smaller reporting company regime, we would expect to consider
whether corresponding changes to the thresholds included in Rule
12g5-1(a)(7) should also be made, taking into account how the
Regulation A regime is working.
    \202\ Id.
    \203\ 15 U.S.C. 78l(g).
    \204\ Id. See Section II.E.4.b(2). below for a discussion on
suspension or termination of the duty to file ongoing reports
pursuant to Rule 257.
    \205\ See fn. 726 below and accompanying text.
---------------------------------------------------------------------------

    In determining to provide a conditional exemption from the
provisions of Section 12(g), we have considered a number of factors.
First, we believe the conditional exemption we are adopting today is
consistent with the intent behind the original enactment of Section
12(g) to the extent it ensures that relevant information about issuers
will be made routinely available to investors and the marketplace.\206\
Second, we believe the additional requirement that Regulation A issuers
use a registered transfer agent will provide an important investor
protection in this context. The use of a transfer agent registered
under the Exchange Act, which, in the absence of a conditional
exemption from the provisions of Section 12(g), would be required of
issuers when they register under the Exchange Act, will provide added
comfort that securityholder records and secondary trades will be
handled accurately. Third, we believe that phasing out the exemption
once companies grow and expand their shareholder base is consistent
with the intent behind Title IV of the JOBS Act, which was enacted to
facilitate smaller company capital formation.\207\ Finally, we are
concerned that, as commenters suggested, the lack of an exemption from
mandatory registration under the Exchange Act may undermine the utility
of amended Regulation A either by discouraging use of the exemption
altogether or by dissuading issuers from making sales to non-accredited
investors in Regulation A offerings in an effort to avoid the
application of Section 12(g).
---------------------------------------------------------------------------

    \206\ Section 12(g) was originally enacted by Congress as a way
to ensure that investors in over-the-counter securities about which
there was little or no information, but which had a significant
shareholder base, were provided with ongoing information about their
investment. See, generally, Report of the Special Study of
Securities Markets of the Securities and Exchange Commission, House
Document No. 95, House Committee on Interstate and Foreign Commerce,
88th Cong., 1st Sess. (1963), at 60-62.
    \207\ See, e.g., H.R. Rep. No. 112-206 (2011), at 4 (``Small
companies are critical to economic growth in the United States.
Amending Regulation A to make it viable for small companies to
access capital will permit greater investment in these companies,
resulting in economic growth and jobs.'').
---------------------------------------------------------------------------

    While we believe, as we noted in the Proposing Release, that the
Section 12(g) record holder threshold continues to provide an important
baseline above which issuers should generally be subject to the
disclosure obligations of the Exchange Act, we are persuaded that this
need not be the case where an issuer is a smaller company that is
subject to, and current in, its periodic reporting obligations under
Tier 2 of Regulation A and engages the services of a transfer agent
that is registered with the Commission under the Exchange Act.
Regulation A, as amended in the final rules, requires issuers that
conduct Tier 2 offerings to provide periodic disclosure to their
investors and updates for certain important corporate events.\208\
While such reports provide less information than is required of an
Exchange Act reporting company, we believe a conditional exemption from
registration under Section 12(g) is warranted for smaller Tier 2
issuers since such companies are required to provide investors with
ongoing information about themselves and the securities offered, and
the ongoing reporting regime we are adopting today is more
appropriately tailored for such companies. Additionally, in order to
address situations where an issuer that conducts a Tier 2 offering
could remain subject to its ongoing reporting requirements indefinitely
and thereby avoid having to comply with Exchange Act reporting
requirements regardless of the size of its shareholder base, we note
that the exemption from Section 12(g) is conditional and that an issuer
that does not meet its conditions, including the limitation on public
float and annual revenues, will be required to register under the
Exchange Act.
---------------------------------------------------------------------------

    \208\ See Rule 257.
---------------------------------------------------------------------------

C. Offering Statement

    Section 3(b)(2)(G)(i) gives the Commission discretion to require an
offering statement in such form and with such content as it determines
necessary in the public interest and for the protection of
investors.\209\ The provision permits electronic filing of

offering statements, and provides a non-exhaustive list of potential
content that may be required in the offering statement, including
audited financial statements, a description of the issuer's business
operations, financial condition, corporate governance principles, use
of investor funds, and other appropriate matters.
---------------------------------------------------------------------------

    \209\ 15 U.S.C. 77c(b)(2)(G)(i).
---------------------------------------------------------------------------

1. Electronic Filing; Delivery Requirements
a. Proposed Rules
    Consistent with the language of Section 3(b)(2)(G)(i), we proposed
to require Regulation A offering statements to be filed with the
Commission electronically on EDGAR.\210\ We further proposed to amend
Form 1-A, but to continue to have the form consist of three parts:
---------------------------------------------------------------------------

    \210\ See proposed Rule 252(e).
---------------------------------------------------------------------------

     Part I: An eXtensible Markup Language (XML) based fillable
form;
     Part II: A text file attachment containing the body of the
disclosure document and financial statements; and
     Part III: Text file attachments, containing the
signatures, exhibits index, and the exhibits to the offering
statement.\211\
---------------------------------------------------------------------------

    \211\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------

    We further proposed to require all other documents required to be
submitted or filed with the Commission in conjunction with a Regulation
A offering, such as ongoing reports, to be submitted or filed
electronically on EDGAR.\212\
---------------------------------------------------------------------------

    \212\ Id.
---------------------------------------------------------------------------

    Additionally, we proposed an access equals delivery model for
Regulation A final offering circulars.\213\ Under the proposed rules,
issuers would be required to include a notice in any preliminary
offering circular used that would inform potential investors that the
issuer may satisfy its delivery obligations for the final offering
circular electronically.\214\ As with registered offerings, we also
proposed aftermarket delivery obligations for dealers that would be
satisfied if the final offering circular is filed and available on
EDGAR and the appropriate notice was given by the dealer.\215\
---------------------------------------------------------------------------

    \213\ Id.
    \214\ See proposed Rule 254(a).
    \215\ As proposed, a dealer would generally be required to
deliver a copy of the current offering circular to purchasers for
all sales that occur within 90 calendar days after qualification,
although this requirement would be satisfied when the final offering
circular is filed and available on EDGAR and the dealer has
otherwise complied with the obligation to deliver a notice of sales
to the purchaser not later than two business days after completion
of such sale. See proposed Rules 251(d)(2)(ii)-(iii).
---------------------------------------------------------------------------

    Consistent with prior Commission releases on the use of electronic
media for delivery purposes, we proposed that ``electronic-only''
offerings of Regulation A securities would not be prohibited, but an
issuer and its participating intermediaries would have to obtain the
consent of investors to the electronic delivery of:
     The preliminary offering circular and other information,
but not the final offering circular, in instances where, upon
qualification, the issuer plans to sell Regulation A securities based
on offers made using a preliminary offering circular; and
     all documents and information, including the final
offering circular, when the issuer sells Regulation A securities based
on offers conducted during the post-qualification period using a final
offering circular.\216\
---------------------------------------------------------------------------

    \216\ See Proposing Release, at Section II.C.1.
---------------------------------------------------------------------------

    We further proposed to maintain the existing requirements in
Regulation A, which require dealers to deliver a copy of the current
offering circular to purchasers for sales that take place within 90
calendar days after qualification.\217\ We proposed to update and amend
Rule 251(d)(2)(i) \218\ to require issuers and participating broker-
dealers to deliver only a preliminary offering circular to prospective
purchasers \219\ at least 48 hours in advance of sale when a
preliminary offering circular is used during the prequalification
period to offer such securities to potential investors. We also
proposed to continue to require a final offering circular to accompany
or precede any written communication that constitutes an offer in the
post-qualification period.\220\
---------------------------------------------------------------------------

    \217\ See proposed Rule 251(d)(2)(iii).
    \218\ 17 CFR 230.251(d)(2)(i) (2014).
    \219\ See proposed Rule 251(d)(2)(i).
    \220\ See proposed Rule 251(d)(1)(iii).
---------------------------------------------------------------------------

    In addition to the revised delivery requirements discussed above,
we proposed to add a provision analogous to Rule 173,\221\ which would
require issuers, underwriters, and dealers, not later than two business
days after completion of a sale, to provide purchasers with a copy of
the final offering circular or a notice stating that the sale occurred
pursuant to a qualified offering statement.\222\ As proposed, the
notice must include the Web site address \223\ where the final offering
circular, or the offering statement of which such final offering
circular is part, may be obtained on EDGAR and contact information
sufficient to notify a purchaser how it may request and receive a final
offering circular from the issuer.\224\
---------------------------------------------------------------------------

    \221\ 17 CFR 230.173.
    \222\ See proposed Rule 251(d)(2)(ii).
    \223\ In the case of an electronic-only offering, the notice
must include an active hyperlink to the final offering circular or
to the offering statement of which such final offering circular is
part.
    \224\ See proposed Rule 251(d)(2)(ii).
---------------------------------------------------------------------------

    We further proposed to allow an issuer to withdraw an offering
statement, with the Commission's consent, if none of the securities
that are the subject of such offering statement has been sold and such
offering statement is not the subject of a Commission order temporarily
suspending a Regulation A exemption. Under the proposed rules, the
Commission also would be able to declare an offering statement
abandoned if the offering statement has been on file with the
Commission for nine months without amendment and has not become
qualified. These withdrawal and abandonment procedures are similar to
the ones that apply to registration statements under the Securities
Act.\225\
---------------------------------------------------------------------------

    \225\ See Securities Act Rule 477, 17 CFR 230.477, and Rule 479,
17 CFR 230.479.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    No commenters opposed the proposed requirement that issuers be
required to file offering statements and related material
electronically with the Commission on EDGAR, while two commenters
expressly supported such a requirement.\226\ One commenter recommended
only requiring preliminary or final offering circular delivery 48 hours
in advance of sale for initial public offerings and not for offerings
by issuers that are already subject to Tier 2 ongoing reporting
requirements.\227\ This commenter also recommended eliminating dealer
offering circular delivery requirements for Tier 2 issuers that are
subject to ongoing reporting.
---------------------------------------------------------------------------

    \226\ See MCS Letter; OTC Markets Letter.
    \227\ Paul Hastings Letter.
---------------------------------------------------------------------------

    A few commenters opposed an access equals delivery model of final
offering circular delivery.\228\ These commenters raised concerns about
the perceived challenge of finding these materials on EDGAR and not
requiring delivery 48 hours in advance of sale in all circumstances.
---------------------------------------------------------------------------

    \228\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    One commenter recommended, in addition to requiring electronic
filing on EDGAR, requiring issuers to maintain a corporate Web site
where the public may access copies of all non-confidential filings in a
timely manner so that investors not familiar with EDGAR may access the
most complete information provided to the

Commission.\229\ In addition to suggested changes to the filing process
itself, several commenters encouraged the Commission to find ways to
reduce the staff's review time for offering statements.\230\
---------------------------------------------------------------------------

    \229\ Ladd Letter 2.
    \230\ Frutkin Law Letter; Heritage Letter (suggesting that the
review time needs to be reduced by two-thirds); Letter from Gregory
S. Fryer, Esq., Partner, Verrill Dana LLP, February 28, 2014
(``Verrill Dana Letter 1'') (recommending providing guidance to
issuers, staff training, and more discretion to the staff to make
materiality determinations and to work informally with issuers);
Letter from Ted J. Coombs, Chief Technology Officer, Workers On
Call, March 24, 2014 (``WOC Letter'').
---------------------------------------------------------------------------

c. Final Rules
(1) Filing Requirements
    We are adopting provisions for electronic filing and delivery
requirements in the final rules for Regulation A substantially as
proposed.\231\ We agree with commenters that support requiring
electronic filing of offering and related materials and believe that
this requirement will ultimately benefit issuers and investors by
streamlining the offering process. As adopted, issuers must file their
Regulation A offering statements with the Commission electronically on
EDGAR.\232\ Further, as proposed, we are amending Form 1-A to consist
of the following three parts:
---------------------------------------------------------------------------

    \231\ In conjunction with the adoption of final rules for
electronic filing and delivery, we are making clarifying revisions
to the proposed rules that renumber some of the proposed provisions
in the final rules. See, e.g., Rule 251(e), (f) (originally proposed
Rules 252(c), (e), respectively).
    \232\ See Rule 101(a)(vii), (xvii) of Regulation S-T, 17 CFR
232.101(a)(xvii); see also Rule 251(f). As proposed, and in
conjunction with this change, Item 101(c)(6) of Regulation S-T (17
CFR 232.101(c)(6)) is revised so that it no longer prohibits
electronic submission of filings related to Regulation A offerings.
---------------------------------------------------------------------------

     Part I: An eXtensible Markup Language (XML) based fillable
form, which captures key information about the issuer and its offering
using an easy to complete online form, similar to Form D, with drop-
down menus, indicator boxes or buttons, and text boxes, and assists
issuers in determining their ability to rely on the exemption. The XML-
based fillable form will provide a convenient means of assembling and
transmitting information to EDGAR, without requiring the issuer to
purchase or maintain additional software or technology; \233\
---------------------------------------------------------------------------

    \233\ Part I (Notification) of Form 1-A. As discussed more fully
in Section II.C.3.a. below, the cover page and Part I of current
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
---------------------------------------------------------------------------

     Part II: A text file attachment containing the body of the
disclosure document and financial statements, formatted in HyperText
Markup Language (HTML) or American Standard Code for Information
Interchange (ASCII) to be compatible with the EDGAR filing system;
\234\ and
---------------------------------------------------------------------------

    \234\ Part II (Offering Circular) of Form 1-A. See discussion in
Section II.C.3.b. below.
---------------------------------------------------------------------------

     Part III: Text file attachments, containing the
signatures, exhibits index, and the exhibits to the offering statement,
formatted in HTML or ASCII to be compatible with the EDGAR filing
system.\235\

    \235\ Part III (Exhibits) of Form 1-A. See discussion in Section
II.C.3.c. below.
---------------------------------------------------------------------------

As proposed and adopted, all other documents required to be submitted
or filed with the Commission in conjunction with a Regulation A
offering, such as ongoing reports, must generally be submitted or filed
electronically on EDGAR.\236\ As materials will be available on EDGAR,
we do not see a need to separately require issuers to maintain a
corporate Web site where the public may access all non-confidential
filings. Issuers may, however, elect to provide the filings on their
Web site or to their EDGAR filing page. Consistent with current
Regulation A, there are no filing fees associated with the Regulation A
filing and qualification process.
---------------------------------------------------------------------------

    \236\ For a discussion on the ongoing reporting requirements,
see Section II.E. below.
---------------------------------------------------------------------------

    We believe the approach to electronic filing adopted today will be
both practical and useful for issuers of Regulation A securities,
investors in such securities, and other market participants. Issuers
will be able to maintain better control over their filing process,
reduce the printing costs associated with filings, obtain immediate
confirmation of acceptance of an offering statement, and ultimately
save time in the qualification process. Investors will gain real-time
access to the information contained in Regulation A filings.\237\ We
anticipate that the efficiency of the Regulation A market should
improve with the increased accessibility of information about
Regulation A issuers and offerings. Additionally, as with registered
offerings, electronic filing on EDGAR will allow for more efficient
storing, processing, and disseminating of Regulation A filings than
paper filings, which should improve the efficiency of the staff review
and qualification processes.
---------------------------------------------------------------------------

    \237\ Investors would not, however, have immediate access to
non-public submissions of draft offering statements. See discussion
in Section II.C.2. below.
---------------------------------------------------------------------------

    Electronic filing also will facilitate the capture of important
financial and other information about Regulation A issuers and
offerings that will enable the Commission and market participants to
analyze any market that develops in Regulation A securities, including,
for example, information about issuer size, issuer location, key
financial metrics, summary information about securities offered and
offering amounts, the jurisdictions in which offerings take place, and
expenses associated with Regulation A offerings.\238\
---------------------------------------------------------------------------

    \238\ The specific disclosure requirements included in the XML-
based fillable form are discussed more fully in Section II.C.3.a.
below.
---------------------------------------------------------------------------

    We appreciate that requiring EDGAR filing will impose some new
costs on issuers, as addressed more fully in the Economic Analysis
section of the release.\239\ We do not, however, believe that the
incremental cost associated with the EDGAR filing requirements
justifies maintaining a paper-only filing requirement. On the contrary,
we believe that the potential additional cost to issuers associated
with the EDGAR filing requirement should be minimal and electronic
filing on EDGAR would eliminate any processing delays and costs
otherwise associated with the current paper filing system, such as
printing or mailing costs.
---------------------------------------------------------------------------

    \239\ See Section III. below.
---------------------------------------------------------------------------

(2) Delivery Requirements
    We are adopting, as proposed, an access equals delivery model for
Regulation A final offering circulars when sales are made on the basis
of offers conducted during the prequalification period and the final
offering circular is filed and available on EDGAR. The expanded use of
the Internet and continuing technological developments suggest that we
should update the final offering circular delivery method for
Regulation A in a manner that is consistent with similar updates to
delivery requirements for registered offerings.\240\ Contrary to the
views of some commenters,\241\ we do not believe that access to EDGAR
generally has proven to be a challenge for investors in registered
offerings since the adoption of the Securities Offering Reform Release
in 2005. We also do not believe that it will be a challenge for
investors under Regulation A or raise investor protection concerns,
particularly in light of our final delivery requirements (including,
where applicable, the inclusion of hyperlinks to offering materials on
EDGAR that must be provided to investors by issuers and
intermediaries).\242\ Therefore, where sales of Regulation A securities
occur

after qualification on the basis of offers made using a preliminary
offering circular, issuers and intermediaries can presume that
investors have access to the Internet and may satisfy their delivery
requirements for the final offering circular by filing it on
EDGAR.\243\ Issuers are, however, required to include a notice in any
preliminary offering circular that will inform potential investors that
the issuer may satisfy its delivery obligations for the final offering
circular electronically.\244\
---------------------------------------------------------------------------

    \240\ See Securities Offering Reform, Rel. No. 33-8591.
    \241\ See fn. 228 above.
    \242\ See Rule 251(d)(2), Rule 254(a), and Rule 255(b) and (d).
    \243\ Cf. Rel. No. 33-8591, at 244.
    \244\ See Rule 254(a).
---------------------------------------------------------------------------

    Further, as proposed, ``electronic-only'' offerings of Regulation A
securities will be permitted under the final rules, provided that
issuers and intermediaries comply with relevant Commission
guidance.\245\ Specifically, in such offerings, an issuer and its
participating intermediaries must obtain the consent of investors to,
or otherwise be able to evidence the receipt of, the electronic
delivery of:
---------------------------------------------------------------------------

    \245\ An electronic-only offering is an offering in which
investors are permitted to participate only if they agree to accept
the electronic delivery of all documents and other information in
connection with the offering. See Rel. No. 34-37182 (May 9, 1996)
[61 FR 24644] (Use of Electronic Media by Broker-Dealers, Transfer
Agents and Investment Advisers for Delivery of Information), Rel.
No. 34-42728 (Apr. 28, 2000) [65 FR 25843] (Use of Electronic
Media), and Rel. No. 33-7233 (Oct. 6, 1995) [60 FR 53458] (Use of
Electronic Media for Delivery Purposes).
---------------------------------------------------------------------------

     The preliminary offering circular and information other
than the final offering circular, in instances where the issuer sells
Regulation A securities based on offers made using a preliminary
offering circular; and
     all documents and information, including the final
offering circular, when the issuer sells Regulation A securities based
on offers made during the post-qualification period using a final
offering circular.
    As we noted in the Proposing Release, in light of the proposed
requirements for electronic delivery and in order to be consistent with
requirements for registered offerings, we believe it appropriate to
permit dealers, during the aftermarket delivery period, to be deemed to
satisfy their final offering circular delivery requirements if such
document is filed and available on EDGAR.\246\ We are amending Rule
251(d)(2)(ii) of existing Regulation A to make clear that dealers, like
issuers and intermediaries, can also rely on the provisions for access
equals delivery.\247\ Additionally, the amendment clarifies that a
dealer can rely on access equals delivery for a final offering circular
provided it complies with the requirements of Rule 251(d)(2)(ii). This
clarifying amendment is necessary to avoid any confusion that the final
rules could be read to impose a double delivery requirement on dealers
during the aftermarket delivery period.
---------------------------------------------------------------------------

    \246\ See Proposing Release, at Section II.C.1.
    \247\ See Rule 251(d)(2)(ii). Notwithstanding the final delivery
requirements, broker-dealers remain subject to the anti-fraud
provisions of Section 15 of the Exchange Act.
---------------------------------------------------------------------------

    Separately, we are modifying the terms of Rule 251(d)(2)(ii) to
make it more consistent with the dealer delivery requirements for
registered offerings under Securities Act Rule 174.\248\ As proposed,
the rules would have required dealers in all circumstances to deliver a
copy of the current offering circular to purchasers for sales that take
place within 90 calendar days after qualification.\249\ Consistent with
the suggestion of one commenter,\250\ we are revising the proposed
rules to more closely align the Regulation A delivery requirements with
those required in Securities Act Rules 174(b) and (d).\251\ We,
therefore, are adopting the proposed 90 calendar day dealer delivery
requirement, but eliminating the dealer delivery requirement when the
issuer is subject immediately prior to filing the offering statement to
Tier 2 ongoing reporting \252\ and reducing the length of the delivery
requirement to 25 calendar days after the later of the qualification
date of the offering statement or the first bona fide offering of
securities if the securities will be listed on a national securities
exchange.\253\ As adopted, the final rules reduce dealer aftermarket
delivery requirements, which should aid dealers in compliance with the
final rules.
---------------------------------------------------------------------------

    \248\ While we have made clarifying revisions to proposed Rule
251(d)(2)(iii) and renumbered it as Rule 251(d)(2)(ii), the final
rule is consistent with Rule 174, as there is no need for an analog
to Rule 174(g), which covers the dealer delivery obligations in
registered offerings by blank check companies under Rule 174(g).
Blank check companies are ineligible issuers under Regulation A. See
Rule 251(b).
    \249\ See proposed Rule 251(d)(2)(iii).
    \250\ Paul Hastings Letter.
    \251\ See 17 CFR 230.174(b), (d).
    \252\ Rule 251(d)(2)(ii)(D); see also Securities Act Rule
174(b).
    \253\ Rule 251(d)(2)(ii)(C); see also Securities Act Rule
174(d).
---------------------------------------------------------------------------

    The final rules also update and amend Rule 251(d)(2)(i) to align
with changes in the prospectus delivery requirements for registered
offerings that have occurred since these requirements were last updated
in Regulation A.\254\ We believe the delivery of the preliminary
offering circular to potential investors before they make an investment
decision on the basis of information provided during the
prequalification period remains an important investor protection that
the final rules should preserve, particularly in light of the proposed
expanded use of ``testing the waters'' solicitation materials to
include the period of time after non-public submission or filing of the
offering statement, as discussed further in Section II.D. below.\255\
We also recognize that updating and amending Regulation A's offering
circular delivery requirements will likely benefit market participants
by minimizing discrepancies between the requirements of broker-dealers
in Regulation A and registered offerings.
---------------------------------------------------------------------------

    \254\ See Proposing Release, at Section II.C.1.
    \255\ See Securities Offering Reform, Rel. No. 33-8591, at 245
(noting that access equals delivery is not appropriate for
preliminary prospectus delivery obligations in IPOs because it is
important for potential investors to be sent the preliminary
prospectus).
---------------------------------------------------------------------------

    We therefore are amending, as proposed, Rule 251(d)(2)(i) to
require issuers and participating broker-dealers to deliver only a
preliminary offering circular to prospective purchasers \256\ at least
48 hours in advance of sale only when a preliminary offering circular
is used during the prequalification period to offer such securities to
potential investors.\257\ To make the final rules more consistent with
the requirements of Exchange Act Rule 15c2-8(b) for issuers who already
provide continuous, ongoing information to investors and the market,
the final rules do not require an issuer or its intermediaries to
deliver a preliminary offering circular at least 48 hours in advance of
sale where the issuer is already subject to a Tier 2 reporting
obligation. In such instances, however, the issuer and its
intermediaries will otherwise remain subject to the general delivery
requirements of the rules, including compliance with the requirements
for making offers pursuant to Rule 251(d)(1) and for including a
preliminary offering circular in any solicitation materials used after
filing the offering statement with the Commission pursuant to Rule 255.
As proposed and adopted, the delivery requirements under the final
rules apply to both issuers and

participating broker-dealers.\258\ We believe these delivery
requirements are an important investor protection that should apply to
issuers in advance of sale, in addition to their intermediaries, and is
consistent with current Regulation A.\259\ We are also adopting, as
proposed, the requirement that a final offering circular must accompany
or precede any written communications that constitute offers in the
post-qualification period.\260\
---------------------------------------------------------------------------

    \256\ Prospective purchasers include any person that has
indicated an interest in purchasing the Regulation A securities
before qualification, including, but not limited to, those investors
that respond to an issuer's solicitation materials. See Rule
251(d)(2)(i).
    \257\ In accordance with time of sale provisions discussed in
Securities Offering Reform, see Rel. No. 33-8591, at p. 173 et seq.,
the final rules provide that the 48-hour delivery obligation must be
made in advance of ``sale'' rather than the ``mailing of the
confirmation of sale.'' See also Section II.D. below for a
discussion of the delivery requirements for solicitation materials
used after publicly filing the offering statement.
    \258\ Issuers may rely on reasonable assurances of delivery from
participating broker-dealers to satisfy their delivery obligations.
    \259\ See also 17 CFR 230.460 (Distribution of Preliminary
Prospectus in Registered Offerings). Additionally, with continued
improvements in information and communication technologies, we
believe direct public offerings (i.e., offerings conducted by an
issuer without the involvement of an underwriter) may become a more
attractive option for certain issuers. For that reason, it is
important that the advance preliminary offering circular delivery
requirements for participating broker-dealers apply equally to
issuers.
    \260\ See Rule 251(d)(1)(iii). For written confirmations and
notices of allocation in the post-qualification period, issuers and
intermediaries may rely on the EDGAR filing of the final offering
circular to satisfy any delivery requirements that may apply under
Rule 251(d)(1)(iii). This approach is consistent with Rule 172(a) in
the context of registered offerings. For a discussion of Rule
172(a), see Securities Offering Reform, Rel. No. 33-8591, at 251.
---------------------------------------------------------------------------

    In addition to the revised delivery requirements discussed above,
we are adopting, as proposed, final rules analogous to Securities Act
Rule 173.\261\ Rule 251(d)(2)(ii) requires issuers and participating
broker-dealers, not later than two business days after completion of
the sale, to provide the purchaser with a copy of the final offering
circular or a notice stating that the sale occurred pursuant to a
qualified offering statement.\262\ The notice must include the URL
\263\ where the final offering circular, or the offering statement of
which such final offering circular is part, may be obtained on EDGAR
and contact information sufficient to notify a purchaser where a
request for a final offering circular can be sent and received in
response.
---------------------------------------------------------------------------

    \261\ 17 CFR 230.173.
    \262\ See Rule 251(d)(2)(ii).
    \263\ As proposed, the final rules make clear that, in the case
of an electronic-only offering, the notice must include an active
hyperlink to the final offering circular or to the offering
statement of which such final offering circular is part. See Rule
251(d)(2)(ii)(E).
---------------------------------------------------------------------------

(3) Withdrawal of an Offering Statement
    The final rules will, as proposed, permit an issuer to withdraw an
offering statement, with the Commission's consent, if none of the
securities that are the subject of such offering statement have been
sold and such offering statement is not the subject of a Commission
order temporarily suspending a Regulation A exemption.\264\ The final
rules also permit, as proposed, the Commission to declare an offering
statement abandoned if the offering statement has been on file with the
Commission for nine months without amendment and has not become
qualified.\265\ These withdrawal and abandonment procedures are similar
to the ones that apply to issuers in registered offerings.
---------------------------------------------------------------------------

    \264\ See Rule 259(a). As discussed in Section II.C.5. below in
the context of qualification, we are amending the delegated
authority of the director of the Division of Corporation Finance to
permit the Division to consent to the withdrawal of an offering
statement or to declare an offering statement abandoned, as opposed
to requiring the Commission to issue an order. Rule 30-1(b)(3), 17
CFR 200.30-1(b)(3).
    \265\ See Rule 259(b).
---------------------------------------------------------------------------

2. Non-Public Submission of Draft Offering Statements
a. Proposed Rules
    We proposed to allow the non-public submission of draft offering
statements by issuers of Regulation A securities. As we noted in the
Proposing Release, such submissions would not be subject to the
statutorily-mandated confidentiality of draft initial public offering
(IPO) registration statements confidentially submitted by ``emerging
growth companies'' \266\ under Title I of the JOBS Act.\267\ Instead,
where an issuer seeks to non-publicly submit a draft offering
statement, the proposal indicated it could do so in compliance with the
Commission's Rule 83.\268\ We also sought comment on whether we should
instead adopt a new rule relating to confidential treatment of draft
offering statements in Regulation A.
---------------------------------------------------------------------------

    \266\ Under Section 2(a)(19) of the Securities Act, an
``emerging growth company'' is defined as, among other things, an
issuer that had total annual gross revenues of less than $1 billion
during its most recently completed fiscal year. 15 U.S.C.
77b(a)(19).
    \267\ Under Section 6(e)(2) of the Securities Act, confidential
submissions of draft registration statements by emerging growth
companies are protected from compelled disclosure under the Freedom
of Information Act (FOIA) (5 U.S.C. 552). There is no similar
provision under Section 3(b) of the Securities Act.
    \268\ See proposed Rule 252(f); see also Proposing Release, at
fn. 212.
---------------------------------------------------------------------------

    Under the proposed rules, issuers whose securities have not been
previously sold pursuant to a qualified offering statement under
Regulation A or an effective registration statement under the
Securities Act would be permitted to submit to the Commission a draft
offering statement for non-public review. As with the confidential
submission of draft registration statements by emerging growth
companies, all non-public submissions of draft offering statements
would be submitted via EDGAR. The initial non-public submission, all
non-public amendments thereto, and correspondence with Commission staff
regarding such submissions would be required to be publicly filed and
available on EDGAR as exhibits to the offering statement not less than
21 calendar days before qualification of the offering statement.\269\
Unlike emerging growth companies in registered offerings, which must
publicly file any confidential submissions not later than 21 calendar
days before a road show, the timing requirements for filing by issuers
seeking qualification under Regulation A would not depend on whether or
not the issuer conducts a road show.
---------------------------------------------------------------------------

    \269\ See proposed Rule 252(f).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters were generally supportive of the proposed non-public
submission process for Regulation A offerings.\270\ One commenter
recommended keeping all filings confidential other than the final
qualified version and possibly any interim version actually used in
conjunction with solicitation materials.\271\ Another commenter
recommended requiring the inclusion of a legend on non-public offering
statements so that the confidentiality of such submissions would be
automatic, without the need for a separate confidentiality
request,\272\ while another commenter recommended treating the proposed
non-public submissions the same way that draft registration statements
are treated under Title I of the JOBS Act.\273\
---------------------------------------------------------------------------

    \270\ BIO Letter; McCarter & English Letter; Paul Hastings
Letter; Richardson Patel Letter.
    \271\ Verrill Dana Letter 1.
    \272\ McCarter & English Letter. The Proposing Release indicated
that issuers seeking to non-publicly submit offering statements
should submit such statements under cover of the Commission's Rule
83, 17 CFR 200.83, which deals with confidential treatment requests.
    \273\ Milken Institute Letter (recommending that the Commission
seek Congressional authority, if necessary, to protect these
submissions from requests under the FOIA.
---------------------------------------------------------------------------

c. Final Rules
    We are adopting rules that will, as proposed, provide for the
submission of non-public draft offering statements under Regulation
A.\274\ In a change from the proposal, however, the final rules do not
require an issuer seeking non-public staff review of its draft offering
statement to submit such draft pursuant to the Commission's Rule 83.
Instead, all such draft offering statements under Rule 252(a) shall
receive non-public review. The final rules only permit

issuers whose securities have not been previously sold pursuant to a
qualified offering statement under Regulation A or an effective
registration statement under the Securities Act to submit to the
Commission a draft offering statement for non-public review. Consistent
with the treatment of draft registration statements in registered
offerings by emerging growth companies, a non-publicly submitted
offering statement must be substantially complete upon submission in
order for staff of the Division of Corporation Finance to begin its
review. All non-public submissions of draft offering statements must be
submitted via EDGAR, and the initial non-public submission, all non-
public amendments thereto, and correspondence submitted by or on behalf
of the issuer to the Commission staff regarding such submissions must
be publicly filed and available on EDGAR as exhibits to the offering
statement not less than 21 calendar days before qualification of the
offering statement.
---------------------------------------------------------------------------

    \274\ See Rule 252(d).
---------------------------------------------------------------------------

    We do not believe, as was suggested by at least one commenter,\275\
that requiring issuers to file only the qualified version of the
offering statement and any earlier versions used in conjunction with
solicitation materials would provide investors with sufficient
disclosure to make informed investment decisions. Further, in light of
the preemption of state securities laws registration requirements for
Tier 2 offerings in the final rules,\276\ the 21 calendar day filing
requirement will insure that state securities regulators are able to
require first-time issuers that non-publicly submit draft offering
statements to file such material with them for a minimum of 21 calendar
days before any potential sales to investors in their respective
states.\277\ Unlike emerging growth companies, the timing requirement
for filing by issuers seeking qualification under Regulation A does not
depend on whether or not the issuer conducts a road show or tests the
waters in a contemplated offering before qualification.\278\
---------------------------------------------------------------------------

    \275\ Verrill Dana Letter 1.
    \276\ See discussion in Section II.H. below.
    \277\ Notwithstanding the final rules that provide for the
preemption of state securities laws' registration and qualification
requirements of Tier 2 offerings, state securities regulators
retain, among other things, their authority to require the filing
with them of any documents filed with the Commission. See, e.g.,
Section 18(c)(2) of the Securities Act. The timing of filing
requirements at the state level, however, may reduce the time period
in which an offering statement and related materials are on file
with the state before Commission qualification.
    \278\ See Section II.D. below for a discussion on the timing and
requirements for the use of solicitation materials under Rule 255.
Regulation A's testing the waters provisions encompass a variety of
activities, including, but not limited to, activities that could
constitute a traditional road show.
---------------------------------------------------------------------------

    Unlike Title I of the JOBS Act, Title IV does not provide for
confidential submissions of offering statements under Regulation
A.\279\ Consequently, the requirements of the FOIA are controlling on
the scope of the Commission's ability to adopt confidentiality rules
for non-publicly submitted offering statements. We are therefore not
adopting any specific additional rule or requirement for non-public
submissions that would deem such submissions ``confidential.'' However,
where an issuer seeks confidential treatment for non-publicly submitted
offering materials, or any portion thereof, for which it believes an
exemption from the FOIA exists, it should continue to do so in
compliance with the Commission's Rule 83.\280\
---------------------------------------------------------------------------

    \279\ See fn. 267 above.
    \280\ See 17 CFR 200.83. Where an issuer seeks confidential
treatment of any information included in a publicly filed offering
statement or related materials, it should do so in compliance with
Securities Act Rule 406. See 17 CFR 230.406. See Rule 251(e)
(confidential treatment).
---------------------------------------------------------------------------

    While non-publicly submitted offering statements must be submitted
electronically on EDGAR, the Commission and its staff will not make
such offering statements publicly available on EDGAR as a matter of
course.\281\ The treatment of non-public submissions in this regard is
consistent with the Commission staff's approach to the public
availability of draft registration statements submitted by foreign
private issuers for registered offerings.\282\ As there is no statutory
basis for withholding non-public submissions from production, absent an
exemption from the FOIA,\283\ issuers that rely on our provisions for
non-public submission should be aware that the Commission may, under
certain circumstances, be compelled to provide such materials to a
requesting party (or to otherwise make them publicly available) before
the date on which an issuer would otherwise have been required to
publicly file on EDGAR.
---------------------------------------------------------------------------

    \281\ This is in contrast to publicly filed draft and final
offering statements that will be made automatically available on
EDGAR at the time of filing.
    \282\ See Non-Public Submissions from Foreign Private Issuers,
available at: http://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm.
    \283\ See 5 U.S.C. 552.
---------------------------------------------------------------------------

3. Form and Content
    Section 3(b)(2)(G)(i) of the Securities Act identifies certain
disclosure requirements that the Commission may require for offerings
relying on the Regulation A exemption. The requirements largely
coincide with the existing offering statement disclosure requirements
of Form 1-A, such as financial statements,\284\ a description of the
issuer's business operations,\285\ financial condition,\286\ and use of
investor funds.\287\ The proposed rules, comments received on the
proposed rules, and the final rules being adopted today for each of
Part I, II, and III of Form 1-A are discussed in detail below.
---------------------------------------------------------------------------

    \284\ See Form 1-A, Part II, Part F/S (2014). Section
3(b)(2)(G)(i) also contemplates that the Commission may require
issuers to submit audited financial statements. Currently, the
financial statements required under Regulation A need to be audited
only if the issuer has them otherwise available.
    \285\ Id., Part II, e.g., Model B, Item 6 (Description of
Business).
    \286\ Id., e.g., Part F/S.
    \287\ Id., e.g., Item 5 (Use of Proceeds to Issuer).
---------------------------------------------------------------------------

a. Part I (Notification)
(1) Proposed Rules
    Part I of Form 1-A serves as a notice of certain basic information
about the issuer and its proposed offering, which also helps to confirm
the availability of the exemption.\288\ As proposed, Part I of Form 1-A
would be converted into an online XML-based fillable form with
indicator boxes or buttons and text boxes and would be filed online
with the Commission.\289\ The information would be publicly available
on EDGAR, as an online data cover sheet, but not otherwise required to
be distributed to investors.\290\
---------------------------------------------------------------------------

    \288\ Rel. No. 33-6275 [46 FR 2637], at 2638.
    \289\ As proposed, the cover page to current Form 1-A would be
eliminated as a standalone requirement, while portions of the
information required on the cover page would be combined with Item 1
of Part I of Form 1-A in the XML fillable form.
    \290\ The Commission would make the information available on
EDGAR in a format that provides normal text for reading and XML-
tagged data for analysis. With the exception of the items that focus
issuers on eligibility to use Regulation A, much of the information
called for in the XML-based fillable form is also required to be
disclosed to investors in Part II of Form 1-A.
---------------------------------------------------------------------------

(2) Comments on Proposed Rules
    We received several comments with recommendations specific to
certain items on Part I of Form 1-A. With respect to Item 1 of Part I,
one commenter recommended defining the term ``publicly traded,''
eliminating the ``Financial Statements'' section of Item 1 of Part I or
conforming it to the existing disclosures required by Item 301 of
Regulation S-K, or conforming the line item descriptions in Item 1 to
those in Regulation S-X.\291\ Other commenters recommended clarifying
that an auditor and related fees need not

be listed in Part I if audited financial statements are not
included.\292\ With respect to Item 5 of Part I, another commenter
supported the proposal's inclusion of checkboxes specifying the
jurisdictions in which the securities are intended to be offered,\293\
while a different commenter recommended expanding the list of
jurisdictions so that issuers could indicate the Canadian provinces in
which they intended to conduct their offerings.\294\ With respect to
Item 6 of Part I, one commenter recommended defining the term
``affiliated issuer.'' \295\ This commenter recommended defining the
term to refer to entities controlled by the issuer, noting that
otherwise it may require disclosure by parent and sister entities,
which is information unrelated to the capitalization of the issuer.
---------------------------------------------------------------------------

    \291\ Letter from Ernst & Young LLP, March 24, 2014 (``E&Y
Letter'').
    \292\ Letter from Cynthia M. Fornelli, Executive Director,
Center for Audit Quality, March 24, 2014 (``CAQ Letter''); Letter
from Deloitte & Touche LLP, March 24, 2014 (``Deloitte Letter'');
E&Y Letter; Letter from PricewaterhouseCoopers LLP, March 24, 2014
(``PwC Letter'').
    \293\ NASAA Letter 2.
    \294\ Letter from Mike Liles, Jr., Attorney, Karr Tuttle
Campbell, January 17, 2014 (``Karr Tuttle Letter'').
    \295\ Paul Hastings Letter.
---------------------------------------------------------------------------

    Other commenters recommended including additional disclosure in
Part I. Two of these commenters recommended requiring issuers to
include their Web site address and the jurisdiction of their principal
place of business.\296\ These commenters also objected to removing the
disclosure and contact information for persons that are covered by the
bad actor rules.\297\
---------------------------------------------------------------------------

    \296\ NASAA Letter 2; WDFI Letter. These commenters requested
that this information be included in XBRL format, rather than XML.
We note that XBRL is a form of XML, and generally requires labeling
information with data ``tags'' rather than providing the information
through fillable forms.
    \297\ NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    (3) Final Rules
    With the exception of technical clarifications, we are adopting
provisions for Part I as proposed. The notification in Part I of Form
1-A will require disclosure in response to the following items:
     Item 1. (Issuer Information) will require information
about the issuer's identity, industry, number of employees, financial
statements and capital structure, as well as contact information.\298\
---------------------------------------------------------------------------

    \298\ Some of the information in Item 1, such as the name of the
issuer, jurisdiction of incorporation, contact information, primary
Standard Industrial Classification Code Number, and I.R.S. Employer
Identification Number is already required to be included on the
cover page of Form 1-A.
---------------------------------------------------------------------------

     Item 2. (Issuer Eligibility) will require the issuer to
certify that it meets various issuer eligibility criteria.
     Item 3. (Application of Rule 262 (``bad actor''
disqualification and disclosure)) will require the issuer to certify
that no disqualifying events have occurred and to indicate whether
related disclosure will be included in the offering circular (i.e.,
events that would have been disqualifying, but occurred before the
effective date of the amendments to Regulation A).\299\
---------------------------------------------------------------------------

    \299\ See discussion of Rule 262(a)(3) and (a)(5) in Section
II.G. below.
---------------------------------------------------------------------------

     Item 4. (Summary Information Regarding the Offering and
other Current or Proposed Offerings) will include indicator boxes or
buttons and text boxes eliciting information about the offering
(including whether the issuer is conducting a Tier 1 or Tier 2
offering, amount and type of securities offered, proposed sales by
selling securityholders and affiliates, type of offering, estimated
aggregate sales of any concurrent offerings pursuant to Regulation A,
anticipated fees in connection with the offering, and the names of
audit and legal service providers, underwriters, and certain others
providing services in connection with the offering).
     Item 5. (Jurisdictions in Which Securities are to be
Offered) will include information about the jurisdiction(s) in which
the securities will be offered.
     Item 6. (Unregistered Securities Issued or Sold Within One
Year) will require disclosure about unregistered issuances or sales of
securities within the last year, but will not include a requirement to
provide the names and identities of the persons to whom unregistered
securities were issued.
    We are adopting, as proposed, further changes to Part I of Form 1-
A. We are eliminating Item 1 (Significant Parties) of current Part I,
which requires disclosure of the names, business address, and
residential address of all the persons covered by current Rule 262.
Instead, we are requiring only narrative disclosure in Part II of Form
1-A when the issuer has determined that a relevant party has a
disclosable, but not disqualifying, ``bad actor'' event.\300\ We also
are eliminating Item 3 of current Part I relating to affiliate sales,
because we are eliminating the current restrictions on affiliate
resales under Rule 251(b).\301\ Information about the amount of
expected secondary sales and the existence of affiliate sales in the
offering, however, will continue to be disclosed in Item 4. Item 6
(Other Present or Proposed Offerings) and Item 9 (Use of a Solicitation
of Interest Document) of current Part I will be incorporated into Item
4 (Summary Information Regarding the Offering and Other Current or
Proposed Offerings). We also are eliminating Item 7 (Marketing
Arrangements) and Item 8 (Relationship with Issuer of Experts Named in
Offering Statement) of current Part I, as disclosure of this
information is required in Part II (Offering Circular).
---------------------------------------------------------------------------

    \300\ See discussion in Section II.G. below.
    \301\ The primary purpose of Item 3 (Affiliate Sales) in Part I
of Form 1-A (2014) is to ensure compliance with certain restrictions
on affiliate resales under Rule 251(b). See discussion in Section
II.B.3. above.
---------------------------------------------------------------------------

    Some of the technical changes from the proposed rules are non-
substantive procedural revisions to the form that are needed to conform
the form with the technical requirements of EDGAR, while the others
will, as suggested by commenters, provide clarifications to the terms
and requirements of Part I.
    We do not, however, believe that the additional disclosure items
suggested by some commenters,\302\ such as the issuer's Web site
address and the jurisdiction of the issuer's principal place of
business, are necessary additional disclosures in Part I of Form 1-A.
As proposed and adopted, Item 1 (Issuer Information) of Part I requires
issuers to disclose the location of their principal executive offices,
while Item 1 (Cover Page of Offering Circular) of Part II requires
issuers to provide investors with their Web site address, if the issuer
has a Web site. In light of these required disclosures, we do not
believe that the additional suggested disclosure items for Part I are
necessary or would provide investors with any additional relevant
information about the issuer. Additionally, notwithstanding the view of
some commenters,\303\ we do not believe that the disclosure
requirements for the application of Rule 262 (Disqualification
Provisions) in Item 3 to Part I of Form 1-A need to include
descriptions and addresses of persons that trigger disqualification for
several reasons. An issuer that has a disqualified person involved in
its offering will not be eligible to conduct a Regulation A offering,
issuers will have to certify their compliance with Rule 262, and, with
the exception of the addresses of covered persons, much of the
requested disclosure, as it applies to persons that would have been
disqualified but whose conduct occurred before effectiveness of the
final rules or have received a waiver from disqualification,\304\ will
be required in Part II of the offering statement.\305\

Therefore, as proposed and adopted, the final rules for Part I of Form
1-A no longer require the disclosure of such information.
---------------------------------------------------------------------------

    \302\ NASAA Letter 2; WDFI Letter.
    \303\ Id.
    \304\ Rule 262(b)(1)-(2).
    \305\ See paragraph (a)(2) to Part II of Form 1-A. Additionally,
underwriters, those receiving sales commissions and finders' fees,
promoters, counsel, executive officers, directors, and significant
securityholders, among others, must be identified in the offering
statement in most instances. See, e.g., Item 4 of Part I and Items
1, 10, and 11 of the Offering Circular, Part II of Form 1-A.
---------------------------------------------------------------------------

    Consistent with a comment received,\306\ we are making technical
amendments to the financial statement requirements of Item 1 (Issuer
Information) of Part I to clarify and require the use of certain
industry-specific terminology and, wherever possible, to use
terminology that is consistent with Regulation S-X and GAAP. These
changes are designed to minimize potential confusion on the part of
issuers in the banking and insurance industries that could result from
the use of more general financial accounting terminology. We disagree,
however, with the suggestion that we eliminate the financial statement
section.\307\ As we noted in the Proposing Release, the disclosure of
this type of information will provide the Commission (and market
participants) with more information about the Regulation A market as it
develops to use as it considers potential changes to the regulation in
the future. We also believe that the disclosure of this information
will provide relevant and useful information about issuers and their
offerings to investors and market participants that will help to
facilitate informed investment decisions. We do not anticipate that the
disclosure of financial information in response to Item 1 to Part I of
Form 1-A will materially alter the compliance obligations of issuers
given that the requirements draw from disclosure already required in
the financial statements included in the offering circular.
Additionally, we are revising Item 1 to require issuers to provide up
to two email addresses to which the Commission's staff may send comment
letters relating to an offering statement, rather than making this
optional as proposed. The email addresses, however, will no longer be
disseminated with the filings. We believe this change will result in
faster reviews of offering statements by the Commission's staff.\308\
Finally, consistent with the concerns underlying a comment we received,
we recognize that the use of the term ``publicly traded'' in the
outstanding securities table of Item 1 may be confusing in the context
of a Regulation A offering.\309\ Accordingly, we have revised Item 1 to
only request the name of the trading center or quotation medium, if
any, for outstanding securities.
---------------------------------------------------------------------------

    \306\ E&Y Letter.
    \307\ Id.
    \308\ In the review of registered offerings the Commission's
staff will call filers to obtain email addresses so as to issue
comment letters electronically. Depending on the responsiveness of
the filer, this can be a time consuming process.
    \309\ See E&Y Letter.
---------------------------------------------------------------------------

    Consistent with the views of several commenters,\310\ we are
clarifying that in the fee table included in Item 4 of Part I (Summary
Information Regarding the Offering and Other Current or Proposed
Offerings), auditor fees only need to be disclosed when the issuer is
providing audited financial statements because, for example, an auditor
might not be used for a Tier 1 offering.\311\ This and similar items in
the fee table could be left blank if not applicable and responses could
be clarified in the text box following the table.
---------------------------------------------------------------------------

    \310\ See fn. 292 above.
    \311\ Disclosure is only required in the fee table to the extent
applicable fees were incurred by the issuer in connection with the
offering.
---------------------------------------------------------------------------

    As suggested by one commenter,\312\ we are expanding the list of
jurisdictions in Item 5 (Jurisdiction in Which Securities are to be
Offered) so that issuers can indicate the Canadian provinces in which
they intend to conduct their offerings.\313\
---------------------------------------------------------------------------

    \312\ Karr Tuttle Letter.
    \313\ Item 5 of Part I of proposed Form 1-A did not include
Canadian provinces, despite Canadian issuers being eligible issuers.
Item 5, as adopted, corrects the form for Canadian issuers or for
offerings that contemplate offers or sales in Canada.
---------------------------------------------------------------------------

    Finally, in response to one comment,\314\ we are clarifying, in
this release, that the scope of the term ``affiliated issuer'' in
proposed Item 6 of Part I is only meant to include affiliates of the
issuer that are issuing securities in the same offering for which
qualification is currently being sought under Regulation A. We believe
this clarification is necessary in the final rules in order to avoid
potential confusion among issuers as to the scope of the definition, in
light of the broader definition of ``affiliate'' as it appears in
Securities Act Rule 405.\315\
---------------------------------------------------------------------------

    \314\ Paul Hastings Letter.
    \315\ Rule 405 defines ``affiliate'' to include, among other
things, persons controlling the issuer or under common control with
the issuer. 17 CFR 230.405.
---------------------------------------------------------------------------

b. Part II (Offering Circular)
(1) Narrative Disclosure
(a) Proposed Rules for Narrative Disclosure
    Part II (Offering Circular) in existing Form 1-A provides issuers
with three options for their narrative disclosure: Model A, Model B,
and Part I of Form S-1.\316\ We proposed to eliminate the Model A
question-and-answer format as a disclosure option, to update and retain
Model B as a disclosure option (renaming it ``Offering Circular''), and
to continue to permit issuers to rely on Part I of Form S-1 to satisfy
the disclosure obligations of Part II of Form 1-A.\317\
---------------------------------------------------------------------------

    \316\ Non-corporate issuers are not permitted to use Model A.
    \317\ See Proposing Release, at Section II.C.3.
---------------------------------------------------------------------------

    We further proposed to create new requirements for audited
financial statements and for a section containing management's
discussion and analysis (MD&A) of the issuer's liquidity, capital
resources, and results of operations.\318\ As proposed, issuers that
have not generated revenue from operations during each of the three
fiscal years immediately before the filing of the offering statement
would be required to describe their plan of operations for the 12
months following qualification of the offering statement, including a
statement about whether, in the issuer's opinion, it will be necessary
to raise additional funds within the next six months to implement the
plan of operations.\319\
---------------------------------------------------------------------------

    \318\ See Proposing Release, at Section II.C.3(b)(1).
    \319\ See Item 9(c) of Offering Circular, Part II of proposed
Form 1-A.
---------------------------------------------------------------------------

    Consistent with the treatment of issuers in registered offerings,
we further proposed to permit issuers to incorporate by reference into
Part II of Form 1-A certain items previously submitted or filed on
EDGAR, regardless of whether they were provided pursuant to Regulation
A disclosure requirements. As proposed, incorporation by reference
would be limited to documents publicly submitted or filed under
Regulation A and issuers would have to be subject to the ongoing
reporting obligations for Tier 2 offerings.\320\ Issuers would be
required to describe the information incorporated by reference, and
include a separate hyperlink to the relevant document on EDGAR, which
need not remain active after the filing of the related offering
statement.
---------------------------------------------------------------------------

    \320\ Issuers following the Offering Circular disclosure model
would be permitted to incorporate by reference Items 2 through 14,
whereas issuers following the narrative disclosure in Part I of Form
S-1 would be permitted to incorporate by reference Items 3 through
11 (other than Item 11(e)) of Part I of Form S-1. See General
Instruction III to proposed Form 1-A. As with Model B, the item
numbers in the Offering Circular format of proposed Part II of Form
1-A and Part I of Form S-1 do not align.
---------------------------------------------------------------------------

(b) Comments on Proposed Rules
    Several commenters recommended against the proposed elimination of
the Model A disclosure format, and instead recommended that the
Commission retain an updated version of the

format.\321\ Two of these commenters recommended including a Model A
disclosure format that reflects the most recent version of NASAA's Form
U-7.\322\ One commenter recommended retaining existing Form 1-A with
minor changes until such time as the Commission and NASAA could develop
an improved form.\323\ Six commenters, however, suggested that the
Commission eliminate Model A and the proposed Offering Circular
disclosure formats and instead recommended requiring disclosure by
reference to Regulation S-K (with reduced disclosure requirements in
some instances).\324\ These commenters believed that such a change
would increase efficiency and comparability. One of these commenters
was concerned that differences between Items 303 and 402 of Regulation
S-K and the comparable disclosure requirements of the Offering Circular
format might cause confusion.\325\ Two commenters recommended requiring
REITs to incorporate certain of the items contained in Industry Guide 5
and Form S-11.\326\
---------------------------------------------------------------------------

    \321\ BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill
Dana Letter 1; WDFI Letter.
    \322\ Karr Tuttle Letter; Verrill Dana Letter 1.
    \323\ NASAA Letter 2.
    \324\ Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter
2 (recommending the change only to the extent that the Commission
believed it would increase the speed of staff reviews); McCarter &
English Letter; WR Hambrecht + Co Letter.
    \325\ E&Y Letter.
    \326\ ABA BLS Letter; MoFo Letter.
---------------------------------------------------------------------------

    Several commenters had specific recommendations on disclosure
requirements. Four commenters recommended that the Commission find a
way to require more concise risk factor disclosure.\327\ One of these
commenters recommended possibly imposing a limit on the number of risk
factors or guidance to avoid repetition and emphasizing that disclosure
should not be repeated throughout the offering circular.\328\ Two
commenters recommended expanding the dilution disclosure requirement in
the Offering Circular format's Item 4.\329\ As proposed, Item 4 only
requires disclosure of any material disparity between the public
offering price and the effective cash cost to insiders over the past
year. These commenters recommended removing the one year restriction.
One commenter recommended focusing the disclosure requirements in the
offering statement on valuation assessments and a discussion of
management's expectations about the company's future performance,
including projections.\330\ Another commenter recommended requiring
disclosure of the names of ``those holding more than 20% of shares''
and a description of the ownership and capital structure, including
descriptions of how the exercise of rights by principal shareowners
could negatively affect the purchasers of shares being offered.\331\
Two commenters recommended reducing and clarifying the disclosure
obligations for executive compensation and management's discussion and
analysis for smaller offerings.\332\ One commenter recommended
requiring disclosure regarding the existence of a code of ethics and
corporate governance principles in a manner that would encourage
issuers to adopt internal controls.\333\
---------------------------------------------------------------------------

    \327\ CFIRA Letter 1; MoFo Letter; SVB Financial Letter; WR
Hambrecht + Co Letter.
    \328\ WR Hambrecht + Co Letter.
    \329\ NASAA Letter 2; WDFI Letter.
    \330\ WR Hambrecht + Co Letter (indicating that, absent this
requirement, such information would be shared orally by management
or research analysts with only the biggest investors).
    \331\ CFA Institute Letter.
    \332\ Letter from Rutheford B. Campbell, Jr., Spears-Gilbert
Professor of Law, University of Kentucky, March 5, 2014 (``Campbell
Letter''); MoFo Letter (recommending that the Commission reduce and
clarify the disclosure obligations for executive compensation and
management's discussion and analysis by eliminating the need to
repeat information already required to be included in the financial
statements, reducing the number of years of business experience
disclosure required to be included and clarifying the instructions
of the executive compensation section).
    \333\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
---------------------------------------------------------------------------

(c) Final Rules for Narrative Disclosure
    With the exception of clarifying changes, certain additional scaled
disclosure items applicable to Tier 1 offerings, and additional
guidance to issuers designed to streamline disclosure, we are adopting
final rules for narrative disclosure in Form 1-A substantially as
proposed. As adopted, Offering Circular disclosure in Part II of Form
1-A will cover: \334\
---------------------------------------------------------------------------

    \334\ Financial statements disclosure requirements for Part F/S
of Form 1-A are discussed in Section II.C.3.b(2)(c). below.
---------------------------------------------------------------------------

     Basic information about the issuer and the offering,
including identification of any underwriters and disclosure of any
underwriting discounts and commissions (Item 1: Cover Page of Offering
Circular);
     Table of Contents (Item 2);
     The most significant factors that make the offering
speculative or substantially risky (Item 3: Summary and Risk Factors);
     Material disparities between the public offering price and
the effective cash costs for shares acquired by insiders during the
past year (Item 4: Dilution);
     Plan of distribution for the offering and disclosure
regarding selling securityholders (Item 5: Plan of Distribution and
Selling Securityholders);
     Use of proceeds (Item 6: Use of Proceeds to Issuer);
     Business operations of the issuer for the prior three
fiscal years (or, if in existence for less than three years, since
inception) (Item 7: Description of Business);
     Material physical properties (Item 8: Description of
Property);
     Discussion and analysis of the issuer's liquidity and
capital resources and results of operations through the eyes of
management covering the two most recently completed fiscal years and
interim periods, if required; and, for issuers that have not received
revenue from operations during each of the three fiscal years
immediately before the filing of the offering statement (or since
inception, whichever is shorter), the plan of operations for the 12
months following qualification of the offering statement, including a
statement about whether the issuer anticipates that it will be
necessary to raise additional funds within the next six months (Item 9:
Management's Discussion and Analysis of Financial Condition and Results
of Operations);
     Identification of directors, executive officers and
significant employees with a discussion of any family relationships
within that group, business experience during the past five years, and
involvement in certain legal proceedings during the past five years
(Item 10: Directors, Executive Officers and Significant Employees);
     Group-level executive compensation disclosure for the most
recent fiscal year for the three highest paid executive officers or
directors with Tier 2 requiring individual disclosure of the three
highest paid executive officers or directors (Item 11: Compensation of
Directors and Executive Officers);
     Beneficial ownership of voting securities by executive
officers, directors, and 10% owners (Item 12: Security Ownership of
Management and Certain Securityholders);
     Transactions with related persons, promoters and certain
control persons (Item 13: Interest of Management and Others in Certain
Transactions);
     The material terms of the securities being offered (Item
14: Securities Being Offered); and
     Any events that would have triggered disqualification of
the offering under Rule 262 if the issuer could not

rely on the provisions in Rule 262(b)(1).\335\
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    \335\ See discussion of the final disqualification provisions in
Section II.G. below. The final rules require issuers to provide this
``bad actor'' disclosure even if it elects to follow the Part I of
Form S-1 disclosure format.
---------------------------------------------------------------------------

    The final rules eliminate Model A as a disclosure format for
Regulation A offerings, as proposed. While some commenters suggested
that the Commission should preserve Model A as an additional disclosure
format for Part II of Form 1-A or update existing Model A with NASAA's
more recent Form U-7, we are not persuaded that a question-and-answer
format should be retained in the final rules. As we noted in the
Proposing Release, the Model A disclosure format has historically been
used less frequently, and resulted in less-uniform disclosure and a
longer time to qualification than the Model B disclosure format.\336\
We do not believe that the use of Form U-7, which is largely similar to
Model A and is also in a question-and-answer format, will alter this
result. While the question-and-answer disclosure format does provide
issuers with additional flexibility, we believe that the Offering
Circular disclosure format (formerly called Model B) and Part I of
Forms S-1 or S-11 provide issuers with sufficient flexibility in
choosing their disclosure format without any of the potential delays or
uniform disclosure issues associated with Model A, either currently or
even if it is updated with Form U-7. We are further concerned that a
question-and-answer format may not best serve the interests of
investors in Regulation A offerings by providing them with less-uniform
disclosure in a potentially unfamiliar format. Additionally, we are
concerned that a question-and-answer format may incorrectly lead
issuers to believe that, despite the guidance contained in the form
itself, less complete disclosure is required under this format, thereby
causing unnecessary delays in the qualification process. Lastly, and
particularly with respect to Tier 2 offerings, we do not believe that a
question-and-answer format is appropriate for issuers and investors in
larger-sized offerings that generally benefit from disclosure that is
comparable between offerings in format and information disclosed. For
similar reasons, we do not believe that this format is appropriate in
offerings of any size by issuers that seek to foster potential trading
in the secondary markets.\337\
---------------------------------------------------------------------------

    \336\ See Proposing Release, at Section II.C.3.
    \337\ See Section II.E. below for a discussion of the final
rules for ongoing reporting.
---------------------------------------------------------------------------

    As proposed, the final rules will require issuers to provide
disclosure in Part II of Form 1-A that follows the Offering Circular or
Part I of Form S-1 disclosure format. Additionally, we agree with
commenters that certain additional disclosure requirements may be
appropriate for offerings by REITs and similar issuers. The final
rules, therefore, also permit issuers to follow, in addition to the
Offering Circular and Part I of Form S-1 formats, the form disclosure
requirements of Part I of Form S-11.\338\ An issuer may, however, only
use Part I of Form S-11 if the securities are eligible to be registered
on that form. As proposed and adopted with respect to disclosure under
Part I of Form S-1, issuers following Part I of Form S-11 may follow
smaller reporting company narrative disclosure requirements if they
meet the definition of that term in Securities Act Rule 405.\339\
---------------------------------------------------------------------------

    \338\ As proposed, issuers must choose one format to follow for
the offering circular and may not combine items from different
formats. See General Instruction II to proposed and final Form 1-A.
In order to avoid confusion and to facilitate the review of offering
circulars by investors and the Commission's staff, the final rules
will also require issuers to indicate on the offering circular cover
page which format they are following. See Part II(a)(1) of Form 1-A.
    \339\ 17 CFR 230.405.
---------------------------------------------------------------------------

    Contrary to the suggestions of some commenters, we are not adopting
rules that would limit the number of risk factors disclosed. While we
appreciate the concern that certain issuers and their advisors may take
an overly cautious approach to the application of our disclosure
requirements resulting in numerous risk disclosures, the decision as to
the appropriate mix of information that should be disclosed to
investors must be based on the particular facts and circumstances of
each company. We do not believe that a limit on risk factor disclosure
is an appropriate substitute for the judgments of issuers and their
advisors. A form-based limitation on the number of risk factors, beyond
the guidance in Item 3 of Part II, could lead to incomplete disclosure
that may place investors at a higher risk of potential loss and issuers
at a higher risk for potential litigation if it results in appropriate
risk factors being excluded.
    Further, we believe that certain other commenter concerns and
suggestions as to specific narrative disclosures are already
appropriately addressed by the final rules. For example, one commenter
suggested that we require disclosure of the names of those holding more
than 20% beneficial ownership of the issuer and a description of the
issuer's ownership and capital structure, including descriptions of the
exercise of rights of principal shareholders.\340\ The final rules
substantially address these topics. Item 12 of the Offering Circular,
as proposed and adopted, requires disclosure relating to more than 10%
beneficial ownership and Item 14, which is adopted as proposed,
requires disclosure of the terms of all classes of outstanding capital
stock.
---------------------------------------------------------------------------

    \340\ CFA Institute Letter.
---------------------------------------------------------------------------

    As adopted, the Offering Circular includes disclosure based on
disclosure guidelines set forth in the Securities Act Industry Guides
as well as guidance applicable to limited partnerships and limited
liability companies.\341\ As suggested by commenters,\342\ in order to
create more flexibility in disclosure matters for smaller issuers, we
are adding a materiality threshold for disclosure as it relates to time
and dollar expenditures on research and development.\343\ Additionally,
the final rules require issuers to provide financial statements, which
in the case of Tier 2 offerings must be audited,\344\ as well as a
section on management's discussion and analysis (MD&A) of the issuer's
liquidity, capital resources, and results of operations.\345\ We are
amending the MD&A disclosure requirements in Item 9 to align more
closely with the language in Regulation S-K that applies to domestic
registrants \346\ and smaller reporting companies.\347\ Consistency
with Regulation S-K in this regard may assist companies with compliance
with the rules for registered offerings to the extent Tier 2 issuers
eventually become Exchange Act reporting companies, while also making
sure that Regulation A issuers do not have a greater disclosure
obligation than registered

domestic issuers.\348\ Further, consistent with the proposed rules,
issuers that have not generated revenue from operations during each of
the three fiscal years immediately before the filing of the offering
statement (or since inception, whichever is shorter) will be required
to describe their plan of operations for the 12 months following
qualification of the offering statement.\349\ For companies that have
been in existence for less than three years, the final rules clarify
that this disclosure requirement applies to them since inception.\350\
---------------------------------------------------------------------------

    \341\ See Item 7(c)-(d) of Offering Circular, Part II of Form 1-
A ; see also Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting
forth the Commission's view on the disclosure requirements for
limited partnerships).
    \342\ CFIRA Letter 1; MoFo Letter; WR Hambrecht + Co Letter.
    \343\ Item 7(a)(1)(iii) of Offering Circular, Part II of Form 1-
A.
    \344\ See discussion in Section II.C.3.b(2)(c). below.
    \345\ See Item 9 of Offering Circular, Part II of Form 1-A.
    \346\ Item 9(b)(1) of Offering Circular, Part II of proposed
Form 1-A is amended to track more closely the language and
requirements of domestic issuers, as opposed to foreign private
issuers. As proposed, the language more closely followed the
requirements contained in Form 20-F for foreign private issuers.
    \347\ We are eliminating proposed Item 9(b)(2)-(3) of Offering
Circular, Part II of Form 1-A. As proposed, these disclosures would
have increased the disclosure obligations of Regulation A issuers in
comparison to those required of smaller reporting companies under
Item 305 of Regulation S-K. 17 CFR 229.305.
    \348\ See also discussion of the final rules for simplifying
Exchange Act registration of Tier 2 issuers in Section II.E.3.c.
below.
    \349\ Item 9(c) of Offering Circular, Part II of Form 1-A.
    \350\ Id.
---------------------------------------------------------------------------

    The changes to the Offering Circular format adopted today will
result in Offering Circular disclosure, particularly for Tier 2
offerings, more akin to what is required of smaller reporting companies
in a prospectus for a registered offering. For example, the final rules
require issuers in both Tier 1 and Tier 2 offerings to disclose
beneficial ownership of their voting securities, as opposed to record
ownership of voting and non-voting securities.\351\ With respect to
transactions with related persons, promoters, and certain control
persons in Tier 2 offerings, issuers will no longer be required to
disclose transactions in excess of $50,000 in the prior two years (or
similar transactions currently contemplated), but rather must follow
the requirements for smaller reporting company disclosure of
transactions during the prior two fiscal years that exceed the lesser
of $120,000 or 1% of the average total assets at year end for the last
two completed fiscal years.\352\ We originally proposed to apply this
threshold to Tier 1 offerings also, but believe that the 1% of average
total assets threshold could result in a lower disclosure threshold for
smaller issuers than was otherwise required of such issuers under the
existing rules. The final rules therefore preserve the related party
transaction disclosure requirements of Regulation A, as they existed
before the adoption of final rules today, for Tier 1 offerings so that
issuers in such offerings are only required to disclose such
transactions in excess of $50,000 in the prior two years (or similar
transactions currently contemplated).\353\
---------------------------------------------------------------------------

    \351\ Item 12 of Offering Circular, Part II of Form 1-A.
    \352\ Item 13 of Offering Circular, Part II of Form 1-A. As
adopted, Tier 2 issuers that have more than $5 million in average
total assets at year end for the last two completed fiscal years
would be required to disclose related party transactions at a higher
threshold (i.e., 1% or more) than was previously required under
Regulation A, which required the disclosure of transactions in
excess of $50,000 in the prior two years.
    \353\ Id.
---------------------------------------------------------------------------

    In addition to preserving the related party transaction disclosure
threshold for Tier 1 offerings, we are adopting a change applicable to
Tier 1 that will provide an additional scaled disclosure option for
issuers in the Offering Circular. This change is consistent with the
general views of a number of commenters that urged the Commission to
consider additional potential scaling for smaller issuers generally and
Tier 1 offerings in particular.\354\ The final rules alter the format
of, but not the ultimate aggregate amount of information required to be
disclosed in, the proposed executive compensation disclosure
requirements for Tier 1 offerings. Instead of providing executive
compensation data on an individual basis for the three highest paid
officers or directors and on a group basis for all directors, as was
proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will
instead be required to disclose only group-level compensation data as
it applies to the three highest paid executives or directors and all
directors as a collective group, including the number of persons
comprising such group, covering the period of the issuer's last
completed fiscal year.\355\ In this regard, the final rules for Tier 1
offerings will continue to require the disclosure of important
compensation data to investors, but on an aggregate, rather than
individual, basis. The group-level disclosure format for the highest
paid executives and all directors should help smaller issuers avoid
some of the harm that could follow compensation disclosure of
individual executives or directors to the market and competitors,
especially when disclosure of such information would not necessarily be
required in the context of a private placement or other exempt
offering.\356\ Further, the additional requirement to disclose the
total number of persons comprising any group for which group-level data
is required to be disclosed will preserve the ability of investors in
Tier 1 offerings to determine the average compensation paid to all
persons within the group.\357\ Consistent with the suggestions of some
commenters,\358\ we believe that this change to the final rules will
assist smaller issuers with more appropriately tailored executive
compensation disclosure requirements and will provide investors with
useful information.
---------------------------------------------------------------------------

    \354\ See, e.g., Campbell Letter; MoFo Letter.
    \355\ See Item 11 of Offering Circular, Part II of Form 1-A. The
number of persons comprising the director-level group data is also
required of issuers providing compensation data under Tier 2.
    \356\ For example, there are no rule-based disclosure
requirements for private placements pursuant to Rule 506 of
Regulation D, 17 CFR 230.500 et seq., when the issuer only sells to
accredited investors. Contrary to the requirements of Regulation D,
we believe mandated compensation (and other) disclosure is
appropriate in the context of a public offering under Regulation A.
Additionally, however, we believe that the final disclosure rules
for such information are appropriately tailored to provide
information to investors.
    \357\ This requirement is a change to the disclosure
requirements of group-level data in both Tiers. Although this
information would have been ascertainable under Tier 2 by comparing
the group-level disclosure of director compensation to the number of
directors disclosed pursuant to Item 10 of the Offering Circular, we
believe the change will facilitate investors' calculations of
average director compensation without significantly increasing the
burden on Tier 2 issuers.
    \358\ Campbell Letter; MoFo Letter.
---------------------------------------------------------------------------

    We do not, however, believe that further scaling of smaller
issuers' MD&A is necessary under the final rules. As we noted in the
Proposing Release, while the final rules provide issuers with more
detailed instructions on MD&A disclosure, similar disclosure is already
called for under existing requirements.\359\ The final MD&A
requirements clarify existing requirements and will likely save issuers
time by providing more express guidance regarding the type of
information and analysis that should be included. We believe the
clearer requirements will lead to improved MD&A disclosure, which will
provide investors with better visibility into management's perspective
on the issuer's financial condition and operations. The final
provisions for MD&A disclosure in the Offering Circular, however, are
not as extensive as those required under Item 303 of Regulation S-
K.\360\ As proposed, the final Offering Circular format includes
detailed guidance and requirements similar to Item 303 with respect to
liquidity, capital resources, and results of operations, including the
most significant trend information,\361\ but does not separately call
for disclosure of off-balance sheet arrangements or a table of
contractual obligations.\362\ Similar to

smaller reporting companies in registered offerings, Regulation A
issuers are required to disclose information about the issuer's results
of operations for the two most recently completed fiscal years and
interim periods, when applicable.\363\
---------------------------------------------------------------------------

    \359\ MD&A disclosure is specifically required by Model A. Model
B calls for similar information in Item 6, which requires disclosure
of the characteristics of the issuer's operations or industry that
may have a material impact upon the issuer's future financial
performance. Item 6 also requires disclosure of the issuer's plan of
operations and short-term liquidity if the issuer has not received
revenue from operations during each of the three fiscal years
immediately prior to filing the offering statement.
    \360\ 17 CFR 229.303.
    \361\ 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
    \362\ An issuer may, however, be required to disclose such
information during the course of the qualification process, if
material to an understanding of the issuer's financial condition.
    \363\ When management's discussion and analysis of the financial
condition and results of operations is provided for interim period
financial statements, any material change in financial condition
from the end of the preceding fiscal year to the date of the most
recent interim balance sheet should be discussed. Also, any material
changes in results of operations with respect to the most recent
fiscal year-to-date period for which an income statement is provided
and the corresponding year-to-date period of the preceding fiscal
year shall be discussed. See Instruction 3 to Item 9(a) of the
Offering Circular, Part II of Form 1-A.
---------------------------------------------------------------------------

    Except as noted above, the updates to the Offering Circular
disclosure requirements will not result in an overall increase in an
issuer's disclosure obligations. For example, as mentioned above,
certain issuers will have a higher threshold for reporting related
party transactions than would have previously been required under
Regulation A. Additionally, Tier 1 issuers (which will likely be
smaller companies) will, in comparison to the proposed rules, benefit
from further scaling of related party transactions and compensation-
related disclosures. Further, as proposed, all issuers will be
permitted to provide more streamlined disclosure of dilutive
transactions with insiders by no longer being required to present a
dilution table based on the net tangible book value per share of the
issuer's securities.\364\ While we disagree with commenters that
suggested we should expand disclosure provisions related to
dilution,\365\ the final rules, which reduce the disclosure time period
from three years to one year, are consistent with their view that the
disclosure of this information should not depend on when such shares
were acquired. We do not believe that information regarding dilution
covering more than the prior year is necessary for the smaller issuers
likely to conduct Regulation A offerings, nor do we believe that a
reduction in the required disclosure from three years to one year, as
proposed and adopted, will negatively affect investor protection.
Additionally, the final provisions for MD&A disclosure clarify existing
requirements and should benefit issuers by providing more express
guidance regarding the type of information and analysis that should be
included, including instructions about disclosure of operating results.
We believe that these clarifications should also lead to improved MD&A
disclosure, which will provide investors with better visibility into
management's perspective on the issuer's financial condition and
results of operations. Investors, particularly in Tier 2 offerings,
will also benefit from disclosure that is more consistent across
issuers in both registered offerings and Regulation A offerings.
---------------------------------------------------------------------------

    \364\ See Item 4 (Dilution) of the Offering Circular, Part II of
Form 1-A.
    \365\ See NASAA Letter 2, at fn. 50; WDFI Letter, at 9.
---------------------------------------------------------------------------

    We are making one change to the disclosure requirements of Item 6
(Use of Proceeds) in the final rules. As proposed, issuers were
required to disclose if any material amount of other funds are to be
used in conjunction with the proceeds raised in the offering. If so, an
issuer would be required to state the amounts and sources of such other
funds. The final rules include these proposed provisions, but add a
requirement that the issuer further provide disclosure about whether
such other funds are firm or contingent. While we did not receive any
comment specifically addressing this issue, where applicable, this type
of information would generally be required to be disclosed as part of
the staff review and comment process before qualification. We believe
an express requirement in the final rules will ultimately save issuers
time in the qualification process and therefore are including language
addressing this issue in the final rules.\366\
---------------------------------------------------------------------------

    \366\ See Instruction 5 to Item 6 (Use of Proceeds) of Part II
of Form 1-A.
---------------------------------------------------------------------------

    For clarity, we are moving the requirements to furnish certain
supplemental information found in Item 7 (Business Description) of Part
II to Form 1-A to General Instruction IV (Supplemental Information) to
Form 1-A, where similar requirements are found. We believe that
providing these instructions in one place will help issuers understand
and comply with the process for furnishing supplemental information to
the Commission. The process for furnishing supplemental information to
the Commission pursuant to Form 1-A is similar to the treatment of such
information in registered offerings.\367\ Additionally, since we
believe it is important for the Commission to be aware of the
existence--rather than the non-existence--of such reports, the final
rules no longer require an issuer to inform the Commission if no such
report has been prepared. Item 7 is further revised to clarify that
issuers must only disclose distinctive or special characteristics of
the issuer's operation or industry that are reasonably likely to have a
material impact on its future financial performance.\368\
---------------------------------------------------------------------------

    \367\ In this regard, we have also clarified in General
Instruction IV that supplemental information provided to the
Commission may be returned in certain circumstances and will be
handled by the Commission in a similar manner to supplemental
information provided in connection with registered offerings.
    \368\ The language in proposed Item 7 to Part II of Form 1-A
indicated that issuers had to disclose characteristics that ``may''
have a material impact on its future financial performance. We
believe this clarifying change in the final rules will help
facilitate compliance by smaller issuers.
---------------------------------------------------------------------------

    The final rules also clarify in Item 5 (Plan of Distribution and
Selling Securityholders) the calculation of selling securityholder
ownership prior to an offering, which we believe will facilitate
compliance with, and calculations pursuant to, this requirement.
Additionally, in order to avoid potential confusion as to the scope of
Items 11 and 13 to Part II of Form 1-A, the final rules make clear that
issuers are required to provide disclosure for ``executive officers''
rather than ``officers.'' \369\ Contrary to the suggestion of one
commenter,\370\ we do not believe that requiring disclosure regarding
the existence of a code of ethics and corporate governance principles
should be a required disclosure item for the types of issuers likely to
conduct Regulation A offerings. While nothing in Part II of Form 1-A
would prevent an issuer from providing more disclosure than is
otherwise required in the form itself, we do not believe it would be
appropriate to mandate this type of disclosure for all issuers because
we anticipate that issuers of Regulation A securities will generally be
smaller companies with less complex organizational structures.\371\ We
further believe that the disclosure requirements of Part II of Form 1-A
will provide investors with the information they need to adequately
evaluate an issuer's business and securities.
---------------------------------------------------------------------------

    \369\ The language in proposed Items 11 and 13 to Part II of
Form 1-A indicated that issuers had to disclose information
regarding directors and officers. We believe the clarifying language
will help smaller issuers comply with the final rules.
    \370\ Ladd Letter 2 (referring to PCAOB AU 325 and 9325).
    \371\ See fn. 93 above and Section III.C.3. below.
---------------------------------------------------------------------------

    As proposed, the final rules permit issuers to incorporate by
reference into Part II of Form 1-A certain items previously submitted
or filed on EDGAR. In a change from the proposed rules, issuers will be
permitted to incorporate by reference any documents publicly submitted
or filed on EDGAR, as opposed to being limited to documents submitted
or filed pursuant to Regulation A. We believe that this

change will continue to facilitate the provision of required
information to investors, while taking a consistent approach to
information previously provided to the Commission and publicly
available on EDGAR. Issuers following the Offering Circular disclosure
model will be permitted to incorporate by reference into Items 2
through 14; issuers following the narrative disclosure in Part I of
Form S-1 will be permitted to incorporate by reference into Items 3
through 11 (other than Item 11(e)) of Part I of Form S-1; issuers
following the narrative disclosure in Part I of Form S-11 will be
permitted to incorporate by reference into Items 3 through 26, Item 28,
and Item 30 of Part I of Form S-11.\372\ The final rules require
issuers to describe the information incorporated by reference, and
include a separate hyperlink to the relevant document on EDGAR, which
need not remain active after the filing of the related offering
statement. Additionally, Form 1-A encourages issuers to cross-reference
items within the form, where applicable.\373\ Further, in order to
avoid incorporation by reference to stale information without requiring
the latest version of the document to be filed, Form 1-A indicates
that, if any substantive modification has occurred in the text of any
document incorporated by reference since such document was filed, the
issuer must file with the reference a statement containing the text and
date of such modification.\374\
---------------------------------------------------------------------------

    \372\ See General Instruction III to Form 1-A. Since, as
proposed, the financial statements required by Part F/S would apply
to those following the Form S-1 format, rather than Item 11(e), we
have removed the reference to that item in General Instruction III
for clarity. Although, as proposed, Items 11(f) and (g) are also not
required for those following the Form S-1 format, we continue to
specifically allow for cross-referencing and incorporation by
reference in those items for those voluntarily choosing to provide
such disclosure. As with Model B, the item numbers in the Offering
Circular format of Part II of Form 1-A and Part I of Form S-1 do not
align.
    \373\ Id. Issuers may, for example, add a cross-reference to
disclosure found in the financial statements. However, they may not
incorporate by reference or add a cross-reference within the
financial statements to disclosures found elsewhere. See General
Instruction III to Form 1-A, which does not allow for incorporation
by reference in Part F/S.
    \374\ Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-
32 (providing a similar requirement when incorporating exhibits by
reference in filings under the Securities Act and Exchange Act).
---------------------------------------------------------------------------

(2) Financial Statements
(a) Proposed Rules for Financial Statements
    Part F/S of Form 1-A currently requires issuers \375\ in Regulation
A offerings to provide the following financial statements prepared in
accordance with U.S. GAAP: \376\
---------------------------------------------------------------------------

    \375\ The requirements also apply to the issuer's predecessors
or any business to which the issuer is a successor.
    \376\ See Form 1-A, Part F/S (2014).
---------------------------------------------------------------------------

     A balance sheet as of a date within 90 days before filing
the offering statement (or as of an earlier date, not more than six
months before filing, if the Commission approves upon a showing of good
cause) but, for filings made more than 90 days after the end of the
issuer's most recent fiscal year, the balance sheet must be dated as of
the end of the fiscal year;
     statements of income, cash flows, and stockholders' equity
for each of the two fiscal years preceding the date of the most recent
balance sheet, and for any interim period between the end of the most
recent fiscal year and the date of the most recent balance sheet;
     financial statements of significant acquired or to be
acquired businesses; and
     pro forma information relating to significant business
combinations.
The required financial statements may be unaudited unless the issuer
has already obtained an audit for another purpose.\377\
---------------------------------------------------------------------------

    \377\ The issuer would be considered to have audited financial
statements if the qualifications and reports of the auditor meet the
requirements of Article 2 of Regulation S-X (17 CFR 210.1 et seq.)
and the audit was conducted in accordance with U.S. GAAS or the
standards of the PCAOB. The auditor is not required to be registered
with the PCAOB.

    We proposed to generally maintain the existing financial statement
requirements of current Part F/S of Form 1-A for Tier 1 offerings,
while requiring Tier 2 issuers to file audited financial
statements.\378\ We proposed to require all issuers to file balance
sheets as of the two most recently completed fiscal year ends (or for
such shorter time that they have been in existence), instead of the
current requirement to file a balance sheet as of only the most
recently completed fiscal year end. As proposed, financial statements
for U.S.-domiciled issuers would be required to be prepared in
accordance with U.S. GAAP. Additionally, however, we proposed to permit
Canadian issuers to prepare financial statements in accordance with
either U.S. GAAP or International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB).\379\
---------------------------------------------------------------------------

    \378\ See paragraph (c) of Part F/S of proposed Form 1-A.
    \379\ If the proposed financial statements comply with IFRS as
issued by the IASB, such compliance must be unreservedly and
explicitly stated in the notes to the financial statements and the
auditor's report must include an opinion on whether the financial
statements comply with IFRS as issued by the IASB. See General Rule
(a)(2) to Part F/S of proposed Form 1-A. Cf. Item 17(c) of Form 20-
F.
---------------------------------------------------------------------------

    As proposed, issuers conducting Tier 1 offerings would be required
to follow the requirements for the form and content of their financial
statements set out in Part F/S, rather than the requirements in
Regulation S-X. In certain less common circumstances, however, such as
for an acquired business or subsidiary guarantors, Part F/S would
direct issuers conducting Tier 1 offerings to comply with certain
portions of Regulation S-X, which provides guidance on the financial
statements required for entities other than the issuer.\380\
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    \380\ We proposed to update the requirements for financial
statements of businesses acquired or to be acquired in Part F/S to
refer to the requirements of Rule 8-04 of Regulation S-X. We also
proposed to provide specific references to the relevant provisions
of Regulation S-X regarding the requirements for financial
statements of guarantors and the issuers of guaranteed securities
(Rule 3-10 of Regulation S-X), financial statements of affiliates
whose securities collateralize an issuance of securities (Rule 3-16
of Regulation S-X), and financial statements provided in connection
with oil and gas producing activities (Rule 4-10 of Regulation S-X).
As proposed, the financial statements provided in these
circumstances would only be required to be audited to the extent the
issuer had already obtained an audit of its financial statements for
other purposes.
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    For all Tier 2 offerings, the proposed rules would require issuers
to follow the financial statement requirements of Article 8 of
Regulation S-X, as if the issuer conducting a Tier 2 offering were a
smaller reporting company, unless otherwise noted in Part F/S. This
requirement would include any financial information with respect to
acquired businesses required by Rule 8-04 and 8-05 of Regulation S-
X.\381\
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    \381\ Tier 2 issuers would, however, follow paragraph (a)(3) of
Part F/S of proposed Form 1-A with respect to the age of the
financial statements and the periods to be presented. In Tier 2
offerings, the form and contents of financial statements for other
entities follow the requirements of Article 8 of Regulation S-X.
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    As proposed, issuers conducting Tier 2 offerings would be required
to have their financial statements audited. As with Tier 1 offerings,
the auditor of financial statements would need to be independent under
Rule 2-01 of Regulation S-X and must comply with the other requirements
of Article 2 of Regulation S-X, but need not be PCAOB-registered.\382\
Unlike Tier 1

issuers, issuers conducting Tier 2 offerings would be required to
provide financial statements that are audited in accordance with the
standards issued by the PCAOB.
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    \382\ See Part F/S of proposed Form 1-A (referencing Article 2
of Regulation S-X, 17 CFR 210.2-01 et seq.).
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    Additionally, we proposed to update the Form 1-A financial
statement requirements to be consistent with the proposed timetable for
ongoing reporting.\383\ Under existing Regulation A, issuers are
required to prepare a balance sheet as of a date not more than 90 days
before filing the offering statement, or not more than six months
before filing if approved by the Commission upon a showing of good
cause.\384\ In practice, issuers often receive a six-month
accommodation. If the financial statements are filed more than 90 days
after the end of the issuer's most recently completed fiscal year, the
financial statements must include that fiscal year.\385\
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    \383\ The rules for ongoing reporting are discussed in Section
II.E. below.
    \384\ See Form 1-A, Part F/S (2014).
    \385\ Id.
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    We proposed to extend the permissible age of financial statements
in Form 1-A to nine months, in order to permit the provision of
financial statements that are updated on a timetable consistent with
our proposed requirement for semiannual interim reporting.\386\ We also
proposed to add a new limitation on the age of financial statements at
qualification, under which an offering statement could not be qualified
if the date of the balance sheet included under Part F/S were more than
nine months before the date of qualification.\387\ For filings made
more than three months after the end of the issuer's most recent fiscal
year, the balance sheet would be required to be dated as of the end of
the most recent fiscal year.\388\ For filings made more than nine
months after the end of the issuer's most recent fiscal year, the
balance sheet would be required to be dated no earlier than as of six
months after the end of the most recent fiscal year.\389\ If interim
financial statements are required, they would be required to cover a
period of at least six months.\390\ In the Proposing Release, we noted
that requiring issuers to file interim financial statements no older
than nine months and covering a minimum of six months would have the
beneficial effect of eliminating what could otherwise be a requirement
for certain issuers to provide quarterly interim financial statements
during the qualification process and would be consistent with the
timing of our proposed ongoing reporting requirements.\391\ We proposed
to generally maintain the timing requirement of existing Form 1-A
concerning the date after which an issuer must provide financial
statements dated as of the most recently completed fiscal year, but to
change the interval from 90 calendar days to three months.\392\ While
not proposed, we additionally solicited comment on whether Tier 2
issuers should be required to submit financial statements in
interactive data format using the eXtensible Business Reporting
Language (XBRL).
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    \386\ This age of financial statements requirement is also
consistent with the treatment of foreign private issuers in the
context of registered offerings. See Division of Corporation
Finance's Financial Reporting Manual, at 6620, available at: http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf#topic6.
    \387\ Form 1-A currently does not expressly limit the age of
financial statements at qualification. In practice, however,
Commission staff requires issuers to update financial statements
before qualification to the extent such financial statements no
longer satisfy Form 1-A's requirements for the age of financial
statements at the time of filing.
    \388\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
    \389\ Id.
    \390\ See paragraph (a)(3)(iv) to Part F/S of proposed Form 1-A.
    \391\ See discussion in Section II.E.1. below.
    \392\ See paragraph (a)(3)(i) to Part F/S of proposed Form 1-A.
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(b) Comments on Proposed Rules
    We received numerous detailed suggestions from commenters on our
proposed financial statement requirements for Part F/S of Form 1-A.
Commenters were generally supportive of the proposed rules, but also
raised concerns as to the effect some of the proposed requirements for
audits in Tier 2 offerings could have on issuers and recommended
clarifying revisions that would help to make the financial statements
more consistent in some respects with those required in registered
offerings, while also eliminating potentially confusing or inconsistent
terminology.
    Commenters generally supported the proposed increase to two years
of balance sheets.\393\ One commenter noted that the Commission's
proposal to require two years of balance sheets was appropriate,
particularly in light of the existing requirement to provide statements
of income, cash flows and stockholders' equity for two years.\394\
Another commenter, however, argued against two years of balance sheets
for Tier 1 issuers instead of the one year required under existing
Regulation A.\395\
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    \393\ See, e.g., CFA Institute Letter; ABA BLS Letter.
    \394\ ABA BLS Letter (noting that in light of the existing
requirements, the proposed change did not seem unduly burdensome).
    \395\ Campbell Letter.
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    While commenters generally approved of the proposed rules not
requiring audits for Tier 1 issuers,\396\ many recommended making
changes to the proposed auditing requirements for the financial
statements included in an offering.\397\ One commenter recommended not
requiring audited financial statements until after the first year of
operations as a ``public startup company'' or not at all for companies
that are pre-revenue or that have paid-in capital, assets and revenues
below a specified threshold.\398\ Many commenters recommended allowing
Tier 1 issuers to designate financial statements as ``audited'' if the
auditor was only independent in accordance with the rules of the AICPA
and not in accordance with the Commission's auditor independence
rules.\399\ These commenters noted that the proposed requirements for
financial statements only to qualify as ``audited'' if the auditor
complies with the independence standards of Article 2 of Regulation S-
X, as opposed to the independence standards of the AICPA, may increase
costs to smaller issuers due to the increased likelihood that an issuer
would need to have their financial statements audited a second time by
an auditor who was independent under Rule 2-01 of Regulation S-X. One
commenter requested clarification of whether a Tier 1 issuer could
voluntarily provide an audit opinion on its financial statements that
was obtained for other purposes if the auditor complied with U.S. GAAS,
including AICPA independence standards, but not with the Commission's
independence rules.\400\ Several commenters recommended requiring Tier
1 issuers that provide unaudited financial statements to label them as
unaudited.\401\
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    \396\ See, e.g., CFA Institute Letter; ABA BLS Letter; Campbell
Letter.
    \397\ ABA BLS Letter; BDO Letter; Canaccord Letter; CAQ Letter;
CFA Letter; CFIRA Letter 2; Deloitte Letter; E&Y Letter; Letter from
KPMG LLP, March 24, 2014 (``KPMG Letter''); Letter from McGladrey
LLP (``McGladrey Letter''); MoFo Letter; WOC Letter; WR Hambrecht +
Co Letter.
    \398\ Letter from Jason Coombs, Co-Founder and CEO, Public
Startup Company, Inc., March 25, 2014 (``Public Startup Co. Letter
3'') (suggesting three tiers, where at least the first two would not
require audited financial statements); Public Startup Co. Letter 6.
    \399\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
    \400\ CAQ Letter.
    \401\ CAQ Letter (recommending that such issuers disclose that
the financial statements have not been subject to an audit or review
by an independent accountant); E&Y Letter; KPMG Letter.
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    Many commenters recommended allowing financial statements in Tier 2
offerings to be audited in accordance

with either PCAOB standards or U.S. GAAS.\402\ One commenter limited
its recommendation to smaller Tier 2 issuers and conditioned this
recommendation on the Commission not altering the requirement that
auditors be independent under Rule 2-01 of Regulation S-X.\403\ This
commenter also recommended conditioning the ability to follow U.S. GAAS
under Tier 2 on the issuer's showing of undue cost and impracticability
in the offering statement and also limiting this relief to the issuer's
initial Tier 2 offering. One commenter noted that because Regulation A
issuers are not ``issuers'' (as defined in Section 2(a)(7) of the
Sarbanes-Oxley Act of 2002),\404\ when the audit is performed in
accordance with PCAOB standards, AICPA rules would require the audit to
be compliant with both AICPA and PCAOB standards and the auditor's
report would have to reference both AICPA and PCAOB standards. This
commenter also noted, however, that given recent changes to the
auditor's report under AICPA standards, it may not be possible for the
auditor to be in compliance with both AICPA and PCAOB standards from a
reporting perspective.\405\
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    \402\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
    \403\ ABA BLS Letter.
    \404\ 15 U.S.C. 7201(a) et seq.
    \405\ KPMG Letter.
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    Additionally, two commenters expressed concern about potential
confusion that could result from requiring PCAOB standards in Tier 2
offerings, but not requiring PCAOB registration.\406\ One of these
commenters recommended avoiding any potential confusion by allowing for
audits under U.S. GAAS in Tier 2 offerings.\407\ Another commenter
stated that the issue could be resolved by requiring either the use of
PCAOB-registered auditors for Tier 2 offerings or appropriate
disclosure of the auditor's PCAOB registration status, noting that the
disclosure option would result in lower costs to the issuer and fewer
instances in which an issuer would need to have its financial
statements audited a second time under PCAOB standards.\408\
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    \406\ BDO Letter; Deloitte Letter.
    \407\ Deloitte Letter.
    \408\ BDO Letter.
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    One commenter asked the Commission to clarify issues relating to
transition reporting for Tier 1 issuers that have previously conducted
an offering pursuant to the exemption under Section 4(a)(6) and were
required to file reviewed annual financial statements.\409\ Another
commenter asked the Commission to clarify the application of the audit
requirements applicable to Tier 1 issuers that have audited financial
statements prepared for other purposes, in light of potentially
contradictory references in proposed Form 1-A to the ``standards of the
PCAOB'' and the PCAOB auditing standards.\410\ One commenter
recommended not requiring audited financials under either Tier 1 or
Tier 2 for ``small companies with limited revenues and assets.'' \411\
Another commenter raised concerns about allowing Tier 1 issuers to
include financial statements audited using U.S. GAAS and not requiring
that all audits be conducted by PCAOB-registered auditors.\412\
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    \409\ E&Y Letter.
    \410\ CAQ Letter.
    \411\ WOC Letter.
    \412\ CFA Letter.
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    Many commenters recommend making other changes to the financial
statement requirements not directly related to audit requirements.\413\
A number of commenters suggested allowing companies to use alternatives
under U.S. GAAP for non-public business entities when preparing their
financial statements, since Regulation A issuers would otherwise be
considered ``public business entities'' under FASB standards.\414\
These commenters were concerned about the need for issuers to have
their financial statements prepared and audited a second time under
U.S. GAAP applicable to public business entities, as discussed in
greater detail below. One commenter did not address this issue with
respect to Tier 1, but recommended allowing the smallest Tier 2 issuers
to follow alternatives under U.S. GAAP applicable to non-public
business entities.\415\ One commenter recommended allowing companies to
include financial statements prepared in accordance with alternatives
under U.S. GAAP for non-public business entities in offerings up to a
specified minimum, suggesting $10 million or $20 million.\416\ Another