today, as well as their impact on efficiency, competition and capital
formation, relative to the baseline discussed above.
2. Analysis of Proposed Amendments to Rule 147
    The proposed amendments to Rule 147 would facilitate intrastate
offerings of securities by local companies, including offerings relying
upon crowdfunding provisions under state securities laws. The proposed
amendments seek to modernize Rule 147 to align with contemporary
business practices, while retaining the underlying intrastate character
of Rule 147 that permits local issuers to raise money from investors
within their state without having to register the securities at the
federal level.
a. Elimination of Limitation on Manner of Offering
    Currently, offers pursuant to Rule 147 must be limited to state
residents only. The proposed amendments to Rule 147 would allow an
issuer to make offers to out-of-state residents, as long as sales are
made only to residents of the issuer's state or territory.\288\ In
addition, the proposed amendments would require issuers to include
disclosure on all offering materials stating that sales will be made
only to residents of the same state or territory as the issuer, while
also disclosing that the securities being sold are unregistered
securities and have resale restrictions for a nine-month period.\289\
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    \288\ See Proposed Rule 147(b).
    \289\ See Proposed Rule 147(f).
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    The proposed amendments would enable Rule 147 issuers to engage in
broad-based solicitations, including on publicly accessible Web sites,
in order to successfully locate potential in-state investors. For
example, for a New Jersey-based Rule 147 offering, issuers would be
permitted under proposed Rule 147 to advertise and disseminate offering
information through online media to reach New Jersey residents that
work in New York, even though such information can be viewed by New
York residents. This is not permitted under the current rule. Hence,
the proposed amendments to Rule 147 would provide issuers with the
flexibility to utilize a wider array of options to advertise their
offerings, taking advantage of modern communication technologies such
as the Internet and other social media platforms that allow investors
inside and outside the issuer's state of residence to openly access
offering information. In this regard, we expect the proposed amendments
to be particularly effective at facilitating state-based crowdfunding
offerings that rely heavily on online platforms to bring issuers and
investors together.\290\
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    \290\ See Massolution 2015.
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    The proposed amendments would thus make it easier for issuers to
rely upon Rule 147 to conduct their offerings. Online advertising
provides a cheaper and more efficient means of communicating with a
more diffused base of prospective investors. Consequently, the
elimination of offering limitations to residents should result in lower
search costs for issuers. The amended provisions also may reduce
issuers' uncertainty about compliance as they would not need to limit
advertising or take additional precautions to ensure that only in-state
residents could view the offering.
    The inclusion of legends on certificates or other documents
evidencing the security and other mandatory disclosures in offering
materials would inform investors, especially out-of-state investors,
about the intrastate nature of the offering. At the same time, as a
greater number of investors become aware of a larger and more diverse
set of investment opportunities in private offerings, the proposed
amendments may enable investors to diversify their investment portfolio
and allocate their capital more efficiently. Further, such broadly
advertised Rule 147 offerings would be able to more effectively compete
for potential investors with Rule 504, Rule 506(c), and Regulation A
offerings, where general solicitation is also permitted. The proposed
amendments could thus heighten competition between unregistered capital
markets, which may result in a more optimal flow of capital between
investors and issuers, thereby enhancing the overall allocative
efficiency of those markets.
    However, as issuers utilizing amended Rule 147 advertise more
widely and freely, the likelihood of out-of-state investors purchasing
into the offering could increase. The inclusion of legends and other
mandatory disclosures may mitigate this concern and provide a certain
measure of investor protection, although out-of-state investors in
their desire to avail themselves of an attractive investment
opportunity may overlook the legends or disclosures or may even
disregard them. While issuers are required to have a reasonable belief
that all their purchasers are resident within the state, the
probability of violating the intrastate sale provisions could increase
(relative to the baseline), at least in resale transactions that occur
within the restrictive period for intrastate resales. Broader
advertising of Rule 147 offerings could also impact the effectiveness
of state oversight as regulators may not have adequate resources to
track the conduct of such offerings on mass media.
b. Ease of Eligibility Requirements for Issuers
i. Incorporation and Residency Requirements
    The proposed amendments to Rule 147 would eliminate the requirement
that issuers need to be incorporated in the state where the offering is
conducted and would revise the current residency requirement to focus
on the issuer's ``principal place of business'' rather than its
``principal office.'' The former would be defined as the location from
which officers, partners, or managers of the issuer primarily direct,
control and coordinate the activities of the issuer.\291\
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    \291\ Proposed Rule 147(c)(1). See also note 55 above.
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    The proposed elimination of the requirement that the issuer be
registered or incorporated in the state where the offering is being
conducted would align the rule's provisions with modern business
practices, thereby making it easier for a greater number of issuers to
utilize the exemption. A significant number of companies are
incorporated in states other than where their

principal place of business is located.\292\ Most of these companies
have chosen to incorporate in places where corporate laws, including
corporate tax laws, comport with modern business practices or are more
permissive. For example, according to one academic study, corporate
laws affect firm value, even after controlling for firm size,
diversification, profitability, investment opportunities and
industry.\293\ Thus, firms have strong incentives to select favorable
local regimes such as Delaware.\294\ These studies and industry
practices indicate that firms' choice of state of incorporation depends
on the economic benefits derived from the regulatory environment in
which the firm is organized, and as such the choice of legal home state
may not be substantially related to where the business operations of
the firms are located.
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    \292\ Based on an analysis of data from Thomson Reuters'
Compustat North America, approximately 74% of Exchange Act reporting
companies indicated that, in 2014, they had separate state of
location of headquarters and state of incorporation.
    \293\ Daines, Robert, ``Does Delaware Law Improve Firm Value?''
Journal of Financial Economics, Volume 62, Issue 3 (2001): 525-558.
    \294\ See Scott D. Dyreng, Bradley P. Lindsey, Jacob R.
Thornock, ``Exploring the Role Delaware Plays as a Domestic Tax
Haven,'' Journal of Financial Economics, Volume 108, Issue 3,
(2013):751-772 (explaining that Delaware's tax laws play an
economically important role in U.S. firms' decision to locate in
Delaware).
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    The practice of incorporating in certain states extends beyond
public companies to private and smaller companies. As discussed in our
baseline analysis above, data from Form D filings for the period 2009-
2014 indicates that a significant percentage of Rule 504 and Rule 505
issuers were incorporated in Delaware and had separate states of
incorporation and principal places of business.\295\ While smaller
firms are less likely than larger firms to have separate states of
incorporation and primary places of business, the Form D data described
in the baseline indicates that a considerable number of small
businesses are currently unable to meet the state of incorporation
requirement in order to use the existing Rule 147 safe harbor. Since
geography of investment and employment is aligned more closely with the
principal place of business of a firm than with place of incorporation,
replacing the current incorporation and residency tests with a
principal place of business test would be consistent with the
intrastate objective of Rule 147 and make it easier for more issuers to
utilize the exemption.
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    \295\ The data indicates that approximately 66% of all Rule 506
offerings initiated during 2009-2014 reported different states of
incorporation and operations.
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    Eliminating the requirement to be incorporated in-state also would
enable foreign incorporated issuers that have their principal place of
business in a U.S. state to access the Rule 147 capital market. This
would create a uniform basis for firms that are operating in similar
local fashion, irrespective of their country or state of incorporation,
to utilize the Rule 147 exemption. Form D filings for the period 2009-
2014 reported that approximately 3% of Regulation D offerings
(approximately 3,000 offerings) were initiated by issuers that were
incorporated outside of the United States and had their principal place
of business in a U.S. state.
    We recognize the potential for issuers to switch their principal
place of business to a different state in order to conduct Rule 147
offerings in multiple states. To mitigate such concerns, the proposed
amendments limit issuers that change their principal place of business
from utilizing the exemption to conduct another intrastate offering in
a different state for a period of nine months from the date of last
sale of securities under the prior Rule 147 offering. This would be
consistent with the duration of the resale limitation period during
which sales to out-of-state residents are not permitted. As we discuss
in detail below, such a provision should help to deter issuers from
misusing the amended residency requirements to change their principal
place of business in order to sell to residents in multiple states.
ii. ``Doing Business'' In-State Requirements
    The proposed amendments to Rule 147 would modify the current
``doing business'' in-state tests for issuers by requiring them to have
a principal place of business in-state and to satisfy one of four
specified tests. The proposed amendments would include a new
alternative test whereby issuers can qualify if a majority of their
employees are located in the state. Consequently, under proposed Rule
147, in order to be deemed ``doing business'' in a state, issuers would
have to have a principal place of business in-state and satisfy at
least one of the following requirements:
     80% of the issuer's consolidated assets are located within
such state or territory;
     80% of the issuer's consolidated gross revenues are
derived from the operation of a business or of real property located in
or from the rendering of services within such state or territory;
     80% of the net proceeds from the offering are intended to
be used by the issuer, and are in fact used, in connection with the
operation of a business or of real property, the purchase of real
property located in, or the rendering of services within such state or
territory; or
     A majority of the issuer's employees are in such state or
territory.
    The proposed modifications to the existing ``doing business'' in-
state tests would provide greater flexibility to potential Rule 147
issuers and thereby ease their burden in complying with the exemption,
while also better aligning the regulation with modern business
practices. Issuers could use the test that best reflects the local
nature of their business operations.
    As currently required, satisfying all the existing ``doing
business'' in-state tests may be burdensome even for small businesses
that are largely located in one state. For example, by restricting
issuers' operations and capital investments substantially to one state,
the existing requirement to qualify under all these tests may have
adverse effects on the growth and survival of startups and early stage
ventures that rely on the exemption.\296\ Moreover, in recent years new
business models have emerged that may make satisfying all the
eligibility tests ill-suited for relying on the Rule 147 exemption as a
capital raising option. For example, businesses that use new
technologies (e.g., e-businesses) to make their operations more
efficient tend to be more geographically distributed in their
operations or revenues than what is permitted under current Rule 147.
According to an academic study, advances in computing and
communications have fundamentally changed how information can be
stored, distributed, modified or assimilated, which has enabled
businesses to become more geographically dispersed and modular rather
than centralized into discrete units.\297\ Similarly, the growth of
modern technologies has made it easier for firms, through e-commerce
and shared logistical networks, to reach a larger and more diffused
customer base, leading to more dispersed revenue streams.
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    \296\ For example, an e-commerce company may need to invest in
distribution facilities outside their state to meet needs of
customers who are more likely to be resident outside the state.
Under current rule provisions, they may be able to invest only a
small part (less than 20%) of the capital raised in a Rule 147
offering outside their principal state of business.
    \297\ See Mohanbir Sawhney and Deval Parikh, ``Where Value Lives
in A networked World,'' Harvard Business Review, 2001.

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    Requiring an issuer to own a majority of its assets in one state,
invest most of the capital raised in one state, and obtain revenue
mostly from in-state sales could create inefficient constraints for
startups and small businesses to operate and grow. While the original
intent of Section 3(a)(11) and Rule 147 was to ensure that investors
and issuers are located in the same state so that they are potentially
familiar with each other,\298\ current business practices of issuers,
consumption habits of customers, and the set of available investment
opportunities of investors have expanded greatly since Rule 147 was
adopted in 1974. In view of these economic and social changes, we
believe that the proposed principal place of business requirement and
the modification to require an issuer to satisfy at least one
additional test that demonstrates that that issuer does business in-
state would more effectively establish the local nature of an offering
pursuant to Rule 147.
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    \298\ See Rule 147 Adopting Release.
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    The proposed amendments, by easing the eligibility and residency
requirements for issuers, would enable a greater number of firms to use
Rule 147 to raise capital. Such new issuers could be those entities
that are currently accessing capital through an alternate private
capital market, or they could be issuers that could not previously
raise capital in any market but would be able to use amended Rule 147
to meet their funding needs. In addition, to the extent raising capital
in the Rule 147 market is cheaper than raising capital in alternate
capital markets, issuers would benefit from such lower costs. Easier
access to local capital would enable issuers to finance investment
opportunities in a timely manner, thereby accelerating firm growth,
which could consequently promote state employment and economic growth.
    As more firms become eligible or are willing to raise capital
pursuant to amended Rule 147, the set of investment opportunities for
investors would also increase in a corresponding manner, resulting in
greater allocative efficiency and higher capital formation. To the
extent the use of Rule 147 increases because of substitution out of
other capital markets, the economy-wide increase in capital formation
may not be significant while competition amongst private capital
markets would be higher.\299\ To the extent that amended Rule 147
attracts new issuers, capital formation levels would increase in the
economy. We also believe that, by facilitating intrastate crowdfunding,
amended Rule 147 would likely finance new firm growth and consequently
would lead to an overall increase in capital formation. Further,
amended Rule 147 could also lead to higher capital formation by
facilitating offerings, including those with offer sizes greater than
what is allowed for intrastate crowdfunding offerings, under other
state exempted or state-registered offerings. However, since we do not
have data on the existing use of Rule 147, we are unable to quantify or
predict the extent of any increase in offering activity in non-
crowdfunding offerings under amended Rule 147.
---------------------------------------------------------------------------

    \299\ We note that issuers that meet current requirements under
existing Rule 147 would also be eligible to rely on amended Rule
147.
---------------------------------------------------------------------------

    At the same time, allowing issuers with a different state of
incorporation to raise capital in another state under amended Rule 147
could result in fewer incorporations for the state where the offering
is being conducted, if this proposed amendment results in more issuers
relocating to jurisdictions with perceived legal and tax advantages.
Moreover, if issuers with widely-distributed assets and operations over
more than one state make use of amended Rule 147, state oversight of
such issuers could weaken, with a consequent decrease in investor
protection. For example, if a majority or a significant proportion of
an issuer's assets is located out-of-state, it could be more difficult
for state regulators to assess whether any disclosures to investors
about such assets are fair and accurate. However, state enforcement
actions for protecting in-state investors can extend to issuers whose
assets are located beyond the boundaries of the state, which could
potentially deter issuers from engaging in fraudulent intrastate
offerings. We also believe that qualifying under any one of the four
``doing business'' in-state tests and requiring an issuer to have an
in-state principal place of business, such that the officers and
managers of the issuer primarily direct, control and coordinate the
activities of the issuer in the state, would provide a state regulator
with a sufficient basis from which to regulate an issuer's activities
and enforce state securities laws for the protection of resident
investors. In addition, if the proposed amendments to Rule 147 are
adopted, state regulators may choose to amend their state regulations
to comport with amended Rule 147, which would allow them to consider
any additional requirements, including qualification tests, for issuers
to comply with state securities offerings regulations.
    At the same time, even under the proposed amendment requiring
issuers to qualify under one of the specified ``doing business'' in-
state tests, the high threshold levels specified in such tests may
preclude certain issuers that use modern business models (e.g., some e-
commerce entities) from relying on the exemption, as such issuers could
have widely distributed operations that may not allow them to qualify
under any of the four tests.\300\
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    \300\ Market participants, state regulators and other commenters
have expressed similar concerns about the prescriptive threshold
requirements for these tests. See note 11.
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    Additionally, the proposed amendment to limit the ability of
issuers for a period of nine months from the date of last sale of
securities under a Rule 147 offering to conduct a new Rule 147 offering
in a different state would discourage issuers from altering their
principal place of business to raise capital through multiple state
offerings. The duration of this proposed restriction is consistent with
the period in which resales to out-of-state investors would not be
permitted. In this regard, the proposed amendment could help mitigate
some of the concerns relating to investor protection that may arise
from the amended residency requirements. To the extent a change in
principal place of business to a new state is motivated by business
needs, this amendment could affect the capital raising prospects of
firms by forcing them to delay their intrastate offerings. For example,
certain start-ups and small businesses that could potentially change
their principal place of business at lower costs could be affected by
the proposed amendment. Issuers located in a greater metropolitan area
(e.g., New Jersey and New York City) that spans multiple states also
may be likely to consider switching their principal place of business
to raise capital from residents of another state, and may be also
impacted by the proposed amendment.
    We note that, under the integration provisions of current and
proposed Rule 147, an issuer that conducts a Rule 147 offering in one
state within six months of having offered or sold securities pursuant a
Rule 147 offering in another state would have such offers and sales
integrated for the purpose of compliance with the federal rule. In this
respect, we believe that the proposed nine-month period during which an
issuer would be prohibited from conducting an intrastate offering
pursuant to the proposed rule after having completed sales of
securities pursuant to the proposed rule in a different state would
have the effect of extending by three months the six-month period of
time during which

issuers cannot make sales in another state or territory.
c. Maximum Offering Amount and Investment Limitations for Offerings
With Exemption From State Registration
    The proposed amendments would limit the availability of the
exemption at the federal level to offerings that are either registered
in the state in which all of the purchasers are resident or conducted
pursuant to an exemption from state law registration in such state that
limits the amount of securities an issuer may sell pursuant to such
exemption to no more than $5 million in a twelve-month period and
imposes an investment limitation on investors. These proposed limits
would provide additional protections at the federal level and could
mitigate investor protection concerns that may arise from the proposed
modernization of Rule 147. Specifically, the proposed availability of
amended Rule 147 to exempt offerings of up to $5 million in a twelve-
month period could provide greater investor protection by reducing the
scale of fraudulent offerings, especially those that may be directed
towards non-accredited investors and do not have significant state
oversight. Similarly, the proposed limitation on the availability of
the amended rule, as it relates to offerings that are exempt from state
registration, to offerings that are conducted pursuant to a state law
exemption that includes investment limitations could reduce the
individual exposure of investors to potential fraud or loss of
investment in a state-exempt offering pursuant to amended Rule 147.
    The proposed amendments would not alter existing state provisions
that rely on, or the ability of states to adopt provisions that require
issuers to comply with, Section 3(a)(11) and that may not impose a
limitation on the maximum aggregate offering amount an issuer can raise
or include investment limitations. As Rule 147 would no longer be a
safe harbor for compliance with Section 3(a)(11), however, some states
would need to update their existing provisions in order to effectively
realize the benefits of the proposed amendments to Rule 147. These
updates could be limited to removing existing references to Section
3(a)(11) and/or adopting additional provisions that comport with the
proposed rule. In the interest of expanding capital raising
opportunities, some state regulations may be overly permissive, leading
to a ``race-to-the-bottom'' that could ultimately impair investor
protection. Given that state regulators have economic and reputational
incentives to provide local issuers and investors with capital markets
that are viable over the long run, it is unclear how significant this
``race-to-the-bottom'' would be.
    Current intrastate crowdfunding provisions provide exemptions for
offerings of less than $5 million and most of these state provisions
have investment limits for non-accredited investors. For example, the
highest maximum offering limit that any intrastate crowdfunding
provisions currently permit is in Illinois, for crowdfunded offerings
up to $4 million. As shown in the baseline, the median (average)
offering size limit is $2 million ($1.6 million) in all the states that
currently permit crowdfunding transactions. The impact of the proposed
amendments on states regulatory flexibility is therefore moderated by
the current absence of an intrastate crowdfunding exemption that
permits offerings greater than $5 million. In addition, while the
proposed amendment relating to investment limits only permits issuers
to conduct their offerings pursuant to the proposed rule in states that
have included investment limitations, it does not specify what such
limitations should be.
    However, such limitations at the federal level could unduly
restrict capital raising options of issuers, especially those issuers
that sell primarily to accredited investors. A limit on the maximum
offering amount could also restrict legitimate state interests in
permitting larger offerings within their jurisdictions that otherwise
rely on Rule 147 at the federal level. To the extent competition
between states to enact securities laws to attract issuers to their
territories results in better regulations that promote effective
functioning of local financial markets, the proposed amendments would
limit state regulators' opportunities to customize provisions that
better suit the interests of issuers and investors in their state,
rather than using a ``one-size fits all,'' or uniform, approach at the
federal level that may work better for issuers and investors in some
states than others.
3. Additional Amendments to Rule 147
    The proposed rules would include a number of additional amendments
to Rule 147, including removing the requirement that an issuer obtain
investor representations as to residency status and establishing a
reasonable belief standard for determining whether a purchaser is a
state resident at the time of the sale of the securities. This proposed
amendment would be conceptually consistent with similar requirements in
Regulation D offerings and would provide greater certainty to issuers
as to their compliance with the conditions of the exemption,
potentially encouraging greater reliance on the amended rule. In
addition, providing a reasonable belief standard for ascertaining the
in-state residency of investors would provide greater flexibility for
Rule 147 issuers who currently are required to obtain a written
representation from investors about their residency, and who are
provided no relief under the rules for sales to persons that are not,
in fact, in-state residents. This, in turn, could increase the number
of issuers that rely on the amended Rule 147 exemption. At the same
time, such provisions may result in issuers selling to investors who
are not, in-fact, residents of the state, with a corresponding decline
in investor protection. We believe this decline would be somewhat
mitigated by any additional requirements that state securities laws may
prescribe, as well as the reasonable belief standard and the mandatory
disclosures and legends required under the proposed rule amendments.
    Moreover, the proposed rules would add a provision to define the
residence of a purchaser that is a legal entity--such as a corporation,
partnership, trust or other form of business organization--as the
location where, at the time of the sale, the entity has its principal
place of business. This definition would create consistency in defining
the place of residence of entity investors with that of the issuer
while also helping to ensure that investors are sufficiently local by
nature. Such uniformity would also help to alleviate the rule's
compliance burden by providing greater certainty.
    The proposed rule also would include a provision to amend the
limitation on resales in Rule 147(e) to provide that resales can be
made only to in-state residents during the nine-month period from the
date of sale by the issuer. By amending the start date for the
restricted period from ``date of last sale'' to ``date of sale'' for
the particular security in question, investors will be able to sell
before the entire offering is completed, while preserving the intent of
restricting resales during a nine-month holding period to provide
assurance that the securities have come to rest in-state before out-of-
state sales begin to occur. The amendment would thus provide greater
liquidity for Rule 147 securities, making them more attractive to
investors, which could lead to greater investor participation and an
increase in the supply of capital available in the Rule 147 market.
Further, it could improve price discovery and lead to lower capital
raising costs for issuers.

    Additionally, the proposed approach not to condition the
availability of the exemption on the issuer complying with provisions
relating to resale restrictions would provide greater certainty to
issuers. For example, issuers would not need to be concerned about
potentially losing the exemption when the resale provisions are
violated under circumstances that are beyond their control. At the same
time, given that issuers would continue to be subject to other
compliance conditions such as in-state sales limitations, mandatory
offeree and purchaser disclosures, and stop transfer instructions, as
well as federal antifraud and civil liability provisions, we believe,
that this proposed amendment would not significantly increase risk of
investor harm.
    The proposed amendment to Rule 147(f) to require disclosure
regarding the limitations on resale to every offeree, in the manner in
which the offering is communicated, would provide greater flexibility
to issuers and ease compliance burdens in cases of oral offerings.
Similarly, the proposed amendments to remove the requirement to
disclose to offerees and purchasers the stop transfer instructions
provided by an issuer to its transfer agent and the provisions of Rule
147(f)(2) regarding the issuance of new certificates during the Rule
147(e) resale period, would also ease compliance burdens for issuers.
These changes together would lower the regulatory burden for issuers,
especially smaller issuers, but may adversely impact the information
provided to potential investors (offerees), who may not receive such
information in writing, prior to making their investment decision. This
impact is somewhat mitigated by the continuing requirement to provide
the disclosure regarding resale restrictions, in writing, to every
purchaser.
    Finally, the proposed rule would expand the current Rule 147
integration safe harbor such that offers and sales pursuant to Rule 147
would not be integrated with: (i) Any prior offers or sales of
securities, (ii) any offers or sales made more than six months after
the completion of the offering, or (iii) any subsequent offer or sale
of securities that is either registered under the Securities Act,
exempt from registration pursuant to Regulation A, Regulation S, Rule
701, or Section 4(a)(6) or made pursuant to an employee benefit plan.
The expansion of the integration safe harbor would provide issuers with
greater certainty that they can engage in other exempt or register
offerings either prior to or near in time with an intrastate offering
without risk of becoming ineligible to rely on the Rule 147 exemption.
Similarly, the addition of Section 4(a)(6) to the list of exempt
offerings which will not be integrated with a Rule 147 offering would
provide certainty to issuers that they can conduct concurrent
crowdfunding offerings as per the provisions of the respective
exemptions. This flexibility and ensuing certainty would be especially
beneficial for small issuers who likely face greater challenges in
relying on a single financing option for raising the desired amount of
capital. However, such expansion of the integration safe harbor could
result in fewer investor protections than if the offerings were
integrated. The proposed rule, however, provides for non-integration
only to the extent that the issuer meets the requirements of each of
the other offering exemptions that are used to raise capital.
Furthermore, requiring an issuer to wait at least 30 calendar days
between its last offer made in reliance on Rule 147 and the filing of a
registration statement with the Commission would provide additional
protection to investors in registered offerings who might otherwise be
influenced by an earlier intrastate offering. Therefore, we do not
believe that the proposed adoption of the integration safe harbor would
result in a significantly increased risk to investors.
4. Analysis of Proposed Amendments to Rule 504
    The proposed amendments to Rule 504 would raise the maximum
aggregate amount that could be raised under a Rule 504 offering, in a
12-month period, from $1 million to $5 million and would disqualify
certain bad actors from participation in Rule 504 offerings.
Additionally, in order to account for the proposed increased to the
Rule 504 aggregate offering amount limitation, we propose technical
amendments to the notes to Rule 504(b)(2) that would update the current
illustrations in the rule regarding how the aggregate offering
limitation is calculated in the event that an issuer sells securities
pursuant to Rule 504 and Rule 505 within the same twelve-month
period.\301\ All other provisions of current Rule 504 of Regulation D
would remain unchanged.
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    \301\ See Notes 1 and 2 to Rule 504(b)(2). [17 CFR
230.504(b)(2)].
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    As shown in our baseline analysis above, use of Rule 504 offerings
has been declining over the past decade, in absolute terms as well as
relative to Rule 506 of Regulation D. Relative to Rule 504 offerings,
Rule 506 offerings have the advantage of preemption from state
registration. Thus, even though Rule 506(b) offerings, unlike Rule 504
offerings, are limited to accredited investors and up to only 35 non-
accredited investors, capital raising activity during the last two
decades suggests that the benefits of state preemption outweigh
unrestricted access to non-accredited investors. With the adoption of
Rule 506(c), which allows for general solicitation, the comparative
advantage of current Rule 504 has further diminished.
    The current $1 million maximum amount was set by the Commission in
1988 and was meant to provide ``seed capital'' for small and emerging
businesses.\302\ Given the costs of raising capital from public
sources, the unregistered offerings market has expanded significantly
in the past twenty-five years. The growth of angel investors and VCs,
who invest primarily through unregistered offerings, has also increased
seed capital available for investment at the initial stages of a firm.
Angel investments in 2014 amounted to approximately $24 billion in 2014
and the average angel deal size was approximately $328,500.\303\
According to PWC MoneyTree, in 2008, U.S. VCs made $1.5 billion of seed
investments in 440 companies.\304\ That is an average seed investment
of $3.5 million per company. While the involvement of VCs at the seed
stage has been increasing over the years, it is reported that some
angel deals at the seed stage have included investments as large as
$2.5 million per entity.\305\ Given these changes, amending the Rule
504 offer size from $1 million to $5 million would better comport
regulation with market trends that indicate larger seed capital
infusions.
---------------------------------------------------------------------------

    \302\ See ``Seed Capital'' Release.
    \303\ According to a recent report, angel investments amounted
to $24.1 billion in 2014, with approximately 73,400 entrepreneurial
ventures receiving angel funding and approximately 316,600 active
angel investors. Seed/startup stage deals accounted for
approximately 25% of the $24 billion. See Jeffrey Sohl, The Investor
Angel Market in 2014: A Market Correction in Deal Size, Center for
Venture Research, May 14, 2015, available at https://paulcollege.unh.edu/sites/paulcollege.unh.edu/files/webform/2014%20Analysis%20Report.pdf.
    \304\ See PricewaterhouseCoopers, Investment by Stage of
Development, available at: https://www.pwcmoneytree.com/CurrentQuarter/BySoD.
    \305\ See Fenwick & West Survey 2012 (March 2013), available at
https://www.fenwick.com/publications/Pages/Seed-Finance-Survey-2012.aspx. The survey defines a ``seed'' financing as the first
round of financing by a company in which the company raises between
$250,000 and $2,500,000, and in which professional investors play a
lead role.
---------------------------------------------------------------------------

    Four parallel developments may further change the regulatory
landscape

surrounding existing Rule 504. First, the use of current Rule 504 could
be overshadowed by interstate crowdfunding offerings pursuant to
Section 4(a)(6), which also allows issuers to raise up to $1 million
over a 12-month period with unlimited access to non-accredited
investors and unrestricted use of general solicitation, in addition to
preemption from state regulation and exemption from the registration
requirements under Section 12(g). Second, at least 29 states and the
District of Columbia have enacted and several other states are in the
process of enacting their own crowdfunding exemptions where the maximum
amount that can be raised in a 12-month period ranges from $250,000 to
$4 million, depending on the state (up to $2 million for all but three
states). The maximum offering amounts for intrastate crowdfunding thus
exceed the current offer limit under Rule 504. While most state
crowdfunding exemptions require use of Rule 147, currently two states
allow issuers to conduct their intrastate crowdfunding under the Rule
504 exemption. Third, state regulators have been working to implement
regional coordinated review programs in order to facilitate regional
offerings that could potentially save issuers time and money.
Additionally, at least one state is in the process of enacting
reciprocal crowdfunding provisions, which may allow issuers to conduct
interstate crowdfunding under state regulation.\306\ Since Rule 147 is
restricted to intrastate offerings, Rule 504 would be the most likely
federal exemption that could be used for such regional offerings.
Fourth, Tier 1 of amended Regulation A, which became effective in June
2015 and has a similar eligible issuer universe as Rule 504, allows
offerings up to $20 million without any restrictions on resale of
securities.
---------------------------------------------------------------------------

    \306\ See http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/. See also, the `Reciprocal Crowdfunding
Exemption' proposed by the Massachusetts Securities Division. http://www.sec.state.ma.us/sct/crowdfundingreg/Reciprocal%20Crowdfunding%20Exemption%20-%20MA.PDF.
---------------------------------------------------------------------------

    In light of these developments, the increase in the maximum amount
that can be raised in Rule 504 offerings to $5 million could help make
this market more attractive for startups and small businesses while
also facilitating intrastate and regional offerings greater than $1
million.
    A higher offering amount limit for Rule 504 offerings could
increase the number of issuers that seek to utilize the exemption. To
the extent that amended Rule 504 permits issuers to raise larger
amounts of capital at lower costs than other unregistered capital
markets, the proposed amendment could also lower issuer cost of capital
and facilitate intrastate crowdfunding and the regional offerings
market as it evolves. In addition to new issuers raising capital for
the first time, it is likely that some issuers currently using other
unregistered capital markets may switch to the amended Rule 504 market.
Such movement would increase competition for supply of and demand for
capital between the different unregistered markets, especially
exemptions pursuant to amended Rule 147, Rule 506 of Regulation D,
Regulation A, Regulation Crowdfunding, and other Section 4(a)(2) and
Section 3(a)(11) exemptions. Further, modernizing our exemptive scheme
in order to provide issuers, and especially small businesses, with more
options for capital raising could foster an environment that encourages
new market participants to enter the capital markets, thereby enhancing
the overall level of capital formation in the economy.
    The proposed increase in the Rule 504 offering amount limit could
also increase the number of investors, including non-accredited
investors that can access a wider array of investment opportunities to
diversify their investment portfolios with positive effects on the
supply of capital and the allocative efficiency of unregistered capital
markets. At the same time, increased access by non-accredited investors
to Rule 504 offerings could raise investor protection concerns.
Incidence of fraud could be higher under regional offerings relying on
the Rule 504 exemption due to reduced oversight by states that may rely
on reciprocal registration or coordinated review programs in the
alternate state. The Commission's experience with the elimination of
the prohibition against general solicitation for Rule 504 offerings in
1992 \307\ and its subsequent reinstatement in 1999 as a result of
heightened fraudulent activity \308\ illustrates the potential for
fraud in the Rule 504 market. It should be noted, however, that in 1999
we concluded that the increase in fraud occurred as a result of the
prohibition on unrestricted general solicitation being removed and
because securities issued under Rule 504 offerings were
unrestricted.\309\ As a result, a non-reporting company could sell up
to $1 million of unrestricted securities in a 12-month period and be
subject only to the antifraud and civil liability provisions of the
federal securities laws. In contrast, the proposed amendments would
only increase the aggregate offering amount limitation of Rule 504,
thereby leaving existing restrictions on general solicitation and the
restricted securities status of the securities unchanged. State
registration requirements may also mitigate the risk for investor abuse
in Rule 504 offerings.
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    \307\ See Adoption of Small Business Initiatives, SEC Release
No. 33-6949 (July 30, 1992).
    \308\ See Seed Capital Release.
    \309\ Id. As the Commission noted at the time it proposed to
eliminate the unrestricted nature of securities issued under Rule
504, securities issued in these Rule 504 offerings may have
facilitated a number of fraudulent secondary transactions in the
over-the-counter markets. The Commission also noted that these
securities were issued by ``microcap'' companies, characterized by
thin capitalization, low share prices and little or no analyst
coverage. As the freely-tradable nature of the securities
facilitated the fraudulent secondary transactions, we proposed to
``implement the same resale restrictions on securities issued in a
Rule 504 transaction as apply to transactions under the other
Regulation D exemptions,'' in addition to reinstating the
prohibition against general solicitation. Although we recognized
that resale restrictions would have ``some impact upon small
businesses trying to raise `seed capital' in bona fide
transactions,'' we believed at the time that such restrictions were
necessary so that ``unscrupulous stock promoters will be less likely
to use Rule 504 as the source of the freely tradable securities they
need to facilitate their fraudulent activities in the secondary
markets.'' See Proposed Revision of Rule 504 of Regulation D, the
``Seed Capital'' Exemption, No. 33-7541 (May 21, 1998) [63 FR 29168
(May 28, 1998)], Executive Summary.
---------------------------------------------------------------------------

    Recent enforcement cases involving Rule 504 offerings could also
raise concerns regarding the potential for increased incidence of fraud
under the proposed amendments. Most of these cases have involved
promoters who engaged in secondary market sales of unrestricted
securities that were previously issued in reliance on Rule
504(b)(1)(iii), defrauding investors and in some cases unsophisticated
issuers.\310\ Securities issued in reliance on Rule 504(b)(1)(iii) are
exempt from state registration, and are permitted to use general
solicitation. While the incidence of enforcement cases in this market
has since declined, we recognize that an increase in the maximum
offering size could increase the risk of investor harm, at least in
offerings that are exempt from state registration.
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    \310\ See, e.g., SEC v. Stephen Czarnik, Case No. 10-cv-745
(S.D.N.Y.), Litigation Release No. 21401 (Feb. 2, 2010); SEC v.
Yossef Kahlon, a/k/a Jossef Kahlon and TJ Management Group, LLC,
Case No. 4:12-cv-517 (E. D. Tex.) (Aug. 14, 2012).
---------------------------------------------------------------------------

    Some of these investor concerns could be mitigated by the proposed
amendments to Rule 504(b)(2) and the proposed amendment to extend bad
actor disqualification provisions to Rule 504, consistent with other
rules under Regulation D. As described above, the proposed amendment to
Rule 504(b)(2) would update the current illustrations

of how the aggregate offering limitation is calculated in the event
that an issuer sells securities pursuant to Rule 504 and Rule 505
within the same twelve-month period. By enabling market participants to
calculate more easily the amounts permitted to be sold, this amendment
would provide greater clarity as to issuer compliance with the proposed
increased aggregate offering limitation.
    The proposed amendments to Rule 504 would include bad actor
disqualification provisions that are substantially similar to related
provisions in Rule 506 of Regulation D.\311\ Consistent with Rule
506(d), the proposed amendments would require that the covered person's
status be assessed at the time of the first sale of securities. As in
Rule 506(d), the proposed disqualification provisions would not
preclude the participation of bad actors whose disqualifying events
occurred prior to the effective date of the final amendments, which
could expose investors to the risks that arise when bad actors are
associated with an offering. However, issuers would be required to
disclose disqualification events that occurred prior to the
effectiveness of the proposed amendments. The risks to investors from
participation of covered persons with prior disqualifying events may
therefore be partly mitigated as investors would have access to
relevant information that could inform their investment decisions.
Disclosure of prior disqualifying events may make it more difficult for
issuers to attract investors, and issuers may experience some or all of
the impact of disqualification as a result. Some Rule 504 issuers may
accordingly choose to exclude involvement by prior bad actors to avoid
such disclosures.
---------------------------------------------------------------------------

    \311\ See Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17
CFR 230,505(b)(2)(iii), 230.506(d).
---------------------------------------------------------------------------

    We expect that the bad actor disqualification provisions could help
reduce the potential for fraud in these types of offerings and thus
strengthen investor protection. If disqualification standards lower the
risk premium associated with the risk of fraud due to the presence of
bad actors in securities offerings, they could also reduce the cost of
capital for issuers that rely on the amended Rule 504 exemption. In
addition, the requirement that issuers determine whether any covered
persons are subject to disqualification might reduce the need for
investors to conduct their own due diligence and could therefore
increase efficiency. While fraud can still occur without prior
incidence of disqualification on the part of the issuer or covered
persons, these provisions could mitigate some of the concerns relating
to incidence of fraud in offerings pursuant to amended Rule 504,
including offerings pursuant to regional coordinated review programs,
that could be registered in one jurisdiction but offered and sold in
multiple jurisdictions.
    The disqualification provisions could also impose costs on issuers
and covered persons. Issuers that are disqualified from using amended
Rule 504 may experience an increased cost of capital or a reduced
availability of capital, which could have negative effects on capital
formation. In addition, issuers may incur costs related to seeking
disqualification waivers from the Commission and replacing personnel or
avoiding the participation of covered persons who are subject to
disqualifying events. Issuers also might incur costs to restructure
their share ownership to avoid beneficial ownership of 20% or more of
the issuer's outstanding voting equity securities by individuals
subject to disqualification.
    As discussed above, the proposed amendments would provide, by
reference to Rule 506(d), a reasonable care exception as applicable for
other exemptive rules under Regulation D. A reasonable care exception
could facilitate capital formation by encouraging issuers to proceed
with Rule 504 offerings in situations in which issuers otherwise might
have been deterred from relying on Rule 504 if they risked potential
liability under Section 5 of the Securities Act for unknown
disqualifying events. At the same time, this exception also could
increase the potential for fraud, by limiting issuers' incentives to
determine whether bad actors are involved with their offerings. We also
recognize that some issuers might incur costs associated with
conducting and documenting their factual inquiry into possible
disqualifications. The rule's flexibility with respect to the nature
and extent of the factual inquiry required could allow an issuer to
tailor its factual inquiry as appropriate to its particular
circumstances, thereby potentially limiting costs. Finally, we note
that extending the disqualification provisions to Rule 504 would create
a more consistent regulatory regime under Regulation D that would
simplify due diligence requirements and thereby benefit issuers and
investors that participate in different types of exempt offerings.

C. Alternatives

1. Rescind Rule 505 Exemption
    As discussed in our baseline analysis above, over the past 20
years, the use of the Rule 505 exemption has declined steadily and to a
greater extent than the decline in the use of the Rule 504 exemption,
in terms of the number of new offerings and amount of capital raised.
During 2014, Rule 505 offerings raised less than 0.02% of capital
raised in the Regulation D market, and approximately 2% of all capital
raised by Regulation D offerings of less than $5 million, Rule 506
which has state preemption clearly dominates the market due to the
lower regulatory burden associated with this provision, relative to
Rules 504 and 505.
    Further, we believe that by allowing offerings up to $5 million,
amended Rule 504 would be preferable to existing Rule 505 for issuers
currently eligible for both exemptions because it would provide access
to an unlimited number of non-accredited investors and restricted
general solicitation. Other unregistered markets may also provide a
comparable market for potential Rule 505 issuers to raise the desired
capital.\312\ Rescinding Rule 505 would therefore simplify the existing
scheme of exemptive rules and regulations for unregistered offerings by
making it easier for issuers and investors to choose between different
capital markets.
---------------------------------------------------------------------------

    \312\ For example, Rule 506(b) enables issuers to raise
unlimited amounts along with providing preemption from state
regulation; however, Rule 506(b) offerings are limited to 35 non-
accredited investors who must be sophisticated, either individually
or through a purchaser representative. In contrast, while Regulation
A offerings have greater disclosure requirements, they provide
unlimited access to non-accredited investors with the added benefit
of unrestricted resales of securities.
---------------------------------------------------------------------------

    To the extent that issuers are not able to switch to an alternate
market or raise a sufficient amount of capital, however, rescinding
Rule 505 could cause overall capital formation in the economy and
allocative efficiency of capital markets to decline. For example,
reporting companies and investment companies cannot utilize the Rule
504 exemption. However, very few reporting companies (8 out of 289) or
fund issuers (11) used the Rule 505 exemption during 2014,\313\ and
these issuers can switch to a Rule 506 offering with little or no
costs. We, therefore, believe that most Rule 505 issuers would likely
be able to utilize other exemptions.
---------------------------------------------------------------------------

    \313\ Based on an analysis of Form D filings. The numbers were
similar during 2009-2013.
---------------------------------------------------------------------------

    The impact of repealing Rule 505 would also depend on investor

willingness and ability to switch from an investment in a Rule 505
offering to an investment in an alternate unregistered capital market.
Overall, we believe that repealing Rule 505 would not have a
significant, or any, impact on capital formation because issuers would
likely be successful at finding commensurate capital supply in an
alternate unregistered capital market.
2. Lower Qualifying Thresholds under ``Doing Business'' In-State Tests
    An alternative to the proposed amendments relating to the four
alternative criteria an issuer must satisfy in order to demonstrate it
is doing business in-state could be to lower the percentage thresholds
for the current or proposed 80% threshold requirements. For example,
compared with the current 80% threshold requirements, requiring issuers
to have the majority of their assets, derive the majority of their
revenue, or use the majority of their offering proceeds in-state could
better comport with modern business practices, provide greater
flexibility and make it less burdensome for issuers to satisfy these
requirements. Such a change would also align Rule 147 with other tests,
including the proposed majority employees test, and also those tests
that use a majority threshold for determining issuer status, for
example for determining foreign private issuers.\314\
---------------------------------------------------------------------------

    \314\ See Securities Act Rule 405 and Exchange Act Rule 3b.
---------------------------------------------------------------------------

    Lowering the prescriptive threshold requirements, while retaining
the requirement to satisfy all or some of the criteria that provide
indicia of in-state business, would help balance issuer compliance
obligations with the need to align the locus of Rule 147 capital
raising more closely with issuer operations. At the same time, if
issuers with widely-distributed operations over more than one state are
able to make greater use of amended Rule 147 under such lower
thresholds, state oversight of such issuers could weaken, with a
consequent decrease in investor protection. Some of these concerns
could be mitigated by continuing to restrict sales to in-state
residents and the inclusion of the principal place of business
requirement, by the ability of states to extend their enforcement
activities to issuers whose assets are located beyond state borders,
and by the availability of federal authority to pursue enforcement
action under the antifraud provisions of the federal securities laws.
3. Eliminate ``Doing Business'' In-State Tests
    As another alternative to the proposed rules we considered
eliminating the proposed requirement to qualify under any of the
``doing business'' tests. This alternative would significantly ease the
burden for potential Rule 147 issuers in complying with the exemption,
while also modernizing regulations to align with modern business
practices. As described above, in recent years new business models have
emerged that may make the eligibility tests ill-suited for relying on
the Rule 147 exemption as a capital raising option. Requiring an issuer
to own a significant proportion of its assets, have a majority of its
employees in one state, invest most of the capital raised in one state,
or derive revenue mostly from in-state sales could create inefficient
constraints for startups and small businesses to operate and grow. In
view of these broad changes in business practices, the principal place
of business requirement may be sufficiently effective in establishing
the local nature of an offering pursuant to Rule 147 for purposes of
compliance with the ``doing business'' in-state requirement at the
federal level. Relative to the proposed approach, this alternative
approach would provide more flexibility to state regulators to enact
their own eligibility and residency requirements that better suit the
interests of issuers and investors in their state, rather than using a
``one-size-fits all,'' or uniform, approach at the federal level that
may work better for issuers and investors in some states than others.
    At the same time, under such alternative, as issuers with widely-
distributed assets and operations over more than one state make use of
amended Rule 147, state oversight of such issuers could weaken, with a
consequent decrease in investor protection. For example, if a majority
or a significant proportion of an issuer's assets is located out-of-
state, it could be more difficult for state regulators to assess
whether any disclosures to investors about such assets are fair and
accurate. At the same time, state enforcement actions for protecting
in-state investors can extend to issuers whose assets are located
beyond the boundaries of the state. Additionally, under this
alternative, the principal place of business requirement would replace
the prescriptive ``doing business'' in-state requirements and could
help mitigate investor protection concerns related to the local nature
of the offering.
4. Decreasing or Increasing Rule 504 Maximum Offering Limit
    The offer limit under Rule 504 was last increased from $500,000 to
$1 million in 1988. Adjusted for inflation, the $1 million in 1988
would be worth approximately $2 million today.\315\ Additionally,
offering amount limits under various state crowdfunding provisions
generally are set around $2 million for most jurisdictions, with $4
million being the highest offering limit in one state. As an
alternative to the proposed rule, the offering limit under Rule 504
could be raised to less than $5 million. Increasing the maximum Rule
504 offering to an amount less than $5 million could help alleviate
concerns about a decrease in investor protection from unlimited access
to non-accredited investors. At the same time, this alternative would
restrict capital raising options for issuers, especially if Rule 505
(which permits offering amounts up to $5 million) is rescinded.
---------------------------------------------------------------------------

    \315\ Annual inflation rates (1988-2014) based on consumer price
index data, for all urban consumers, obtained from the Bureau of
Labor Statistics.
---------------------------------------------------------------------------

    Alternately, the maximum offering limit under amended Rule 504
could be raised to an amount greater than $5 million. One example could
be to align the maximum offering limit to that of the Tier I offer
limit ($20 million) under amended Regulation A. This could allow for
more cost-effective state registration, while also providing a
competitive alternative to eligible issuers in Tier 1 of the Regulation
A market. However, unlike the Regulation A market, non-accredited
investors have no investment limits under the Rule 504 provisions.
Moreover, recent enforcement cases have highlighted instances of
investor abuse in offerings that are sold only to accredited investors
in reliance on Rule 504(b)(1)(iii). A higher maximum offering amount
would thus lead to greater investor protection concerns.
5. Additional Amendments to Rule 504
    In light of concerns about potential abuses involving securities
issued in reliance on Rule 504(b)(1)(iii),\316\ imposing resale
restrictions on such securities could increase investor protection by
helping to ensure that securities initially sold pursuant to the
exemption are only resold by initial purchasers after the passage of a
fixed period of time. However, these restrictions would reduce the
liquidity of Rule 504(b)(1)(iii) securities, which could increase the
cost of capital for issuers seeking to raise capital in

reliance on this rule provision. At the same time, increasing investor
protection through resale restrictions could attract greater investor
interest and lower the expected risk premium, which would mitigate, to
some extent, the higher costs arising from less liquid securities.
---------------------------------------------------------------------------

    \316\ See note 182 and related discussion in Section 0 and
Section V.B.0 above.
---------------------------------------------------------------------------

    Additionally, Rule 504 could be amended to include additional
disclosures to address investor protection concerns arising from the
increase in the maximum offering size. While such disclosures could
mitigate some of these concerns, they would increase the compliance
burden for Rule 504 issuers and may also overlap or extend similar
requirements under state law provisions in the jurisdiction in which
such Rule 504 offering is registered.

D. Request for Comment

    We request comments regarding our analysis of the potential
economic effects of the proposed amendments and other matters that may
have an effect on the proposed rule. We request comment from the point
of view of issuers, investors and other market participants. With
regard to any comments, we note that such comments are of particular
assistance to us if accompanied by supporting data and analysis of the
issues addressed in those comments. For example, we are interested in
receiving estimates and data on all aspects of the proposal and, in
particular, on the expected size of the Rule 147 and Rule 504 markets
(number of offerings, number of issuers, size of offerings, number of
investors, etc., as well as information comparing these estimates to
our baseline), overall economic impact of the proposed amendments, and
any other aspect of this economic analysis. We also are interested in
comments on the benefits and costs we have identified and any benefits
and costs we may have overlooked as well as the impact of the proposed
amendments on competition.
    66. What type (size, industry, age, etc.) and how many issuers have
relied on Rule 147 during the years 2013 and 2014? In what states were
these offerings conducted? How many of these were state-registered
offerings? How many claimed an exemption from registration under state
laws?
    67. What types of issuers (size, industry, age, etc.) would most
likely rely on intrastate or regional offerings pursuant to amended
Rules 147 and 504?
    68. As proposed, would amended Rules 147 and 504 attract startups
and small businesses that are considering an offering pursuant to
Regulation Crowdfunding? What types of issuers (size, industry, age,
etc.) would prefer to conduct an intrastate crowdfunding offering to an
interstate crowdfunding offering?
    69. How similar is a securities-based intrastate crowdfunding
offering to a securities-based offering under Regulation Crowdfunding?
How would the cost of an interstate crowdfunding offering compare with
the cost of an intrastate crowdfunding offering? How would the expected
incidence of success, failure, fraud and other outcomes of an
interstate crowdfunding offering compare to the cost of an intrastate
crowdfunding offering?
    70. Are issuers more likely to use the exemption under amended Rule
147 or the exemption under amended Rule 504 for intrastate offerings if
they have a choice under state regulation? Would the cost of raising
capital be lower under amended Rule 147 or under amended Rule 504?
    71. As proposed, would the amended Rules 147 and 504 attract
issuers that are considering offerings under Rule 506(b) or Rule 506(c)
of Regulation D or Regulation A? What would the costs and benefits be
from relying on the amended rules, compared to the costs and benefits
from relying on Rule 506(b) or Rule 506(c) of Regulation D or
Regulation A? Please provide estimates, where possible.
    72. What would be the economic effect of the proposed modification
of the ``doing business'' in-state tests on Rule 147 offerings? What
types of issuers and investors are most likely to be affected by the
proposed amendments to the ``doing business'' tests?
    73. What would be the economic effect of the elimination of all
``doing business'' in-state tests on Rule 147 offerings? What types of
issuers and investors are most likely to be affected by the existing
``doing business'' in-state requirements? Would the elimination of all
``doing business'' in-state tests decrease investor protection? What
would be the economic effect of retaining some or all of the tests with
lower qualifying thresholds?
    74. What are the economic effects of requiring a maximum offering
amount and investment limits for Rule 147 offerings that are exempt
from state registration? Will issuers be likely to use Rule 147 if
these proposed amendments relating to state-exempt offerings are
adopted?
    75. How would amended Rule 147 affect other state registered and
state exempt offerings? What type of issuers (size, age, industry,
etc.) would rely on amended Rule 147 pursuant to state registration or
a state exemption other than intrastate crowdfunding? What would be the
typical offering sizes?
    76. Would the amended Rules 147 and 504 attract accredited and/or
non-accredited investors to intrastate and regional offerings? How
would the costs and benefits of the amended requirements compare to the
costs and benefits of state preemption that currently exists for
securities offered under Rule 506 of Regulation D? How would the costs
and benefits compare to other exempt offering methods, such as
Regulation A or Regulation Crowdfunding? Please provide estimates,
where possible.
    77. Would the amended Rule 147 and 504 exemptions attract
intermediaries (e.g., crowdfunding portals, broker-dealers or
underwriters) to intrastate or regional offerings markets? How would
the presence of intermediaries change the cost structure for Rule 147
and Rule 504 issuers? Would the presence of intermediaries likely
increase the chances that a wider variety of investors would
participate in Rule 147 and 504 offerings?
    78. To what extent would additional resale restrictions on
securities issued in reliance of Rule 504(b)(1)(iii) decrease the
liquidity of such securities?
    79. How would a decrease in the Rule 504 offering amount limitation
to, for example, $2.5 million in a 12-month period affect the use of
Rule 504 exemption? Would it be sufficient to efficiently address
capital raising needs of issuers and effectively address investor
protection concerns? Would the costs of state registration be feasible
under a smaller Rule 504 offering limitation?
    80. How would an increase in the Rule 504 offering amount
limitation to, for example, $20 million in a 12-month period affect the
use of Tier 1 of Regulation A? How would issuers benefit from the
increased offering limitation? Would any such increase in the offering
limitation have an adverse effect on investor protection?
    81. In the case of a repeal of Rule 505, which alternate exemption
would Rule 505 issuers be most likely to utilize? How would the costs
of capital for such issuers be affected?
    82. What would the cost be for an issuer that issues securities
under state crowdfunding provisions and crosses the Section 12(g)
thresholds for registering with the Commission? Please provide
quantitative estimates, where available.
    83. What would be the economic impact of alternatives to the
proposed rule amendments that have been discussed above?

VI. Paperwork Reduction Act

    The proposed amendments to Rule 147 do not contain a ``collection
of information'' requirement within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\317\ Accordingly, the PRA is not
applicable to the proposed amendments to Rule 147 and no PRA analysis
is required.
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    \317\ 44 U.S.C. 3501 et seq. Although amended Rule 147(f) would
require a legend on stock certificates and certain other disclosures
to be made to offerees and purchasers, the proposed rule would
prescribe the precise form of disclosure to be provided to the
public, and thus the proposed amendments would not require issuers
to obtain or compile information for purposes of compliance with
this provision. See 5 CFR 1320.3(c)(2).
---------------------------------------------------------------------------

    The proposed amendments to Rule 504 of Regulation D contain
``collection of information'' requirements within the meaning of the
PRA. There are two titles for the collection of information
requirements contemplated by the proposed amendments. The first title
is: ``Form D'' (OMB Control No. 3235-0076), an existing collection of
information.\318\ The second title is: ``Regulation D Rule 504(b)(3)
Felons and Other Bad Actors Disclosure Statement,'' a new collection of
information. Although the proposed amendments to Rule 504 do not alter
the information requirements set forth in Form D, the proposed
amendments are expected to increase the number of new Form D filings
made pursuant to Regulation D. Additionally, the mandatory bad actor
disclosure provisions that would be required under proposed Rule 504
would contain ``collection of information'' requirements within the
meaning of the PRA. We are submitting the proposed amendments to the
Office of Management and Budget (``OMB'') for review and approval in
accordance with the PRA and its implementing regulations.\319\
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    \318\ Form D was adopted pursuant to Sections 2(a)(15), 3(b),
4(a)(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C.
77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)).
    \319\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The information collection requirements related to the filing of
Form D with the Commission are mandatory to the extent that an issuer
elects to make an offering of securities in reliance on the relevant
exemption. Responses are not confidential, and there is no mandatory
retention period for the information disclosed. The hours and costs
associated with preparing and filing forms and retaining records
constitute reporting and cost burdens imposed by the collection of
information requirements. We are applying for an OMB control number for
the proposed new collection of information in accordance with 44 U.S.C.
3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a control
number to the new collection. Responses to the new collection of
information would be mandatory. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
requirement unless it displays a currently valid OMB control number.

Form D (OMB Control No. 3235-0076)

    The Form D filing is required for issuers as a notice of sales
without registration under the Securities Act based on a claim of
exemption under Regulation D or Section 4(a)(5) of the Securities Act.
The Form D must include basic information about the issuer, certain
related persons, and the offering. This information is used by the
Commission to observe use of the Regulation D exemptions and safe
harbor.
    As we are not proposing to alter the information requirements of
Form D, our proposed amendments will not affect the paperwork burden of
the form, and the burden for responding to the collection of
information in Form D will be the same as before the proposed
amendments to Form D. However, we estimate that our proposed amendments
to increase the aggregate amount of securities that may be offered and
sold in any 12-month period in reliance on Rule 504 will increase the
number of Form D filings that are made with the Commission.
    The table below shows the current total annual compliance burden,
in hours and in costs, of the collection of information pursuant to
Form D. For purposes of the PRA, we estimate that, over a three-year
period, the average burden estimate will be four hours per Form D. Our
burden estimate represents the average burden for all issuers. This
burden is reflected as a one hour burden of preparation on the company
and a cost of $1,200 per filing. In deriving these estimates, we assume
that 25% of the burden of preparation is carried by the issuer
internally and that 75% of the burden of preparation is carried by
outside professionals retained by the issuer at an average cost of $400
per hour. The portion of the burden carried by outside professionals is
reflected as a cost, while the portion of the burden carried by the
issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \320\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,300                4          101,200           25,300           75,900      $30,360,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the year ended 2014, 19,717 issuers made 22,004 new Form D
filings. The annual number of new Form D filings rose from 13,764 in
2009 to 22,004 in 2014, an average increase of approximately 1,648 Form
D filings per year, or approximately 10%. Assuming the number of Form D
filings continues to increase by 1,648 filings per year for each of the
next three years, the average number of Form D filings in each of the
next three years would be approximately 25,300.
---------------------------------------------------------------------------

    \320\ Although the number of responses for Form D is reported as
21,824 in the OMB's Inventory of Currently Approved Information
Collections, available at http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65, we are
preparing a new estimate based on the historical trend of the annual
number of new Form D filings. Based on an average increase of
approximately 1,648 new Form D filings per year over the past five
years, we believe that the average number of new Form D filings in
each of the next three years would be approximately 25,300.
---------------------------------------------------------------------------

    We estimate that the proposed amendments to Rule 504 would result
in a much smaller annual increase in the number of new Form D filings
than the average annual increase that has occurred over the past five
years. To estimate how the proposed amendments to Rule 504 would impact
the number of new Form D filings, we used as a reference point the
impact of a past rule change on the market for Regulation D

offerings. In 1997, the Commission amended Rule 144(d) under the
Securities Act \321\ to reduce the holding period for restricted
securities from two years to one year,\322\ thereby increasing the
attractiveness of Regulation D offerings to investors and to issuers.
Prior to amending Rule 144(d), there were 10,341 Form D filings in
1996, which was followed by a 20% increase in the number of Form D
filings in each of the subsequent three calendar years, reaching 17,830
by 1999. Although it is not possible to predict with any degree of
certainty the increase in the number of Rule 504 offerings following
the proposed amendments, we estimate for purposes of the PRA that there
would be a similar 20% increase in the number of new Form D offerings
that currently rely on either Rule 504 or 505.\323\ In 2014, there were
544 new Form D filings reporting reliance on Rule 504 and 289 new Form
D filings reporting reliance on Rule 505. We estimate that there will
be an additional approximately 200 new Form D filings in each of the
next three years attributable to the proposed amendments.\324\
---------------------------------------------------------------------------

    \321\ 17 CFR 230.144(d).
    \322\ See, SEC Rel. No. 33-7390 (Feb. 20, 1997) [62 FR 9242].
    \323\ We include the number of new Form D filings that rely on
Rule 505 in these estimates since Rule 505 provides an alternative
Regulation D exemption for an issuer to rely upon with a maximum
offering limitation of no more than $5 million in a twelve month
period.
    \324\ We estimate the number of new Form D filings attributable
to the proposed amendments over the next three years as follows: 833
new Form D filings in 2014 relying on either Rules 504 or 505,
multiplied by 20% equals 166.6. Rounding 166.6 to the nearest
hundredth provides us with an estimate of 200 new Form D filings
attributable to the proposed amendments.
---------------------------------------------------------------------------

    Based on these increases, we estimate that the annual compliance
burden of the collection of information requirements for issuers making
Form D filings after amending Rule 504 to increase the aggregate
offering amount from $1 million to $5 million would be an aggregate
25,500 hours of issuer personnel time and $30,600,000 for the services
of outside professionals per year.

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \325\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,500                4          102,000           25,500           76,500      $30,600,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure
Statement (a Proposed New Collection of Information)

    As proposed, the amendments to Rule 504 would disqualify issuers
from reliance on Rule 504 if such issuer would be subject to
disqualification under Rule 506(d) of Regulation D.\326\ Consistent
with the requirements of Rule 506(e), we proposed to require that the
issuer in a Rule 504 offering furnish to each purchaser, a reasonable
time prior to sale, a written description of any matters that occurred
before effectiveness of any amendments to the rule that may be adopted
and within the time periods described in the list of disqualification
events set forth in Rule 506(d)(1) of Regulation D,\327\ in regard to
the issuer or any other ``covered person'' associated with the
offering. For purposes of the mandatory disclosure provision described
in the note to proposed Rule 504(b)(3),\328\ issuers would be required
to ascertain whether any disclosures are required in respect of covered
persons involved in their offerings, prepare any required disclosures
and furnish them to purchasers.
---------------------------------------------------------------------------

    \325\ The information in this column is not based on the number
of responses for Form D of 21,824, as reported in the OMB's
Inventory of Currently Approved Information Collections, but rather
on a new estimate of the average number of new Form D filings in
each of the next three years. We prepared this estimate based on the
historical trend of the annual number of new Form D filings. See
text accompanying note 320 above. Based on an average increase of
approximately 1,648 new Form D filings per year over the past five
years, we estimate that the number of new Form D filings after the
proposed amendment to Rule 504 would be the average number of new
Form D filings we estimate in each of the next three years of
25,300, plus the additional 200 filings we estimate would be filed
as a result of the proposed amendment to Rule 504.
    \326\ See proposed Rule 504(b)(3); see also 17 CFR 230.506(d).
    \327\ 17 CFR 230.506(d)(1).
    \328\ See note to proposed Rule 504(b)(3).
---------------------------------------------------------------------------

    The Commission would adopt the proposed Regulation D Rule 504(b)(3)
Felons and Other Bad Actors Disclosure Statement under the Securities
Act. The Regulation D Rule 504(b)(3) Felons and Other Bad Actors
Disclosure Statement that would be required to be furnished to
investors does not involve submission of a form filed with the
Commission and is not required to be presented in any particular
format, although it must be in writing. The hours and costs associated
with preparing and furnishing the Regulation D Rule 504(b)(3) Felons
and Other Bad Actors Disclosure Statement to investors in the offering
constitute reporting and cost burdens imposed by the collection of
information. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
    The disclosure or paperwork burden imposed on issuers appears in a
note to proposed Rule 504(b)(3) and pertains to events that occurred
before effectiveness of the final rules but which would have triggered
disqualification had they occurred after effectiveness. Issuers relying
on proposed Rule 504 would be required to furnish disclosure of any
relevant past events that would have triggered disqualification under
proposed Rule 504(b)(3) that relate to the issuer or any other covered
person. If there are any such events, a disclosure statement would be
required to be furnished, a reasonable time before sale, to all
purchasers in the offering. The disclosure requirement would serve to
protect purchasers by ensuring that they receive information regarding
any covered persons that were subject to such disqualifying events.
    The disclosure requirement would not apply to triggering events
occurring after the effective date of the proposed rule amendments, if
adopted, because those events would result in disqualification from
reliance on Rule 504 (absent a waiver or other exception provided in
Rule 506(d)), rather than any disclosure obligation.
    The steps that issuers would take to comply with the proposed
disclosure requirement are expected to mirror the steps they would take
to determine whether they are disqualified from relying on Rule 504. We
expect that issuers planning or conducting a Rule 504 offering would
undertake a factual

inquiry to determine whether they are subject to any disqualification.
Disqualification and mandatory disclosure would be triggered by the
same types of events in respect of the same covered persons, with
disqualification arising from triggering events occurring after the
adoption and effectiveness of any amended rules and mandatory
disclosure applicable to events occurring before that date. Therefore,
we would expect that factual inquiry into potential disqualification
could simply be extended to cover the period before any amended rules
so adopted become effective. On that basis, we would expect that the
factual inquiry process for the disclosure statement requirement would
impose a limited incremental burden on issuers.
    We expect that the size of the issuer and the circumstances of the
particular Rule 504 offering would determine the scope of the factual
inquiry and require tailored and offering-specific data gathering
approaches. We do not anticipate that it would generally be necessary
for any issuer or any compensated solicitor to make inquiry of any
covered individual with respect to ascertaining the existence of events
that require disclosure more than once, because the proposed period to
be covered by the inquiry would end with the effective date of any new
disqualification rules (so future events would be unlikely to affect
the inquiry or change the disclosures that would have to be made). We
do, however, expect that issuers may be required to revise their
factual inquiry for each Rule 504 offering due to changes in management
or intermediaries, other changes to the group of covered persons or if
questions arise about the accuracy of previous responses. We also would
expect that the disclosure requirement may serve the additional
function of helping issuers develop processes and procedures for the
factual inquiry required to establish reasonable care under the
disqualification provisions of Rule 506(d).
    We anticipate that the Regulation D Rule 504(b)(3) Felons and Other
Bad Actors Disclosure Statement would result in an incremental increase
in the burdens and costs for issuers that rely on the Rule 504
exemption by requiring these issuers to conduct factual inquiries into
the backgrounds of covered persons with regard to events that occurred
before effectiveness of the final bad actor disqualification
provisions. For purposes of the PRA, we estimate the total annual
increase in paperwork burden for all affected Rule 504 issuers to
comply with our proposed collection of information requirements would
be approximately 830 hours of company personnel time and approximately
$9,600 for the services of outside professionals. These estimates
include the incremental time and cost of conducting a factual inquiry
to determine whether the Rule 504 issuers have any covered persons with
past disqualifying events. The estimates also include the cost of
preparing a disclosure statement that issuers would be required to
furnish to each purchaser a reasonable time prior to sale.
    In deriving our estimates, consistent with those assumptions used
in the PRA analysis for the Rule 506 bad actor disqualification
provisions,\329\ we assume that:
---------------------------------------------------------------------------

    \329\ See SEC Rel. No. 33-9414 (July 10, 2013).
---------------------------------------------------------------------------

    Approximately 750 Rule 504 issuers \330\ relying on Rule 504 of
Regulation D would spend on average one additional hour to conduct a
factual inquiry to determine whether any covered persons had a
disqualifying event that occurred before the effective date of the rule
amendments; and
---------------------------------------------------------------------------

    \330\ Filing data reviewed by the staff of the Commission's
Division of Economic and Risk Analysis indicate that for 2014, 544
issuers claimed Rule 504 and 289 issuers claimed Rule 505 in their
Form D filings with the Commission. See Figure 1 in Section V.1
above. For purposes of the PRA estimates, and based on the data
provided for Rule 504 and Rule 505 offerings in 2014, we assume that
approximately 750 issuers would file a Form D indicating reliance on
Rule 504 after the effectiveness of any rule amendments proposed
today. This figure includes issuers that, before the adoption of any
potential amendments to Rule 504 proposed today, would have
conducted offerings pursuant to Rule 505, but that after the
adoption of any such amendments would likely conduct their offerings
pursuant to Rule 504.
---------------------------------------------------------------------------

    On the basis of the factual inquiry, approximately eight issuers
(or approximately 1%) would spend ten hours to prepare a disclosure
statement describing matters that would have triggered disqualification
under Rule 504(b)(3) of Regulation D had they occurred on or after the
effective date of the rule amendments; and
    For purposes of the disclosure statement, approximately eight Rule
504 issuers would retain outside professional firms to spend three
hours on disclosure preparation at an average cost of $400 per hour.
    The increase in burdens and costs associated with conducting the
proposed factual inquiry for the disclosure statement requirement
should pose a minimal incremental effort given that issuers are
simultaneously required to conduct a similar factual inquiry for
purposes of determining disqualification from the Rule 506 exemption.
    It is difficult to provide any standardized estimates of the costs
involved with the factual inquiry. There is no central repository that
aggregates information from all federal and state courts and regulators
that would be relevant in determining whether a covered person has a
disqualifying event in his or her past. In this regard, we are
currently unable to accurately estimate the burdens and costs for
issuers in a verifiable way. We expect, however, that the costs to
issuers may be higher or lower depending on the size of the issuer and
the number and roles of covered persons. We realize there may be a wide
range of issuer size, management structure, and offering participants
involved in Rule 504 offerings and that different issuers may develop a
variety of different factual inquiry procedures.
    Where the issuer or any covered person would be subject to an event
covered by Rule 504(b)(3) that existed before the effective date of
these rules, the issuer would be required to prepare disclosure for
each relevant Rule 504 offering. The estimates include the time and the
cost of data gathering systems, the time and cost of preparing and
reviewing disclosure by in-house and outside counsel and executive
officers, and the time and cost of delivering or furnishing documents
and retaining records.
    Issuers conducting ongoing or continuous offerings would be
required to update their factual inquiry and disclosure as necessary to
address additional covered persons. The annual incremental paperwork
burden, therefore, depends on an issuer's Rule 504 offering activity
and the changes in covered persons from offering to offering. For
example, some issuers may only conduct one Rule 504 offering during a
year while other issuers may have multiple, separate Rule 504 offerings
during the course of the same year involving different financial
intermediaries, may hire new executive officers or may have new 20%
shareholders, any of which would result in a different group of covered
persons. In deriving our estimates, we recognize that the burdens would
likely vary among individual companies based on a number of factors,
including the size and complexity of their organizations. We believe
that some companies would experience costs in excess of this estimated
average and some companies may experience less than the estimated
average costs.

Request for Comment

    We request comment on our approach and the accuracy of the current
estimates. Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits

comments to: (1) Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility; (2)
evaluate the accuracy of the Commission's estimate of burden of the
collection of information; (3) determine whether there are ways to
enhance the quality, utility and clarity of the information to be
collected; and (4) evaluate whether there are ways to minimize the
burden of the collection of information on those who are required to
respond, including through the use of automated collection techniques
or other forms of information technology.
    Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and send a copy to Brent J. Fields, Secretary, Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549-1090, with
reference to File No. S7-22-15. Requests for materials submitted to OMB
by the Commission with regard to these collections of information
should be in writing, refer to File No. S7-22-15, and be submitted to
the Securities and Exchange Commission, Office of FOIA Services, 100 F
Street NE., Washington, DC 20549-1090. OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication of this release. Consequently, a comment to OMB
is assured of having its full effect if OMB receives it within 30 days
of publication.

VII. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \331\ requires the
Commission, in promulgating rules under Section 553 of the
Administrative Procedure Act,\332\ to consider the impact of those
rules on small entities. The Commission has prepared this Initial
Regulatory Flexibility Analysis (``IRFA'') in accordance with Section
603 of the RFA.\333\ This IRFA relates to the proposed amendments to
Securities Act Rules 147 and 504.
---------------------------------------------------------------------------

    \331\ 5 U.S.C. 601 et seq.
    \332\ 5 U.S.C. 553.
    \333\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

    The primary reason for, and objective of, the proposed amendments
to Rule 147 is to establish a new Securities Act exemption for
intrastate offerings of securities by local companies, including
offerings relying upon newly adopted and proposed crowdfunding
provisions under state securities laws. Market participants and state
regulators have indicated that the combined effect of Section
3(a)(11)'s statutory limitation on offers and the prescriptive issuer
eligibility requirements of Rule 147 unduly restrict the availability
of the exemption for local companies that would otherwise conduct
intrastate offerings in a manner that is consistent with the original
intent of Section 3(a)(11). These commenters have also indicated that
the current requirements of Rule 147 make it difficult for issuers to
take advantage of recently adopted state crowdfunding provisions. The
proposed amendments to Rule 147 would ease these limitations in the
rule and would allow an issuer to engage in any form of general
solicitation or general advertising, including the use of publicly
accessible Internet Web sites, to offer and sell its securities, so
long as all purchasers of such securities are residents of the same
state or territory in which the issuer's principal place of business is
located. We propose to amend Rule 147 pursuant to our general exemptive
authority under Section 28 of the Securities Act.
    The primary reason for, and objective of, the proposed amendments
to Rule 504 is to facilitate capital formation by increasing the
flexibility of state securities regulators to implement regional
coordinated review programs that would facilitate regional offerings.
The proposed amendments to Rule 504 would raise the aggregate amount of
securities an issuer may offer and sell in any 12-month period from $1
million to $5 million and disqualify certain bad actors from
participating in Rule 504 offerings. We believe that raising the
aggregate offering limitation and disqualifying certain bad actors
would maximize the flexibility of state securities regulators to
implement regional coordinated review programs and provide for greater
consistency across Regulation D.

B. Legal Basis

    We are proposing the amendments pursuant to Sections 3(b)(1),
4(a)(2), 19 and 28 of the Securities Act.

C. Small Entities Subject to the Proposed Amendments

    For purposes of the RFA, under our rules, an issuer, other than an
investment company, is a ``small business'' or ``small organization''
if it has total assets of $5 million or less as of the end of its most
recent fiscal year and is engaged or proposing to engage in an offering
of securities which does not exceed $5 million.\334\ For purposes of
the Regulatory Flexibility Act, an investment company is a small entity
if it, together with other investment companies in the same group of
related investment companies, has net assets of $50 million or less as
of the end of its most recent fiscal year.\335\
---------------------------------------------------------------------------

    \334\ 17 CFR 230.157.
    \335\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    While we lack data on the number and size of Rule 147 offerings
\336\ or the type of issuers currently relying on the Rule 147 safe
harbor, the nature of the eligibility requirements and other
restrictions of the rule lead us to believe that it is currently being
used by U.S. incorporated businesses that are likely small businesses
seeking to raise small amounts of capital without incurring the costs
of registering with the Commission.
---------------------------------------------------------------------------

    \336\ See note 211 above.
---------------------------------------------------------------------------

    Currently, issuers that intend to conduct intrastate crowdfunding
offerings are required to use the Rule 147 exemption by most of the
states that have enacted crowdfunding provisions. Since December 2011,
when the first state enacted crowdfunding provisions, 106 state
crowdfunding offerings have been reported to be filed with the
respective state regulators.\337\ Of these offerings, 91 were reported
to be approved or cleared, as of June 2015. We expect that almost all
of the entities conducting these offerings were small issuers.
---------------------------------------------------------------------------

    \337\ Based on estimates provided by NASAA.
---------------------------------------------------------------------------

    The proposed amendments to Rule 504 would affect small issuers that
rely on this exemption from Securities Act registration. All issuers
that sell securities in reliance on Regulation D are required to file a
Form D with the Commission reporting the transaction. For the year
ended December 31, 2014, 19,717 issuers made 22,004 new Form D filings,
of which 495 issuers relied on the Rule 504 exemption. Based on the
information reported by issuers on Form D, there were 146 small issuers
\338\

relying on the Rule 504 exemption in 2014. This number likely
underestimates the actual number of small issuers relying on the Rule
504 exemption, however, because 38% of issuers that are not pooled
investment funds and 50% of issuers that are pooled investment funds
declined to report on their Form D filed with the Commission their
amount of revenues or assets.
---------------------------------------------------------------------------

    \338\ Of this number, 140 of these issuers are not pooled
investment funds, and 6 are pooled investment funds. We also note
that issuers that are not pooled investment funds disclose only
revenues on Form D, and not total assets. Hence, we use the amount
of revenues as a measure of issuer size for non-pooled investment
funds and net asset value as a measure of issuer size for pooled
investment funds.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments to Rule 147 would not impose any reporting
or recordkeeping requirements, but would require that issuers
conducting offerings in reliance on the rule make certain specific
disclosures to each offeree and purchaser in the offering. These
disclosures would be made to each offeree in the manner in which any
such offer is communicated and to each purchaser of a security in the
offering in writing. The proposed amendments to Rule 147 would also
require that issuers place a specific legend on the certificate or
other document evidencing the securities that are being offered in
reliance on the rule.
    In order to comply with proposed Rule 147(d), issuers would need to
have a reasonable belief that a prospective purchaser resides within
the state or territory of which the issuer has its principal place of
business. The steps required to establish reasonable belief would vary
with the circumstances. For example, an issuer may need to consider
facts and circumstances, such as the existence of a pre-existing
relationship between the issuer and the prospective purchaser providing
the issuer with insight and knowledge as to the primary residence of
the prospective purchaser. An issuer may also consider other facts and
circumstances establishing the residency of a prospective purchaser,
such as evidence of the home address of the prospective purchaser, as
documented by a recently dated utility bill, pay-stub, information
contained in a state or federal tax returns, or any state-issued
documentation, such as a driver's license or identification card.
    The proposed amendments to Rule 504 would increase the aggregate
offering ceiling from $1 million to $5 million and disqualify certain
bad actors from participating in Rule 504 offerings. Issuers would need
to comply with all the current requirements of Rule 504, including the
filing of a Form D.\339\ Also, as it is the case under current Rule
504, issuers relying on the rule that wish to engage in general
solicitation and issue freely tradable securities may also be required
to register their offering with at least one state regulator. The
proposed amendments to Rule 504 would also impose a disclosure
requirement with respect to bad actor disqualifying events that
occurred before the effective date of any of the proposed
disqualification provisions, if adopted, and would have triggered
disqualification had they occurred after that date.\340\ Such
disclosure would be required to be in writing and furnished to each
purchaser a reasonable time prior to sale. There would be no prescribed
form that such disclosure must take.
---------------------------------------------------------------------------

    \339\ Rule 503 requires an issuer relying on any exemption under
Regulation D to file a Form D within 15 calendar days after the
first sale of securities in the offering.
    \340\ See proposed Rule 504(b)(3).
---------------------------------------------------------------------------

    In addition, we would expect that issuers would exercise reasonable
care to ascertain whether a disqualification exists with respect to any
covered person, and document their exercise of reasonable care. The
steps required would vary with the circumstances, but we anticipate
would generally include making factual inquiry of covered persons and,
where the issuer has reason to question the veracity or completeness of
responses to such inquiries, further steps such as reviewing
information on publicly available databases. In addition, issuers would
have to prepare any necessary disclosure regarding preexisting events.
We would expect that the costs of compliance would vary depending on
the size and nature of the offering but that they would generally be
lower for small entities than for larger ones because of the relative
simplicity of their organizational structures and securities offerings
and the generally smaller numbers of individuals and entities involved.

E. Overlapping or Conflicting Federal Rules

    We believe that there are no federal rules that conflict with the
proposed amendments to Rule 147 and Rule 504 of Regulation D. As
discussed above,\341\ Rule 147, as proposed to be amended, would
encompass offerings that are exempt under Securities Act Section
3(a)(11). Amended Rule 147, however, also would extend to certain other
offerings that do not meet the requirements for the statutory
exemption, such as those offered on publicly accessible Internet Web
sites. As discussed above,\342\ Rule 504, as proposed to be amended,
would have the same offering limitation as current Rule 505 and include
bad actor disqualification provisions, which would reduce the
distinctions between these rules across Regulation D if the amendments
to the rules are adopted as proposed.
---------------------------------------------------------------------------

    \341\ See discussion in Section II.B above.
    \342\ See discussion in Section III.C above.
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives of our
amendments, while minimizing any significant adverse impact on small
entities. Specifically, we considered the following alternatives: (1)
Establishing different compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) clarifying, consolidating or simplifying compliance and
reporting requirements for small entities under the rule; (3) using
performance rather than design standards; and (4) exempting small
entities from coverage of all or part of the proposed amendments.
    With respect to clarification, consolidation and simplification of
the rule's compliance and reporting requirements for small entities,
the proposed amendments to Rule 147 do not impose any new reporting
requirements. To the extent the proposed amendments may be considered
to create a new compliance requirement to have a reasonable belief that
a prospective purchaser is a resident of the state or territory in
which the issuer has its principal place of business, the precise steps
necessary to meet that requirement will vary according to the
circumstances, and this flexible standard will be applicable to all
issuers, regardless of size. We believe our proposals are designed to
streamline and modernize the rule for all issuers, both large and
small. Nevertheless, we request comment on ways to clarify,
consolidate, or simplify any part of the proposed amendments to Rule
147, including whether we should retain the current safe harbor under
Rule 147.
    In connection with our proposed amendments to Rule 147, we do not
think it feasible or appropriate to establish different compliance or
reporting requirements or timetables for small entities. The proposed
amendments are designed to facilitate access to capital for both large
and small issuers, but particularly smaller issuers who may satisfy
their financing needs by limiting the sales of their securities only to
residents of the state or territory

in which they have their principal place of business. The proposed
amendments do not contain any reporting standards and the compliance
requirements it does include are minimal and designed with the limited
resources of smaller issuers in mind. For example, the proposed rule
would eliminate the current requirement to obtain an investor
representation as to residency status because we do not believe such a
requirement would be necessary in all circumstances. Similarly, we do
not believe it is necessary to clarify, consolidate or simplify
reporting or compliance requirements for small entities as the proposed
rule contains more streamlined requirements for all issuers, both large
and small. For example, the proposed amendments simplify the doing
business in-state determination by amending the current rule
requirements so that an issuer's ability to rely on the rule would be
based on the location of the issuer's principal place of business and
its ability to satisfy an additional criterion that we believe would
provide further assurance of the in-state nature of the issuer's
business within the state in which the offering takes place. With
respect to using performance rather than design standards, we note that
our proposed amendment establishing a ``reasonable belief'' standard
for the determination of a prospective purchaser's residency status is
a performance standard. Rather than prescribe specific steps necessary
to meet such a standard, such as requiring written representations from
investors, the proposed rules recognize that reasonable belief can be
established in a variety of ways (e.g., through pre-existing knowledge
of the purchaser, obtaining supporting documentation, or using other
appropriate methods). We believe that the use of a performance standard
accommodates different types of offerings and purchasers without
imposing overly burdensome methods that may be ill-suited or
unnecessary to a particular offering or purchaser, given the facts and
circumstances.
    With respect to exempting small entities from coverage of the
proposed amendments to Rule 147, we believe such changes would be
impracticable. These proposed amendments are designed to facilitate an
issuer's access to capital, regardless of the size of the issuer. We
have endeavored throughout these proposed amendments to minimize the
regulatory burden on all issuers, including small entities, while
meeting our regulatory objectives. We believe exempting small entities
from our proposals would increase, rather than decrease, their
regulatory burden. Nevertheless, we request comment on ways in which we
could exempt small entities from coverage of any unduly onerous aspects
of our proposed amendments.
    In connection with our proposed amendments to Rule 504 of
Regulation D, we do not think it is feasible or appropriate to
establish different compliance or reporting requirements or timetables
for small entities. Our proposals are intended to facilitate issuers'
access to capital and are particularly designed for smaller issuers who
are not subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act and who are offering no more than $5 million of their
securities in any twelve month period. The proposed amendments are also
designed to exclude ``felons and other `bad actors' '' from involvement
in Rule 504 securities offerings, which we believe could benefit small
issuers by protecting them and their investors from bad actors and
increasing investor trust in such offerings. Increased investor trust
could potentially reduce the cost of capital and create greater
opportunities for small businesses to raise capital. Exempting small
entities from our proposals would increase, rather than decrease, their
regulatory burden. Nevertheless, we request comment on whether it is
feasible or appropriate for small entities to have different
requirements or timetables for compliance with our proposals.
    With respect to clarification, consolidation and simplification of
the compliance and reporting requirements for small entities, the
proposed amendments do not impose any new reporting requirements. To
the extent the proposed amendments may be considered to create a new
compliance requirement to exercise reasonable care to ascertain whether
a disqualification exists with respect to any offering and to furnish a
written description of preexisting triggering events, the precise steps
necessary to meet that proposed requirement would vary according to the
circumstances. In general, we believe the requirement would more easily
be met by small entities than by larger ones because we believe that
their structures and securities offerings would be generally less
complex and involve fewer participants. Nevertheless, we request
comment on ways to clarify, consolidate, or simplify any part of our
proposed rule amendments for small entities.
    With respect to the use of performance or design standards, we note
that our proposed amendments to Rule 504 relating to increasing the
aggregate offering amount that may be offered and sold in any 12-month
period from $1 million to $5 million would use design rather than
performance standards. We note, however, that the ``reasonable care''
exception would be a performance standard. With respect to exempting
small entities from coverage of these proposed amendments, we believe
that such an approach would be impracticable. Regulation D was
designed, in part, to provide exemptive relief for smaller issuers.
Exempting small entities from bad actor provisions could result in a
decrease in investor protection and trust in the private placement and
small offerings markets. We have endeavored to minimize the regulatory
burden on all issuers, including small entities, while meeting our
regulatory objectives, and have proposed to include a ``reasonable
care'' exception and waiver authority for the Commission to give
issuers and other covered persons additional flexibility with respect
to the application of these amendments.

G. General Request for Comment

    We encourage comments with respect to any aspect of this initial
regulatory flexibility analysis. In particular, we request comments
regarding:
     The number of small entities that may be affected by the
proposals;
     The existence or nature of the potential impact of the
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed amendments.
    Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposals are adopted, and will be placed
in the same public file as comments on the proposed amendments
themselves.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\343\ the Commission must advise the OMB as to
whether a proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
---------------------------------------------------------------------------

    \343\ Pub. L. 104-121, Tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);

     a major increase in costs or prices for consumers or
individual industries; or
     significant adverse effects on competition, investment or
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed
for 60 days pending Congressional review.
    We request comment on whether our proposed amendments would be a
``major rule'' for purposes of SBREFA. We solicit comment and empirical
data on:
     The potential effect on the U.S. economy on an annual
basis;
     any potential increase in costs or prices for consumers or
individual industries; and
     any potential effect on competition, investment or
innovation.
    We request those submitting comments to provide empirical data and
other factual support for their views to the extent possible.

IX. Statutory Basis and Text of Proposed Rules

    The amendments contained in this release are being proposed under
the authority set forth in Sections 3(b)(1), 4(a)(2), 19 and 28 of the
Securities Act of 1933, as amended.

Text of Proposed Amendments

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read in part as
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Section 230.147 is revised to read as follows:

Sec.  230.147  Intrastate sales exemption.

    (a) Scope of the exemption. Offers and sales by or on behalf of an
issuer of its securities made in accordance with all of the provisions
of this section (Sec.  230.147) are exempt from section 5 of the Act
(15 U.S.C. 77e) if the issuer:
    (1) Registers the offer and sale of such securities in the state in
which all purchasers of the securities are resident; or
    (2) Conducts the offer and sale of such securities pursuant to an
exemption from registration in the state in which all purchasers of the
securities are resident that limits the amount of securities:
    (i) An issuer may sell pursuant to such exemption to no more than
$5 million in a twelve-month period; and
    (ii) An investor may purchase in such offering (as determined by
the appropriate authority in such state).
    (b) Manner of offers and sales. An issuer, or any person acting on
behalf of the issuer, may rely on this exemption to make offers and
sales using any form of general solicitation and general advertising,
so long as the issuer complies with the provisions of paragraphs (c),
(d), and (f) through (h) of this section.
    (c) Nature of the issuer. The issuer of the securities shall at the
time of any offers and sales pursuant to this section:
    (1) Have its principal place of business within the state or
territory in which all purchasers of the securities are resident. The
issuer shall be deemed to have its principal place of business in a
state or territory in which the officers, partners or managers of the
issuer primarily direct, control and coordinate the activities of the
issuer; and
    (2) Meet at least one of the following requirements:
    (i) The issuer derived at least 80% of its consolidated gross
revenues from the operation of a business or of real property located
in or from the rendering of services within such state or territory;
    (ii) The issuer had at the end of its most recent semi-annual
fiscal period prior to an initial offer of securities in any offering
or subsequent offering pursuant to this section, at least 80% of its
assets and those of its subsidiaries on a consolidated basis located
within such state or territory;
    (iii) The issuer intends to use and uses at least 80% of the net
proceeds to the issuer from sales made pursuant to this section (Sec.
230.147) in connection with the operation of a business or of real
property, the purchase of real property located in, or the rendering of
services within such state or territory; or
    (iv) A majority of the issuer's employees are based in such state
or territory.

    Note 1 to paragraph (c)(1). An issuer that has previously
conducted an intrastate offering pursuant to this section (Sec.
230.147) may not conduct another intrastate offering pursuant to
this section (Sec.  230.147), based upon satisfaction of the
principal place of business definition contained in paragraph (c)(1)
of this section (Sec.  230.147(c)(1)) in a different state or
territory, until the expiration of the time period specified in
paragraph (e) of this section (Sec.  230.147(e)), calculated on the
basis of the date of the last sale in such offering.

    Note 1 to paragraph (c)(2)(i). Revenues must be calculated based
on the issuer's most recent fiscal year, if the first offer of
securities pursuant to this section is made during the first six
months of the issuer's current fiscal year, and based on the first
six months of the issuer's current fiscal year or during the twelve-
month fiscal period ending with such six-month period, if the first
offer of securities pursuant to this section is made during the last
six months of the issuer's current fiscal year.

    (d) Residence of purchasers. Sales of securities pursuant to this
section (Sec.  230.147) shall be made only to persons that the issuer
reasonably believes at the time of sale are residents of the state or
territory in which the issuer has its principal place of business. For
purposes of determining the residence of purchasers:
    (1) A corporation, partnership, limited liability company, trust or
other form of business organization shall be deemed to be a resident of
a state or territory if, at the time of sale to it, it has its
principal place of business, as defined in paragraph (c)(1) of this
section, within such state or territory.
    (2) Individuals shall be deemed to be residents of a state or
territory if such individuals have, at the time of sale to them, their
principal residence in the state or territory.
    (3) A corporation, partnership, trust or other form of business
organization, which is organized for the specific purpose of acquiring
securities offered pursuant to this section (Sec.  230.147), shall not
be a resident of a state or territory unless all of the beneficial
owners of such organization are residents of such state or territory.
    (e) Limitation on resales. For a period of nine months from the
date of the sale by the issuer of a security pursuant to this section
(Sec.  230.147), any resale of such security by a purchaser shall be
made only to persons resident within the purchaser's state or territory
of residence, as determined pursuant to paragraph (d) of this section.
    Instruction to Paragraph (e): In the case of convertible
securities, resales of either the convertible security, or if it is
converted, the underlying security, could be made during the period
described in paragraph (e) only to persons resident within such state
or territory. For purposes of this paragraph (e), a conversion in
reliance on section 3(a)(9) of the Act (15 U.S.C. 77c(a)(9)) does not
begin a new period.
    (f) Precautions against interstate sales. (1) The issuer shall, in
connection with any securities sold by it pursuant to this section:
    (i) Place a prominent legend on the certificate or other document
evidencing

the security stating that: ``Offers and sales of these securities were
made under an exemption from registration and have not been registered
under the Securities Act of 1933. For a period of nine months from the
date of the sale by the issuer of these securities, any resale of these
securities (or the underlying securities in the case of convertible