18(b)(3) of the Securities Act to require investor qualifications
greater than those provided in the accredited investor definition, and
sales through broker-dealers do not provide adequate protections.\490\
This commenter suggested that ``qualified purchaser'' could be defined
based on existing definitions of ``qualified purchaser'' in the
Investment Company Act \491\ or ``qualified client'' in Rule 205 under
the Investment Advisers Act.\492\
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    \489\ NASAA Letter 2; see also NASAA Letter 3 (indicating
NASAA's concerns with the Commission's use of either the ``qualified
purchaser'' or ``accredited investor'' definition in the context of
implementing rules for Section 3(b)(2) of the Securities Act).
    \490\ NASAA Letter 2; see also NASAA Letter 3. Section 18(b)(3)
was enacted under the National Securities Markets Improvement Act of
1996 (NSMIA), Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \491\ 15 U.S.C. 80a-2(a)(51). For natural persons to be
``qualified purchasers'' under this definition, they must own at
least $5 million in investment assets.
    \492\ 17 CFR 275.205-3. For natural persons to be ``qualified
clients,'' they must have at least $1 million in assets under
management with the investment adviser or have a net worth of more
than $2 million, excluding the value of their primary residence.
---------------------------------------------------------------------------

    In light of the issues raised by commenters and in the GAO study,
we are concerned that the costs associated with state securities law
compliance may deter issuers from using Regulation A, even if the
increased cap on offering size and other proposals intended to make
Regulation A more workable are implemented. This could significantly
limit the possible impact of an amended Regulation A as a tool for
capital formation. We believe that the addition of Section
18(b)(4)(D)(ii) of the Securities Act, which specifically refers to a
``qualified purchaser'' definition that would apply to transactions
under the new 3(b)(2) exemption, suggests that it is appropriate for us
to consider including such a definition in our rulemaking to implement
Title IV of the JOBS Act.
    We also believe that Regulation A, as we propose to amend it, would
provide substantial protections to purchasers. Under the proposed
amendments, a Regulation A offering statement would continue to provide
substantive narrative and financial disclosures about the issuer,
including an MD&A discussion. The proposed electronic filing
requirement, including the structured data in Part I of the offering
circular, would provide ready access to key information about the
issuer and the offering, and would facilitate analysis of the offering
in relation to comparable opportunities. We expect that Regulation A
offering statements would continue to receive the same level of
Commission staff review as registration statements. Additional investor
protections would be afforded by Regulation A's limitations on eligible
issuers and ``bad actor'' disqualification provisions, which we are
proposing to expand.
    The requirements for Tier 2 offerings would provide further
protection, because the financial statements contained in the offering
circular would be required to be audited, the issuer would have an
obligation to provide ongoing reporting to purchasers, and such
purchasers would be limited in the percentage of income or net worth
that could be invested in a single offering. Ongoing reporting would
assure a continuing flow of information to investors and could support
the development of secondary markets for Regulation A securities,
offering the prospect of reduced investor risk through liquidity.
    The approach to investor protection for Tier 2 of Regulation A is
in some ways similar to the approach taken under Title III of the JOBS
Act and our recently proposed rules for securities-based crowdfunding
transactions under Section 4(a)(6) of the Securities Act.\493\ In
Section 4(a)(6), Congress outlined a new exemption for securities-based
crowdfunding transactions intended to take advantage of the internet
and social media to facilitate capital-raising by the general public,
or crowd. In that provision, Congress directly preempted state
securities laws relying, in part, on a variety of investor protections,
including disclosure requirements, the use of regulated intermediaries
and limitations on the amount of securities an investor could acquire
through this type of offering required by the JOBS Act.\494\
---------------------------------------------------------------------------

    \493\ See Section 4(a)(6)(ii) of the Securities Act, 15 U.S.C.
77d(a)(6)(ii), and SEC Rel. No. 33-9470.
    \494\ See, generally, the requirements for issuers and
intermediaries and state securities law preemption set forth in
Title III of the JOBS Act, Public Law 112-106, 126 Stat. 306,
Sec. Sec.  301-305.
---------------------------------------------------------------------------

    Like the proposed provisions for securities-based crowdfunding,
Regulation A--both as currently in effect and as proposed to be
amended--is available to all types of investors, and therefore we
believe it should include certain appropriate investor protections. We
believe that the substantial investor protections embedded in the
issuer eligibility conditions, limitations on investment, disclosure
requirements, qualification process and ongoing reporting requirements
of proposed Tier 2 of Regulation A, in combination, could address
potential concerns that may arise as a result of the preemption of
state securities law registration and qualification requirements.
    We therefore propose to define the term ``qualified purchaser'' for
certain purposes under Regulation A. As proposed, ``qualified
purchasers'' in a Regulation A offering would consist of:
    (i) All offerees; and
    (ii) All purchasers in a Tier 2 offering.\495\
---------------------------------------------------------------------------

    \495\ See Proposed Rule 256.

We believe that this approach would protect offerees and investors in
Regulation A securities, while streamlining compliance and reducing
---------------------------------------------------------------------------
transaction costs.

    We believe it would be appropriate to preempt blue sky requirements
with respect to all offerees in a Regulation A offering, in order to
make Regulation A a workable approach to capital raising. Issuers
relying on Regulation A should be able to communicate with potential
investors about their offerings using the

internet, social media, and other means of widespread communication,
without concern that such communications might trigger registration
requirements under state law. We believe this is consistent with
Section 3(b)(2)(E) of the Securities Act and the ``testing the waters''
provisions of Rule 254 of existing Regulation A, which we are proposing
to expand, and that it would result in reduced costs to issuers seeking
capital while maintaining investor protections.\496\
---------------------------------------------------------------------------

    \496\ We understand that some state securities regulators do not
require the registration of broadly advertised offerings such as
internet offerings, if the advertisement indicates, directly or
indirectly, that the offering is not available to residents of that
state. See, e.g., Washington State Dep't of Financial Institutions,
Securities Act Policy Statement--16, available at: http://dfi.wa.gov/sd/securitiespolicy.htm#ps-16; see also NASAA Reports ]
7,040 (regarding NASAA resolution, dated January 7, 1996, which
encourages states to take appropriate steps to exempt from
securities registration offers of securities over the Internet).
---------------------------------------------------------------------------

    Alternatively, we could import existing ``qualified purchaser''
definitions from other regulatory regimes. These other regimes may not,
however, account for the regulatory protections and limited offering
size of Regulation A, or the likelihood that issuers that target
investors meeting these other standards could choose to rely on other
Securities Act exemptions, such as Regulation D, rather than Regulation
A. We could also consider the involvement of a regulated intermediary
or advisor in a transaction as, or as part of, the basis for such a
definition. Such intermediaries may, however, increase costs to issuers
and investors without commensurate investor protection benefits.
Finally, we could consider a broad definition such that any purchaser
in any Regulation A offering would be treated as a ``qualified
purchaser.'' Our preliminary view is that the investment limitations,
enhanced disclosure and ongoing reporting obligations associated with
Tier 2 would meaningfully bolster the protections otherwise embedded in
Regulation A, and justify a difference in treatment to offerings
conducted pursuant to Tier 1.
    We believe the proposed ``qualified purchaser'' definition for Tier
2 offerings would help to make Regulation A a more workable means of
capital formation. We are soliciting comment, however, on whether we
should adopt such a definition or an alternative definition and, if so,
what it should require. In particular, we are mindful that, if NASAA
and its members are able to implement a coordinated review program for
Regulation A offerings, the costs to issuers of state law registration
and qualification requirements and the time required for qualification
may be substantially lower in the future. We solicit comment below on
whether, rather than adopting a definition of ``qualified purchaser''
for Regulation A as proposed, we should wait to determine whether such
a coordinated review program can be finalized, adopted and successfully
implemented and, if so, whether such a program would sufficiently
address current concerns about the costs of blue sky compliance.\497\
We solicit comment on the extent to which state securities law
registration and qualification requirements may affect the use of
Regulation A, as proposed to be amended. We will also consult with the
states and consider any changes to the states' processes and
requirements for reviewing offerings before we adopt final amendments.
---------------------------------------------------------------------------

    \497\ If the proposed coordinated review program were not
adopted by every state, we could consider whether a ``qualified
purchaser'' definition that would provide preemption as to the non-
participating states would be appropriate.
---------------------------------------------------------------------------

Request for Comment
    114. Should we preempt state securities law registration and
qualification requirements for certain Regulation A offerings by
adopting a definition of ``qualified purchaser,'' as proposed? Why or
why not? Please explain. In responding to this question and the
questions below, please address both the practical implications of
preemption for capital formation and the impact on investor protection.
    115. Is there any potential alternative approach by which we might
address the concern raised by commenters and the GAO that state
securities regulation poses a significant impediment to the use of
Regulation A? \498\ In particular, could NASAA's proposed coordinated
review program be effectively implemented in the near term? If NASAA
implements a coordinated review program, should we consider changes to
the proposed ``qualified purchaser'' definition or other provisions of
the proposed rules? Are there other methods to streamline state review,
such as a process based on review or qualification in a single state?
---------------------------------------------------------------------------

    \498\ See related discussion and requests for comment in Section
II.I. below.
---------------------------------------------------------------------------

    116. Does proposed Tier 2 of Regulation A include sufficient
investor protections to justify the preemption of state securities law
registration and qualification requirements for offerings sold to
``qualified purchasers,'' defined as proposed or otherwise? If not, are
there additional investor protections that would justify such
preemption? What are they?
    117. As proposed, should we adopt a ``qualified purchaser''
definition for purposes of Regulation A to include all offerees and all
purchasers in a Tier 2 offering? Is it appropriate, as proposed, to
treat all offerees as qualified purchasers? Is it appropriate to treat
all purchasers in a Tier 2 offering as qualified purchasers, or should
we impose additional limitations (based on, for example, an income
threshold, a net worth threshold and/or an investment assets
threshold)? Should we base the definition of ``qualified purchasers''
on the Investment Company Act definition of that term, or on the
definition of ``qualified client'' under the Investment Advisers Act?
Alternatively, should we define all accredited investors as qualified
purchasers, as has been previously proposed? \499\ Why or why not?
---------------------------------------------------------------------------

    \499\ See SEC Rel. No. 33-8041 (Dec. 19, 2001) [66 FR 66839].
---------------------------------------------------------------------------

    118. Are there other approaches we should consider to defining
``qualified purchaser'' for Regulation A offerings? For example, should
we define ``qualified purchaser'' as any offeree or purchaser in a
Regulation A offering by an issuer that meets certain criteria--for
example, specified financial criteria or operating or other criteria
indicative of reduced risk? Or should we define it based on attributes
of the offering that may reduce risk to investors (e.g., firm
commitment underwritten offerings or offerings through a registered
broker-dealer)? Alternatively, should we consider a ``qualified
purchaser'' definition that reflects some attributes of the purchaser,
issuer and offering?
    119. Should we consider defining ``qualified purchaser''
unconditionally, as all offerees and all purchasers in any Regulation A
offering? Would such a definition better address potential burdens to
capital formation under Regulation A? If so, how? Would such a
definition provide sufficient investor protections to support the
preemption of state securities law registration and qualification
requirements? If not, what would support unconditional preemption of
state securities laws? Please explain.
    120. In addition to providing blue sky preemption for Tier 2
offerings, should we also consider providing preemption for some or all
resales of Regulation A securities? Would the need to comply with blue
sky laws prevent the development of a liquid secondary market for
Regulation A securities?
    121. Would the preemption of state securities law registration and

qualification requirements provided by Section 18(b)(1) of the
Securities Act for securities that are listed or authorized for listing
on a national securities exchange be a viable option for many
Regulation A issuers? Why or why not?

I. Regulation A in Comparison to Other Methods of Capital Formation

    As noted above, in developing the proposals, we have attempted to
create a workable exemption that both promotes small company capital
formation and provides for meaningful investor protections. In that
context, we are mindful that issuers have a range of possible
approaches to capital-raising, including Securities Act registration
and other exemptions from registration, such as the statutory exemption
under Section 4(a)(2) of the Securities Act, Rules 504, 505 and 506
under Regulation D \500\ and Section 4(a)(6) of the Securities Act and
the proposed rules for a crowdfunding exemption.\501\
---------------------------------------------------------------------------

    \500\ The Regulation D market is large, in recent years
approaching the size of the registered market. See Vladimir Ivanov
and Scott Bauguess, Capital Raising in the U.S.: An Analysis of
Unregistered Offerings Using the Regulation D Exemption, 2009-2012
(July 2013), available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
    \501\ See SEC Rel. No. 33-9470.
---------------------------------------------------------------------------

Request for Comment
    122. How does Regulation A, as proposed to be amended, compare--in
terms of the type of companies that may use the exemption, its
requirements, and its potential effectiveness--to other methods of
capital raising that issuers may choose for small offerings? How would
it compare to the proposed crowdfunding exemption? Either by reference
to today's proposals or more generally, are there ways in which
Regulation A could be amended that would make it a more usable
exemption?

J. Additional Considerations Related to Smaller Offerings

    As noted above, in recent years, Regulation A offerings have been
rare. Commenters \502\ and the GAO identified a number of factors that
have influenced the use of Regulation A in its current form, including
the process of filing the offering statement with the Commission, state
securities law compliance, the types of investors businesses seek to
attract, and the cost-effectiveness of Regulation A relative to other
exemptions.\503\ In developing the proposals, we have attempted to
create a more efficient and effective method to raise capital that
incorporates important investor protections. We also have been
cognizant of how issuers seeking to raise relatively smaller amounts of
capital could consider a range of possible approaches to capital-
raising.\504\
---------------------------------------------------------------------------

    \502\ See, e.g., Karr Tuttle Letter; Lacey Letter; Kaplan
Voekler Letters 1 and 2; McCarter & English Letter; ABA Letter;
Alpine Ventures Letter; Campbell Letter; WR Hambrecht + Co. Letter;
and Oggilby Letter.
    \503\ See fn. 35 above.
    \504\ These methods include, for example, Rules 504, 505 and 506
under Regulation D and Section 4(a)(6) of the Securities Act and the
proposed rules for a crowdfunding exemption. See Section II.I.
above.
---------------------------------------------------------------------------

    Under our proposal, offerings for up to $5 million that are
conducted under Tier 1 would benefit from the proposed updates to
Regulation A's filing and qualification processes, but the proposed
amendments would not otherwise substantially alter the existing
exemption for such offerings.\505\ We are mindful of the possibility
that additional changes to Tier 1 could expand its use by, and thus
potentially benefit, issuers conducting smaller offerings. An
intermediate tier between proposed Tier 1 and Tier 2 could also
potentially help increase the effectiveness of Regulation A for smaller
offerings by, among other things, permitting additional modifications
to requirements in light of the size of the offering. We are soliciting
comment on additional considerations with respect to Tier 1 and an
intermediate tier for offerings incrementally larger than Tier 1
offerings and how they would affect investor protection and capital
formation.
---------------------------------------------------------------------------

    \505\ See Kaplan Voekler Letter 1 (suggesting updating the
filing and qualification processes of, but otherwise preserving a
separate $5 million tier based on, existing Regulation A in the
revised exemption); see also Beacon Investment Letter (suggesting
existing Regulation A be preserved as a separate exemption from the
implementing rules for Title IV of the JOBS Act).
---------------------------------------------------------------------------

Request for Comment
    123. As proposed, and as is currently the case for Regulation A,
state law registration and qualification requirements would not be
preempted for Tier 1 offerings. Issuers in offerings of up to $5
million could also elect to proceed under Tier 2, which would provide
for preemption by complying with the additional requirements for Tier 2
(investment limitations, audited financial statements in the offering
statement and ongoing reporting). Are there circumstances in which we
should provide for preemption for Tier 1 offerings? If so, what are the
circumstances? Should we consider including in Tier 1 certain elements
of Tier 2, such as investment limitations, audited financial statements
in the offering statement, or ongoing reporting, or some combination of
these requirements in order to provide for preemption? Should we
consider including requirements that draw on those for other approaches
to capital-raising? If so, which requirements should we include and
why? If we require ongoing reporting for issuers that have conducted
Tier 1 offerings, should the substance or frequency of the requirements
be different from the requirements proposed for Tier 2, such as
requiring only an annual report consisting of annual financial
statements and a cover sheet or only an annual report, or an annual
report and current updates but no semiannual report?
    124. Should we consider adding an intermediate tier for offerings
exceeding $5 million but significantly less than the $50 million (e.g.,
$10 million) limitation for Tier 2? Why or why not? If so, what would
be an appropriate annual offering limitation for any such intermediate
tier? What requirements of Tier 1 and Tier 2 (e.g., audited financial
statements, investor limitations) should or should not apply to any
such intermediate tier? Should those requirements be modified with
respect to the intermediate tier? If so, how? Should we consider other
requirements? How would such requirements compare to requirements for
other avenues of capital-raising that an issuer might choose? Should
offerings made using this intermediate tier be preempted from state law
registration and qualification requirements? If so, under what
circumstances should we provide for preemption?
    125. If an issuer undergoes a registration or qualification process
that complies with the coordinated review protocol proposed and being
developed by NASAA,\506\ assuming such a program is adopted and fully
implemented, should an offering under Tier 1 or any potential
intermediate tier also be subject to review, in whole or in part, by
the Commission's staff? Why or why not? Should the Commission's rules
specify the scope or other requirements of any such coordinated review?
What standards would apply to the review and what would the review
entail (e.g., would the state review for compliance with state law
requirements, compliance with requirements of the federal securities
laws and Commission rules and forms, or both)?
---------------------------------------------------------------------------

    \506\ See discussion in Section II.H. above.
---------------------------------------------------------------------------

    126. Should we provide for preemption in a Tier 1 offering or an
offering conducted pursuant to the requirements for any potential
intermediate tier if an issuer undergoes a registration or
qualification process in

a single state? If we develop a process based on registration or
qualification in a single state for Tier 1 offerings or for offerings
conducted pursuant to the requirements for an intermediate tier, how
should it be determined which state would review and qualify the
offering? Should we specify how the issuer would determine the state
for review (e.g., the state of the issuer's principal place of business
or the state in which the issuer is incorporated)? If an offering were
subject to a single state review, should the offering also be subject
to review, in whole or in part, by the Commission's staff? Why or why
not? Would the answer depend on whether the state had a disclosure or
merit review program? Should the Commission's rules specify the scope
or other requirements of any such state review? What role, if any,
would other states have in any such state review? What standards would
apply to the review and what would the review entail (e.g., would the
state review for compliance with state law requirements, compliance
with requirements of the federal securities laws and Commission rules
and forms, or both)? How would allowing a single state review or
qualification process affect the filing choices made by issuers and the
regulatory choices made by states? Would such a process enhance or
diminish the comparability and consistency of state regulatory
frameworks? If so, how? What would be the impact of such a process on
investor protection and capital formation?

K. Regulation A Offering Limitation

    As noted above, Section 401 of the JOBS Act requires the Commission
to review the $50 million offering limit not later than two years after
enactment of the JOBS Act and every two years thereafter and, if the
Commission decides not to increase the amount, requires that it report
its reasoning to Congress.\507\ The first such review must be completed
by April 5, 2014. We solicit comment on whether the Commission should
adopt an offering amount under Regulation A, as proposed to be amended,
that is higher than the $50 million limitation for offerings in a
twelve-month period provided in Section 3(b)(2) of the Securities Act.
---------------------------------------------------------------------------

    \507\ See discussion in Section I.D. above.
---------------------------------------------------------------------------

Request for Comment
    127. As proposed to be amended, and consistent with Section
3(b)(2), should we limit offerings conducted in reliance on Regulation
A in a twelve-month period to $50 million? Or should the Commission
adopt an offering limit under Regulation A that is higher than $50
million in a twelve-month period? \508\ Why or why not? If so, what
would be an appropriate threshold for offerings in a twelve-month
period conducted in reliance on Regulation A, as proposed to be
amended?
---------------------------------------------------------------------------

    \508\ See Section 3(a)(5) of the Securities Act (requiring the
review of the Section 3(b)(2) offering limit every two years after
enactment of Title IV of the JOBS Act). 15 U.S.C. 77c(b)(5).
---------------------------------------------------------------------------

L. Technical and Conforming Amendments

    We propose to amend existing Rules 251-263 \509\ under Regulation
A.\510\ The proposed rule amendments take into account changes to
Regulation A associated with the addition of Section 3(b)(2) \511\ to
the Securities Act,\512\ and the proposals detailed in this release.
---------------------------------------------------------------------------

    \509\ 17 CFR 230.251 through 230.263.
    \510\ 17 CFR 230.251 through 230.263.
    \511\ 15 U.S.C. 77c(b)(2).
    \512\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

    In connection with these actions, we propose to revise Form 1-
A,\513\ to rescind Form 2-A,\514\ and to create four new forms, Form 1-
K (annual updates), Form 1-SA (semiannual updates), Form 1-U (current
reporting), and Form 1-Z (exit report).
---------------------------------------------------------------------------

    \513\ 17 CFR 239.90.
    \514\ 17 CFR 239.91.
---------------------------------------------------------------------------

    We also propose to revise Rule 4a-1 \515\ under the Trust Indenture
Act \516\ to increase the dollar ceiling of the exemption from the
requirement to issue securities pursuant to an indenture, and to amend
Rule 15c2-11 \517\ of the Exchange Act \518\ to permit an issuer's
ongoing reports filed under Regulation A to satisfy a broker-dealer's
obligations to review and maintain certain information about an
issuer's quoted securities. In addition, we are proposing a technical
amendment to Exchange Act Rule 15c2-11 to amend subsection (d)(2)(i) of
the rule to update the outdated reference to the ``Schedule H of the
By-Laws of the National Association of Securities Dealers, Inc.'' which
is now known as the ``Financial Industry Regulatory Authority, Inc.''
and to reflect the correct rule reference.
---------------------------------------------------------------------------

    \515\ 17 CFR 260.4a-1.
    \516\ 15 U.S.C. 77aaa et seq.
    \517\ 17 CFR 240.15c2-11.
    \518\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    As a result of the proposed revisions to Regulation A, conforming
and technical amendments would be made to Rule 157(a),\519\ in order to
reflect amendments to Section 3(b) of the Securities Act, and Rule
505(b)(2)(iii),\520\ in order to reflect the proposed changes to Rule
262 of Regulation A. Additionally, Item 101(a) \521\ of Regulation S-T
\522\ would be revised to reflect the mandatory electronic filing of
all issuer initial filing and ongoing reporting requirements under
proposed Regulation A. The portion of Item 101(c)(6) \523\ of
Regulation S-T dealing with paper filings related to a Regulation A
offering, and Item 101(b)(8) \524\ of Regulation S-T dealing with the
optional electronic filing of Form F-X by Canadian issuers, would
therefore be rescinded.
---------------------------------------------------------------------------

    \519\ 17 CFR 230.157(a).
    \520\ 17 CFR 230.505(b)(2)(ii).
    \521\ 17 CFR 232.101(a).
    \522\ 17 CFR 232.10 et seq.
    \523\ 17 CFR 232.101(c)(6).
    \524\ 17 CFR 232.101(b)(8).
---------------------------------------------------------------------------

III. General Request for Comment

    We solicit comment, both specific and general, on each component of
the proposals. We request and encourage any interested person to submit
comments regarding:
     the proposals that are the subject of this release;
     additional or different revisions to Regulation A; and
     other matters that may have an effect on the proposals
contained in this release.
    Comment is solicited from the point of view of both issuers and
investors, as well as of capital formation facilitators, such as
broker-dealers, and other regulatory bodies, such as state securities
regulators. Any interested person wishing to submit written comments on
any aspect of the proposal is requested to do so. With regard to any
comments, we note that such comments are of particular assistance to us
if accompanied by supporting data and analysis of the issues addressed
in those comments. We urge commenters to be as specific as possible.

IV. Economic Analysis

    As discussed above, Title IV of the JOBS Act requires the
Commission to adopt rules under Section 3(b)(2) of the Securities Act
exempting from Securities Act registration the offer and sale of
securities that, in the aggregate, shall not exceed $50 million in a
twelve-month period. Congress enacted Section 3(b)(2) against a
background of public commentary suggesting that Regulation A, an
existing exemption for offerings of up to $5 million in a twelve-month
period adopted under Section 3(b)(1) of the Securities Act, should be
expanded and updated to make it more useful to small companies.
    We are mindful of the costs imposed by, and the benefits to be
obtained from, our rules. Securities Act Section 2(b) and Exchange Act
Section 3(f) require

us, when engaging in rulemaking that requires us to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition and capital
formation. Exchange Act Section 23(a)(2) requires us, when adopting
rules under the Exchange Act, to consider the impact that any new rule
would have on competition and not to adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
    The discussion below addresses the economic effects of the proposed
rules, including the likely costs and benefits of the proposed rules,
as well as the likely effect of the proposed rules on efficiency,
competition and capital formation. The proposed rules include
provisions mandated by the statute as well as provisions that rely on
the Commission's discretionary authority. As a result, while many of
the costs and benefits of the proposed rules stem from the statutory
mandate of Title IV, certain costs and benefits are affected by the
discretion we propose to exercise in connection with implementing this
mandate. For purposes of this economic analysis, we address the costs
and benefits resulting from the mandatory statutory provisions and our
exercise of discretion together, because the two types of benefits and
costs are not separable. We also analyze the potential costs and
benefits of significant alternatives to what is proposed.
    We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed rules.

A. Economic Baseline \525\

    The baseline for our economic analysis of proposed amendments to
Regulation A, including the baseline for our consideration of the
effects of the proposed rules on efficiency, competition and capital
formation, is a description of market conditions today, in which
companies seeking to raise capital through securities offerings must
register the offer and sale of securities under the Securities Act
unless they can rely on an exemption from registration under the
federal securities laws. The baseline also includes a description of
investors in offerings of similar amounts and a discussion of liquidity
considerations that impact issuers' choice of capital markets.
---------------------------------------------------------------------------

    \525\ Several rules mandated by the JOBS Act have been proposed
by the Commission and one has been adopted recently. These rules may
affect the economic baseline for proposed Regulation A, but because
of data limitations the analysis below cannot account for potential
changes that may result from other Commission actions. For example,
pursuant to Title II the Commission recently amended Rule 506 of
Regulation D to permit issuers relying on the exemption in Rule
506(c) to use general solicitation or general advertising, subject
to certain conditions. See SEC Rel. No. 33-9415. This recent change
could increase the use of Regulation D, but the sample of Regulation
D offerings analyzed below does not include offerings utilizing this
amendment.
---------------------------------------------------------------------------

1. Current Methods of Raising up to $50 Million of Capital
    While there are a number of factors that companies consider when
determining how to raise capital, a key consideration is whether to
issue securities through a registered public offering or through an
offering that is exempt from Securities Act registration and ongoing
Exchange Act financial reporting requirements. The choice of offering
method may also depend on the size of the issuer and the amount of new
capital sought. Registered offerings entail initial and ongoing fixed
costs that can weigh more heavily on smaller companies, providing
incentive to remain private and to pursue capital outside of public
markets. As we describe throughout this economic analysis, the proposed
amendments to Regulation A are intended to provide small issuers access
to sources for capital unavailable through other offering exemptions
without imposing the full registration and ongoing reporting
requirements of a registered public offering. This section describes
the various currently available offering methods and prevalence of
their use.
a. Exempt Offerings
    Currently, small companies can raise capital by relying on an
exemption from registration under the Securities Act, such as Section
3(a)(11),\526\ Section 4(a)(2),\527\ Regulation D \528\ and Regulation
A.\529\ Each of these exemptions, however, includes restrictions that
may limit its utility for small companies. For example, the exemption
under Securities Act Section 3(a)(11) is limited to intrastate
offerings, and Regulation D offerings may limit or prohibit
participation by unaccredited investors. Additionally, offerings
relying on Regulation A require submission of offering materials to,
and qualification of the offering statement by, the Commission, and may
require qualification or registration in multiple states.\530\ The
table below summarizes the main features of each exemption.
---------------------------------------------------------------------------

    \526\ Under Securities Act Section 3(a)(11), except as expressly
provided, the provisions of the Securities Act (including the
registration requirement under Securities Act Section 5) do not
apply to a security that is ``part of an issue offered and sold only
to persons resident within a single State or Territory, where the
issuer of such security is a person resident and doing business
within, or, if a corporation, incorporated by and doing business
within, such State or Territory.'' 15 U.S.C 77c(a)(3)(a)(11).
    \527\ Securities Act Section 4(a)(2) provides that the
provisions of the Securities Act shall not apply to ``transactions
by an issuer not involving a public offering.'' 15 U.S.C.
77d(4)(a)(2).
    \528\ Regulation D contains three rules providing exemptions
from the registration requirements, allowing some companies to offer
and sell their securities without having to register the securities
with the SEC. 17 CFR 230.504, 505, 506.
    \529\ See release text Section I.B. above for a description of
the current terms and conditions of Regulation A.
    \530\ See Rutheford B. Campbell, Regulation A: Small Business'
Search for a Moderate Capital, 31 Del. J. Corp. L. 77, 106 (2005).
See also GAO-12-839, ``Factors that May Affect Trends in Regulation
A Offerings'', (July 3, 2012).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Offering limit                          Issuer and investor          Filing             Resale         Blue Sky Law
        Type of offering                \531\           Solicitation           requirements          requirement        restrictions       preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)...............  None..............  No limitations....  All issuers and          None.............  Restricted in      No.
                                                                          investors must be                           some cases \532\.
                                                                          resident in state.
Section 4(a)(2)................  None..............  No general          All investors must meet  None.............  Restricted         No.
                                                      solicitation.       sophistication and                          securities.
                                                                          access to information
                                                                          test.

Regulation A...................  $5 million with     ``Testing the       U.S. or Canadian         File ``testing     No...............  No.
                                  $1.5 million        waters''            issuers, excluding       the waters''
                                  limit on            permitted before    investment companies,    materials, Form
                                  secondary sales.    filing; general     blank-check companies,   1-A, Form 2-A.
                                                      solicitation        and reporting
                                                      permitted after     companies.
                                                      qualification.
Rule 504 Regulation D..........  $1 million........  General             Excludes investment      File Form D \534\  Restricted in      No.
                                                      solicitation        companies, blank-check                      some cases \535\.
                                                      permitted in some   companies, and
                                                      cases \533\.        reporting companies.
Rule 505 Regulation D..........  $5 million........  No general          Unlimited accredited     File Form D \536\  Restricted         No.
                                                      solicitation.       investors and 35 non-                       securities.
                                                                          accredited investors.
Rule 506 Regulation D..........  None..............  General             Unlimited accredited     File Form D \539\  Restricted         Yes.
                                                      solicitation        investors. Limitations                      securities.
                                                      permitted in some   on unaccredited
                                                      cases \537\.        investors \538\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\531\ Aggregate offering limit on securities sold within a twelve-month period.
\532\ Resale restrictions are determined by state securities laws, which typically restrict in-state resales for a one-year period.
\533\ No general solicitation or advertising are permitted unless registered in a state requiring the use of a substantive disclosure document or sold
  under state exemption for sales to accredited investors with general solicitation.
\534\ Filing is not a condition of the exemption.
\535\ Restricted unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited
  investors.
\536\ Filing is not a condition of the exemption.
\537\ No general solicitation or advertising is permitted under Rule 506(b). General solicitation and general advertising permitted under Rule 506(c),
  provided all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited investor status.
\538\ Under Rule 506(b), offerings may involve an unlimited number of accredited investors and up to 35 non-accredited investors. Under Rule 506(c), all
  purchasers must be accredited investors.
\539\ Filing is not a condition of the exemption.

    While we do not have adequate data on offerings relying on an
exemption under Section 3(a)(11) or Section 4(a)(2), certain data
available related to Regulation D and Regulation A filings allow us to
gauge how frequently issuers currently use these exemptions when
raising capital.
(1) Regulation A Offerings
    Companies rarely rely on existing Regulation A when raising
capital. The chart below, from the GAO study,\540\ reports the number
of filed and qualified Regulation A offerings in fiscal years 1992 to
2011.\541\ Specifically, the GAO notes that the number of filed
Regulation A offerings decreased from 116 in 1997 to 19 in 2011. The
number of qualified offerings dropped from 57 in 1998 to 1 in fiscal
year 2011.
---------------------------------------------------------------------------

    \540\ See Factors That May Affect Trends in Regulation A
Offerings, U.S. Government Accountability Office (Jul. 3, 2012),
available at http://www.gao.gov/products/GAO-12-839 (``GAO
Report'').
    \541\ A Regulation A offering is considered ``filed'' when the
Commission receives a potential issuer's offering materials through
Form 1-A. A Regulation A offering is considered qualified after the
Commission has reviewed the offering materials and certified that
all conditions have been met. Therefore, offerings that are filed
and not qualified are either pending, withdrawn, or abandoned.
[GRAPHIC] [TIFF OMITTED] TP23JA14.000

    Based on information submitted in 1,001 Form 1-A filings between
1993 and 2012, there were 914 unique Regulation A issuers during this
period. Of these, 439 offerings by 393 unique issuers were qualified by
SEC staff. Examination of these filings shows that 80% of the offerings
were for equity. Although issuers may include up to $1.5 million in
secondary sales under existing regulations, more than 95% of Regulation
A offerings included only primary shares. Analysis of industry
composition indicates that many of the issuers operate in the financial
industry (49%). In the year of the offering, the median financial
industry issuer had assets and annual revenue of $29.3 million and $2.9
million respectively, while the median non-financial industry issuer
had assets of $188,000 and annual revenue of $34,000.
    Section 402 of the JOBS Act required the GAO to study the impact of
blue sky laws on Regulation A offerings. The GAO examined (1) trends in
Regulation A filings, (2) differences in state registration of
Regulation A filings, and (3) factors that may have affected the number
of Regulation A filings. In its July 2012 report on Regulation A, the
GAO cited four central factors affecting the use of Regulation A
offerings: (1) Costs associated with compliance with state securities
regulations, or ``blue sky laws''; (2) the availability of alternative
offering methods exempt from registration, such as Regulation D
offerings; (3) costs associated with the filing and qualification
process with the SEC; and (4) the type of investors businesses sought
to attract.
    As identified by the GAO, compliance with state securities laws may
currently affect the use of existing Regulation A. While state
securities law filing fees are likely not significant in any particular
state (filing fees are, on average, approximately $1000 in every
state), such fees can become non-trivial when the offering extends
across multiple states.\542\ For example, state securities law filing
fees averaged $35,000 in initial public offerings under $50
million.\543\ Legal and compliance costs for issuers seeking to offer
securities in multiple states may be significant for issuers due to
myriad differences in securities laws and applicable procedures across
states. Inconsistencies in state laws and exemptions, as well as in the
process of registration or qualification of an offering under state
law, can result in an expensive, drawn-out process for issuers that
could adversely affect their efforts to raise capital in a timely and
cost-effective manner.
---------------------------------------------------------------------------

    \542\ See Paul Hastings Letter, at 2 and Exhibit A (citing
estimated costs of state securities law filings under Section
3(b)(2) of $50,000 to $70,000); Cf. Regulation D Rule 506 Blue Sky
Filing Chart available at http://americansaferetirements.com/agents/wp-content/uploads/2012/09/Blue-Sky-Filing-Chart-Reg-D-506-.pdf.
    \543\ This calculation is based on data provided by Capital IQ
and is obtained from S-1 filings from 1996-2012 which reports six
categories of IPO-related fees, shown in more detail in the ``IPO-
related fees'' table below.
---------------------------------------------------------------------------

    The GAO also identified costs associated with the filing and
qualification process for Regulation A offerings as a potential reason
for its current limited use. As described above, a business that relies
on Regulation A must file an offering statement with the Commission
that is subject to review by Commission staff and must be qualified
before the offering can proceed. From 2002 through 2012, Regulation A
filings took an average of 241 days to qualify.\544\ While some of this
timeframe reflects delays associated with the paper filing method, most
of the delay results from the concurrent review by state securities
regulators and the fact that the review process may encompass several
rounds of discussion between Commission staff and issuers. It may also
take longer to qualify when issuers fail to provide all required
information in their filings or to address all questions from previous
correspondence with the Commission. Issuer size may also be related to
the speed at which offerings are qualified. For example, larger
companies (i.e., those with total assets greater than the median ($1.4
million) for all qualified Regulation A offerings) navigate the
qualifying process on average 97 days faster than smaller
companies.\545\
---------------------------------------------------------------------------

    \544\ This estimate is based on the initial Form 1-A filing and
the last Form 1-A filing through which the offering was qualified.
The median number of calendar days for an offering to be qualified
was approximately 189. The fastest offering qualified in 4 calendar
days and the slowest offering took 693 calendar days.
    \545\ Id. It is also possible that because most of the larger
Regulation A issuers are financial institutions, such as banks and
trusts, which are regulated and disclose more information than other
Regulation A issuers, they are able to prepare offering materials
relatively quickly and easily, based on information they are
required to provide to other regulators.
---------------------------------------------------------------------------

    Unlike other exemptions, existing Regulation A permits offerings to
an unlimited number of unaccredited investors, provided that the total
amount sold does not exceed $5 million in a twelve-month period.
Further, securities sold under existing Regulation A have no
restrictions on resale. As discussed below, Regulation A issuers
currently have limited involvement in secondary markets.
(2) Regulation D Offerings
    Based on information available to us, it appears that the most
common way to issue up to $50 million of securities is in reliance on a
Regulation D offering exemption. Regulation D includes three rules
providing exemptions from the registration requirements of the
Securities Act. Specifically, as described in the table above, eligible
issuers can rely on Rule 504 to raise up to $1 million within a twelve-
month period, Rule 505 to raise up to $5 million within a twelve-month
period, and Rule 506 to raise an unlimited amount. As the table notes,
the three rules have different requirements that affect their use. In
total, based on analysis of issuer offering details reported on Form D,
Regulation D accounts for approximately $900 billion in annual capital
raising.\546\ During the 2009 to 2012 period, most issuers chose to
raise capital by relying on Rule 506, even when their offering
permitted reliance on Rule 504 or Rule 505.\547\
---------------------------------------------------------------------------

    \546\ These exclude issuances of pooled investment vehicles.
    \547\ This tendency could, in part, be attributed to two
features of Rule 506: Blue sky law preemption and an unlimited
offering amount. See also Factors That May Affect Trends in
Regulation A Offerings, U.S. Government Accountability Office (Jul.
3, 2012), available at http://www.gao.gov/products/GAO-12-839.
---------------------------------------------------------------------------

    During 2012, there were nearly 22,000 Regulation D offerings
reported on Form D. Of these, approximately 12,000 would meet the
conditions of Regulation A, as proposed to be amended, which excludes
offerings by reporting companies, foreign issuers and investment
companies, and offerings of interests in claims on natural resources.
The following table reports the breakdown of Regulation D filings from
2012 for all issuers that would be eligible to use Regulation A, as
proposed to be amended.\548\
---------------------------------------------------------------------------

    \548\ These numbers are calculated using data from raw Form D's
filed with the Commission. We have adjusted for amended filings by
dropping old filings if an amended filing exists. This analysis
excludes filings from issuers relying on Regulation D as a pooled
investment fund.

                                  Regulation D Offerings During 2012 by Issuers Eligible To Rely on Regulation A \549\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Rule 504                Rule 505                                       Rule 506
           Offering size           ---------------------------------------------------------------------------------------------------------------------
                                             <$1M                    <$5M                    <$5M                  $5M-$50M                >$50M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Reg A Eligible............  Yes...................  Yes...................  Yes...................  No...................  No
Proposed Reg A Eligible...........  Yes...................  Yes...................  Yes...................  Yes..................  No
Number of filings.................  385...................  142...................  7,202.................  2,784................  330
Median offering amount ($           0.4...................  1.0...................  1.0...................  10.0.................  88.9
 millions).
Average offering amount ($          0.5...................  1.3...................  1.4...................  13.7.................  481
 millions).
Average amount raised (% of         62.2..................  67.9..................  72.1..................  72.7.................  76.4
 offering) \550\.
Portion with unaccredited           62.1..................  36.8..................  7.8...................  5.0..................  8.2
 investors (% of deals).
Average fees (% of funds raised)..  0.1...................  0.2...................  0.7...................  0.7..................  0.8
Median number of investors........  4.....................  4.....................  5.....................  8....................  12
--------------------------------------------------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in natural resources, and issuers who failed
  to sell any securities.

    As shown in the table above, most Regulation D offerings that would
be eligible for Regulation A under the proposed rules are relying on
Rule 506 of Regulation D. A comparison of Rule 506 offerings over $50
million to those below $50 million shows that larger offerings involve
more investors and have generally raised a greater percentage of the
amount of capital sought at the time of the Form D filing. This
evidence indicates potentially higher success rates for larger
offerings, although this cannot be confirmed because there is no
requirement for issuers to file an amended Form D at the completion of
an offering.
---------------------------------------------------------------------------

    \549\ Id.
    \550\ The total offering amount is not always equivalent to the
total amount raised at the time of filing. Regulation D permits
filing a Form D before completion of the fundraising round. Thus for
most companies, the difference between the total offering amount and
amount raised results from filing a Form D before securing all funds
promised. In addition, some companies (usually pooled investment
funds) use Form D for open-ended offerings.
---------------------------------------------------------------------------

    Most Regulation D issuers elect not to disclose their revenue range
in their Form D filings. The following table shows the breakdown of the
issuers potentially eligible to rely on Regulation A that did not
disclose, and those that elected to disclose a revenue range for
offerings made in 2012.

   Amount Raised Through Regulation D Offerings in 2012 by Issuers Eligible To Rely on Regulation A, by Issuer
                                               Revenue Range.\551\
----------------------------------------------------------------------------------------------------------------
                                                                     Frequency       Frequency      Avg. raised
                          Revenue range                             offering  <   offering  $5M-   ($ millions)
                                                                        $5M            $50M       offering <$50M
----------------------------------------------------------------------------------------------------------------
Not Applicable \552\............................................             141              92             4.7
Decline to Disclose.............................................           4,543            2091             4.3
No revenues.....................................................           1,353             264             1.4
$1-$1,000,000...................................................           1,168             118             1.0
$1,000,001-$5,000,000...........................................             315              64             2.1
$5,000,001-$25,000,000..........................................             132              93             3.8
$25,000,001-$100,000,000........................................              53              41             7.7
Over $100,000,000...............................................              24              21             6.9
----------------------------------------------------------------------------------------------------------------
Excludes offerings by reporting companies, foreign issuers and investment companies, offerings of interests in
  natural resources, and issuers who failed to sell any securities.

    If issuers that disclose a revenue range are representative of all
Form D filers, then nearly half of the issuers that file Form D have no
revenues. The portion of issuers without revenues is noteworthy because
debt is not likely to be a feasible source of capital for companies
without regular cash flows.
---------------------------------------------------------------------------

    \551\ Id.
    \552\ These could be Regulation D issuers (non-registered
investment companies) that manage assets and report net asset value,
for example, REITS, or spillover from the ``No revenues'' category.
---------------------------------------------------------------------------

b. Registered Offerings
    Companies seeking to raise capital without being subject to the
restrictions under exempt offerings can register the offer and sale of
securities under the Securities Act.
    The following figure shows the frequency of IPOs each year for
companies issuing above or below $50 million.\553\ Consistent with many
previous observations about the recent IPO market, the number of IPOs,
particularly those under $50 million, has fallen dramatically since the
late 1990s.\554\
---------------------------------------------------------------------------

    \553\ There were approximately 25 registered initial public
offerings up to $50 million in 2012 according to data from Capital
IQ.
    \554\ See, e.g., D. Weild and E. Kim, A wake-up call for
America, 2009. In 2011, the Treasury Department hosted a conference
on access to capital to better understand how to restore access to
capital for emerging companies. The conference featured the findings
of an IPO task force comprised of a number of experienced venture
capitalists, investment bankers, and lawyers. Their findings provide
a number of possible explanations for the decline in the number of
IPOs, including that 92% of the surveyed CEOs listed the
``Administrative Burden of Public Reporting'' as being one of the
most significant challenges of an IPO.

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

[GRAPHIC] [TIFF OMITTED] TP23JA14.001

    One possible reason for the decreasing number of IPOs under $50
million is that public offerings may be too costly to be a viable
alternative for some small companies.\556\ In particular, commissions
paid to underwriters average 7% for IPOs, 5% for seasoned public
issuances, and 1% for bond issuances.\557\ Issuers conducting
registered public offerings must also pay Commission registration fees
and FINRA filing fees, legal and accounting fees and expenses, transfer
agent and registrar fees, costs associated with periodic reporting
requirements and other regulatory requirements and various other fees.
Two surveys concluded that regulatory compliance costs of IPOs average
$2.5 million initially, followed by an ongoing $1.5 million per
year.\558\
---------------------------------------------------------------------------

    \555\ The data is provided by Capital IQ and this sample
excludes offerings from blank check companies and non-Canadian
foreign issuers.
    \556\ See also Gao, Xiaohui, Jay R. Ritter, and Zhongyan Zhu.
Where have all the IPOs gone?, Working Paper, University of Florida,
2012 (suggesting, among other things, that acquisitions have
partially supplanted the traditional IPO as an exit path for smaller
companies).
    \557\ See, e.g., H. Chen and J. Ritter (2000), The Seven Percent
Solution, Journal of Finance 55, pp. 1105-1131; S. Corwin (2000),
The Determinants of Underpricing for Seasoned Equity Offers, Journal
of Finance 58 pp. 2249-2279; L. Fang (2005), Investment Bank
Reputation and the Price and Quality of Underwriting Services,
Journal of Finance 60, pp. 2729-2761.
    \558\ See IPO Task Force, Rebuilding the IPO On-Ramp, 9 (Oct.
20, 2011), available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force'').
---------------------------------------------------------------------------

    Because of the fixed-cost nature of many of the fees associated
with public offerings, size may be one of the most important
determinates of whether an offering is made available to the public. As
shown in the scatter plot below, there is a downward trend in IPO-
related fees (excluding underwriter and printing costs and reported as
a percentage of offering proceeds) as offering size increases.\559\
---------------------------------------------------------------------------

    \559\ Fee information is compiled by Capital IQ and is obtained
from S-1 filings from 1996-2012 which reports six categories of IPO-
related fees. The analysis includes four of the fees: legal,
accounting, blue sky, and registration, which we collectively refer
to as ``compliance fees''.

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

[GRAPHIC] [TIFF OMITTED] TP23JA14.002

    For offerings below $50 million, the fixed cost components of legal
and accounting-related fees, as a percentage of offering size, are
particularly burdensome. In the table below, which reports the six fee
types reported in Form S-1, offerings less than $50 million incur
compliance related fees that are on average nearly twice those incurred
by larger offerings, measured as a percentage of proceeds.

          IPO-Related Fees as a Percentage of Offering Size for Offerings Completed From 1996 to 2012.
----------------------------------------------------------------------------------------------------------------
                                                                                Offerings  $5-    Offering >
                                                                   All offerings    $50 million     $50 million
                                                                    (N=4868)  %    (N = 2017)  %   (N = 2851)  %
----------------------------------------------------------------------------------------------------------------
Total Fees......................................................            9.55           11.15            8.44
    Compliance Fees.............................................            1.39            1.91            1.03
        Registration Fees.......................................            0.03            0.04            0.02
        Blue Sky Fees...........................................            0.03            0.07            0.01
Accounting Fees.................................................            0.53            0.72            0.40
        Legal Fees..............................................            0.80            1.08            0.60
    Underwriter Fees............................................            6.45            6.87            6.17
    Printing Fees...............................................            0.32            0.47            0.22
----------------------------------------------------------------------------------------------------------------
Analysis excludes offerings from non-Canadian foreign issuers and blank-check companies.

    Additional statistical analysis \560\ of these fees using
regression methodologies shows that fees have increased by
approximately six basis points per year since 1996, and that these fees
have increased disproportionately more for small offerings than for
large offerings. For example, fees related to offerings over $50
million increased by approximately 50 basis points from 2000 to 2010,
while fees related to offerings below $50 million increased by 100
basis points over the same period.
---------------------------------------------------------------------------

    \560\ We tested for statistical significance in the relationship
between fees and issue size using regression analysis of fees
disclosed in S-1 filings. The data is from Capital IQ, which
tabulates S-1 and other filings. Due to the abnormal distribution of
IPO-related fees, we use quantile regressions. Fees were calculated
as described in the table above. The sample eliminates all
observations by issuers who would be ineligible for the proposed
Regulation A exemption. Finally, we determine that fees have
increased more rapidly for smaller issuers by including an
interaction term of issuance date with offering size.
---------------------------------------------------------------------------

    In addition to increased compliance costs, there are a number of
other possible explanations for the decline in IPOs. For example, one
benefit of a public listing is the increased liquidity that results
from access to retail investors; however, catering to retail owners can
involve investor relations challenges and liability-related costs.\561\
A second explanation for the decline of IPOs could result if current
offerings are

concentrated in high-technology sectors that are sensitive to R&D-
related disclosure requirements, which could potentially cause issuers
to rely more on private capital sources.\562\ Access to capital may
also be especially time-sensitive for the types of companies most
likely to make small offerings, rendering these companies unwilling to
go through a potentially lengthy registration process. It is also
possible that directors and officers of companies looking to raise less
than $50 million may not want to subject themselves to the increased
liability and takeover threats that come with dispersed ownership.\563\
Finally, the decline of public offerings could result from macro-
economic effects on investment opportunities in the economy and the
cost of capital.\564\
---------------------------------------------------------------------------

    \561\ For instance, the 2011 IPO Task-Force survey results
indicate that 88% of CEOs that had completed an IPO listed
``Managing Public Communications Restrictions'' as one of the most
significant challenges brought on by becoming a reporting company.
    \562\ Campbell, Tim S. (1979), Optimal investment financing
decisions and the value of confidentiality, Journal of Financial and
Quantitative Analysis: pp. 913-924.
    \563\ Burkart, Mike, Denis Gromb, and Fausto Panunzi (2000),
Agency conflicts in public and negotiated transfers of corporate
control, The Journal of Finance 55.2, pp. 647-677.
    \564\ Lowry, Michelle (2003), Why does IPO volume fluctuate so
much?, Journal of Financial Economics 67.1, pp. 3-40.
---------------------------------------------------------------------------

    Companies that have completed an IPO often continue to raise
capital through follow-on offerings. In 2012, public follow-on
offerings accounted for $155 billion, $4 billion of which came from
offerings less than $50 million,\565\ which is significantly more than
the amount raised through IPOs over the same period, suggesting that
follow-on offerings (also known as ``seasoned equity offerings'')
comprise a prevalent source of capital for companies.\566\
---------------------------------------------------------------------------

    \565\ There were approximately 211 public follow-on offerings in
2012 according to data from Thompson Reuters SDC.
    \566\ These estimates are based on our analysis of data on
seasoned equity offerings from Thompson Financials SDC Platinum and
excludes offerings from non-Canadian foreign issuers.
---------------------------------------------------------------------------

c. Private Debt Offerings
    Companies with regular cash flows often rely on debt as a source of
capital; however, borrowing may not be a cost effective option for many
early-stage companies as they may face large information asymmetries
with investors, irregular cash-flow projections, insufficient assets to
offer as collateral, and high external monitoring costs.\567\ For
example, an internet start-up company without steady revenues might
have trouble securing a loan or a line of credit from a bank because it
would have difficulty signaling the quality of its business model and
ability to repay. Conversely, an owner of a restaurant franchise could
reasonably rely on regular cash flows and its own credit history to
support a loan application. Additionally, some companies may find loan
requirements imposed by financial institutions difficult to meet. For
example, financial institutions generally require a borrower to provide
collateral and/or a guarantee by owners,\568\ which some companies may
not be able to or may be reluctant to provide.\569\
---------------------------------------------------------------------------

    \567\ Robb, Alicia M., and David T. Robinson, The capital
structure decisions of new firms, No. w16272, National Bureau of
Economic Research, 2010.
    \568\ Approximately 92% of all small business debt to financial
institutions is secured, and owners of the firm guarantee about 52%
of that debt. See Berger, Allen N., and Gregory F. Udell.
Relationship lending and lines of credit in small firm finance.
Journal of Business (1995): 351-381.
    \569\ Some of these companies might instead rely on trade
credit, which can be an important source of capital for young firms.
See, e.g. Petersen, Mitchell A., and Raghuram G. Rajan, Trade
credit: theories and evidence, Review of Financial Studies 10.3
(1997): 661-691; and Murfin, Justin, and Ken Njoroge, The Implicit
Costs of Trade Credit Borrowing by Large Firms., working paper.
---------------------------------------------------------------------------

2. Liquidity Considerations
    As described above, various financing options are available to
small companies looking to raise up to $50 million of capital. For many
companies, access to liquid markets is an important consideration as
they compare the merits of these options.
    There are important differences in liquidity for securities issued
in a registered offering or under Regulation D or Regulation A.
Securities in registered offerings that meet listing requirements
benefit from the liquidity of listing on a national securities
exchange. Conversely, securities sold under Regulation D are relatively
illiquid due to restrictions that prohibit resale in the public market
for up to a year. Although securities issued under Regulation A are
freely tradable, they typically trade in over-the-counter markets (if
at all), as these issuers may not meet listing standards of a national
securities exchange or be willing or able to bear the costs of ongoing
reporting.\570\ In fact, a much larger proportion of the qualified
Regulation A offerings from 2001 to 2012 are quoted in the OTC market
than listed on a national securities exchange; although most of these
offerings are not currently quoted on OTC markets.\571\
---------------------------------------------------------------------------

    \570\ See, e.g., Sanger and Peterson, 1990; Harris,
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
    \571\ This conclusion is based on a review of three databases
with coverage of OTC markets: CapitalIQ, iMetrix, and OTC quote.
---------------------------------------------------------------------------

    More generally, OTC-traded securities are significantly less liquid
than those listed on a national securities exchange.\572\ Existing
studies of bid-ask spreads, trading volume, and price volatility find
statistically lower liquidity in OTC securities and a comparison group
\573\ of similar securities listed on a national securities
exchange.\574\
---------------------------------------------------------------------------

    \572\ See, e.g., Sanger and Peterson, 1990; Harris,
Panchapagesan, and Werner, 2008; Macey, O'Hara, and Pompilio, 2008.
    \573\ Choosing a comparison set of companies with similar
characteristics, such as market capitalization, helps isolate the
effect of trading venue on liquidity.
    \574\ Ang, A., Shtauber, A., & Tetlock, P. Asset pricing in the
Dark: The Cross Section of OTC Stocks (July 1, 2013). Netspar
Discussion Paper No. 11/2010-093, available at SSRN: http://ssrn.com/abstract=1817542 or http://dx.doi.org/10.2139/ssrn.1817542.
Review of Financial Studies, forthcoming. The study analyzes 486 OTC
stocks and compares them with a benchmarked (size-based) sample of
listed stocks.
---------------------------------------------------------------------------

    There is also evidence that illiquidity is especially expensive for
companies that trade on OTC markets.\575\ A recent study finds OTC-
traded securities differ from listed securities in that they are
primarily held by retail investors and have a larger illiquidity return
premium.\576\ One explanation for the higher liquidity premium is the
likelihood of increased asymmetric information,\577\ as the cost of
illiquidity is largest for securities whose issuers choose not to
disclose financial information and that are primarily held by retail
investors.\578\ The desire of issuers to alleviate this illiquidity
discount may explain why many OTC quoted companies that are not
required to report financial information under the Exchange Act
voluntarily provide limited financial information to investors.\579\
---------------------------------------------------------------------------

    \575\ Id.
    \576\ Id.
    \577\ Lev, Baruch. Toward a theory of equitable and efficient
accounting policy. Accounting Review (1988): 1-22.
    \578\ Ang, A., Shtauber, A., & Tetlock, P. 2011. Asset pricing
in the Dark: The Cross Section of Over-the-Counter Stocks. Review of
Financial Studies, forthcoming. The study analyzes 486 OTC stocks
and compares them a benchmark group of listed stocks.
    \579\ Analysis by staff in the Division of Economic and Risk
Analysis found that in 2012, there were more than 700 companies
quoted through the OTC Markets Group platform that provided limited
financial information to qualify as OTC Pink Limited Information
securities, which are quoted in a tier above firms that do not
provide financial information.
---------------------------------------------------------------------------

3. Investors in Offerings of up to $50 Million
    The various methods of raising up to $50 million in capital may
attract different types of investors. For example, as discussed above,
Regulation A and public offerings have no limit on the number of
unaccredited investors that can participate. In contrast,

offerings under Rule 506(b) of Regulation D are limited to a maximum of
35 unaccredited investors.
    Data from Form D filings suggests that unaccredited investors are
not significantly involved in Regulation D offerings of up to $50
million. While unaccredited investors can and do participate in
Regulation D offerings, offerings involving unaccredited investors are
typically smaller than those that do not involve unaccredited
investors. In 2012, we estimate that there were approximately 220,000
investor participations in nearly 11,000 Regulation D offerings of
below $50 million by issuers that would be eligible for exemption under
Regulation A, as proposed to be amended.\580\ Of these offerings,
approximately 9.4% involved at least one unaccredited investor.
Offerings to exclusively accredited investors averaged 12 investors per
offering and raised an average of $3.7 million per offering. In
contrast, an average of 107 investors participated in offerings that
involved at least one unaccredited investor and raised an average of
$1.5 million.\581\
---------------------------------------------------------------------------

    \580\ These numbers are based on analysis by the Division of
Economic and Risk Analysis of initial Form D filings submitted
during calendar year 2012. The estimated total number of investor
participations is likely greater than the actual number of
Regulation D investors because investors could have participated in
more than one offering.
    \581\ Because some investors participate in multiple offerings,
these numbers likely overestimate the actual number of unique
investors in these reported offerings.
---------------------------------------------------------------------------

    As of 2010, 8.7 million U.S. households, or 7.4% of all U.S.
households, qualified as accredited investors based on the net worth
standard in the definition of ``accredited investor,'' \582\ which is
substantially larger than the total number of investors that reported
as having participated in an unregistered offering, but considerably
less than the total number of retail investors, which we estimate could
be as high as 33 million.\583\ Thus the current pool of investors
eligible to participate in Regulation A offerings and public offerings
is substantially larger than the estimated total number of accredited
investors or current levels of investor participation in the private
offering market.
---------------------------------------------------------------------------

    \582\ See analysis presented in SEC Rel. No. 33-9415 (July 10,
2013) [78 FR 44771].
    \583\ Id.
---------------------------------------------------------------------------

B. Analysis of Proposed Rules

1. General Considerations
    The impact of the proposed rules on the level and efficiency of
capital formation will depend on the extent to which companies use the
new offering method to raise capital that would not otherwise have been
available to them. It will also depend on the extent to which companies
elect to rely on Regulation A, as proposed to be amended, in place of
existing offering methods. As discussed above, many companies finance
their operations and investments with credit from banks and other
financial entities.\584\ Other companies, particularly early-stage and
high growth companies, seek capital through equity-based financing
because they do not have sufficient collateral or the revenue streams
necessary to support the fixed repayment schedule of debt
financing.\585\ These companies often seek capital from institutional
or accredited investors through offerings that are exempt from
registration because the minimum fixed costs of going public through a
registered offering can be disproportionately large for small
issuers.\586\ But private offerings impose restrictions on resale,
offering amounts, or participating investors in ways that can limit the
ability to raise capital and may not be attractive to some small
companies or investors.
---------------------------------------------------------------------------

    \584\ Berger, Allen N., and Gregory F. Udell, 1998, The
economics of small business finance: The roles of private equity and
debt markets in the financial growth cycle, Journal of Banking &
Finance 22.6, pp. 613-673.
    \585\ Id.
    \586\ See Section I.A. above.
---------------------------------------------------------------------------

    The proposed amendments to Regulation A are intended to provide
small issuers access to sources for capital unavailable through other
offering exemptions without imposing the full registration and ongoing
reporting requirements of a registered public offering. Hence, it is
likely that companies seeking to raise capital through an offering
conducted under Regulation A, as proposed to be amended, would have
been able to access to capital through private offerings or registered
public offerings. In this respect, the impact of the proposed
Regulation A amendments on capital formation could be redistributive in
nature, but with potentially significant positive effects on capital
formation and allocative efficiency by providing the issuers less
costly access to capital than alternative offering methods and by
providing unaccredited (retail) investors with additional investment
opportunities.
    The potential future use of an amended Regulation A depends largely
on the perceived trade-off between the costs of qualification and
ongoing disclosure requirements and the potential benefits to issuers
from access to a broad investor base and secondary market
liquidity.\587\ For example, companies considering a traditional IPO
may alternatively consider issuing securities pursuant to Regulation A,
as amended, if they believe that the benefits of reduced disclosure
requirements offset the potential loss of secondary market liquidity
that may result from an issuer's inability to have its securities
quoted on platforms that are available only for Exchange Act-registered
securities. Alternatively, companies considering seeking capital from
institutional or accredited investors through a private offering might
consider an offering under amended Regulation A if they believe that
there is a more dispersed investor base, which could include retail
investors, willing to provide capital at a lower cost.
---------------------------------------------------------------------------

    \587\ The Commission also recognizes that other important
considerations could affect the use of Regulation A as proposed to
be amended. In particular, as explained above, the GAO study of
Regulation A offerings found that blue sky law compliance was a
primary factor in the infrequent reliance on Regulation A. Because
we are proposing to define qualified purchasers in a way that has
the potential to include a large percentage of Regulation A
investors, we believe that compliance costs associated with blue sky
laws will be eliminated for most offerings, making them similar to
Regulation D offerings and registered offerings in this respect.
---------------------------------------------------------------------------

    We preliminarily believe that an approach that generally preserves
existing Regulation A while also introducing an option that allows
issuers to raise greater amounts of capital without state review but
with additional disclosure requirements is a prudent first step to
adapting Regulation A for larger offerings. We believe this approach
balances the trade-offs among compliance costs, investor protection,
and benefits associated with liquidity and access to investors. We
recognize, however, that this approach may limit the use of Regulation
A for certain issuers, and we accordingly are requesting comment on
additional considerations for smaller offerings. For example, the
ongoing reporting obligations of a Tier 2 offering may be
proportionately more burdensome for smaller issuers that are looking to
raise substantially less than $50 million, and may not provide the same
benefit to smaller issuers that are not pursuing secondary market
liquidity. For these issuers, it may also not be reasonable to pursue a
Tier 1 offering because the $5 million maximum issuance threshold may
be insufficient in light of costs associated with the existing offering
process. We recognize that observing market behavior under the proposed
approach would provide information that would allow us to assess the
need for modifications to the proposed

approach, which also could be made when the Commission considers the
efficacy of the $50 million threshold, as mandated by Congress every
two years.
    The disclosure requirements that we are proposing account for the
trade-offs identified above and are guided by current and past market
experiences. For example, prior to 1999, securities traded over-the-
counter (OTC) and quoted on the OTC Bulletin Board (OTCBB) interdealer
quotation system were not required to be Exchange Act reporting
companies. In January 1999, the SEC approved an OTCBB eligibility rule
that required companies whose securities are quoted on OTCBB to file
periodic financial reports under the Exchange Act or with their primary
regulator if not the SEC.\588\ One study evaluating this change found
improved liquidity at companies that were already providing periodic
reports, or that chose to comply with Exchange Act reporting
requirements to remain eligible for quotation on OTCBB.\589\
Approximately three-fourths of the companies that were not already
reporting chose not to satisfy the new eligibility requirement by
becoming an Exchange Act reporting company and instead entered less
regulated and less liquid OTC markets, indicating that, for these
companies, the expected costs associated with mandatory public
reporting under the Exchange Act outweighed the expected liquidity
benefits.\590\
---------------------------------------------------------------------------

    \588\ See Order Granting Approval of Proposed Rule Change and
Amendment No. 1 from the National Association of Securities Dealers,
Inc. Relating to Microcap Initiatives-Amendments to NASD Rules 6530
and 6540, Exchange Act Release No. 34-40878 (Jan. 4, 1999), 64 FR
1255 (Jan. 8, 1999).
    \589\ Bushee, Brian J., and Christian Leuz, (2005), Economic
consequences of SEC disclosure regulation: Evidence from the OTC
bulletin board, Journal of Accounting and Economics 39.2, pp. 233-
264.
    \590\ Id.
---------------------------------------------------------------------------

    The Tier 2 reporting requirements are substantially less than
Exchange Act reporting requirements, but greater than what is currently
required for an exemption from registration under the existing
Regulation A rules and those under Regulation D. The following table
shows a selection of commonly filed reports for Exchange Act registered
companies and the analogous form, if any, that would be required for
securities issued under Regulation A, as proposed to be amended, or
Regulation D.

   Overview Comparison of Differences in Reporting Requirements for Offerings Exempt Under Regulation D, Regulation A, Regulation A as Proposed To Be
                                                            Amended and Registered Offerings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Proposed  regulation    Proposed  regulation
    Common disclosure types            Regulation D        Current  regulation A         A tier 1                A tier 2            Registered \591\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Offering document or notice....  D \592\................  1-A...................  1-A...................  1-A...................  S-1
Auditors.......................  .......................  ......................  ......................  No requirement for a    PCAOB-registered
                                                                                PCAOB-registered        Auditor.
                                                                                Auditor.
Report of material events......  .......................  ......................  ......................  1-U...................  8-K
Interim report.................  .......................  ......................  ......................  1-SA..................  10-Q
Annual report..................  .......................  ......................  ......................  1-K...................  10-K
Termination of registration....  .......................  2-A...................  1-Z...................  1-Z...................  15
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Tier 2 reporting requirements are also greater than what is
proposed to be required under Tier 1. We believe that it is appropriate
to require some additional disclosure from issuers of larger offerings
up to $50 million in order to better protect investors under the new
Regulation A regime.
---------------------------------------------------------------------------

    \591\ This comparison does not cover offerings by foreign
private issuers.
    \592\ Form D is a notice of sale under Regulation D, not a
disclosure document, although certain disclosures are required.
Regulation D does not require filing of a disclosure document with
the Commission, and does not generally impose disclosure
requirements except when sales are made to purchasers that are not
accredited investors. See Rule 502(b), 17 CFR 230.502(b).
---------------------------------------------------------------------------

    We recognize that even if the proposed rules reduce compliance
costs and require sufficient disclosure to enable investors,
particularly retail investors, to make informed capital allocation
decisions, some issuers may still prefer other offering exemptions.
Preferences for other offering exemptions could be particularly strong
given that general solicitation is now permissible in certain cases
under Rule 506(c). In particular, it is possible that issuers relying
on Rule 506(c) may now be in a better position to identify
institutional and accredited investors, such that seeking capital from
a broader retail investor base is not required or desired. In addition,
eliminating the ban on general solicitation for certain Rule 506
offerings may encourage new trading platforms for privately placed
securities once their resale restrictions are lifted. While secondary
markets for private offerings are unlikely to achieve the same level of
liquidity of OTC or other listing venues, it is nonetheless possible
that trading platforms could achieve levels of liquidity sufficient to
allow certain types of securityholders (like founders and other
affiliated owners) to exit once resale restrictions are lifted.
2. Scope of Exemption
a. Eligible Issuers
    Under the proposed rules, and consistent with current Regulation A
eligibility requirements, eligible issuers include any companies
organized and with their principal place of business inside the United
States or Canada excluding investment companies, reporting companies,
blank check companies, and issuers of claims on natural resources, and
certain disqualified ``bad actors''. We also propose to exclude some
issuers that are currently eligible to rely on Regulation A.
Specifically, the Commission is proposing to exclude from eligibility
issuers that are subject to a denial, suspension, or revocation order
by the Commission pursuant to Section 12(j) of the Exchange Act within
the five years immediately preceding the filing of the offering
statement and issuers that have not filed required ongoing reports
pursuant to Regulation A, as proposed to be amended, in the two-year
period immediately preceding the filing of a new offering statement.
    The proposed changes to the Regulation A eligibility requirements
would have benefits and costs. In particular, we believe that the
proposed exclusion from eligibility of issuers that have not complied
with ongoing reporting requirements in the two-year period immediately
preceding the filing of a new offering statement would

incentivize issuers that intend to rely on Regulation A in the future
to comply with ongoing reporting requirements, which would allow
investors to make better informed investment decisions. This exclusion,
however, should not impose additional burdens or costs on issuers that
would not have already been incurred with the proposed ongoing
reporting requirements of Regulation A.
    The Commission is also proposing to exclude from eligibility
issuers that are subject to a denial, suspension, or revocation order
by the Commission pursuant to Section 12(j) of the Exchange Act within
the five years immediately preceding the filing of the offering
statement. This exclusion may incentivize Exchange Act registrants to
comply with their obligations, and would prevent companies with a
history of reporting non-compliance from relying on Regulation A. We
also recognize that this exclusion could prevent offerings by issuers
that intend to comply with Regulation A requirements despite a history
of Exchange Act non-compliance, which could limit capital formation in
certain situations.
    The proposed rules continue to exclude non-Canadian foreign issuers
from use of Regulation A, but, as discussed above, we are soliciting
comment about the alternative of amending Regulation A to expand
eligibility to additional foreign issuers. Allowing participation by
non-Canadian foreign issuers could increase competition between foreign
and domestic issuers for U.S.-based investor capital. This increased
competition could raise the cost of capital for Regulation A issuers to
the extent that there is not a commensurate increase in the supply of
Regulation A capital. It is also possible, however, that expanding
eligibility to use Regulation A to non-Canadian foreign issuers could
attract additional investor capital to the market such that the change
would not have a material impact on domestic issuers' cost of capital.
    The proposed rules also continue to exclude blank-check companies.
We believe that this exclusion is appropriate given the potential
difficulty for retail investors to evaluate the investment
opportunities posed by these issuers, particularly because the issuers
do not explicitly identify investment opportunities at the time of
offering. The continued exclusion of blank check companies could
prevent some legitimate early-stage companies that would otherwise be
eligible issuers from relying on Regulation A.
    We are not proposing to amend the existing exclusion of companies
subject to the ongoing reporting requirements of Section 13 or 15(d) of
the Exchange Act (``reporting companies''). As an alternative, we could
amend Regulation A to expand the category of eligible issuers to
include reporting companies. Although reporting companies do
occasionally rely on exemptions for private placements, we believe that
many reporting companies generally would not benefit from eligibility
to rely on Regulation A as proposed to be amended. In particular,
reporting companies are subject to Exchange Act reporting requirements
that are more extensive than those proposed for Regulation A, so would
not benefit from the reduced disclosure requirements; although
reporting companies could potentially benefit from the liability
standards conferred by reliance on Regulation A, and such issuers that
do not have the class of securities being offered already listed, or
are not simultaneously listing, on a national securities exchange could
potentially benefit from blue sky law preemption. Nonetheless, we
believe that the benefits of amending Regulation A to permit reporting
companies to rely on the exemption are minimal.\593\
---------------------------------------------------------------------------

    \593\ This exemption does not bar reporting companies from
suspending or terminating their reporting obligations and then
relying on Regulation A. This option could appeal even to large
reporting companies if they are not looking to raise more than $50
million of new capital. Many follow-on offerings, for example, are
for less than $50 million, as discussed above. This could have both
benefits (in the form of reduced transaction costs and compliance
costs for issuers) and costs (in the form of reduced accountability
and reduced information available to investors).
---------------------------------------------------------------------------

    The proposed rules also continue to exclude investment companies
and BDCs. If, as an alternative, the Commission were to permit
investment companies to use Regulation A, offerings from investment
companies could increase investment opportunities for retail investors.
Additionally, the Commission recognizes that permitting investment
companies to rely on Regulation A could enhance capital formation
indirectly. Specifically, if the use of proposed Regulation A decreased
the cost of capital for investment companies and those savings were
passed through to the company recipients of the investment companies'
capital, expanding the eligibility for Regulation A to investment
companies could potentially enhance capital formation.\594\
---------------------------------------------------------------------------

    \594\ Brewer, Elijah, et al. (1996), Performance and access to
government guarantees: The case of small business investment
companies, Economic Perspectives--Federal Reserve Bank of Chicago
20, pp. 16-30.
---------------------------------------------------------------------------

b. Eligible Securities and Maximum Offering Size
    Consistent with the statute, the proposed rules increase the
maximum offering size from $5 million to $50 million of ``equity
securities, debt securities, and debt securities convertible or
exchangeable to equity interests, including any guarantees of such
securities.'' The proposed rules exclude asset-backed securities
(``ABS'') from eligibility. As discussed above, the Commission does not
believe that ABS issuers are the intended beneficiaries of the mandated
expansion of Regulation A. ABS are designed to pool the risk of
already-issued loans and other financial assets, and, in this respect,
do not constitute new capital formation. We recognize, however, that
allowing ABS offerings under Regulation A could, in certain cases,
lower the cost of capital for underlying borrowers whose loans are
eventually securitized by ABS issuers and therefore indirectly
facilitate capital formation.\595\
---------------------------------------------------------------------------

    \595\ This indirect effect may result because, due to bank
accounting standards and capital requirements, securitization allows
banks sponsoring ABS issuers to move assets off balance sheet,
freeing up capital for additional loans. The resulting increase in
capital available for lending could lead to lower borrowing costs
for all borrowers down the capital supply chain. See, e.g.,
Pennacchi, George G. (1995), Loan sales and the cost of bank
capital, The Journal of Finance 43, no. 2, pp. 375-396.; Carlstrom,
Charles T., and Katherine A. Samolyk (1995), Loan sales as a
response to market-based capital constraints, Journal of Banking &
Finance 19, no. 3, pp. 627-646.
---------------------------------------------------------------------------

    Although there are potential indirect benefits from allowing ABS
offerings under Regulation A, we believe that, in practice, Regulation
A would have little appeal to ABS issuers if available. Most ABS
offerings are much larger than the maximum allowable offer size under
the proposed rules. Average ABS offering sizes are generally well over
$50 million.\596\ Because of their large size, unregistered ABS
offerings--for which Regulation A might be an alternative offering
method--currently target Qualified Institutional Buyers (QIBs) under
Rule 144A. For these reasons, we do not believe excluding ABS from
eligibility for Regulation A will have an adverse effect on capital
formation.
---------------------------------------------------------------------------

    \596\ Our analysis indicates that from 2011-2013, 2.9% of ABS
issuances were below $50 million. This calculation uses the AB Alert
and CM Alert databases and includes only private label (non-GSE) ABS
deals.
---------------------------------------------------------------------------

    As explained above, we are proposing to increase the maximum
offering size of Regulation A offerings by introducing two tiers of
offerings. Tier 1 offerings may be up to $5 million and Tier 2
offerings may be up to $50 million. As compared to the current rules,
the

increase in the offering limit for some Regulation A offerings should
significantly lower issuance costs as a proportion of proceeds to the
extent that issuers face certain fixed costs or costs that do not
otherwise scale in proportion to offering size. This could make
Regulation A, as proposed to be amended, more cost effective and
attractive for issuers than existing Regulation A.\597\
---------------------------------------------------------------------------

    \597\ Section 401 of the JOBS Act also requires the Commission
to review the $50 million offering limit not later than two years
after enactment of the JOBS Act and every two years thereafter and,
if the Commission decides not to increase the amount, requires that
it report its reasoning to Congress. This requirement will benefit
issuers and investors by establishing a regular schedule for the
Commission to review whether the offering limit remains appropriate
or should be increased.
---------------------------------------------------------------------------

    Increasing the maximum offering size could lead to improved
liquidity of the securities sold in offerings under Regulation A as
proposed to be amended, to the extent that larger issuances permit
greater breadth of ownership.\598\ This would be of particular benefit
to companies that have a greater interest in floating their securities
in the public market for the purpose of creating liquidity than in
raising capital. Greater investor participation, particularly retail
investor participation, could increase investors' demand for liquidity,
resulting in more frequent trading and further increases in liquidity.
As a result of improved liquidity, current and potential investors in
larger Regulation A offerings could more easily unwind their
investments and at lower cost, thus making such investments more
attractive.
---------------------------------------------------------------------------

    \598\ Grullon, Gustavo, George Kanatas, and James P. Weston,
Advertising, breadth of ownership, and liquidity, Review of
Financial Studies 17.2, pp. 439-461. The study shows that large
issuances permit greater analyst coverage, which leads to higher
breadth of ownership.
---------------------------------------------------------------------------

    The increase in maximum offering size could also increase the
potential feasibility and value of intermediation services, such market
making and analyst coverage, with respect to Regulation A securities.
These services require sufficient investor demand for securities and
information following the issuance because market makers and analysts
are generally compensated on a per transaction or subscription basis.
The presence of these intermediation services could also have a
positive impact on investor participation and aftermarket liquidity of
Regulation A offerings, providing further demand for such services. It
is also possible, however, that even the large increase in maximum
offering size included in the statute and proposed rules would not be
sufficient to make such services economically feasible. \599\
---------------------------------------------------------------------------

    \599\ For instance, one prominent study finds that firm size is
an important predictor of analyst coverage. See Barth, Mary E., Ron
Kasznik, and Maureen F. McNichols., Analyst coverage and intangible
assets. Journal of Accounting Research 39.1 (2001): 1-34.
---------------------------------------------------------------------------

    Lastly, the increased maximum offering size could make Regulation A
more attractive to larger or more mature companies that are in less
need of capital than business start-ups. For these issuers, secondary
market liquidity may be the primary goal of an offering, and it is
possible that their resulting market capitalization could be much
greater than the maximum offering size.\600\ It is not clear whether
existing OTC markets would be able to supply the liquidity necessary
for large issuers.
---------------------------------------------------------------------------

    \600\ For instance, an issuer that floats 20% of its shares at
$50 million would be valued at $250 million following the issuance.
For this issuer, secondary market liquidity may facilitate
subsequent offerings by founders, employees, affiliates, and other
pre-issuance shareholders who are seeking a partial or full exit of
their holdings.
---------------------------------------------------------------------------

c. Limitations on Secondary Sales
    We propose to permit sales by selling securityholders of up to $1.5
million in Tier 1 offerings and to $15 million in Tier 2 offerings in
any twelve-month period, which represents 30% of the total maximum
offering size.\601\ This percentage is consistent with the current
Regulation A rules, which permit secondary sales of up to $1.5 million,
or 30% of the $5 million maximum offering size. The proposed rules
would also eliminate current Rule 251(b), which prohibits resales by
affiliated parties unless the issuer has had operating income in at
least one of the last two years.\602\ As discussed above, selling
securityholder access to Regulation A has historically been an
important part of the exemptive scheme, and for some issuers, secondary
market liquidity and the ability for significant company insiders and
affiliates to exit all or a portion of their holdings in the issuer may
be a more important consideration than the ability to raise new
capital.\603\ Hence, we believe that removing the limitation on
affiliate resales would have negligible costs and could enhance capital
formation and allocative efficiency of capital; however, it is also
possible that the limit on resales would not be a constraint on selling
securityholders in most instances. The table below shows that if the
proposed $15 million resale cap for Regulation A Tier 2 offerings had
been applied to registered offerings conducted in 2012, only a small
fraction of offerings below $50 million would have been affected.
---------------------------------------------------------------------------

    \601\ So, for example, an offering under $5 million but
involving secondary sales in excess of $1.5 million would require
exemption under section 3(b)(2) of the Exchange Act and would
therefore be a Tier 2 offering.
    \602\ Tier 1 offerings may still be subject to state law
limitations on secondary sales and sales from affiliates.
    \603\ For example, see Rydqvist, Kristian, and Kenneth
H[ouml]gholm (1995), Going public in the 1980s: evidence from
Sweden, European Financial Management 1.3, pp. 287-315.

Overview by Offering Size of the Percent of Registered Offerings Conducted in 2012 That Would Have Been Affected
                                    by a $15 Million Limit on Secondary Sales
----------------------------------------------------------------------------------------------------------------
                                                        Initial public offerings     Follow-on public offerings
                                                            \604\ (millions)              \605\ (millions)
                                                     -----------------------------------------------------------
                                                        <$5 %   $5-$50 %   >$50 %     <$5 %   $5-$50 %   >$50 %
----------------------------------------------------------------------------------------------------------------
Average percentage of proceeds to existing                 0.0       1.4      13.4       2.8       5.1      21.7
 shareholders sales.................................
Percentage offerings with proceeds to existing             n/a       0.8      26.5       n/a       0.0       6.2
 shareholders > $15 million.........................
----------------------------------------------------------------------------------------------------------------

    Permitting these secondary sales provides exit options for company
founders, employees, and institutional investors, such as private
equity or venture capital investors, which can have a positive effect
on capital formation. For instance, because these investors consider
available exit options before participating in a new venture,
permitting secondary sales increases the incentives to make the
original investment.\606\ Allowing these exits could also facilitate an
optimal re-allocation of human capital. In particular, entrepreneurs
and venture capitalists have valuable talents and allowing them to exit
may free their attention for new projects and business ventures, and
allow them to make investments not otherwise possible.\607\ In turn,
their exits facilitate new investment opportunities for investors with
different skills and risk preferences, and potentially a more
appropriate investor base for an issuer.
---------------------------------------------------------------------------

    \604\ These estimates use data provided by Capital IQ and are
calculated by comparing the total IPO proceeds to the proceeds from
the IPO that went to incumbent shareholders as disclosed on Form S-
1.
    \605\ These estimates use SCD data provided by Thompson
Analytics and, as above, these numbers are calculated by comparing
total offering proceeds to the proceeds that went to incumbent
shareholders.
    \606\ Cumming, Douglas J., and Jeffrey G. MacIntosh (2003),
Venture-capital exits in Canada and the United States, The
University of Toronto Law Journal 53.2, pp. 101-199.
    \607\ Zhang, Junfu (2011), The advantage of experienced start-up
founders in venture capital acquisition: Evidence from serial
entrepreneurs, Small Business Economics 36.2, pp. 187-208. Also see,
Gompers, P., A. Kovner, J. Lerner, D. Scharfstein (2006), Skill vs.
luck in entrepreneurship and venture capital: Evidence from serial
entrepreneurs, No. w12592. National Bureau of Economic Research.
---------------------------------------------------------------------------

    As an alternative, we could increase the cap on secondary sales
above the proposed $1.5 million for Tier 1 offerings and $15 million
for Tier 2 offerings. Increasing the cap on secondary sales could
provide additional exit options for incumbent shareholders, which could
indirectly increase capital formation because exiting investors could
more quickly redeploy their capital into new projects and business
ventures.
    It is also possible that increasing the cap on secondary sales
could lead to better monitoring of the underwriter or placement agent
if used, as the selling securityholders have incentives to ensure that
the underwriter values the securities and conducts the offering so as
to maximize the value of their investment.\608\ Finally, increasing the
cap on secondary share offerings could result in more dispersed
ownership, resulting in better liquidity in the secondary resale
market. As described above, an increase in the portion of securities
sold to the public generally increases investor participation and the
breadth of ownership. The exit of a large shareholder that accounts for
an increase in public float has the benefit of changing the composition
of shareholders to those that do not have access to non-public
information about the issuer's operations and that predominantly trade
based on liquidity needs or publicly available information. Studies
show that this can result in lower spreads because it minimizes the
inventory risk that dealers face.\609\
---------------------------------------------------------------------------

    \608\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2,
pp. 723-752.
    \609\ Bharath, S. and Amy Dittmar (2010), Why Do Firms Use
Private Equity to Opt Out of Public Markets?, Review of Financial
Studies 23(5), pp. 1771-1818.
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    Increasing the permitted amount of secondary sales could also
result in potential costs. In particular, it is often argued that the
incentives of company management are better aligned with other
shareholders when managers hold a significant equity interest in the
company.\610\ Specifically, it can be important for insiders to retain
some ownership stake to ensure that the incentives of directors and
officers are aligned.\611\ Hence, it is possible that affiliate sales,
if too large, could be detrimental to purchasing investors. However,
there is no conclusive evidence that affiliate sales are associated
with poor post-offering performance in the context of IPOs, \612\ and
there is some evidence that affiliate sales are associated with
positive post-IPO performance, as the selling affiliates have
incentives to monitor and limit rent capture by underwriters.\613\
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    \610\ See, e.g., Jensen, Michael C., and William H. Meckling
(1978), Theory of the firm: Managerial behavior, agency costs and
ownership structure, Journal of Financial Economics 3.4, pp. 305-
360.
    \611\ Core, John E., Robert W. Holthausen, and David F. Larcker
(1999), Corporate governance, chief executive officer compensation,
and firm performance, Journal of Financial Economics 51.3, pp. 371-
406.; Mehran, Hamid (1995), Executive compensation structure,
ownership, and firm performance, Journal of Financial Economics
38.2, pp. 163-184.
    \612\ Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah.
Ownership and operating performance of companies that go public.
Journal of Financial Economics 44.3 (1997): 281-307.
    \613\ Ljungqvist, Alexander, and William J. Wilhelm (2003), IPO
pricing in the dot[hyphen]com bubble, The Journal of Finance 58.2,
pp. 723-752.
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    There may also be investor protection benefits in some cases from
precluding affiliate sales by limiting transactions between informed
investors (affiliates) and uninformed investors, such as retail
investors. These potential benefits may be limited, as buyers are aware
that they are less informed than affiliates and consequently, security
prices should generally reflect these asymmetries at the time of the
offering.\614\ Investors also may prefer to transact with affiliates in
an offering because affiliates assume additional liability for
misstatements in the offering documents. Thus affiliates may be
sensitive to the risks of exploiting uninformed investors during an
offering in which they are selling securities. For example, some
empirical evidence suggests venture capitalists avoid reputational
consequences of selling over-valued securities to uninformed investors
during IPOs.\615\ Furthermore, we believe that state oversight of
affiliate sales in Tier 1 offerings and the proposed investment
limitation and financial statement and disclosure requirements for Tier
2 offerings could provide additional investor protection.
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    \614\ Easley, David, and Maureen O'Hara (2004), Information and
the cost of capital, The Journal of Finance 59.4, 1553-1583.
    \615\ Lin, Timothy H., and Richard L. Smith (1998), Insider
reputation and selling decisions: the unwinding of venture capital
investments during equity IPOs, Journal of Corporate Finance 4.3,
pp. 241-263.
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    Using an operating income criterion for permitting secondary sales
could promote investor confidence with respect to issuer viability by
reducing the incidence of insiders offloading investments in companies
that are not financially viable. However, the Commission believes that
doing so may result in an under- or over-inclusion of companies that
are viable investment opportunities because there is no single
criterion that would provide an accurate measure of the financial
health of all companies that could rely on Regulation A.\616\
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    \616\ Indeed, one study suggests that standard accounting
measures are often poor indicators of financial health in small
companies. Davila, Antonio, and George Foster (2005), Management
accounting systems adoption decisions: evidence and performance
implications from early-stage/startup companies, The Accounting
Review 80.4, pp. 1039-1068.
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d. Investment Limitation
    Regulation A currently does not place any limitations on the amount
of securities that may be purchased by an investor. As explained above,
we are proposing that purchasers of Tier 2 offerings be limited to
investing no more than 10% of the greater of the investor's annual
income and net worth.\617\ By limiting investment size in Tier 2
Regulation A offerings in that way, the

proposed rules could limit potential losses to investors; however, they
could also limit potential gains.
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    \617\ Annual income and net worth would be calculated for
individual purchasers as provided in the accredited investor
definition in Rule 501 of Regulation D. See 17 CFR 230.501. For
example, individuals' net worth calculations would exclude the value
of their primary residence.
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    The proposed rules would permit issuers to rely on investors'
representation that they are investing no more than 10% of their net
worth and annual income. The ability to rely on investor
representations should help to mitigate potential costs that issuers
could incur in relation to this requirement. At the same time, we
realize that investors might make inaccurate representations, whether
intentionally or not, which could expose these investors to the risk of
increased losses.
    It is also possible that preventing investors from investing more
than 10% of the greater of their income and net worth in a Tier 2
Regulation A offering could limit capital formation, particularly if
potential purchasers of Tier 2 offerings are not able to meet minimum
investment sizes that may be required by some issuers.\618\ While these
issuers could require smaller minimum investment sizes, doing so may
entail searching for, and involving more, investors that contribute to
a smaller portion of the offering, which could increase transaction
costs. If issuers maintain minimum investment sizes, the proposed rules
could limit investor participation in Tier 2 offerings.
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    \618\ For example, in 2012 approximately half of the Regulation
D offerings that would have been eligible for reliance on Regulation
A included a minimum investment amount; the median minimum
investment amount was $20,000.
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    Furthermore, in some settings, it may be beneficial for issuers to
involve large investments from some types of investors in Regulation A
offerings. For example, it could be beneficial to allow company
officers to invest a substantial portion of their net worth in an
offering as a mechanism to align the officers' incentives with those of
the other securityholders. While we recognize that limiting investment
size could result in less capital being raised by issuers in Regulation
A offerings, we believe that preventing investors from exposing more
than 10% of the greater of their income or net worth in a Tier 2
offering could enhance investor protection by limiting potential
losses.
    As an alternative, we could also require that purchasers of Tier 1
offerings, like purchasers of Tier 2 offerings, be limited to investing
no more than 10% of the greater of their annual income and net worth.
We believe, however, that because Tier 1 offerings would continue to be
subject to additional state oversight, any benefit associated with
limiting the investment size in Tier 1 offerings could potentially be
eclipsed by state-level protections. We also recognize that Tier 1
offerings would be subject to fewer reporting obligations and other
investor protections than Tier 2 offerings, which could make investor
losses due to fraud more likely under Tier 1.
e. Integration
    We are proposing to allow companies to conduct other exempt
offerings that would not be integrated with an offering made in
reliance on Regulation A under the proposed amendments, as long as the
company complies with the requirements of the exemption relied upon for
the particular offering. We could have selected an alternative that
would have aggregated the amounts offered in reliance on Regulation A
with the amounts offered pursuant to other exempt offerings. Under such
an alternative, the amounts raised in other exempt offerings would
count toward the maximum offering amount under Regulation A. Compared
to this alternative, the ability of issuers to conduct other exempt
offerings that would not count toward the maximum offering amount under
Regulation A would allow issuers to raise more capital.
f. Exclusion From Section 12(g)
    As amended by the JOBS Act, Section 12(g) of the Exchange Act
requires, among other things, that an issuer with total assets
exceeding $10 million 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.\619\ As
explained above, the JOBS Act includes a provision regarding the
treatment under Section 12(g) of securities issued in securities-based
crowdfunding transactions pursuant to Section 4(a)(6) of the Securities
Act, but did not provide a similar provision in Section 3(b)(2). We are
not proposing to exempt Regulation A securities from the requirements
of Section 12(g).
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    \619\ See Section 501 of the JOBS Act.
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    As discussed above and in more detail below, the intent of the
proposed rules is to provide sufficient financial disclosure to help
investors make informed decisions while limiting the costs imposed on
issuers for doing so. We believe that the limited required initial and
ongoing disclosures, as proposed, accomplish this objective. If
Regulation A issuers cross the shareholder of record threshold
described above, however, they would no longer benefit from the limited
Regulation A disclosure environment and would be subject to the more
comprehensive periodic reporting requirements under the Exchange Act.
This may not have significant economic consequences for issuers that
are prepared to list on a national securities exchange and would
otherwise be required to register with the Commission under Section
12(b) and become subject to Exchange Act reporting requirements. For
issuers that do not wish to list on a national securities exchange or
do not meet listing requirements, the additional disclosure burden
could provide incentive to take actions that would allow them to
deregister and cease reporting.\620\ In this case, the benefits of the
Regulation A environment would be lost to the issuer's securityholders.
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    \620\ Leuz, Christian, Alexander Triantis, and Tracy Yue Wang
(2008), Why do firms go dark? Causes and economic consequences of
voluntary SEC deregistrations, Journal of Accounting and Economics
45.2, pp. 181-208.
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    Because of the manner in which shareholders of record are
tabulated, the likelihood of a Regulation A issuer triggering the 12(g)
threshold is low if not triggered at the time of offering. In
particular, beneficial owners of Regulation A issuers who hold their
shares at a broker are not counted as a record holder. Their shares,
held in ``street name,'' are counted at the broker level, so that each
brokerage at which there is a least one beneficial owner would
constitute one shareholder of record. Because of this treatment, the
number of shareholders of record is often significantly less than the
number of beneficial owners.\621\
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    \621\ Langevoort, Donald, and Robert Thompson,
Publicness' in Contemporary Securities Regulation after