materials used under new Rule 241 if the issuer sells securities under
Rule 506(b) within 30 days of the generic solicitation of interest to
any purchaser that is not an accredited investor. This provision, which
we believe is appropriate for the same reasons as discussed above with
respect to Regulation A and Regulation Crowdfunding, will apply whether
or not the issuer engaged in general solicitation through its
communications under new Rule 241 and whether or not the generic
solicitation would be subject to integration with the Rule 506(b)
offering. Consistent with Rule 255 of Regulation A, these amendments to
Regulation A, Regulation Crowdfunding, and 17 CFR 230.502(b) (``Rule
502(b)'' of Regulation D) require issuers to provide any written
communications or broadcast scripts used under new Rule 241.
    While some commenters recommended that we preempt State blue sky
laws for these offers, we are not doing so at this time. We acknowledge
the concerns raised by commenters about the possibility that the lack
of preemption will affect the utility of the new rule and potentially
subject issuers to civil and criminal liabilities under State blue sky
laws. However, in light of the novel nature of this new exemption and
the concerns expressed by other commenters about potential misuse of
the exemption, we believe a more measured approach is warranted.\250\
We believe that generic solicitation of interest can still be useful to
issuers and investors without such preemption and that issuers and
their advisers will be able to navigate applicable State law
requirements as they have done in connection with other Federal
exemptions from registration that do not provide for preemption.
Although we are not preempting State securities law registration and
qualification requirements at this time, the Commission will have the
opportunity to receive feedback on how State regulation may be
affecting the use of generic solicitations of interest through its
Small Business Capital Formation Advisory Committee and annual Small
Business Forum, and that feedback may help inform future determinations
about whether State law preemption is warranted.
---------------------------------------------------------------------------

    \250\ As we noted in the Proposing Release, in connection with
the 2015 amendments to Regulation A, the Commission did not provide
for preemption of State securities law registration and
qualification requirements for Tier 1 offerings in light of concerns
raised by State regulators about the testing-the-waters provisions
applicable to Regulation A, as well as what the Commission
anticipated would be the generally more local nature of Tier 1
offerings.
---------------------------------------------------------------------------

b. Regulation Crowdfunding
    Rule 255 of Regulation A permits an issuer to test the waters prior
to filing the offering statement with the Commission. In contrast to
Regulation A, an issuer conducting an offer pursuant to Regulation
Crowdfunding currently may not solicit interest or make offers or sales
under Regulation Crowdfunding prior to filing a Form C with the
Commission.\251\
---------------------------------------------------------------------------

    \251\ See Section 4A(b) of the Securities Act.
---------------------------------------------------------------------------

i. Proposed Amendments
    The Commission proposed to permit Regulation Crowdfunding issuers
to test the waters orally or in writing prior to filing a Form C with
the Commission under proposed Rule 206, which is based on existing Rule
255 of Regulation A.\252\ As proposed, Rule 206 would permit issuers to
test the waters with potential investors, and such testing-the-waters
materials would be considered offers subject to the antifraud
provisions of the Federal securities laws. Similar to Rule 255,
proposed Rule 206 would require issuers to include legends providing
that:
---------------------------------------------------------------------------

    \252\ The Commission also proposed an amendment to Rule 204 to
permit issuers to engage in communications under proposed Rule 206.
---------------------------------------------------------------------------

     No money or other consideration is being solicited, and if
sent, will not be accepted;
     No sales will be made or commitments to purchase accepted
until the Form C offering statement is filed with the Commission and
only through an intermediary's platform; and
     Prospective purchaser's indications of interest are non-
binding.
    In addition, pursuant to proposed Rule 201(z), issuers would be
required to include any Rule 206 solicitation materials with the Form C
that is filed with the Commission. Unlike Rule 255 of Regulation A,
which permits issuers to use testing-the-waters materials both before
and after the filing of the offering statement with the Commission,
proposed Rule 206 would only permit testing the waters before the Form
C is filed. Once the Form C is filed, any offering communications would
be required to comply with the terms of Regulation Crowdfunding,
including the Rule 204 advertising restrictions.
ii. Comments
    Commenters addressing the proposal generally supported permitting
testing-the-waters communications in Regulation Crowdfunding
offerings.\253\ Some of these commenters recommended permitting broad
testing the waters with few limits,\254\ while others recommended only
permitting testing the waters through the use of or after engaging an
intermediary.\255\ Some of these commenters additionally suggested that
permitting testing the waters in Regulation Crowdfunding will improve
the offering process for issuers \256\ and be a benefit to potential
investors.\257\ In contrast, one commenter expressed concern that
relaxing the restrictions on testing-the-waters communications in the
crowdfunding market could put investors at risk.\258\
---------------------------------------------------------------------------

    \253\ See, e.g., Letter from Andrew A. Schwartz dated May 21,
2020 (``A. Schwartz Letter''); Letter from Wefunder dated May 28,
2020 (``Wefunder Letter''); SEC SBCFAC Letter; J. Clarke Letter;
Silicon Prairie Letter; Republic Letter; NextSeed Letter;
S[omacr].Capital Letter; W. Hubbard Letter; SAF Letter; Letter from
Engine Advocacy dated June 1, 2020 (``Engine Letter''); D. Burton
Letter; Letter from InnaMed, Inc., et al. dated June 1, 2020
(``InnaMed, et al. Letter''); Letter from SeedInvest dated June 4,
2020 (``SeedInvest Letter''); Crowdwise Letter; CrowdCheck Letter;
Letter from Honeycomb Credit Inc. dated June 17, 2020 (``Honeycomb
Letter''); R. Campbell Letter; and Ketsal Letter. See also Letter
from Association of Online Investment Platforms, dated September 1,
2020 (``AOIP Letter'') (suggesting the Commission immediately allow
Regulation Crowdfunding issuers to test the waters prior to the
filing of a Form C in response to the COVID-19 pandemic).
    \254\ See, e.g., A. Schwartz Letter (recommending permitting
advertising and general solicitations); and InnaMed, et al. Letter.
See also D. Burton Letter; and W. Hubbard Letter (each suggesting
that additional restrictions on the manner of communication are
unnecessary).
    \255\ See, e.g., NextSeed Letter; and CrowdCheck Letter. See
also CFA Letter (expressing opposition to the proposal and
supporting restricting crowdfunding communications to communications
through intermediary platforms, both before and after a Form C is
filed with the Commission).
    \256\ See, e.g., SeedInvest Letter; and Honeycomb Letter.
    \257\ See, e.g., Wefunder Letter (suggesting investors may be
able to set more reasonable terms); and Engine Letter (suggesting
investors will be able to avoid committing equity to campaigns not
likely to be successful).
    \258\ See CFA Letter (expressing concern about the proposal due
to the poor record of issuer compliance with Regulation Crowdfunding
rules).
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed to permit Regulation
Crowdfunding issuers to test the waters orally or in writing prior to
filing a Form

C with the Commission under Rule 206, which is based on existing Rule
255 of Regulation A.\259\ For the reasons discussed below, we believe
that permitting Regulation Crowdfunding issuers to engage in such
communications will further the public interest while being consistent
with the protection of investors.
---------------------------------------------------------------------------

    \259\ We are amending 17 CFR 227.203(a)(1) (``Rule 203(a)(1)'')
to clarify that a Regulation Crowdfunding issuer may rely on new
Rule 206 to offer securities prior to filing a Form C with the
Commission. We are also amending Rule 204, as proposed, to permit
issuers to engage in communications under new Rule 206.
---------------------------------------------------------------------------

    As adopted, new Rule 206 permits issuers to test the waters with
all potential investors. Like Rule 255, Rule 206 requires issuers to
include legends in the testing-the-waters materials. Specifically, Rule
206 requires issuers to state that: (1) No money or other consideration
is being solicited, and if sent, will not be accepted; (2) no offer to
buy the securities can be accepted and no part of the purchase price
can be received until the offering statement is filed and only through
an intermediary's platform; \260\ and (3) a prospective purchaser's
indication of interest is non-binding. These testing-the-waters
materials would be considered offers that are subject to the antifraud
provisions of the Federal securities laws. We are additionally amending
17 CFR 227.201(z) (``Rule 201(z)'') as proposed to require issuers to
include any Rule 206 solicitation materials with the Form C that is
filed with the Commission. We believe that making the solicitation
materials publicly available will promote accountability for the
content of those materials and help to ensure that they are consistent
with the information contained in the Regulation Crowdfunding offering
materials.
---------------------------------------------------------------------------

    \260\ The Proposing Release discussed, but the proposed text of
Rule 206 did not include, the phrase ``and only through an
intermediary's platform.'' Rule 206 as adopted includes this
language, which is consistent with 17 CFR 227.100(a)(3).
---------------------------------------------------------------------------

    Unlike Rule 255 of Regulation A, which permits issuers to use
testing-the-waters materials both before and after the filing of the
offering statement with the Commission, Rule 206 will only permit
issuers to use testing-the-waters materials before the Form C is filed.
Once the Form C is filed, any offering communications are required to
comply with the terms of Regulation Crowdfunding, including the Rule
204 advertising restrictions. We believe this is appropriate because,
while sales under Regulation A may not occur until after the offering
statement is qualified, a Regulation Crowdfunding intermediary may
accept investment commitments from the time of filing the Form C.
    Although some commenters suggested that we require testing the
waters to be conducted only through intermediary platforms, we believe
that such a requirement would unnecessarily limit the flexibility
provided by the new rule by effectively requiring an issuer to enter
into a formal relationship with an intermediary prior to determining
whether it will proceed with an offering under Regulation Crowdfunding.
Nevertheless, we believe issuers may choose to engage an intermediary
before testing the waters so that they have a readily available means
to receive feedback and questions from prospective investors.
    We acknowledge the concern raised by some commenters about the
increased communications permitted by new Rule 206--and other proposed
changes to the requirements of Regulation Crowdfunding \261\--in light
of questions about the extent of issuer compliance with existing
Regulation Crowdfunding requirements. We remind issuers of their
obligation to comply with the terms, conditions, and requirements of
Regulation Crowdfunding and the serious consequences that may result
from a failure to do so, such as the potential loss of the exemption
and ensuing potential private rights of action for rescission for
violations of Section 5 of the Securities Act and loss of preemption
for State securities law registration requirements.\262\ We also remind
intermediaries of their obligation under 17 CFR 227.301(a) (``Rule
301(a)'') to have a reasonable basis for believing that an issuer
seeking to offer and sell securities in reliance on Section 4(a)(6)
through the intermediary's platform complies with the requirements in
Securities Act Section 4A(b) and the related requirements in Regulation
Crowdfunding.\263\ Commission staff will continue to work with FINRA to
assess issuer and intermediary compliance with the requirements of
Regulation Crowdfunding.
---------------------------------------------------------------------------

    \261\ See infra note 428.
    \262\ While 17 CFR 227.502(a) sets forth a safe harbor for
insignificant deviations, 17 CFR 227.502(b) makes it clear that such
safe harbor does not preclude the Commission from bringing an
enforcement action seeking appropriate relief for an issuer's
failure to comply with all applicable terms, conditions, and
requirements of Regulation Crowdfunding.
    \263\ Rule 301(a) also permits intermediaries to reasonably rely
on representations of the issuer, unless the intermediary has reason
to question the reliability of those representations. As discussed
in the Crowdfunding Adopting Release, in satisfying the requirements
of Rule 301(a), an intermediary has a responsibility to assess
whether it may reasonably rely on an issuer's representation of
compliance through the course of its interactions with potential
issuers. See Crowdfunding Adopting Release, at Section II.C.3.a.(3).
---------------------------------------------------------------------------

    In light of the foregoing, we believe that permitting issuers to
test the waters orally or in writing prior to incurring the expense of
filing a Form C with the Commission may greatly facilitate the use of
the Regulation Crowdfunding exemption, as well as limit the costs
incurred by those issuers. We further believe that the flexibility
afforded by the amendment will benefit investors, who will be able to
have input into the structuring of the offering and convey to the
issuer the types of information about which they are most
interested.\264\
---------------------------------------------------------------------------

    \264\ See, e.g., Transcript of SEC Small Business Capital
Formation Advisory Committee (May 8, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 72-
73 (noting that when investors are involved earlier in the process,
it allows more time for them to ``garner more information to make a
well informed decision'' when it is time to make an investment).
---------------------------------------------------------------------------

3. Other Regulation Crowdfunding Offering Communications
    An issuer may not advertise the terms of a Regulation Crowdfunding
offering \265\ outside of the intermediary's platform except in a
notice that directs investors to the intermediary's platform and is
limited to the information enumerated in Rule 204 of Regulation
Crowdfunding.\266\ An issuer may communicate with investors and
potential investors about the terms of the offering through
communication channels provided on the intermediary's platform.\267\
---------------------------------------------------------------------------

    \265\ For purposes of Rule 204, the ``terms of [a Regulation
Crowdfunding] offering'' currently means the amount of securities
offered, the nature of the securities, the price of the securities
and the closing date of the offering period.
    \266\ Rule 204 limits the information to: A statement that the
issuer is conducting an offering pursuant to Section 4(a)(6) of the
Securities Act, the name of the intermediary through which the
offering is being conducted, and a link directing the potential
investor to the intermediary's platform; the terms of the offering;
and specified factual information about the legal identity and
business location of the issuer.
    \267\ See 17 CFR 227.204(c).
---------------------------------------------------------------------------

a. Proposed Amendments
    The Commission proposed to amend Rule 204 to permit oral
communications with prospective investors once the Form C is filed, so
long as the communications comply with the requirements of Rule
204.\268\ The proposed changes would align the Regulation Crowdfunding

communication rules more closely with Rule 255 of Regulation A.
---------------------------------------------------------------------------

    \268\ For a discussion of the proposals regarding communications
prior to the filing of a Form C, see supra Section II.B.2.
---------------------------------------------------------------------------

b. Comments
    Most commenters that addressed permitting oral communications about
the offering outside of the funding portal's platform channels
supported the proposal,\269\ while some commenters opposed allowing
such communications.\270\ Some of the commenters supporting the
proposal recommended that the Commission go further and expand the
information that issuers are permitted to provide, such as allowing
disclosure of the planned use of proceeds and progress towards meeting
the issuer's funding goals.\271\
---------------------------------------------------------------------------

    \269\ See, e.g., CfPA Letter; R. Campbell Letter; J. Clarke
Letter (noting the importance of outside oral communications
directing investors to the platform for completion of the offering);
Netcapital Letter; Republic Letter; NextSeed Letter; W. Hubbard
Letter; Raise Green & New Haven Comm. Solar Letter; CrowdCheck
Letter; and Honeycomb Letter (recommending eliminating Rule 204).
Some of these commenters supported permitting information related to
concurrent offerings to be disclosed in those offering materials.
See J. Clarke Letter; and CrowdCheck Letter.
    \270\ See, e.g., CFA Institute Letter.
    \271\ See, e.g., CfPA Letter (recommending permitting both oral
and written communications); J. Clarke Letter (recommending
permitting disclosure of the use of proceeds as well as how the
offering is progressing); Netcapital Letter; Republic Letter
(recommending unrestricted communications); and W. Hubbard Letter.
---------------------------------------------------------------------------

    We requested comment in the Proposing Release as to whether we
should consider revisions to Regulation Crowdfunding that relate to
intermediaries involved in concurrent exempt offerings or provide
guidance regarding issues that may arise when an intermediary seeks to
host concurrent offerings. A few commenters supported permitting
Regulation Crowdfunding portals to be used to sell Rule 506(c)
offerings.\272\ One of these commenters also expressed support for
providing Commission guidance.\273\ Another commenter questioned the
need for guidance and stated its view that it is ``standard market
practice'' for concurrent Rule 506(c) offerings to be offered and sold
alongside Regulation Crowdfunding offerings on the same online
platform.\274\
---------------------------------------------------------------------------

    \272\ See Letter from Fred Pea dated Apr. 25, 2020; J. Clarke
Letter; and W. Hubbard Letter.
    \273\ See W. Hubbard Letter.
    \274\ See CrowdCheck Letter (``Where the platform is not a
registered broker-dealer, the Regulation [Crowdfunding] offering is
intermediated by a registered funding portal, and the Rule 506(c)
offering is not intermediated by the funding portal but hosted by
the same technology and no commission is charged.'').
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting the amendments substantially as proposed to permit
oral communications with prospective investors once the Form C is
filed, so long as the communications comply with the requirements of
Rule 204. In connection with this amendment to 17 CFR 227.204(a), we
have revised 17 CFR 227.204(b)(1) (``Rule 204(b)(1)''), as proposed, to
indicate that a link to the intermediary's platform is only required to
be provided when the communications are in writing. In response to
comment, we are also expanding the information that an issuer may
provide in accordance with Rule 204 to include:
     A brief description of the planned use of proceeds of the
offering; and
     Information on the issuer's progress toward meeting its
funding goals.
    We believe that investors will find this information useful in
making an investment decision and that the incremental increase in the
limited information permitted to be provided under the amendments is
unlikely to affect investor protection, particularly because the
investors receiving the information will continue to be directed to the
intermediary's platform where they can access the disclosures necessary
for them to make informed investment decisions. We also believe that
these amendments to Rule 204 will improve the information available to
investors and provide issuers with certainty as to the acceptable form
and content of communications with potential investors.
    In a further change from the proposal, in response to
comments,\275\ we are adding a new 17 CFR 227.204(d) to specify that an
issuer may provide information about the terms of an offering under
Regulation Crowdfunding in the offering materials for a concurrent
offering, such as in an offering statement on Form 1-A for a concurrent
Regulation A offering or a Securities Act registration statement filed
with the Commission, without violating Rule 204. To do so, the
information provided about the Regulation Crowdfunding offering must be
in compliance with Rule 204, including the requirement to include a
link directing the potential investor to the intermediary's platform as
required by Rule 204(b)(1). However, in accordance with the
Commission's rules with respect to the use of hyperlinks in electronic
filings, such link may not be a live hyperlink.\276\ We believe the
change to Rule 204 will allow issuers to conduct concurrent offerings
more easily under different exemptions, without sacrificing investor
protection.
---------------------------------------------------------------------------

    \275\ See CrowdCheck Letter.
    \276\ See 17 CFR 232.105(b). We note that the information
contained in the linked material will not be considered part of the
document for determining compliance with reporting obligations, but
the inclusion of the link will cause the filer to be subject to the
civil liability and antifraud provisions of the Federal securities
laws with reference to the information contained in the linked
material. See 17 CFR 232.105(c).
---------------------------------------------------------------------------

    Further, in response to commenters who requested clarification on
whether funding portals can host concurrent offerings, we note that
under 17 CFR 227.401 (``Rule 401'' of Regulation Crowdfunding), a
funding portal is exempt from the broker registration requirements of
Section 15(a) of the Exchange Act only in connection with its
activities as an intermediary in a transaction involving the offer or
sale of securities for the account of others, pursuant to Section
4(a)(6) of the Securities Act. To the extent a funding portal seeks to
host a concurrent offering pursuant to another offering exemption, it
would need to consider whether these additional activities could cause
it to lose the exemption provided by Rule 401,\277\ or otherwise become
subject to broker registration requirements.\278\
---------------------------------------------------------------------------

    \277\ Among other things, the funding portal should consider
whether it is clear that the offerings are being conducted under
different exemptions from registration, including whether the
funding portal has provided appropriate disclosures to avoid
investor confusion.
    \278\ The question of whether a person is a broker within the
meaning of Section 3(a)(4) turns on the facts and circumstances of
the matter. Because the Exchange Act does not define what it means
to be ``engaged in the business'' or ``effecting transactions,'' the
Commission has looked to an array of factors in determining whether
a person is a broker within the meaning of the statute. See, e.g.,
SEC v. Helms, No. 13-cv-01036, 2015 WL 5010298, at *17 (W.D. Tex.
Aug. 21, 2015) (``In determining whether a person `effected
transactions [within the meaning of Section 3(a)(4)],' courts
consider several factors, such as whether the person: (1) Solicited
investors to purchase securities, (2) was involved in negotiations
between the issuer and the investor, and (3) received transaction-
related compensation.'') (citing cases initiated by the Commission).
---------------------------------------------------------------------------

C. Rule 506(c) Verification Requirements

    Rule 506(c) permits issuers to generally solicit and advertise an
offering, provided that all purchasers in the offering are accredited
investors, the issuer takes reasonable steps to verify that purchasers
are accredited investors, and certain other conditions in Regulation D
are satisfied.\279\ Rule 506(c) provides a principles-based method for
verification of accredited investor status as well as a non-exclusive
list of verification methods. The principles-based method of
verification requires an objective

determination by the issuer (or those acting on its behalf) as to
whether the steps taken are ``reasonable'' in the context of the
particular facts and circumstances of each purchaser and
transaction.\280\ Rule 506(c) includes a non-exclusive list of
verification methods that issuers may use, but are not required to use,
when seeking to satisfy the verification requirement with respect to
natural person purchasers.\281\
---------------------------------------------------------------------------

    \279\ See 17 CFR 230.501 (Definitions and terms used in
Regulation D); Rule 502(a) (Integration); and 17 CFR 230.502(d)
(Limitations on Resales).
    \280\ See Rule 506(c) Adopting Release, at Section II.B.1.
    \281\ The rule does not set forth a non-exclusive list of
methods for the verification of investors that are not natural
persons. In the adopting release, the Commission expressed the view
that the potential for uncertainty and the risk of participation by
non-accredited investors is highest in offerings involving natural
persons as investors. See Rule 506(c) Adopting Release, at Section
II.B.3.
---------------------------------------------------------------------------

1. Proposed Amendments
    The Commission proposed to add a new item to the non-exclusive list
in Rule 506(c) that would allow an issuer to establish that an investor
that the issuer previously took reasonable steps to verify as an
accredited investor remains an accredited investor as of the time of a
subsequent sale if the investor provides a written representation that
the investor continues to qualify as an accredited investor and the
issuer is not aware of information to the contrary. In the Proposing
Release, the Commission expressed the view that this new method would
reduce the cost and burden of verification for issuers while
alleviating privacy concerns associated with investors having to
repeatedly provide financially sensitive information to the issuer and
noted that the risk of investor harm would be mitigated by the pre-
existing relationship between the issuer and such investor.\282\ The
Commission additionally reaffirmed its prior guidance that the
principles-based method in Rule 506(c) was intended to provide issuers
with significant flexibility in deciding the steps needed to verify a
person's accredited investor status and to avoid requiring them to
follow uniform verification methods that may be ill-suited or
unnecessary to a particular offering or purchaser in light of the facts
and circumstances.\283\
---------------------------------------------------------------------------

    \282\ See Proposing Release, at Section II.C.
    \283\ See id. See also Rule 506(c) Adopting Release, at Section
II.B.1.
---------------------------------------------------------------------------

2. Comments
    Commenters that addressed verification generally supported the
proposal to allow an issuer to establish that an investor that the
issuer previously took reasonable steps to verify as an accredited
investor remains an accredited investor as of the time of a subsequent
sale if the investor provides a written representation that the
investor continues to qualify as an accredited investor and the issuer
is not aware of information to the contrary.\284\ A number of these
commenters expressed concern that the requirement to take reasonable
steps to verify accredited investor status has generally affected
issuers' willingness to use Rule 506(c).\285\ One commenter supported
eliminating the verification requirement entirely,\286\ while another
commenter expressed support for the existing standard.\287\
---------------------------------------------------------------------------

    \284\ See, e.g., ABA Letter; Geraci Law Letter; Netcapital
Letter; Md. St. Bar Assoc. Letter; NextSeed Letter; Letter from
Shaver Law Group, LLC dated June 1, 2020; W. Hubbard Letter; Letter
from Mark Schonberger dated June 1, 2020 (``M. Schonberger
Letter''); IAA Letter; Letter from TIAA dated June 1, 2020 (``TIAA
Letter''); Invesco Letter; D. Burton Letter; and IPA Letter.
    \285\ See, e.g., Geraci Law Letter; J. Clarke Letter; NextSeed
Letter; W. Hubbard Letter; TIAA Letter; and D. Burton Letter
(suggesting that the income verification requirements are the
primary concern); and IPA Letter. In contrast, one commenter
suggested that the principal reason more issuers do not use Rule
506(c) is that they do not need it. See CrowdCheck Letter.
    \286\ See W. Hubbard Letter.
    \287\ See ABA Letter (supporting the existing principles-based
method and clear objective standards in the accredited investor
definition).
---------------------------------------------------------------------------

    Some commenters, on the other hand, opposed the additional
verification method.\288\ These commenters expressed concern that
permitting reliance on previous verification would not account for
changes in investor financial circumstances over time and could
therefore result in issuers raising money from investors that may have
lost their accredited investor status.\289\ Some commenters that
supported permitting reliance on previous verification also supported
imposing time limits on such reliance in order to alleviate this
concern.\290\
---------------------------------------------------------------------------

    \288\ See, e.g., CFA Letter (noting that an investor's ability
to meet the financial thresholds that determine whether they are
accredited can and does change over time and suggesting that
permitting issuers to rely on previous verification will result in
purchasers that are not accredited investors in contravention of the
condition in Rule 506(c) that all purchasers must be accredited
investors); Better Markets Letter (expressing concern that
permitting reliance on the prior verification could lead to issuers,
especially issuers of risky investments, to design mechanisms that
maximize self-certification); and R. Rutkowski Letter. See also
CrowdCheck Letter (questioning whether additional verification
procedures would be helpful to increase utilization of Rule 506(c)).
    \289\ See, e.g., CFA Letter; and Better Markets Letter.
    \290\ See, e.g., Md. St. Bar Assoc. Letter (suggesting that an
unlimited time period could call into question the appropriateness
of the method and supporting a ``reasonable time limit''); NextSeed
Letter (acknowledging limits to reliance after an extended period of
time has passed, such as five years); W. Hubbard Letter (supporting
a three- to five-year time limit); Invesco Letter (supporting a two-
year lookback on verification which would tie the standard to the
two-year income test in Rule 501(a)(6). In contrast, some commenters
specifically opposed any time limit. See M. Schonberger Letter; and
Netcapital Letter.
---------------------------------------------------------------------------

    A number of commenters expressed the need for additional guidance
under the principles-based reasonable steps approach.\291\ Several
commenters also supported additional or alternative verification
methods,\292\ with some commenters offering specific alternatives, such
as minimum investment amounts,\293\ self-certification,\294\ or
reliance on a financial intermediary.\295\
---------------------------------------------------------------------------

    \291\ See, e.g., ABA Letter (recommending confirmation that the
means of verification may be relied on in making determinations
under Section 12(g)); IAA Letter (recommending that the Commission
provide clear assurances to issuers that they may rely on the
principles-based reasonable steps approach, including confirmation
that it could be reasonable under the facts and circumstances for
issuers to contract with a third party to conduct the required
verification); TIAA Letter (recommending clear guidance that the
non-exclusive list is not prescriptive); Fried Frank Letter
(recommending guidance with respect to verification of the status of
a trust); NextSeed Letter (recommending additional guidance with
respect to what actions would constitute ``reasonable steps''
generally and in particular with respect to verification of trusts);
and IPA Letter (recommending that the Commission reaffirm and
provide clarity on the Commission's prior guidance that the non-
exclusive list is not prescriptive, and that a range of verification
methods not enumerated in the rule may qualify as ``reasonable,''
and provide guidance with respect to verification by broker-dealers
and registered investment advisers). In contrast, one commenter
suggested that additional guidance is unnecessary. See CrowdCheck
Letter.
    \292\ See, e.g., W. Hubbard Letter; Invesco Letter (recommending
verification only apply to natural persons); and IPA Letter
(recommending additional means to verify status including an annual
net worth certification process). In addition, some commenters
generally supported additional verification methods in light of the
amendments to the accredited investor definition. See, e.g., Geraci
Law Letter; W. Hubbard Letter; IAA Letter; and D. Burton Letter.
    \293\ See, e.g., CrowdCheck Letter; Invesco Letter; and NextSeed
Letter.
    \294\ See, e.g., Sen. Toomey Letter; IPA Letter; and NextSeed
Letter. See also D. Burton Letter; and J. Clarke Letter.
    \295\ See, e.g., Fried Frank Letter (recommending not requiring
further verification for investors who have been verified as
accredited investors by registered broker-dealers and registered
investment advisers and that a representation from an investor to a
registered broker-dealer or registered investment adviser with which
the investor has a substantive pre-existing relationship is
sufficient verification); Letter from Macquarie Investment
Management dated June 29, 2020; and TIAA Letter (recommending not
requiring verification for offerings involving a registered
investment adviser, broker-dealer placement agent or other such
intermediary).
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the amendments substantially as proposed with some
changes in response to comments. In addition, we are re-affirming the
guidance in the Proposing Release. As

proposed, we are permitting an issuer to establish that an investor
that the issuer previously took reasonable steps to verify as an
accredited investor in accordance with Rule 506(c)(2)(ii) remains an
accredited investor as of the time of a subsequent sale if the investor
provides a written representation that the investor continues to
qualify as an accredited investor and the issuer is not aware of
information to the contrary. In a change from the proposal, in response
to commenter feedback, we are adding a time limit on the ability of an
issuer to rely on the earlier verification.
    We believe that permitting an issuer to rely on a prior
verification of accredited investor status will reduce the cost and
burden of verification for issuers that engage in more than one Rule
506(c) offering over time, and therefore may, to some extent, address
commenters' concern that the requirement to take reasonable steps to
verify accredited investor status has affected issuers' willingness to
use Rule 506(c). We recognize, as some commenters expressed, that over
an unlimited time period permitting reliance on a prior verification
may not appropriately account for changes in investor financial
circumstances and could result in issuers raising money from non-
accredited investors. Because such concerns could call into question
the appropriateness of the verification method, we are adopting a five-
year time limit on the ability of issuers to rely on a prior
verification. A five-year period is not so remote that the initial
verification is no longer meaningful, but also provides issuers relying
on the prior verification substantial cost savings. We believe the
inclusion of a five-year time limit, together with the pre-existing
relationship between the issuer and such investor, will appropriately
balance reducing the cost and burden of verification for issuers with
the mitigation of risk of investor harm caused by issuers selling to
non-accredited investors.
    In addition, as indicated in the Proposing Release, we are
reaffirming and updating the Commission's prior guidance with respect
to the principles-based method for verification, and in particular what
may be considered ``reasonable steps'' to verify an investor's
accredited investor status, in order to reduce concerns that an
issuer's method of verification may be second guessed by regulators or
other market participants without regard to the analysis performed by
the issuer in making the determination and to encourage more issuers to
rely on additional verification methods tailored to their specific
facts and circumstances.\296\ The principles-based method was intended
to provide issuers with significant flexibility in deciding the steps
needed to verify a person's accredited investor status and to avoid
requiring them to follow uniform verification methods that may be ill-
suited or unnecessary to a particular offering or purchaser in light of
the facts and circumstances.\297\ The Commission has previously
indicated, and we continue to believe, that the following factors are
among those an issuer should consider when using this principles-based
method of verification:
---------------------------------------------------------------------------

    \296\ Commenters that addressed the issue of Commission guidance
generally supported the Commission's updated guidance. See supra
note 291.
    \297\ See Rule 506(c) Adopting Release, at Section II.B.1.
---------------------------------------------------------------------------

     The nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
     The amount and type of information that the issuer has
about the purchaser; and
     The nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.\298\
---------------------------------------------------------------------------

    \298\ See id. at Section II.B.3.a.
---------------------------------------------------------------------------

    We are of the view that, in some circumstances, the reasonable
steps determination may not be substantially different from an issuer's
development of a ``reasonable belief'' for Rule 506(b) purposes. For
example, an issuer's receipt of a representation from an investor as to
his or her accredited status could meet the ``reasonable steps''
requirement if the issuer reasonably takes into consideration a prior
substantive relationship with the investor or other facts that make
apparent the accredited status of the investor. That same
representation from an investor may not meet the ``reasonable steps''
requirement if the issuer has no other information about the investor
or has information that does not support the view that the investor was
an accredited investor.\299\
---------------------------------------------------------------------------

    \299\ We caution issuers that we continue to believe that an
issuer will not be considered to have taken reasonable steps to
verify accredited investor status if it, or those acting on its
behalf, require only that a person check a box in a questionnaire or
sign a form, absent other information about the purchaser indicating
accredited investor status.
---------------------------------------------------------------------------

    We are not adopting additional amendments to the definition to
expand the list of verification methods, as requested by some
commenters. We appreciate that the addition of further verification
methods to the non-exclusive list could provide greater certainty to
issuers as to satisfaction of the rule's verification requirement, but
are mindful that significant expansion of the list could further
undermine the use of the principles-based method of verification. We
believe that the methods suggested by commenters as possible additions
to the list may be considered by an issuer under the principles-based
method, depending on the particular facts and circumstances of its
offering, and do not wish to limit that flexibility.
    We remind issuers that they are not required to use any of the
methods set forth in the non-exclusive list and can apply the
reasonableness standard directly to the specific facts and
circumstances presented by the offering and the investors. We do not
believe additional guidance is warranted at this time. We also do not
believe it is appropriate to provide guidance, as suggested by a
commenter, with respect to reliance on the specified verification
methods in making determinations of accredited investor status under
Section 12(g). We continue to believe that requiring issuers to
consider their particular facts and circumstances in establishing a
reasonable basis for their determination of accredited investor status
for Section 12(g) purposes provides issuers with appropriate
flexibility for making the determination.\300\
---------------------------------------------------------------------------

    \300\ See Changes to Exchange Act Registration Requirements to
Implement Title V and Title VI of the JOBS Act, Release No. 33-10075
(May 3, 2016) [81 FR 28689 (May 10, 2016)], at text accompanying
note 71. The term ``accredited investor'' for purposes of Section
12(g)(1) is as defined in 17 CFR 230.501(a), which provides that an
accredited investor is any person who comes within one or more of
the categories of investors specified therein, or whom the issuer
reasonably believes comes within any such category. Whether the
issuer has a reasonable belief depends on the particular facts and
circumstances surrounding the determination. Under 17 CFR 240.12g-1,
an issuer needs to determine, based on the facts and circumstances,
whether prior information provides a basis for a reasonable belief
that the security holder continues to be an accredited investor as
of the last day of the fiscal year. See id. at Section II.B.3.
---------------------------------------------------------------------------

D. Harmonization of Disclosure Requirements

    Currently, the exempt offerings rules provide different financial
statement information requirements for Regulation A and Regulation D.
Additionally, in some areas compliance with Regulation A is more
complex or difficult than for registered offerings, such as with
respect to the rules regarding redaction of confidential information in
material contracts and incorporation by reference. Finally, the Supreme
Court's decision in Food Marketing Institute v. Argus Leader Media
\301\ led the Commission to review its standard for allowing redaction
of information from certain exhibits.
---------------------------------------------------------------------------

    \301\ 139 S.Ct. 2356 (2019) (``Food Marketing Institute'').
---------------------------------------------------------------------------

1. Rule 502(b) of Regulation D
    When non-accredited investors are participating in an offering
under Rule 506(b), the issuer conducting the offering must furnish the
information required by Rule 502(b),\302\ including specified financial
statement and non-financial information, to such non-accredited
investors a reasonable time prior to the sale of the securities and
must provide these investors with the opportunity to ask questions and
receive answers about the offering.\303\ This includes, if the issuer
is not subject to the reporting requirements of Section 13 \304\ or
15(d) \305\ of the Exchange Act, the following financial statement
information:
---------------------------------------------------------------------------

    \302\ See 17 CFR 230.502(b)(2)(i) through (vii).
    \303\ See 17 CFR 230.502(b)(2)(v). Although not expressly
required by Rule 502(b), issuers and funds conducting Rule 506(b)
offerings exclusively to accredited investors often provide those
accredited investors with information about the issuer in view of
the antifraud provisions of the Federal securities laws. See Note to
Rule 502(b).
    \304\ 15 U.S.C. 78m.
    \305\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

     For offerings up to $2 million: The information required
in 17 CFR 210.8-01 through 8-08 (``Article 8 of Regulation S-X''),
except that only the issuer's balance sheet, which shall be dated
within 120 days of the start of the offering, must be audited; \306\
---------------------------------------------------------------------------

    \306\ See 17 CFR 230.502(b)(2)(i)(B)(1) (``Rule
502(b)(2)(i)(B)(1)'').
---------------------------------------------------------------------------

     For offerings up to $7.5 million: The financial statement
information required in 17 CFR 239.11 (``Form S-1'') for smaller
reporting companies.\307\
---------------------------------------------------------------------------

    \307\ See 17 CFR 230.502(b)(2)(i)(B)(2) (``Rule
502(b)(2)(i)(B)(2)''). See also 17 CFR 240.12b-2 (defining smaller
reporting company).
---------------------------------------------------------------------------

     For offerings over $7.5 million: The financial statement
information as would be required in a registration statement filed
under the Securities Act on the form that the issuer would be entitled
to use; \308\ and
---------------------------------------------------------------------------

    \308\ See 17 CFR 230.502(b)(2)(i)(B)(3) (``Rule
502(b)(2)(i)(B)(3)''). For offerings above $2 million, issuers that
cannot obtain audited financial statements without unreasonable
effort and expense, that are not limited partnerships, are only
required to have the balance sheet, which must be dated within 120
days of the start of the offering, audited. If the issuer is a
limited partnership, and it cannot obtain audited financial
statements without unreasonable effort and expense it may furnish
financial statements that have been prepared on the basis of Federal
income tax requirements and examined and reported on in accordance
with generally accepted auditing standards by an independent public
or certified accountant. See Rules 502(b)(2)(i)(B)(2) and (3).
---------------------------------------------------------------------------

     For offerings by foreign private issuers eligible to use
17 CFR 249.220f (``Form 20-F''): The same kind of information required
to be included in a registration statement filed under the Securities
Act on the form that the issuer would be entitled to use.\309\
---------------------------------------------------------------------------

    \309\ See 17 CFR 230.502(b)(2)(i)(C). The financial statements
provided by foreign private issuers eligible to use Form 20-F need
be certified only to the extent required by paragraph Rules
502(b)(2)(i)(B)(1), (2), or (3), as appropriate. See id.
---------------------------------------------------------------------------

    Similarly, issuers conducting offerings pursuant to Regulation A
are required to provide certain financial statement and non-financial
information to investors. Table 4 summarizes the financial information
issuers conducting a Regulation A offering are required to provide
under Part F/S of Form 1-A.

                         Table 4--Current Regulation A Financial Statement Requirements
----------------------------------------------------------------------------------------------------------------
                                         Financial statement        Age of financial
            Offering size                information required          statements             Audit required
----------------------------------------------------------------------------------------------------------------
Up to $20 million (Tier 1)...........  Consolidated balance     Not more than nine       No, unless issuer has
                                        sheets of the issuer     months before the date   already obtained an
                                        for the two previous     of non-public            audit for another
                                        fiscal year ends (or     submission, filing or    purpose.
                                        for such shorter time    qualification, with
                                        that the issuer has      the most recent annual
                                        been in existence);.     or interim balance
                                       Consolidated statements   sheet not older than
                                        of comprehensive         nine months.
                                        income, cash flows,
                                        and stockholders'
                                        equity of the issuer;
                                        and.
                                       Financial statements of
                                        guarantors and issuers
                                        of guaranteed
                                        securities, affiliates
                                        whose securities
                                        collateralize an
                                        issuance, significant
                                        acquired or to be
                                        acquired businesses
                                        and real estate
                                        operations, and pro
                                        forma information
                                        relating to
                                        significant business
                                        combinations.
Up to $50 million (Tier 2)...........  Financial statements in  Not more than nine       Yes (but see paragraph
                                        compliance with          months before the date   (c) in Part F/S of
                                        Article 8 of             of non-public            Form 1-A noting that
                                        Regulation S-X.          submission, filing or    interim financial
                                                                 qualification, with      statements need not be
                                                                 the most recent annual   audited).
                                                                 or interim balance
                                                                 sheet not older than
                                                                 nine months.
----------------------------------------------------------------------------------------------------------------

a. Proposed Amendments
    The Commission proposed to amend Rule 502(b)'s requirements
governing the financial information that non-reporting companies must
provide to non-accredited investors participating in Regulation D
offerings to align with the financial information that issuers must
provide investors in Regulation A

offerings. Specifically, for Regulation D offerings of $20 million or
less, proposed Rule 502(b)(2)(i)(B)(1) would refer such issuers to
paragraph (b) of part F/S of Form 1-A, which applies to Tier 1
Regulation A offerings. For offerings of greater than $20 million,
proposed Rule 502(b)(2)(i)(B)(2) would refer issuers to paragraph (c)
of part F/S of Form 1-A, which applies to Tier 2 Regulation A
offerings.\310\ This proposed amendment would eliminate the current
Rule 502(b) provisions that permit an issuer, other than a limited
partnership, that cannot obtain audited financial statements without
unreasonable effort or expense, to provide only the issuer's audited
balance sheet.\311\
---------------------------------------------------------------------------

    \310\ As proposed, issuers need not comply with the other
ongoing non-financial statement disclosure requirements in Tier 2
Regulation A offerings. Instead, the proposed requirement would be
limited to harmonization of the financial statement disclosure
requirements outlined in the offering circular.
    \311\ See Rules 502(b)(2)(i)(B)(2) and (3).
---------------------------------------------------------------------------

    In addition, under the proposed amendments, a foreign private
issuer that is not an Exchange Act reporting company would be required
to provide financial statement disclosure consistent with the
Regulation A requirements.\312\ The foreign private issuer would be
permitted to provide financial statements prepared in accordance with
either U.S. GAAP or International Financial Reporting Standards as
issued by the International Accounting Standards Board. For business
combinations and exchange offers, an issuer that is not an Exchange Act
reporting company would provide financial statements consistent with
the Regulation A requirements.
---------------------------------------------------------------------------

    \312\ The term ``foreign private issuer'' means any foreign
issuer, other than a foreign government, except an issuer meeting
the following conditions as of the last business day of its most
recently completed second fiscal quarter: (i) More than 50 percent
of the outstanding voting securities of such issuer are directly or
indirectly owned of record by residents of the United States; and
(ii) any of the following: (a) The majority of the executive
officers or directors are United States citizens or residents; (b)
more than 50 percent of the assets of the issuer are located in the
United States; or (c) the business of the issuer is administered
principally in the United States. See 17 CFR 230.405.
---------------------------------------------------------------------------

b. Comments
    Commenters were divided on the proposal. Some commenters supported
aligning the financial statement information requirements in Rule
502(b) with the requirements of Regulation A,\313\ while others opposed
the proposal.\314\ One commenter, who opposed the proposal, questioned
whether the financial statement information requirements in Rule 502(b)
are overly burdensome given the amounts raised under Rule 506(b) and
whether the Regulation A disclosure requirements were appropriate for
Regulation D, given that the Regulation A disclosures are reviewed by
the Commission.\315\ Another commenter who opposed the proposal
expressed concern that removing the audit requirement for financial
statements in Rule 506(b) offerings under $20 million would deprive
investors of critical information.\316\
---------------------------------------------------------------------------

    \313\ See ABA Letter (suggesting that the disclosure
requirements of Regulation A provide adequate information upon which
a non-accredited investor can make an informed investment decision);
CfPA Letter; SEC SBCFAC Letter; Geraci Law Letter; Letter from
Carta, Inc. dated June 1, 2020 (``Carta Letter''); W. Hubbard
Letter; CrowdCheck Letter; and IPA Letter.
    \314\ See J. Clarke Letter; NASAA Letter (opposing harmonization
of the financial statement requirements with Regulation A because of
the difference in the terms of the two exemptions); Better Markets
Letter (expressing concern about a loss of investor protection
because the proposal would allow companies, including foreign
companies, to raise capital without providing audited financial
statements); CFA Letter (expressing concern that the proposal would
reduce transparency and weaken investor protections); and CFA
Institute Letter (stating that harmonization with the Regulation A
requirement is not appropriate because Rule 506(b) lacks investor
protections that Regulation A Tier 1 (and Regulation Crowdfunding)
provide to non-accredited investors).
    \315\ See NASAA Letter.
    \316\ See CFA Institute Letter.
---------------------------------------------------------------------------

    Several commenters addressed further aspects of the proposed
harmonization of financial disclosure requirements. One commenter
recommended harmonizing the Rule 502(b) disclosures with Regulation
Crowdfunding.\317\ Another commenter expressly opposed requiring
issuers conducting Regulation D offerings above the Regulation A Tier 2
offering limit to comply with the financial information requirements
applicable to smaller reporting companies under Article 8 of Regulation
S-X.\318\
---------------------------------------------------------------------------

    \317\ See J. Clarke Letter.
    \318\ See W. Hubbard Letter (stating that the current Reg A Tier
2 approach to financial statement disclosure requirements is
understandable and straightforward and adding financial disclosure
requirements for offerings above $50 million will not provide a
commensurate benefit or protection to investors however will likely
discourage issuers from using the exemption).
---------------------------------------------------------------------------

    The 2020 Government-Business Forum on Small Business Capital
Formation generally recommended that the Commission revise the
disclosures required for non-accredited investors in offerings made
under Rule 506(b).\319\
---------------------------------------------------------------------------

    \319\ See 2020 Forum Report.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting the amendments as proposed. By aligning the
disclosure requirements in Rule 502(b) with those in Regulation A,
additional issuers may be willing to include non-accredited investors
in their offerings pursuant to Rule 506(b), which would expand
investment opportunities for those investors. In addition, we continue
to believe, as stated in comments received on the Concept Release, that
many issuers view the current financial statement requirements of Rule
502(b) as overly burdensome.\320\ We believe revising the disclosure
requirements will help address those concerns, while continuing to
provide investors with material information about the issuer. We
acknowledge that there are differences in the terms and conditions of
Regulation A and Rule 506(b) offerings involving non-accredited
investors, in particular the fact that the financial statements
provided pursuant to Rule 502(b) are not subject to staff review and
qualification. We also note that staff review and qualification is not
a guarantee that the disclosure is complete and accurate. Nevertheless,
we have determined that the financial statement requirements of
Regulation A provide adequate information to non-accredited investors
in such offerings, and we believe that the same is true for non-
accredited investors in the Rule 506(b) context.\321\ Further, as noted
in the Proposing Release, the information disclosed to investors will
continue to be subject to the anti-fraud provisions of the Federal and
State securities laws.
---------------------------------------------------------------------------

    \320\ See Proposing Release, at text accompanying notes 195-198.
    \321\ Regulation A is available only to U.S. or Canadian
issuers, and excludes, among others, blank check companies,
registered investment companies, business development companies, and
issuers of certain securities including asset-backed securities.
These limitations do not apply to Regulation D; therefore, such
issuers shall apply the Regulation A financial statement
requirements as if they were eligible to do so under Regulation A.
With respect to foreign private issuers, we are adopting as proposed
a provision stating that a foreign private issuer that is not an
Exchange Act reporting company would be permitted to provide
financial statements prepared in accordance with U.S. GAAP or
International Financial Reporting Standards as issued by the
International Accounting Standards Board.
---------------------------------------------------------------------------

    We are not persuaded by commenters who suggested that we harmonize
the disclosure requirements in Rule 502(b) with those in Regulation
Crowdfunding. We also do not believe harmonizing the disclosure
requirements in Rule 502(b) with Regulation Crowdfunding for offerings
below $5 million and with Regulation A for offerings above $5 million
would alleviate any additional burdens on issuers. Instead, such a
requirement would create additional complexity for issuers with
offerings that could cross from below to above $5 million, by requiring
them to

simultaneously consider the disclosure requirements of Regulation A and
Regulation Crowdfunding.
2. Proposed Amendments To Simplify Compliance With Regulation A
    In its review of the exempt offering framework, the Commission
identified several areas where compliance with Regulation A is more
complex or difficult than for registered offerings, including the rules
regarding the redaction of confidential information in material
contracts, making draft offering statements public on EDGAR,
incorporation by reference, and the abandonment of a post-qualification
amendment.
a. Redaction of Confidential Information in Certain Exhibits
    In March 2019, the Commission amended several rules to permit
registrants to file redacted material contracts and plans of
acquisition, reorganization, arrangement, liquidation, or succession
without applying for confidential treatment.\322\ These rules require
registrants to mark the exhibit index to indicate that portions of the
exhibit or exhibits have been omitted, include a prominent statement on
the first page of the redacted exhibit that certain identified
information has been excluded from the exhibit because it is both not
material and would be competitively harmful if publicly disclosed, and
indicate with brackets where the information has been omitted from the
filed version of the exhibit.\323\ This process for filing redacted
exhibits was not extended to Regulation A offerings at that time. As a
result, Regulation A issuers are still compelled to submit an
application for confidential treatment in order to redact immaterial
confidential information from material contracts and plans of
acquisition, reorganization, arrangement, liquidation, or succession.
---------------------------------------------------------------------------

    \322\ See FAST Act Modernization and Simplification of
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674
(Apr. 2, 2019)] (``FAST Act Modernization Release'') at text
accompanying notes 45-73 (amending 17 CFR 229.601(b)(2)(ii) and 17
CFR 229.601(b)(10)(iv)).
    \323\ See 17 CFR 229.601(b)(2) (``Item 601(b)(2)'' of Regulation
S-K) and 17 CFR 229.601(b)(10)(iv) (``Item 601(b)(10)(iv)'' of
Regulation S-K). Redacted exhibits are subject to compliance reviews
by the staff.
---------------------------------------------------------------------------

i. Proposed Amendments
    The Commission proposed to amend Item 17 of Form 1-A to provide
issuers with the option to file redacted material contracts \324\ and
plans of acquisition, reorganization, arrangement, liquidation, or
succession,\325\ consistent with the recent amendments to Regulation S-
K). Issuers would still have the option to file such exhibits pursuant
to the existing confidential treatment application process, which would
remain unchanged.
---------------------------------------------------------------------------

    \324\ See Item 17.6 of Form 1-A.
    \325\ See Item 17.7 of Form 1-A.
---------------------------------------------------------------------------

ii. Comments
    Commenters that addressed the proposed amendments supported the
proposal to apply the simplified confidential treatment process to
Regulation A filers.\326\
---------------------------------------------------------------------------

    \326\ See Republic Letter; W. Hubbard Letter; M. Schonberger
Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed to add a new instruction
to Item 17 of Form 1-A that applies to paragraphs 6 and 7 of that item
and includes procedures similar to Items 601(b)(2) and (b)(10) of
Regulation S-K for filing redacted material contracts or plans of
acquisition, reorganization, arrangement, liquidation, or succession.
We are making one change to the proposed instruction, to further
harmonize the procedures for redacting information under Item 17 of
Form 1-A with those in 17 CFR 229.601(a)(6) (``Item 601(a)(6)'' of
Regulation S-K), by allowing issuers to redact information that ``would
constitute a clearly unwarranted invasion of personal privacy'' in any
of the exhibits listed in Item 17 of Form 1-A. As a matter of practice,
the staff generally does not object where an issuer omits sensitive
personally identifiable information, such as bank account numbers,
social security numbers, home addresses, and similar information
(``PII'') from exhibits without also submitting a confidential
treatment request. As with the adoption of Item 601(a)(6) of Regulation
S-K, codifying this staff practice in Item 17 of Form 1-A will
alleviate the burden from issuers of having to provide an analysis in
order to redact PII from exhibits, and will also better safeguard PII
by limiting its dissemination.\327\
---------------------------------------------------------------------------

    \327\ See FAST Act Modernization Release, at Section
II.B.5.b.ii. (adopting Item 601(a)(6) of Regulation S-K).
---------------------------------------------------------------------------

    Commission staff will continue to review Forms 1-A filed in
connection with Regulation A offerings and selectively assess whether
redactions from exhibits appear to be limited to information that meets
the appropriate standard.\328\ Upon request, issuers will be expected
to promptly provide supplemental materials to the staff similar to
those currently required, including an unredacted copy of the exhibit
and an analysis of why the redacted information is both not material
and the type of information that the issuer both customarily and
actually treats as private and confidential.\329\ If the issuer's
supplemental materials do not support its redactions, the staff may
request that the issuer file an amendment that includes some, or all,
of the previously redacted information, similar to the process the
staff currently follows for confidential treatment requests in
connection with Regulation A offerings.\330\
---------------------------------------------------------------------------

    \328\ As discussed below, we are amending the standard for
redaction of information under this streamlined process, which
currently requires that the redactions from exhibits be limited to
information that is not material and that would cause competitive
harm if publicly disclosed. The amended standard is patterned on the
Supreme Court's language set out in Food Marketing Institute. See
supra note 301.
    \329\ Pursuant to 17 CFR 200.83, companies are permitted to
request confidential treatment of this supplemental information
while it is in the staff's possession.
    \330\ After completing its review of the supplemental materials,
the Commission or its staff will return or destroy them at the
request of the company, as applicable.
---------------------------------------------------------------------------

b. Amendment to Form 1-A Item 17.16(a) Requirement
    Issuers that are conducting Regulation A offerings are permitted to
submit non-public draft offering statements and amendments for review
by the Commission staff if they have not previously sold securities
pursuant to (i) a qualified offering statement under Regulation A or
(ii) an effective Securities Act registration statement.\331\ Such
issuers also may submit related non-public correspondence to the
Commission staff for review confidentially. Current rules require that
these non-public offering statements, amendments and correspondence be
filed as an exhibit to a publicly filed offering statement at least
twenty-one calendar days prior to the qualification of the offering
statement.\332\ Similarly, an emerging growth company may, prior to its
initial public offering date, submit a draft registration statement and
amendments to the Commission for non-public review by the staff.\333\
However, unlike issuers submitting Regulation A offering statements for
non-public review, there is no corresponding Securities Act rule or
item requiring registration statements and amendments confidentially
submitted by emerging growth companies to be filed as an exhibit to a
publicly filed registration statement.

Instead issuers satisfy their public filing requirement by logging into
their EDGAR account, selecting materials previously submitted non-
publicly, and releasing them for public dissemination.\334\
---------------------------------------------------------------------------

    \331\ See 17 CFR 230.252(d).
    \332\ See Item 17, paragraph 16(a) of Form 1-A and 17 CFR
230.252(d).
    \333\ See Section 6(e)(1) of the Securities Act.
    \334\ See Announcement by the Division of Corporation Finance,
Draft Registration Statements to Be Submitted and Filed on EDGAR
(Sep. 26, 2012), available at https://www.sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
---------------------------------------------------------------------------

i. Proposed Amendments
    The Commission proposed to amend Item 17.16(a) of Form 1-A to
harmonize the procedures for publicly filing draft Regulation A
offering statements with those for draft Securities Act registration
statements. Instead of requiring documents previously submitted for
non-public review by the staff and related, non-public correspondence
to be filed as exhibits to a publicly filed offering statement, issuers
conducting offerings exempt from registration pursuant to Regulation A
would be able to make such documents available to the public via EDGAR
to comply with the requirements of 17 CFR 230.252(d).
ii. Comments
    Commenters that addressed the proposed amendment supported the
proposal to amend Item 17.16(a) of Form 1-A to allow non-public draft
offering statements, amendments and related non-public correspondence
to be made publicly available through the use of the EDGAR system.\335\
---------------------------------------------------------------------------

    \335\ See J. Clarke Letter; Republic Letter; W. Hubbard Letter;
M. Schonberger Letter; CrowdCheck Letter; and IPA Letter.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed, with two changes to
renumber the exhibit paragraphs for clarity. As adopted, we are
renumbering paragraph 16 of Item 17 of Form 1-A so that it will be
referred to as ``99. Additional Exhibits,'' and will be the last
paragraph in Item 17, and former paragraph 16 will be designated as
``reserved.'' In addition, as proposed, we are deleting sub-paragraph
(a) of that paragraph so that issuers no longer will be required to
file the non-public offering statements and related amendments and
correspondence as exhibits. Instead, Regulation A issuers will be able
to make previously non-public documents available to the public on
EDGAR using the same process as issuers conducting a registered
offering. We believe that this change simplifies the process of moving
from a draft offering statement to a publicly filed document for
issuers conducting Regulation A offerings, saving both time and money
for such issuers. In addition, because all previously submitted
offering statements and related amendments and correspondence will be
available to the public on EDGAR, rather than attached as exhibits to a
given offering statement, this change should make it easier for
investors to learn about the issuer and the Regulation A offering
itself, furthering their ability to make informed investment decisions.
c. Incorporation by Reference of Previously Filed Financial Statements
in Form 1-A for Regulation A Offerings
    The ability to incorporate financial statements by reference to
Exchange Act reports filed before the effective date of a registration
statement is permitted on Form S-1, subject to certain conditions.\336\
Specifically, General Instruction VII of Form S-1 permits registrants
that meet certain eligibility standards \337\ to incorporate by
reference the information required by Item 11 of Form S-1, which
includes information about the registrant, such as, among other things,
financial statement information meeting the requirements of 17 CFR
210.1-01 through 12-29.\338\ Regulation A issuers, however, are
required to include the issuer's financial statements, prepared in
accordance with the applicable requirements of Tier 1 or Tier 2 of
Regulation A, in their Regulation A offering circular that is
distributed to investors.\339\
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    \336\ See General Instruction VII to Form S-1.
    \337\ These criteria include, but are not limited to, that the
registrant: (i) Is subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, (ii) has filed all reports
and other materials required to be filed by Sections 13(a), 14, or
15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports and materials), (iii) has filed an annual report required
under Section 13(a) or Section 15(d) of the Exchange Act for its
most recently completed fiscal year and (iv) is not, and during the
past three years neither it nor any of its predecessors was: (a) A
blank check company; (b) a shell company, other than a business
combination related shell company; or (c) offering penny stock. The
registrant must make its periodic and current reports filed pursuant
to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference pursuant to Item 11A or Item 12 of Form S-
1 readily available and accessible on a website maintained by or for
the registrant and containing information about the registrant.
    \338\ See Item 12 to Form S-1.
    \339\ See General Rule (a) to Part F/S of Form 1-A.
---------------------------------------------------------------------------

i. Proposed Amendments
    The Commission proposed to permit issuers to incorporate previously
filed financial statements by reference into a Regulation A offering
circular. The Commission proposed that an issuer must satisfy criteria
similar to the requirement in connection with Form S-1. Specifically,
issuers that have a reporting obligation under 17 CFR 230.257 (``Rule
257'') or the Exchange Act must be current in their reporting
obligations. Issuers would be required to make incorporated financial
statements readily available and accessible on a website maintained by
or for the issuer and to disclose in the offering statement that such
financial statements will be provided upon request.\340\ Issuers
conducting ongoing offerings would need to continue to file post-
qualification amendments to Form 1-A annually to include the financial
statements that would be required to be included in a Form 1-A as of
such date.\341\ These financial statements could be either filed with
such post-qualification amendment or incorporated by reference to a
previously filed periodic or current report. In addition, issuers would
remain liable for such financial statements under Section 12(a)(2) of
the Securities Act \342\ to the same extent as if they had been filed
rather than incorporated by reference.
---------------------------------------------------------------------------

    \340\ General Instruction III(b) of Form 1-A requires the
inclusion of a hyperlink in the offering circular to material
incorporated by reference, which would include an issuer's
previously filed financial statements on EDGAR.
    \341\ See 17 CFR 230.252(f)(2)(i).
    \342\ 15 U.S.C. 77l(a)(2).
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ii. Comments
    Commenters generally supported the proposal to permit incorporation
by reference of an issuer's previously filed financial statements.\343\
Some commenters additionally supported permitting forward incorporation
by reference in Regulation A,\344\ with some of these commenters
further supporting the elimination of the requirement to file annual
post-qualification amendments.\345\
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    \343\ See J. Clarke Letter; Republic Letter; W. Hubbard Letter;
M. Schonberger Letter; and CrowdCheck Letter.
    \344\ See W. Hubbard Letter; M. Schonberger Letter; and
CrowdCheck Letter.
    \345\ See M. Schonberger Letter; and CrowdCheck Letter
(supporting elimination of post-qualification amendments where the
auditor's consent was included in the 17 CFR 239.91 (``Form 1-K'')).
In contrast, one commenter supported continuing to require annual
post-qualification amendments to ensure that filings remain subject
to ongoing staff review. See W. Hubbard Letter.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed. We believe that
allowing incorporation by reference of previously filed financial
statements should decrease existing filing burdens on Regulation A
issuers. We are not expanding Regulation A to allow for

forward incorporation by reference as recommended by some commenters,
as we believe doing so could increase investor search costs and would
eliminate the benefit of staff review of post-qualification amendments
prior to their qualification.
d. Amendment to Abandonment Provision of Regulation A
    Regulation A permits the Commission to declare an offering
statement abandoned, but does not provide the same authority for post-
qualification amendments.
i. Proposed Amendments
    The Commission proposed to amend the abandonment provisions of Rule
259(b) to permit the Commission to declare a post-qualification
amendment to an offering statement abandoned, consistent with 17 CFR
230.479, the rule applicable to registered offerings.
ii. Comments
    Commenters who addressed the proposed amendment to the abandonment
provisions of Rule 259(b) supported the proposal.\346\
---------------------------------------------------------------------------

    \346\ See Republic Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments as proposed. We continue believe
there are situations where it is appropriate for the Commission to be
able to declare a specific post-qualification amendment abandoned,
instead of the entire offering statement. For example, Commission staff
has observed some issuers attempting to use post-qualification
amendments for separate classes of securities that are not otherwise
being offered under the offering statement. Under the final rules, if
an issuer fails to qualify a post-qualification amendment for such a
separate class, but otherwise is in compliance with all of its
Regulation A obligations, the Commission will be able to declare that
specific post-qualification amendment abandoned so as to avoid
potential investor confusion arising from the presence of the
unqualified post-qualification amendment on EDGAR.
3. Confidential Information Standard
    The current requirements for registrants to file material contracts
as exhibits to their disclosure documents permit registrants to redact
provisions or terms of exhibits required to be filed if those
provisions or terms are both (i) not material and (ii) would likely
cause competitive harm to the registrant if publicly disclosed.\347\
The ``competitive harm'' requirement was patterned on the standard then
being used by the U.S. Circuit Court of Appeals for the District of
Columbia \348\ to define what information is confidential under
Exemption 4 of the Freedom of Information Act, which protects ``trade
secrets and commercial or financial information obtained from a person
[if they are] privileged or confidential.'' \349\ In June 2019, the
Supreme Court rejected the Circuit Court's longstanding test for
determining what information was confidential under Exemption 4 and
adopted a new definition of ``confidential'' that does not include a
competitive harm requirement.\350\ The Supreme Court stated that ``[a]t
least where commercial or financial information is both customarily and
actually treated as private by its owner and provided to the government
under an assurance of privacy, the information is `confidential' within
the meaning of Exemption 4.'' \351\
---------------------------------------------------------------------------

    \347\ See, e.g., FAST Act Modernization Release, at text
accompanying notes 45-73 (amending paragraphs (b)(2)(ii) and
(b)(10)(iv) of Item 601 of Reg. S-K).
    \348\ See National Parks and Conservation Association v. Morton,
498 F.2d 765 (D.C. Cir. 1974); and National Parks and Conservation
Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976).
    \349\ 5 U.S.C. 552(b)(4).
    \350\ See Food Marketing Institute.
    \351\ Id. at 2366.
---------------------------------------------------------------------------

a. Proposed Amendments
    The Commission proposed to adjust the exhibit filing requirements
by removing the competitive harm requirement and replacing it with a
standard more closely aligned with the Supreme Court's definition of
``confidential.'' Under the proposed amendments, information may be
redacted from material contracts if it is the type of information that
the issuer both customarily and actually treats as private and
confidential and that is also not material.\352\
---------------------------------------------------------------------------

    \352\ The Commission proposed changes to the following rules and
forms to update the standard: Item 601(b)(2) and (b)(10) of
Regulation S-K; Form S-6; Form N-14; Form 20-F; Form 8-K; Form N-1A;
Form N-2; Form N-3; Form N-4; Form N-5; Form N-6; and Form N-8B-2.
---------------------------------------------------------------------------

b. Comments
    We received no comments on the proposed amendments to revise the
confidential information standard, other than one comment expressing
support for the proposed revisions in the context of variable product
registration statement forms.\353\ This commenter also suggested that
we revise Form N-6 to expand the types of exhibits to which the
standard would apply to include participation agreements and
administrative contracts.\354\ The commenter stated that this would
provide greater consistency between Form N-4, which relates to variable
annuities, and Form N-6, which relates to variable life insurance
contracts.\355\
---------------------------------------------------------------------------

    \353\ See Letter from the Committee of Annuity Insurers dated
May 6, 2020 (``Comm. of Annuity Insurers Letter'').
    \354\ See id.
    \355\ See id.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting the amendments as proposed to adjust the exhibit
filing requirements by removing the competitive harm requirement and
replacing it with a standard that permits information to be redacted
from material contracts if it is the type of information that the
issuer both customarily and actually treats as private and
confidential, and which is also not material.\356\
---------------------------------------------------------------------------

    \356\ We did not propose, and are not adopting, changes to 17
CFR 229.402(b) (``Item 402(b)'' of Regulation S-K). Instruction 4 to
Item 402(b) and Instruction 2 to 17 CFR 229.402(e) (``Item
402(e)(1)''), which reference a competitive harm standard that is
the same as would apply under the current rules when a registrant
requests confidential treatment of confidential trade secrets or
confidential commercial or financial information pursuant to 17 CFR
230.406 and 17 CFR 240.24b-2. The changes we are adopting to the
exhibit requirements do not alter the existing standard applicable
to Items 402(b) and 402(e) of Regulation S-K.
---------------------------------------------------------------------------

    We did not propose to revise Form N-6 to modify the types of
exhibits to which the confidential information standard applies and
decline to do so here. Information contained in such exhibits is
already disclosed to investors in other contexts and, in our staff's
experience, these exhibits do not contain confidential or proprietary
information. Further, as part of our adoption of updated disclosure
requirements for variable annuity and variable life insurance
products,\357\ among other changes, the instructions to exhibits in
Form N-6 and Form N-4 will be revised to eliminate discrepancies
related to the categories of exhibits eligible for redaction.\358\
---------------------------------------------------------------------------

    \357\ See Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts, Release
No. IC-33814 (May 1, 2020) [FR 24964 (May 1, 2020)] (``VASP
Release''). For purposes of this release, we refer to the versions
of the relevant forms adopted by the VASP Release as the ``VASP
amended'' versions of Forms N-3, N-4, and N-6 (e.g., ``VASP amended
Form N-3''). The changes to the exhibit filing requirements that we
are adopting in this release, which replace the competitive harm
standard, also apply to the parallel instruction in each of Item 32
of VASP amended Form N-3, Item 27 of VASP amended Form N-4, and Item
30 of VASP amended Form N-6.
    \358\ See Instruction 3 to Item 27 of VASP amended Form N-4
(allowing for the redaction of reinsurance contracts and other
material contracts); see also Instruction 3 to Item 30 of amended
Form N-6 (allowing for the redaction of reinsurance contracts and
other material contracts). Registrants must comply with these rule
and form amendments by January 1, 2022. See VASP Release, at Section
II.G.

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

E. Offering and Investment Limits

    Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D
contain a variety of requirements and investor protections, including
limits on the amount of securities that may be offered and sold under
the exemptions. Regulation A and Regulation Crowdfunding also include
limits on how much an individual may invest. The Commission has
estimated that approximately $2.7 trillion of new capital was raised
through exempt offering channels in 2019, of which approximately $1.3
billion (0.05 percent) was raised under Regulation A, Regulation
Crowdfunding, and Rule 504 combined.\359\
---------------------------------------------------------------------------

    \359\ See Concept Release, at Section II. Preliminary estimates
from 2019 similarly reflect limited capital raising under the rules,
with $1.042 billion raised under Regulation A, $228 million under
Rule 504, and $62 million under Regulation Crowdfunding.
---------------------------------------------------------------------------

1. Regulation A
    Regulation A establishes two tiers of offerings: Tier 1, for
offerings that do not exceed $20 million in a 12-month period; and Tier
2, for offerings that do not exceed $50 million in a 12-month period.
The Commission is required by Section 3(b)(5) of the Securities Act to
review the $50 million Tier 2 offering limit specified in Section
3(b)(2) of the Securities Act every two years, and the statute
authorizes the Commission to increase the annual offering limit if the
Commission determines that it would be appropriate to do so.
    Earlier this year, the Divisions of Corporation Finance and
Economic and Risk Analysis conducted a Regulation A Lookback Study and
Offering Limit Review Analysis (``2020 Regulation A Review'') as
required by the 2015 Regulation A Release.\360\ The 2020 Regulation A
Review found that from June 2015 to December 2019, $2.4 billion was
reported raised by 183 issuers in ongoing and closed Regulation A
offerings, including $230 million in Tier 1 and $2.2 billion in Tier 2
offerings.\361\
---------------------------------------------------------------------------

    \360\ See Staff of the U.S. Securities and Exchange Commission,
Report to the Commission, Regulation A Lookback Study and Offering
Limit Review Analysis, 2020 (Mar. 4, 2020), available at https://www.sec.gov/smallbusiness/exemptofferings/rega/2020Report. The
report includes a review of: The amount of capital raised under the
amendments; the number of issuances and amount raised by both Tier 1
and Tier 2 offerings; the number of placement agents and brokers
facilitating the Regulation A offerings; the number of Federal,
State, or any other actions taken against issuers, placement agents,
or brokers with respect to both Tier 1 and Tier 2 offerings; and
whether any additional investor protections appear necessary for
either Tier 1 or Tier 2.
    \361\ Over this time period issuers sought $11.2 billion across
487 Regulation A offerings, of which 382 were qualified offering
statements seeking up to $9.1 billion. See 2020 Regulation A Review.
---------------------------------------------------------------------------

a. Proposed Amendments
    Since adoption of the 2015 amendments, the Commission has continued
to receive feedback on, and has considered further enhancements to,
Regulation A.\362\ This feedback and consideration informed our
proposal to increase the maximum offering amount under Tier 2 of
Regulation A from $50 million to $75 million. Consistent with the
Commission's approach to limitations on secondary sales when adopting
the Regulation A amendments, the Commission also proposed to increase
the maximum offering amount for secondary sales under Tier 2 of
Regulation A from $15 million to $22.5 million.
---------------------------------------------------------------------------

    \362\ While the Commission has received feedback from market
participants and commenters seeking an increase in the Tier 2
offering limit, these commenters did not seek an increase in the
Tier 1 limit. See 2017 Forum Report; 2018 Forum Report; and A
Financial System That Creates Economic Opportunities--Capital
Markets (Oct. 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury Report'').
---------------------------------------------------------------------------

b. Comments
    While most commenters that addressed the proposal supported raising
the Tier 2 offering limits,\363\ some opposed the increase.\364\
Commenters supporting the increase suggested that an increase could
encourage development of the smaller initial public offering market,
encouraging more issuers to conduct offerings and providing more
investment opportunities for investors.\365\ Some of these commenters
additionally suggested that the higher offering limits would improve
the economics for issuers and broker dealers to participate in the
Regulation A market.\366\ A number of commenters supported raising the
limit further to $100 million.\367\ Several commenters also
specifically supported raising the limit for secondary sales.\368\ We
additionally received many letters urging the Commission to provide
Federal preemption for secondary sales of a Tier 2 Regulation A
offering.\369\
---------------------------------------------------------------------------

    \363\ See, e.g., ABA Letter; Letter from Bruce D. Wertz, Sr.
dated Mar. 10, 2020; B. Andrews, et al. Letter; SEC SBCFAC Letter;
Geraci Law Letter (suggesting the increased offering limits will
attract a more seasoned pool of investors as well as institutional
investors); Carta Letter; SAF Letter; M. Schonberger Letter; D.
Burton Letter; InnaMed, et al. Letter; CrowdCheck Letter; IPA
Letter; Republic Letter; and Sen. Toomey Letter. Some of these
commenters further supported indexing additional increases for
inflation. See, e.g., Carta Letter; IPA Letter; and Sen. Toomey
Letter. Other commenters offered further suggestions to improve the
offering process and raise effective offering limits. See, e.g., M.
Schonberger Letter (recommending Regulation A be amended to apply
the 180-day selling extension for continuous offerings to certain
post-qualification amendment filings). See also Annual Report for
Fiscal Year 2019: Office of the Advocate for Small Business Capital
Formation (``2019 OASB Annual Report''), available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf, at 41 (recommending
that the Commission tie offering limits to expressed marketplace
needs for capital and provide flexibility for future review and
adjustment).
    \364\ See, e.g., CII Letter; NASAA Letter; Md. St. Bar Assoc.
Letter; AFREF Letter; Better Markets Letter; CFA Letter; R.
Rutkowski Letter; and CFA Institute Letter.
    \365\ See, e.g., Letter from Chamber of Digital Commerce dated
June 1, 2020 (``Chamber of Digital Commerce Letter''); J. Clarke
Letter; W. Hubbard Letter; CrowdCheck Letter; and Ketsal Letter.
    \366\ See, e.g., Chamber of Digital Commerce Letter, IPA Letter;
and Hubbard Letter.
    \367\ See, e.g., J. Clarke Letter; Chamber of Digital Commerce
Letter; Ketsal Letter; IPA Letter; Sen. Toomey Letter; Letter from
Biotechnology Innovation Organization dated July 21, 2020; M.
Schonberger Letter (suggesting higher offering limits reduce the
burden on issuers by permitting them to raise more capital before
having to file post qualification amendments or new offering
statements); and CrowdCheck Letter. See also Carta Letter; and Sen.
Toomey (additionally recommending indexing the limit for inflation).
But see ABA Letter (supporting the Commission's proposed incremental
approach and suggesting that precedent, prestige of the public
offering process and customary use of investment bankers likely will
mean that registered offerings will be more frequently used for
relatively larger offerings).
    \368\ See, e.g., Carta Letter; and IPA Letter.
    \369\ See Form Letter Type A; and Carta Letter.
---------------------------------------------------------------------------

    Commenters opposed to the increase suggested that there is not
compelling evidence supporting a need to raise the offering limit \370\
and stated that issuers raising such large amounts of capital should be
subject to the full disclosure and protections provided in the
Securities Act.\371\ One commenter expressed concern over the negative
effects of increasing the use of Regulation A for unsophisticated non-
accredited retail investors due to what it perceived as the lower
quality of Regulation A issuers and increased risks

of investor losses.\372\ Another commenter suggested that the reason
Regulation A Tier 2 is underutilized is not that the offering limits
are too low, but rather that the issuers and investments involve
greater risk.\373\ Additionally, one commenter opposed to the increase
and one commenter supporting the increase expressed concern relating to
the Commission's use of its general exemptive authority under Section
28 of the Securities Act to increase the limit.\374\
---------------------------------------------------------------------------

    \370\ See, e.g., CII Letter; CFA Letter; CFA Institute Letter
(noting that issuers that have exhausted the Tier II offering limits
have been almost exclusively real estate industry issuers, and that
the real estate industry is one marked by significant volatility and
risk); and Md. St. Bar Assoc. Letter (noting that the 2020
Regulation A Review found that only approximately 10% of issuers
conducting Regulation A Tier 2 offerings have reached the $50
million offering limit).
    \371\ See, e.g., Md. St. Bar Assoc. Letter; CFA Institute Letter
(suggesting the expansion of exempt offerings undermines the
traditional trade-off between the burdens of public disclosure and
the benefits of the right to raise capital from the general public);
and NASAA Letter. See also R. Rutkowski Letter (suggesting that the
proposal would weaken private offering rules in way that would
discourage public market offerings and the associated disclosure and
governance protections).
    \372\ See CFA Letter. See also CFA Institute Letter (expressing
concerns with compliance by issuers in the exempt markets and its
perception of the lower quality of issuers offering in the
Regulation A market).
    \373\ See, e.g., NASAA Letter (recommending strengthening
corporate governance and disclosure obligations and rescinding
preemption of State securities regulation to increase the regulatory
oversight of these companies making them more attractive to and
safer for investors).
    \374\ See Better Markets Letter (opposing the increase); and
CrowdCheck Letter (supporting the increase).
---------------------------------------------------------------------------

    Although many commenters were supportive of raising the Tier 2
offering limits, only one commenter recommended increasing the Tier 1
offering limit.\375\ This commenter also recommended that the
Commission reconsider whether ``covered securities'' status under
Section 18 of the Securities Act should be extended to Tier 1 of
Regulation A.\376\ Other commenters that addressed Tier 1 offering
limits, however, were generally opposed to increasing those
limits.\377\
---------------------------------------------------------------------------

    \375\ See Chamber of Digital Commerce Letter.
    \376\ See id.
    \377\ See, e.g., CII Letter; NASAA Letter; and CrowdCheck
Letter.
---------------------------------------------------------------------------

c. Final Amendments
    In order to facilitate use of Tier 2 Regulation A offerings and
having considered the comments on the Proposing Release, the 2020
Regulation A Review, feedback that the Commission received from the
Small Business Forums \378\ and in response to the Concept Release, we
are increasing the maximum offering amount under Tier 2 of Regulation A
from $50 million to $75 million as proposed. Section 3(b)(5) of the
Securities Act expressly authorizes the Commission to review and raise
the offering limit as appropriate.\379\ Consistent with the
Commission's approach to limitations on secondary sales when adopting
the Regulation A amendments, we are also increasing the maximum
offering amount for secondary sales under Tier 2 of Regulation A from
$15 million to $22.5 million.\380\
---------------------------------------------------------------------------

    \378\ See 2017 Forum Report; and 2018 Forum Report.
    \379\ We also believe that the Commission has general exemptive
authority under Securities Act Section 28 to raise the Regulation A
offering limit if it finds that raising the limit is necessary or
appropriate in the public interest and consistent with the
protection of investors.
    \380\ The Commission observed in connection with the 2014
amendments to Regulation A that selling security holder access to
Regulation A has historically been an important part of the
exemptive scheme. See Amendments for Small and Additional Issues
Exemptions Under Section 3(b) of the Securities Act, Release No. 33-
9497 (Dec. 18, 2013) [79 FR 3925 (Jan. 23, 2014)], at Section
II.B.3; and 2015 Regulation A Adopting Release, at Section II.B.3.c.
Consistent with existing and historical provisions of Regulation A,
we are continuing to permit secondary sales under Regulation A up to
30 percent of the maximum offering amount permitted under the
applicable tier.
---------------------------------------------------------------------------

    While the 2015 amendments have stimulated the Regulation A offering
market, aggregate Regulation A financing levels remain modest relative
to traditional IPOs and the Regulation D market.\381\ The 2020
Regulation A Review noted that these financing levels are likely
related to a combination of factors, including: The pool of issuers and
investors drawn to the market under existing conditions; the
availability to issuers of attractive private placement alternatives
without an offering limit; the availability to investors of attractive
investment alternatives outside of Regulation A with a more diversified
pool of issuers; limited intermediary participation and a lack of
traditional underwriting; and a lack of secondary market
liquidity.\382\
---------------------------------------------------------------------------

    \381\ See 2020 Regulation A Review.
    \382\ See id.
---------------------------------------------------------------------------

    We are raising the Tier 2 offering limit in order to enhance the
ability of Regulation A issuers that have exhausted existing offering
limits to raise additional capital.\383\ Further, public commentary
since the 2015 amendments indicates that a higher offering limit may
help attract a larger and potentially more seasoned pool of issuers and
intermediaries or institutional investors to the Regulation A
market.\384\ In addition, a higher offering limit may make Regulation A
offerings more attractive to more established Exchange Act reporting
companies.\385\ Although some commenters suggested raising the offering
limit to $100 million, we believe it is more appropriate to pursue an
incremental approach to increasing the threshold,\386\ which will
provide the Commission with a reasonable opportunity to assess the
impact of the increased offering limit on the Regulation A market
before considering further changes. In this regard, we note that the
Commission is required by Section 3(b)(5) of the Securities Act to
review and consider increasing the new $75 million Tier 2 offering
limit every two years.\387\ In addition, we believe that the issuer
eligibility requirements, content, and filing requirements for offering
statements and ongoing reporting requirements for issuers in Tier 2
Regulation A offerings continue to provide appropriate protections for
investors at this higher offering limit. For these reasons, we believe
that it is necessary and appropriate in the public interest and
consistent with the protection of investors to raise the Tier 2
offering limit as proposed.\388\
---------------------------------------------------------------------------

    \383\ The 2020 Regulation A Review estimates that approximately
10 percent of issuers in Tier 2 offerings have reached the $50
million offering limit across completed and ongoing offerings. See
id. at Table 4. As discussed in the 2020 Regulation A Review and
noted by one commenter, these issuers have primarily been from the
real estate industry. See CFA Institute Letter. While raising the
offering limit will permit all issuers to raise additional capital,
we believe that the disclosure requirements of Regulation A will
help investors to evaluate the risk of such investments.
    \384\ See, e.g., letter in response to the Concept Release from
Committee on Securities Regulation of the Business Law Section of
the New York State Bar Association dated Oct. 16, 2019.
    \385\ See 2020 Regulation A Review, at Section F.1. However, as
noted in the 2020 Regulation A Review, the staff lacks data that
would allow it to assess how a specific offering limit increase
would affect the size and composition of the pool of prospective
issuers, intermediaries, and investors in the Regulation A market.
See infra Section IV.C.5.a.i.
    \386\ We note that adjusting the existing offering limit for
inflation from 2015 to present would increase the Tier 2 offering
limit by only $5.845 million. See 2020 Regulation A Review, at Table
7. Such a change likely would not attract additional institutional
investors, intermediaries, or traditional underwriters to the
Regulation A market.
    \387\ As noted above, because of the statutory obligation to
review the limit every two years, we do not think it is necessary to
index the offering limit for inflation, as some commenters
suggested. See Carta Letter; and Sen. Toomey Letter.
    \388\ We did not propose and are not increasing the Tier 1
offering limit. While one commenter recommended an increase, we do
not believe it is likely to result in the kinds of benefits
discussed above that we expect may result from the increased Tier 2
offering limit, such as attracting a larger and more seasoned pool
of issuers and intermediaries or institutional investors to the
Regulation A market. As discussed in the 2020 Regulation A Review,
while an increase in the Tier 1 offering limit could draw more
issuers to Tier 1, Tier 2 may remain more attractive to issuers due
to, for example, preemption of state review, an easier path to
quotation on the upper tiers of the OTC market in the presence of
periodic reports required by Tier 2, and the flexibility to raise
more capital without having to undergo a re-qualification. See 2020
Regulation A Review at Section F.2. While we do not believe an
increase is warranted at this time, we will continue to consider the
Tier 1 offering limitation and the appropriate investor protections
under Tier 1 when we conduct the Tier 2 offering limit review
required by Section 3(b)(5) of the Securities Act.
---------------------------------------------------------------------------

    We note that under the final amendments, Tier 2 offerings will
continue to be preempted from State law registration and qualification
requirements.\389\ We believe this is

appropriate because we expect that Tier 2 offerings will continue to be
more national in nature. While issuers in Tier 2 offerings are required
to qualify offerings with the Commission before sales can be made
pursuant to Regulation A, they are not required to register or qualify
their offerings with State securities regulators. Section 18 of the
Securities Act generally provides for preemption of State law
registration and qualification requirements for ``covered securities.''
\390\ Section 18(b)(4)(D) of the Securities Act further provides that
securities issued pursuant to Section 3(b)(2) of the Securities Act are
covered securities if they are listed, or will be listed, on a national
securities exchange or if they are offered or sold to a ``qualified
purchaser,'' \391\ which the Commission has defined to include any
person to whom securities are offered or sold in a Tier 2
offering.\392\ We are not extending ``covered securities'' status under
Section 18 of the Securities Act to Tier 1, as suggested by one
commenter. We continue to believe that, in light of concerns raised by
state regulators and the generally more local nature of Tier 1
offerings, it is appropriate for the States to retain oversight over
Tier 1 offerings.\393\
---------------------------------------------------------------------------

    \389\ Many commenters recommended preempting State securities
law regulation of secondary trading of Regulation A securities
issued in Tier 2 offerings. While such preemption could further
advance the development of a national securities market by easing
the compliance obligations of investors that trade in the secondary
markets, we believe this recommendation merits careful consideration
and an opportunity for market participants to receive notice and
comment on a specific proposal. Accordingly, we are not adopting any
changes to preemption of State securities laws for secondary trading
at this time.
    \390\ See 15 U.S.C. 77r(c).
    \391\ See 15 U.S.C. 77r(b)(4)(D).
    \392\ See 17 CFR 230.256.
    \393\ See 2015 Regulation A Release, at Section II.H.3.
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2. Rule 504
    Rule 504 of Regulation D provides an exemption for eligible issuers
\394\ from registration under the Securities Act for the offer and sale
of up to $5 million of securities in a 12-month period. In 2016, the
Commission amended Rule 504 to raise the aggregate amount of securities
an issuer may offer and sell in any 12-month period from $1 million to
$5 million.\395\ From 2009 through 2019, for issuers other than pooled
investment funds, two percent of the capital raised in Regulation D
offerings under $5 million was offered under Rule 504 (and under Rule
505, prior to its repeal), and 98 percent of the capital raised was
offered under Rule 506.\396\
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    \394\ Issuers that are required to file reports under Exchange
Act Section 13(a) or 15(d), investment companies, blank check
companies, and issuers that are disqualified under Rule 504's ``bad
actor'' disqualification provisions are not eligible to use Rule
504.
    \395\ Five million dollars is the maximum amount statutorily
allowed under Securities Act Section 3(b)(1). See Intrastate and
Regional Offerings Release. In light of the increased offering
threshold under Rule 504, the Commission repealed Rule 505. Most
issuers previously using Rule 505 are able to conduct an offering up
to $5 million under Rule 504.
    \396\ See Proposing Release, at note 263 and accompanying text.
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a. Proposed Amendments
    The Commission proposed to use its general exemptive authority
under Section 28 of the Securities Act to raise the maximum offering
amount under Rule 504 from $5 million to $10 million.
b. Comments
    We received mixed comments on the proposal to raise the Rule 504
maximum offering amount to $10 million with some commenters supporting
\397\ and others opposing \398\ the proposal. Commenters who supported
increasing the maximum offering amount stated that it would allow
issuers to more easily raise capital,\399\ make offerings more cost
effective,\400\ and encourage greater use of the exemption.\401\ One of
these commenters additionally suggested that because Rule 504 offerings
will remain subject to applicable federal and state securities law
requirements, including antifraud provisions, it is reasonable to
expect that the increase ``will not meaningfully decrease investor
protection or incentivize bad actors to enter the marketplace.'' \402\
Commenters opposed to the increase stated that issuers do not use the
full capacity under the existing limit and that an increase may not
drive more regional multistate offerings.\403\ Commenters also
expressed concern that the Commission's analysis of the impact of
raising the Rule 504 limit was insufficient,\404\ and that increasing
the limits may be detrimental to the public markets.\405\ Other
commenters questioned the Commission's statutory authority to increase
the limit.\406\
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    \397\ See, e.g., ABA Letter; B. Andrews, et al. Letter; SEC
SBCFAC Letter; Geraci Law Letter (further recommending that
securities sold pursuant to Rule 504 be considered ``covered
securities''); SAF Letter; Carta Letter; and Ketsal Letter. See also
2019 OASB Annual Report, at 41 (suggesting that the Commission
ensure that dollar amount caps used in exemptions are ``tied to
expressed marketplace needs for capital and provide flexibility for
future review and adjustment'').
    \398\ See, e.g., CII Letter; NASAA Letter; AFREF Letter; Better
Markets Letter; CFA Letter; R. Rutkowski Letter; and CFA Institute
Letter. Some of these commenters suggested that increased offering
limits increase investor risk by creating more opportunities for
high risk issuers to sell to unsophisticated investors. See, e.g.,
CFA Letter and CFA Institute Letter.
    \399\ See ABA Letter.
    \400\ See Carta Letter.
    \401\ See Ketsal Letter. See also Carta Letter (stating that the
increase would make the exemption more attractive to a broader group
of issuers).
    \402\ See ABA Letter.
    \403\ See, e.g., NASAA Letter (stating its belief that raising
the threshold above $5 million would require issuers to comply with
Securities Act Section 3(b)(2), which carries with it obligations
including mandatory filing of audited financial statements with the
Commission.); CFA Letter; and CrowdCheck Letter.
    \404\ See, e.g., CFA Letter (stating that the Commission's
analysis lacks data or a methodological approach to determine the
impacts of raising the offering limit); CII Letter (stating that the
Commission's analysis fails to adequately consider the potential
impact on long-term investors and the capital markets from expanding
the exempt offering framework); AFREF Letter (stating that the
Commission's analysis does not adequately analyze the negative
effects of the amendments); and R. Rutkowski Letter.
    \405\ See, e.g., AFREF Letter; CFA Letter; R. Rutkowski Letter;
and CFA Institute Letter.
    \406\ See, e.g., Better Markets Letter; CFA Letter; and Public
Interest Comment Letter from Andrew N. Vollmer and Brian R. Knight,
Mercatus Center at George Mason University dated Oct. 30, 2020
(``Mercatus Center Letter''). See infra note 429.
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c. Final Amendments
    Based on our consideration of the available data and the feedback
that we received on the Concept Release, on the Proposing Release, and
from the Small Business Capital Formation Advisory Committee, and in
order to facilitate use of Rule 504 for capital raising, we are
amending the rules as proposed to raise the offering limit from $5
million to $10 million. We believe that increasing the offering limit
in reliance on our general exemptive authority under Securities Act
Section 28 \407\ is appropriate in the public interest because
permitting larger offerings under Rule 504 may encourage more issuers
to use the exemption, could encourage more issuers to conduct regional
multistate offerings and make use of State coordinated review programs,
and could make the exemption a more efficient capital raising option
for smaller issuers by lowering the offering costs per dollar raised.
At the same time, we do not believe that raising the offering limit
would expand the private markets at the expense of the public
markets.\408\

Furthermore, we believe that increasing the offering limit is
consistent with the protection of investors because the amendments
would not alter the significant protections applicable under Rule 504,
such as potential State review and prohibitions on ``bad actor''
participation.
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    \407\ Securities Act Section 3(b)(1) currently sets the maximum
offering amount for small issues exempted under that section at $5
million. See 15 U.S.C. 77c(b)(1). As explained above, we are relying
on our general exemptive authority to raise the threshold in Rule
504 to $10 million. We therefore do not agree with the commenter who
stated that raising the threshold above $5 million would require
compliance with Securities Act Section 3(b)(2).
    \408\ As discussed in Section IV.A below, Rule 504, like
Regulation Crowdfunding, currently represents a small segment of the
private offering market, and issuers that raise capital pursuant to
the exemption tend to be at a much earlier stage of development than
those that conduct a traditional initial public offering.
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3. Regulation Crowdfunding
    Regulation Crowdfunding provides an exemption from registration for
certain crowdfunding transactions including limits on the amount an
issuer may raise; limits on the amount an individual may invest; and a
requirement that the transactions be conducted through an intermediary
that is registered as either a broker-dealer or a ``funding portal.''
    The exemption from registration provided by Section 4(a)(6) is
available provided that ``the aggregate amount sold to all investors by
the issuer, including any amount sold in reliance on the exemption
provided under [Section 4(a)(6)] during the 12-month period preceding
the date of such transaction, is not more than $1,000,000.'' Under
Securities Act Section 4A(h), the Commission is required to adjust the
dollar amounts in Section 4(a)(6) ``not less frequently than once every
five years, by notice published in the Federal Register, to reflect any
change in the Consumer Price Index for All Urban Consumers published by
the Bureau of Labor Statistics.'' \409\ The Commission adjusted the
maximum offering limit to $1.07 million ($1.0 million adjusted to
reflect changes in the Consumer Price Index (``CPI'')) in 2017.\410\
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    \409\ See 15 U.S.C. 77d(a)(6) and 15 U.S.C. 77d-1(h). See also
17 CFR 227.100(a)(1) (``Rule 100(a)(1)'' of Regulation
Crowdfunding).
    \410\ See Inflation Adjustments and Other Technical Amendments
under Titles I and III of the JOBS Act (Technical Amendments;
Interpretation), Rel. No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
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    In addition, Regulation Crowdfunding also limits the amount
individual investors are allowed to invest across all Regulation
Crowdfunding offerings over the course of a 12-month period. The
limitation on how much an individual can invest during that period
depends on his or her net worth and annual income and may not exceed
$107,000. Individual investors are limited to:
     The greater of $2,200 or five percent of the lesser of the
investor's annual income or net worth, if either of an investor's
annual income or net worth is less than $107,000; or
     Ten percent of the lesser of his or her annual income or
net worth, if both annual income and net worth are equal to or more
than $107,000.\411\
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    \411\ See 17 CFR 227.100(a)(2) (``Rule 100(a)(2)'' of Regulation
Crowdfunding). Rule 100(a)(2) is based on the requirement in Section
4(a)(6).
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    Further, the offering statement for a Regulation Crowdfunding
offering must include specified information, including a discussion of
the issuer's financial condition and financial statements. Regulation
Crowdfunding's financial statement requirements are based on the amount
offered and sold in reliance on the exemption within the preceding
twelve-month period, with progressively increasing requirements and
involvement of outside accountants as offering size increases.\412\ On
May 4, 2020, the Commission adopted temporary final rules under
Regulation Crowdfunding to facilitate capital formation for small
businesses impacted by COVID-19, which include, among other things, an
exemption from certain financial statement review requirements for
issuers offering $250,000 or less of securities in reliance on
Regulation Crowdfunding within a 12-month period.\413\ These temporary
final rules were subsequently extended and apply to offerings initiated
under Regulation Crowdfunding between May 4, 2020, and February 28,
2021.\414\
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    \412\ See 17 CFR 230.201(t).
    \413\ See Temporary Amendments to Regulation Crowdfunding,
Release No. 33-10781 (May 4, 2020) [85 FR 27116 (May 7, 2020)]
(``Temporary Amendments Adopting Release''). The amendments adopted
in this release do not affect the application of these temporary
final rules.
    \414\ See Temporary Amendments to Regulation Crowdfunding;
Extension, Release No. 33-10829 (Aug. 28, 2020) [85 FR 54483 (Sept.
2, 2020)] (``Temporary Amendments Extension''). The temporary final
rules expire on September 1, 2021.
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    In 2019, the Commission staff undertook a study of the available
information on the capital formation and investor protection impacts of
Regulation Crowdfunding. The resulting report to the Commission
summarized quantitative information, where it was available to the
staff, as well as qualitative observations of Commission staff and
FINRA staff and input from market participants regarding their
experience with Regulation Crowdfunding.\415\ The study found that
during the considered period, the number of offerings and the total
amount of funding were relatively modest, with issuers raising $108
million under Regulation Crowdfunding from May 16, 2016, through
December 31, 2018.\416\ The study also found that the typical offering
during the considered period was small and raised less than the 12-
month offering limit.\417\
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    \415\ See Report to the Commission: Regulation Crowdfunding
(June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf (``2019 Regulation Crowdfunding Report'').
    \416\ See id.
    \417\ See id., at Section I.
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a. Proposed Amendments
    The Commission proposed to use its general exemptive authority
under Securities Act Section 28 to raise the offering limit in
Regulation Crowdfunding from $1.07 million to $5 million. The
Commission also proposed to increase the investment limits for
investors in Regulation Crowdfunding offerings. First, the Commission
proposed to no longer apply any investment limits to accredited
investors. The proposed amendments would treat accredited investors
under Regulation Crowdfunding in the same manner as other exempt
offerings. Second, the Commission proposed to amend the Regulation
Crowdfunding calculation method for the investment limits for non-
accredited investors to allow them to rely on the greater of their
annual income or net worth. The proposed amendment would conform this
aspect of Regulation Crowdfunding with Tier 2 of Regulation A and would
apply a consistent approach to limiting the potential losses investors
may incur in offerings conducted in reliance on the two
exemptions.\418\ The Commission did not propose to adjust the financial
statement requirements in Regulation Crowdfunding, although the
economic analysis in the Proposing Release considered alternatives that
would amend these disclosure requirements and solicited comment on
them.
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    \418\ Under Regulation A accredited investors are not limited in
the amount of securities they may purchase and other investors are
limited to purchasing in a Tier 2 offering no more than: (a) Ten
percent of the greater of annual income or net worth (for natural
persons); or (b) ten percent of the greater of annual revenue or net
assets at fiscal year-end (for non-natural persons). See 17 CFR
230.251(d)(2)(i)(C). This limit does not, however, apply to
purchases of securities that will be listed on a national securities
exchange upon qualification.
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b. Comments
    Commenters were broadly supportive of raising the Regulation
Crowdfunding offering limit to $5 million.\419\ Many

commenters recommended raising the limit in light of economic concerns
raised by COVID-19.\420\ Some additionally supported raising the limit
beyond $5 million.\421\ Some commenters supportive of an increased
offering limit also supported further action by the Commission to
enhance compliance with Regulation Crowdfunding.\422\ In particular,
some commenters supported relaxing the disclosure and financial
statement requirements for smaller Regulation Crowdfunding
offerings.\423\ Others supported Federal preemption of State securities
law registration and qualification requirements for secondary
sales.\424\