[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Rules and Regulations]
[Pages 21805-21925]
[FR Doc No: 2015-07305]

Vol. 80

Monday,

No. 75

April 20, 2015

Part II

Securities and Exchange Commission

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17 CFR Parts 200, 230, 232, et al.

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

Federal Register / Vol. 80 , No. 75 / Monday, April 20, 2015 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-9741; 34-74578; 39-2501; File No. S7-11-13]
RIN 3235-AL39

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

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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

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

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

SUPPLEMENTARY INFORMATION: We are amending Rules 251 through 263 \1\ of
Regulation A under the Securities Act of 1933 (the ``Securities
Act'').\2\
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    \1\ 17 CFR 230.251 through 230.263.
    \2\ 15 U.S.C. 77a et seq.
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    We are revising Form 1-A,\3\ rescinding Form 2-A,\4\ and adopting
four new forms, Form 1-K (annual report), Form 1-SA (semiannual
report), Form 1-U (current report), and Form 1-Z (exit report).
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    \3\ 17 CFR 239.90.
    \4\ 17 CFR 239.91.
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    Further, we are revising Rule 4a-1 \5\ under the Trust Indenture
Act of 1939 (the ``Trust Indenture Act'') \6\ to increase the dollar
ceiling of the exemption from the requirement to issue securities
pursuant to an indenture. We are also amending Rule 12g5-1 \7\ of the
Securities Exchange Act of 1934 (the ``Exchange Act'') \8\ to permit
issuers to rely on a conditional exemption from mandatory registration
of a class of securities under Section 12(g) of the Exchange Act, Rule
15c2-11 \9\ of the Exchange Act to permit an issuer's ongoing reports
filed under Regulation A to satisfy a broker-dealer's obligations to
review and maintain certain information about an issuer's quoted
securities, and Rule 30-1 \10\ of the Commission's organizational rules
and provisions for delegated authority to permit the Division of
Corporation Finance to issue notices of qualification and deny Form 1-Z
filings. In addition, we are adopting a technical amendment to Exchange
Act Rule 15c2-11 to update the outdated reference to ``Schedule H of
the By-Laws of the National Association of Securities Dealers, Inc.,''
which is now known as the ``Financial Industry Regulatory Authority,
Inc.'' and to reflect the correct rule reference.
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    \5\ 17 CFR 260.4a-1.
    \6\ 15 U.S.C. 77aaa et seq.
    \7\ 17 CFR 240.12g5-1.
    \8\ 15 U.S.C. 78a et seq.
    \9\ 17 CFR 240.15c2-11.
    \10\ 17 CFR 200.30-1.
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    As a result of the revisions to Regulation A, we are adopting
conforming and technical amendments to Securities Act Rules 157(a),\11\
505(b)(2)(iii),\12\ and Form 8-A. Additionally, we are revising Item
101(a) \13\ of Regulation S-T \14\ to reflect the mandatory electronic
filing of all issuer initial filing and ongoing reporting requirements
under Regulation A. We are also revising Item 101(c)(6) \15\ of
Regulation S-T to remove the reference to paper filings in a Regulation
A offering, and removing and reserving Item 101(b)(8) \16\ of
Regulation S-T dealing with the optional electronic filing of Form F-X
by Canadian issuers.
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    \11\ 17 CFR 230.157(a).
    \12\ 17 CFR 230.505(b)(2)(iii).
    \13\ 17 CFR 232.101(a).
    \14\ 17 CFR 232.10 et seq.
    \15\ 17 CFR 232.101(c)(6).
    \16\ 17 CFR 232.101(b)(8).
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Table of Contents

I. Introduction
II. Final Rules and Amendments to Regulation A
    A. Overview
    B. Scope of Exemption
    1. Eligible Issuers
    2. Eligible Securities
    3. Offering Limitations and Secondary Sales
    4. Investment Limitation
    5. Integration
    6. Treatment Under Section 12(g)
    C. Offering Statement
    1. Electronic Filing; Delivery Requirements
    2. Non-Public Submission of Draft Offering Statements
    3. Form and Content
    4. Continuous or Delayed Offerings and Offering Circular
Supplements
    5. Qualification
    D. Solicitation of Interest (Testing the Waters)
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    E. Ongoing Reporting
    1. Continuing Disclosure Obligations
    2. Exchange Act Rule 15c2-11 and Other Implications of Ongoing
Reporting Under Regulation A
    3. Exchange Act Registration of Regulation A Securities
    4. Exit Report on Form 1-Z
    F. Insignificant Deviations From a Term, Condition or
Requirement
    G. Bad Actor Disqualification
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    H. Relationship With State Securities Law
    1. Proposed Rules
    2. Comments on Proposed Rules
    3. Final Rules
    I. Additional Considerations Related to Smaller Offerings
    J. Transitional Guidance for Issuers Currently Conducting
Regulation A Offerings
    K. Technical and Conforming Amendments
III. Economic Analysis
    A. Broad Economic Considerations
    B. Baseline
    1. Current Methods of Raising Up to $50 Million of Capital
    2. Investors
    3. Financial Intermediaries
    C. Scope of Exemption
    1. Eligible Issuers
    2. Eligible Securities
    3. Offering Limitations and Secondary Sales
    4. Investment Limitation
    5. Integration
    6. Treatment Under Section 12(g)
    D. Offering Statement
    1. Electronic Filing and Delivery
    2. Disclosure Format and Content
    3. Audited Financial Statements
    4. Other Accounting Requirements
    5. Continuous and Delayed Offerings
    6. Nonpublic Review of Draft Offering Statements
    E. Solicitation of Interest (``Testing the Waters'')
    F. Ongoing Reporting
    1. Periodic and Current Event Reporting Requirements
    2. Termination and Suspension of Reporting and Exit Reports
    3. Exchange Act Registration
    G. Insignificant Deviations
    H. Bad Actor Disqualification
    I. Relationship With State Securities Law
IV. Paperwork Reduction Act
    A. Background
    B. Estimated Number of Regulation A Offerings
    C. PRA Reporting and Cost Burden Estimates

    1. Regulation A (Form 1-A and Form 2-A)
    2. Form 1-K: Annual Report
    3. Form 1-SA: Semiannual Report
    4. Form 1-U: Current Reporting
    5. Form 1-Z: Exit Report
    6. Form 8-A: Short Form Registration Under the Exchange Act
    7. Form ID Filings
    8. Form F-X
    D. Collections of Information Are Mandatory
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Rules
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rules
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Basis and Text of Amendments

I. Introduction

    On December 18, 2013, we proposed rule and form amendments \17\ to
implement Section 401 of the Jumpstart Our Business Startups Act (the
``JOBS Act'').\18\ Section 401 of the JOBS Act amended Section 3(b) of
the Securities Act by designating existing Section 3(b) as Section
3(b)(1), and creating new Sections 3(b)(2)-(5). Section 3(b)(2) directs
the Commission to adopt rules adding a class of securities exempt from
the registration requirements of the Securities Act for offerings of up
to $50 million of securities within a 12-month period. Sections
3(b)(2)-(5) specify mandatory terms and conditions for such exempt
offerings and also authorize the Commission to adopt other terms,
conditions, or requirements as necessary in the public interest and for
the protection of investors.\19\ In addition, Section 3(b)(5) directs
the Commission to review the $50 million offering limit specified in
Section 3(b)(2) not later than two years after the enactment of the
JOBS Act and every two years thereafter, and authorizes the Commission
to increase the annual offering limit if it determines that it would be
appropriate to do so. Accordingly, we are revising Regulation A under
the Securities Act to require issuers conducting offerings in reliance
on Section 3(b)(2) to comply with terms and conditions established by
the Commission's rules, and, where applicable, to make ongoing
disclosure.
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    \17\ See Rel. No. 33-9497 [79 FR 3925] (Dec. 18, 2013) (the
``Proposing Release''), available at: http://www.sec.gov/rules/proposed/2013/33-9497.pdf.
    \18\ Public Law 112-106, 126 Stat. 306.
    \19\ We are adopting a number of terms and conditions for
Regulation A offerings pursuant to our discretionary authority under
Sections 3(b)(2)-(5). Where we have done so, as discussed in detail
in Section II. below, it is because we find such terms and
conditions to be necessary in the public interest and for the
protection of investors.
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II. Final Rules and Amendments to Regulation A

A. Overview

    We are adopting final rules to implement the JOBS Act mandate by
expanding Regulation A into two tiers: Tier 1, for securities offerings
of up to $20 million; and Tier 2, for offerings of up to $50
million.\20\ The final rules for offerings under Tier 1 and Tier 2
build on current Regulation A and preserve, with some modifications,
existing provisions regarding issuer eligibility, offering circular
contents, testing the waters, and ``bad actor'' disqualification. As
proposed, and with the modifications described below, the final rules
modernize the Regulation A filing process for all offerings, align
practice in certain areas with prevailing practice for registered
offerings, create additional flexibility for issuers in the offering
process, and establish an ongoing reporting regime for Regulation A
issuers. Under the final rules, Tier 2 issuers are required to include
audited financial statements in their offering documents and to file
annual, semiannual, and current reports with the Commission. With the
exception of securities that will be listed on a national securities
exchange upon qualification, purchasers in Tier 2 offerings must either
be accredited investors, as that term is defined in Rule 501(a) of
Regulation D, or be subject to certain limitations on their investment.
The differences between Tier 1 and Tier 2 offerings are described more
fully below.
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    \20\ An issuer of $20 million or less of securities could elect
to proceed under either Tier 1 or Tier 2.
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    In developing the final rules, we considered the statutory language
of JOBS Act Section 401, the JOBS Act legislative history, recent
recommendations of the Commission's Government-Business Forum on Small
Business Capital Formation,\21\ the Advisory Committee on Small and
Emerging Companies,\22\ the Equity Capital Formation Task Force,\23\
comment letters received on Title IV of the JOBS Act before the
Commission's proposed rules were issued in December of 2013,\24\ and
comment letters received to date on the Commission's proposed rules to
implement Section 401 of the JOBS Act.\25\
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    \21\ Recommendations of the Commission's Government-Business
Forum on Small Business Capital Formation are available at: http://www.sec.gov/info/smallbus/sbforum.shtml.
    \22\ Recommendations of the Advisory Committee on Small and
Emerging Companies are available at: http://www.sec.gov/info/smallbus/acsec.shtml.
    \23\ Equity Capital Task Force, From the On-Ramp to the Freeway:
Refueling Job Creation and Growth by Reconnecting Investors with
Small-Cap Companies, presentation to the U.S. Dep't. of Treasury
(November 11, 2013), available at: http://www.equitycapitalformationtaskforce.com/.
    \24\ To facilitate public input on JOBS Act rulemaking before
the issuance of rule proposals, the Commission invited members of
the public to make their views known on various JOBS Act initiatives
in advance of any rulemaking by submitting comment letters to the
Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. Comment letters received to date on Title IV
of the JOBS Act are available at: http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml.
    \25\ The comment letters received to date in response to the
Proposing Release are available at: http://www.sec.gov/comments/s7-11-13/s71113.shtml.
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    The key provisions of the final rules and amendments to Regulation
A follow: Scope of the exemption--the final rules:

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

securities exchange upon qualification.
 Exclude asset-backed securities, as defined in Regulation AB,
from the list of eligible securities.
 Update the safe harbor from integration and provide guidance
on the potential integration of offerings conducted concurrently with,
or close in time after, a Regulation A offering.

    Solicitation materials:

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

    Qualification, communications, and offering process:

 Require issuers and intermediaries in the prequalification
period to deliver a preliminary offering circular to prospective
purchasers at least 48 hours in advance of sale unless the issuer is
subject to, and current in, Tier 2 ongoing reporting obligations. Where
the issuer is subject to, and current in, a Tier 2 ongoing reporting
obligation, issuers and intermediaries will only be required to comply
with the general delivery requirements for offers.
 Modernize the qualification, communications, and offering
processes in Regulation A to reflect analogous provisions of the
Securities Act registration process: \26\
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    \26\ See, e.g., Securities Offering Reform, Rel. No. 33-8591
(July 19, 2005) [70 FR 44722].
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     Permit issuers and intermediaries to satisfy their
delivery requirements as to the final offering circular under an
``access equals delivery'' model when sales are made on the basis of
offers conducted during the prequalification period and the final
offering circular is filed and available on the Commission's Electronic
Data Gathering, Analysis and Retrieval system (EDGAR);
     Require issuers and intermediaries, not later than two
business days after completion of a sale, to provide purchasers with a
copy of the final offering circular or a notice with the uniform
resource locator (URL) where the final offering circular may be
obtained on EDGAR and contact information sufficient to notify a
purchaser where a request for a final offering circular can be sent and
received in response; and
     Permit issuers to file offering circular updates and
supplements after qualification of the offering statement in lieu of
post-qualification amendments in certain circumstances, including to
provide the types of information that may be excluded from a prospectus
under Rule 430A.
 Permit continuous or delayed offerings, but require issuers in
continuous or delayed Tier 2 offerings to be current in their annual
and semiannual reporting obligations in order to do so.
 Permit issuers to qualify additional securities in reliance on
Regulation A by filing a post-qualification amendment to a qualified
offering statement.

    Offering statement:

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

    Ongoing reporting:

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

to report sales and the termination of sales made under Regulation A
every six months after qualification and within 30 calendar days after
the termination, completion, or final sale of securities in the
offering.

    Exchange Act registration:

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

    ``Bad actor'' disqualification provisions:

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

    Application of state securities laws:

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

B. Scope of Exemption

1. Eligible Issuers
a. Proposed Rules
    Section 401 of the JOBS Act does not include any express issuer
eligibility requirements. The proposed rules would have maintained
Regulation A's existing issuer eligibility requirements and added two
new categories of ineligible issuers.\27\ The two new categories would
exclude issuers that are or have been subject to any order of the
Commission pursuant to Section 12(j) of the Exchange Act entered within
five years before the filing of the offering statement and issuers that
are required to, but that have not, filed with the Commission the
ongoing reports required by the final rules during the two years
immediately preceding the filing of an offering statement.
Additionally, we requested comment on other potential changes to the
existing issuer eligibility requirements, including whether the
exemption should be limited to ``operating companies,'' United States
domestic issuers, or issuers that use a certain amount of the proceeds
raised in a Regulation A offering in the United States. We also
solicited comment on whether we should extend issuer eligibility to
non-Canadian foreign issuers, business development companies as defined
in Section 2(a)(48) of the Investment Company Act of 1940 (BDCs),\28\
blank check companies,\29\ or Exchange Act reporting companies, or,
alternatively, eliminate shell companies or REITs from the exemptive
regime.
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    \27\ Existing Regulation A limits issuer eligibility to issuers
organized, and with a principal place of business, in the United
States or Canada, while excluding Exchange Act reporting companies,
investment companies, including business development companies,
development stage companies that have no specific business plan or
purpose or have indicated that their business plan is to engage in a
merger or acquisition with an unidentified company or companies,
issuers of fractional undivided interests in oil or gas rights or a
similar interest in other mineral rights, and issuers disqualified
because of Rule 262, 17 CFR 230.262 (2014). See 17 CFR 230.251(a)
(2014).
    \28\ 15 U.S.C. 80a-2(a)(48).
    \29\ ``Blank check companies'' are development stage companies
that have no specific business plan or purpose or have indicated
that their business plan is to engage in a merger or acquisition
with an unidentified company or companies. See Securities Act Rule
419(a)(2)(i), 17 CFR 230.419(a)(2)(i); see also SEC Rel. No. 33-6949
[57 FR 36442] (July 30, 1992), at fn. 50 (clarifying that blank
check companies regardless of whether they are issuing penny stock
are precluded from relying on Regulation A).
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b. Comments on the Proposed Rules
    Commenters expressed a wide range of views on the proposed issuer
eligibility requirements. A number of commenters expressed general
support for the proposed issuer eligibility requirements.\30\ Many
commenters expressly supported the new proposed issuer eligibility
criterion relating to the requirement to be current in Tier 2 ongoing
reporting obligations.\31\ One commenter also expressly supported the
proposed exclusion of issuers subject to an order of the Commission
entered pursuant to Section 12(j) of the Exchange Act from the list of
eligible issuers.\32\ Other commenters suggested additional limitations
on issuer eligibility, including: a requirement that issuers be
``operating companies,'' \33\

excluding shell companies and issuers of penny stock,\34\ and excluding
other types of investment vehicles, such as commodity pools and
investment funds that invest in gold or virtual currencies.\35\
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    \30\ Letter from Catherine T. Dixon, Chair, Federal Regulation
of Securities Committee, Business Law Section, American Bar
Association, April 3, 2014 (``ABA BLS Letter''); Letter from
Gabrielle Buckley, Chair, Section of International Law, American Bar
Association, May 14, 2014 (``ABA SIL Letter''); Letter from Andrew
F. Viles, Canaccord Letter Genuity Inc., March 27, 2014 (``Canaccord
Letter''); Letter from Pw Carey, March 24, 2014 (``Carey Letter'');
Letter from Kurt N. Schacht, CFA, Managing Director, Standards and
Financial Market Integrity, and Linda L. Rittenhouse, Director,
Capital Markets, CFA Institute, March 24, 2014 (``CFA Institute
Letter''); Letter from Kim Wales, Executive Board Member, Crowdfund
Intermediary Regulatory Advocates (CFIRA), May 14, 2014 (``CFIRA
Letter 1''); Letter from Christopher Tyrrell, Chair, Crowdfunding
Intermediary Regulatory Advocates, February 23, 2015 (``CFIRA Letter
2''); Robert R. Kaplan, Jr. and T. Rhys James, Kaplan Voekler
Cunningham & Frank PLC, March 23, 2014 (``KVCF Letter''); Letter
from William F. Galvin, Secretary, Commonwealth of Massachusetts,
March 24, 2014 (``Massachusetts Letter 2''); Letter from Morrison &
Foerster LLP, March 26, 2014 (``MoFo Letter''); Letter from Andrea
Seidt, President, North American Securities Administrators
Association (NASAA) and Ohio Securities Commissioner, March 24, 2014
(``NASAA Letter 2''); Letter from William M. Beatty, Securities
Administrator, Washington Department of Financial Institutions,
March 24, 2014 (``WDFI Letter''); Letter from William R. Hambrecht,
Chairman, WR Hambrecht+ Co, March 4, 2014 (``WR Hambrecht + Co
Letter'').
    \31\ ABA BLS Letter; CFA Institute Letter; Massachusetts Letter
2; NASAA Letter 2; WDFI Letter.
    \32\ CFA Institute Letter.
    \33\ CFIRA Letter 1; WR Hambrecht + Co Letter (suggesting that
limiting the availability of the exemption to, among other things,
operating companies would provide investors with more confidence in
the offerings conducted pursuant to Regulation A). But see KVCF
Letter (suggesting that limiting availability of the exemption to
operating companies would unnecessarily limit the utility of the
exemption).
    \34\ ABA BLS Letter; MoFo Letter.
    \35\ Massachusetts Letter 2.
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    A few commenters recommended allowing blank check companies and
special purpose acquisition companies (SPACs) to rely on Regulation
A.\36\ One of these commenters recommended allowing blank check
companies seeking to raise at least $10 million to use Regulation A in
the same manner as any other eligible issuer, but suggested that, if a
company is raising less than $10 million in a Tier 2 offering, the
Commission should implement certain additional requirements.\37\
Another commenter recommended allowing issuers of fractional interests
in oil and gas or other mineral rights to rely on Regulation A based on
a ``reasonable'' eligibility test to be developed by the
Commission.\38\ Several commenters opposed any change to the proposed
issuer eligibility requirements that would exclude REITs from
participating in Regulation A offerings.\39\ Other commenters advocated
expanding the current categories of eligible issuers, and specifically
supported the continued inclusion of Canadian companies and shell
companies as eligible issuers, as proposed.\40\
---------------------------------------------------------------------------

    \36\ Gilman Law Letter; Letter from Mark Goldberg, Chairman,
Investment Program Association, March 24, 2014 (``IPA Letter'');
Letter from David N. Feldman, Partner, Richardson Patel LLP, January
15, 2014 (``Richardson Patel Letter''). A SPAC is a type of blank
check company created specifically to pool funds in order to finance
a merger or acquisition opportunity within a set timeframe.
    \37\ Richardson Patel Letter (recommending that for offerings of
less than $10 million under Tier 2, the rules should require that:
(a) Monies raised be placed into escrow, minus underwriters
compensation and 10% for offering expenses, until a reverse merger
is completed; (b) a combination with an operating business be
completed within three years; (c) full Form 10 information be
disclosed regarding a pending reverse merger to investors who will
have 15-20 days to reconfirm their investment or receive their money
back; (d) there be no requirement that a certain percentage of
investors reconfirm; and (e) accredited investors have no limit on
the investment they make in the offering).
    \38\ Letter from Mark Kosanke, President, Real Estate Investment
Securities Association, March 24, 2014 (``REISA Letter'')
(suggesting that the Commission base the eligibility test on the
issuer having an ``established track record'' or some minimum amount
of assets).
    \39\ ABA BLS Letter; Letter from Gilman Law LLC, March 24, 2014
(``Gilman Law Letter''); MoFo Letter; Letter from Serenity Storage,
January 5, 2014 (``Serenity Storage Letter'').
    \40\ Letter from Jonathan C. Guest, McCarter & English, LLP,
February 19, 2014 (``McCarter & English Letter'') (also opposing any
limitation on issuer eligibility on the basis of whether most of the
offering proceeds were being used in connection with the issuer's
operations in the United States, noting that many Canadian issuers
would be excluded as a result); OTC Markets Letter.
---------------------------------------------------------------------------

(1) Non-Canadian Foreign Issuers
    Many commenters recommended making non-Canadian foreign companies
eligible issuers under Regulation A.\41\ Several commenters suggested
that the proposed approach to non-Canadian foreign companies is
inconsistent with the treatment of foreign private issuers in
registered offerings.\42\ Additionally, commenters noted a variety of
benefits arising from allowing foreign companies to access the U.S.
capital markets through Regulation A offerings, including job
creation,\43\ increasing the amount of disclosure available for
investors in foreign companies,\44\ encouraging domestic exchange
listings,\45\ expanding investment opportunities for U.S.
investors,\46\ and general economic benefits.\47\ One commenter
recommended making all foreign private issuers eligible if they
maintained a principal place of business in the United States.\48\ Two
commenters also recommended permitting companies relying on Exchange
Act Rule 12g3-2(b) to make offerings under Regulation A.\49\
---------------------------------------------------------------------------

    \41\ ABA SIL Letter; Letter from Scott Kupor, Managing Partner,
Andreessen Horowitz, and Jeffrey M. Solomon, Chief Executive
Officer, Cowen and Company, February 26, 2014 (``Andreessen/Cowen
Letter''); Letter from BDO USA, LLP, March 20, 2104 (``BDO
Letter''); Canaccord Letter (suggesting expanding issuer eligibility
to companies organized in jurisdictions with ``robust securities
regulation systems'' such as the United Kingdom and other countries
in the European Union, Australia, and Asian markets such as
Singapore and Hong Kong); McCarter & English Letter; OTC Markets
Letter; Richardson Patel Letter; Letter from Michael T. Lempres,
Assistant General Counsel, SVB Financial Group, March 21, 2014
(``SVB Financial Letter''); Letter from Bill Soby, Managing
Director, Silicon Valley Global Shares, March 24, 2014 (``SVGS
Letter'').
    \42\ Andreessen/Cowen Letter; BDO Letter; Richardson Patel
Letter. In the context of registered offerings, foreign private
issuers may provide scaled disclosure if it qualifies as a ``smaller
reporting company,'' which is defined in Item 10(f)(1) of Regulation
S-K, 17 CFR 229.10(f)(1), Securities Act Rule 405, 17 CFR 230.405,
and Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and rely on other
disclosure accommodations.
    \43\ ABA SIL Letter; SVGS Letter (noting that high-paying jobs
would be created by expanding global tech companies).
    \44\ SVB Financial Letter.
    \45\ Andreessen/Cowen Letter; SVB Financial Letter.
    \46\ Andreessen/Cowen Letter; OTC Markets Letter.
    \47\ ABA SIL Letter; Andreessen/Cowen Letter; McCarter & English
Letter; SVB Financial Letter.
    \48\ ABA SIL Letter.
    \49\ McCarter & English Letter; OTC Markets Letter. Rule 12g3-
2(b) generally provides foreign private issuers with an automatic
exemption from registration under Section 12(g) if the issuer (i) is
not required to file reports under Exchange Act Sections 13(a) or
15(d); (ii) maintains a listing of the subject class of securities
on one or two exchanges in non-U.S. jurisdictions that comprise more
than 55% of its worldwide trading volume; and (iii) publishes in
English on its Web site certain material items of information. See
17 CFR 240.12g3-2(b).
---------------------------------------------------------------------------

(2) BDCs
    A number of commenters supported making BDCs eligible issuers under
Regulation A.\50\ Most of these commenters noted that BDCs serve an
important function in facilitating small or emerging business capital
formation or in providing a bridge from the private to public
markets.\51\ Several of these commenters recommended at least allowing
small business investment company (SBIC) licensed BDCs to use the
exemption given the review process such entities are required to
undergo with the U.S. Small Business Administration.\52\ One of these
commenters noted that if BDCs become eligible to use Regulation A, the
Commission should consider requiring them to provide quarterly
financial disclosure so as to enhance transparency and provide the
market with critical investment information.\53\
---------------------------------------------------------------------------

    \50\ ABA BLS Letter; CFIRA Letter 1; Letter from Michael
Sauvante, Executive Director, Commonwealth Fund LLC, March 21, 2014
(``Commonwealth Fund Letter 1''); Letter from Michael Sauvante,
Executive Director, Commonwealth Fund LLC, March 22, 2014
(``Commonwealth Fund Letter 2''); KVCF Letter; Letter from Daniel
Gorfine, Director, Financial Markets Policy, and Staci Warden,
Executive Director, Center for Financial Markets, Milken Institute,
March 19, 2014 (``Milken Institute Letter''); MoFo Letter; REISA
Letter; SBIA Letter; WR Hambrecht + Co Letter.
    \51\ ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letter 1;
Commonwealth Fund Letter 2; KVCF Letter; Milken Institute Letter;
MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter.
    \52\ Milken Institute Letter; SBIA Letter. A SBIC-licensed BDC
is a company that is licensed by the Small Business Administration
(SBA) to operate as such under the Small Business Investment Act of
1958.
    \53\ Milken Institute Letter.
---------------------------------------------------------------------------

(3) Potential Limits on Issuer Size
    Several commenters opposed using the issuer's size to limit
eligibility.\54\ Two of these commenters thought that the $50 million
offering limit for Tier 2 would already limit the utility of the

exemption for issuers on the basis of issuer size--with smaller issuers
likely benefitting most from the exemption--and recommended against
size-based eligibility criteria that may be difficult to define.\55\
One commenter suggested that most issuers with a large public float
would likely be subject to Exchange Act reporting requirements and
therefore would be ineligible to use Regulation A.\56\ Another
commenter noted that a size restriction based on public float would be
particularly harmful to biotechnology companies, because they often
have a public float that is disproportionately high in relation to
their corporate structure, number of employees, or revenues.\57\
---------------------------------------------------------------------------

    \54\ Letter from E. Cartier Esham, Executive Vice President,
Emerging Companies, Biotechnology Industry Organization (BIO), March
11, 2014 (``BIO Letter''); IPA Letter; Letter from Tom Quaadman,
Vice President, Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce, March 24, 2014 (``U.S. Chamber of Commerce
Letter'').
    \55\ BIO Letter; U.S. Chamber of Commerce Letter.
    \56\ IPA Letter.
    \57\ BIO Letter.
---------------------------------------------------------------------------

(4) Exchange Act Reporting Companies
    A number of commenters supported allowing Exchange Act reporting
companies to conduct offerings under Regulation A.\58\ Several of these
commenters recommended allowing Exchange Act reporting companies that
are current in their reporting obligations to conduct Tier 2
offerings,\59\ with one commenter limiting its recommendation to
companies with a non-affiliate float of less than $250 million.\60\
Three commenters further suggested that, if Exchange Act reporting
companies are permitted to conduct offerings pursuant to Regulation A,
Exchange Act reporting should satisfy any Regulation A reporting
obligation.\61\ One such commenter further suggested that Exchange Act
reporting companies should be required to be current in their Exchange
Act reporting obligations in order to be eligible to rely on the
exemption, in a manner that is consistent with Regulation A as it
existed before 1992.\62\
---------------------------------------------------------------------------

    \58\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter;
Letter from U.S. Senator Pat Roberts, May 27, 2014 (``Sen. Roberts
Letter''); Letter from Jack H. Brier, President and Founder, US
Alliance Corporation, March 19, 2014 (``US Alliance Corp. Letter'').
    \59\ Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter.
    \60\ BIO Letter.
    \61\ Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets
Letter.
    \62\ CFIRA Letter 1. Before amendments to Regulation A were
adopted in 1992, Exchange Act reporting companies were permitted to
conduct offerings in reliance on Regulation A, provided they were
current in their public reporting. See 17 CFR 230.252(f) (1992).
---------------------------------------------------------------------------

c. Final Rules
    We are adopting the issuer eligibility criteria as proposed. Under
the final rules, Regulation A will be limited to companies organized in
and with their principal place of business in the United States or
Canada. It will be unavailable to:
     Companies subject to the ongoing reporting requirements of
Section 13 or 15(d) of the Exchange Act;
     companies registered or required to be registered under
the Investment Company Act of 1940 and BDCs;
     blank check companies;
     issuers of fractional undivided interests in oil or gas
rights, or similar interests in other mineral rights;
     issuers that are required to, but that have not, filed
with the Commission the ongoing reports required by the rules under
Regulation A during the two years immediately preceding the filing of a
new offering statement (or for such shorter period that the issuer was
required to file such reports);
     issuers that are or have been subject to an order by the
Commission denying, suspending, or revoking the registration of a class
of securities pursuant to Section 12(j) of the Exchange Act that was
entered within five years before the filing of the offering statement;
\63\ and
---------------------------------------------------------------------------

    \63\ See Rule 251(b).
---------------------------------------------------------------------------

     issuers subject to ``bad actor'' disqualification under
Rule 262.\64\
---------------------------------------------------------------------------

    \64\ See Rule 262.
---------------------------------------------------------------------------

    We expect that the amendments we are adopting will significantly
expand the utility of the Regulation A offering exemption.
    Our approach in the final rules is generally to maintain the issuer
eligibility requirements of existing Regulation A with the limited
addition of two new categories of ineligible issuers. We believe this
approach will provide important continuity in the Regulation A regime
as it expands in the way Congress mandated. For this reason, we do not
believe it is necessary to adopt final rules to exclude issuers that
are currently eligible to conduct Regulation A offerings. Additionally,
we recognize that expanding the categories of eligible issuers, as
suggested by a number of commenters, could provide certain benefits,
including increased investment opportunities for investors and avenues
for capital formation for certain issuers. We are concerned, however,
about the implications of extending issuer eligibility before the
Commission has the ability to assess the impact of the changes to
Regulation A being adopted today. In light of these changes, we believe
it prudent to defer expanding the categories of eligible issuers (for
example, by including non-Canadian foreign issuers, BDCs, or Exchange
Act reporting companies) until the Commission has had the opportunity
to observe the use of the amended Regulation A exemption and assess any
new market practices as they develop.
    Additionally, we are not adopting further restrictions on
eligibility at this time. In light of the disclosure requirements
contained in the final rules, we do not believe that it is necessary to
exclude additional types of issuers, such as shell companies, issuers
of penny stock, or other types of investment vehicles, from relying on
the exemption in Regulation A. At the same time, we are concerned about
potentially increased risks to investors that could result from
extending issuer eligibility to other types of entities, such as blank
check companies, before the Commission has the opportunity to observe
developing market practices. We therefore believe the prudent approach
with respect to any potential expansion of issuer eligibility is to
give the Regulation A market time to develop under rules that we are
adopting today. We also do not believe it is necessary to limit
availability of the exemption to issuers of a certain size, as we agree
with commenters that suggested that the annual offering limit will
serve to limit the utility of the exemption for larger issuers in need
of greater amounts of capital. We further do not believe that it is
appropriate to limit the availability of the exemption to ``operating
companies,'' as that term would restrict availability of the exemption
to fewer issuers than are currently eligible under Regulation A, such
as by excluding shell companies.
    As proposed, the final rules include two new issuer eligibility
requirements that add important investor protections to Regulation A.
First, potential issuers must have filed all required ongoing reports
under Regulation A during the two years immediately preceding the
filing of a new offering statement (or for such shorter period that the
issuer was required to file such reports) to remain eligible to conduct
offerings pursuant to the rules. This requirement will benefit
investors by providing them with more information, with respect to
issuers that have previously made a Regulation A offering, to consider
when making an investment decision, facilitate the development of an
efficient secondary market in such securities, and enhance our ability
to analyze and observe the Regulation A market. Second, issuers subject
to orders by the Commission entered pursuant to Section 12(j) of the
Exchange Act within a five-year period immediately preceding the filing
of the offering statement will not be eligible to conduct an offering
pursuant to Regulation A. This requirement will increase investor
protection and

compliment the exclusion of delinquent Regulation A filers discussed
immediately above by excluding issuers with a demonstrated history of
delinquent filings under the Exchange Act from the pool of eligible
issuers under Regulation A.
2. Eligible Securities
a. Proposed Rules
    Section 3(b)(3) of the Securities Act limits the availability of
any exemption enacted under Section 3(b)(2) to ``equity securities,
debt securities, and debt securities convertible or exchangeable into
equity interests, including any guarantees of such securities.'' \65\
The proposed rules would have limited the types of securities eligible
for sale under both Tier 1 and Tier 2 of Regulation A to the
specifically enumerated list of securities in Section 3(b)(3) and also
would have excluded asset-backed securities, as defined in Regulation
AB, from the list of eligible securities.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 77c(b)(3).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Several commenters supported the exclusion of asset-backed
securities from the list of eligible securities.\66\ One commenter
recommended clarifying that warrants exercisable for equity or debt
securities are eligible securities.\67\
---------------------------------------------------------------------------

    \66\ ABA BLS Letter; Carey Letter; Massachusetts Letter 2; NASAA
Letter 2; WDFI Letter.
    \67\ ABA BLS Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting final rules that limit the types of securities
eligible for sale under Regulation A to the specifically enumerated
list in Section 3(b)(3), which includes warrants and convertible equity
securities, among other equity and debt securities.\68\ The final rules
exclude asset-backed securities from the list of eligible securities.
Asset-backed securities are subject to the provisions of Regulation AB
and other rules specifically tailored to the offering process,
disclosure, and reporting requirements for such securities. These rules
were not in effect when Regulation A was last updated in 1992.\69\ We
do not believe that Section 401 of the JOBS Act was enacted to
facilitate the issuance of asset-backed securities.
---------------------------------------------------------------------------

    \68\ See Rule 261(c); see also Rule 405 (defining ``equity
security'' to include, among other things, warrants and certain
convertible securities). We have also revised the proposed
definition in Rule 261(c) to clarify that all securities, rather
than just equity securities, that are convertible or exchangeable
into equity interests are eligible, subject to the other terms of
Regulation A.
    \69\ Regulation AB, 17 CFR 229.1100 et seq., went into effect in
2005. See Rel. No. 33-8518 (Dec. 22, 2004). Asset-backed securities
are defined in Rule 1101(c)(1) to generally mean a security that is
primarily serviced by the cash flows of a discrete pool of
receivables or other financial asset, either fixed or revolving,
that by its terms converts into cash within a finite time period.
---------------------------------------------------------------------------

3. Offering Limitations and Secondary Sales
a. Proposed Rules
    We proposed to amend Regulation A to create two tiers of
requirements: Tier 1, for offerings of up to $5 million of securities
in a 12-month period; and Tier 2, for offerings of up to $50 million of
securities in a 12-month period.\70\ As proposed, issuers could conduct
offerings of up to $5 million under either Tier 1 or Tier 2. Consistent
with the existing provisions of Regulation A, we also proposed to
permit sales by selling securityholders of up to 30% of the maximum
offering amount permitted under the applicable tier ($1.5 million in
any 12-month period for Tier 1 and $15 million in any 12-month period
for Tier 2). Sales by selling securityholders under either tier would
be aggregated with sales by the issuer for purposes of calculating the
maximum permissible amount of securities that may be sold during any
12-month period. In addition, we proposed to eliminate the last
sentence of Rule 251(b), which prohibits affiliate resales unless the
issuer has had net income from continuing operations in at least one of
its last two fiscal years.
---------------------------------------------------------------------------

    \70\ As proposed, if the offering included securities that were
convertible, exercisable, or exchangeable for other securities, the
offer and sale of the underlying securities would also be required
to be qualified and the aggregate offering price would include the
aggregate conversion, exercise, or exchange price of such
securities, regardless of when they become convertible, exercisable,
or exchangeable.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commenters were generally supportive of the proposed offering
limitations on primary and secondary offerings. Many commenters,
however, suggested changes to the proposed offering limits for both
tiers, as well as to the proposed limits on secondary sales.
(1) Offering Limitation
    Several commenters recommended that the Commission increase the $50
million offering limitation for Tier 2.\71\ As an alternative, one
commenter recommended applying the $50 million limit on a per offering
basis rather than on a 12-month basis, and suggested that the
Commission consider eliminating the offering limits for certain types
of issuers, such as those that have yet to generate revenue.\72\
Additionally, two commenters recommended that the Commission do more to
increase the utility of Tier 1 offerings by raising the Tier 1 offering
limitation to $10 million or more in a 12-month period.\73\ Another
commenter suggested that the Commission create a third tier in between
Tier 1 and Tier 2 that would have a $15 million offering
limitation.\74\
---------------------------------------------------------------------------

    \71\ Letter from Salomon Kamalodine, Director, Investment
Banking, B. Riley & Co., March 24, 2014 (``B. Riley Letter'');
Letter from William Klehm, Chairman and CEO, Fallbrook Technologies,
March 22, 2014 (``Fallbrook Technologies Letter'') (recommended
raising the limit to $75 million); OTC Markets Letter (recommended
raising the limit to $80 million); Jason Coombs, Co-Founder and CEO,
Public Startup Company, Inc., March 24, 2014 (``Public Startup Co.
Letter 1'') (recommended raising the limit to $75 million);
Richardson Patel Letter (recommended raising the limit to $100
million).
    \72\ Richardson Patel Letter.
    \73\ Letter from Samuel S Guzik, Guzik and Associates, March 24,
2014 (``Guzik Letter 1'') (recommended raising the limit to ``at
least $10 million''); Letter from Christopher Cole, Senior Vice
President and Senior Regulatory Counsel, Independent Community
Bankers of America, March 25, 2014 (``ICBA Letter'') (encouraged
increasing the limit ``from $5 million to $10 million'').
    \74\ Public Startup Co. Letter 1.
---------------------------------------------------------------------------

    With respect to offering limit calculations, one commenter
recommended that the aggregate offering price of the underlying
security only be included in the $50 million offering limitation during
the 12-month period in which such security is first convertible,
exercisable, or exchangeable.\75\ This commenter suggested that its
recommended approach would accommodate common small business offering
structures that involve warrants exercisable at a premium over several
years.
---------------------------------------------------------------------------

    \75\ Andreessen/Cowen Letter; cf. Proposing Release, fn. 112.
---------------------------------------------------------------------------

(2) Secondary Sales Offering Limitation
    Several commenters specifically supported the proposed limitations
on secondary sales.\76\ While some commenters indicated their support
for resale limitations,\77\ they expressed a preference for either
proscribing resales entirely \78\ or requiring the approval of the
resale offering by a majority of the issuer's independent directors
upon a finding that the offering is in the best interests of both the
selling securityholders and the issuer.\79\ One commenter recommended
prohibiting

resales under Regulation A entirely.\80\ Another commenter recommended
requiring selling securityholders to hold the issuer's securities for
12 months before being eligible to sell pursuant to Regulation A, in
order to distinguish between investors seeking to invest in a business
and investors simply seeking to sell to the public for a gain.\81\
---------------------------------------------------------------------------

    \76\ Massachusetts Letter 2; NASAA Letter 2; Richardson Patel
Letter; WDFI Letter.
    \77\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \78\ Massachusetts Letter 2; NASAA Letter 2.
    \79\ NASAA Letter 2 (supporting the proposed limits coupled with
a board approval requirement in lieu of prohibiting resales
entirely); WDFI Letter (not expressing a preference for prohibiting
resales entirely).
    \80\ Carey Letter.
    \81\ Letter from Andrew M. Hartnett, Missouri Commissioner of
Securities, March 24, 2014 (``MCS Letter'').
---------------------------------------------------------------------------

    Many other commenters recommended raising the resale limits or
eliminating them entirely.\82\ One such commenter recommended
alternatively removing non-affiliate securityholders from the resale
limitation since concerns over investor information asymmetries would
be reduced when dealing with non-affiliate securityholders.\83\ This
commenter also recommended that the Commission reevaluate the need for
resale limits within a year of implementing the rules. Another
commenter also recommended allowing for unlimited sales by non-
affiliate selling securityholders and further suggested that the rules
not aggregate such sales with issuer sales.\84\ Two commenters
suggested that limitations on resales are contrary to the Congressional
intent behind the enactment of Title IV of the JOBS Act.\85\
---------------------------------------------------------------------------

    \82\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA
Letter 1; Milken Institute Letter; MoFo Letter; Richardson Patel
Letter; WR Hambrecht + Co Letter.
    \83\ Milken Institute Letter.
    \84\ B. Riley Letter.
    \85\ CFIRA Letter 1; WR Hambrecht + Co Letter (noting that the
JOBS Act contemplated an increase in the offering threshold to $50
million, but did not limit the percentage that could be sold by
selling securityholders).
---------------------------------------------------------------------------

(3) Rule 251(b)
    Many commenters specifically supported the proposed elimination of
the requirement that issuers must have had net income from continuing
operations in at least one of its last two fiscal years in order for
affiliate resales to be permitted, generally noting that many companies
have net losses for many years, including, for example, due to high
research and development costs.\86\
---------------------------------------------------------------------------

    \86\ ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA
Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co
Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting the proposed amendments to Regulation A with
modifications to the Tier 1 offering limitation and the secondary sales
offering limitation. We discuss these amendments in detail below. We
are also making a technical change to clarify the description of how
compliance with the offering limitations is calculated in Rule
251(a).\87\
---------------------------------------------------------------------------

    \87\ The proposed rules used the phrase ``aggregate offering
price for all securities sold'' when discussing the gross proceeds
resulting from prior or anticipated sales of securities under
Regulation A. We have clarified Rule 257(a)(1) to define as
``aggregate sales'' gross proceeds within the prior 12 month time
frame contemplated by Regulation A. We have also made conforming
changes elsewhere in the final rules and forms.
---------------------------------------------------------------------------

Tier 1
    As discussed more fully in the ``Additional Considerations for
Smaller Offerings'' section below, we are making changes to the
proposed rules in response to comments and to increase the utility of
Tier 1 of the Regulation A exemption.\88\ Several commenters \89\ and a
report on the impact of state securities law requirements on offerings
conducted under Regulation A by the U.S Government Accountability
Office (GAO), as required by Section 402 of the JOBS Act,\90\
highlighted the $5 million offering limitation in existing Regulation A
as one of the main factors limiting the utility of the exemption. In
certain circumstances, fixed costs associated with conducting
Regulation A offerings, such as legal and accounting fees, may serve as
a disincentive to use the exemption for lower offering amounts. We are
therefore increasing the offering limitation in the final rules for
Tier 1 offerings in a 12-month period from the proposed $5 million
limitation to $20 million.\91\ We believe that raising the offering
limitation for Tier 1 offerings, in addition to other changes discussed
in Section II.I. below, will increase the utility of the exemption for
smaller issuers by providing them with additional options for capital
formation and potentially increasing the proceeds received by the
issuer. Consistent with the proportionate limitation on secondary sales
in the proposed rules, we are also increasing the limitation on
secondary sales in Tier 1 offerings in a 12-month period from the
proposed $1.5 million limitation to $6 million.
---------------------------------------------------------------------------

    \88\ See Section II.I. below.
    \89\ See, e.g., Guzik Letter 1; ICBA Letter; Public Startup Co.
Letter 1.
    \90\ Factors that May Affect Trends in Regulation A Offerings,
GAO-12-839 (July 2012) (the ``GAO Report'') (available at: http://www.gao.gov/assets/600/592113.pdf). The GAO Report concludes that it
is unclear whether increasing the Regulation A offering ceiling from
$5 million to $50 million will improve the utility of the exemption.
    \91\ Rule 251(a)(1). We intend to revisit the Tier 1 offering
limitation at the same time that we are required by Section 3(b)(5)
of the Securities Act to review the Tier 2 offering limitation and
will consider whether additional investor protections would be
necessary if the Tier 1 offering limitation is increased.
---------------------------------------------------------------------------

Tier 2
    We are adopting the proposed $50 million Tier 2 offering
limitation.\92\ Some commenters suggested that we raise the offering
limitation to an amount above the statutory limitation set forth in
Section 3(b)(2), but we do not believe an increase is warranted at this
time. While Regulation A has existed as an exemption from registration
for some time, today's changes are significant. We believe that the
final rules for Regulation A will provide for a meaningful addition to
the existing capital formation options of smaller companies while
maintaining important investor protections. We are concerned, however,
about expanding the offering limitation of the exemption beyond the
level directly contemplated in Section 3(b)(2) at the outset of the
adoption of final rules. As noted above in Section II.B.1., the final
rules do not limit issuer eligibility on the basis of issuer size, as
we believe that the $50 million annual offering limitation will serve
to limit the utility of the exemption for larger issuers in need of
greater amounts of capital. Similarly, we believe that the more
extensive disclosure requirements associated with Exchange Act
reporting are more appropriate for larger and generally more complex
issuers that raise money in the public capital markets.\93\ We are
therefore concerned that an increase in the offering limitation at this
time may increase risks to investors by encouraging larger issuers to
conduct offerings pursuant to Regulation A in instances where
disclosure pursuant to a registered offering under the Securities Act
would be more appropriate.
---------------------------------------------------------------------------

    \92\ Rule 251(a)(2).
    \93\ See discussion in Section III.C.3. below.
---------------------------------------------------------------------------

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

selling securityholders access to avenues for liquidity will encourage
them to invest in companies, although we acknowledge that providing for
secondary sales in any amount may give rise to certain concerns. As
highlighted by at least one commenter at the pre-proposing stage,
permitting some secondary sales pursuant to Regulation A could place
investors at an informational disadvantage to selling securityholders
who have potentially greater access to inside information about the
issuer and does not necessarily provide capital to the issuer.\94\
Other commenters stated that such concerns are misplaced in the context
of secondary sales by non-affiliates, who generally do not have access
to inside information.\95\
---------------------------------------------------------------------------

    \94\ Letter from A. Heath Abshure, President, NASAA, April 10,
2013 (``NASAA (pre-proposal) Letter'').
    \95\ See, e.g., Milken Institute Letter.
---------------------------------------------------------------------------

    We do not believe that a wholesale prohibition on secondary sales,
as suggested by some commenters, is appropriate or necessary for either
Tier 1 or Tier 2 of Regulation A. However, in order to strike an
appropriate balance between allowing selling securityholders continued
access to avenues for liquidity in Regulation A and the concern that
secondary offerings do not directly provide new capital to companies
and could pose the potential risks to investors discussed above, the
final rules continue to permit secondary sales but provide additional
limitations on secondary sales in the first year. The final rules limit
the amount of securities that selling securityholders can sell at the
time of an issuer's first Regulation A offering and within the
following 12 months to no more than 30% of the aggregate offering price
of a particular offering.\96\ While the final rules continue to provide
selling securityholders with the flexibility to sell securities during
this period, we believe that this approach to the final rules will help
to ensure that secondary sales at the time of such offerings will be
made in conjunction with capital raising events by the issuer.
---------------------------------------------------------------------------

    \96\ Rule 251(a)(3) (Additional limitation on secondary sales in
first year).
---------------------------------------------------------------------------

    Further, we are providing different requirements for secondary
sales by affiliates and by non-affiliates. The final rules limit
secondary sales by affiliates that occur following the expiration of
the first year after an issuer's initial qualification of an offering
statement to no more than $6 million, in the case of Tier 1 offerings,
or no more than $15 million, in the case of Tier 2 offerings, over a
12-month period. Secondary sales by non-affiliates that are made
pursuant to a qualified offering statement following the expiration of
the first year after an issuer's initial qualification of an offering
statement will not be limited except by the maximum offering amount
permitted by either Tier 1 or Tier 2.\97\ Although the secondary sales
offering amount limitation will only apply to affiliates during this
period, consistent with the proposal, non-affiliate secondary sales
will be aggregated with sales by the issuer and sales by affiliates for
purposes of calculating compliance with the maximum offering amount
permissible under the respective tiers.\98\
---------------------------------------------------------------------------

    \97\ Rule 251(a).
    \98\ Secondary sales of shares acquired in a Regulation A
offering--which are freely tradable--are not subject to limitations
on secondary sales, but must be resold under an exemption from
Securities Act registration (e.g., Section 4(a)(1), 15 U.S.C.
77d(a)(1)).
---------------------------------------------------------------------------

    We do not believe that the concerns expressed by one commenter
about informational disadvantages that may exist with affiliate sales
are present with respect to resales by non-affiliates.\99\ On the
contrary, in comparison to requirements for non-affiliate resales of
restricted securities after the expiration of Securities Act Rule 144
holding periods,\100\ we believe that Regulation A provides purchasers
of such securities with the benefit of, among other things, narrative
and financial disclosure that is reviewed and qualified by the
Commission in transactions that are subject to Section 12(a)(2)
liability and the antifraud provisions of Section 17 of the Securities
Act.\101\
---------------------------------------------------------------------------

    \99\ NASAA (pre-proposal) Letter.
    \100\ Under Rule 144, non-affiliates of an issuer are, among
other things, permitted to resell restricted securities after the
expiration of a one-year holding period without limitations or
requirements as to: (i) The availability of current public
information about the issuer or its securities, (ii) the volume of
resales, (iii) the manner of sale, or (iv) disclosure. See 17 CFR
230.144.
    \101\ 15 U.S.C. 77l(a)(2), 77q.
---------------------------------------------------------------------------

    We also disagree with the commenters who suggested limitations on
secondary sales are contrary to the legislative intent behind the
enactment of Title IV of the JOBS Act. We note that Section 3(b)(2)
expressly provides that the Commission may impose additional terms,
conditions, or requirements as it deems necessary in the public
interest and for the protection of investors.\102\ For the reasons
discussed above, we believe that limiting secondary sales by affiliates
is not only consistent with the language and purpose of the statute but
also necessary in the public interest and for the protection of
investors.
---------------------------------------------------------------------------

    \102\ See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).
---------------------------------------------------------------------------

Offering Limit Calculation
    Under the proposal, if the offering included securities that are
convertible into, or exercisable or exchangeable for, other securities
(rights to acquire), the offer and sale of the underlying securities
also would generally be required to be qualified,\103\ and the
aggregate offering price would include the aggregate conversion,
exercise, or exchange price of such securities, regardless of when they
become convertible, exercisable, or exchangeable.\104\ Consistent with
the views of at least one commenter,\105\ we are concerned that the
proposed requirement could have a greater impact on smaller issuers
than larger issuers because smaller issuers frequently issue rights to
acquire other securities in capital raising events. The proposed method
of calculating the offering limit would presume the exercise price of
underlying securities that, by their terms, may occur at a date in the
distant future or only upon the occurrence of key events. By including
all securities underlying any rights to acquire other securities in the
offering limit calculation, the proposed rules could effectively limit
the proceeds of an offering available to an issuer by requiring such
issuers to include in the aggregate offering price at the time of
qualification the securities underlying rights to acquire that may or
may not become exercisable or exchangeable in the future. We are
adopting final rules that will require issuers to aggregate the price
of all securities for which qualification is currently being sought,
including the securities underlying any rights to acquire that are
convertible, exercisable, or exchangeable within the first year after
qualification or at the discretion of the issuer. As such, and
consistent with the treatment of rights to acquire in the context of
registered offerings, if an offering includes rights to acquire other
securities at a time more than one year after qualification and the
issuer does not otherwise seek to qualify such underlying securities,
the aggregate offering price would not include the aggregate
conversion, exercise, or exchange price of the underlying
securities.\106\ For purposes

of calculating the price of underlying securities that use a pricing
formula, as opposed to a known conversion price, the issuer will be
required to use the maximum estimated price for which such securities
may be converted, exercised, or exchanged.\107\
---------------------------------------------------------------------------

    \103\ Qualification would not be required for securities
transactions exempt from registration pursuant to Securities Act
Section 3(a)(9), 15 U.S.C. 77c(a)(9). Section 3(a)(9) exempts from
registration any security exchanged by the issuer with its existing
security holders exclusively where no commission or other
remuneration is paid or given directly or indirectly for soliciting
such exchange.
    \104\ See note to proposed Rule 251(a).
    \105\ Andreessen/Cowen Letter.
    \106\ See note to Rule 251(a). In these circumstances, the
securities underlying the rights to acquire would need to be
separately qualified under Regulation A or, depending on the
circumstances, registered, exempt from registration, or otherwise
offered in an appropriate manner at the time of issuance.
    \107\ Id.
---------------------------------------------------------------------------

Rule 251(b)
    We are adopting as proposed final rules that eliminate the last
sentence of Rule 251(b),\108\ which prohibited affiliate resales unless
the issuer had net income from continuing operations in at least one of
its last two fiscal years. We agree with the views expressed by
commenters that the absence of net income, by itself, is not a
sufficient indicator of an enhanced risk that existing shareholders
will use informational advantages to transfer their holdings to the
investing public that would necessitate the continued application of
the prohibition in the final rules. Further, as noted in the Proposing
Release, the Commission's current disclosure review and qualification
processes and enforcement programs are significantly more sophisticated
and robust than they were when this provision was added to Regulation A
in its original form.\109\ In addition, the final rules being adopted
today include revised ``bad actor'' disqualification provisions and
additional issuer eligibility requirements aimed at limiting access to
the exemption for market participants with demonstrated track records
of non-compliance or abuse.\110\
---------------------------------------------------------------------------

    \108\ 17 CFR 230.251(b) (2014).
    \109\ See Proposing Release, at Section II.B.3.
    \110\ See discussions in Section II.G (Bad Actor
Disqualification) below and Section II.B.1 (Eligible Issuers) above.
---------------------------------------------------------------------------

4. Investment Limitation
a. Proposed Rules
    Regulation A does not currently limit the amount of securities an
investor can purchase in a qualified Regulation A offering. As we noted
in the Proposing Release, however, we recognize that with the increased
annual offering limitation provided in Section 3(b)(2) comes a risk of
commensurately greater investor losses.\111\ To address that risk we
proposed, among other things, to limit the amount of securities
investors can purchase in a Tier 2 offering to no more than 10% of the
greater of their annual income or their net worth. For this purpose,
annual income and net worth would be calculated as provided in the
accredited investor definition under Rule 501 of Regulation D.\112\
Under the proposal, issuers would be required to make investors aware
of the investment limitations,\113\ but would otherwise be able to rely
on an investor's representation of compliance with the proposed
investment limitation unless the issuer knew, at the time of sale, that
any such representation was untrue.
---------------------------------------------------------------------------

    \111\ See Proposing Release, at Section II.B.4.
    \112\ 17 CFR 230.501.
    \113\ See paragraph (a)(5) to Part II of proposed Form 1-A.
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    A number of commenters generally supported investment limitations
for Tier 2 offerings.\114\ These commenters believed that an investment
limitation would serve as an important investor protection. Several
commenters recommended revisiting the necessity of the limitations
after a one- to three- year trial period,\115\ and another commenter
\116\ recommended extending the investment limitation to Tier 1
offerings to make them more consistent with our proposed rules for
securities-based crowdfunding transactions conducted pursuant to
Section 4(a)(6) of the Securities Act.\117\ Some commenters' support
for the proposed investment limitations was conditioned on suggested
changes to the proposed rules that would require issuers to do more to
ensure compliance with the limitations and that would impose adverse
consequences on issuers for the failure to do so.\118\ One commenter
believed that the 10% limitation is ``significantly higher'' than is
appropriate for ``all but the wealthiest, least risk averse''
investors.\119\ Two commenters suggested that the 10% limitation should
be aggregated across all Regulation A offerings instead of being
applied on a per offering basis,\120\ while one commenter specifically
argued against such an aggregated limit.\121\
---------------------------------------------------------------------------

    \114\ CFA Institute Letter; IPA Letter; Letter from Robert
Kisel, Small Business Owner, March 18, 2014 (``Kisel Letter'')
(erroneously referring to the 10% limit as a 5% limit); MCS Letter;
REISA Letter; Richardson Patel Letter; WDFI Letter.
    \115\ CFIRA Letter 1; Kisel Letter; Milken Institute Letter.
    \116\ CFA Institute Letter.
    \117\ See Crowdfunding, Rel. No. 33-9470 [78 FR 66427] (Nov. 5,
2013).
    \118\ CFA Institute Letter; MCS Letter; WDFI Letter.
    \119\ Letter from Barbara Roper, Director of Investor
Protection, Consumer Federation of America, March 24, 2014 (``CFA
Letter'').
    \120\ CFA Letter (not recommending this specifically, but noting
this as one reason why the investment limit was not an adequate
substitute for state review of Tier 2 offerings); William A.
Jacobson, Clinical Professor of Law, Cornell Law School, and
Director, Cornell Securities Law Clinic, March 24, 2014 (``Cornell
Clinic Letter'').
    \121\ KVCF Letter.
---------------------------------------------------------------------------

    Numerous commenters recommended eliminating the investment
limitation for Tier 2 offerings.\122\ Several of these commenters
alternatively recommended at least doubling the limit if the provision
is not eliminated entirely.\123\ Other commenters thought that the
investment limitation is unnecessary in light of the other investor
protections for Tier 2 offerings, such as the expanded disclosure
requirements.\124\ Several commenters noted that the limit does not
have a statutory basis and suggested that it may be contrary to
Congressional intent,\125\ or contrary to the principles underlying
federal securities law, which focus on fraud prevention and full
disclosure.\126\ One commenter recommended eliminating the investment
limitations only if the final rules do not preempt state law
registration requirements for Tier 2 offerings, arguing that the
limitations may conflict with state investor suitability
standards,\127\ while another commenter indicated that investment
limitations would be unnecessary with appropriate state oversight, but
supported limits for retail investors in startup companies and high-
risk offerings.\128\ Another commenter recommended creating various
categories of investor sophistication with corresponding requirements
and limitations for each.\129\
---------------------------------------------------------------------------

    \122\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter;
CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter;
Letter from Groundfloor Finance, Inc., Nov. 18, 2014 (``Groundfloor
Letter''); Heritage Letter; ICBA Letter; IPA Letter; Letter from
Ford C. Ladd, Esq., May 19, 2014 (``Ladd Letter 2''); Letter from
John Rodenrys, Executive Director R&D, Leading Biosciences, Inc.,
March 24, 2014 (``Leading Biosciences Letter''); Milken Institute
Letter; MoFo Letter; NASAA Letter 2; Letter from Michael L. Zuppone,
Paul Hastings LLP, March 24, 2014 (``Paul Hastings Letter''); Letter
from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc.,
April 2, 2014 (``Public Startup Co. Letter 7''); SVB Financial
Letter.
    \123\ Fallbrook Technologies Letter; Leading Biosciences Letter;
ICBA Letter.
    \124\ ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter;
MoFo Letter; Paul Hastings Letter; SVB Financial Letter.
    \125\ ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1;
Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter.
    \126\ ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken
Institute Letter.
    \127\ Groundfloor Letter.
    \128\ NASAA Letter 2.
    \129\ Cornell Clinic Letter (recommending the tiered investment
limits in our proposed rules for securities-based crowdfunding as an
example).
---------------------------------------------------------------------------

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

the limit to such types of investors.\130\ These commenters believed
that the investor protections afforded by the investment limit would
not be necessary for all types of investors or in all types of
Regulation A offerings. Some commenters recommended eliminating the
investment limit for accredited investors.\131\ One such commenter
recommended eliminating the investment limit generally and, if not, at
least for institutional investors and offerings of securities listed on
securities exchanges.\132\ Several commenters recommended eliminating
the investment limit for non-natural persons or institutional
investors.\133\ Other commenters recommended eliminating the investment
limits for other types of investors or offerings.\134\ Two commenters
noted that it would be difficult to apply the investment limits to non-
natural persons (such as small businesses and IRAs) if the rules use an
income or net worth test.\135\ One of these commenters recommended
that, if the test applies to such investors, it should be based on
assets or revenue.\136\
---------------------------------------------------------------------------

    \130\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter;
Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage
Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter &
English Letter; MCS Letter; Milken Institute Letter; MoFo Letter;
Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter;
WR Hambrecht + Co Letter.
    \131\ ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter;
Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2;
Leading Biosciences Letter; McCarter & English Letter; MCS Letter;
MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB
Financial Letter; cf. Cornell Clinic Letter (recommending an
unspecified higher limit for accredited investors); Milken Institute
Letter; WR Hambrecht + Co Letter (supporting eliminating the
investment limit generally).
    \132\ Milken Institute Letter.
    \133\ ABA BLS Letter; Canaccord Letter; Milken Institute Letter;
MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters
believed that, as proposed, the investment limitations would not
apply to non-natural persons and asked the Commission to confirm or
clarify this point.
    \134\ Cornell Clinic Letter (creating a separate, higher limit
for institutional investors and other types of non-retail investors
included in the ``accredited investor'' definition); Heritage Letter
(eliminating the investment limit for ``any current or former
investor, employee or officer of the issuer''); Ladd Letter 2
(eliminating the investment limit for any non-accredited affiliates,
founders, employees, agents, independent contractors and owners);
Milken Institute Letter (eliminating the investment limit for
investors that purchase Tier 2 securities on an exchange); Paul
Hastings Letter (eliminating the investment limit for offerings
conducted by registered broker-dealers); Richardson Patel Letter
(eliminating the investment limit for any non-individual investor
with at least $100,000 in assets or $100,000 in revenue in the
previous fiscal year).
    \135\ McCarter & English Letter; Richardson Patel Letter.
    \136\ Richardson Patel Letter.
---------------------------------------------------------------------------

    Many commenters explicitly supported allowing issuers to rely on an
investor's representation of compliance with the 10% investment
limit.\137\ Most of these commenters stated that any more rigorous
verification process would cause the compliance costs to be too high.
One commenter recommended eliminating any obligation for the issuer to
monitor the 10% investment limit and allowing the issuer to rely on a
representation by the investor that he or she will notify the issuer
upon exceeding the 10% limit.\138\ Another commenter recommended
permitting an issuer to rely on representations from its underwriters
or broker-dealers as to the 10% investment limit, rather than having to
seek this directly from investors.\139\ This commenter believed that
the issuers in most Tier 2 offerings would have little direct contact
with the investors and that the intermediaries would be better
positioned to assess compliance (possibly already having information
about the investor's finances).
---------------------------------------------------------------------------

    \137\ Fallbrook Technologies Letter; Heritage Letter; IPA
Letter; KVCF Letter; Leading Biosciences Letter; REISA Letter.
    \138\ REISA Letter.
    \139\ KVCF Letter.
---------------------------------------------------------------------------

    Several commenters disagreed with allowing investors to represent
compliance with the investment limitation and recommended a standard
that would require an issuer to do more to ensure compliance.\140\ Two
commenters recommended adopting a standard requiring issuers to take
reasonable steps to verify that the purchasers are in compliance with
the 10% investment limit.\141\ Two commenters recommended requiring an
issuer to have a ``reasonable belief'' or ``reasonable basis'' that it
can rely on an investor's representation of compliance with the 10%
investment limit.\142\ One such commenter also suggested allowing
accredited investors to exceed the 10% investment limit, but requiring
that the issuer take reasonable steps to verify accredited investor
status.\143\ One commenter recommended requiring a ``duty of inquiry''
so that the issuer would have to follow-up on any ``red flags.'' \144\
Additionally, this commenter recommended that the Commission create an
independent and secure means of verifying investor income or to require
a mandatory questionnaire for individual investors to complete before
buying a security issued under Regulation A.
---------------------------------------------------------------------------

    \140\ Letter from Paul Sigelman, President & CEO, Accredited
Assurance, March 24, 2014 (``Accredited Assurance Letter''); CFA
Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter;
WDFI Letter.
    \141\ Accredited Assurance Letter; WDFI Letter.
    \142\ CFA Institute Letter; MCS Letter.
    \143\ MCS Letter.
    \144\ Cornell Clinic Letter.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting an investment limitation for Tier 2 offerings in
the final rules, with minor modifications from the proposed rules. We
believe that the investment limitation serves as an important investor
protection and may help to mitigate the risk that with the increased
annual offering limitation provided in Section 3(b)(2) comes a risk of
commensurately greater investor losses. We do not believe that the
limitation is needed for accredited investors because investors that
qualify as accredited under our rules satisfy certain criteria that
suggest they are capable of protecting themselves in transactions that
are exempt from registration under the Securities Act.\145\ We also do
not believe that the limitation is necessary for investments in
securities that will be listed on a national securities exchange upon
qualification because of the issuer listing requirements and the
potential liquidity that exchanges provide to investors that seek to
reduce their holdings. These both are important investor protections
that help to mitigate concerns about the magnitude of loss that could
potentially result from an investor purchasing a large amount of
securities in a single offering.
---------------------------------------------------------------------------

    \145\ See Rule 501(a) of Regulation D, 17 CFR 230.501(a); see
also SEC v. Ralston Purina Co., 346 U.S. 119 (1953).
---------------------------------------------------------------------------

    Under the final rules, the investment limitations for purchasers in
Tier 2 offerings will not apply to purchasers who qualify as accredited
investors under Rule 501 of Regulation D.\146\ Further, investment
limitations in a Tier 2 offering will not apply to the sale of
securities that will be listed on a national securities exchange upon
qualification since such issuers will be required to meet the listing
standards of

a national securities exchange \147\ and become subject to ongoing
Exchange Act reporting, resulting in additional investor protections.
---------------------------------------------------------------------------

    \146\ See Rule 252(c)(2). Under Rule 501, natural persons are
accredited investors if: (i) Their income exceeds $200,000 in each
of the two most recent years (or $300,000 in joint income with a
person's spouse), and they reasonably expect to reach the same
income level in the current year; (ii) they serve as executives or
directors of the issuer; or (iii) their net worth exceeds $1,000,000
(individual or jointly with a spouse), excluding the value of their
primary residence. Certain enumerated entities that satisfy an
asset-based test also qualify as accredited investors, while others,
including regulated entities such as banks and registered investment
companies, are not subject to the asset test. See 17 CFR 230.501.
The accredited investor definition is intended to encompass those
individuals and entities ``whose financial sophistication and
ability to sustain the risk of loss of investment or ability to fend
for themselves render the protections of the Securities Act's
registration process unnecessary.'' See, e.g., Rel. No. 33-6683
(Jan. 16, 1987) [52 FR 3015] (Regulation D Revisions; Exemption for
Certain Employee Benefit Plans).
    \147\ National securities exchanges impose certain requirements
on issuers, in addition to those generally required by the
Commission, in order for an issuer's securities to be approved for
listing. See discussion of listing requirements for, and additional
investor protections associated with, national securities exchanges
in Section II.E.3.c. below; see also fns. 721, 722 below.
---------------------------------------------------------------------------

    In response to questions raised by commenters, we are clarifying
that non-accredited, non-natural persons are subject to the investment
limitation and should calculate the limitation based on no more than
10% of the greater of the purchaser's revenue or net assets (as of the
purchaser's most recent fiscal year end).\148\ Non-accredited, natural
persons must calculate the investment limitations on the basis of 10%
of the greater of the purchaser's annual income or net worth
(determined as provided in Rule 501 of Regulation D).\149\
---------------------------------------------------------------------------

    \148\ Rule 251(d)(2)(i)(C)(1).
    \149\ Rule 251(d)(2)(i)(C)(2). See Securities Act Rule 501(a)(5)
[17 CFR 230.501(a)(5)] (net worth). Consistent with this rule, the
calculation of a natural person's net worth for purposes of the
investment limit excludes the value of the primary residence of such
person.
---------------------------------------------------------------------------

    If the investor is purchasing securities that are convertible into,
or exercisable or exchangeable for, other securities, if such
securities are exercisable within a year or otherwise are being
qualified, the investment limitation will include the aggregate
conversion, exercise, or exchange price of such securities, in addition
to the purchase price.\150\ We believe this is an appropriate
calculation because it is consistent with the offering limit
calculation for the respective tiers \151\ and because it applies
investment limitations to reasonably foreseeable investment decisions
(i.e., those involving securities exercisable within a year or
otherwise qualified by the issuer) while reducing the risk that issuers
may seek to sell large amounts of securities that are convertible,
exercisable or exchangeable into other securities in the near term at a
low cost in an effort to avoid the 10% limitation.
---------------------------------------------------------------------------

    \150\ See note to Rule 251(d)(2)(i).
    \151\ See discussion in Section II.B.3.c. above.
---------------------------------------------------------------------------

    As proposed, we are adopting final rules that require issuers to
notify investors of the investment limitations.\152\ Issuers may rely
on a representation of compliance with the investment limitation from
the investor, unless the issuer knew at the time of sale that any such
representation was untrue.\153\ As we noted in the Proposing Release,
we are cognizant of the privacy issues and practical difficulties
associated with verifying individual income and net worth and,
therefore, are not requiring investors to disclose personal information
to issuers in order to verify compliance.\154\
---------------------------------------------------------------------------

    \152\ See paragraph (a)(5) to Part II of Form 1-A.
    \153\ Rule 251(d)(2)(i)(D). Similarly, issuers may also rely on
representations of investor compliance with the investment
limitations from participating broker-dealers, unless the issuer
knew at the time of sale that any such representation was untrue.
    \154\ See Proposing Release, at Section II.B.4.
---------------------------------------------------------------------------

    Some commenters suggested requiring an issuer to have a reasonable
belief that it can rely on an investor's representation of compliance
with the investment limitations or to take reasonable steps to verify
compliance, while other commenters suggested we establish consequences
for issuers (and intermediaries, when applicable) if an investor failed
to comply with the limitations.\155\ At the same time, many commenters
supported the proposed approach, noting the low compliance costs and
the certainty it would provide issuers and their intermediaries.\156\
We believe that the rules, as adopted, will limit potential losses for
non-accredited investors with respect to individual offerings, while
providing certainty to, and lower compliance costs for, issuers and
intermediaries.
---------------------------------------------------------------------------

    \155\ See fn. 140-144 above.
    \156\ See fn. 137 above.
---------------------------------------------------------------------------

    We do not believe that additional requirements for issuers and
their intermediaries, such as requiring issuers to take reasonable
steps to verify an investors' compliance with the investment
limitations, are necessary to protect investors in light of the total
package of investor protections included in the final rules for Tier 2
offerings.\157\ We believe that additional requirements, like the ones
suggested by some commenters, may have an unintended consequence of
dissuading issuers from selling to non-accredited investors in Tier 2
offerings by increasing compliance uncertainties and obligations. We
are therefore not adopting any additional compliance requirements with
respect to investment limitations in the final rules.
---------------------------------------------------------------------------

    \157\ For example, the final rules include limitations on issuer
eligibility, bad actor disqualification provisions, a requirement
that offering statements must be qualified by the Commission,
narrative and financial disclosure requirements, which for Tier 2
offerings must include audited financial statements on an initial
and annual basis, as well as annual, semiannual, and current event
reporting.
---------------------------------------------------------------------------

    While many commenters urged the Commission to eliminate or provide
less restrictive investment limitations in the final rules,\158\ we
believe that these requirements, as proposed and adopted, usefully
augment other requirements for, and investor protections applicable to,
Tier 2 offerings. As we noted in the Proposing Release, Title IV of the
JOBS Act mandates certain investor protections \159\ and suggests that
the Commission consider others as part of its Section 3(b)(2)
rulemaking.\160\ Congress recognized in Section 3(b)(2) that investor
protections beyond those expressly provided in Title IV of the JOBS Act
may be necessary in the revised regulation. To that end, Section
3(b)(2)(G) indicates that the Commission may include in the expanded
exemption ``such other terms, conditions, or requirements. . .
necessary in the public interest and for the protection of investors. .
. .'' Limiting the amount of securities that a non-accredited investor
can purchase in a particular Tier 2 offering (other than a Tier 2
offering of securities listed on a national securities exchange) should
help to mitigate concerns that such investors may not be able to absorb
the potential loss of the investment and is consistent with the
authority granted to the Commission in Section 3(b)(2).\161\ We further
believe that setting the investment limitation at 10% of the greater of
such investor's net worth/net assets and annual income/revenue, as
opposed to some other percentage (e.g., 5% or 20%), is generally
consistent with similar maximum investment limitations placed on
investors in Title III of the JOBS Act and will help to set a loss
limitation standard in such offerings.\162\
---------------------------------------------------------------------------

    \158\ See fn. 122 above.
    \159\ See Section 3(b)(2)(D) (expressly providing for Section
12(a)(2) liability for any person offering or selling Section
3(b)(2) securities); Section 3(b)(2)(F) (requiring issuers to file
audited financial statements with the Commission annually).
    \160\ See Section 3(b)(2)(G) (inviting the Commission to
consider, among other things, requiring audited financial statements
in the offering statement and implementing bad actor
disqualification provisions); Section 3(b)(4) (inviting the
Commission to consider implementing ongoing reporting requirements).
    \161\ As proposed and adopted, an underwriter in a firm
commitment underwritten Regulation A offering, or participating
broker-dealer that is involved in stabilization activities with
respect to an offering of Regulation A securities will not be
considered an investor that is subject to the investment
limitations.
    \162\ Section 301 of the JOBS Act; see also Securities Act
Section 4(a)(6), 15 U.S.C. 77d(a)(6).
---------------------------------------------------------------------------

    Despite the suggestions of some commenters,\163\ we do not believe
that further distinctions as to the applicability of investment
limitations are appropriate among investors that do not qualify as
accredited investors. On the contrary, we believe that the regulatory
distinctions among accredited and non-accredited investors and the
familiarity many market participants have with such terms will help to
ease compliance with, and

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

    \163\ See fn. 134 above.
---------------------------------------------------------------------------

5. Integration
a. Proposed Rules
    We proposed amending Rule 251(c) of Regulation A, which governs the
integration of Regulation A offerings with other offerings, to provide
that offerings under Regulation A would not to be integrated with any
of the following: \164\
---------------------------------------------------------------------------

    \164\ The integration doctrine seeks to prevent an issuer from
improperly avoiding registration by artificially dividing a single
offering into multiple offerings such that Securities Act exemptions
would apply to multiple offerings that would not be available for
the combined offering.
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     Prior offers or sales of securities; or
     certain specified subsequent offers and sales of
securities.\165\

    \165\ See proposed Rule 251(c), which included in the safe
harbor subsequent offers or sales that are registered under the
Securities Act, or made pursuant to Securities Act Rule 701, an
employee benefit plan, Regulation S, proposed Regulation
Crowdfunding (see Rel. No. 33-9470), or more than six months after
completion of the Regulation A offering.
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    The proposed safe harbor was substantially the same as the existing
integration safe harbor in Rule 251(c), with the addition of a separate
provision for securities-based crowdfunding transactions conducted
pursuant to Section 4(a)(6) of the Securities Act.\166\
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    \166\ Section 4(a)(6) was added to the Securities Act by Section
302 of the JOBS Act.
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    We further proposed to amend Rule 254(d) to provide that, where an
issuer decides to register an offering after soliciting interest in a
contemplated, but abandoned, Regulation A offering, any offers made
pursuant to Regulation A would not be subject to integration with the
registered offering, unless the issuer engaged in solicitations of
interest in reliance on Regulation A to persons other than qualified
institutional buyers (QIBs) \167\ and institutional accredited
investors permitted by Section 5(d) \168\ of the Securities Act.\169\
As proposed, an issuer (and any underwriter, broker, dealer, or agent
that is acting on behalf of the issuer in connection with the proposed
offering) soliciting interest in a Regulation A offering to persons
other than QIBs and institutional accredited investors would need to
wait at least 30 calendar days between the last such solicitation of
interest in the Regulation A offering and the filing of the
registration statement with the Commission.\170\ The Proposing Release
also provided guidance on the applicability of the integration doctrine
for offerings conducted outside the scope of the safe harbor.\171\
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    \167\ QIBs are large institutions meeting specific requirements
outlined in Rule 144A, or entities the seller (or a person acting on
its behalf) reasonably believes to be QIBs. See Rule 144A, 17 CFR
230.144A.
    \168\ 15 U.S.C. 77e(d); see also fn. 537 below.
    \169\ Proposed Rule 255(e).
    \170\ Id.
    \171\ See Proposing Release, Section II.B.5.
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b. Comments on the Proposed Rules
    One commenter specifically supported the proposed changes to the
integration provisions of Regulation A.\172\ Another commenter objected
to the proposed changes to the integration provisions and related
guidance.\173\ This commenter cautioned that it would be very difficult
to police compliance with these provisions and suggested that they
would be used to evade regulatory requirements.
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    \172\ ABA BLS Letter.
    \173\ CFA Letter.
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c. Final Rules
    We are adopting, as proposed, an integration safe harbor, with one
clarifying change. Under the final rules, offerings pursuant to
Regulation A will not be integrated with:
     Prior offers or sales of securities; or
     subsequent offers and sales of securities that are:
     Registered under the Securities Act, except as provided in
Rule 255(c);
     made pursuant to Rule 701 under the Securities Act;
     made pursuant to an employee benefit plan;
     made pursuant to Regulation S;
     made pursuant to Section 4(a)(6) of the Securities Act; or
     made more than six months after completion of the
Regulation A offering.\174\
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    \174\ Rule 251(c).
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    We believe that the integration safe harbor has historically
provided and, as amended, will continue to provide, issuers,
particularly smaller issuers whose capital needs often change, with
valuable certainty as to the contours of a given offering and their
eligibility for an exemption from Securities Act registration. The
addition of subsequent offers or sales made pursuant to Section
4(a)(6), which is the only substantive change to the existing safe
harbor being adopted today, should not significantly alter the
application of the doctrine in practice. Given the unique capital
formation method available to issuers and investors through Section
4(a)(6) of the Securities Act and the small dollar amounts involved, we
believe that the addition to the safe harbor list of subsequent
crowdfunding offers and sales conducted pursuant to such section is
appropriate and will not unduly increase risks to investors.\175\ As
with any exemption from registration, the burden of proof of compliance
with a claimed exemption rests with the party claiming it.\176\ In our
view, the benefits of providing issuers with certainty as to the scope
of the integration doctrine, particularly for Regulation A, outweighs
the concern expressed by one commenter that compliance with the
doctrine may be difficult to enforce.\177\ In light of the broad
permissible target audience of Regulation A solicitations, the
potential for expanded use of solicitation materials in Regulation A
discussed more fully in Section II.D. below, and the addition of
similar provisions for registered offerings under Section 5(d), we
believe the integration provisions in the final rule are necessary to
ensure that amended Regulation A functions as a viable capital raising
option for issuers.
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    \175\ See 15 U.S.C.77d(a)(6); see also Rel. No. 33-9470.
    \176\ See Ralston Purina Co., 346 U.S. 119.
    \177\ CFA Letter.
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    We are also clarifying in the final rules the scope of the proposed
safe harbor from integration in instances where an issuer abandons a
contemplated Regulation A offering before qualification, but after
soliciting interest in such offering to persons other than QIBs and
institutional accredited investors. The proposed language could be read
to imply that issuers must wait at least 30 calendar days to avoid
integration with a subsequent registered offering or else be subject to
integration. The final rules clarify that waiting less than 30 calendar
days before a subsequent registered offering would not necessarily
result in integration and would instead depend on the particular facts
and circumstances.\178\
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    \178\ See Note to Rule 251(c) and Rule 255(e); see also Section
II.D. below for a discussion on solicitation materials.
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    We are also reaffirming the integration guidance provided in the
Proposing Release, which is consistent with guidance provided by the
Commission in a 2007 rule proposal on Regulation D.\179\ As noted in
the Proposing Release,

we believe that an offering made in reliance on Regulation A should not
be integrated with another exempt offering made by the issuer, provided
that each offering complies with the requirements of the exemption that
is being relied upon for the particular offering. For example, an
issuer conducting a concurrent exempt offering for which general
solicitation is not permitted will need to be satisfied that purchasers
in that offering were not solicited by means of the offering made in
reliance on Regulation A, including without limitation any ``testing
the waters'' communications.\180\ Alternatively, an issuer conducting a
concurrent exempt offering for which general solicitation is permitted,
for example, under Rule 506(c), could not include in any such general
solicitation an advertisement of the terms of a Regulation A offering,
unless that advertisement also included the necessary legends for, and
otherwise complied with, Regulation A.\181\
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    \179\ See Revision of Limited Offering Exemptions in Regulation
D, Release No. 33-8828 (Aug. 3, 2007) (expressing the view that the
determination as to whether the filing of the registration statement
should be considered to be a general solicitation or general
advertising that would affect the availability of an exemption under
Securities Act Section 4(a)(2) for such a concurrent unregistered
offering should be based on a consideration of whether the investors
in the private placement were solicited by the registration
statement or through some other means that would otherwise not
foreclose the availability of the Section 4(a)(2) exemption).
    \180\ For a concurrent offering under Rule 506(b), an issuer
will have to conclude that purchasers in the Rule 506(b) offering
were not solicited by means of a Regulation A general solicitation.
For example, the issuer may have had a preexisting substantive
relationship with such purchasers. Otherwise, the solicitation
conducted in connection with the Regulation A offering may preclude
reliance on Rule 506(b). See also Rel. No. 33-8828 (Aug. 3, 2007)
[72 FR 45116].
    \181\ See discussion in Section II.D. below.
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6. Treatment Under Section 12(g)
a. Proposed Rules
    Exchange Act Section 12(g) requires, among other things, that an
issuer with total assets exceeding $10,000,000 and a class of equity
securities held of record by either 2,000 persons, or 500 persons who
are not accredited investors, register such class of securities with
the Commission.\182\ We did not propose to exempt Regulation A
securities from mandatory registration under Section 12(g), but we
solicited comment on whether Regulation A securities should be granted
such an exemption, either conditionally or otherwise.
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    \182\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters generally expressed support for some form of exemption
from the registration requirements under Section 12(g). Numerous
commenters recommended exempting Regulation A securities from Section
12(g).\183\ Several of these commenters expressed concern that the
Section 12(g) record holder count would decrease the utility of the
Regulation A exemption by incentivizing issuers to sell to accredited
investors over non-accredited investors, likely resulting in issuers
electing to rely on a potentially less costly exemption, such as Rule
506 of Regulation D.\184\ These commenters also expressed concern that
Section 12(g) would decrease the utility of the exemption because
secondary trading in otherwise unrestricted Regulation A securities
might result in issuers inadvertently crossing the Section 12(g)
registration threshold.\185\ Other commenters questioned the extent to
which Regulation A securities would be held in street name through
brokers, which the proposal mentions as a factor that could potentially
limit the impact of not proposing an exemption from Section 12(g).\186\
Some commenters suggested that the reporting regime under Tier 2 would
be a sufficient means by which issuers could provide investors with
current information and that therefore Exchange Act reporting would be
unnecessary.\187\ Two commenters believed that the legislative history
of the JOBS Act supported an exemption from Section 12(g).\188\
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    \183\ B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook
Technologies Letter; Letter from Jonathan Frutkin, Principal, The
Frutkin Law Firm, PLC, March 24, 2014 (``Frutkin Law Letter'');
Guzik Letter 1; Letter from Samuel S Guzik, October 25, 2014
(``Guzik Letter 2''); Heritage Letter; IPA Letter; Ladd Letter 2;
Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that
the trigger be ``raised or remedied,'' but not explicitly calling
for elimination); US Alliance Corp. Letter; U.S. Chamber of Commerce
Letter; WR Hambrecht + Co Letter.
    \184\ CFIRA Letter 1; Fallbrook Technologies Letter; Frutkin Law
Letter; Heritage Letter; IPA Letter; Milken Institute Letter; MoFo
Letter; SBIA Letter; U.S. Chamber of Commerce Letter.
    \185\ Id.
    \186\ Guzik Letter 1 (noting the statements of other
commenters); Heritage Letter; Ladd Letter 2 (citing discussions with
various brokers); MoFo Letter; SBIA Letter; WR Hambrecht + Co
Letter; see also OTC Markets Letter (highlighting difficulties
associated with issuer securities becoming eligible for Depository
Trust Company (DTC) services, which services typically limit the
number of an issuer's record holders thereby minimizing the impact
of the Section 12(g) mandatory registration provisions; further
suggesting that companies issuing Regulation A securities be
required to use registered transfer agents).
    \187\ B. Riley Letter; Fallbrook Technologies Letter; Milken
Institute Letter; MoFo Letter.
    \188\ Ladd Letter 2; WR Hambrecht + Co Letter.
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    Several commenters recommended changing, delaying, or conditioning
the application of Section 12(g)'s registration requirements,
especially the corresponding Section 13 reporting obligations that come
with registration.\189\ One of these commenters recommended delaying
the application of Exchange Act reporting requirements for Tier 2
issuers until the issuer's non-affiliate market capitalization reached
$250 million, so long as the issuer filed reports under Regulation
A.\190\ This commenter believed that non-affiliate market
capitalization was a superior proxy for market interest than the
thresholds under Section 12(g) and noted that the Commission uses the
measure in establishing primary S-3 eligibility. Another commenter
recommended exempting initial Tier 2 issuers from all or part of
Exchange Act reporting obligations until the earliest of the occurrence
of several events.\191\ Yet another commenter suggested exempting Tier
2 issuers from Exchange Act reporting until they reach a certain
unspecified level of revenue or market capitalization.\192\ Two
commenters recommended deeming Tier 2 issuers' ongoing reports under
Regulation A to satisfy the issuer's Exchange Act reporting obligations
for a phase-in period.\193\ One commenter recommended at least allowing
for 2,000 holders of record (whether accredited or not) without being
subject to Exchange Act registration requirements,\194\ while two other
commenters suggested eliminating the cap of 500 non-accredited
investors.\195\ One commenter conditioned its support for a conditional
exemption from Section 12(g) on the Commission requiring Tier 2 issuers
to remain current in their ongoing Regulation A reporting
requirements.\196\
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    \189\ Heritage Letter; KVCF Letter; McCarter & English Letter;
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA
Letter.
    \190\ Paul Hastings Letter.
    \191\ McCarter & English Letter (suggesting the earliest of: (1)
The last day of any fiscal year of the issuer during which it had
annual gross revenues of $250 million; (2) the last day of any
fiscal year following the fifth anniversary of the date of the first
sale of equity securities under Regulation A; and (3) the date on
which the issuer has an aggregate worldwide market value of voting
and non-voting equity held by its non-affiliates of at least $75
million computed as of the last business day of the issuer's most
recently completed second quarter).
    \192\ Milken Institute Letter.
    \193\ ABA BLS Letter (a 24 month phase-in period that could
expire earlier if the company triggered Exchange Act reporting in
some other manner); MoFo Letter.
    \194\ Heritage Letter.
    \195\ KVCF Letter; SBIA Letter.
    \196\ MoFo Letter.
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c. Final Rules
    We are adopting today final rules that exempt securities issued in
a Tier 2 offering from the provisions of Section 12(g) for so long as
the issuer remains subject to, and is current in (as of its fiscal year
end),\197\ its Regulation A

periodic reporting obligations.\198\ Additionally, in order for the
conditional exemption to apply, issuers are required to engage the
services of a transfer agent registered with the Commission pursuant to
Section 17A of the Exchange Act. The final rules also provide that the
exemption from Section 12(g) is only available to companies that meet
requirements similar to those in the ``smaller reporting company''
definition under Securities Act and Exchange Act rules.\199\ As such,
the conditional exemption in the final rules is limited to issuers that
have a public float of less than $75 million, determined as of the last
business day of its most recently completed semiannual period,\200\ or,
in the absence of a public float, annual revenues of less than $50
million, as of the most recently completed fiscal year.\201\ An issuer
that exceeds either of the thresholds, in addition to exceeding the
threshold in Section 12(g) of the Exchange Act, would be granted a two-
year transition period before it would be required to register its
class of securities pursuant to Section 12(g), provided it timely files
all ongoing reports due pursuant to Rule 257 during such period.\202\
Section 12(g) registration will only be required if, on the last day of
the fiscal year in which the company exceeded the public float or
annual revenue threshold, the company has total assets of more than $10
million and the class of equity securities is held by more than 2,000
persons or 500 persons who are not accredited investors.\203\ In such
circumstances, an issuer that exceeds the thresholds in Section 12(g)
and Rule 12g5-1(a)(7) would be required to begin reporting under the
Exchange Act the fiscal year immediately following the end of the two-
year transition period.\204\ An issuer entering Exchange Act reporting
will be considered an ``emerging growth company'' to the extent the
issuer otherwise qualifies for such status.\205\
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    \197\ The determination as to ``current'' reporting status is
determined at the time of fiscal year end in reference to the filing
of all periodic reports, including special financial reports,
required to be filed during such fiscal year. For these purposes, a
newly qualified issuer that at fiscal year end has not yet been
obligated to file a periodic report, including, if applicable, a
special financial report, would be considered ``current'' for these
purposes.
    \198\ Rule 12g5-1(a)(7).
    \199\ ``Smaller reporting company'' is defined in Securities Act
Rule 405, 17 CFR 230.405, Exchange Act Rule 12b-2, 17 CFR 240.12b-2,
and Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1). The
provision of the smaller reporting company definition relating to
initial registration statements under the Securities Act is not
applicable to exempt offering pursuant to Regulation A. See Item
10(f)(1)(a)(ii) of Regulation S-K, 17 CFR 229.10(f)(a)(ii). The
final rules do not therefore incorporate this concept for purposes
of Rule 12g5-1(a)(7). See Rule 12g5-1(a)(7).
    \200\ Consistent with the smaller reporting company definition,
an issuer will calculate ``public float'' by multiplying the
aggregate worldwide number of shares of its common equity securities
held by non-affiliates by the price at which such securities were
last sold (or the average bid and asked prices of such securities)
in the principal market for such securities. Rule 12g5-1(a)(7). See
also, e.g., Item 10(f)(1)(i) of Regulation S-K.
    \201\ Rule 12g5-1(a)(7). The Commission adopted the smaller
reporting company regime in 2007. See SEC Rel. No. 33-8876 (Dec. 19,
2007) [73 FR 934]. Some commentators, such as the Commission's
Advisory Committee on Small and Emerging Companies, have suggested
that the Commission revisit the smaller reporting company regime,
including the definitional thresholds. Recommendations Regarding
Disclosure and Other Requirements for Smaller Public Companies,
Securities and Exchange Commission, Advisory Committee on Small and
Emerging Companies (February 1, 2013), at 2-3, available at: http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf. Although the Commission has not yet responded to
this recommendation, in considering any potential changes to the