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

    \345\ See proposed Rule 3a-9(a)(8). See, e.g., Rule 201 of
Regulation Crowdfunding [17 CFR 227.201].
---------------------------------------------------------------------------

    Finally, we recognize that, absent a contrary condition in the
proposed rule, there could be certain differences in an investor's
rights under state and federal law when an investor invests in a
crowdfunding vehicle as opposed to directly in a crowdfunding issuer. A
direct investor as a shareholder of record, for example, could have
rights of access to corporate records or appraisal rights under state
law that might not be available to an investor that holds his or her
investment indirectly through another entity.\346\ We are therefore
proposing to require a crowdfunding vehicle to provide to each investor
the right to direct the crowdfunding vehicle to assert the rights under
state and federal law that the investor would have if he or she had
invested directly in the crowdfunding issuer.\347\ We are also
requiring that the crowdfunding vehicle provide to each investor any
information that it receives from the crowdfunding issuer as a
shareholder of record of the crowdfunding issuer.\348\ These conditions
are designed to provide shareholders the ability to assert the same
rights under state and federal law regardless of whether they invest
directly in a crowdfunding issuer or through a crowdfunding vehicle.
These conditions would also require the crowdfunding vehicle to provide
its investors with any information they would have received if they had
invested directly in a crowdfunding issuer so that the investors would
have the information that may be necessary to determine whether to
direct the crowdfunding vehicle to assert any rights under state or
federal law.
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    \346\ See, e.g., MA Secretary Letter.
    \347\ See proposed Rule 3a-9(a)(9).
    \348\ Id.
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    In addition to these conditions, we also considered proposing to
require that a registered investment adviser manage the crowdfunding
vehicle, as suggested by some commenters and the 2017 Treasury
Report.\349\ We are not proposing this requirement, however, because
the proposed rule's conditions are designed to limit the crowdfunding
vehicle's activities to that of acting solely as a conduit to hold the
securities of the crowdfunding issuer without the ability for
independent investment decisions to be made on behalf of the
crowdfunding vehicle. We are also concerned that, given the relatively
small amount of capital that can be raised through Regulation
Crowdfunding, it would not be economically feasible to require a
registered investment adviser in light of the fees and other expenses
associated with such a requirement.
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    \349\ See Iownit Letter; NASAA Letter; CrowdCheck Letter; and
2017 Treasury Report.
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Request for Comment
    66. Should we permit crowdfunding issuers to use crowdfunding
vehicles as proposed? Would this approach encourage crowdfunding
issuers to offer voting rights or other advantageous terms to
investors?
    67. Should we require registered investment advisers to manage
crowdfunding vehicles? Would there be a role for a registered
investment adviser in light of the limited activities in which a
crowdfunding vehicle could engage? Would registered investment advisers
find it practical to serve a role with respect to a crowdfunding
vehicle? Should we require an exempt reporting adviser to manage
crowdfunding vehicles? Should we allow investment advisers to form
funds for non-accredited investors that invest in multiple crowdfunding
issuers?
    68. The proposed rule includes several conditions designed to
require that the crowdfunding vehicle serve the sole purpose of acting
as a conduit for investors to invest in the crowdfunding issuer. Are
these conditions appropriate? Should a crowdfunding vehicle be
permitted to engage in a broader range of activities? For example,
should the rule provide that a crowdfunding vehicle must redeem or
offer to repurchase its securities if there is a liquidity event at the
crowdfunding issuer? If so, how should the rule accommodate these
activities? Are there

other purposes for which the crowdfunding vehicle should be permitted
to receive compensation or use offering proceeds? Should a crowdfunding
issuer be required to pay the expenses associated with the formation,
operation, or winding up of the crowdfunding vehicle? Should anyone
else bear these costs? Should any compensation paid to any person
operating the crowdfunding vehicle be paid solely by the crowdfunding
issuer? Should we include any additional restrictions? Are there any
other issues that could arise if we allow the use of crowdfunding
vehicles in Regulation Crowdfunding offerings, as proposed? Would
legislative changes be necessary or beneficial to permit crowdfunding
vehicles to engage in a broader range of activities, pay compensation
to any person operating the crowdfunding vehicle, or include any
additional restrictions on the operations of the crowdfunding vehicle?
    69. The proposed rule includes several conditions designed to
provide investors in the crowdfunding vehicle the same economic
exposure, voting power, and Regulation Crowdfunding disclosures as if
the investors had invested directly in the crowdfunding issuers. Are
these conditions appropriate? Should a crowdfunding vehicle be allowed
to issue multiple classes of securities in the event that the
crowdfunding issuer has multiple classes of securities? Would
legislative changes be necessary or beneficial to permit a crowdfunding
vehicle to issue multiple classes of securities? Should the
crowdfunding vehicle and the crowdfunding issuer be deemed co-issuers
for purposes of the Securities Act, including that Act's antifraud and
liability provisions?
    70. Would the proposed requirement that the crowdfunding vehicle
maintain a one-to-one relationship between the number, denomination,
type and rights of crowdfunding issuer securities it owns and the
number, denomination, type and rights of crowdfunding vehicle
securities outstanding provide an investor in the crowdfunding vehicle
the same economic exposure as if he or she had invested directly in the
crowdfunding issuer? Are there any changes we should make to achieve
this objective more effectively or to address the manner in which a
crowdfunding vehicle may hold crowdfunding issuer securities? For
example, in the case of a stock-split by a crowdfunding issuer, should
we permit a crowdfunding vehicle to maintain its current capitalization
structure on the condition that it otherwise maintain the same economic
exposure for its beneficial owners to the stock-split securities of the
crowdfunding issuer?
    71. The crowdfunding vehicle would be required to seek instructions
from its investors with regard to two matters: (i) The voting of the
crowdfunding issuer securities it holds; and (ii) participating in
tender or exchange offers or similar transactions conducted by the
crowdfunding issuer. The crowdfunding vehicle would be required to vote
the crowdfunding issuer securities, and participate in tender or
exchange offers or similar transactions, only in accordance with
instructions from the investors in the crowdfunding vehicle. Would
these requirements effectively pass-through any voting rights
associated with securities issued by crowdfunding issuers and the
ability to participate in tender or exchange offers or similar
transactions? Should the rule refer to additional types of
transactions? Would these requirements impact an issuer's willingness
to use a crowdfunding vehicle, as the issuer would still indirectly be
required to obtain consent or approval from numerous investors?
Operationally, how would crowdfunding vehicles comply with this
condition? Should the rule provide that a crowdfunding issuer may
obtain proxies or investors' pre-approval with respect to certain (or
all) matters? Should the rule provide more flexibility? For example,
should the rule permit a crowdfunding vehicle to disclose to its
investor at the time of its initial offering that the vehicle will cast
all of its votes in accordance with the instructions of a majority of
its security holders, rather than using pass-through voting as
proposed? Would legislative changes be necessary or beneficial to
provide the crowdfunding vehicles additional flexibility with respect
to voting rights and the distribution of information?
    72. Upon receiving all of the disclosures and other information
required under Regulation Crowdfunding from the crowdfunding issuer,
the crowdfunding vehicle would then be required promptly to provide
such disclosures and information to the investors and potential
investors in the crowdfunding vehicle's securities and to the relevant
intermediary. Would these requirements address any concerns about
investors and potential investors in a crowdfunding vehicle receiving
regular information from the crowdfunding issuers?
    73. The crowdfunding vehicle would be required to provide to each
investor (i) the right to direct the crowdfunding vehicle to assert the
rights under state and federal law that the investor would have if he
or she had invested directly in the crowdfunding issuer and (ii) any
information that it receives from the crowdfunding issuer as a
shareholder of record of the crowdfunding issuer. Would this
effectively preserve state and federal law rights for shareholders and
provide shareholders with the necessary information to determine
whether to direct the crowdfunding vehicle to assert such rights? Is
this condition appropriate for crowdfunding vehicles which, unlike
collective investment vehicles generally, would serve the specific and
limited purpose of functioning solely as conduits to invest in
businesses raising capital through the vehicle under Regulation
Crowdfunding? Operationally, how would crowdfunding vehicles comply
with this condition in practice? In lieu of this condition, would a
crowdfunding vehicle's disclosure to investors in writing of any
differences that its investors would experience by investing indirectly
in the crowdfunding issuer through the crowdfunding vehicle
sufficiently address any concerns about a crowdfunding vehicle
affecting an investor's rights under state or federal law?
    74. Should we, as proposed, require crowdfunding issuers and
crowdfunding vehicles to jointly file a Form C? Alternatively, should
we require that each file a separate Form C or only require the
crowdfunding vehicle to file a Form C? What would be the advantages and
disadvantages of requiring separate Forms C to be filed? Should the
application of the Regulation Crowdfunding offering limit be revised in
light of the requirement to jointly file a Form C?
    75. The proposed rule would require a crowdfunding issuer that is
offering securities through a crowdfunding vehicle to file a separate
Form C if it wanted to also directly offer its securities to investors.
Should we instead permit such a crowdfunding issuer to offer its
securities directly to investors on the same Form C the crowdfunding
vehicle uses to offer its securities? If so, are there any restrictions
or disclosure obligations we should implement to avoid investor
confusion? What issues could arise if crowdfunding issuers were allowed
to simultaneously offer on Form C in this way?
    76. A crowdfunding vehicle may constitute a single record holder
for purposes of Section 12(g), rather than treating each of the
crowdfunding vehicle's investors as record holders as would be the case
if they had invested in the crowdfunding issuer directly. Is this
treatment appropriate? Should each investor in the crowdfunding vehicle
be

treated as a separate record holder for purposes of Section 12(g)?
Would legislative changes be necessary or beneficial to address the
treatment of the crowdfunding vehicle under Section 12(g)?
    77. Should the Commission further address the status of a
crowdfunding vehicle complying with the proposed rule for purposes of
the definition of broker under Section 3(a)(4) of the Exchange Act or
dealer under Section 3(a)(5) of the Exchange Act, and persons operating
such crowdfunding vehicle?
2. Regulation Crowdfunding Eligible Securities
    We are proposing to limit the types of securities that may be
offered and sold in reliance on Regulation Crowdfunding. Unlike
Regulation A, which limits the types of securities eligible for sale to
equity securities, debt securities, and securities convertible or
exchangeable to equity interests, including any guarantees of such
securities,\350\ Regulation Crowdfunding does not restrict the type of
security that may be offered and sold in reliance on the exemption. As
a result, issuers using Regulation Crowdfunding have offered and sold a
number of non-traditional securities.\351\ One type of non-traditional
security that has caused concern is the ``Simple Agreement for Future
Equity,'' or SAFE.\352\ The offer and sale of these kinds of securities
to retail investors in an exempt offering could result in harm to
investors who may face challenges in analyzing and valuing such
securities, or who may be confused by the descriptions of such
securities on the funding portals. These kinds of securities may also
create confusion for retail investors who may not understand the
differences between these securities and traditional common stock. Such
confusion could lead to investor dissatisfaction, which in turn may
jeopardize the reputation of the Regulation Crowdfunding market.
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    \350\ See 17 CFR 230.261.
    \351\ Other types of non-traditional securities that have been
offered and sold under Regulation Crowdfunding include Simple
Agreements for Future Tokens and certain revenue sharing agreements.
See infra Section IV.C.6.b for further information about security
types in Regulation Crowdfunding.
    \352\ See SEC Office of Investor Education and Advocacy,
Investor Bulletin: Be Cautious of SAFEs in Crowdfunding (May 9,
2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes. A SAFE is an agreement to provide investors with
a future equity stake in the issuer if certain triggering events
occur. SAFEs are not an equity interest or common stock of an
issuer. Rather, they are convertible into such equity only upon the
occurrence of a triggering event specifically enumerated in the
agreement, such as when the issuer is acquired, merges with another
company, or conducts an initial public offering. As such, SAFEs are
specifically controlled by the terms of the agreement between the
issuer and the investors and unlike common stock do not confer all
of the rights and entitlements provided under state corporation law,
such as voting rights or appraisal rights. See also FINRA, ``Be
Safe--5 Things You Need to Know About SAFE Securities and
Crowdfunding,'' available at https://www.finra.org/investors/insights/safe-securities.
---------------------------------------------------------------------------

    As a result, we are proposing to amend Regulation Crowdfunding to
harmonize the rule with Regulation A and limit the types of securities
that may be offered under the exemption to correspond with the eligible
securities provision of Regulation A. Thus, the types of securities
eligible for sale in an offering under Regulation Crowdfunding would be
limited to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.\353\ We preliminarily believe that such
a limitation is consistent with the nature of the crowdfunding
exemption. We understand that the popularity of SAFEs and similar
security types in Regulation Crowdfunding offerings may be in part due
to a desire by issuers to avoid a complicated capitalization table.
However, we believe that the proposed amendment permitting crowdfunding
vehicles to use Regulation Crowdfunding discussed above may more
appropriately alleviate that concern.
---------------------------------------------------------------------------

    \353\ Certain securities that may not have all of the
characteristics traditionally associated with equity or debt
securities, such as tokens, may qualify as Regulation A eligible
securities, depending on the particular facts and circumstances. If
adopted, we believe the proposed amendment to eligible securities
under Regulation Crowdfunding would be applied in the same manner.
---------------------------------------------------------------------------

Request for Comment
    78. Should we harmonize the limitations on the types of eligible
securities issuable under Regulation Crowdfunding with Regulation A as
proposed? If so, what would be the effect on issuers, investors, and
the market of limiting these categories of securities? In the
alternative, should we modify Regulation Crowdfunding only to exclude
particular security types, such as SAFEs?
    79. If the popularity of SAFEs is in part due to a desire by
issuers to avoid a complicated capitalization table, would our proposed
amendments permitting crowdfunding vehicles to use Regulation
Crowdfunding appropriately alleviate that concern? Are there other
reasons why issuers issue SAFEs or other security types in Regulation
Crowdfunding offerings that we should be aware of when considering
whether to exclude particular security types?
3. Regulation A Eligibility Restrictions for Delinquent Exchange Act
Filers
    Regulation A includes an eligibility requirement that an issuer
conducting a Regulation A offering must have filed with the Commission
all reports required to be filed, if any, pursuant to Rule 257 during
the two years before the filing of the offering statement (or for such
shorter period that the issuer was required to file such reports).\354\
Now that issuers that are subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act are permitted to conduct
Regulation A offerings, we are proposing to amend Regulation A to
include a similar eligibility requirement covering Exchange Act
reports. As proposed, companies that do not file all the reports
required to have been filed by Sections 13 or 15(d) of the Exchange Act
in the two-year period preceding the filing of an offering statement
would be ineligible to conduct a Regulation A offering.\355\
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    \354\ 17 CFR 230.251(b)(7). Rule 257 requires issuers conducting
Tier 2 offerings to comply with certain ongoing and periodic
reporting requirements.
    \355\ If an issuer is delayed in filing a report, it would need
to become current in its reports over the last two years in order to
become eligible again.
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    Because Exchange Act registrants are not required to file reports
pursuant to Rule 257, the existing eligibility provision does not
expressly require those registrants to have filed their Exchange Act
reports in order to rely on Regulation A. The proposed change would
hold Exchange Act reporting companies to the same standard as repeat
Regulation A issuers. This requirement would benefit investors by
ensuring that they have access to historical financial and non-
financial statement disclosure about Exchange Act reporting companies
that are conducting Regulation A offerings and may facilitate the
development of an efficient secondary market for the securities they
purchase in Regulation A offerings. Furthermore, because they are
already required to file such reports, the proposed requirement would
not increase the burden of making a Regulation A offering for Exchange
Act reporting companies or companies that were Exchange Act reporting
companies within the two years prior to making a Regulation A offering.
Request for Comment
    80. Should we amend Regulation A as proposed to include an
eligibility requirement that requires Exchange Act reporting companies
to be current in their Exchange Act reporting for the two years before
filing an offering statement?

G. Bad Actor Disqualification Provisions
    The Commission's exempt offering framework includes rules
disqualifying certain covered persons, including felons and other ``bad
actors'' from relying on Regulation A, Regulation Crowdfunding, and
Regulation D to offer and sell securities. While the disqualification
provisions are substantially similar,\356\ the look-back period for
determining whether a covered person is disqualified differs between
Regulation D and the other exemptions. We are proposing to harmonize
the bad actor disqualification provisions in Rule 506(d) of Regulation
D, Rule 262(a) of Regulation A and Rule 503(a) of Regulation
Crowdfunding by adjusting the look-back requirements in Regulation A
and Regulation Crowdfunding to include the time of sale in addition to
the time of filing.
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    \356\ Section 3(b)(2)(G)(ii) of the Securities Act [15 U.S.C.
77c(b)(2)(G)(ii)] provides the Commission with authority to issue
bad actor disqualification rules under Regulation A that are
``substantially similar'' to those adopted for securities offerings
under Rule 506 of Regulation D pursuant to Section 926 of the Dodd-
Frank Act. See 2015 Regulation A Release; Disqualification of
Felons, Other ``Bad Actors'' from Rule 506 Offerings, Release No.
33-9414 (July 10, 2013) [78 FR 44729 (July 24, 2013)] (``Rule 506(d)
Final Release''); and Crowdfunding Adopting Release.
---------------------------------------------------------------------------

    Under Regulation D \357\ a disqualification occurs if: (1) A
covered person is involved in the offering; (2) that covered person is
subject to one or more of the disqualifying events in Rule 506(d); and
(3) the disqualifying event occurs within the look-back period provided
by the regulation.\358\ For Regulation D, the look-back period is
measured from the time of the sale of securities in the relevant
offering. For Rule 262(a) of Regulation A and Rule 503(a) of Regulation
Crowdfunding, the look-back period is measured from the time the issuer
files an offering statement.\359\
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    \357\ The disqualification provisions in Rule 506(d) also apply
to Rule 504. See 17 CFR 230.504(b)(3).
    \358\ See 17 CFR 230.506(d)(1)(i) through (viii).
    \359\ Rule 503(a) provides look-back language based on ``the
filing of the offering statement'' or ``the filing of the
information required by section 4A(b) of the Securities Act'' on
Form C. See 17 CFR 227.503. While the disqualification events in
Securities Act Rule 262 and Regulation Crowdfunding Rule 503 are
generally tied to the filing of an offering statement, Rule
262(a)(6) and Rule 503(a)(6) are not. See 17 CFR 230.262(a)(6); and
17 CFR 227.503(a)(6).
---------------------------------------------------------------------------

    We believe that it is important to look to both the time of filing
of the offering document and the time of the sale with respect to
disqualifying bad actors from participating in an offering.\360\
Otherwise, there is an increased likelihood that investors may
unknowingly participate in securities offerings involving offering
participants who have engaged in fraudulent activities or violated
securities or other laws or regulations. We note, for example, that in
the context of a continuous or delayed offering under Regulation A
where the look-back is generally measured from the time of filing of
the offering statement, a covered person under Rule 262 could
potentially offer and sell securities under Regulation A after the
filing of the offering statement and until the issuer is required to
file a post-qualification amendment to the offering statement, despite
the occurrence of an event during that time frame that otherwise would
constitute a disqualifying event if it occurred prior to the filing of
the offering statement.
---------------------------------------------------------------------------

    \360\ This may be particularly true for regulating the conduct
of promoters connected with an issuer throughout an ongoing
offering.
---------------------------------------------------------------------------

    Under Regulation A, if a covered person triggers one of the
disqualifying events in Rule 262, the Commission may suspend reliance
on the Regulation A exemption through Rule 258, which requires a notice
and hearing opportunity for the issuer prior to the suspension becoming
permanent. Furthermore, if a covered person triggers one of the
disqualifying events, the issuer may need to consider whether it must
suspend the offering until it files a post-qualification amendment to
reflect a fundamental change in the information set forth in the most
recent offering statement or post-qualification amendment.\361\
Regulation Crowdfunding, which similarly measures the look-back from
the time of filing of the offering statement, does not have a
suspension provision, similar to Regulation A, but similarly requires
an issuer to amend the offering statement to disclose material changes,
additions, or updates to information that it provides to investors for
offerings that have not been completed or terminated.\362\
Nevertheless, in certain circumstances, periods of time may exist
during Regulation A and Regulation Crowdfunding offerings between the
filing of the offering statement and the next required filing where an
offering could continue despite an event that would have constituted a
disqualifying event at the time of filing.
---------------------------------------------------------------------------

    \361\ See Rule 252(f)(2).
    \362\ See Rule 203(a)(2).
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    The disqualification provisions in Regulation A and Regulation
Crowdfunding were intended to be ``substantially similar'' to those in
Regulation D.\363\ We believe that further harmonizing these provisions
by using the same disqualification look-back period would simplify
compliance and due diligence for issuers and would improve investor
protections by further limiting the role of ``bad actors'' in exempt
offerings.\364\ Specifically, we propose to add ``or such sale'' to any
look-back references that refer to the time of filing, such as the
``filing of the offerings statement,'' ``such filing,'' or ``the filing
of the information required by Section 4A(b) of the Securities Act'' in
Rule 262(a) and Rule 503(a).
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    \363\ See 2015 Regulation A Release; and Crowdfunding Adopting
Release. Section 302(d) of the JOBS Act requires the Commission to
establish disqualification provisions under which an issuer would
not be eligible to offer securities pursuant to Section 4(a)(6) and
an intermediary would not be eligible to effect or participate in
transactions pursuant to Section 4(a)(6). Section 302(d)(2)
specifies that the disqualification provisions must be
``substantially similar'' to the ``bad actor'' disqualification
provisions contained in Rule 262 of Regulation A. As noted above,
the disqualification provisions under Regulation A are required to
be ``substantially similar'' to those adopted for securities
offerings under Rule 506. See supra note 356.
    \364\ See 2015 Regulation A Release, at Section II.G. In
adopting the 2015 Regulation A amendments, the Commission stated
that a uniform set of bad actor triggering events would simplify due
diligence, particularly for issuers that may engage in different
types of exempt offerings.
---------------------------------------------------------------------------

    Additionally, in order to reflect the offering statement filing
requirement before the first Regulation Crowdfunding sale, and more
closely track the requirement in Rule 262(a) of Regulation A, we
propose including ``any promoter connected with the issuer in any
capacity at the time of filing, any offer after filing, or such sale''
in Rule 503(a). Rule 503(a) currently only covers promoters connected
with the issuer in any capacity ``at the time of such sale,'' making it
possible that a promoter that previously engaged in fraudulent
activities or violated securities or other laws or regulations, could
be involved in offering activities under Regulation Crowdfunding so
long as such promoter is not connected with the issuer in any capacity
at the time of sale.
    In adopting the disqualification provisions under Regulation D, the
Commission was cognizant of the monitoring costs associated with Rule
506(d)'s disqualification provisions in an ongoing offering. The
Commission therefore adopted an exception from disqualification for
offerings where the issuer establishes that it did not know and, in the
exercise of reasonable care, could not have known that a
disqualification existed. The Commission was particularly aware of the
costs of monitoring beneficial owners of 20 percent or more of the
issuer's outstanding voting securities.\365\

At the time, the Commission clarified that, for ongoing offerings, the
issuer's reasonable care duty to monitor covered persons generally
``includes updating the factual inquiry'' on a periodic basis.\366\ For
Regulation A and Regulation Crowdfunding, however, monitoring covered
beneficial owners may pose different challenges than for Regulation D
offerings because shares sold under Regulation A are potentially freely
tradable immediately following an investor's initial purchase, and
shares sold under Regulation Crowdfunding are generally freely tradable
after a holding period. In recognition of the additional monitoring
burdens associated with Regulation A and Regulation Crowdfunding
offerings, we are proposing to retain the current look-back period
applicable to covered beneficial owners in Regulation A and Regulation
Crowdfunding rather than amending it to start at the time of sale. We
are not aware of any investor protection concerns that have arisen with
respect to the current look-back period for beneficial owners.
---------------------------------------------------------------------------

    \365\ Rule 506(d) Final Release, at Section II.B.
    \366\ Id. at Section II.D.2.
---------------------------------------------------------------------------

    These proposed amendments would not alter the availability of the
existing reasonable care exception, an issuer's ability to seek a
waiver from disqualification from the Commission, or the exception
applicable when a court or regulatory authority advises in writing that
disqualification should not arise.\367\ Nonetheless, with respect to
the latter provision, we propose to amend Rule 262(b)(3) and Rule
503(b)(3), which currently provide that a court's or regulatory
authority's advice with respect to the disqualifying effect of an
order, judgment or decree may occur after the time of ``the filing of
the offering statement,'' in the case of Regulation A, or ``the filing
of the information required by section 4A(b) of the Securities Act,''
in the case of Regulation Crowdfunding. The proposed added language
would accord with the parallel look-back language in Rule
506(d)(2)(iii) of Regulation D by replacing the references in Rules
262(b)(3) and 503(b)(3) with ``before the relevant sale.''
---------------------------------------------------------------------------

    \367\ 17 CFR 230.262(b)(3).
---------------------------------------------------------------------------

Request for Comment
    81. Should we revise the bad actor look-back provisions in Rule
262(a) of Regulation A and Rule 503(a) of Regulation Crowdfunding as
proposed?
    82. Should we keep any of the current bad actor look-back
provisions centered on the time of filing rather than the time of sale
as we are proposing to do for 20 percent beneficial owners? Should we
do the same for any covered persons other than 20 percent beneficial
owners?
    83. Instead of disqualifying Regulation A or Regulation
Crowdfunding issuers affected by disqualifying events that first arise
or occur during an ongoing offering, should we allow such issuers to
continue the offering but require them to disclose the disqualifying
event, and provide investors with the option to cancel their investment
commitments and obtain a refund of invested funds? Would such an option
be difficult for issuers to administer?
    84. Should we, as proposed, revise the language in Rule 503(a) to
more closely track the requirement in Rule 262(a) of Regulation A by
including ``any promoter connected with the issuer in any capacity at
the time of filing, any offer after filing, or such sale''?
    85. Are there any anticipated additional costs of verifying the bad
actor status of covered persons under Rule 262(a) and Rule 503(a) with
a look-back period based on the time of sale instead of the time of
filing? If so, would those costs be significant to the average issuer
in Regulation A and Regulation Crowdfunding offerings?

III. General Request for Comment

    We request and encourage any interested person to submit comments
regarding the proposed rules and amendments that are the subject of
this release, potential additions or changes to these proposals, and
other matters that may have an effect on the proposals. With regard to
any comments, we note that such comments are of particular assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments.

IV. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(b) of the Securities Act,\368\ Section 3(f)
of the Exchange Act,\369\ and Section 2(c) of the Investment Company
Act \370\ require us, when engaging in rulemaking that requires us to
consider or determine whether an action is necessary or appropriate in
(or, with respect to the Investment Company Act, consistent with) the
public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation. In addition, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the effects on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\371\
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    \368\ 15 U.S.C. 77b(b).
    \369\ 15 U.S.C. 78c(f).
    \370\ 15 U.S.C. 80a-2(c).
    \371\ 15 U.S.C. 78w(a)(2).
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    We have considered the economic effects of the proposed amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from this proposal, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the proposed amendments, we provide a
qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
    We request comment from the points of view of all interested
parties. With regard to any comments, we note that such comments are of
greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.

A. Broad Economic Considerations

    The proposed amendments would simplify, harmonize, and improve
certain aspects of the Commission's exempt offering framework,
including Regulation D, Regulation A, Regulation Crowdfunding, and
other related rules. The proposed amendments build on changes to the
federal securities laws brought about by the JOBS Act, as well as many
other developments in the securities laws, capital markets, and
communication technologies since the adoption of Regulation D in 1982.
By providing a more streamlined and consistent exempt offering
framework, the proposed amendments are expected to promote capital
formation through exempt offerings (either by existing issuers or by
issuers that would not have otherwise pursued a securities offering),
expanding such issuers' ability to pursue positive net present value
investment and growth opportunities. The proposed amendments may also
address current uncertainties in the ability to use exempt offerings
prior to, or concurrent with, registered offerings, which could ease
the path for some issuers to a registered offering. In

addition, the increased flexibility afforded by the proposed amendments
could enable issuers to optimize their offering strategy and reduce
their external financing costs, enabling such issuers to fund a broader
range of investment projects. We recognize, however, that the proposed
amendments might lead to some substitution between different exempt
offering methods or between registered offerings and exempt offerings,
which would moderate the aggregate effects of the amendments on new
capital formation.
    Amendments to certain provisions of Regulation A, Regulation
Crowdfunding, and Rule 504 intended to facilitate compliance and raise
offering limits are expected to make these exemptions more cost-
effective and attractive to a broader range of issuers than they are
today. The resulting composition of the issuers that would rely on
these exemptions remains unclear. One possibility is that the amended
exemptions would draw a larger and more diversified set of issuers,
including issuers with high-growth potential and associated high
financing needs that might otherwise forgo these exemptions in light of
the existing, lower limits. The higher offering limits also might make
the amended exemptions more attractive to financial intermediaries that
presently might be unwilling to partake in such offerings because fixed
costs of participating in such a fund raising, such as the costs of due
diligence, might be too high in proportion to the potential
compensation, and because the pool of issuers seeking financing in
these market segments today might not be sufficiently large or
diversified to attract intermediaries. Another possibility is that the
proposed amendments could make these exemptions more attractive to
issuers seeking to avoid more stringent requirements that would apply
to other offering structures. We lack the data, or a methodological
approach, to disentangle these competing effects. Importantly, even if
adverse selection increased somewhat in some segments of the exempt
market under the proposed amendments, the investor protections
applicable to each exemption would remain as significant safeguards
against the risk of losses for less sophisticated investors.
    Some of the proposed amendments could expand non-accredited
investor access to investment opportunities, including:
     Proposed changes to increase investment limits for non-
accredited investors in Regulation Crowdfunding offerings;
     Provisions expanding integration safe harbors for Rule 506
offerings, potentially enabling more frequent offerings involving non-
accredited investors; and
     Provisions that potentially make Rule 504, Regulation A,
and Regulation Crowdfunding, which do not limit the number of non-
accredited investors, more attractive to prospective issuers through
increased offering limits, the eligibility of crowdfunding vehicles
under Regulation Crowdfunding, and modifications to certain Regulation
A disclosure requirements.
    Expanded access to exempt securities could enable non-accredited
investors to allocate capital across a broader range of
opportunities.\372\ Several factors make it difficult to assess the net
effects of the proposed amendments would have on the participation in
exempt offerings

and efficiency of capital allocation by non-accredited investors:
---------------------------------------------------------------------------

    \372\ As noted by several commenters, comprehensive data on the
investment returns resulting from investments in exempt offerings is
scarce due to the scaled disclosure requirements and a lack of a
secondary trading market. See State Attorneys General Letter; letter
from Philip A. Feigin dated August 21, 2019; letter from Elizabeth
D. de Fontenay et al. dated September 24, 2019; letter from Rick A.
Fleming, Investor Advocate of the Commission, dated July 11, 2019;
and letter from Better Markets, Inc. dated September 24, 2019
(``Better Markets Letter''). Available evidence focuses on returns
of hedge funds and private equity funds. Comprehensive, market-wide
data on the returns of private investments is not available due to a
lack of required disclosure, the voluntary nature of disclosure of
performance information by private funds, and the very limited
nature of secondary trading in these securities. Academic studies
have focused on private fund returns, acknowledging limitations and
biases in the available data. As an important caveat, risk-adjusted
returns obtained by large institutional investors in private
placements may not be an accurate representation of the returns that
would be obtained by non-accredited investors. Research has examined
(i) private equity returns (see, e.g., Steven N. Kaplan & Antoinette
Schoar, Private Equity Performance: Returns, Persistence, and
Capital Flows, 60 J. Fin. 1791 (2005); Andrew Metrick & Ayako
Yasuda, Venture Capital and Other Private Equity: A Survey, 17 Eur.
Fin. Mgmt. 619 (2011); Christian Diller & Christoph Kaserer, What
Drives Private Equity Returns? Fund Inflows, Skilled GPs, and/or
Risk?, 15 Eur. Fin. Mgmt. 643 (2009); Robert S. Harris et al.,
Financial Intermediation in Private Equity: How Well Do Funds of
Funds Perform?, 129 J. Fin. Econ. 287 (2018); Robert S. Harris, Tim
Jenkinson, & Steven N. Kaplan, Private Equity Performance: What Do
We Know?, 69 J. Fin. 1851 (2014); and Kasper Nielsen, The Return to
Direct Investment in Private Firms: New Evidence on the Private
Equity Premium Puzzle, 17 Eur. Fin. Mgmt. 436 (2011)); (ii) VC
performance (see, e.g., John H. Cochrane, The Risk and Return of
Venture Capital, 75 J. Fin. Econ. 3 (2005); Arthur Korteweg & Stefan
Nagel, Risk[hyphen]Adjusting the Returns to Venture Capital, 71 J.
Fin. 1437 (2016); and Axel Buchner, Abdulkadir Mohamed, & Armin
Schwienbacher, Does Risk Explain Persistence in Private Equity
Performance?, 39 J. Corp. Fin. 18 (2016)); and (iii) hedge fund
returns (see, e.g., William Fung & David A. Hsieh, Hedge Fund
Benchmarks: A Risk-Based Approach, Fin. Analysts J., Sept./Oct.
2004, at 65; William Fung & David A. Hsieh, Measurement Biases in
Hedge Fund Performance Data: An Update, Fin. Analysts J., May/June
2009, at 36; Manuel Ammann, Otto R. Huber, & Markus Schmid,
Benchmarking Hedge Funds: The Choice of the Factor Model (Working
Paper, 2011); Zheng Sun, Ashley W. Wang, & Lu Zheng, Only Winners in
Tough Times Repeat: Hedge Fund Performance Persistence over
Different Market Conditions, 53 J. Fin. & Quantitative Analysis 2199
(2018); Charles Cao et al., What Is the Nature of Hedge Fund Manager
Skills? Evidence from the Risk-Arbitrage Strategy, 51 J. Fin. &
Quantitative Analysis 929 (2016); Vikas Agarwal, T. Clifton Green, &
Honglin Ren, Alpha or Beta in the Eye of the Beholder: What Drives
Hedge Fund Flows?, 127 J. Fin. Econ. 417 (2018); Jakub Jurek and
Erik Stafford, The Cost of Capital for Alternative Investments, 70
J. Fin. 2185 (2015); Turan G. Bali, Stephen J. Brown, & Mustafa O.
Caglayan, Systematic Risk and the Cross Section of Hedge Fund
Returns, 106 J. Fin. Econ. 114 (2012); Turan G. Bali, Stephen J.
Brown, & Mustafa O. Caglayan, Macroeconomic Risk and Hedge Fund
Returns, 114 J. Fin. Econ. 1 (2014); Andrea Buraschi, Robert
Kosowski, & Fabio Trojani, When There Is No Place to Hide:
Correlation Risk and the Cross-Section of Hedge Fund Returns, 27
Rev. Fin. Stud. 581 (2014); Ravi Jagannathan, Alexey Malakhov, &
Dmitry Novikov, Do Hot Hands Exist Among Hedge Fund Managers? An
Empirical Evaluation, 65 J. Fin. 217 (2010); Andrea Buraschi, Robert
Kosowski, & Worrawat Sritrakul, Incentives and Endogenous Risk
Taking: A Structural View on Hedge Fund Alphas, 69 J. Fin. 2819
(2014); Ronnie Sadka, Liquidity Risk and the Cross-Section of Hedge-
Fund Returns, 98 J. Fin. Econ. 54 (2010); and Ilia D. Dichev & Gwen
Yu, Higher Risk, Lower Returns: What Hedge Fund Investors Really
Earn, 100 J. Fin. Econ. 248 (2011)).
     Comprehensive data on angel investment returns, entrepreneur
returns on investment of their own funds and savings in starting a
private business, and returns of investors in the crowdfunding
market is lacking. A few studies we have identified have used small,
selected samples, sometimes from foreign markets, which do not
generalize to the entire U.S. market. See, e.g., Vincenzo Capizzi,
The Returns of Business Angel Investments and Their Major
Determinants, 17 Venture Cap. 271 (2015) (using a small sample of
Italian data); and Colin M. Mason & Richard T. Harrison, Is It Worth
It? The Rates of Return from Informal Venture Capital Investments,
17 J. Bus. Venturing 211 (2002) (using a small UK sample).
Investments through AngelList and similar platforms allow accredited
investors to make VC-like investments in startups. The returns
generated by such investments have been a topic of debate in the
literature. See, e.g., Olga Itenberg & Erin E. Smith, Syndicated
Equity Crowdfunding: The Trade-Off Between Deal Access and Conflicts
of Interest (Simon Bus. Sch., Working Paper No. FR 17-06, Mar.
2017). See also, e.g., Elisabeth Mueller, Returns to Private
Equity--Idiosyncratic Risk Does Matter!, 15 Rev. Fin. 545 (2011);
Thomas Astebro, The Returns to Entrepreneurship, in Oxford Handbook
of Entrepreneurial Finance (Douglas Cumming ed. 2012); and Thomas J.
Moskowitz & Annette Vissing-J[oslash]rgensen, The Returns to
Entrepreneurial Investment: A Private Equity Premium Puzzle?, 92 Am.
Econ. Rev. 745 (2002) (``Moskowitz and Vissing-J[oslash]rgensen'').
For instance, Moskowitz and Vissing-J[oslash]rgensen examine the
returns to investing in U.S. nonpublicly traded equity and find
that, although entrepreneurial investment is extremely concentrated,
the returns to private equity are no higher than the returns to
public equity. They attribute the willingness of households to
invest substantial amounts in a single privately held firm with a
seemingly far worse risk-return trade-off to large nonpecuniary
benefits, a preference for skewness, or overestimated probability of
survival.
---------------------------------------------------------------------------

     The amendments might lead to substitution between exempt
offering methods that allow non-accredited investors or between
registered offerings and exempt offerings, leaving the aggregate set of
investment opportunities for non-accredited investors little changed.
For instance, some commenters expressed concern that facilitating
capital raising through exempt offerings might incrementally contribute
to the ongoing decline in U.S. registered offerings, which might limit
the overall set of investment opportunities available to non-accredited
investors and decrease the aggregate amount of information available to
investors.\373\ Even if that were the case, expanded access to capital
allowing issuers to meet their financing needs at a lower cost would
enhance the efficiency of capital allocation to growth opportunities,
with the resulting benefits for economic growth, competition, and
capital markets as a whole. Importantly, we do not expect the proposed
amendments to deter a significant proportion of the issuers that are
large and mature enough to be on the cusp of going public from pursuing
a public offering. Such issuers likely already have a developed network
of angel investors and/or backing from venture capitalists on which
they can rely to raise the necessary amount of financing today. Thus,
such issuers' decision to go public is likely driven more by the
benefits of being a public reporting company (relative to the cost of
being public). Rather, we believe that the amendments might have the
most significant effects on smaller growth issuers that presently lack
sufficient access to financing that they require to develop their
business model and gain scale. Such issuers may face significant
financing constraints and lack an established network of angel
investors or venture capital backing and may be too early in their
lifecycle to be a candidate for a public offering. Thus, if the added
flexibility contained in the amendments allows some of these small
issuers to raise enough external financing to develop their business
model and scale up to a point where they may become viable candidates
for a public offering, the amendments might diversify the pool of
prospective issuers that are able to conduct a registered offering,
which could result in a higher number of IPOs in the future.
---------------------------------------------------------------------------

    \373\ See, e.g., Better Markets Letter (opining that ``if the
Commission enacts some of the ideas it is contemplating in this
Concept Release, the US investors will have fewer public companies
to invest in, the securities markets will have more companies with
illiquid securities, and price discovery will suffer.'') and Healthy
Markets Letter (opining that ``the available evidence suggests that
instead of promoting efficient allocations of capital and protecting
investors, the proposals outlined by the Concept Release will
increase the number of companies and amount of capital in the
private markets on one hand, while further eroding the number and
quality of public companies on the other.'').
---------------------------------------------------------------------------

     Issuers might remain unwilling to undertake exempt
offerings with non-accredited investors (e.g., due to a preference for
institutional and angel investors that bring connections and expertise
in addition to capital; capitalization table concerns in light of
subsequent financing plans \374\ or Section 12(g) registration
thresholds; costs of investor relations with small investors; or risks
of proprietary information disclosure due to the presence of multiple
small investors; or general solicitation). Issuers with worse prospects
that are unable to attract capital from large investors, which
undertake more monitoring and screening, might be overrepresented among
exempt offerings focused on non-accredited investors. This mechanism
might contribute to quality sorting in an expanded set of investment
opportunities in exempt offerings to non-accredited investors.
---------------------------------------------------------------------------

    \374\ See, e.g., supra Section II.F.
---------------------------------------------------------------------------

     Non-accredited investors might choose not to participate
in exempt offerings (e.g., due to illiquidity, high transaction costs,
search costs, high information asymmetries and due diligence costs,
high investment minimums that preclude the desired level of
diversification for small investors, agency problems due to minority
stakes, etc.).
     The resulting efficiency of portfolio allocations of non-
accredited investors also would depend on the level of investor
sophistication in obtaining and analyzing information in a setting
where issuers provide less disclosure compared to registered
offerings.\375\
---------------------------------------------------------------------------

    \375\ In Modern Portfolio Theory, constraining the set of
investment opportunities yields a potentially inferior optimal
portfolio. See, e.g., Zvi Bodie, Alex Kane, & Alan J. Marcus,
Investments (10th ed. 2013) (``Bodie et al. 2013''). However, the
presence of information frictions due to a lack of investor
sophistication might reverse this general prediction and result in
lower portfolio risk-adjusted returns. See, generally, surveys in
Nicholas Barberis & Richard Thaler, A Survey of Behavioral Finance,
in Handbook of the Economics of Finance (Vol. 1B) (George M.
Constantinides, Milton Harris, & Rene M. Stulz eds., 1st ed. 2003),
at 1053; and Brad Barber & Terrance Odean, The Behavior of
Individual Investors, in Handbook of the Economics of Finance (Vol.
2B) (George M. Constantinides, Milton Harris, & Rene M. Stulz eds.,
1st ed. 2013), at 1533. See also, e.g., William N. Goetzmann & Alok
Kumar, Equity Portfolio Diversification, 12 Rev. Fin. 433 (2008)
(finding that ``U.S. individual investors hold under-diversified
portfolios, where the level of under-diversification is greater
among younger, low-income, less-educated, and less-sophisticated
investors. The level of under-diversification is also correlated
with investment choices that are consistent with over-confidence,
trend-following behavior, and local bias. . .Under-diversification
is costly to most investors, but a small subset of investors under-
diversify because of superior information.''); Shlomo Benartzi &
Richard H. Thaler, Heuristics and Biases in Retirement Savings
Behavior, J. Econ. Persp., Summer 2007, at 81; Warren Bailey, Alok
Kumar, & David Ng, Behavioral Biases of Mutual Fund Investors, 102
J. Fin. Econ. 1 (2011) (examining ``the effect of behavioral biases
on the mutual fund choices of a large sample of US discount
brokerage investors using new measures of attention to news, tax
awareness, and fund-level familiarity bias, in addition to
behavioral and demographic characteristics of earlier studies.
Behaviorally biased investors typically make poor decisions about
fund style and expenses, trading frequency, and timing, resulting in
poor performance. Furthermore, trend chasing appears related to
behavioral biases, rather than to rationally inferring managerial
skill from past performance. Factor analysis suggests that biased
investors often conform to stereotypes that can be characterized as
Gambler, Smart, Overconfident, Narrow Framer, and Mature.''); Anders
Anderson, Trading and Under-Diversification, 17 Rev. Fin. 1699
(2013) (documenting ``a link between trading and diversification by
using detailed trading records from a Swedish discount broker
matched with individual tax records. Diversification is measured by
the investors' stake size, defined as the fraction of their risky
financial wealth invested in individual stocks through the broker
under study. High-stake investors have concentrated portfolios,
trade more, and achieve lower trading performance. They share
several features with those who trade excessively, namely lower
income, wealth, age, and education, suggesting that they lack
investment expertise. The results directly imply that trading losses
in the cross-section are mainly borne by those who can least afford
them.''); and Hans-Martin von Gaudecker, How Does Household
Portfolio Diversification Vary with Financial Literacy and Financial
Advice?, 70 J. Fin. 489 (2015) (finding that ``[n]early all
households that score high on financial literacy or rely on
professionals or private contacts for advice achieve reasonable
investment outcomes. Compared to these groups, households with
below-median financial literacy that trust their own decision-making
capabilities lose an expected 50 bps on average. All group
differences stem from the top of the loss distribution.'').
     We note that the level of investor sophistication and due
diligence capabilities might improve with investing experience,
which investors might not have been able to develop under the
baseline, although evidence is mixed on the effectiveness of
learning among individual investors. See, e.g., Lubos Pastor &
Pietro Veronesi, Learning in Financial Markets, 1 Ann. Rev. Fin.
Econ. 361 (2009) (surveying literature on learning); Maximilian
Koestner et al., Do Individual Investors Learn from Their Mistakes?,
87 J. Bus. Econ. 669 (2017); Amit Seru, Tyler Shumway, & Noah
Stoffman, Learning by Trading, 23 Rev. Fin. Stud. 705 (2010)
(finding ``evidence of two types of learning: some investors become
better at trading with experience, while others stop trading after
realizing that their ability is poor. A substantial part of overall
learning by trading is explained by the second type'' and noting
that ``ignoring investor attrition, the existing literature
significantly overestimates how quickly investors become better at
trading.''); Stefan Muhl & T[otilde]nn Talpsepp, Faster Learning in
Troubled Times: How Market Conditions Affect the Disposition Effect,
68 Q. Rev. Econ. & Fin. 226 (2018) (using Estonian data and finding
that learning, particularly learning by doing, is enhanced during
bad times); and Tarvo Vaarmets, Kristjan Liivam[auml]gi, &
T[otilde]nn Talpsepp, How Does Learning and Education Help to
Overcome the Disposition Effect?, 23 Rev. Fin. 801 (2019)
(evaluating how investor learning reduces disposition effect using
Estonian data and finding heterogeneity in learning ability). But
see, e.g., Yao-Min Chiang et al., Do Investors Learn from
Experience? Evidence from Frequent IPO Investors, 24 Rev. Fin. Stud.
1560 (2011) (presenting evidence of IPO investors in Taiwan that
``individuals become unduly optimistic after receiving good
returns.'').

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

     Irrespective of their individual level of sophistication,
non-accredited investors might potentially benefit from the positive
spillovers of the monitoring and screening efforts of any participating
accredited investors that have more extensive due diligence expertise.
However, non-accredited investors that tend to hold minority stakes
might need to perform additional due diligence, given potential
differences in the payoffs obtained by accredited versus non-accredited
investors.\376\
---------------------------------------------------------------------------

    \376\ Such differences might be due to differences in terms of
securities. For instance, downside protection and anti-dilution
options may be negotiated by large investors with greater bargaining
power. See Healthy Markets Letter (commenting that investors' rights
in private placements are ``left to the bargaining power of the
parties'' which limits the rights of smaller investors); and NASAA
Letter (commenting that ``investors are not treated equally'' in
private markets). For example, one study has analyzed data on
contractual provisions in PIPEs and documented significant variation
in the use of downside protection terms. See Matthew T. Billett,
Redouane Elkamhi, & Ioannis V. Floros, The Influence of Investor
Identity and Contract Terms on Firm Value: Evidence from PIPEs, 24
J. Fin. Intermediation 564 (2015). See also David J. Brophy, Paige
P. Ouimet, & Clemens Sialm, Hedge Funds as Investors of Last
Resort?, 22 Rev. Fin. Stud. 541 (2009) (showing that hedge funds
investing in PIPEs as ``investors of last resort'' protect
themselves by requiring substantial discounts, negotiating repricing
rights, and entering into short positions of the underlying stocks);
and Susan Chaplinsky & David Haushalter, Financing Under Extreme
Risk: Contract Terms and Returns to Private Investments in Public
Equity, 23 Rev. Fin. Stud. 2789 (2010) (examining control rights and
other contractual terms in PIPE transactions with financially
constrained issuers). We recognize that evidence from PIPEs need not
generalize to non-reporting companies that account for the majority
of private placement issuers. However, because Form D does not
provide disclosure of contractual terms and private placement
memoranda from Regulation D or Section 4(a)(2) offerings are not
required to be filed, data on the terms obtained by various
investors in private placements is generally not available.
     Studies have also documented terms negotiated in VC contracts.
See, e.g., Steven N. Kaplan & Per Stromberg, Characteristics,
Contracts, and Actions: Evidence from Venture Capitalist Analyses,
59 J. Fin. 2177 (2004) (documenting the use of redemption rights,
liquidation rights, and antidilution provisions in VC contracts);
and Paul A. Gompers et al., How do Venture Capitalists Make
Decisions?, 135 J. Fin. Econ. 169 (2020) (surveying 885
institutional VCs at 681 firms and documenting various VC practices,
including the use of various deal terms, such as anti-dilution
protection (which gives the VC more shares if the company raises a
future round at a lower price), pro rata rights (which give
investors the right to participate in the next round of funding),
liquidation preferences (which give investors a seniority position
in liquidation), participation rights (which allow VC investors to
combine upside and downside protection so that VC investors first
receive their downside protection and then share in the upside), and
redemption rights (which give investors the right to redeem their
securities, or demand from the company the repayment of the original
amount)).
     We further recognize that differences in payoffs of different
investor types can be fair compensation for value added by the
expertise, advice, governance, and network connections contributed
by large investors. See also Karen H. Wruck & YiLin Wu,
Relationships, Corporate Governance, and Performance: Evidence from
Private Placements of Common Stock, 15 J. Corp. Fin. 30 (2009)
(concluding that PIPEs are more likely to create value when they are
associated with increased monitoring and strong governance by PIPE
investors).
     Other potential benefits resulting from a large investor's
control of an issuer include the investor's ability to enter a
governance relationship with the issuer or otherwise have input into
corporate decisions that reduce the value of such issuer but
increase the value of other issuers in which a large investor also
has a stake.
---------------------------------------------------------------------------

     Finally, any potential effects of the proposed amendments
on the risks to non-accredited investors should be assessed in the
context of the existing economic and market conditions, which allow
such investors to establish other financial exposures that might
involve a high level of risk or require extensive due diligence, both
as part of the securities market (e.g., leveraged investments in
individual listed securities; short positions; holdings of registered
securities of foreign, small-cap, and over-the-counter (OTC) issuers;
and holdings of registered nontraded securities, including REITs and
structured notes) and outside of the securities market (e.g., holdings
of futures, foreign exchange, real estate, individual small businesses,
peer-to-peer lending, and other personal financial transactions that
may entail high risk or leverage). Thus, some of the new capital
invested in exempt offerings by non-accredited investors under the
proposed amendments might have otherwise been allocated to other assets
with high risk or extensive due diligence requirements.
    Some of the proposed amendments affect the same offerings and
issuers or have mutually reinforcing or partly offsetting effects,
which makes it more difficult to draw conclusions about the net effects
of the proposed amendments package as a whole. For example, it is
difficult to predict how the amendments that expand, simplify, and
increase the uniformity of integration safe harbors will affect issuer
reliance on individual exemptions. Nevertheless, we expect that these
proposed integration amendments would overall facilitate capital
formation by harmonizing requirements and providing additional
flexibility to issuers seeking an exemption from registration or
transitioning to a registered offering. As another example, the effects
of the amendments to provisions regarding eligible security types and
eligible categories of issuers in Regulation Crowdfunding might
interact. To the extent that reliance on SAFEs is driven by
capitalization table concerns, the proposed narrowing of the eligible
security types, which would exclude SAFEs from Regulation Crowdfunding,
might have minimal effects on issuers if crowdfunding vehicles become
eligible under Regulation Crowdfunding as proposed. Furthermore, the
proposed amendments relaxing investment limits and raising offering
limits in Regulation Crowdfunding might result in mutually reinforcing
benefits for capital formation. In a related vein, the proposed
amendments to raise offering limits for individual offering exemptions
might lead to increased substitution between exemptions. Finally, we
recognize that the proposed amendments to exemptions that are currently
little used might have limited aggregate economic effects in absolute
terms even if the relative changes to the rate of use of those
exemptions are substantial.
    In a recent release, the Commission has proposed to amend and
expand the accredited investor definition.\377\ If adopted, those
amendments would affect the economic impacts of the amendments proposed
here. In particular, some of the effects of the changes to the exempt
offerings proposed here that are intended to facilitate exempt offering
financing under Regulation D (e.g., expanded integration provisions) or
under other exemptions (e.g., exempting accredited investors from the
investment limits under Regulation Crowdfunding) might have relatively
greater economic effects if issuers can offer securities to an expanded
pool of accredited investors as contemplated by the proposed accredited
investor definition amendments. In turn, some of the anticipated
effects of the proposed changes to facilitate exempt offerings to non-
accredited investors (e.g., amendments to the disclosure requirements
for sales to non-accredited investors under Rule 506(b); expanded
offering limits under Rule 504, Regulation A, and Regulation
Crowdfunding; and test-the-waters provisions for Regulation
Crowdfunding) might have relatively smaller economic effects if issuers
can

access an expanded accredited investor pool as contemplated by the
proposed accredited investor definition amendments, and thus become
less reliant on offerings to non-accredited investors.
---------------------------------------------------------------------------

    \377\ See Accredited Investor Definition Proposing Release.
---------------------------------------------------------------------------

B. Baseline

    We examine the economic effects of the proposed amendments relative
to the baseline, which comprises the existing regulatory requirements
(described in detail in Section I above) and market practices related
to exempt offerings (described below).
    Generally, the parties affected by the proposed amendments include
current and prospective issuers and investors in exempt offerings. To
the extent that the proposed amendments affect how issuers choose
between registered and exempt offerings, the proposed amendments also
might affect issuers and investors in the registered offering market.
In cases where intermediaries are involved in exempt offerings and
either receive transaction-based compensation or perform some of the
offering-related or compliance functions on behalf of issuers,
intermediaries would also be affected by the proposed amendments. In
particular, Regulation Crowdfunding requires offerings to be conducted
through an intermediary's online platform. Thus, to the extent that the
amendments affect Regulation Crowdfunding offering activity, they are
expected to have direct effects on all crowdfunding intermediaries. In
other instances, the effects of the proposed amendments on
intermediaries might be more limited (e.g., intermediaries might verify
investor status for issuers under Rule 506(c), be authorized by some
issuers to test-the-waters with investors prior to an offering, or be
drawn to the Regulation A market if they find that the proposed
increase in the offering limit makes the underwriting role more cost-
effective).
    Table 11 \378\ summarizes recent data on the Regulation D market.
---------------------------------------------------------------------------

    \378\ This table includes offerings by pooled investment funds.
Information on Regulation D offerings, including offerings under
Rule 504 and Rule 506, is based on staff analysis of data from Form
D filings on EDGAR. The amount raised is based on the amounts
reported as ``Total amount sold'' in all Form D filings (new filings
and amendments) on EDGAR. Subsequent amendments to a new filing were
treated as incremental fundraising and recorded in the calendar year
in which the amendment was filed. It is likely that the reported
data on Regulation D offerings underestimates the actual amount
raised through these offerings. First, Rule 503 of Regulation D
requires issuers to file a Form D no later than 15 days after the
first sale of securities, but a failure to file the notice does not
invalidate the exemption. Accordingly, it is possible that some
issuers do not file Form D for offerings relying on Regulation D.
Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10 percent.

                                 Table 11--Offerings Under Regulation D in 2019
----------------------------------------------------------------------------------------------------------------
                                              Rule 504               Rule 506(b)               Rule 506(c)
----------------------------------------------------------------------------------------------------------------
Number of New Offerings.............  476....................  24,636.................  2,269.
Amount Reported Raised..............  $0.2 billion...........  $1,491.9 billion.......  $66.3 billion.
----------------------------------------------------------------------------------------------------------------

    As can be seen from Table 11, Rule 506(b) dominates the market for
exempt securities offerings. Amounts raised under Rule 506(b) also
exceeded the amounts raised in the registered market, estimated to be
$1.2 trillion in 2019.\379\
---------------------------------------------------------------------------

    \379\ See supra Section II.E.. For a discussion of trends in the
Regulation D markets, see also Concept Release; and Scott Bauguess,
Rachita Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.:
An Analysis of the Market for Unregistered Securities Offerings,
2009-2017 (U.S. Sec. and Exch. Comm'n, DERA White Paper, Aug. 1,
2018), available at https://www.sec.gov/dera/staff-papers/white-papers/dera_white_paper_regulation_d_082018.
---------------------------------------------------------------------------

    Table 12 \380\ summarizes amounts sought and reported raised in
offerings under Regulation Crowdfunding since its inception.\381\
---------------------------------------------------------------------------

    \380\ See supra note 12. Issuers that have not raised the target
amount or not filed a report on Form C-U are not included in the
estimate of proceeds.
    \381\ For a discussion of the Regulation Crowdfunding market,
see also 2019 Regulation Crowdfunding Report.

    Table 12--Regulation Crowdfunding Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2019
----------------------------------------------------------------------------------------------------------------
                                                                                Aggregate
                                                      Number          Average         Median         (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings.....           2,003         $63,791         $25,000          $126.9
Maximum amount sought in initiated offerings....           2,003         599,835         535,000         1,174.2
Amounts reported as raised in completed                      795         213,678         106,900           169.9
 offerings......................................
----------------------------------------------------------------------------------------------------------------

    Given the offering limits, crowdfunding is used primarily by
relatively small issuers. Table 13 \382\ presents data on the
characteristics of issuers in crowdfunding offerings.\383\
---------------------------------------------------------------------------

    \382\ See supra note 12. The estimates are based on data from
Form C or the latest amendment to it, excluding withdrawals.
    \383\ See also 2019 Regulation Crowdfunding Report.

     Table 13--Characteristics of Issuers in Regulation Crowdfunding
                Offerings, May 16, 2016-December 31, 2019
------------------------------------------------------------------------
                                              Average         Median
------------------------------------------------------------------------
Age in years............................             2.9             1.8
Number of employees.....................             5.3             3.0
Total assets............................        $455,280         $29,982

Total revenues..........................        $325,481              $0
------------------------------------------------------------------------

    Based on information in new Form C filings, the median crowdfunding
offering was by an issuer that was incorporated approximately two years
prior to the offering and employed about three people. The median
issuer had total assets of approximately $30,000 and no revenues (just
over half of the offerings were by issuers with no revenues).
Approximately ten percent of offerings were by issuers that had
attained profitability in the most recent fiscal year prior to the
offering.
    Table 14 \384\ summarizes amounts sought and reported raised in
offerings under Regulation A since the effective date of the 2015
Regulation A amendments.\385\
---------------------------------------------------------------------------

    \384\ See supra note 12. The estimates include post-
qualification amendments, and exclude abandoned or withdrawn
offerings. See also 2020 Regulation A Review.
    \385\ See also Figures 1 and 2 in the 2020 Regulation A Review,
which provide a graphic depiction of the data conveyed in Table 14.

   Table 14--Regulation A Offering Amounts and Reported Proceeds in $ Million, June 19, 2015-December 31, 2019
----------------------------------------------------------------------------------------------------------------
                                             Tiers 1 & 2                 Tier 1                   Tier 2
----------------------------------------------------------------------------------------------------------------
All Filed Offerings:
    Aggregate dollar amount sought...  $11,170.2 million......  $1,101.5 million.......  $10,068.6 million.
    Number of offerings..............  487....................  145....................  342.
    Average dollar amount sought.....  $22.9 million..........  $7.6 million...........  $29.4 million.
Offerings Qualified by Commission
 Staff:
    Aggregate dollar amount sought...  $9,094.8 million.......  $759.0 million.........  $8,335.8 million.
    Number of offerings..............  382....................  105....................  277.
    Average dollar amount sought.....  $23.8 million..........  $7.2 million...........  $30.1 million.
Capital Reported Raised:
    Aggregate dollar amount reported   $2,445.9 million.......  $230.4 million.........  $2,215.6 million.
     raised.
    Number of issuers reporting        183....................  39.....................  144.
     proceeds.
    Average dollar amount reported     $13.4 million..........  $5.9 million...........  $15.4 million.
     raised.
----------------------------------------------------------------------------------------------------------------

    As can be seen, Tier 2 accounted for the majority of Regulation A
offerings (70 percent of filed and 73 percent of qualified offerings),
amounts sought (90 percent of amounts sought in filed offerings and 9
percent of amounts sought in qualified offerings), and reported
proceeds (91 percent) during this period.
    Because reliance on integration safe harbors is not required to be
disclosed, we lack a way to reliably quantify the pool of issuers and
offerings that would be affected by the proposed approach to
integration. Nevertheless, some indication of the scope of issuers
affected by integration provisions may come from indirect sources: In
2019, based on the analysis of Form D filings, we estimate that
approximately 1,256 issuers other than pooled investment funds filed
more than one Form D (excluding amendments) and an additional 258
issuers filed one new Form D and either had a registration statement
declared effective, had a Regulation A offering statement qualified, or
filed a new or amended Form C. Many private placements, however, rely
on Section 4(a)(2) rather than on the Regulation D safe harbor. We lack
data on Section 4(a)(2) offerings due to the absence of filing or
disclosure requirements associated with this statutory exemption. Also,
for issuers filing forms for multiple offerings, in most cases we
cannot reliably determine if, and when, proceeds were raised or the
offering closed, or whether the specific offerings were eventually
subject to integration or not. For instance, a closeout filing on Form
D is not required, making it difficult to know when the offering closed
or how much was raised. Similarly, proceeds data for Regulation A and
Regulation Crowdfunding can be lagged or incomplete.

C. Economic Effects of the Proposed Amendments

1. Integration
    We are proposing to revise the framework relating to the
integration analysis. As discussed in greater detail in Section II.A,
the proposed amendments would update and expand existing integration
provisions to provide greater uniformity and flexibility to issuers
regarding integration of offerings.
    Considered together, the proposed amendments are expected to
facilitate compliance and promote greater consistency and uniformity
across exemptions, and thus promote the use of exemptions by issuers
that undertake multiple offerings.
Benefits
    The proposed amendments expand and simplify the integration
framework, provide greater uniformity in integration tests applicable
across offering types, and in many cases shorten the period of time
that issuers must wait between offerings to rely on a safe harbor from
integration. The proposed amendments are expected to reduce the cost of
compliance with the integration requirements for issuers. In
particular, we expect that the reduction in the safe harbor period from
six months to 30 days would facilitate compliance for issuers that
might need to adjust their financing strategy as a result of evolving
business circumstances, growing financing needs, or an inability to
attract sufficient capital through a single offering method. A six-
month waiting period between consecutive offerings, or the need to
assess whether consecutive

offerings can be treated as separate offerings or whether they must be
integrated, can significantly limit such issuers' ability to raise
sufficient capital or react to dynamic business conditions. Similarly,
expanding the bright-line safe harbors from integration to a broader
set of offering types is expected to reduce the costs for issuers
seeking to raise capital through multiple offering exemptions. Overall,
greater emphasis in the integration analysis on whether a particular
offering satisfies the registration requirements or conditions of the
specific exemption, as proposed, is expected to reduce integration-
specific compliance efforts. The proposed amendments are expected to
reduce the costs of compliance with the provisions of the exemptions
for issuers that conducted an offering before, or close in time with,
another offering, especially in light of the expansion of capital
raising options following the JOBS Act. The resulting decrease in
compliance costs might encourage additional issuers to pursue one or
more exempt offerings or to pursue a private placement and a registered
offering.
    The proposed amendments are expected to be particularly beneficial
to young, financially constrained, or high-growth issuers whose capital
needs, and thus preferred capital raising methods, may change more
frequently. The flexibility may be especially valuable in cases where
one or more of the exempt offerings conducted by an issuer is subject
to offering limits, as well as in cases where an issuer conducts
multiple offerings that are subject to different solicitation,
disclosure, offering size, or investor requirements. Overall, this
flexibility may promote capital formation and enable issuers to
optimize their financing strategy so as to attain a lower overall cost
of capital while raising the required amount of external financing.
    The benefits of the proposed amendments to issuers discussed above
also are expected to accrue to the shareholders of those issuers by
enhancing shareholder value, particularly if the increased flexibility
in accessing external financing enables issuers to more efficiently
pursue high-growth investment opportunities.
    We recognize that the benefits of the proposed rules may be limited
in a range of circumstances:
     In cases where the proposed amendments are codifying
existing guidance, to the extent that the market has already developed
practices aligned with the existing guidance, the effects of the
proposed amendments relative to the baseline would be limited;
     Given that the vast majority of exempt offerings, and the
capital raised through such offerings, relies on Rule 506(b) under
Regulation D (or Section 4(a)(2)), the benefits of expanding the
integration safe harbors for other types of offerings under the
proposed amendments could be limited; \386\ and
---------------------------------------------------------------------------

    \386\ We recognize that other amendments we are proposing today
might increase the use of Rule 506(c), Rule 504, Regulation A, and
Regulation Crowdfunding.
---------------------------------------------------------------------------

     Rule 506(b) offerings do not have offering limits, and
most do not involve non-accredited investors, thus a change in
integration provisions is unlikely to affect issuers that continue to
engage in such offerings in practice because such issuers would likely
be able to meet all of their financing needs without having to conduct
multiple offerings and would not have to resort to other offering types
that permit greater non-accredited investor participation.\387\
---------------------------------------------------------------------------

    \387\ We recognize that the amendments we are proposing today to
non-accredited investor disclosure requirements might increase the
incidence of non-accredited investors in Rule 506(b) offerings.
---------------------------------------------------------------------------

Costs
    The proposed amendments could result in additional financing being
raised from non-accredited investors without registration
requirements.\388\ The disclosure requirements of all of these
exemptions are less extensive than the requirements associated with a
registered offering, which may in some cases lead to a weakening of
investor protections. Another potential concern is that a decrease in
the integration of multiple offerings might result in inadvertent
overlaps in solicitation of investors for offerings with different
communications provisions. For example, Rule 506(b) and Section 4(a)(2)
offerings that do not allow general solicitation may be preceded by
offerings relying on exemptions that allow general solicitation (such
as Regulation Crowdfunding, Regulation A, or Rule 506(c)), which could
condition the market for the subsequent private placement offering.
This may potentially increase risks to any non-accredited investors
participating in the subsequent private placement offering if such
investors rely on the information communicated through general
solicitation because private placement offerings do not afford the same
investor protections as, for instance, Regulation A and Regulation
Crowdfunding.
---------------------------------------------------------------------------

    \388\ For example, conducting a Rule 506(b) offering and a
Regulation A or Regulation Crowdfunding offering may enable an
issuer to reach a broader non-accredited investor base and/or raise
a greater amount of non-accredited investor capital. Certain
exemptions (Regulation Crowdfunding, Regulation A Tier 2) also
conditionally exempt securities offered under the respective
exemption from the number of shareholders of record for purposes of
Section 12(g).
---------------------------------------------------------------------------

    We anticipate a number of factors would mitigate these potential
costs. The proposed amendments do not alter the substantive
requirements of individual offering methods, including ones relating to
investor protection. In addition, the proposed amendments would more
closely align issuer efforts to comply with integration provisions and
requirements of the respective exemptions, including, importantly, the
provisions deemed important for investor protection in the context of
each respective exemption. Moreover, nothing in the proposed amendments
would enable a scheme to evade the requirements of the respective
exemption or, in the context of registered offerings, the registration
and gun jumping provisions of the Securities Act. In this regard,
proposed Rule 152 specifies that the safe harbors are not available to
any issuer for any transaction or series of transactions that, although
in technical compliance with the rule, is part of a plan or scheme to
evade the registration requirements of the Securities Act. Further,
issuers would remain prohibited from using general solicitation in a
Rule 506(b) offering, through any means, irrespective of the proposed
integration amendments.
    The proposed amendments contain several other safeguards that are
expected to minimize potential costs to investors. The provision in
proposed Rule 152(a)(1)--that an issuer who is conducting or has
conducted an offering that permits general solicitation (``Offering
1'') and is conducting a concurrent offering or has conducted a
subsequent offering that does not permit general solicitation
(``Offering 2'') must have a reasonable belief, based on the facts and
circumstances, that the prospective investors in Offering 2 were not
solicited through general solicitation from Offering 1 or that the
investors established a substantive relationship with the issuer prior
to the commencement of the offering not permitting general
solicitation--is expected to minimize the effect of possible
solicitation overlaps for multiple offerings. This provision would
bolster existing solicitation restrictions in the individual exemptions
and focus the integration analysis on issuer compliance with
solicitation restrictions. Further, proposed Rule 152(a)(2) specifying
that an issuer conducting an exempt offering for which general
solicitation is permitted concurrently with an offering under another
exemption for which

general solicitation is permitted must include appropriate legends in
its general solicitation would provide notice to investors and thereby
help minimize potential confusion about the offering method, reducing
the risk of uninformed investor decisions as a result of reliance on
preliminary information contained in such solicitations.
    The proposed safe harbors from integration are designed to minimize
potential risks to investors. The 30-day period in the first proposed
safe harbor is expected to minimize inadvertent overlaps between
offerings and investor solicitation for different offerings while
providing issuers greater flexibility to adjust their financing
strategy as a result of evolving circumstances. Moreover, the proposed
safe harbor would provide that if an offering that does not permit
general solicitation follows a registered offering or an exempt
offering that permits general solicitation, the investors in the
private offering either must not have been solicited through the use of
the registration statement or the prior general solicitation or must
have developed a substantive relationship with the issuer prior to the
commencement of the private offering. In addition, the proposed
amendment to Rule 506(b) providing that where an issuer conducts more
than one offering under Rule 506(b), the number of non-accredited
investors purchasing in all such offerings within 90 calendar days of
each other would be limited to 35 is expected to address the concern
that failure to integrate multiple such offerings could result in sales
to a large number of non-accredited investors.
    The second proposed safe harbor concerns offerings under Rule 701
or Regulation S. As discussed above, Rule 701 offerings involve
compensation agreements with employees and other parties with a pre-
existing relationship with the issuer, and thus excluding such
offerings from integration is not likely to raise meaningful investor
protection concerns. The proposed amendments would permit an issuer
conducting an offering with general solicitation to undertake a
Regulation S offering using general solicitation so long as the general
solicitation activity is not undertaken for the purpose of conditioning
the U.S. market for any of the securities being offered in reliance on
Regulation S. The proposed amendments also would require a Regulation S
issuer that engages in general solicitation activity to prohibit
resales to U.S. persons of the Regulation S securities for a period of
six months from the date of sale except to QIBs or IAIs (which are
expected to have the financial sophistication and ability to sustain
the risk of loss of investment or fend for themselves). We expect these
provisions would strengthen protections for United States investors
from the risk of flowback of such securities to the United States.
    The third proposed safe harbor concerns offerings for which a
Securities Act registration statement has been filed following a
completed or terminated private placement. Because private placements
would continue to restrict general solicitation, the impact on
investors in the private placement, most of which are deemed to have
the financial sophistication and ability to sustain the risk of loss of
investment or fend for themselves, is likely to be minimal. In turn,
because private placements do not permit general solicitation, and
because the extensive registration requirements would apply to the
registered offering, it is unlikely to have any impact on investors in
the registered offering. The third proposed safe harbor also provides
that a registered offering would not be integrated if made subsequent
to a completed or terminated exempt offering for which general
solicitation is permitted but that was either limited to QIBs and IAIs
or took place more than 30 days prior to the offering. This is similar
to current Rule 147(h), Rule 147A(h), and Rule 255(e) of Regulation A.
Because of the extensive protections built into the registration
requirements and the 30-day waiting period that would apply if a
solicitation involved investors other than QIBs or IAIs, the proposed
safe harbor is unlikely to have adverse impacts on investors in the
registered offering. In cases where solicitation was limited to QIBs
and IAIs, due to the sophistication of those investors, we do not
believe that the lack of a 30-day waiting period in the proposed
integration safe harbor would meaningfully affect investor protection.
The proposal is also consistent with Securities Act Section 5(d) and
Rule 163B, which allow solicitation of QIBs and IAIs at any time prior
to a registered offering.
    The fourth proposed safe harbor extends the approach in Regulation
A and Rules 147 and 147A and in the guidance regarding Regulation
Crowdfunding to exclude any prior offer or sale from integration with
offers and sales under Rule 147, Rule 147A, Regulation Crowdfunding,
Rule 504(b)(1)(i), (ii), or (iii), and Rule 506(c). The disclosure and
substantive requirements of these exemptions should minimize potential
costs to investors from not integrating these offerings with prior
offers and sales.
    We believe these proposed amendments appropriately calibrate the
effort required on the part of issuers to address potential overlaps
between multiple offerings by the same issuer that may raise investor
protection concerns. Overall, because the proposed amendments require
that issuers continue to meet the conditions of each exemption they are
relying upon, and because investor protection provisions of each
exemption as well as general anti-fraud provisions would continue to
apply, we believe that the proposed amendments would not have
significant adverse effects on investor protection.
    We recognize that issuers seeking to rely on one or more of the
proposed integration provisions would incur costs of analyzing the
facts and circumstances of the contemplated offerings and/or the
respective integration safe harbors. While we believe that the proposed
amendments substantially simplify and streamline the integration safe
harbors, we recognize that some issuers might find that navigating the
amended integration framework requires additional time and effort.
Because the integration safe harbors would remain voluntary, we expect
that issuers would only rely on the safe harbors if such reliance might
reduce their compliance costs. This would not affect all issuers. For
instance, new entrants to the market would have to conduct this
analysis presently, with more a more confusing and difficult to
navigate integration framework.
Effects on Efficiency, Competition, and Capital Formation
    The proposed integration provisions are expected to increase
capital formation through exempt offerings and to enable issuers to
combine financing under different exemptions more optimally as part of
their financing strategy. However, the net capital formation benefits
may be modest to the extent that issuers currently can avoid the need
for multiple offerings (e.g., by relying on a single Rule 506(b)
offering with no, or few, non-accredited investors but seeking a larger
amount of financing).
    It is unclear how the proposed integration amendments would affect
competition for investor capital. To the extent the proposed amendments
might reduce issuer compliance costs associated with accessing a
broader range of offering exemptions (e.g., multiple JOBS Act
exemptions), competition for investor capital in those market segments
might increase. However, net effects on overall competition for
investor capital might be limited to the extent that issuers

reallocate between offering exemptions or additional investor capital
is drawn to these markets under the proposed amendments.
    As discussed above, the amendments might offer the greatest
benefits to smaller issuers that have varying financing needs or to
issuers that need to rely on multiple offering exemptions to meet their
financing needs (e.g., because they lack an established accredited
investor network to support financing exclusively through Rule 506(b)
and need to rely on non-accredited investors or general solicitation).
    By streamlining and harmonizing integration safe harbors, the
proposed amendments are expected to improve the efficiency of an
issuer's compliance efforts, particularly for issuers conducting
multiple offerings.
Reasonable Alternatives
    As an alternative, we could propose a uniform safe harbor with a
time period other than 30 days (e.g., 15, 45, 60, 75, or 90 days).
Compared to the proposed amendments, the alternative of a universal
safe harbor with a shorter (longer) time period than proposed would
reduce (increase) the likelihood that multiple offerings would be
integrated and, accordingly, reduce (increase) issuer costs of
compliance. Compared to the proposed amendments, the alternative of a
safe harbor with a shorter (longer) time period than proposed would
provide issuers with greater (lower) flexibility in tailoring their
capital raising strategy to changing financing needs and market
conditions. Compared to the proposed amendments, such an alternative
also could increase (reduce) the number of instances where issuers
improperly divide a single plan of financing into multiple offerings.
    The proposed amendments would replace the five factor test. As
another alternative, we could codify the use of the five factor test
for all analyses of integration. Compared to the proposed amendments,
such an alternative could be more successful in identifying instances
where issuers improperly divide what is economically a single offering
into multiple offerings to avoid exemption limitations. However, it
also would result in additional costs for issuers and reduced
flexibility to combine multiple offering methods.
Request for Comment
    86. Would the proposed amendments facilitate issuer compliance and
enhance their ability to access capital markets and meet their
financing needs?
    87. Would an alternative integration approach achieve greater
capital formation benefits? If so, which one? Would it impose
additional costs?
    88. Would the proposed approach to integration allow issuers to
reduce their compliance costs or other costs of raising capital? Would
the proposed approach to integration facilitate transition to a
registered offering for issuers that previously relied on offering
exemptions? Would the proposed approach to integration allow issuers to
transition more easily among offering exemptions?
    89. Which categories of issuers would benefit the most from the
proposed approach to integration? Would the proposed approach to
integration benefit smaller and younger issuers and promote
competition?
    90. Would there be costs to investors as a result of the proposed
approach to integration? What would those costs be? What categories of
investors would be most affected? What factors could mitigate such
costs? Would an alternative integration safe harbor or guideline reduce
costs to investors? If so, which one?
    91. What would be the costs and benefits of shortening the period
in the integration safe harbor to 30 days, as proposed? What would be
the economic effects of an alternative time period, such as 15, 45, 60,
or 90 days? What would be the economic effects of eliminating the
waiting period entirely?
2. General Solicitation and Offering Communications
a. ``Demo Days'' and Similar Events
    As discussed in greater detail in Section II.B.1 above, we are
proposing to add certain ``demo day'' communications to the list of
communications that would not be deemed general solicitation.
Benefits
    The proposed amendments to Rule 148 specify that certain limited
``demo day'' activities would not be deemed general solicitation. These
events are generally organized by a group or entity (such as a
university, angel investors, an accelerator, or an incubator) that
invites issuers to present their businesses to potential investors,
with the aim of securing investment. These amendments are expected to
benefit issuers by expanding the range of options for communicating
about their business with prospective investors without incurring the
cost of restrictions associated with general solicitation and by
allowing them to more efficiently access potential investors. These
benefits may be relatively more pronounced for small and emerging
issuers that may not have a sufficient existing angel investor network
to rely on in a Rule 506(b) or Section 4(a)(2) offering.
Costs
    We do not expect significant costs to investors due to the proposed
amendments specifying that certain limited ``demo day'' activities
would not be deemed general solicitation because the proposed exclusion
significantly restricts permissible activities of ``demo day''
sponsors. In particular, under the proposed amendment, the sponsor of
the seminar or meeting would not be allowed to make investment
recommendations or provide investment advice to attendees of the event;
engage in any investment negotiations between the issuer and investors
attending the event; charge attendees of the event any fees, other than
reasonable administrative fees; receive any compensation for making
introductions between event attendees and issuers or for investment
negotiations between such parties; or receive any compensation with
respect to the event that would require registration of the sponsor as
a broker-dealer or an investment advisor. These restrictions are
expected to mitigate the risk that investors would be improperly
induced into an investment as a result of misleading information or
sales pressure from financially incentivized ``demo day'' sponsors.
Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments are expected to make it easier for issuers
to participate in ``demo days'' without incurring the costs of
restrictions associated with general solicitation. To the extent that
the proposed amendments encourage some additional issuers to
participate in demo days, and such participation facilitates their
efforts to raise capital, issuers might realize capital formation
benefits. Overall, the effects of the amendments on efficiency,
competition, and capital formation are expected to be modest because
issuers may offer securities to the same individuals and groups other
than through a demo day.
Reasonable Alternatives
    As an alternative, we could have proposed a definition of general
solicitation that would either narrow or expand the scope of
communications that constitute general solicitation. The alternative of
narrowing (expanding) the scope of communications that constitute
general solicitation, either through changes to the examples of

communications that constitute general solicitation or through a
definition of general solicitation, would provide greater (lower)
flexibility to issuers with regard to the manner of communicating
offers of securities and reaching prospective investors, potentially
expanding (limiting) the ability of issuers that lack an established
network of investors with whom they have a pre-existing relationship to
raise capital through an exempt offering. Narrowing (expanding) the
scope of communications that constitute general solicitation also could
expose investors, including non-accredited investors, to more (fewer)
offers of securities from prospective issuers. Additional offers of
securities might reduce investor search costs for investors eligible
and seeking to invest in the offerings of issuers that engage in
solicitation, enabling investors to potentially make more informed
decisions and allocate capital more efficiently to a broader range of
investment opportunities, and vice versa. The alternative of providing
a specific definition of general solicitation might incrementally
reduce the compliance costs of issuers to determine whether
communications that fall outside the list of provided examples
constitute general solicitation. However, this alternative could
decrease the flexibility for issuers to consider all relevant facts and
circumstances in determining whether a particular communication
constitutes general solicitation.
    As another alternative, we could simplify the existing framework
for all exempt offerings by deregulating offers, thus eliminating
general solicitation restrictions, and focusing the requirements on
sales.\389\ This alternative would significantly expand the options for
pre-offering and offering-related communications, giving issuers
greater flexibility and reducing costs compared to the proposed
amendments, some of which expand pre-offering communications but impose
additional conditions (such as filing and legending). However, by
shifting the investor protections to requirements for sales and anti-
fraud provisions, this alternative might result in increased risk of
confusion among those investors that rely on information in offers and
fail to compare the information in offers to disclosures required in
conjunction with a sale.
---------------------------------------------------------------------------

    \389\ See CrowdCheck Letter.
---------------------------------------------------------------------------

Request for Comment
    92. What are the economic effects of the proposed ``demo day''
amendments? Would the proposed amendments encourage greater reliance on
''demo days''? Would the proposed amendment benefit issuers and
investors?
    93. Should we prescribe a definition of general solicitation that
either narrows or broadens the scope of that term? If so, how should we
define the term, and what would be the economic effects of adopting
such a definition?
b. Offering Communications
    As discussed in greater detail in Section II.B.2 above, we are
proposing a generic testing-the-waters exemption that would permit an
issuer to use testing-the-waters materials for an offer of securities
prior to making a determination as to the exemption under which the
offering may be conducted. In connection with this exemption, we are
proposing to require that the generic solicitation materials be made
publicly available as an exhibit to the offering materials filed with
the Commission, if the Regulation A or Regulation Crowdfunding offering
is commenced within 30 days of the generic solicitation. Further, if
the issuer sells securities under Rule 506(b) within 30 days of the
generic solicitation to non-accredited investors, the issuer would be
required to provide such investors with any written communication used
under the proposed generic testing-the-waters exemption. We are also
proposing to expand permissible offering communications under
Regulation Crowdfunding by permitting testing-the-waters prior to
filing a Form C with the Commission. Under the proposed rule, issuers
would be required to use legends and to include any solicitation
materials as an exhibit to Form C that is filed with the Commission.
    The economic effects of the proposed amendments would be limited to
the extent that issuers are reluctant to test-the-waters in reliance on
the proposed amendments, for example, as a result of the proposed
filing requirements or applicable state restrictions.
Benefits
    In general, allowing issuers to gauge interest through expanded
testing-the-waters is expected to reduce uncertainty about whether an
offering could be completed successfully. Allowing solicitation prior
to filing would enable issuers to determine market interest in their
securities before incurring the costs of preparing and filing an
offering statement. Testing-the-waters before filing can reduce the
risk of a failed offering and the associated reputational costs. If,
after testing-the-waters, the issuer is not confident that it would
attract sufficient investor interest, the issuer could consider
modifying offering plans or the target amount of the offering,
reconsidering the contemplated offering structure and terms, postponing
the offering, or exploring alternative methods of raising capital. This
option might be useful for smaller issuers, especially early stage
issuers, first-time issuers, issuers in lines of business characterized
by a considerable degree of uncertainty, and other issuers with a high
degree of information asymmetry. The ability to engage in testing-the-
waters communications might attract certain issuers--those that may be
uncertain about the prospects of raising investor capital--to consider
using an exempt offering, thus potentially promoting competition for
investor capital as well as capital formation. Importantly, the
proposed amendments could benefit issuers that find after testing-the-
waters that their offering is unlikely to be successful and choose not
to proceed with an offering, thus saving disclosure preparation and
filing costs (including, where applicable, the cost of review or audit
of financial statements by an independent accountant), lowering the
risk of disclosure of potentially sensitive proprietary information to
competitors and mitigating the reputational cost from a failed
offering.
    The proposed amendments to enable issuers to engage in generic
test-the-waters communications prior to determining the specific
exemption type might provide additional flexibility to gauge market
interest that is likely to be especially valuable for smaller, less
well known issuers that may lack an accurate understanding of
prospective investor demand for their securities. Similarly, the
proposed amendments to permit issuers to solicit investor interest,
orally or in writing, in Regulation Crowdfunding offerings are expected
to benefit issuers by enabling them to gauge investor interest in a
prospective Regulation Crowdfunding offering before incurring the full
costs of preparing and filing an offering circular.
    The requirement in the proposed test-the-waters exemptions to
include legends is expected to provide notice to investors of the
preliminary nature of these communications. We propose to require
issuers that proceed with an offering under Regulation A or Regulation
Crowdfunding after testing-the-waters to include as exhibits to the
offering statement any written materials used in a generic test-the-
waters communication within 30 days prior to the filing of a Regulation
A or Regulation Crowdfunding offering statement. We also propose to
require issuers to include as exhibits any

Regulation Crowdfunding test-the-waters materials. Combined, these
requirements are expected to provide informational benefits to
investors and allow them to compare the solicitation materials with the
offering statement disclosures, leading to potentially more informed
investment decisions. The proposed requirement to provide materials
used for a generic test-the-waters solicitation to any non-accredited
investors in a Rule 506(b) offering that occurs within 30 days of such
solicitation is expected to incrementally enhance the ability of
investors in the offering to make informed decisions.
    The proposed amendments expanding communications permissible under
Regulation Crowdfunding after the filing of Form C are expected to
benefit issuers by allowing greater flexibility to communicate with
prospective investors about the offering. Being able to communicate
with prospective investors outside the communications channels provided
by the online crowdfunding platform is expected to facilitate the
efforts of issuers to solicit prospective investors and advertise the
offering, potentially resulting in a higher rate of offering success
and more capital formation, particularly for lesser known, small
issuers. Oral off-portal communications about the terms of the offering
might incrementally reduce costs of searching for information about
offering terms for some prospective investors (e.g., investors that may
have prior knowledge of, or be customers of, the issuer) that would
prefer to find out about offering terms without first reviewing the
crowdfunding platform's website and communications channels. Should
such prospective investors decide to invest in an offering, they would
still have to do so through the portal and would have access therein to
the filed offering materials, other offering information, and investor
education materials required by Regulation Crowdfunding. Communications
intended to drive traffic to the intermediary's website, and therefore
to the issuer's offering, would continue to be governed by the
Regulation Crowdfunding advertising restrictions.
Costs
    We recognize that there might also be potential costs associated
with expanding the use of testing-the-waters communications in
connection with a contemplated Regulation Crowdfunding offering or
another exempt offering. If the contents of the offering circular
differ substantively from the material distributed through test-the-
waters communications, and if investors rely on test-the-waters
materials when making investment decisions, this might lead investors
to make less informed investment decisions. For example, if the
information conveyed through test-the-waters communications is an
incomplete representation of the risk of an offering, and if investors
fail to read the subsequent offering circular before making the
investment decision, they might make a less informed investment
decision. These investor costs might be exacerbated to the extent that
investors in Regulation Crowdfunding offerings are likely to be small
and relatively less sophisticated and thus less equipped to process
information contained in test-the-waters communications.
    These potential investor protection concerns are expected to be
alleviated by several factors:
     The application of the anti-fraud provisions of the
federal and state securities laws; \390\
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    \390\ Test-the-waters communications under Regulation
Crowdfunding would be treated as offers of securities, similar to
test-the-waters communications under Regulation A, Section 5(d), and
the recently adopted Rule 163B.
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     For issuers that proceed with a Regulation Crowdfunding
offering:
    [cir] The availability of an offering circular, allowing investors
to review disclosures compliant with Regulation Crowdfunding prior to
investing;
    [cir] The proposed requirement that written test-the-waters
materials be included as an exhibit to Form C, allowing the public and
Commission staff to review written solicitation materials and compare
them to the contents of the offering circular;
    [cir] The availability of investor education materials required to
be provided by crowdfunding intermediaries before investing; and
    [cir] The continued application of other provisions of Regulation
Crowdfunding, including ones expected to provide additional investor
protection, such as investment limits, offering limits, crowdfunding
intermediary requirements, periodic reporting requirements, and issuer
eligibility restrictions; and
     The reputational incentives of issuers and intermediaries,
as well as the risk of litigation (particularly for issuers and
intermediaries that have assets and that engage in test-the-waters
communications).
    Further, concerns about costs of expanding test-the-waters
communications to investors should be considered in the context of the
baseline. Investors in Regulation Crowdfunding offerings today might
perform an incomplete analysis of the offering risks if they base their
investment decision on the promotional video or summary information
from the crowdfunding platform's campaign page and fail to review the
entire contents of the offering materials. Low investment minimums
(many around $100, and some as low as $25) might make it optimal for
investors to allocate a limited amount of time to due diligence
regarding prospective crowdfunding investments. While some unscrupulous
issuers might seek to disseminate misleading information through test-
the-waters communications, such issuers or intermediaries already could
engage in misleading communications today, and such misleading offering
communications would remain in violation of the anti-fraud provisions
of the federal securities laws.
    The proposed amendments to Rule 204 of Regulation Crowdfunding
expanding the ability to advertise the ongoing offering and discuss it
in off-portal oral and written communications with prospective
investors might similarly result in some investors receiving incomplete
information about the offering from the issuer, and, if such investors
fail to review the offering circular and other filed offering
materials, potentially making less well informed investment decisions.
    Several factors are expected to mitigate potential costs to
investors due to expanded off-portal communications under the proposed
amendments:
     The availability of the offering circular containing
disclosures compliant with Regulation Crowdfunding prior to investing,
as well as the continued applicability of Rule 204 requirements, such
as the requirement to include a link directing the potential investor
to the intermediary's platform where the Form C disclosure document is
available;
     The application of anti-fraud provisions of federal and
state securities laws;
     The availability of investor education materials required
to be provided by funding portals;
     The other provisions of Regulation Crowdfunding, including
ones expected to provide additional investor protection, such as
investment limits, offering limits, crowdfunding intermediary
requirements, periodic reporting requirements, and issuer eligibility
restrictions, continue to apply; and
     The reputational incentives of issuers, as well as the
risk of litigation (for issuers with assets).
    The proposed amendments that allow issuers to engage in testing-
the-waters prior to determining the specific

exemption type might lead to investor confusion with regard to the
regulatory framework applicable to the contemplated offering,
particularly for non-accredited investors that may be less
sophisticated. However, for issuers that proceed with an exempt
offering, the investor protections of the respective exemption would
continue to apply. Importantly, because investors would be able to
review the offering circular that clearly delineates the exemption
relied upon for issuers that proceed with a Regulation A or Regulation
Crowdfunding offering, investors are expected to receive the disclosure
necessary to reach an informed investment decision. Furthermore, should
an issuer elect to proceed with a Regulation A or Regulation
Crowdfunding offering within 30 days of a generic testing-the-waters
communication, the test-the-waters materials must be filed as an
exhibit to the offering statement, enabling investors and the
Commission staff to review test-the-waters materials and compare them
against the disclosures in the offering statement. In cases where an
issuer decides to proceed with a Rule 506(c) offering after testing-
the-waters, non-accredited investors that might have received
solicitations would remain restricted from participation in a Rule
506(c) offering.
    For issuers that choose not to proceed with a Rule 506(c),
Regulation A, or Regulation Crowdfunding offering following testing-
the-waters for an exempt offering conducted under the proposed
amendments, but that choose instead to undertake an exempt offering
under an exemption that does not permit general solicitation, the
proposed amendments are not expected to have significant effects on
investors in such a private placement or registered offering.
Restrictions specific to private placements, including a restriction on
general solicitation for a Rule 506(b) or a Section 4(a)(2) offering
would continue to apply in that case. In cases of issuers proceeding
with a registered offering, gun jumping provisions of the Securities
Act and other investor protections associated with registered offerings
(including staff review, Section 11 liability, disclosure requirements
in the registration statement, and Exchange Act reporting requirements)
would continue to apply.
    Because the use of test-the-waters communications would remain
voluntary under the proposed amendments, we anticipate that issuers
would elect to rely on test-the-waters communications only if the
benefits anticipated by issuers justify the expected costs. Issuers
that elect to test-the-waters under the proposed amendments might incur
costs, including direct costs of identifying prospective investors and
developing test-the-waters solicitation materials; indirect costs of
potential disclosure of proprietary information to solicited investors;
and in some instances, potential legal costs associated with liability
arising from test-the-waters communications with prospective investors.
We note that issuers that proceed with an exempt offering without
testing-the-waters similarly might incur costs of searching and
soliciting investors, either on their own or through an intermediary.
Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments to expand permissible testing-the-waters
prior to exempt offerings are expected to facilitate capital formation
for small issuers by giving prospective issuers that might not
otherwise consider an exempt offering a low-cost method of assessing
investor interest in a potential offering and efficiently adjusting
their financing strategy to reflect information about market demand.
These effects are expected to be particularly significant for issuers
contemplating Regulation Crowdfunding offerings that presently have to
incur the compliance costs of preparing and filing Form C and the risk
of disclosure of proprietary information to competitors, as well as the
reputational risk of a failed offering, and do not have a cost-
effective way of gauging investor demand. Similarly, the proposed
amendments to expand permissible issuer communications in Regulation
Crowdfunding offerings might promote capital formation in the
Regulation Crowdfunding market by allowing issuers to more effectively
reach prospective investors as part of marketing the offering and to
more efficiently structure the offering based on feedback from
prospective investors. Combined, these amendments might make it easier
for the smallest issuers with low investor recognition and limited or
no securities offering experience to access the Regulation Crowdfunding
market or issue securities pursuant to another offering exemption,
resulting in potential positive effects on competition. To the extent
that these amendments result in switching of issuers between offering
exemptions, the net effects on capital allocation might be modest.
However, in that scenario some issuers might still benefit from a lower
cost of capital if they are able to obtain preliminary information that
helps them to identify the most cost-effective offering method and
terms that are likely to attract sufficient investor demand.
Reasonable Alternatives
    The proposed amendments permit test-the-waters communications in
connection with Regulation Crowdfunding offerings prior to the filing
of Form C. As an alternative, we could permit test-the-waters
communications both before and after the filing of Form C.\391\ This
alternative would provide greater flexibility to issuers compared to
the proposed amendments, potentially increasing the likelihood that the
issuer would raise the desired amount of capital. This option might be
most useful for smaller and early stage issuers. This alternative might
also require investors to expend additional effort to compare test-the-
waters communications after the filing of an offering statement with
the filed offering statement disclosures. However, the incremental
economic effects of this alternative on investors and issuers might be
limited because of the advertising permitted under Rule 204 and because
the incremental costs of filing test-the-waters materials might
discourage the use of testing-the-waters after the filing of Form C
under this alternative.
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    \391\ Under Regulation A, testing-the-waters is permitted before
and after the filing of Form 1-A before the qualification of Form 1-
A. However, differently from Regulation Crowdfunding, Regulation A
issuers are not able to accept investor commitments between the
filing and the qualification of Form 1-A. Under Regulation
Crowdfunding, issuers may accept investor commitments upon the
filing of Form C because Commission qualification is not applicable
to Form C. Thus, permitting test-the-waters communications before
the filing of Form C would be more consistent with the test-the-
waters communications permissible under Regulation A, before
investor commitments may be accepted.
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    We are proposing to extend the filing requirement to written test-
the-waters communications for issuers that proceed with a Regulation
Crowdfunding offering, consistent with the requirements of Rule 255 of
Regulation A. As an alternative, we could allow test-the-waters
communications prior to a contemplated Regulation Crowdfunding offering
but not impose a filing requirement. As another alternative, we could
waive the filing requirement for test-the-waters communications prior
to any exempt offering, including a Regulation A offering. Issuers that
have elected to use testing-the-waters communications have already
incurred the cost of preparing the materials, so the incremental direct