exemptions.
---------------------------------------------------------------------------

    \638\ See proposed Rule 262.
---------------------------------------------------------------------------

    The proposed rules likely would induce issuers to implement
measures to restrict bad actor participation in offerings made in
reliance on Regulation A, which could help reduce the potential for
fraud in these types of offerings. If disqualification standards lower
the risk premium associated with the presence of bad actors in
securities offerings, any resulting reduction in fraud could also
reduce the cost of raising capital to issuers that rely on Regulation A
as proposed to be amended. 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 proposed disqualification provisions likely would also impose
costs on issuers, other covered persons and investors. If issuers are
disqualified from participating in offerings made in reliance on
proposed Regulation A, they may experience increased costs in raising
capital through alternative methods. These costs could hinder potential
investment opportunities for such issuers, which could have negative
effects on capital formation. In addition, issuers may incur personnel
costs to avoid the participation of covered persons who are subject to
disqualifying events. Issuers also might incur costs by restructuring
share ownership to avoid beneficial ownership of more than 20% from
individuals subject to disqualifying events. Finally, issuers might
incur costs by devoting resources to seeking disqualification waivers.
    As discussed above, we are also proposing a reasonable care
exception under Regulation A on a basis consistent with Rule 506.\639\
We anticipate that the reasonable care exception also would impose
benefits and costs. For example, a reasonable care exception could
encourage capital formation by enabling Regulation A offerings to go
forward, where issuers 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 could
increase the potential for fraud by limiting issuers' incentive 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 about the nature and extent
of the factual inquiry required could increase these costs because
uncertainty could drive issuers to misunderstand requirements for
compliance; however, the flexibility would allow an issuer to tailor
its factual inquiry as appropriate to its particular circumstance,
thereby potentially reducing costs associated with conducting the
inquiry.
---------------------------------------------------------------------------

    \639\ See proposed Rule 262(b)(4).
---------------------------------------------------------------------------

    The proposed requirement that issuers disclose matters that would
have triggered disqualification, had such matters occurred after the
effective date of proposed Regulation A, also would impose costs and
benefits. The proposed disclosure requirement would likely reduce
issuer costs, relative to the cost of disqualification. This approach
would not preclude the participation of past bad actors, whose
disqualifying events occurred prior to the effective date of the
proposed rules, which could expose investors to the risks that arise
when bad actors are associated with an offering. Nevertheless,
investors would benefit by having access to such 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
from prior bad actors to avoid such disclosures.
    We believe the inclusion of Commission cease-and-desist orders in
the list of disqualifying events would not impose a significant,
incremental cost on issuers and other covered persons because many
might already be subject to Commission cease-and-desist orders or may
already be disqualified on the basis of orders issued by state
regulators, federal banking regulators and the National Credit Union
Administration.\640\ The inclusion of Commission cease-and-desist
orders in the list of disqualifying events might change how settlement
negotiations are conducted between respondents and the Commission, and
the Commission could grant an appropriate waiver from disqualification.
---------------------------------------------------------------------------

    \640\ See SEC Rel. No. 33-9414 (July 10, 2013) [78 FR 44729]
(``Bad Actor'' adopting release).
---------------------------------------------------------------------------

    Under the proposed rules, orders issued by the CFTC would trigger

disqualification to the same extent as orders of the regulators
enumerated in Section 302(d)(2)(B)(i) of the JOBS Act (e.g., state
securities, insurance and banking regulators, federal banking agencies
and the National Credit Union Administration). We believe that
including orders of the CFTC would result in the similar treatment, for
disqualification purposes, of comparable sanctions. In this regard, we
note that the conduct that would typically give rise to CFTC sanctions
is similar to the type of conduct that would result in disqualification
if it were the subject of sanctions by another financial services
industry regulator. This provision should enable the disqualification
rules to more effectively screen out bad actors.
7. Relationship With State Securities Law
    As explained above, Regulation A offerings are subject to
registration or qualification under state ``blue sky laws,'' unless the
offering is made to ``qualified purchasers'' (as the Commission may
define that term) or is offered or sold on a national securities
exchange. Compliance with blue sky law requirements can impose
significant costs, predominantly as a result of having to coordinate
independent reviews across multiple regulatory regimes when issuers are
offering securities to investors in multiple states.\641\
---------------------------------------------------------------------------

    \641\ See discussion in Section IV.A.1.a. above regarding the
determinates of trends in Regulation A issuances.
---------------------------------------------------------------------------

    The GAO study of Regulation A offerings found that blue sky law
compliance was one of four central factors in the infrequent reliance
on Regulation A.\642\ Commenters have also raised the importance of
state securities law preemption to the utilization of Regulation
A.\643\ As discussed above, we are concerned that the costs associated
with state securities law compliance may deter issuers from using
Regulation A, even if the increased cap on offering size and other
proposals intended to make Regulation A more workable are implemented.
This would limit the possible impact of an amended Regulation A as a
tool for capital formation. We believe that Regulation A, as we propose
to amend it for Tier 2 offerings, would provide substantial protections
to purchasers. Under the proposed amendments, a Regulation A offering
statement would continue to provide substantive narrative and financial
disclosures about the issuer, including an MD&A discussion. We expect
that Regulation A offering statements would continue to receive the
same level of Commission staff review as registration statements.
Additional investor protections would be afforded by Regulation A's
limitations on eligible issuers and ``bad actor'' disqualification
provisions, which we are proposing to expand. In addition, the
requirements for Tier 2 offerings would provide further protection by
requiring the audited financial statements in the offering circular, an
obligation for issuers to provide ongoing reporting to purchasers, and
a limitation on the percentage of annual income or net worth that an
investor could invest in a single offering. Ongoing reporting would
assure a continuing flow of information to investors and could support
the development of secondary markets for Regulation A securities,
offering the prospect of reduced investor risk through liquidity.
---------------------------------------------------------------------------

    \642\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
    \643\ See Fallbrook Letter (``It cannot be understated as to how
critical state securities law preemption is to ensuring the
Regulation A+ Rules are user-friendly and attractive for utilization
by growing companies.'').
---------------------------------------------------------------------------

    Based on these requirements, we are proposing to define the term
``qualified purchasers'' for purposes of Regulation A to include all
offerees in a Regulation A offering and all purchasers in a Tier 2
Regulation A offering. Therefore, as proposed, Tier 1 offerings would
be subject to state registration and qualification requirements to the
same extent as offerings under current Regulation A, whereas such
requirements would be preempted for Tier 2 offerings.
    Because state registration requirements were cited as a central
factor in the infrequent reliance on Regulation A,\644\ we believe that
by eliminating these costs of state law compliance for Tier 2 offerings
issuers may be more likely to rely on amended Regulation A relative to
the current rules under Regulation A, which do not preempt state
securities laws.\645\ We believe that this definition could facilitate
capital formation, as suggested in several comment letters.\646\ It is
also possible that the preemption of state securities laws for Tier 2
offerings could attract issuers away from offerings conducted under
Rule 506, which also provides preemption of state laws, but restricts
resales. Given that in 2012 the majority of Rule 506 offerings by
eligible issuers were less than $50 million, some shift from Rule 506
to Regulation A is possible; however, we are unable to quantify its
magnitude. The infrequent and issuer-specific use of existing
Regulation A makes it difficult to identify general findings about the
effect of preemption on Regulation A, as proposed to be amended, and to
quantify the potential effects of defining qualified purchasers to
include all offerees in a Regulation A offering and all purchasers in
Tier 2 offerings made under the proposed amendments.
---------------------------------------------------------------------------

    \644\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
    \645\ See discussion in Section IV.A.1.a. above.
    \646\ See, e.g., Campbell Letter, Kaplan Voekler Letter, WR
Hambrecht + Co. Letter, and Tresslar Letter.
---------------------------------------------------------------------------

    We recognize that the proposal could impose some costs. For
example, because the types of issuers and investors that would
participate in Regulation A offerings could vary by state, state-
specific securities requirements may potentially be tailored to the
specific investors and issuers involved in these transactions. It is
possible that state securities regulators could provide a meaningful
level of investor protection for certain offerings because of greater
familiarity with local issuers and investors.
    As a policy alternative, we could permit one or a subset of states
to qualify certain Regulation A offerings either in place of, or in
addition to, federal qualification. This alternative could allow state
securities regulators to provide a comparable level of oversight, while
still limiting the costs associated with requiring issuers to undergo
multiple review processes. Depending on how this alternative is
implemented, it may not result in comparable review. For example, if
state review is conducted by a single state, issuers could seek review
from the state with the least stringent standards and could therefore
increase the level of fraud in Regulation A offerings. A potentially
greater risk of fraud could negatively affect both investors and
issuers, which may find it more expensive to raise capital using
Regulation A, as proposed to be amended, if investors demand higher
returns because of any perceived increase in the risk associated with
this type of offering. The Commission also recognizes that there are a
number of alternative definitions of qualified purchaser that we could
propose. One alternative that we could have selected is to define as a
``qualified purchaser'' any purchaser in any Regulation A offering.
Compared to the definition in the proposed rulemaking, such a broad
definition would allow Tier 1 Regulation A offerings to qualify for the
state law preemption, which in turn would decrease the cost of such
offerings and potentially enhance capital formation. However, the
resulting loss of state review for Tier 1

offerings, combined with the absence of the additional investor
protections included in Tier 2, could increase the likelihood of fraud
in these offerings.
    Other alternatives can be broadly categorized as relying on
attributes of the investor, the issuer, and/or the offering. We discuss
these alternatives in greater detail below.
    We could have selected a policy alternative that defines as a
``qualified purchaser'' any purchaser who meets a specified income or
net worth standard that is set either lower or higher than the current
``accredited investor'' definition in Rule 501 of Regulation D.
Compared to the definition in the proposed rulemaking, such an
alternative could limit the number of offerings that would qualify for
state preemption because some investors that purchased securities in
Tier 2 offerings would not satisfy these alternative definitions.
However, such alternatives might allow the preemption of blue sky law
for Tier 1 offerings, which are not subject to the same reporting and
other obligations proposed for Tier 2. Limiting eligible investors
could result in higher offering costs for potential Regulation A
issuers but could also lower the likelihood of fraud in Regulation A
offerings compared to the proposed rules.
    Another policy alternative that we could have adopted is to define
a ``qualified purchaser'' as any purchaser who purchases securities in
a Regulation A offering through a registered broker-dealer. Such an
alternative could have limited the number of offerings that would
qualify for state preemption because some investors might not use
broker-dealers when participating in Tier 2 offerings. Such a
limitation could result in higher offering costs for issuers.
Additionally, such an alternative could have increased the cost to
investors participating in Tier 2 offerings because they would have to
pay broker-dealer fees. On the other hand, the presence of registered
broker-dealers, who presumably perform due diligence on potential
investments, could result in lower likelihood of fraud in this market
compared to the proposed rules, and could support blue sky preemption
for Tier 1 offerings as well as Tier 2 offerings.
    In addition, we could have defined qualified purchasers as
investors in a Regulation A offering in which the issuer meets
specified conditions. For example, the definition could require that
the issuer meet some financial criteria, or that the issuer meet some
governance requirements. The potential advantage of defining qualified
purchaser according to attributes of the issuer is that indicators of
fraud or risky investments are often characteristics of the issuer
(e.g. shell companies, financially distressed companies, etc.).
Therefore, a definition based on issuer attributes might effectively
identify the investments most in need of additional regulatory
oversight. However, it may be difficult to identify criteria that
effectively distinguish between fraudulent or excessively risky
investments and safer investments, given the wide variety of potential
issuers. For example, a high degree of leverage would be indicative of
financial distress in some companies, but could be optimal in others.
    Lastly, we could have used attributes of the offering, other than
or in addition to the proposed requirements for Tier 2, to define
qualified purchasers. For example, qualified purchasers could be
defined in relation to offerings in which issuers and agents of the
issuer assume increased liability for material misstatements and
omissions, offerings over a certain size, or offerings with a firm
commitment underwriting. While some of these factors are correlated
with the riskiness of the offering, using a definition based on these
factors could prompt issuers to sub-optimally modify features of the
offering in order to avoid state regulation.
    We considered the policy alternative suggested by one commenter to
preempt blue sky laws with respect to secondary sales of Regulation A
securities in addition to preempting blue sky laws governing primary
offerings.\647\ If blue sky laws pertaining to resales affect the
ability to conduct or the cost of transactions involving Regulation A
securities, preemption of sales in addition to offers could help
facilitate liquid secondary markets, and could therefore enhance
capital formation. We are currently unaware of any evidence suggesting
that blue sky laws inhibit trading in OTC markets; therefore, we are
not proposing to preempt blue sky laws with respect to secondary sales
of Regulation A securities at this time.
---------------------------------------------------------------------------

    \647\ See Paul Hastings Letter.
---------------------------------------------------------------------------

8. Effect of Regulation A on OTC Markets and Dealer Intermediation
    For securities issued in Regulation A offerings that end up trading
on the OTC market, the proposed new Tier 2 disclosure requirements
would provide timely and relevant issuer information to broker-dealers
that initiate quotations and make markets in these securities and to
investors in these securities. This information would be much more
detailed than what is currently required for non-reporting issuers
under Rule 15c2-11 and reported on Form 211. Similarly, for issuers
with existing securities trading on the OTC market, the disclosure
proposed to be required under Tier 2 would supplement the issuer
information otherwise used by broker-dealers when relying on the
existing piggyback exception of Rule 15c2-11.\648\ For Tier 2 issuers,
the proposed new periodic reporting requirements, including audited
financials, would allow broker-dealers to obtain more current
information about these issuers more frequently and at lower cost.
Thus, broker-dealers quoting securities for such issuers under Rule
15c2-11 would have a more robust basis for believing that the issuer
information is accurate. The availability of more current information
about Tier 2 issuers would likely improve the pricing efficiency and
reduce the likelihood of fraud in the OTC market for their securities.
We expect this effect to be much stronger for issuers that do not
currently provide voluntary disclosure to the OTC market. The overall
effect of the required disclosure would also depend on what fraction of
Regulation A securities eventually trade on the OTC market and on how
many current OTC participants decide to make offerings under Regulation
A.
---------------------------------------------------------------------------

    \648\ Rule 15c2-11(a)(5) currently provides that issuer
information must be made available upon request to any person
expressing an interest in a transaction in that issuer's security
with the broker-dealer. This requirement may have little practical
effect because only the first broker-dealer to publish quotations
must have the information, and an investor might find it difficult
to identify that broker-dealer. In fact, that broker-dealer may no
longer be publishing quotations.
---------------------------------------------------------------------------

    A particular set of OTC-listed companies--those that cease
reporting and, if necessary, delist from national securities
exchanges--might find the proposed rules attractive for raising
capital. As mentioned above, the proposed Tier 2 disclosure
requirements are less stringent than those applicable to reporting
companies. Companies that delist from national exchanges might be able
to use Regulation A offerings to raise capital as well as maintain
liquid securities in the OTC market. The potential effect of the
proposed rules on companies that delist from national securities
exchanges is difficult to predict. Companies that would like to
maintain liquidity for their securities trading in the OTC market and
face a less burdensome disclosure regime than entailed by Exchange Act
registration might find Regulation A useful. On the other hand,
companies that delist from national securities exchanges because they
want to minimize disclosure and

cease reporting might find the proposed disclosure requirements under
Regulation A too burdensome, and might prefer other offering methods to
raise capital (e.g., Regulation D).
    The potential future use of Regulation A could also depend on the
willingness of financial intermediaries such as placement agents or
underwriters to participate in offerings. 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. Some commenters claim that
underwriters are generally unwilling to participate in small offerings
because the commissions are not sufficient to warrant their
involvement.\649\ If the services of financial intermediaries continue
to be limited for small offerings under Regulation A as proposed to be
amended, it could be difficult for Regulation A issuers to place all
offered securities. As noted in the GAO report,\650\ increasing the
allowed maximum Regulation A offering amount may make placement agents
more inclined to participate in offerings because they would be able to
collect more compensation from larger offerings. Furthermore,
underwriter costs for offerings under Regulation A as proposed to be
amended may be lower than for registered public offerings because
underwriters would not take on liability under Section 11 of the
Securities Act (although they could be liable as sellers under Section
12(a)(2)). Finally, if the requirements for qualification of Regulation
A offerings are substantially lighter than the requirements for
registered offerings, an underwriting market could develop to provide
expedient Regulation A underwriting services.
---------------------------------------------------------------------------

    \649\ See, e.g., Karr Tuttle Letter.
    \650\ See GAO-12-839, ``Factors that May Affect Trends in
Regulation A Offerings'', (July 3, 2012).
---------------------------------------------------------------------------

C. Request for Comment

    Throughout this release, we have discussed the anticipated costs
and benefits of the proposed rules and their potential impact on
efficiency, competition and capital formation. We request and encourage
any interested person to submit comments regarding the proposed rules,
our analysis of the potential effects of the rules and other matters
that may have an effect on the proposed rules. We request comment from
the point of view of issuers, investors and other market participants.
With regard to any comments, we note that such comments are of
particular assistance to us if accompanied by supporting data and
analysis of the issues addressed in those comments. We also are
interested in comments on the qualitative benefits and costs we have
identified and any benefits and costs we may have overlooked. We urge
commenters to be as specific as possible.
Request for Comment
    128. What types of companies (e.g., in terms of size, industry,
age, etc.) would most likely rely on the amended Regulation A
exemption? Would Exchange Act reporting companies, which are ineligible
to rely on proposed Regulation A, consider raising additional capital
through Regulation A by first terminating or suspending their reporting
requirements?
    129. Are investors in private companies likely to use the amended
Regulation A exemption to exit their investments? Would eliminating
current Rule 251(b), which prohibits resales by affiliated parties
unless the issuer has had operating income in at least one of the last
two years, affect fraud in this market?
    130. How likely is the amended Regulation A exemption to attract
companies that are considering a traditional IPO? What types of
companies (e.g., in terms of size, industry, age, etc.) would prefer a
Regulation A offering to a traditional IPO? How would the cost of a
traditional IPO compare to the cost of a Regulation A offering? Could a
Regulation A offering serve as a stepping stone for a future
traditional IPO or a national securities exchange listing?
    131. How likely is the amended Regulation A exemption to attract
companies that are considering offerings relying on Rule 506(b) or Rule
506(c) of Regulation D? What would be the costs and benefits from
relying on the amended Regulation A exemption versus Rule 506(b) or
Rule 506(c) of Regulation D? Please provide estimates, where possible.
    132. What is the economic effect of the proposed investment
limitation in Tier 2 Regulation A offerings? What types of issuers and
investors are most likely to be affected by this restriction? Will this
restriction enhance investor protection? What would be the economic
effect of imposing a similar restriction on Tier 1 Regulation A
offerings?
    133. Would the amended Regulation A exemption attract
intermediaries (e.g., broker-dealers or underwriters) to the market for
Regulation A offerings? How would the presence of intermediaries change
the cost structure for Regulation A issuers? Would the amended
Regulation A exemption make it economically feasible for intermediaries
to serve as market makers and provide research and analyst coverage?
Would the presence of intermediaries likely increase the chances that a
wider variety of investors will participate in Regulation A offerings?
    134. Do the proposed disclosure requirements help ensure that
investors have a reasonable understanding of the risks and costs of
investing in Regulation A securities? If not, what additional
requirements would further mitigate the associated risks? How would the
costs and benefits of the requirements compare to the costs and
benefits of the disclosure that currently exists for securities offered
under the current Regulation A requirements? How would the costs and
benefits compare to other exempt offering methods? Please provide
estimates, where possible.
    135. How would the proposed preemption of state blue sky laws for
offerings made to qualified purchasers, as we propose to define that
term, affect the costs and benefits of Tier 1 and Tier 2 Regulation A
offerings? Please provide estimates, where possible. Would the proposed
blue sky law preemption affect fraud and investor protection and
capital formation in this market?
    136. The Commission is interested in receiving comments, views,
estimates and data on all aspects of the proposal and the following:
     Expected size of the Regulation A market (e.g., number of
offerings, number of issuers, size of offerings, number of investors,
etc., as well as information comparing these estimates to the current
baseline);
     Overall economic impact of the proposed rules; and
     Any other aspect of the economic analysis.
    137. What would be the economic impact of the policy alternatives
discussed in the proposed rules?

V. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\651\ We are submitting the proposal to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\652\ The titles for the collections of information are:
---------------------------------------------------------------------------

    \651\ 44 U.S.C. 3501 et seq.
    \652\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.

---------------------------------------------------------------------------

    (1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number
3235-0286);
    (2) ``Form 1-K'' (a proposed new collection of information);
    (3) ``Form 1-SA'' (a proposed new collection of information);
    (4) ``Form 1-U'' (a proposed new collection of information);
    (5) ``Form 1-Z'' (a proposed new collection of information);
    (6) ``Form ID'' (OMB Control Number 3235-0328).
    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 are applying for OMB control
numbers for the proposed new collections of information in accordance
with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned
a control number to each new collection. Responses to these new
collections of information would be mandatory for issuers raising
capital under Regulation A.

B. Estimate of Issuers

    The number, type and size of the issuers that would participate in
offerings of securities under Regulation A, as proposed to be amended,
is uncertain, but data regarding current market practices may help
identify the number and characteristics of potential issuers that may
offer and sell securities in reliance on the proposed rules.\653\ We
estimate that there are currently approximately 22 Regulation A filings
by issuers per year.\654\ While it is not possible to predict the
number of filings by issuers relating to offerings made in reliance on
the proposed amendments to Regulation A, for purposes of this analysis,
we estimate that the number would be 250 offerings per year. We base
this estimate on (i) the current approximate number of issuers that, on
average in recent years, filed a Form 1-A to qualify a Regulation A
offering of securities under the existing rules, plus (ii) 95 percent
of the estimated number of registered offering of securities of up to
$50 million,\655\ plus (iii) an additional four 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.\656\ We believe issuers that have either previously relied on
Regulation A or have offered securities in amounts up to the revised
offering ceiling of $50 million in a twelve-month period would be
similar to the potential issuers that may participate in offerings of
securities under Regulation A as proposed to be amended.
---------------------------------------------------------------------------

    \653\ See Section I.C. above for a discussion of the data
regarding current market practices.
    \654\ From 2009 through 2012, there were 87 Form 1-As filed with
the Commission, and 19 qualified offering statements during this
same period. See also figures for current use of Regulation A in
Section I.C. above.
    \655\ See figures and graphs for registered offerings cited in
Section IV. above (citing approximately 236 registered initial
public offerings or follow-on offerings of up to $50 million in
calendar year 2012).
    \656\ See figures and graphs for registered and exempt offerings
under Regulation D cited in Section IV.A.1.a(2). above (citing
approximately 12,000 issuances of up to $50 million in reliance on
Regulation D in calendar year 2012).
---------------------------------------------------------------------------

C. Estimate of Issuer Burdens

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 1.00 administrative burden hour
associated with it, while current Form 1-A takes approximately 608.00
hours to prepare and Form 2-A takes approximately 12.00 hours to
prepare.\657\ We do not anticipate that the 1.00 administrative burden
hour associated with Regulation A would change as a result of the
proposal. As discussed more fully below, we believe the burden hours
associated with Form 1-A would change, while Form 2-A and the
associated burden hours would be eliminated as a result of today's
proposal.\658\
---------------------------------------------------------------------------

    \657\ See Form 1-A at 1; Form 2-A at 1.
    \658\ See discussion in Section II.E.1. above.
---------------------------------------------------------------------------

    Under the proposed rules, an issuer conducting a transaction in
reliance on Regulation A would be able to conduct either a Tier 1
offering or a Tier 2 offering.\659\ In either case, a Regulation A
issuer would continue to be required to file with the Commission
specified disclosures on a Form 1-A: Offering Statement.\660\ An issuer
also would file amendments to Form 1-A to reflect comments from
Commission staff and to disclose material changes in the disclosure
previously provided to the Commission or investors.\661\ In light of
the proposed electronic filing requirements for Regulation A offering
materials discussed above,\662\ issuers would no longer be required to
file a manually signed copy of the Form 1-A with the Commission.\663\
Issuers would, however, be required to manually sign a copy of the
offering statement before or at the time of non-public submission or
filing that would have to be retained by the issuer for a period of
five years and produced to the Commission, upon request.\664\ As
issuers are currently required to manually sign the Form 1-A and file
it with the Commission, we do not anticipate the proposed Form 1-A
retention requirement would alter an issuer's compliance burden. As
proposed, Form 1-A is similar to existing Form 1-A. In some instances,
Form 1-A, as proposed, would contain fewer disclosure items than
existing Form 1-A (e.g., Part I (Notification) of Form 1-A would not
require disclosure of ``Affiliate Sales''; Part II (Offering Circular)
of Form 1-A would require a description of the issuer's business for a
period of three years, rather than five years). Part II of Form 1-A
would no longer permit disclosure in reliance on the Model A disclosure
format, but direct issuers to follow the provisions of Model B (renamed
``Offering Circular'') or Part I of Form S-1.\665\ In other instances,
Form 1-A would contain more disclosure items than existing Form 1-A
(e.g., Part I of Form 1-A would require additional disclosure of
certain summary information regarding the issuer and the offering; Part
II of Form 1-A would require a more detailed management discussion and
analysis of the issuer's liquidity and capital resources and results of
operations). Form 1-A would require disclosure similar to that required
in a Form S-1 registration statement for registered offerings under the
Securities Act, but it would require fewer disclosure items (e.g., it
would require 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, not require issuers to file audited
financial statements.\666\
---------------------------------------------------------------------------

    \659\ See discussion in Section II.B.3. above.
    \660\ See 17 CFR 239.91 (Form 1-A) (OMB Control Number 3235-
0286) and proposed Rule 252.
    \661\ See proposed Rule 252(h).
    \662\ See discussion in Section II.C.1. above.
    \663\ See discussion in Section II.C.3.d. above.
    \664\ See Instruction 2. to Signatures in Form 1-A.
    \665\ See discussion at Section II.C.3.b. above.
    \666\ See discussion in Section II.C.3.b. above.
---------------------------------------------------------------------------

    We expect that issuers relying on proposed Regulation A for Tier 1
offerings of up to $5 million in a twelve-month period would largely be
at a similar stage of development to issuers relying on existing
Regulation A and would therefore not experience an increased compliance
burden with proposed Form 1-A. Given the increased annual offering
threshold of $50 million, however, we expect that issuers conducting
Tier 2 offerings pursuant to proposed Regulation A may be at a more
advanced stage of

development than issuers offering securities at a lower threshold. In
such cases, the complexity of the required disclosure and, in turn, the
burden of compliance with the requirements of proposed Form 1-A may be
greater for some issuers than for issuers relying on existing Form 1-
A.\667\ We estimate that the total burden to prepare and file proposed
Form 1-A, including any amendments to the form, would increase on
average across all issuers in comparison to existing Form 1-A to
approximately 750.00 hours.\668\ We believe that the burden hour
response of proposed Form 1-A would be greater than the current
estimated 608.00 burden hours per response, but would not be as great
as the current estimated 972.32 burden hours per response for Form S-1.
We estimate that the issuer would internally carry 75 percent of the
burden of preparation and that outside professionals \669\ retained by
the issuer at an average cost of $400 per hour would carry 25
percent.\670\
---------------------------------------------------------------------------

    \667\ As noted above, we estimate the burden per response for
preparing existing Form 1-A to be 608.00 hours. See Form 1-A at 1.
    \668\ By comparison, we estimate the burden per response for
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
    \669\ For example, an issuer may address certain disclosure
requirements internally, but retain an outside professional to
assist in the preparation of the financial statements.
    \670\ The costs of retaining outside professionals may vary
depending on the nature of the professional services. For purposes
of this PRA analysis, however, we estimate that such costs would be
an average of $400/hour, which is consistent with the rate we
typically estimate for outside legal services used in connection
with public company reporting.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of a Form 1-A
provided in connection with transactions made in reliance on proposed
Regulation A would require 187,500 burden hours (250 offering
statements x 750.00 hours/offering statement) in aggregate each year,
which corresponds to 140,625 aggregated hours carried by the issuer
internally (250 offering statements x 750.00 hours/offering statement x
0.75) and aggregated costs of $18,750,000 (250 offering statements x
750.00 hours/offering statement x 0.25 x $400) for the services of
outside professionals. These estimates include the time and cost of
collecting the information, preparing and reviewing disclosure, filing
documents and retaining records. In deriving our estimates, we
recognize that the burdens likely would 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
would experience costs in excess of the average and some issuers may
experience less than the average costs.
2. Form 1-K: Annual Report
    Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to file
an annual report with the Commission on Form 1-K: Annual Report.\671\ A
manually-signed copy of the Form 1-K would have to 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.\672\ We do not anticipate that the
proposed requirement to retain a manually-signed copy of the Form 1-K
would affect an issuer's compliance burden. We believe the compliance
burden on disclosure provided in Form 1-K would be less than the
compliance burden associated with reporting required under Exchange Act
Section 13 or 15(d). We also believe the burden would be more analogous
to the compliance burden attendant to proposed Form 1-A. Unlike the
disclosure required in Form 1-A, however, offering-specific disclosure
in Form 1-K would not be required. Additionally, under certain
circumstances, an issuer would also be required to disclose information
similar to the information previously required of issuers on Form 2-
A.\673\ Unlike the disclosure previously required on Form 2-A, however,
an issuer would not be required to provide disclosure about the use of
proceeds. We estimate that the burden to prepare and file a Form 1-K
would be less than that required to prepare and file a Form 1-A. We
estimate that compliance with proposed Form 1-K would result in a
burden of 600.00 hours per response.\674\ We further estimate that 75
percent of the burden of preparation would be carried by the issuer
internally and that 25 percent would be carried by outside
professionals \675\ retained by the issuer at an average cost of $400
per hour.\676\ While we do not know the exact number of issuers that
will seek to qualify offerings in excess of $5 million in a twelve-
month period in reliance on proposed Regulation A, we estimate 75
percent of all issuers filing a Form 1-A (or 188 issuers, 250 issuers x
.75) will enter the proposed ongoing reporting regime and therefore be
required to file proposed Form 1-K.
---------------------------------------------------------------------------

    \671\ See proposed Rule 257(b)(1).
    \672\ See General Instruction C. to proposed Form 1-K and
related discussion in Section II.E.1.a. above.
    \673\ See discussion in Section II.E.1.a. above.
    \674\ We estimate that the burden of preparing the information
required by Form 1-K would be approximately 3/4 of the burden for
the Form 1-A due to the lack of offering-specific disclosure and an
issuer's ability to update previously-provided disclosure.
    \675\ See fn. 669 above.
    \676\ See fn. 670 above.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-K for
issuers with an ongoing reporting obligation under proposed Regulation
A would require 112,800 burden hours (188 issuers x 600.00 hours/
issuer) in the aggregate each year, which corresponds to 84,600 hours
carried by the issuer internally (188 issuers x 600.00 hours/issuer x
0.75) and costs of $11,280,000 (188 issuers x 600.00 hours/issuer x
0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
    Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to file
a semiannual report with the Commission on Form 1-SA: Semiannual
Report.\677\ A manually-signed copy of the Form 1-SA would have to 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.\678\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-SA would affect an issuer's compliance burden. Issuers would be
required to provide semiannual updates on proposed Form 1-SA, which,
much like a Form 10-Q,\679\ would consist primarily of financial
statements and MD&A. Unlike Form 10-Q, Form 1-SA would not require
disclosure regarding quantitative and qualitative market risk or
controls and procedures.\680\ We estimate, however, that on balance the
reduction in burden attributable to eliminating these two items in Form
1-SA would 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 would be similar to the compliance burden for issuers filing a
Form 10-Q under the Exchange Act.\681\ Therefore,

for purposes of this PRA, we estimate that the burden to prepare and
file a Form 1-SA would equal the burden to prepare and file Form 10-Q,
which we have previously estimated as 187.43 hours per response.\682\
Unlike proposed 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 handle more of the
required disclosures internally. Accordingly, we estimate that 85
percent of the burden of preparation would be carried by the issuer
internally and that 15 percent would be carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.\683\
---------------------------------------------------------------------------

    \677\ See proposed Rule 257(b)(3).
    \678\ See General Instruction C. to proposed Form 1-SA and
related discussion in Section II.E.1.b. above.
    \679\ 17 CFR 249.308a.
    \680\ See discussion in Section II.E.1.b. above.
    \681\ Issuers would, however, have to file Form 1-SA, a
semiannual report, less frequently than Form 10-Q, a quarterly
report.
    \682\ See Form 10-Q, at 1.
    \683\ See fn. 670 above.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-SA for
issuers with an ongoing reporting obligation under proposed Regulation
A would require 23,428.75 burden hours (188 issuers x 187.43 hours/
issuer) in the aggregate each year, which corresponds to 19,914.44
hours carried by the issuer internally (188 issuers x 187.43 hours/
issuer x 0.85) and costs of $1,405,725 (188 issuers x 187.43 hours/
issuer x 0.15 x $400) for the services of outside professionals.
4. Form 1-U: Current Reporting
    Under the proposed rules, any issuer that conducts a Tier 2
offering in reliance on proposed Regulation A would be required to
promptly file current reports on proposed Form 1-U with the
Commission.\684\ A manually-signed copy of the Form 1-U would have to
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.\685\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-U would affect an issuer's compliance burden. Issuers would be
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.\686\ The requirement to file a Form 1-U, however, would be
triggered by significantly fewer corporate events than those that
trigger a reporting requirement on a Form 8-K, and, as proposed, the
form itself would be slightly less burdensome for issuers to fill
out.\687\ Thus, the frequency of filing the required disclosure and the
burden to prepare and file a Form 1-U would be considerably less than
for Form 8-K. We estimate that the burden to prepare and file each
current report would be 5.00 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 would be required to file one
current report annually.\688\ Therefore, we estimate that an issuer's
compliance with proposed Form 1-U would result in an annual aggregate
burden of 5.00 hours (1.00 current report annually x 5.00 hours per
current report) per issuer.
---------------------------------------------------------------------------

    \684\ See proposed Rule 257(b)(4).
    \685\ See General Instruction C. to proposed Form 1-U and
related discussion in Section II.E.1.c. above.
    \686\ We estimate the burden per response for preparing a Form
8-K to be 5.71 hours. See Form 8-K, at 1.
    \687\ See discussion at Section II.E.1.c. above.
    \688\ We have previously estimated that on average issuers file
one current report on Form 8-K annually. Although we believe that
the frequency of filing a Form 1-U would be considerably less than a
Form 8-K, to be conservative, we are estimating that each issuer
would be required to file one Form 1-U per year.
---------------------------------------------------------------------------

    As with Form 1-SA, we estimate that 85 percent of the burden of
preparation would be carried by the issuer internally and that 15
percent would be carried by outside professionals retained by the
issuer at an average cost of $400 per hour.\689\ We estimate that
compliance with the requirements of Form 1-U would require 940 burden
hours (188 issuers x 1 current report annually x 5.00 hours per current
report) in aggregate each year, which corresponds to 799 hours carried
by the issuer internally (188 issuers x 5.00 hours/issuer/year x 0.85)
and costs of $56,400 (188 issuers x 5.00 hours/issuer/year x 0.15 x
$400) for the services of outside professionals.
---------------------------------------------------------------------------

    \689\ See fn. 670 above.
---------------------------------------------------------------------------

5. Form 1-Z: Exit Report
    Under the proposed rules, all Regulation A issuers would be
required to file a notice under cover of Form 1-Z: Exit Report. Issuers
conducting Tier 1 offerings would be required to file Part I of Form 1-
Z that would disclose information similar to the information previously
required of issuers on Form 2-A.\690\ Issuers conducting Tier 2
offerings would 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 would also be required to fill out 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.\691\ In Tier 2 offerings, an issuers' 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,\692\ 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 would have to 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.\693\ We do not anticipate
that the proposed requirement to retain a manually-signed copy of the
Form 1-Z would affect an issuer's compliance burden. We estimate that
50 percent of issuers with an ongoing reporting obligation under
proposed Regulation A (or 94 issuers, 188 issuers with an ongoing
reporting obligation x .50 of issuers filing a Form 1-Z) would file a
Form 1-Z in the second fiscal year after qualification of the offering
statement. Although we believe that the vast majority of issuers
subject to ongoing reporting under Regulation A would qualify for
termination in the second fiscal year after qualification, we believe
that only half or 50 percent of such issuers would actually choose to
terminate their reporting obligations. An issuer may have many reasons,
such as a desire to facilitate continued quotations in the over-the-
counter (``OTC'') markets pursuant to proposed revisions to Exchange
Act Rule 15c2-11,\694\ to continue reporting even though entitled to
terminate reporting.
---------------------------------------------------------------------------

    \690\ See discussion in Section II.E.1.a. above.
    \691\ See proposed Rule 257(d).
    \692\ See proposed Rule 252(h)(2).
    \693\ See Instruction to proposed Form 1-Z and related
discussion in Section II.E.4. above.
    \694\ See discussion in Section II.E.2. above.
---------------------------------------------------------------------------

    The Form 1-Z would be 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).\695\ Therefore, we estimate that compliance
with the proposed Form 1-Z would result in a similar burden as
compliance with Form 15, a burden of 1.50 hours per response. We
estimate

that compliance with proposed Form 1-Z would result in a burden of 141
hours (94 issuers filing Form 1-Z x 1.50 hours/issuer) in the aggregate
during the second fiscal year after qualification of the offering
statement for issuers terminating their reporting obligations.
---------------------------------------------------------------------------

    \695\ We currently estimate the burden per response for
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

6. Form ID Filings
    Under the proposed rules, an issuer would be required to file
specified disclosures with the Commission on EDGAR.\696\ We anticipate
that many issuers relying on proposed Regulation A for the first time
would not have previously filed an electronic submission with the
Commission and so would need to file a Form ID. Form ID is the
application form for access codes to permit filing on EDGAR. The
proposed rules would not change the form itself, but we anticipate that
the number of Form ID filings would increase due to an increase in
issuers relying on proposed Regulation A. For purposes of this PRA
discussion, we estimate that 75 percent of the issuers who would seek
to offer and sell securities in reliance on proposed Regulation A would
not have previously filed an electronic submission with the Commission
and would, therefore, be required to file a Form ID. As noted above, we
estimate that approximately 250 issuers per year would seek to offer
and sell securities in reliance on proposed Regulation A, which would
correspond to approximately 188 additional Form ID filings. As a
result, we estimate the additional annual burden would be approximately
28.20 hours (188 filings x 0.15 hours/filing).\697\
---------------------------------------------------------------------------

    \696\ See proposed Rules 252 and 257.
    \697\ We currently estimate the burden associated with Form ID
is 0.15 hours per response. See Form ID at 1.
---------------------------------------------------------------------------

D. Collections of Information Are Mandatory

    The collections of information required under proposed Rules 251
through 263 would 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 would not be confidential, although issuers may
request confidential treatment for certain materials submitted in
conjunction with the filings.\698\ It is anticipated that most of this
material would be made public when the offering is qualified. A Form 1-
A that is submitted by an issuer with a confidential treatment request
and later abandoned before being publicly filed with the Commission and
responses on Form ID would, however, remain non-public, absent a
request for such information under the Freedom of Information Act.\699\
The hours and costs associated with preparing and filing forms and
retaining records constitute reporting and cost burdens imposed by the
collection of information requirements.
---------------------------------------------------------------------------

    \698\ See Commission Rule 83, 17 CFR 200.83.
    \699\ 5 U.S.C. 552. The Commission's regulations that implement
the Freedom of Information Act are at 17 CFR 200.80 et seq.
---------------------------------------------------------------------------

E. Request for Comment

    The Commission invites comment on all of the above estimates.
Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission requests comment in
order to: (1) Evaluate whether the proposed collections of information
are necessary for the proper performance of our functions, including
whether the information would have practical utility; (2) evaluate the
accuracy of our estimate of the burden of the proposed collections of
information; (3) determine whether there are ways to enhance the
quality, utility and clarity of the information to be collected; and
(4) evaluate whether there are ways to minimize the burden of the
proposed collections of information on those who respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the proposed collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should also send a copy of their comments to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100
F Street NE., Washington, DC 20549-1090, with reference to File No. S7-
11-13. Requests for materials submitted to OMB by the Commission, with
regard to these collections of information, should be in writing, with
reference to File No. S7-11-13, and they should be submitted to the
Securities and Exchange Commission, Office of FOIA Services, 100 F
Street NE., Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collections of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to the following:
     proposed amendments to Rules 251 through 263 of Regulation
A, Form 1-A, Rule 4a-1 under the Trust Indenture Act, Rule 15c2-11
under the Exchange Act, and Item 101 of Regulation S-T;
     proposed new Forms 1-K, 1-SA, 1-U, and 1-Z; and
     the proposed rescission of Form 2-A.

A. Reasons for the Proposed Action

    The proposed 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
proposed 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 twelve-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.

B. Objectives

    Our primary objective is to implement Section 401 of the JOBS Act,
as mandated by Section 3(b)(2), 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 endeavored to
craft a workable revision of Regulation A that would both promote small
company capital formation and provide 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 more frequently
relied upon, thereby facilitating capital formation for small
businesses.

C. Legal Basis

    The amendments are being proposed under the authority set forth in
Sections 3(b), 19 and 28 of the Securities Act of 1933, as amended, and
Section 401 of the JOBS Act.\700\
---------------------------------------------------------------------------

    \700\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
---------------------------------------------------------------------------

D. Small Entities Subject to the Proposed 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.\701\
---------------------------------------------------------------------------

    \701\ 17 CFR 230.157. We note that currently this rule refers to
``the dollar limitation prescribed by Section 3(b) of the Securities
Act.'' As noted earlier in this release, the JOBS Act amended
Section 3(b) of the Securities Act. The former Section 3(b) is now
Section 3(b)(1), and a new Section 3(b)(2) was added. To retain the
meaning of 17 CFR 230.157, we are proposing a technical correction
to replace the reference to ``Section 3(b)'' with a reference to
``Section 3(b)(1).''
---------------------------------------------------------------------------

    While proposed Regulation A would be available for offerings of up
to $50 million in securities in a twelve-month period, only offerings
up to $5 million in securities in a twelve-month period would be
offerings by small entities. It is difficult to predict the number of
small businesses that would use proposed Regulation A due to the many
variables created by our proposed amendments. Nevertheless, we believe
that proposed 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.A.
above.
    Regulation A is currently limited to offerings with an aggregate
offering price of $5 million or less.\702\ From 2009 through 2012, 87
issuers filed offering statements and 19 offering statements were
qualified by the Commission, or an average of approximately 5 qualified
offering statements per year. Of the 19 offering statements that were
qualified, 12 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 3 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 3 small businesses will
conduct offerings under proposed Regulation A per year.
---------------------------------------------------------------------------

    \702\ As explained in Section II.B.3. above, the aggregate
offering price under existing and proposed Regulation A includes
prior sales generated from Regulation A offerings that occurred in
the twelve months preceding the current offering.
---------------------------------------------------------------------------

E. Reporting, Recordkeeping, and Other Compliance Requirements

    As discussed above in Section II.C., the proposed regulation
includes reporting, recordkeeping and other compliance requirements. In
particular, the proposed regulation would impose certain reporting
requirements on issuers offering and selling securities in a
transaction relying on the exemptions provided by Section 3(b) and
Regulation A. The proposed rules would 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.\703\ Such issuers would also be 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 would not require
the financial statements to be audited unless the issuer has already
had them audited for another purpose.\704\
---------------------------------------------------------------------------

    \703\ See discussion in Section II.C.3. above.
    \704\ The distinction between a Tier 1 offering and Tier 2
offering are discussed in Section II.B.3. above.
---------------------------------------------------------------------------

    As discussed above in Section II.E., issuers conducting Tier 2
offerings would also be required to file annual reports on proposed new
Form 1-K, semiannual updates on proposed new Form 1-SA, current event
reporting on proposed new Form 1-U, and to provide notice to the
Commission of the termination of their ongoing reporting obligations on
proposed new Form 1-Z. A Tier 1 offering would be limited to $5 million
in a twelve-month period. Issuers in a Regulation A offering that would
result in exceeding $5 million in a twelve-month period would be
required to comply with the requirements for Tier 2 offerings,
including being subject to ongoing reporting.
    An issuer subject to the Tier 2 periodic and current event
reporting described above would be 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 would consist 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 would require 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.
    Unlike the other ongoing reporting requirements, Form 1-Z would
only be 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 would, however, 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 and thus its use by small entities would be limited. Also,
the information that is required in Form 1-Z is minimal.
    Although we estimated that approximately 188 issuers under proposed
Regulation A would enter the proposed ongoing reporting regime every
year, we believe that very few small businesses would do so. A small
business under our rules would only be required to file ongoing reports
under Regulation A if a Regulation A offering would result in exceeding
the Tier 1 annual offering limitation of $5 million in a twelve-month
period.

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no federal rules that conflict with or
duplicate the proposed rules.

G. Significant Alternatives

    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 proposed 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 proposed rules for small 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.\705\ We also considered whether there should
be an exemption from coverage of the rules, or any parts of the rule
for small entities. As discussed above, we do propose different
compliance reporting requirements for issuers of less than $5 million
that conduct an offering under Tier 1. For example, we are not
proposing to subject entities likely to be small entities to ongoing
reporting requirements and the requirement to provide audited financial
statements. We also considered providing additional reductions in the
disclosures required by Form 1-A for issuers of less than $5 million,
but we believe that different compliance requirements for Form 1-A
users 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
filling out 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.\706\ For these reasons, we believe that small entities
should be covered by the proposed rules to the extent specified above.
We believe that the proposed rules should have limited impact on small
entities and we are not proposing to establish different compliance
requirements for small entities other than what we have proposed. We
do, however, seek comment on alternatives that may reduce any potential
adverse impact on small entities but accomplish similar objectives.
---------------------------------------------------------------------------

    \705\ See Section II.C. above.
    \706\ See discussion in Section V.C.1. above.
---------------------------------------------------------------------------

H. Request for Comment

    We encourage comments with respect to any aspect of this initial
regulatory flexibility analysis. In particular, we request comments
regarding:
     The number of small entities that may be affected by the
proposals;
     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 request members of the public to submit comments and ask them to
describe the nature of any impact on small entities they identify and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the final regulatory
flexibility analysis, if the proposals are adopted, and will be placed
in the same public file as comments on the proposed amendments
themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\707\ a rule is ``major'' if it has resulted, or is likely
to result in:
---------------------------------------------------------------------------

    \707\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment or
innovation.
    We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment or
innovation.
    We request those submitting comments to provide empirical data and
other factual support for their views if possible.

VIII. Statutory Basis and Text of Proposed Amendments

    The amendments and forms contained in this document are being
proposed under the authority set forth in Sections 3(b), 19 and 28 of
the Securities Act of 1933, as amended, and Section 401 of the JOBS
Act.\708\
---------------------------------------------------------------------------

    \708\ Public Law 112-106, -401, 126 Stat. 307 (April 5, 2012).
---------------------------------------------------------------------------

Text of Proposed Amendments

List of Subjects in 17 CFR Part 230, 232, 239, 240 and 260

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:

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

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1. 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, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, Sec.  201(a), Sec.  401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
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2. Sec.  230.157 paragraph (a) is revised to read as follows:

Sec.  230.157  Small entities under the Securities Act for purposes of
the Regulatory Flexibility Act.

* * * * *
    (a) When used with reference to an issuer, other than an investment
company, for purposes of the Securities Act of 1933, means an issuer
whose total assets on the last day of its most recent fiscal year were
$5 million or less and that is engaged or proposing to engage in small
business financing. An issuer is considered to be engaged or proposing
to engage in small business financing under this section if it is
conducting or proposes to conduct an offering of securities which does
not exceed the dollar limitation prescribed by section 3(b)(1) of the
Securities Act.
* * * * *
    3. Revise the undesignated center heading and Sec. Sec.  230.251
through 230.263 to read as follows:
* * * * *

Regulation A

Sec.
230.251 Scope of exemption.
230.252 Offering statement.
230.253 Offering circular.
230.254 Preliminary offering circular.
230.255 Solicitation of interest communications.
230.256 Definition of ``qualified purchaser.''
230.257 Periodic and current reporting; exit report.

230.258 Suspension of the exemption.
230.259 Withdrawal or abandonment of offering statements.
230.260 Insignificant deviations from a term, condition or
requirement of Regulation A.
230.261 Definitions.
230.262 Disqualification provisions.
230.263 Consent to service of process.
* * * * *
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4. Sec. Sec.  230.251 through 230.263 are revised to read as follows:

Sec.  230.251  Scope of exemption.

    (a) Tier 1 and Tier 2. A public offer or sale of eligible
securities, as defined in Rule 261 (Sec.  230.261), that meets the
following terms and conditions shall be exempt under section 3(b) from
the registration requirements of the Securities Act of 1933 (the
``Securities Act'') (15 U.S.C. 77a et seq.):
    (1) Offerings pursuant to Regulation A in which the sum of all cash
and other consideration to be received for the securities being offered
(``aggregate offering price'') plus the aggregate offering price for
all securities sold pursuant to other Regulation A offering statements
within the twelve months before the start of and during the current
offering of securities does not exceed $5,000,000, including not more
than $1,500,000 offered by all selling securityholders (``Tier 1
offerings''); and
    (2) Offerings pursuant to Regulation A in which such sum does not
exceed $50,000,000, including not more than $15,000,000 offered by all
selling securityholders (``Tier 2 offerings'').

    Note: Where a mixture of cash and non-cash consideration is to
be received, the aggregate offering price must be based on the price
at which the securities are offered for cash. Any portion of the
aggregate offering price attributable to cash received in a foreign
currency must be translated into United States currency at a
currency exchange rate in effect on or at a reasonable time before
the date of the sale of the securities. If securities are not
offered for cash, the aggregate offering price must be based on the
value of the consideration as established by bona fide sales of that
consideration made within a reasonable time, or, in the absence of
sales, on the fair value as determined by an accepted standard.
Valuations of non-cash consideration must be reasonable at the time
made. If convertible securities or warrants are being offered, the
underlying securities must also be qualified and the aggregate
offering price must include the conversion, exercise, or exchange
price of such securities.

    (b) Issuer. The issuer of the securities:
    (1) Is an entity organized under the laws of the United States or
Canada, or any State, Province, Territory or possession thereof, or the
District of Columbia, with its principal place of business in the
United States or Canada;
    (2) Is not subject to section 13 or 15(d) of the Securities
Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78a et seq.)
immediately before the offering;
    (3) Is not a development stage company that either has no specific
business plan or purpose, or has indicated that its business plan is to
merge with an unidentified company or companies;
    (4) Is not an investment company registered or required to be
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.) or a business development company as defined in section 2(a)(48)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48));
    (5) Is not issuing fractional undivided interests in oil or gas
rights, or a similar interest in other mineral rights;
    (6) Is 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. 78l(j)) within five years before the filing of the offering
statement;
    (7) Has filed with the Commission all the reports it was required
to file, if any, pursuant to Rule 257 (Sec.  230.257) during the two
years before the filing of the offering statement (or for such shorter
period that the issuer was required to file such reports); and
    (8) Is not disqualified under Rule 262 (Sec.  230.262).
    (c) Integration with other offerings. Offers and sales made in
reliance on this Regulation A will not be integrated with:
    (1) Prior offers or sales of securities; or
    (2) Subsequent offers or sales of securities that are:
    (i) Registered under the Securities Act, except as provided in Rule
255(e) (Sec.  230.255(e));
    (ii) Made pursuant to Rule 701 (Sec.  230.701);
    (iii) Made pursuant to an employee benefit plan;
    (iv) Made pursuant to Regulation S (Sec.  230.901-905);
    (v) Made more than six months after the completion of the
Regulation A offering; or
    (vi) Made in reliance on Regulation Crowdfunding (Sec.  230.XX-XX).

    Note: If these safe harbors do not apply, whether subsequent
offers and sales of securities will be integrated with the
Regulation A offering will depend on the particular facts and
circumstances. See Securities Act Release No. 4552 (November 6,
1962) [27 FR 11316].

    (d) Offering conditions--(1) Offers.
    (i) Except as allowed by Rule 255 (Sec.  230.255), no offer of
securities may be made unless a Form 1-A offering statement has been
filed with the Commission.
    (ii) After the Form 1-A offering statement has been filed, but
before it is qualified:
    (A) Oral offers may be made;
    (B) Written offers pursuant to Rule 254 (Sec.  230.254) may be
made; and
    (C) Communications pursuant to Rule 255 (Sec.  230.255) may be
made.
    (iii) After the Form 1-A offering statement has been qualified, any
written offers must be accompanied with or preceded by the most recent
offering circular filed with the Commission for such offering.
    (2) Sales.
    (i) No sale of securities may be made until:
    (A) The Form 1-A offering statement has been qualified;
    (B) A Preliminary Offering Circular is delivered at least 48 hours
before the sale to any person that before qualification of the offering
statement had indicated an interest in purchasing securities in the
offering, including those persons that responded to an issuer's
solicitation of interest materials; and
    (C) For Tier 2 offerings, no sale may be made to a purchaser if the
aggregate purchase price paid by such purchaser for securities in the
offering (including any conversion, exercise, or exchange price for
securities that are convertible, exercisable or exchangeable for other
securities) is more than ten percent (10%) of the greater of such
purchaser's annual income and net worth, based on the representations
of the purchaser (with annual income and net worth for natural person
purchasers determined as provided in Rule 501 (Sec.  230.501), provided
that the issuer does not know, at the time of sale, that any such
representation is untrue.
    (ii) In a transaction that represents a sale by the issuer or an
underwriter, or a sale where there is not an exclusion or exemption
from the requirement to deliver a Final Offering Circular pursuant to
paragraph 251(d)(2)(iii) of this rule, each underwriter or dealer
selling in such transaction must deliver to each purchaser from it, not
later than two business days following the completion of such sale, a
copy of the Final Offering Circular or, in lieu of such Final Offering
Circular, a notice to the effect that the sale was made pursuant to a
qualified offering statement that includes the uniform resource locator
(``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. If the sale was by the issuer and was not effected by or
through an underwriter or dealer, the issuer is responsible for sending
the Final Offering Circular or notice.
    (iii) Sales by a dealer (including an underwriter no longer acting
in that capacity for the security involved in such transaction) that
take place within 90 calendar days after the qualification of the
Regulation A offering statement may be made only if the dealer delivers
a copy of the current offering circular to the purchaser before or with
the confirmation of sale, provided that where an offering statement
relates to offerings to be made from time to time pursuant to paragraph
(d)(3) of this rule, such 90 calendar day period shall commence on the
day of the first bona fide offering of securities under such offering
statement; and
    (3) Continuous or delayed offerings. (i) Continuous or delayed
offerings may be made under this Regulation A, so long as the offering
statement pertains only to:
    (A) Securities that are to be offered or sold solely by or on
behalf of a person or persons other than the issuer, a subsidiary of
the issuer, or a person of which the issuer is a subsidiary;
    (B) Securities that are to be offered and sold pursuant to a
dividend or interest reinvestment plan or an employee benefit plan of
the issuer;
    (C) Securities that are to be issued upon the exercise of
outstanding options, warrants, or rights;
    (D) Securities that are to be issued upon conversion of other
outstanding securities;
    (E) Securities that are pledged as collateral; or
    (F) Securities the offering of which will be commenced within two
calendar days after the qualification date, will be made on a
continuous basis, may continue 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. These securities may be offered and sold only if
not more than three years have elapsed since the initial qualification
date of the offering statement under which they are being offered and
sold; provided, however, that if a new offering statement has been
filed pursuant to this paragraph (d)(3)(i)(F), securities covered by
the prior offering statement may continue to be offered and sold until
the earlier of the qualification date of the new offering statement or
180 days after the third anniversary of the initial qualification date
of the prior offering statement. Before the end of such three-year
period, an issuer may file a new offering statement covering the
securities. The new offering statement must include all the information
that would be required at that time in an offering statement relating
to all offerings that it covers. Before the qualification date of the
new offering statement, the issuer may include as part of such new
offering statement any unsold securities covered by the earlier
offering statement by identifying on the cover page of the new offering
circular or the latest amendment the amount of such unsold securities
being included. The offering of securities on the earlier offering
statement will be deemed terminated as of the date of qualification of
the new offering statement. Securities may be sold pursuant this
paragraph (d)(3)(i)(F) only if the issuer is current in its annual and
semiannual filings pursuant to Rule 257(b) (Sec.  230.257(b)), at the
time of such sale.
    (ii) At the market offerings, by or on behalf of the issuer or
otherwise, are not permitted under this Regulation A. As used in this
paragraph (d)(3)(ii), the term at the market offering means an offering
of equity securities into an existing trading market for outstanding
shares of the same class at other than a fixed price.

Sec.  230.252  Offering statement.

    (a) Documents to be included. The offering statement consists of
the contents required by Form 1-A (Sec.  239.90 of this chapter) and
any other material information necessary to make the required
statements, in light of the circumstances under which they are made,
not misleading.
    (b) Paper, printing, language and pagination. Except as otherwise
specified in this rule, the requirements for offering statements are
the same as those specified in Rule 403 (Sec.  230.403) for
registration statements under the Act. No fee is payable to the
Commission upon either the submission or filing of an offering
statement on Form 1-A, or any amendment to an offering statement.
    (c) Confidential treatment. A request for confidential treatment
may be made under Rule 406 (Sec.  230.406) for information required to
be filed, and Rule 83 (Sec.  200.83) for information not required to be
filed.
    (d) Signatures. 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, must sign the offering statement. If a signature is by a person
on behalf of any other person, evidence of authority to sign must be
filed, except where an executive officer signs for the issuer.
    (e) How to file. The offering statement 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). The
offering statement must be signed in the manner prescribed by Form 1-A.
    (f) Non-public submission. An issuer whose securities have not been
previously sold pursuant to a qualified offering statement under this
Regulation A or an effective registration statement under the
Securities Act may submit under Rule 83 (Sec.  200.83) a draft offering
statement to the Commission for non-public review by the staff of the
Commission before public filing, provided that the offering statement
shall not be qualified less than 21 calendar days after the public
filing of (1) the initial non-public submission, (2) all non-public
amendments with the Commission, and (3) all non-public correspondence
submitted by or on behalf of the issuer to the Commission staff
regarding such submissions (subject to any separately approved
confidential treatment request under paragraph (c) of this rule). Draft
offering statements must be submitted to the Commission in electronic