permitting offerees to receive oral disclosures if the offer is
communicated orally.\191\
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    \190\ CFA Letter; NASAA Letter.
    \191\ Id.
---------------------------------------------------------------------------

c. Final Rules
    After considering the comments, we are adopting amendments to Rule
147 and a provision in new Rule 147A that will require issuers to make
specified disclosures to offerees and purchasers about the limitations
on resale contained in Rules 147(e) and 147A(e), respectively. Issuers
will also be required to meet the legend requirement of Rules
147(f)(1)(i) and 147A(f)(1)(i), respectively. Although the disclosure
should be prominently disclosed to each offeree and purchaser at the
time any offer or sale is made by the issuer to such person, consistent
with the proposal, the amendment and new rule will not require that
such disclosure be made in writing in all instances.
    While two commenters recommended that we require issuers to provide
all offerees written disclosures, rather than permitting offerees to
receive oral disclosures if the offer is communicated orally,\192\ we
are not adopting that requirement in our rules. We believe the approach
we are adopting--requiring issuers to provide the disclosure to
offerees in the same manner in which an offer is communicated--will
provide appropriate flexibility to issuers in the conduct of their
offerings and avoid potential confusion as to when, for example, an
oral offer must be followed up with a written disclosure.\193\
Requiring the disclosure to be made orally if the offer is made orally
also will help ensure that the investor receives the required
disclosure when most relevant (i.e., immediately upon learning about
the offer). Furthermore, we believe our amendments to Rule 147(f)(3)
and the provision in new Rule 147A(f)(3) will maintain appropriate
investor protections, especially in light of the new provision
requiring issuers to provide written disclosure to all purchasers
within a reasonable period of time before the date of sale. We note
that this requirement to provide written disclosure a reasonable period
of time before the date of sale is consistent with the disclosure
delivery requirements of Regulation D and Rule 701.\194\ Finally, while
we are not adopting commenters' suggestions to require that written
disclosure be provided to all offerees, nothing in our rules prevents
state regulators, that deem it necessary and appropriate, from
requiring such written disclosures for offers to residents within their
states. State regulators are in a position to tailor any such rules to
their local capital markets in a manner that addresses capital market
practices and investor protection measures they deem appropriate for
offers and sales to residents of their state.
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    \192\ Id.
    \193\ In addition, it may not be possible for an issuer to
provide written disclosures to all offerees. For example, an issuer
conducting an offer over the radio would not be able to provide the
written disclosures to everyone listening to the offer on the radio
as it would not know the identity of each of the offerees.
    \194\ See e.g., Rules 501(i)(4) and 502(b)(1) of Regulation D
and Rule 701(e).
---------------------------------------------------------------------------

    Consistent with the proposal, issuers will also be required to
satisfy the legend requirement in Rules 147(f)(1)(i) and 147A(f)(1)(i),
respectively. However, issuers will not be required to disclose to
offerees and purchasers the stop transfer instructions provided by an
issuer to its transfer agent \195\ or the provisions of Rules 147(f)(2)
and 147A(f)(2), respectively, regarding the issuance of new
certificates during the resale period.\196\ Although issuers will have
to comply with these transfer agent instruction requirements,\197\ we
continue to believe that requiring issuers to disclose information
regarding such requirements to offerees and purchasers at the time of
the offer and/or sale will not enhance the disclosure requirements
under Rules 147(e), 147A(e), 147(f)(1) or 147A(f)(1), and we therefore
are eliminating the disclosure requirements related to stop transfer
instructions and the issuance of new certificates from Rule 147 and not
including them in new Rule 147A.\198\
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    \195\ See 17 CFR 230.147(f)(1)(ii).
    \196\ See 17 CFR 230.147(f)(2). Additionally, as discussed in
Section II.B.1 above, we are requiring issuers in offerings
conducted pursuant to Rule 147 or Rule 147A to disclose to each
offeree in the manner in which any offer is communicated and to each
purchaser of a security in writing that sales will be made only to
residents of the same state or territory as the issuer. See Rules
147(f)(3) and 147A(f)(3).
    \197\ See Rules 147(f)(1)(ii), 147(f)(2), 147A(f)(1)(ii) and
147A(f)(2).
    \198\ See Rules 147(f)(3) and 147A(f)(3).
---------------------------------------------------------------------------

    Finally, in order for the required disclosure to offerees and
purchasers under amended Rule 147(f) and new Rule 147A(f) to be as
clear as possible, and consistent with our revisions to make the
issuer's state of residency the focus of the relevant resale
restrictions, we are adding a requirement that the issuer identify in
this disclosure the particular state or territory in which the issuer
was resident at the time of the original sale of the security. Since a
small business may change the location of its residence and principal
activities within the six-month resale limitation period provided for
in amended Rule 147(e) and new Rule 147A(e), we believe this
information, which should be readily available to the issuer, will
assist purchasers in understanding the implications of the applicable
resale restrictions.
7. State Law Requirements
a. Proposed Amendments
    We proposed to limit the availability of Rule 147 to issuers that
have registered an offering in the state in which all of the purchasers
are resident or that conduct the offering pursuant to an exemption from
state law registration in such state that limits the amount of
securities an issuer may sell pursuant to such exemption to no more
than $5 million in a twelvemonth period and that limits the amount of
securities an investor can purchase in any such offering.\199\ In the
Proposing Release, we expressed our preliminary view that, in light of
the other proposed changes to

Rule 147, including a maximum offering amount limitation and investment
limitations in the rule would provide investors with additional
protection and would be consistent with existing state law crowdfunding
provisions.\200\
---------------------------------------------------------------------------

    \199\ See proposed Rule 147(a).
    \200\ See Proposing Release.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    All commenters that addressed the issue opposed any limits at the
federal level on offering size or investment size.\201\ In general,
these commenters preferred that any limits be imposed through the state
legislative and/or rulemaking process, which they stated may be better
situated to making a determination about specific limits.\202\
Commenters also stated that the requirements are unnecessary at the
federal level since these are local offerings where only the individual
state's residents are involved.\203\ One of these commenters noted the
potential disparate impact on larger versus smaller states with
different resident populations and gross domestic products.\204\
Another of these commenters noted that, in addition to the regulation
of these offerings at the state level, to the extent federal regulatory
oversight is deemed necessary, these offerings are also subject to the
Commission's powers to enforce the antifraud provisions of Section
10(b) of the Exchange Act and Rule 10b-5 thereunder.\205\ Another of
these commenters stated that the baseline cost of the proposed federal
requirements may prevent state policy makers from adding investor
protection provisions that the states consider to be more effective due
to the cumulative compliance burden.\206\ In addition, the 2015 Small
Business Forum recommended that the Commission remove the $5 million
limit in the proposal, permitting the states to set their own limits as
appropriate.\207\
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    \201\ See ABA Letter; Letter from Rutheford B. Campbell, Jr.,
Spears-Gilbert Professor of Law, University of Kentucky College of
Law, March 30, 2016 (``Campbell Letter''); CFIRA Letter;
Congressional Letter (``the states are better positioned to
determine offering and investment caps that best meet their local
population and business needs''); CrowdCheck Letter; Guzik Letter;
Milken Letter; NASAA Letter; NextSeed Letter; WBA Letter.
    \202\ See, e.g., ABA Letter; Campbell Letter; CFIRA Letter;
Congressional Letter; CrowdCheck Letter; Guzik Letter; NASAA Letter;
WBA Letter.
    \203\ ABA Letter; Campbell Letter; CFIRA Letter; CrowdCheck
Letter; Guzik Letter; Milken Letter; NASAA Letter; NextSeed Letter;
WBA Letter.
    \204\ NASAA Letter.
    \205\ Guzik Letter.
    \206\ Milken Letter.
    \207\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

    A few commenters stated that, if the proposed limits were retained,
any limit on the amount a company can raise under Rule 147 should be
indexed for inflation,\208\ with one of these commenters suggesting an
automatic, periodic review of any such limits.\209\ One commenter
strongly encouraged the Commission to raise the offering limit
significantly.\210\ Two commenters believed that, if the proposed
limits were retained, Rule 147 should be amended to require that the
offering, not the state exemption, be limited to no more than $5
million in order to allow issuers to rely upon existing state law
exemptions.\211\ One of these commenters also suggested that, if the
proposed investment limits were retained, the Commission should
establish them as direct requirements of amended Rule 147 and should
only apply them to non-accredited investors.\212\
---------------------------------------------------------------------------

    \208\ ABA Letter; NASAA Letter; Milken Letter.
    \209\ NASAA Letter.
    \210\ WBA Letter.
    \211\ Bishop Letter; WBA Letter.
    \212\ WBA Letter.
---------------------------------------------------------------------------

c. Final Rules
    Given the comments received, the recommendations of the 2015 Small
Business Forum and the intrastate nature of the offerings, we are not
limiting amended Rule 147 and new Rule 147A to offerings that either
are registered in the state where all of the purchasers are resident or
that are conducted pursuant to an exemption from state law registration
in a state that limits the amount of securities an issuer may sell
pursuant to such exemption to no more than $5 million in a twelve-month
period and that limits the amount of securities an investor can
purchase in any such offering. Consistent with the policy underlying
Section 3(a)(11), we believe it appropriate that the resident investor
protections in intrastate offerings primarily flow from the
requirements of state securities law. For example, as with the federal
securities laws, states generally require an issuer to register an
offering with appropriate state authorities when offers or sales of
securities are made to their residents, unless the state has adopted,
by rule or statute, an exemption from registration. As noted in the
Proposing Release, of the states that have adopted and/or enacted
crowdfunding provisions that require an issuer to comply with Rule 147,
either alone or in conjunction with Section 3(a)(11), no state has
adopted and/or enacted a crowdfunding provision with an aggregate
offering amount that exceeds $5 million.\213\ Additionally, almost all
of these states have adopted provisions that impose investment
limitations on investors.
---------------------------------------------------------------------------

    \213\ See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/. Illinois is the only state with a
crowdfunding provision allowing for a maximum aggregate offering
amount up to $5 million in a twelve-month period. All other states
that have adopted some form of a state-based crowdfunding provision
limit the aggregate offering amount to between $1 million and $2.5
million. See Illinois House Bill 3429, Sec.  4.T. (2015), available
at https://legiscan.com/IL/text/HB3429/id/1257029.
---------------------------------------------------------------------------

    In light of these existing limitations in state exemptions and the
fact that all commenters opposed our proposed limits at the federal
level on offering size and investment size, we are not adopting the
proposed federal limits on state exemptions. As commenters noted,
states can decide whether to adopt requirements not specifically
contemplated by the federal requirements that are consistent with their
respective interests in facilitating capital formation and protecting
their resident investors in intrastate securities offerings within
their jurisdiction.\214\ If any states determine to amend their
statutes and/or rules to require compliance with new Rule 147A, those
states can consider whether any additional requirements should be
adopted at the state level given their interest in regulating local
offerings within their jurisdiction. Moreover, in addition to state
securities law requirements, issuers will continue to be subject to the
antifraud and civil liability provisions of the federal securities
laws.
---------------------------------------------------------------------------

    \214\ States currently employ this approach to varying degrees
in their respective state crowdfunding statutes. See, e.g., D.C.
Mun. Regs. tit. 26-B, Sec.  250 (2014) (escrow required until
minimum offering amount satisfied), Ind. Code Sec.  6-3.1-24-14
(2014) (funding portal required).
---------------------------------------------------------------------------

C. Additional Considerations

    In addition to soliciting specific comments on the proposals, we
also solicited general comments, including additional or different
revisions to the rules and other matters that may impact the proposals.
1. Notice Filings
    Commenters were divided on whether to require issuers utilizing the
exemption to make a notice filing with the Commission. While one
commenter specifically stated that additional federal administrative
obligations, such as new minimum disclosure or delivery requirements,
registration and/or additional filings with the Commission, should not
be imposed on issuers for

conducting intrastate crowdfunding,\215\ another commenter recommended
that the Commission require issuers utilizing Rule 147 to file a notice
with the Commission, but (similar to Regulation D) the exemption should
not be conditioned on the filing.\216\ Given the local intrastate
nature of the exemptions, we continue to believe that the limited
benefits of a notice filing with the Commission would not justify the
costs and burdens on issuers to add such a requirement. We note,
however, that states could make a notice filing (at the state level) a
condition to any state law exemption.\217\ In this regard, we note that
a vast majority of intrastate crowdfunding provisions require a notice
filing with a state regulator.\218\ Commission staff will seek to
collaborate with state regulators to consider filing data in connection
with the study of amended Rule 147 and new Rule 147A.\219\
---------------------------------------------------------------------------

    \215\ NextSeed Letter.
    \216\ Campbell Letter.
    \217\ See NASAA Letter.
    \218\ E.g., Alabama, Arizona, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Iowa, Indiana, Kansas, Kentucky, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana,
Nebraska, New Mexico, North Carolina, Oregon, South Carolina,
Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin,
Wyoming and the District of Columbia. Other states have pending
legislation that would require notice filings for intrastate
crowdfunded offerings, e.g., California, Hawaii, Missouri, Nevada,
and New Hampshire.
    \219\ See Section I above.
---------------------------------------------------------------------------

2. Intrastate Broker Dealer Exemption
    Exchange Act Section 15(a)(1) exempts from broker-dealer
registration requirements under Section 15(b) a broker-dealer whose
business is exclusively intrastate and who does not use any facility of
a national securities exchange (``intrastate broker-dealer
exemption'').\220\ Several commenters supported interpreting the
intrastate broker-dealer exemption under the Exchange Act to include
intermediaries whose activities are limited to facilitating intrastate
offerings using the Internet.\221\ One commenter was concerned that
intrastate intermediaries operating exclusively online may not qualify
for the intrastate exemption from registration if they post information
on the Internet and it is accessed by out-of-state residents.\222\ The
commenter, therefore, suggested that the Commission clarify that an
entity will not relinquish its ability to rely on the intrastate
broker-dealer exemption solely because it has a web presence, as long
as it continues to operate and conduct sales intrastate.\223\ Two
commenters similarly suggested that intrastate intermediaries should be
able to rely on the intrastate broker-dealer exemption from broker-
dealer registration if they use the Internet to facilitate offerings
being conducted in reliance on Rule 147.\224\
---------------------------------------------------------------------------

    \220\ Under Section 15(a)(1) of the Exchange Act, it is
generally unlawful for any broker or dealer to use any means or
instrumentality of interstate commerce to effect any transaction in,
or to induce or attempt to induce the purchase or sale of, any
security (other than an exempt security) unless the broker or dealer
is registered with the Commission. Section 15(a)(1) provides an
exemption from registration for ``a broker or dealer whose business
is exclusively intrastate and who does not make use of any facility
of a national securities exchange.''
    \221\ See NASAA Letter; NextSeed Letter; WBA Letter. The
commenters were focused, in particular, on intermediaries that
facilitate intrastate crowdfunding offerings using the Internet.
    \222\ NASAA Letter. This commenter noted that an SEC staff Guide
to Broker-Dealer Registration indicates that information posted on
the Internet that is accessible by persons in another state would be
considered an interstate offer of securities and would require
federal broker-dealer registration. See id. See also Guide to
Broker-Dealer Registration, Division of Trading and Markets, U.S.
Securities and Exchange Commission (Apr. 2008), available at https://www.sec.gov/divisions/marketreg/bdguide.htm. The Commission has not
previously spoken to this issue, and the guidance in this release is
intended to take into account modern business practices of broker-
dealers and clarify the permissibility of the use of the Internet by
broker-dealers relying on the intrastate broker-dealer exemption. To
the extent the staff guidance is inconsistent, it is superseded.
    \223\ See NASAA Letter. The commenter also suggested that
intrastate broker-dealers be permitted to advertise and use the
Internet without having to register with the Commission so long as
they used certain disclaimers. Id.
    \224\ NextSeed Letter (``[S]tate crowdfunding intermediaries
should be permitted to use the internet to facilitate intrastate
crowdfunding offerings pursuant to Rule 147 and still be able to
rely on the intrastate broker-dealer exemption.''); WBA Letter (``If
crowdfunding offerings conducted in accordance with amended Rule 147
are intrastate in nature, then state crowdfunding portals which
exclusively host such offerings should be deemed to conduct
`exclusively intrastate' business under [Section] 15(a)(1).'').
---------------------------------------------------------------------------

    We agree with the commenters that it would be helpful to provide
guidance regarding the use of the Internet by a person that seeks to
rely on the intrastate broker-dealer exemption.\225\ In providing this
guidance, we are seeking to take into account the contemporary business
practices of broker-dealers, which have evolved over the years to
include as a routine matter the use of the Internet as an essential
tool in conducting business. As noted elsewhere, the actions we are
taking today are intended to facilitate capital formation, while
maintaining appropriate investor protections. We believe that a broker-
dealer whose business otherwise meets the requirements of the
intrastate broker-dealer exemption should not cease to qualify for the
intrastate broker-dealer exemption solely because it has a Web site
that may be viewed by out-of-state persons, so long as the broker-
dealer takes measures reasonably designed to ensure that its business
remains exclusively intrastate.\226\ The use of disclaimers clearly
indicating that the broker-dealer's business is exclusively intrastate
and that the broker-dealer can only act for or with, and provide
broker-dealer services to, a person in its state could be one means
reasonably designed to ensure that the broker-dealer's business remains
exclusively intrastate so long as the broker-dealer does not provide
brokerage services to a person that indicates that it is, or that the
broker-dealer has reason to believe is, not within the broker-dealer's
state of residence.\227\ These measures are not

intended to be exclusive. A broker-dealer could adopt other measures
reasonably designed to ensure that it does not provide brokerage
services to persons that are not within the same state as the broker-
dealer. We do not believe, however, that an intermediary's business
would be ``exclusively intrastate'' if it sold securities or provided
any other brokerage services to a person that indicates that it is, or
that the broker-dealer has reason to believe is, not within the broker-
dealer's state of residence.\228\ We believe that this guidance will
facilitate capital formation by smaller companies while maintaining
appropriate protections for investors.\229\ This guidance also is
consistent with, and will further, the goal of modernizing our rules to
comport with contemporary business practices.
---------------------------------------------------------------------------

    \225\ Although commenters focused on broker-dealers who
facilitate intrastate crowdfunding offerings, we are providing more
general guidance not limited to offerings relying upon intrastate
crowdfunding provisions under state law.
    \226\ As noted, Section 15(a)(1) of the Exchange Act provides an
exemption from registration for ``a broker or dealer whose business
is exclusively intrastate.'' Our guidance today is intended to
provide clarity regarding when a broker-dealer's business will be
``exclusively intrastate'' in connection with its use of the
Internet. As discussed in this section of this release, a broker-
dealer with a Web site that may be viewed by an out-of-state person
may still be able to rely on the intrastate exemption if the broker-
dealer implements measures reasonably designed to ensure that its
business remains exclusively intrastate. This guidance is separate
and apart from the question of whether a security may be offered and
sold on the broker-dealer's Web site in reliance on an exemption
from registration under Section 5 of the Securities Act. In this
regard, we note that an offer in the context of the Securities Act
has generally been defined broadly, and the considerations involved
in determining whether an offer includes an impermissible general
solicitation are necessarily distinct from the considerations as to
whether a broker-dealer's activities occur exclusively within a
single state. Therefore, a broker-dealer facilitating an offering
pursuant to an exemption from registration under the Securities Act
should be careful not to engage in activity that would compromise
the issuer's ability to rely on the applicable exemption to
Securities Act Section 5. See, e.g., Rules 147 and 147A, including
paragraphs (d) and (f) and the Instruction to paragraph (d).
    \227\ This guidance is consistent with the concepts articulated
in prior Commission guidance for foreign broker-dealers. See
Interpretation: Re: Use of Internet Web sites to Offer Securities,
Solicit Securities Transactions, or Advertise Investment Services
Offshore, SEC Rel. No. 33-7516 (Mar. 23, 1998) (``Offshore
Interpretation''). In the Offshore Interpretation, the Commission
stated that it would not consider a foreign broker-dealer's
advertising on an Internet Web site to constitute an attempt to
induce a securities transaction with U.S. persons if the foreign
broker-dealer takes measures reasonably designed to ensure that it
does not effect securities transactions with U.S. persons as a
result of its Internet activities. The Commission further stated
that, as applied in the broker-dealer context, a foreign broker-
dealer generally would be considered to have taken measures
reasonably designed to ensure it does not effect securities
transactions with U.S. persons as a result of its Internet
activities if it: (i) Posts a prominent disclaimer on the Web site
either affirmatively delineating the countries in which the broker-
dealer's services are available, or stating that the services are
not available to U.S. persons; and (ii) refuses to provide brokerage
services to any potential customer that the broker-dealer has reason
to believe is, or that indicates that it is, a U.S. person, based on
residence, mailing address, payment method, or other grounds.
    \228\ See, e.g., In the Matter of Professional Investors, Inc.,
37 SE.C. 173, 175-176 (1956) (indicating that a broker-dealer that
effected transactions on national securities exchanges for its
customers and its own account and, as an underwriter, sold stock on
behalf of an out-of-state issuer no longer had an exclusively
intrastate business and the intrastate exemption from registration
as a broker-dealer was therefore not available); Peoples Securities
Company, 39 SE.C. 641, 652-653 (1960) (stating that a broker-
dealer's business was not exclusively intrastate based on its
interstate activities, which included sales of securities to out-of-
state residents), aff'd sub nom. Peoples Securities Co. v. SE.C.,
289 F.2d 268 (C.A. 5, 1961).
    \229\ Commission staff expects to consider the role of
intrastate broker-dealers and other intermediaries in offerings
under amended Rule 147 or new Rule 147A in connection with its
study. See Section I above.
---------------------------------------------------------------------------

3. Section 12(g) Registration
    Several commenters recommended exempting securities issued in
reliance upon Rule 147 from the reporting requirements of Section 12(g)
of the Exchange Act.\230\ Most of these commenters asserted that the
Rule 147 exemption would be of limited utility if the securities were
not exempted from Section 12(g).\231\ In addition, the 2015 Small
Business Forum recommended that the Commission provide a permanent
exemption from Section 12(g) registration under the Exchange Act for
securities sold in a Rule 147 offering.\232\ As amended by the JOBS
Act, Section 12(g) requires, among other things, that an issuer with
total assets exceeding $10,000,000 and a class of securities held of
record by either 2,000 persons or 500 persons who are not accredited
investors to register such class of securities with the
Commission.\233\
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    \230\ CFIRA Letter; CrowdCheck Letter; Guzik Letter; Milken
Letter; City of Adrian Letter.
    \231\ CFIRA Letter; CrowdCheck Letter; Guzik Letter; City of
Adrian Letter.
    \232\ See 2015 Small Business Forum Recommendations.
    \233\ See Section 501 of the JOBS Act. See also 17 CFR 240.12g-
1. In the case of an issuer that is a bank, a savings and loan
holding company or a bank holding company, Exchange Act Section
12(g)(1)(B) (15 U.S.C. 78l(g)(1)(B)) requires, among other things,
that the issuer, if it has total assets exceeding $10,000,000 and a
class of securities held of record by 2,000 persons, register such
class of securities with the Commission. See Section 601 of the JOBS
Act and Section 85001 of the FAST Act. See also 17 CFR 240.12g-1.
---------------------------------------------------------------------------

    Section 12(g) was originally enacted by Congress as a way to ensure
that purchasers of over-the-counter securities about which there was
little or no information, but which had a significant shareholder base,
were provided with ongoing information about their investment.\234\
Unlike Tier 2 offerings under Regulation A \235\ or Regulation
Crowdfunding,\236\ where the Commission provided conditional exemptions
from registration under Section 12(g), issuers that utilize the
exemptions under amended Rule 147 or new Rule 147A will not be required
to comply with ongoing reporting requirements. Given the lack of
ongoing reporting requirements, we believe that the Section 12(g)
record holder and asset thresholds continue to provide an important
baseline above which issuers should generally be subject to the
disclosure obligations of the Exchange Act. As the shareholder base of
these issuers and their total assets grow, we believe that the
additional protections that will be provided by registration under
Section 12(g) are necessary and appropriate.
---------------------------------------------------------------------------

    \234\ See generally Report of the Special Study of Securities
Markets of the Securities and Exchange Commission, House Document
No. 95, House Committee on Interstate and Foreign Commerce, 88th
Cong., 1st Sess. (1963), at 60-62.
    \235\ See 2015 Regulation A Release at Section II.B.6.
    \236\ See Regulation Crowdfunding Adopting Release at Section
II.E.4.
---------------------------------------------------------------------------

4. Exclusion of Investment Companies
    In the proposing release, we asked whether we should leave existing
Rule 147 in place and unchanged as a safe harbor under Section 3(a)(11)
while adopting the proposed revisions to Rule 147 as a new rule, and if
so, whether we should make any additional changes to the proposed rule.
One commenter that recommended retaining the existing Rule 147 safe
harbor and adopting a new exemption also recommended that the new
exemption exclude investment companies subject to the Investment
Company Act of 1940 (the ``Investment Company Act''),\237\ including
private equity funds, from relying upon Rule 147.\238\ Under Section
24(d) of the Investment Company Act,\239\ the Section 3(a)(11)
exemption is not available for an investment company registered or
required to be registered under the Investment Company Act.\240\ Since
we are retaining Rule 147 as a safe harbor under Section 3(a)(11), Rule
147 will continue to be unavailable for an investment company
registered or required to be registered under the Investment Company
Act. To provide a consistent treatment between Rule 147 and new Rule
147A, we are specifically excluding an issuer that is an investment
company registered or required to be registered under the Investment
Company Act from relying on Rule 147A.\241\ As described above, the
final rules maintain a consistent approach across the two intrastate
offering exemptions, where possible, including with respect to issuer
eligibility. In addition, this same commenter also recommended
excluding other types of issuers from Rule 147.\242\ Since these other
types of issuers are not excluded from existing Rule 147 and because we
believe that, absent specific Congressional direction or evidence of
abuse, the states should have the discretion to determine whether any
additional restrictions are appropriate for offerings conducted
exclusively within their jurisdiction, we

are not amending Rule 147 or including a provision in Rule 147A to
exclude other types of issuers from these provisions.
---------------------------------------------------------------------------

    \237\ 15 U.S.C. 80a-1 et seq.
    \238\ NASAA Letter.
    \239\ 15 U.S.C. 80a-24(d).
    \240\ See 1961 Release at note 1.
    \241\ See Rule 147A(a). Investment companies are companies that
are registered or required to be registered under the Investment
Company Act. 15 U.S.C. 80a-1 et seq. Private funds (including
private equity funds and other pooled investment vehicles) generally
rely on the exclusions from the definition of ``investment company''
in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. See 15
U.S.C. 80a-3(c). Private funds are precluded from relying on either
of these exclusions if they make a public offering of their
securities. Id. Accordingly, if such a private fund engaged in a
public offering of its securities, that private fund would no longer
be able to rely on the applicable exclusion under Section 3(c)(1) or
(7) and thus would be required to be registered under the Investment
Company Act, unless another exclusion or exemption is available. As
a result, the private fund would be an ``investment company'' for
purposes of Section 24(d) and would be excluded from the Section
3(a)(11) exemption and safe harbor of existing Rule 147.
    \242\ Specifically, NASAA also recommended excluding the
following types of issuers from the exemption: holding companies
(i.e., companies whose principal purpose is owning stock in, or
supervising the management of, other companies); blind pools;
commodity pools; public companies reporting under the Exchange Act;
and blank check companies (i.e., development stage companies that
either 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 or other entity or
person).
---------------------------------------------------------------------------

5. Trust Indenture Act
    Two commenters supported exempting securities issued in reliance
upon Rule 147, as proposed to be amended, from the Trust Indenture Act
of 1939.\243\ Rule 147 offerings are exempt from the Trust Indenture
Act pursuant to Section 304(a)(4) which exempts any security issued in
reliance on Section 3(a)(11) of the Securities Act.\244\ Since the
Trust Indenture Act applies to any debt security sold through the use
of the mails or interstate commerce, including debt securities sold in
transactions that are exempt from Securities Act registration, the
issuance of a debt security under new Rule 147A, as a new exemption not
under Section 3(a)(11), raises questions about the applicability of the
Trust Indenture Act. We note, however, that Trust Indenture Act Section
304(a)(8) \245\ and Rule 4a-1 \246\ provide an exemption for the
issuance of up to $50 million of debt securities without an indenture
in any 12-month period. Given the existing exemption for up to $50
million of debt securities, we do not believe that a specific exemption
from the requirements of the Trust Indenture Act for offerings of debt
securities under Rule 147A is necessary at this time.
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    \243\ NextSeed Letter; WBA Letter.
    \244\ 15 U.S.C. 77ddd(a)(4).
    \245\ 15 U.S.C. 77ddd(a)(8).
    \246\ 17 CFR 260.4a-1.
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6. Other Requirements
    Two commenters recommended that the Commission work with the states
to encourage, or amend Rule 147 in a way that encourages, issuers to
use any U.S. escrow agent, as opposed to using only escrow agents
registered in the state of the offering, which is often a requirement
of state law.\247\ Another commenter recommended amending Rule 147 to
include bad actor disqualification provisions similar to those set
forth under Rule 506(d).\248\
---------------------------------------------------------------------------

    \247\ City of Adrian Letter; Localstake Letter.
    \248\ NASAA Letter.
---------------------------------------------------------------------------

    As noted elsewhere, the amendments we are adopting today are
intended to facilitate capital formation, while maintaining appropriate
investor protections and providing state securities regulators with the
flexibility to add additional investor protections they deem
appropriate for offerings within their state. Moreover, a broad
consensus of commenters opposed additional requirements for exempt
intrastate offerings beyond those currently contemplated by our
rules.\249\ State legislatures and/or securities regulators have a
significant interest in intrastate offerings made to their residents
and therefore may wish to impose, and are uniquely positioned to
determine, additional requirements they deem necessary or appropriate
for the protection of their residents. Consistent with our approach to
other aspects of the final rules, we believe it is appropriate in these
circumstances to defer to the states regarding which, if any, of the
additional provisions recommended by commenters should supplement the
federal rules. In this regard, we note that bad actor disqualification
provisions are a feature of most state crowdfunding exemptions.\250\ In
addition, a majority of states have adopted the Uniform Limited
Offering Exemption (``ULOE''), or a variant of that uniform
exemption.\251\ The ULOE includes a bad actor disqualification
provision.\252\ Other state exemptions include bad actor
disqualification provisions,\253\ and the small corporate offering
registration (``SCOR'') program \254\ also contemplates
disqualification of an issuer or any of its officers, directors,
principal stockholders or promoters because of prior violations of the
securities laws. We believe that state and federal regulators share an
interest in collaborative efforts that facilitate capital formation and
investor protection. Accordingly, Commission staff will seek to
collaborate with state regulators to review data on the application of
state bad actor disqualification provisions in offerings conducted
pursuant to amended Rule 147 or new Rule 147A to inform whether the
Commission should consider including bad actor disqualification
provisions in Rules 147 and 147A.\255\
---------------------------------------------------------------------------

    \249\ See Section II.B.7 above.
    \250\ See NASAA Letter. See, e.g., Alabama, Arizona, Colorado,
Florida, Georgia, Idaho, Illinois, Iowa, Indiana, Kansas, Kentucky,
Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana,
Nebraska, New Jersey, New Mexico, North Carolina, Oregon, South
Carolina, Tennessee, Texas, Vermont, Washington, Wisconsin and the
District of Columbia.
    \251\ See, e.g., Alabama, Arizona, Colorado, Georgia, Illinois,
Iowa, Kansas, Louisiana, Massachusetts, Maryland, Mississippi,
Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota,
Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah,
Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming and
the District of Columbia. The Uniform Limited Offering Exemption was
adopted by NASAA in 1983 and again in 1989 (available from the NASAA
Web site at http://www.nasaa.org/wp-content/uploads/2011/07/UNIFORM-LIMITED-OFFERING-EXEMPTION.pdf).
    \252\ See Section 1.B of the ULOE.
    \253\ See, e.g., the Model Accredited Investor Exemption
(available from the NASAA Web site at http://www.nasaa.org/wp-content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf),
as well as other state exemptions such as the Small Issuer Exemption
in Pennsylvania, 10 Pa. Code Sec.  203.187, and the Small Offering
Exemption in Washington, WAC 460-44A-504.
    \254\ Forty-three states, the District of Columbia and the
Commonwealth of Puerto Rico have adopted some form of the SCOR
program or recognize the filing of Form U-7 (also referred to as
uniform limited offering registration (``ULOR'')). See CCH Blue Sky
Law Reporter, Blue Sky Findings Lists, Small Corporate Offering
Registration Program and Form U-7, ] 6461 (2016). SCOR and Form U-7
were developed by NASAA as a registration format for companies
registering securities under state securities laws when relying upon
an exemption from Securities Act registration, including Rule 504. A
company may not use the SCOR Form to offer and sell its securities
if the company or any of its officers, directors, principal
stockholders or promoters are disqualified because of prior
violations of the securities laws. A company also may not use
salespersons who are disqualified because of prior violations of the
securities laws. See SCOR Overview, available from the NASAA Web
site at http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/.
    \255\ See Section I above.
---------------------------------------------------------------------------

III. Amendments to Rules 504 and 505 of Regulation D

A. Overview of Rules 504 and 505

    Rule 504 \256\ of Regulation D provides issuers with an exemption
from registration for offers and sales of up to $1 million of
securities in a twelve-month period, provided that the issuer is not:
---------------------------------------------------------------------------

    \256\ 17 CFR 230.504.
---------------------------------------------------------------------------

     Subject to reporting pursuant to Section 13 or 15(d) of
the Exchange Act; \257\
---------------------------------------------------------------------------

    \257\ 17 CFR 230.504(a)(1).
---------------------------------------------------------------------------

     an investment company; \258\ or
---------------------------------------------------------------------------

    \258\ 17 CFR 230.504(a)(2).
---------------------------------------------------------------------------

     a development stage company that either has no specific
business plan or purpose or that has indicated that its business plan
is to engage in a merger or acquisition with an unidentified company or
companies (``blank check company'').\259\
---------------------------------------------------------------------------

    \259\ 17 CFR 230.504(a)(3).
---------------------------------------------------------------------------

    Additionally, Rule 504 imposes certain conditions, including
limitations on the use of general solicitation or general advertising
in the offering and the restricted status of securities issued pursuant
to the exemption, with limited exceptions for offers and sales made:
     Exclusively in one or more states that provide for the
registration of the securities, and require the public filing and
delivery to investors of a substantive disclosure document before sale,
and are made in accordance with state law requirements;
     in one or more states that have no provision for the
registration of the securities or the public filing or delivery

of a disclosure document before sale, if the securities have been
registered in at least one state that provides for such registration,
public filing and delivery before sale, offers and sales are made in
that state in accordance with such provisions, and the disclosure
document is delivered before sale to all purchasers (including those in
the states that have no such procedure); or
     exclusively according to state law exemptions from
registration that permit general solicitation and general advertising
so long as sales are made only to ``accredited investors'' as defined
in Rule 501(a) of Regulation D.\260\
---------------------------------------------------------------------------

    \260\ 17 CFR 230.504(b)(1). State exemptions of this nature
include those based upon the ``Model Accredited Investor
Exemption,'' which was adopted by NASAA in 1997. CCH NASAA Reporter
Para. 361. Generally, the model rule exempts offers and sales of
securities from state registration requirements, if among other
matters, the securities are sold only to persons who are, or are
reasonably believed to be, ``accredited investors'' as defined in
Rule 501(a) of Regulation D, 17 CFR 230.501(a). The model rule
restricts transfer of the securities for 12 months after issuance
except to other accredited investors or if registered. General
solicitations by any means under that provision are generally
limited to a type of ``tombstone'' ad. See Model Accredited Investor
Exemption, available from the NASAA Web site at http://www.nasaa.org/wp-content/uploads/2011/07/24-Model_Accredited_Investor_Exemption.pdf.
---------------------------------------------------------------------------

    Rule 504, together with Rules 505 and 506, comprise the Securities
Act exemptions and safe harbor in Regulation D.\261\ Regulation D
offerings are exempt from the registration requirements of the
Securities Act. Offerings conducted pursuant to Rule 504 or Rule 505,
however, must be registered in each state in which they are offered or
sold unless an exemption to state registration is available under state
securities laws.\262\ The vast majority of states have adopted a
uniform registration form for offerings relying upon Rule 504.\263\ One
state, however, recently adopted a form of state-based crowdfunding
that permits the use of general solicitation but has provided for an
abbreviated state registration procedure where, in addition to
following various state-specific requirements for registration, an
issuer also complies with Rule 504 of Regulation D.\264\ Additionally,
offerings conducted pursuant to Rules 505 and 506 are subject to bad
actor disqualification provisions, while offerings conducted pursuant
to Rule 504 are not subject to such provisions.\265\
---------------------------------------------------------------------------

    \261\ 17 CFR 230.500 through 508. Rules 501 through 503 contain
definitions, conditions, and other provisions that apply generally
throughout Regulation D. Rules 504, 505 and 506(c) are exemptions
from registration under the Securities Act, while Rule 506(b) is a
``safe harbor'' for compliance with the non-public offering
exemption in Section 4(a)(2) of the Securities Act. Rule 507
disqualifies issuers from relying on Regulation D, under certain
circumstances, for failure to file a Form D notice. Rule 508
provides a safe harbor for certain insignificant deviations from a
term, condition, or requirement of Regulation D.
    \262\ Section 18(b)(4)(D) of the Securities Act provides
``covered security'' status to all securities sold in transactions
exempt from registration under Commission rules promulgated under
Section 4(a)(2), which includes Rule 506 of Regulation D. Covered
security status under Section 18 provides for the preemption of
state securities laws registration and qualification requirements
for offerings of such securities. In comparison, securities issued
pursuant to either Rules 504 or 505 are not covered securities as
these two exemptions are adopted pursuant to the Commission's
authority under Section 3(b)(1) of the Securities Act.
    \263\ See note 254 above.
    \264\ Of the 34 states and the District of Columbia that have
adopted intrastate crowdfunding provisions, only Maine allows an
issuer to rely upon Rule 504 of Regulation D where the issuer is
required to file with the Maine securities regulator in an
abbreviated registration procedure. See Me. Rev. Stat. tit. 32,
Sec.  16304(6-A)(D) (2013).
    \265\ See Rule 505(b)(2)(iii), 17 CFR 230.505(b)(2)(iii), and
Rule 506(d), 17 CFR 230.506(d), of Regulation D.
---------------------------------------------------------------------------

B. Amendments to Rule 504

1. Proposed Amendments to Rule 504
    In an effort to facilitate capital formation, including
facilitating the development of comprehensive regional coordinated
review programs at the state level, and enhance investor protection, we
proposed to increase the aggregate amount of securities that may be
offered and sold in any twelve-month period pursuant to Rule 504 from
$1 million to $5 million and to disqualify certain bad actors from
participation in Rule 504 offerings. We further proposed a technical
amendment to Rules 504 and 505 to account for the re-designation of
Securities Act Section 3(b) as Section 3(b)(1) that occurred as a
result of the enactment of the JOBS Act in 2012.\266\ Additionally, to
account for the proposed increase in the Rule 504 aggregate offering
amount limitation, we proposed technical amendments to the notes to
Rule 504(b)(2) that would update the current illustrations in the rule
regarding how the aggregate offering limitation is calculated in the
event that an issuer sells securities pursuant to Rule 504 and Rule 505
within the same twelve-month period.\267\
---------------------------------------------------------------------------

    \266\ Public Law 112-106, 126 Stat. 306.
    \267\ See proposed Notes 1 and 2 to Rule 504(b)(2). See also 17
CFR 230.504(b)(2).
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments to Rule 504
    Many commenters supported, and no commenters opposed, increasing
the Rule 504 offering amount limit from $1 million to $5 million.\268\
These commenters stated that increasing the offering amount limit will
allow more small businesses to use this capital raising tool, better
satisfying the needs of these businesses for capital formation and
helping to facilitate multi-state offerings.\269\ Several commenters
stated that Rule 504 is currently being underutilized, in part, due to
the low offering amount limit of $1 million and the erosion of the
dollar's value due to inflation since the offering amount limit was
last raised in 1988 from $500,000 to $1 million.\270\ As Rule 504
allows issuers to conduct an offering in multiple states and provides
an opportunity for states to coordinate a regional review of the
offering, commenters stated that an increase in the Rule 504 offering
amount limit will encourage new interstate, regional approaches to
crowdfunding and other small business offerings and will provide
greater utility to a regional review of those offerings.\271\ Two
commenters stated that the offering amount limit should be increased to
$10 million in order to offset the significant compliance costs
involved in state registration and review.\272\ In addition, the 2015
Small Business Forum recommended that the Commission increase the
proposed limit on Rule 504 to $10 million, permitting the states to set
their own limit as appropriate.\273\ Another commenter stated that Rule
504 should be automatically indexed for inflation in order to preserve
the utility of the rule from the erosion of the dollar's value in real
terms.\274\ Two commenters stated the Commission should use its general
exemptive

authority under Section 28 for future increases in the Rule 504
offering limitation.\275\ Several commenters also supported, and no
commenters opposed, amending Rule 504 to include bad actor
disqualification provisions to provide a more uniform set of bad actor
triggering events across Regulation D.\276\
---------------------------------------------------------------------------

    \268\ ABA Letter; CFA Letter; CFIRA Letter; CrowdCheck Letter;
Milken Letter; NASAA Letter.
    \269\ Id.
    \270\ ABA Letter; Milken Letter; NASAA Letter.
    \271\ NASAA Letter (``Maine currently permits interstate
crowdfunding under the federal exemption in Rule 504 and Mississippi
and Vermont dually offer intrastate crowdfunding under Section
3(a)(11) and interstate crowdfunding under Rule 504. Many other
states are presently exploring a dual option for crowdfunding,
including additional regional review programs under Rule 504.'').
See also CFA Letter.
    \272\ CrowdCheck Letter (``Having recently gone through the
coordinated review process in the context of a Regulation A
offering, we believe that the compliance cost involved in state
registration and review is significant, and Rule 504 will only be of
interest to issuers if they can raise enough capital to offset this
burden.''); CFIRA Letter.
    \273\ See 2015 Small Business Forum Recommendations.
    \274\ Milken Letter (``Rule 504's current obsolescence is
largely a result of the erosion of the dollar's value in real terms
. . . Indexing would place Rule 504 in a similar position to
Regulation Crowdfunding offerings where, under Section 4A(h)(1) of
the 1933 Act the annual dollar amount is to be adjusted for
inflation at least every five years.'').
    \275\ ABA Letter; Milken Letter.
    \276\ ABA Letter; CFA Letter (``It not only clarifies the
applicability to new Rule 504 offering limits, but also provides
consistency across Regulation D.''); CFIRA Letter; CrowdCheck
Letter; NASAA Letter (``We also strongly support a more uniform set
of bad actor triggering events across Regulation D . . . as this
would align with bad actor disqualification provisions already
included in state crowdfunding exemptions.'').
---------------------------------------------------------------------------

    In response to our solicitation for comment on whether to repeal
Rule 504(b)(1)(iii) or amend the rule to place limitations on resale,
one commenter recommended that the Commission not repeal or amend Rule
504(b)(1)(iii), but retain this provision to provide an environment
that ``allow[s] the states to experiment'' and innovate in a manner
that may prove useful for state and federal policy makers.\277\ Rule
504(b)(1)(iii) provides an exemption from registration for offers and
sales of securities that are conducted ``according to state law
exemptions from registration that permit general solicitation and
general advertising so long as sales are made only to `accredited
investors' as defined in Rule 501(a).'' Securities sold without
registration in reliance on this provision are not subject to the
limitations on resale established in Rule 502(d) and, as such, are not
``restricted securities'' for purposes of Rule 144(a)(3)(ii). Another
commenter indicated that ``the Commission should consider amending Rule
504 to permit resales of securities issued in Rule 504 `public
offerings' in states where the offering complies with exemptions that
permit general solicitation or advertising and that require
dissemination of a state law compliant disclosure document.'' \278\
---------------------------------------------------------------------------

    \277\ Milken Letter (noting that this approach ``will allow for
innovation in a tightly controlled environment that may prove useful
for other state and federal policy makers.'').
    \278\ ABA Letter.
---------------------------------------------------------------------------

    One commenter recommended that the Commission exempt securities
sold under Rule 147 and 504 from the requirements of Section 12(g) of
the Securities Exchange Act of 1934.\279\ In addition, the 2015 Small
Business Forum recommended that the Commission provide a permanent
exemption from Section 12(g) registration under the Exchange Act for
securities sold in a Rule 504 offering.\280\
---------------------------------------------------------------------------

    \279\ Milken Letter (``Given the expected local nature of Rule
147 offerings and the likelihood that they will be made to the
general public for relatively small amounts, it is very possible
that small companies making even modest offerings would accrue
sufficient numbers of non-accredited investors to be forced to
register with the Commission.'').
    \280\ See 2015 Small Business Forum Recommendations.
---------------------------------------------------------------------------

3. Final Amendments to Rule 504
    The amendments that we are adopting to Rule 504 will raise the
aggregate amount of securities an issuer may offer and sell in any
twelve-month period from $1 million to $5 million, which is the maximum
statutorily allowed under Section 3(b)(1).\281\ The Commission has not
raised the 12-month aggregate offering amount limit in Rule 504 since
1988, when the Commission increased the original Rule 504 offering
amount limit of $500,000 to $1 million.\282\ Adjusted for inflation,
the $1 million limit in 1988 would equate to approximately $2 million
today.\283\ We believe the $5 million limit will facilitate issuers'
ability to raise capital. We also believe that our amendments to
increase the aggregate offering amount limit in Rule 504 to $5 million
may bolster efforts among the states to enter into, or revise existing,
regional coordinated review programs that are designed to increase
efficiencies associated with the registration of securities offerings
in multiple jurisdictions without increasing risks to investors.
Increasing the aggregate offering amount limit from $1 million to $5
million will also increase the flexibility of state securities
regulators to set their own limits and to consider whether any
additional requirements should be implemented at the state level.
---------------------------------------------------------------------------

    \281\ Rules 504 and 505 were adopted pursuant to the
Commission's small issues exemptive authority under Section 3(b)(1)
of the Securities Act, which gives the Commission authority to adopt
an exemption for offerings not exceeding $5 million where the
Commission believes registration under the Securities Act is not
necessary by reason of the small amount involved or the limited
character of the public offering.
    \282\ See SEC Rel. No. 33-6758 (Mar. 3, 1988) [53 FR 7870 (Mar.
10, 1988)].
    \283\ Annual inflation rates (1988-2015) based on consumer price
index data, for all urban consumers, obtained from the Bureau of
Labor Statistics.
---------------------------------------------------------------------------

    Although two commenters and the 2015 Small Business Forum
recommended that the Commission increase the Rule 504 offering amount
limit to $10 million, we are not exceeding the maximum offering amount
permitted under Section 3(b)(1). Although, as several commenters noted,
we could use our exemptive authority under Section 28 of the Securities
Act to raise the maximum offering amount above $5 million,\284\ in
accord with the suggestion of one of those commenters,\285\ we believe
it appropriate to first observe market activity under a new maximum
offering amount of $5 million before raising the Rule 504 offering
limit higher.
---------------------------------------------------------------------------

    \284\ ABA Letter; Milken Letter.
    \285\ ABA Letter (``If the increase to $5 million is adopted,
after there is experience with the use and operation of new Rule
504, the Commission may wish to consider using its exemption
authority under Section 28 to increase the dollar limitation amount
that may be offered under Rule 504.'').
---------------------------------------------------------------------------

    In conjunction with our increase to the Rule 504 aggregate offering
amount limit, we are also adopting provisions that will disqualify
certain bad actors from participation in offerings conducted pursuant
to the exemption.\286\ We believe that the disqualification provisions
that we are adopting, which are substantially similar to related
provisions in Rule 506 of Regulation D,\287\ will create a more
consistent regulatory regime across Regulation D and provide additional
protections to investors in Rule 504 offerings.
---------------------------------------------------------------------------

    \286\ See Rule 504(b)(3).
    \287\ See 17 CFR 230.506(d). See also Rule 262 of Regulation A,
17 CFR 230.262, and Rule 505(b)(2)(iii) of Regulation D, 17 CFR
230.505(b)(2)(iii).
---------------------------------------------------------------------------

    The Rule 504 disqualification provisions will be implemented by
reference to the disqualification provisions of Rule 506 of Regulation
D.\288\ We believe that creating a uniform set of bad actor triggering
events across the various exemptions from Securities Act registration
should simplify due diligence, particularly for issuers that may engage
in different types of exempt offerings. In accordance with the views of
several commenters,\289\ the bad actor triggering events for Rule 504
will be substantially similar to existing provisions in Regulation
D,\290\ Regulation A,\291\ and Regulation Crowdfunding \292\ and will
apply to the issuer and other covered persons (such as underwriters,
placement agents, and the directors, officers and significant
shareholders of the issuer). Consistent with the Commission's treatment
of disqualification in Rule 506(e),\293\ disqualification will only
occur for triggering events that occur after effectiveness of any
amendments, but disclosure will be required for triggering

events that pre-date effectiveness of any amendments.\294\
---------------------------------------------------------------------------

    \288\ See Rule 504(b)(3), referencing the disqualification
provisions of Rule 506(d), 17 CFR 230.506(d), and Instruction to
paragraph (b)(3) of Rule 504, referencing the disclosure provisions
of Rule 506(e), 17 CFR 230.506(e).
    \289\ CFA Letter; NASAA Letter.
    \290\ See Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17
CFR 230.505(b)(2)(iii), 230.506(d).
    \291\ See Rule 262 of Regulation A, 17 CFR 230.262.
    \292\ See Rule 503 of Regulation Crowdfunding, 17 CFR 227.503.
    \293\ See 17 CFR 230.506(e).
    \294\ See Rule 504(b)(3).
---------------------------------------------------------------------------

    We also sought public comment on whether additional changes to Rule
504 should be adopted in the final amendments. In particular, in
conjunction with the increase in the Rule 504 offering amount limit, we
contemplated amending the calculation of the aggregate offering limit
in Rule 504(b)(2). Currently, this rule requires issuers to aggregate
all securities sold within the preceding 12 months in any transaction
that is exempt under Section 3(b) or in violation of Section 5(a) of
the Securities Act for purposes of computing the aggregate offering
amount under Rule 504.\295\ This rule also includes illustrations of
how the aggregate offering limit is calculated in the event that an
issuer sells securities pursuant to Rule 504 and Rule 505 within the
same twelve-month period.\296\
---------------------------------------------------------------------------

    \295\ 17 CFR 230.504(b)(2); see also 17 CFR 230.505(b)(2).
    \296\ See 17 CFR 230.504(b)(2).
---------------------------------------------------------------------------

    When the current aggregation provisions in Rules 504 and 505 were
originally adopted in Rule 505's predecessor, Rule 242, the Commission
noted that aggregating offering amounts across offerings conducted
pursuant to Section 3(b) was intended to ``limit the potential for the
issuer to raise large sums by circumventing the registration provisions
of the Securities Act through multiple offerings pursuant to Section
3(b).'' \297\ In the intervening years, however, in implementing
Congressional mandates,\298\ the Commission has increased the number of
exemptive provisions available to issuers, particularly smaller
issuers, to raise large sums of capital in a more cost-effective manner
in offerings that are exempt from registration, while continuing to
provide appropriate safeguards for investors.\299\ Therefore, we sought
comment on whether the current requirements for Rule 504(b)(2), as they
relate to the aggregation of offering proceeds across all offerings
that are conducted pursuant to Securities Act Section 3(b)(1), should
be retained in the amendments.\300\
---------------------------------------------------------------------------

    \297\ SEC Rel. No. 33-6180 (Jan. 17, 1980). This provision was
subsequently carried over into Rule 505 and incorporated into Rule
504 when Regulation D was adopted by the Commission in 1982. See SEC
Rel. No. 33-6389 (Mar. 8, 1982); SEC Rel. No. 33-6339 (Aug. 7,
1981).
    \298\ See JOBS Act, Public Law 112-106, 126 Stat. 306.
    \299\ See, e.g., Regulation A, 17 CFR 230.251 et seq., providing
non-Exchange Act reporting companies with the option to raise up to
$20 million annually pursuant to the requirements of Tier 1 and up
to $50 million annually pursuant to the requirements of Tier 2.
    \300\ We are referring to Section 3(b)(1) instead of Section
3(b), due to the changes that occurred as a result of the Securities
Act amendments in Title IV of the JOBS Act.
---------------------------------------------------------------------------

    Although no commenters responded to our request for comment on this
issue, in light of our repeal today of Rule 505, which is the only
other existing exemption in Regulation D promulgated under Section
3(b)(1), we are amending Rule 504(b)(2) to omit any reference to the
aggregation of offering proceeds across all offerings that are
conducted pursuant to Section 3(b) of the Securities Act.
Correspondingly, we are also deleting the related note under Rule
504(b)(2) illustrating how the aggregate offering amount limitation is
calculated in the event that an issuer sells securities pursuant to
Rule 504 and Rule 505 within the same twelve-month period.
    We are also adopting a further technical amendment to the second
note to Rule 504(b)(2), as proposed. Specifically, we are updating the
illustration of how the aggregate offering amount limitation is
calculated to account for the increase to the Rule 504 aggregate
offering amount limitation from $1 million to $5 million.\301\
---------------------------------------------------------------------------

    \301\ See Instruction to paragraph (b)(2) to Rule 504.
---------------------------------------------------------------------------

    One commenter \302\ and the 2015 Small Business Forum recommended
that the Commission provide an exemption from Section 12(g)
registration under the Exchange Act for securities sold in a Rule 504
offering.\303\ As discussed above, Section 12(g) requires, among other
things, that an issuer with total assets exceeding $10,000,000 and a
class of 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.\304\ Unlike Tier 2 offerings under
Regulation A \305\ or Regulation Crowdfunding,\306\ where the
Commission provided conditional exemptions from registration under
Section 12(g), issuers that utilize the exemptions under amended Rule
504 will not be required to comply with ongoing reporting requirements.
Given the lack of ongoing reporting requirements under Rule 504, we
believe that the Section 12(g) record holder and asset thresholds
continue to provide an important baseline above which issuers should
generally be subject to the disclosure obligations of the Exchange Act.
As the shareholder base of these companies and their total assets grow,
we believe that the additional protections that will be provided by
registration under Section 12(g) are necessary and appropriate.
---------------------------------------------------------------------------

    \302\ Milken Letter.
    \303\ See 2015 Small Business Forum Recommendations.
    \304\ See note 233 above.
    \305\ See 17 CFR part 251. See also 2015 Regulation A Release at
Section II.B.6.
    \306\ See 17 CFR 227.100. See also Regulation Crowdfunding
Adopting Release at Section II.E.4.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission amend Rule 504 to
permit the resale of securities issued in Rule 504 ``public offerings''
in states where the offering complies with exemptions that permit
general solicitation or advertising and that require a public filing
and delivery of a state law compliant disclosure document before any
sales to purchasers.\307\ As discussed above, Rule 504 currently
permits the resale of securities issued in Rule 504 offerings that
involve general solicitation or advertising where either the offering
is registered in one or more states and one or more states require the
dissemination of a state-approved disclosure document or the offering
is exempt but sales are only made to accredited investors.\308\
Consistent with the limitations on resales in other Securities Act
exemptions that permit general solicitation or advertising, such as
Rule 506(c) and Regulation Crowdfunding, we have concerns with
expanding the ability to issue freely tradable securities under Rule
504 to offerings that permit general solicitation or advertising to
non-accredited investors without state registration. Further, we
believe that the additional protections that will be provided by the
limitations on resale for securities offered and sold in these
transactions, which are directed primarily to non-accredited
investors,\309\ are necessary and appropriate given that these
offerings are not registered at either the state or federal level.
---------------------------------------------------------------------------

    \307\ ABA Letter.
    \308\ See 17 CFR 230.504(b).
    \309\ In contrast, general solicitation or advertising is
permitted under Rule 506(c), so long as the issuer limits all sales
exclusively to accredited investors and the issuer takes reasonable
steps to verify that the investor is an accredited investor.
---------------------------------------------------------------------------

C. Repeal of Rule 505

    In light of the proposed amendments to Rule 504, we solicited
comments on whether we should repeal Rule 505 as an exemption from
registration. Rule 505 is used far less frequently than Rule 506,\310\
and in the Proposing Release, we noted that an increase in the Rule 504
offering amount limit from $1 million to $5 million could further
diminish its utility.\311\
---------------------------------------------------------------------------

    \310\ See note 22 above. See also Table 5 in Section V.A.2.a
below.
    \311\ See Proposing Release at Section III.C.

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

1. Comments on Repealing Rule 505
    Three commenters responded to our request for comment on Rule 505.
One commenter recommended that the Commission review the Rule 505
exemption ``to consider whether modifications may and/or should be made
to modernize the exemption; for example, reviewing the aggregate
offering amount or information requirements.'' \312\ This commenter
strongly opposed, however, replacing Rule 505 with a new Securities Act
exemption providing ``covered security status'' under Section 18 of the
Securities Act to securities issued in reliance on the new
exemption.\313\ This commenter cautioned ``against considering a new
framework for Rule 505 that is contrary to the rule's original intent
and purpose--to be a coordinated federal-state exemption and `to
achieve a uniform system of federal-state limited offering exemptions
that facilitates capital formation consistent with the protection of
investors.' '' \314\
---------------------------------------------------------------------------

    \312\ NASAA Letter.
    \313\ Id. (opposing extension of covered security status ``by
either enacting a new `safe harbor' pursuant to Securities Act
Section 4(a)(2) or by defining purchasers of securities issued in an
offering pursuant to the exemption as `qualified purchaser,'
pursuant to Securities Act Section 18(b)(3).'')
    \314\ Id. (``In 1983, NASAA adopted a model exemption, the
Uniform Limited Offering Exemption (``ULOE''), designed to provide
an exemption at the state level for offerings that are exempt at the
federal level under Rules 505 and 506 of Regulation D.'').
---------------------------------------------------------------------------

    Another commenter stated that changes to Rule 505 aimed at
facilitating very small offerings by early stage companies merit
further consideration.\315\ This commenter also recommended that the
Commission consider ``whether an exempt, simple debt-only offering is
feasible and could be made cost-efficient for smaller issuers.'' \316\
According to this commenter, the Commission should explore whether an
exemption focused on simple debt securities could serve the needs of
small businesses and investors, especially since the unique nature of
simple debt securities may warrant more modest and easier compliance
requirements, while not sacrificing investor protections, as compared
to an exemption that permits both debt and equity offerings.\317\
---------------------------------------------------------------------------

    \315\ Milken Letter.
    \316\ Id.
    \317\ Id. In commenting on the proposed amendments to Rule 147,
one commenter noted that small businesses are likely to seek debt
financing more frequently than equity offerings. See Nextseed Letter
(``equity offerings are more likely to be attractive to technology-
based, high growth companies that cannot financially support debt
obligations,'' as compared to ``Main Street'' businesses (e.g.,
local restaurants operated by friends and families) that are
inherently local in nature seeking to raise not millions of dollars,
but much smaller amounts of capital that traditional lenders are
increasingly reluctant to fund).
---------------------------------------------------------------------------

    Finally, another commenter stated that, if the proposed changes to
Rule 504 are adopted, Rule 505 would be substantially similar to Rule
504, making Rule 505 unnecessary, unless the Commission increases the
aggregate offering amount that may be raised under Rule 505 in any
twelve-month period.\318\ This commenter recommended, for example, that
the ceiling could be raised from $5 million to $10 million or some
larger amount, thereby preserving Rule 505 as a viable alternative
exemption. Despite its infrequent use, the commenter noted that Rule
505 serves the purpose of permitting issuers to sell to up to 35 non-
accredited investors without having to be satisfied that these
investors meet a financial sophistication test.\319\
---------------------------------------------------------------------------

    \318\ ABA Letter.
    \319\ Id. In contrast, issuers relying upon Rule 506(b) may sell
to up to 35 non-accredited investors, but each non-accredited
investor must satisfy a financial sophistication test set forth in
Rule 506(b)(2)(ii).
---------------------------------------------------------------------------

2. Repeal of Rule 505
    After considering these comments, we are repealing Rule 505. After
the effective date of the repeal of Rule 505, issuers will no longer be
able to make offers and sales of securities in reliance on Rule 505. We
believe that amending Rule 504 to increase the aggregate offering
amount from $1 million to $5 million will further reduce the incentives
to use Rule 505 by issuers contemplating an exempt offering. We also
believe that, even if we were to raise the Rule 505 aggregate offering
amount limit from $5 million to $10 million, or some higher amount,
such a higher limit would not increase the utility of the Rule 505
exemption as compared to Rule 506, which has no limit, given the
historical use of Rule 505 as compared to Rule 506. Further, although
Rule 505 provides issuers the ability to sell securities to up to 35
non-accredited investors without having to make a finding, as in Rule
506(b)(2)(ii), that such persons have the knowledge and experience in
financial matters that they are capable of evaluating the merits and
risks of the prospective investment,\320\ this provision does not
appear to have historically resulted in the Rule 505 exemption being
widely utilized.\321\
---------------------------------------------------------------------------

    \320\ Cf., 17 CFR 230.506(b)(2)(ii).
    \321\ For the period 2009-2015, there were a total of 1,542 Rule
505 offerings. During this same time period, there were a total of
70,793 Rule 506(b) offerings of $5 million or less. See Table 5 in
Section V.A.2.b below. See also Scott Bauguess, Rachita Gullapalli
and Vladimir Ivanov, ``Capital Raising in the U.S.: An Analysis of
the Market for Unregistered Securities Offerings, 2009-2014''
(October 2015) (``Unregistered Offerings White Paper''), available
at http://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.
---------------------------------------------------------------------------

    We believe the flexibility of the requirements of Rule 504, as
amended today, as well as the availability of Rule 506(b) and Rule
506(c) will continue to fulfill the original objectives of Regulation D
to achieve uniformity between state and federal exemptions in order to
facilitate capital formation consistent with the protection of
investors.\322\ Amended Rule 504 will be available only to non-
reporting issuers \323\ that are not investment companies \324\ or
development stage companies \325\ for offerings of up to $5 million in
a twelve-month period and will permit general solicitation and the
issuance of unrestricted securities in certain limited situations.\326\
Rule 506(b) and 506(c) are available to all issuers without any
aggregate offering amount limitations. Rule 506(b) prohibits general
solicitation and limits sales to no more than 35 non-accredited
investors.\327\ Rule 506(c) permits general solicitation where all
purchasers of the securities are accredited investors and the issuer
takes reasonable steps to verify that the purchasers are accredited
investors.\328\ Securities issued pursuant to Rules 506(b) and 506(c)
are deemed restricted securities.\329\ Reporting issuers also can
register the offer and sale of securities on Form S-1, for which the
Commission recently promulgated rules permitting forward incorporation
by reference.\330\
---------------------------------------------------------------------------

    \322\ See SEC Rel. No. 33-7644 (Feb. 25, 1999) [64 FR 11090
(Mar. 8, 1999)] (``Seed Capital Release'') at text accompanying note
4. See also Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251]
(Regulation D adopting release).
    \323\ See Rule 504(a)(1).
    \324\ See Rule 504(a)(2).
    \325\ See Rule 504(a)(3).
    \326\ See Rule 504(b)(1).
    \327\ See 17 CFR 230.506(b)(2).
    \328\ See 17 CFR 230.506(c).
    \329\ See 17 CFR 230.506(b)(2) and 17 CFR 230.502(d).
    \330\ See SEC Release No. 33-10003 [81 FR 2743] (Jan. 19, 2016)
(revising Form S-1 to permit a smaller reporting company to
incorporate by reference into its registration statement any
documents filed by the issuer subsequent to the effective date of
the registration statement). The information delivery requirements
under Rule 505 for an Exchange Act reporting issuer that sells
securities to a non-accredited investor are similar to the
disclosure requirements for a registered offering under the
Securities Act. See Rule 502(b)(2)(ii).
---------------------------------------------------------------------------

IV. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid,

such invalidity shall not affect other provisions or application of
such provisions to other persons or circumstances that can be given
effect without the invalid provision or application.

V. Economic Analysis

    This section analyzes the expected economic effects of the final
rules relative to the current baseline, which is the regulatory
framework and state of the market \331\ in existence today, including
current provisions available to potential issuers to raise capital up
to $5 million. We are mindful of the costs imposed by, and the benefits
obtained from, the final rules. Relative to this baseline, our analysis
considers the anticipated benefits and costs for market participants
affected by the final rules as well as the impact of the final rules on
efficiency, competition and capital formation.\332\ We also analyze the
potential benefits and costs stemming from alternatives to the final
rules that we considered. Many of the benefits and costs discussed
below are difficult to quantify, especially when analyzing the likely
effects of the final rules on efficiency, competition and capital
formation. For example, it is difficult to precisely estimate the
extent to which amended Rule 147 and new Rule 147A will promote future
reliance by issuers on these provisions, or the extent to which future
use of amended Rule 147 and new Rule 147A will affect the use of other
offering methods. Similarly, it is difficult to quantify the effect of
the final rules on investor protection. Therefore, much of the
discussion in this section is qualitative in nature. However, where
possible, we have attempted to quantify the expected effects of the
final rules.
---------------------------------------------------------------------------

    \331\ The term ``market'' as used throughout this economic
analysis refers to capital markets in general, and where discussed
in the context of a specific rule, relates to the provisions of the
relevant exemption or safe harbor. We refer, for example, to the
Rule 147 safe harbor and Rule 504 exemption as the Rule 147 and Rule
504 markets because each of those rules' provisions prescribe
requirements that determine who can participate and how the
participants (issuers/investors/intermediaries) can engage in
transactions under each exemption. Participants face different
trade-offs when choosing between the markets created by each of the
exemptions and safe harbors.
    \332\ Securities Act Section 2(b) and Exchange Act Section 3(f)
direct us, when engaging in rulemaking that requires us to consider
or determine whether an action is necessary or appropriate in the
public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation. See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f). In
addition, Exchange Act Section 23(a)(2) requires us, when adopting
rules, to consider the impact that any new rule would have on
competition. See 15 U.S.C. 78w(a)(2)
---------------------------------------------------------------------------

A. Baseline

    The final rules will modernize Rule 147, a safe harbor under
Section 3(a)(11), and establish new Rule 147A in order to facilitate
intrastate offerings, including intrastate crowdfunded offerings under
state securities laws. We also are amending Rule 504 of Regulation D to
raise the aggregate amount that can be raised during a twelve-month
period from $1 million as established in 1988, to $5 million and to
disqualify certain bad actors from participating in Rule 504 offerings.
In light of the amendments to Rule 504, we are also repealing Rule 505,
an alternate exemption available under Regulation D for offerings of up
to $5 million during a twelve-month period.
    The final rules will primarily impact the financing market for
startups and small businesses.\333\ The baseline for our economic
analysis--including the baseline for our consideration of the effects
of the final rules on efficiency, competition and capital formation--is
the regulatory framework and market structure in existence today in
which startups and small businesses seeking to raise capital through
securities offerings must register the offer and sale of securities
under the Securities Act, unless they can rely on an existing exemption
from registration under the federal securities laws.
---------------------------------------------------------------------------

    \333\ According to the Longitudinal Business Database of the
U.S. Census Bureau, there were more than 6.7 million active
establishments in the U.S., of which approximately 5.5 million had
fewer than 500 paid employees and approximately 5.2 million had less
than 100 paid employees. See U.S. Department of Commerce, United
States Census Bureau, Business Dynamics Statistics, Data: Firm
Characteristics (2013), available at http://www.census.gov/ces/dataproducts/bds/data_firm.html.
---------------------------------------------------------------------------

    In addition to a description of the type and number of issuers that
currently offer and sell securities in reliance on Rules 147, 504 and
505, our analysis includes a description of the types of investors who
purchase or may consider purchasing such securities and a discussion of
the role of intermediaries in such offerings. Table 1 summarizes the
main characteristics of Rules 147, 504 and 505.

                                            Table 1--Main Characteristics of Existing Rules 147, 504 and 505
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Blue sky law
                                                                               Issuer and                                                preemption and
       Type of offering          Offering limit \334\      Solicitation         investor        Filing requirement    Restriction on       bad actor
                                                                              requirements                                resale        disqualification
                                                                                provisions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 147......................  None..................  Only intrastate    All issuers must   None.................  Interstate        State Law
                                                         solicitation.      be incorporated                           resales are       Preemption: No.
                                                                            and ``doing                               restricted for   Bad Actor
                                                                            business'' in                             nine months       Provisions:
                                                                            state. Statutory                          from the later    Required by the
                                                                            exemption                                 of the last       majority of
                                                                            excludes                                  sale in, or the   states at the
                                                                            investment                                completion of,    state
                                                                            companies. All                            the offering      level.\336\
                                                                            investors must                            \335\.
                                                                            be residents in
                                                                            state.
Rule 504 Regulation D.........  $1 million............  General            Excludes           File Form D..........  Restricted,       State Law
                                                         solicitation       investment                                unless offering   Preemption: No.
                                                         permitted in       companies, blank-                         is within        Bad Actor
                                                         specified          check companies,                          specified         Provisions:
                                                         circumstances      and Exchange Act                          circumstances     Required by the
                                                         \337\.             reporting                                 \338\.            majority of
                                                                            companies.                                                  states at the
                                                                                state
                                                                                level.\339\
Rule 505 Regulation D.........  $5 million............  No general         Excludes           File Form D..........  Restricted        State Law
                                                         solicitation.      investment                                securities.       Preemption: No.
                                                                            companies.                                                 Bad Actor
                                                                            Unlimited                                                   Provisions: Yes.
                                                                            accredited
                                                                            investors and up
                                                                            to 35 non-
                                                                            accredited
                                                                            investors.
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Current Market Participants
---------------------------------------------------------------------------

    \334\ Aggregate offering limit on securities sold within a 12-
month period.
    \335\ See 17 CFR 230.147(e). Additional resale restrictions may
apply under state securities laws.
    \336\ See text accompanying notes 250, 251, 252, 253 and 254
above.
    \337\ No general solicitation or advertising is permitted unless
the offering is registered in a state requiring the use of a
substantive disclosure document or sold under a state exemption that
permits general solicitation or advertising so long as sales are
made only to accredited investors. See Rule 504(b).
    \338\ Restricted unless the offering is registered in a state
requiring the use of a substantive disclosure document or sold under
a state exemption limiting sales only to accredited investors. See
Rule 504(b).
    \339\ See text accompanying notes 250, 251, 252, 253 and 254
above.
---------------------------------------------------------------------------

    The final rules that amend existing Rules 147 and 504, establish
new Rule 147A, and repeal Rule 505 will primarily affect securities
issuers, particularly startups and small businesses, that rely on
unregistered offerings under these and other provisions or safe harbors
to raise capital, as well as accredited and non-accredited investors
who participate in unregistered offerings.
a. Issuers
i. Rule 147 Issuers
    Under current Rule 147, there is no limit on the amount of capital
that can be raised. Since the Section 3(a)(11) exemption is not
available for an investment company registered or required to be
registered under the Investment Company Act,\340\ the existing Rule 147
safe harbor is also not available to these issuers. Current Rule 147
has no other restrictions on the type of issuers that may rely on the
safe harbor. However, there are in-state residency and eligibility
requirements that an issuer must satisfy in order to rely on Rule 147.
Eligible issuers are those that are incorporated or organized in-state,
have their ``principal office'' in-state, and can satisfy three 80%
threshold requirements concerning their revenues, assets and use of net
proceeds.
---------------------------------------------------------------------------

    \340\ See 15 U.S.C. 80a-24(d) and 1961 Release at note 1.
---------------------------------------------------------------------------

    While we lack data on the number and size of Rule 147 offerings
\341\ or the type of issuers currently relying on the Rule 147 safe
harbor, the nature of the eligibility requirements and other
restrictions of the rule lead us to believe that it is used by U.S.
incorporated entities that are likely small businesses seeking to raise
small amounts of capital locally without incurring the costs of
registering with the Commission.
---------------------------------------------------------------------------

    \341\ Unlike Regulation D, which requires the filing of a Form
D, Rule 147 does not require any filing with the Commission, and we
thus have no source of reliable data about the prevalence and scope
of Rule 147 offerings. Commission staff will seek to collaborate
with state regulators in gathering information for the study of
amended Rule 147 and new Rule 147A. See Section I above.
---------------------------------------------------------------------------

    Currently, most of the states that have enacted crowdfunding
provisions require issuers that intend to conduct intrastate
crowdfunding offerings to use Rule 147.\342\ Based on information from
NASAA,\343\ as of May 20, 2016, 34 states and the District of Columbia
have enacted crowdfunding provisions, and more states are expected to
promulgate similar provisions in the near future. Since December 2011,
when the first state (Kansas) enacted its crowdfunding provisions, 179
state crowdfunding offerings have been reported to be filed with the
respective state regulator.\344\ Of these offerings, 166 were reported
to be approved or cleared, as of July 2016.\345\
---------------------------------------------------------------------------

    \342\ See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \343\ See NASAA's Intrastate Crowdfunding Resource Center at
http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/. See also http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \344\ See Slide Presentation on ``NASAA Intrastate Crowdfunding
Update,'' NASAA July 18, 2016 available at http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/Intrastate-Crowdfunding-Slides-7-18-16.pdf.
    \345\ Id. Most of the early approved or cleared offerings were
in Georgia, Michigan, Oregon, Kansas and Indiana. See Slide
Presentation on ``Intrastate Equity Crowdfunding'' by Anya Coverman,
Deputy Director of Policy, NASAA at the SEC Government Business
Forum on Small Business Capital Formation, November 19, 2015
available at http://www.sec.gov/info/smallbus/sbforum119015-coverman-presentation.pdf.
---------------------------------------------------------------------------

    Given that investment companies are statutorily restricted from
relying on Section 3(a)(11) \346\ and that almost all the enacted state
crowdfunding provisions currently exclude reporting companies, we
expect that issuers that rely on Rule 147 are likely operating
companies (``non-fund issuers'') that are not reporting under the
Exchange Act. As stated above, information on the size of these issuers
is not available. Data from NASAA shows that most issuers are from
various industries including agriculture, manufacturing, business
services, retail, entertainment, and technology.
---------------------------------------------------------------------------

    \346\ See also note 241 above.

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

    We anticipate that many potential issuers of securities under
amended Rule 147 and new Rule 147A, particularly those utilizing the
exemptions for intrastate crowdfunding, will continue to be small
businesses, early stage firms and ``idea'' stage business ventures that
have not yet commenced operations. Some of these issuers may lack
business plans that are sufficiently developed to attract venture
capitalists (VCs) or angel investors that invest in high risk ventures,
or may not offer the profit potential or business model to attract such
investors.\347\
---------------------------------------------------------------------------

    \347\ In this regard, a study of one large crowdfunding platform
revealed that relatively few companies on that platform operate in
technology sectors that typically attract VC investment activity.
See Ethan R. Mollick, The Dynamics of Crowdfunding: An Exploratory
Study, J. BUS. VENT., January 2014 (1-16).
---------------------------------------------------------------------------

ii. Rule 504 and Rule 505 Issuers
    Rules 504 and 505 of Regulation D provide exemptions from
registration under Section 3(b)(1) of the Securities Act for small
offerings where the Commission believes registration under the
Securities Act is not necessary by reason of the small amount involved
or the limited character of the public offering. An analysis of Form D
filings indicates that reliance on these two exemptions has been
declining over time. As shown in Figure 1, while offerings under Rule
506(b) of Regulation D grew significantly from 1993 to 2015, offerings
under Rule 504 and Rule 505 in 2015 were approximately a quarter of
1993 levels. In addition, while offering activity under Rule 504 has
been higher than under the Rule 505 exemption, the number of new Rule
504 offerings peaked in 1999, with 3,402 new offerings initiated, and
steeply declined afterward.\348\ Compared to the early 1990s when Rule
504 offerings constituted approximately 28% of all new Regulation D
offerings, the proportion of Rule 504 offerings between 2009 and 2015
ranged between 3% and 4% of all new Regulation D offerings. The number
of new Rule 505 offerings peaked in 1996 at 1,124 (12% of all new
Regulation D offerings), and during 2015, less than 1% of all new
Regulation D offerings claimed the Rule 505 exemption.
---------------------------------------------------------------------------

    \348\ While there is a strong, positive correlation of the
incidence of new Regulation D offerings with the economic conditions
of the public market (see Section 4.2 of Unregistered Offerings
White Paper), some of the decline in Rule 504 offerings during the
early 2000s could also be attributed to the 1999 Commission decision
to reinstate the ban on general solicitation in Rule 504 offerings.
See Seed Capital Release and Release No. 34-69959 (July 10, 2013).
Though the incidence of new Rule 506 offerings recovered in 2003
with improved conditions in the public markets, the number of new
Rule 504 offerings remained well below the pre-2000 levels.
[GRAPHIC] [TIFF OMITTED] TR21NO16.000

    The current limited use of the Rule 504 and Rule 505 exemptions and
the predominance of Rule 506, especially Rule 506(b), are also evident
when we consider the total amount raised in offerings under each of
these exemptions. Overall, capital formation in the Rule 504 and Rule
505 markets individually constituted approximately 0.1% of the capital
raised in all Regulation D offerings initiated during 2009-2015.\350\
Considering only Regulation D offerings of up to $1 million (the
maximum amount that a Rule 504 offering can raise in a year) initiated
by non-fund issuers, the share of Rule 504 offerings was slightly
higher at approximately 7%. Similarly, considering only Regulation D
offerings by non-fund issuers of up to $5 million (the maximum amount
that an existing

Rule 505 offering or amended Rule 504 offering can raise in a year),
the share of the total amount raised for Rule 505 offerings was less
than 2%.
---------------------------------------------------------------------------

    \349\ Data is not readily available for the period 2002-2008
during which Form D was a paper-based filing. The form became
available electronically in March 2009. Since the data for year 2009
is only for the period April to December, the number of new
Regulation D offerings shown is underestimated for 2009.
    \350\ Based on staff analysis of Form D filings. See also
Unregistered Offerings White Paper.
---------------------------------------------------------------------------

    Table 2 presents data on the number of new Rule 504 and 505
offerings and amounts reported to be raised in these offerings during
the period 2009-2015.\351\ Since investment companies are excluded from
using the two exemptions, issuers relying on Rules 504 and 505 are
predominantly non-fund issuers.\352\ Form D data also indicates that
the mean and median Rule 504 offering sizes during 2009-2015 were
approximately $0.5 million and $0.36 million, respectively, while the
average and median Rule 505 offering sizes were approximately $1.90
million and $1.54 million, respectively.
---------------------------------------------------------------------------

    \351\ Id. This analysis uses the same assumptions and
methodologies described in the Unregistered Offerings White Paper.
    \352\ Non-fund issuers constituted 98% and 93% of all Rule 504
and Rule 505 offerings, respectively. In terms of amounts reported
to be raised, non-fund issuers raised 96% and 76% of all amounts
reported to be raised in Rule 504 offerings and Rule 505 offerings,
respectively. Based on information in Form D filings, funds using
the Rule 504 or Rule 505 exemption were not registered under the
Investment Company Act.

                       Table 2--Rule 504 and Rule 505 Capital Raising Activity, 2009-2015
----------------------------------------------------------------------------------------------------------------
                                                    Number of  offerings \353\        Total amount raised ($
                                                 --------------------------------            million)
                                                                                -------------------------------
                                                     Rule 504        Rule 505        Rule 504        Rule 505
----------------------------------------------------------------------------------------------------------------
2009............................................             579             195             $91            $185
2010............................................             714             262             131             257
2011............................................             721             207             113             205
2012............................................             632             227             109             193
2013............................................             599             229              97             203
2014............................................             544             289              94             238
2015............................................             519             179              84             134
2009-2015.......................................           4,308           1,588             719           1,415
----------------------------------------------------------------------------------------------------------------

    Companies that file reports with the Commission under Section
12(b), Section 12(g) or Section 15(d) of the Exchange Act can use the
Rule 505 exemption but not the Rule 504 exemption. Data from Form D
filings indicates that approximately 10 of 278 unique Rule 505 issuers
during 2014 and 8 of 163 unique Rule 505 issuers during 2015 were
reporting companies.\354\ These reporting companies initiated 12 Rule
505 offerings during 2014 and 11 such offerings during 2015. The mean
size of Rule 505 offerings by reporting companies was approximately
$824,000 and the median size was approximately $200,000.
---------------------------------------------------------------------------

    \353\ Based on staff analysis of Form D filings. This analysis
uses the same assumptions and methodologies described in the
Unregistered Offerings White Paper. As noted in the Unregistered
Offerings White Paper, some issuers in Regulation D offerings check
multiple exemptions in their Form D filing. Under those
circumstances, staff assigns the highest checked numerical exemption
to the offering. While issuers in 4,308 offerings checked only the
Rule 504 exemption and reported to raise $719 million during the
period 2009-2015, issuers in an additional 1,224 offerings checked
the Rule 504 exemption along with the Rule 505 and/or the Rule 506
exemption and safe harbor. Similarly, issuers in 1,520 offerings
checked only the Rule 505 exemption and reported to raise $1,399
million during 2009-2015; issuers in an additional 68 new offerings
checked the Rule 504 and 505 exemptions; and issuers in 2,170 new
offerings checked the Rule 505 exemption along with the Rule 506
exemption.
    \354\ Based on staff analysis of Form D filings and Form 10-K
filings made during 2014 and 2015.
---------------------------------------------------------------------------

    Figure 2 shows the financial size of Rule 504 and Rule 505 issuers
based on revenues or net asset value during the period 2009-2015.\355\
Of all the issuers that disclosed these metrics in their Form D filings
(approximately 70% of all Rule 504 issuers and 80% of all Rule 505
issuers), more than three quarters of those offerings were initiated by
issuers that had no revenues or had revenues or net asset values of
less than $1 million. From this reported size, we believe that a vast
majority of Rule 504 and Rule 505 issuers likely consist of startups
and small businesses. These issuers' small size is also consistent with
their younger age, as measured by years since incorporation. Based on
Form D filings, 51% of Rule 504 issuers and 62% of Rule 505 issuers
initiated their offerings during the year of their incorporation or in
the subsequent year. Another 14% of Rule 504 and Rule 505 issuers
initiated their offerings between two and three years since
incorporation.\356\
---------------------------------------------------------------------------

    \355\ Based on staff analysis of Form D filings.
    \356\ Id.

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

[GRAPHIC] [TIFF OMITTED] TR21NO16.001

    Most Rule 504 and Rule 505 issuers that initiated offerings in the
past seven years operate in the technology, real estate or other
industry (Figure 3).\357\
---------------------------------------------------------------------------

    \357\ Id.
    [GRAPHIC] [TIFF OMITTED] TR21NO16.002

    With regard to the geographical location of issuers, Form D filings
indicate that during the period 2009-2015, most Rule 504 and Rule 505
issuers had their principal place of business in California (22% and
21%), followed by Texas, New York, Florida, Colorado and Illinois; most
were incorporated in Delaware (19%, 23%),

California (13%, 12%), Nevada and Texas. In addition, approximately 37%
of Rule 504 offerings and 39% of Rule 505 offerings reported having
different states of incorporation and principal places of business.
While only approximately 2% of Rule 504 and Rule 505 offerings were
initiated by foreign-incorporated issuers, a larger number of issuers
(4-5%) reported their principal place of business to be outside the
United States. In addition, approximately 89% of issuers in the Rule
504 market and 93% of issuers in the Rule 505 market initiated only one
offering. Approximately 83% of Rule 504 offerings and 79% of Rule 505
offerings during the period 2009-2015 were equity offerings.\358\
---------------------------------------------------------------------------

    \358\ Id.
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b. Investors
    Currently, Rule 147 limits offers and sales to residents of the
same state or territory as the issuer. While there are generally no
limitations on who can invest in Rule 504 offerings, only accredited
investors and up to 35 non-accredited investors can participate in Rule
505 offerings. Although the Commission does not require a form to be
filed in connection with Rule 147 offerings, and thus does not receive
information concerning investors participating in these offerings, data
from Form D filings provide some insights into the number and
characteristics of investors in Rule 504 and Rule 505 offerings.
    Data in Table 3 below shows that more than 34,000 investors
participated in new Rule 504 offerings initiated during the period
2009-2015, while almost 14,400 investors participated in new Rule 505
offerings initiated during the same period.\359\ An analysis of the
same Form D filings indicates that, for new Rule 504 offerings that
reported sales, the mean number of investors was approximately 11 and
the median number of investors was approximately four. The mean and
median number of investors in new Rule 505 offerings that reported
sales was 12 and seven, respectively.
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    \359\ Id. See also Unregistered Offerings White Paper.

                                      Table 3--Number and Type of Investors in Rule 504 Offerings, 2009-2015 \360\
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                                                                        Rule 504 Offerings                              Rule 505 Offerings
                                                        ------------------------------------------------------------------------------------------------
                                                                                % Offerings                                      % Offerings
                                                              Total      Mean number of     with non-          Total      Mean number of     with non-
                                                            investors       investors       accredited       investors       investors      accredited
                                                                                investors                                        investors
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009...................................................           4,004               9              53            1,818              12              38
2010...................................................           5,427              10              54            2,234              11              41
2011...................................................           5,512              11              57            1,676              12              43
2012...................................................           6,295              13              58            2,027              13              44
2013...................................................           5,573              13              61            2,167              13              41
2014...................................................           3,996              10              60            2,943              13              36
2015...................................................           3,398               9              61            1,520              11              43
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
2009-2015..............................................          34,205              11              57           14,385              12              41
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    The presence of non-accredited investors was larger in Rule 504
offerings, where the number of non-accredited investors is not limited,
than in Rule 505 or Rule 506 offerings, where the number of non-
accredited investors is limited to 35. Data in Table 3 above shows that
issuers in approximately 57% of Rule 504 offerings and 41% of Rule 505
offerings during 2009-2015 reported having sold or intending to sell to
non-accredited investors.\361\
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    \360\ Id. The data shown in the table represents offerings that
reported sales to investors.
    \361\ Form D data shows that Rule 504 offerings that involved
non-accredited investors were, on average, smaller and had a fewer
mean number of investors (8) than those offerings that involved only
accredited investors (9). In contrast, Rule 505 offerings that
indicated potential sales to non-accredited investors were, on
average, larger and had a greater mean number of investors (11) than
Rule 505 offerings that sold only to accredited investors (8). We
note that since issuers do not file Form D at the close of the
offering, the number of investors reported in initial Form D filings
may be an underestimate (offerings reporting zero investors are
included).
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    Given existing investment limitations under state crowdfunding
provisions, we believe that many investors affected by amended Rule 147
and new Rule 147A will likely be individual retail investors whose
broad access to potentially riskier investment opportunities in early-
stage ventures is currently limited, either because they do not have
the necessary accreditation or sophistication to invest in most private
offerings, or because they do not have sufficient funds to participate
as angel investors. Intrastate crowdfunding offerings may provide
retail investors with additional investment opportunities, although the
extent to which they invest in such offerings will likely depend on
their view of the potential return on investment as well as the
potential risks, including fraud.
    In contrast, larger, more sophisticated or well-funded investors
may be less likely to invest in intrastate crowdfunding offerings. The
relatively low offering amount limits, in-state investor residency
requirements, and low investment limits for crowdfunding investors
under state laws \362\ may make these offerings less attractive for
such investors, which include VCs and angel investors.\363\ While an
intrastate crowdfunding offering can result in increased visibility for
an issuer, it is likely that such investors will elect to invest in
offerings relying on Rule 506, which are not subject to the investment
limitations applicable to crowdfunding.
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    \362\ Most state crowdfunding provisions allow up to a $2
million offering size and a maximum investment of $10,000 by non-
accredited investors.
    \363\ An observer suggests that, unlike angels, VCs may be less
interested in crowdfunding because, if VCs rely on crowdfunding
sites for their deal flow, it would be difficult to justify charging
a 2% management fee and 20% carried interest to their limited
partners. See Ryan Caldbeck, Crowdfunding--Why Angels, Venture
Capitalists And Private Equity Investors All May Benefit, Forbes,
Aug. 7, 2013.
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c. Intermediaries
    Issuers that undertake private offerings may use broker-dealers to
help them with various aspects of the offering and to help ensure
compliance with the ban on general solicitation and advertising that
exists for most private offerings. Private offerings can also involve
finders and investment advisers

who connect issuers with potential investors for a fee.\364\ We do not
have information on the extent of intermediary use in Rule 147
offerings; however, an analysis of Form D filings indicates that
intermediaries are used less frequently in Rule 504 offerings than in
registered offerings. Approximately 20% of Rule 504 offerings and 29%
of Rule 505 offerings reported using an intermediary during the period
2009-2015.\365\ The average commissions and fees paid by issuers that
reported using an intermediary was approximately 6% of the offering
amount for Rule 504 and 5.6% for Rule 505.\366\
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    \364\ Depending on the nature and scope of their activities,
these persons may need to be registered as broker-dealers or finders
under state law.
    \365\ Based on staff analysis of Form D filings.
    \366\ Id.
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    Although we are unable to predict the potential use of broker-
dealers, transfer agents,\367\ investment advisers and finders in
private offerings as a result of the adoption of the final rules, data
on the use of broker-dealers and finders in the Rule 506 market
suggests that they do not currently play a large role in private
offerings. Form D filings indicate that approximately 17% of Rule 506
offerings with an offering size up to $5 million, including 18% of such
Rule 506 offerings initiated by non-fund issuers, used an intermediary
during 2009-2015.\368\ The use of a broker-dealer or a finder increased
with offering size, while the average percentage of the total fee
declined with offering size.\369\ We base these estimates, however,
only on available data from the Regulation D market. It is possible
that issuers engaging in other types of unregistered offerings, for
which data is not available to us, may use broker-dealers and finders
more frequently or less frequently.\370\
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    \367\ Aside from their standard role in maintaining records of
ownership of securities, transfer agents play an important role in
private offerings that involve restricted securities, in which there
may be limitations on resale of such securities for a certain period
or to certain types of investors. In addition to ensuring compliance
with such provisions, only a transfer agent can remove a restrictive
legend from the security, which is done with the consent of the
issuer.
    \368\ Based on staff analysis of Form D filings.
    \369\ Based on analysis of Form D filings for 2009-2015,
approximately 20% of all Rule 506 offerings reported using an
intermediary. Further, intermediaries participated in approximately
16% of Rule 506 offerings of up to $1 million and 31% of offerings
of more than $50 million during the period 2009-2015. The average
total fee (commission plus finder fee) paid by issuers conducting
offerings of up to $1 million was 6.2%, while the average total fee
paid by issuers conducting offerings of more than $50 million was
1.9%. See also Section 5.3 in the Unregistered Offerings White
Paper.
    \370\ A number of states that have enacted crowdfunding
provisions require that the offer and sale of securities by means of
intrastate crowdfunding be conducted through a funding portal or a
broker-dealer. Some intrastate crowdfunding provisions require the
offering portals to be registered with the state or as a broker-
dealer. Based on FOCUS Reports filed with the Commission, as of
December 2015, there were 4,122 registered broker-dealers, with
average total assets of approximately $0.98 billion per broker-
dealer. The aggregate assets of these registered broker-dealers
totaled approximately $4.1 trillion. See Regulation Crowdfunding
Adopting Release for a more detailed discussion of intermediaries in
crowdfunding offerings.
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2. Alternative Methods of Raising Up to $5 Million of Capital
    The potential economic impact of the final rules, including their
effects on efficiency, competition and capital formation, will depend
primarily on the extent of use of amended Rules 147 and 504 and new
Rule 147A and how these methods compare to alternative sources of
capital that startups and small businesses can utilize.
    As the amendments to Rule 504 would permit offerings up to $5
million by all types of issuers (other than investment companies,
Exchange Act reporting companies and development stage companies), the
analysis below discusses alternatives available for startups and small
businesses to access up to $5 million in capital. Current state
crowdfunding provisions, most of which require issuers to rely on Rule
147 for federal exemption, have offering limits of up to $4 million and
most restrict private funds from utilizing the crowdfunding provisions.
In addition, final Rules 147, 147A and 504 all exclude investment
companies. Thus, our analysis below also includes a discussion of
alternative sources for non-fund issuers to raise capital up to $5
million.\371\
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    \371\ While offerings greater than $5 million that are
registered or exempt under state law, subject to certain conditions,
could be raised under amended Rule 147 or new Rule 147A, we believe
that the impact of the final rules on larger offerings is not likely
to be significant, given the local nature of offerings under these
exemptions and current state regulations applicable for larger
offerings. See Section V.B (discussing the impact of the final rules
in detail).
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    Startups and small businesses can potentially access a variety of
external financing sources in the capital markets through, for example,
registered or unregistered offerings of debt, equity or hybrid
securities and bank loans. Issuers seeking to raise capital must
register the offer and sale of securities under the Securities Act or
qualify for an exemption from registration under the federal securities
laws. Registered offerings, however, are generally too costly to be
viable alternatives for startups and small businesses. Issuers
conducting registered offerings incur a variety of fees and expenses
related to registration and reporting requirements. Two surveys
concluded that the average initial compliance cost associated with
conducting an initial public offering is $2.5 million, followed by an
ongoing compliance cost for public companies of $1.5 million per
year.\372\ Moreover, issuers conducting registered offerings usually
pay underwriter fees, which average approximately 7% for initial public
offerings, approximately 5% for follow-on equity offerings and
approximately 1-1.5% for public bond issuances.\373\ Hence, for a small
issuer seeking to raise less than $5 million, a registered offering
typically may not be economically feasible relative to options
available under exempt offerings.
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    \372\ See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20,
2011), at 9, available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force''). The estimates
should be interpreted with the caveat that most companies in the IPO
Task Force surveys likely raised more than $1 million. The IPO Task
Force surveys do not provide a breakdown of costs by offering size.
However, compliance related costs of an initial public offering and
subsequent compliance related costs of being a reporting company
likely have a fixed cost component that would disproportionately
affect smaller issuers.
    Title I of the JOBS Act provided certain accommodations to
issuers that qualify as emerging growth companies (EGCs). According
to a recent working paper, the underwriting, legal and accounting
fees of EGC and non-EGC initial public offerings were similar (based
on a time period from April 5, 2012 to April 30, 2015). For a median
EGC initial public offering, gross spread comprised 7% of proceeds
and accounting and legal fees comprised 2.4% of proceeds. See Susan
Chaplinsky, Kathleen W. Hanley, and S. Katie Moon, ``The JOBS Act
and the Costs of Going Public,'' working paper, October 4, 2015,
available at http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2492241, (``Chaplinsky Study'').
    \373\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, ``The Seven
Percent Solution,'' 55 J. Fin. 1105-1131 (2000); Mark Abrahamson,
Tim Jenkinson, and Howard Jones, ``Why Don't U.S. Issuers Demand
European Fees for IPOs?'' 66 J. Fin. 2055-2082 (2011); Shane A.
Corwin, ``The Determinants of Underpricing for Seasoned Equity
Offers,'' 58 J. Fin. 2249-2279 (2003); Lily Hua Fang, ``Investment
Bank Reputation and the Price and Quality of Underwriting
Services,'' 60 J. Fin. 2729-2761 (2005); Rongbing Huang and Donghang
Zhang, ``Managing Underwriters and the Marketing of Seasoned Equity
Offerings,'' 46 J. Fin. Quant. Analysis 141-170 (2011); Stephen J.
Brown, Bruce D. Grundy, Craig M. Lewis and Patrick Verwijmeren,
``Convertibles and Hedge Funds as Distributors of Equity Exposure,''
25 Rev. Fin. Stud. 3077-3112 (2012).
    Recent studies that analyze IPOs by EGCs and non-EGCs find that