that, with the exception of the addition of security-based crowdfunding
transactions conducted pursuant to Section 4(a)(6) of the Securities
Act, preserves the provisions of existing Regulation A.
    We believe that the final rules provide issuers with valuable
certainty as to the contours of offerings conducted before, or close in
time with, Regulation A offerings. This certainty may be particularly
beneficial for smaller issuers whose capital needs, and thus preferred
capital raising methods, may change frequently.
    As an alternative, we could have eliminated the integration safe
harbor. We believe that the elimination of the safe harbor, however,
would inject uncertainty into offerings conducted before, or close in
time with, Regulation A offerings and would, in turn, decrease the
utility of the exemption. Uncertainty as to the contours of offerings,
as they relate to Regulation A, could possibly cause issuers to prefer
other offering methods to Regulation A, which may have an effect on
investor protection. For example, if issuers rely more on Regulation D,
this alternative could result in investors receiving less information
about an issuer before making an investment, thereby reducing investor
protection. Instead, if issuers rely more on registered offerings, this
alternative could potentially provide investors with the more extensive
disclosure required of, and liability protections associated with, such
offerings, although it would cause smaller issuers to incur the higher
initial and ongoing costs associated with such offerings.
6. Treatment Under Section 12(g)
    Existing rules currently do not exempt Regulation A securities from
the requirements of Section 12(g), but the Proposing Release requested
comment on whether we should adopt such an exemption. A number of
commenters recommended exempting Regulation A securities from Section
12(g) of the Exchange Act,\966\ and several commenters recommended
changing or delaying the application of Section 12(g).\967\ In a change
from the proposed rules, the final rules exempt securities issued in a
Tier 2 offering from the provisions of Section 12(g) for so long as the
issuer remains subject to, and is current in, its periodic Regulation A
reporting obligations as of its fiscal year end,\968\ engages the
services of a transfer agent registered with the Commission pursuant to
Section 17A of the Exchange Act, and had a public float of less than
$75 million as of the last business day of its most recently completed
semiannual period, or, in the absence of a public float, had annual
revenues of less than $50 million as of

its most recently completed fiscal year.\969\
---------------------------------------------------------------------------

    \966\ See B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2;
Fallbrook Technologies Letter; Frutkin Law Letter; Guzik Letter 1
and Letter 3; Heritage Letter; IPA Letter; Ladd Letter 2; Milken
Institute Letter; MoFo Letter; SBIA Letter (recommending that the
trigger be ``raised or remedied,'' but not explicitly calling for
elimination); U.S. Chamber of Commerce Letter; WR Hambrecht + Co
Letter.
    \967\ See Heritage Letter; KVCF; McCarter & English Letter;
Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA
Letter.
    \968\ See Rule 12g5-1(a)(7).
    \969\ Id.
---------------------------------------------------------------------------

    The final rules are intended to provide sufficient disclosure to
help investors make informed decisions while limiting the costs imposed
on issuers. We believe that the initial and ongoing disclosures
required for Tier 2 offerings in the final rules accomplish this
objective and that the final rules also provide an appropriate balance
between providing investor protection and promoting capital formation.
The size of Tier 2 offerings, combined with the investment limitation
and the ability to offer Tier 2 securities to the general public, may
result in the number of an issuer's shareholders of record exceeding
Section 12(g) thresholds. A conditional Section 12(g) exemption for
small issuers of Tier 2 securities in such instances is expected to
reduce the compliance cost for small issuers and facilitate capital
formation and the creation of a broad investor base in offerings made
pursuant to Regulation A by small Tier 2 issuers. This will benefit
those small Regulation A issuers that are not seeking to list on a
national securities exchange \970\ and that may find the costs of
Exchange Act reporting to be too high given their size.
---------------------------------------------------------------------------

    \970\ Issuers seeking to list on a national securities exchange
will be required to register with the Commission under Section
12(b).
---------------------------------------------------------------------------

    Regulation A offerings may be particularly attractive to small
private companies whose shareholder bases are approaching the Section
12(g) registration threshold. The conditional Section 12(g) exemption
may enable small private issuers of Tier 2 securities under amended
Regulation A to expand their shareholder base over time, as a result of
secondary market trading, to the extent that such a market develops, or
through subsequent security issuances, without incurring the costs
associated with reporting company status.\971\
---------------------------------------------------------------------------

    \971\ See IPO Task Force. Based on two surveys, regulatory
compliance costs of IPOs average $2.5 million initially, followed by
an ongoing cost of $1.5 million per year.
---------------------------------------------------------------------------

    While the additional requirement to use a registered transfer agent
will impose costs on issuers,\972\ it should provide investor
protection benefits by helping to ensure that securityholder records
and secondary trades will be handled accurately. As it is a conditional
exemption from Section 12(g), however, issuers that are not concerned
with registration under the Exchange Act, perhaps because they do not
believe that Exchange Act registration will be required as a result of
a Regulation A offering, would not be required to retain the services
of a registered transfer agent in order to conduct a Tier 2 offering.
---------------------------------------------------------------------------

    \972\ We lack the information to provide a precise quantitative
estimate of transfer agent costs for Tier 2 issuers. However, we
have some sources of information about transfer agent costs in
analogous contexts.
    According to the Securities Transfer Association (STA), the
registered transfer agent industry is highly competitive and many of
its members can develop business models that will suit the needs of
small issuers and at the same time provide adequate protection to
investors. The STA further noted that it did not anticipate most
small issuers to require some of the services, such as the
processing of dividends, that raise the cost of recordkeeping
services. See STA letter on JOBS Act regulatory initiatives,
available at: http://www.sec.gov/comments/jobs-title-i/general/general-207.pdf. STA estimated that monthly transfer agent fees
would be $75[hyphen]$300 for security-based crowdfunding issuers,
which translates into annual fees of $900-$3600. See STA letter on
proposed crowdfunding rules, available at: http://www.sec.gov/comments/s7-09-13/s70913-96.pdf. In 2014, average transfer agent and
registrar fees amounted to approximately $9,000 in registered IPOs
with offering sizes below $50 million, based on Thomson Reuters SDC
data, excluding offerings from non-Canadian foreign issuers, blank-
check companies, and investment companies. Offerings with proceeds
below $1,000 are excluded to minimize measurement error. While
estimates for security-based crowdfunding issuers are likely to
underestimate the cost for a typical Tier 2 issuer, estimates for
IPOs are likely to overestimate the cost of transfer agent services
for a typical Tier 2 issuer. Costs of transfer agent services for a
typical Tier 2 issuer may be in the range between the two sets of
estimates.
---------------------------------------------------------------------------

    The final rules also include an issuer size limit in the
eligibility requirements for the Section 12(g) exemption for Tier 2
offerings, consistent with providing a conditional exemption tailored
to facilitate small company capital formation. The issuer size limit
may make Regulation A less attractive for larger issuers and issuers
anticipating growth or capital appreciation that expect to reach
Section 12(g) thresholds after conducting a Tier 2 offering or
subsequent secondary market trading. The two-year transition period
before reporting must begin may partly mitigate some of these costs to
issuers. Due to the uncertainty about the future composition of the
issuer and investor base in Tier 2 offerings, we cannot determine the
proportion of Tier 2 issuers whose number of shareholders of record
will exceed Section 12(g) thresholds or the proportion of those issuers
that will not qualify for an exemption due to their size.\973\
---------------------------------------------------------------------------

    \973\ Based on the analysis by the staff of Division of Economic
and Risk Analysis of 2013 data on registrants under Section 12(g),
excluding issuers with a class of securities registered under
Section 12(b), approximately three-quarters of Section 12(g)
registrants would have been below the issuer size limit (defined
similarly to smaller reporting company (SRC) criteria). These
figures may not be representative of the proportion of issuers that
would be below the issuer size limit among future Regulation A
issuers that would potentially exceed Section 12(g) thresholds for
the number of shareholders of record.
---------------------------------------------------------------------------

    Some issuers may be able to limit the number of shareholders of
record by adopting a minimum investment size requirement. This may
potentially limit the breadth of investor base and the availability of
investment opportunities to some investors. We are not able to
determine the extent to which the issuer size limit may affect overall
capital formation and whether large or growth issuers will proceed with
a Tier 2 offering or pursue a registered offering, a Regulation D
offering or another method of financing. In addition, the issuer size
limit may place at a competitive disadvantage those potential issuers
that exceed the size limit but for which the costs of registration
remain high, relative to potential issuers that are close to the size
limit but that qualify for the Section 12(g) conditional exemption.
    We recognize that there are costs associated with the conditional
exemption adopted today. Under this exemption, some issuers in Tier 2
offerings with a large number of shareholders could avoid--potentially
indefinitely--the comprehensive disclosure requirements of the Exchange
Act, which may decrease the informational efficiency of prices and
potentially result in less informed investment decisions by a larger
number of investors than in the absence of a conditional Section 12(g)
exemption. The issuer size limit partly mitigates this concern. For the
same reasons, however, the inclusion of a conditional exemption from
Section 12(g) may entice small issuers that would have otherwise
generally preferred to raise capital in private offerings to enter the
public markets through a Tier 2 offering pursuant to Regulation A.\974\
In this regard, the conditional exemption could increase the
availability of information about companies that would otherwise remain
relatively obscure in the private markets. On balance, we believe that
provisions such as the initial and periodic disclosure requirements and
the investment limit in Tier 2 offerings appropriately balance investor
protections and issuer compliance costs while facilitating the creation
of a broad investor base in Tier 2 offerings for small issuers.
---------------------------------------------------------------------------

    \974\ For example, issuers may be more willing to raise capital
publicly and become subject to some ongoing reporting requirements
if such requirements are less costly to the issuer than the costs
generally associated with the ongoing reporting requirements of the
Exchange Act.
---------------------------------------------------------------------------

    We have considered the alternative of providing a conditional
exemption from Section 12(g) registration that does not

incorporate an issuer size limitation. Such an alternative would enable
a broader class of potential Tier 2 issuers to remain exempt from
Exchange Act registration. Larger Regulation A issuers could generate a
more vibrant OTC trading market, providing enhanced liquidity to those
issuers that may not otherwise be of sufficient size to make listing on
a national market exchange cost-effective. Providing an exemption from
Section 12(g) could provide incentive for these larger issuers to
broaden their investor base while still providing the ongoing
disclosure of the Tier 2 reporting regime. This could result in
potentially beneficial effects on capital formation, competition, and
informational efficiency of prices. However, such an alternative would
potentially create a class of securities permanently exempt from
Exchange Act registration regardless of issuer size and thus subject to
less extensive disclosure requirements than public reporting companies,
which may affect investor protection.

D. Offering Statement

1. Electronic Filing and Delivery
    The final rules preserve the current three-part structure of Form
1-A but make various revisions and updates to the form to streamline
the information included in the form. Since most of this information is
already contained in other offering materials, the additional reporting
burden in Part I of the Form 1-A should not entail significantly higher
costs in terms of time or out-of-pocket expenses.\975\
---------------------------------------------------------------------------

    \975\ For the purposes of the Paperwork Reduction Act (``PRA''),
we estimate that compliance with the requirements of amended Form 1-
A will result in a burden of approximately 750 hours per response
(compared to the current burden associated with Form 1-A of 608
hours per response). We estimate that compliance with the
requirements of amended Form 1-A will result in an aggregate annual
burden of 140,625 hours of in-house personnel time and an aggregate
annual cost of $18,750,000 for the services of outside
professionals. See Section IV below.
---------------------------------------------------------------------------

    Under existing Regulation A, offering materials are submitted to
the Commission in paper form. The final rules require electronic
submission of offering materials. Electronic submission is expected to
offer benefits to issuers and investors. Paper documents are difficult
to process both for the Commission and for investors. Electronic filing
is therefore expected to reduce processing delays and costs associated
with the current paper filing system, improve the overall efficiency of
the filing process for issuers, benefit investors by providing them
with faster access to the offering statement, and allow offering
materials to be more easily accessed and analyzed by regulators and
analysts.
    We anticipate that electronic access to offering materials may
promote the informational efficiency of prices of Regulation A
securities.\976\ Evidence, obtained from the adoption of EDGAR for 10-K
filings by reporting companies, suggests that the use of EDGAR has
favorably affected small investors.\977\ Moreover, the adoption of XML
format for Part I of Form 1-A, which captures key information about the
issuer and the offering, should allow more efficient access to
information and more systematic tracking of offering details by
investors, analysts, other market participants and regulators. The XML
format for Part I will provide a convenient and efficient means of
gathering information from issuers and transmitting it to EDGAR.\978\
---------------------------------------------------------------------------

    \976\ In the case of reporting companies, one study found that
EDGAR e-filing was associated with an increase in the speed with
which information was incorporated into share prices (thus,
increased informational efficiency of prices) and presented evidence
of a larger market reaction to 10-K and 10-Q filings in the EDGAR
period relative to the pre-EDGAR period. See Griffin, P., 2003, Got
information? Investor response to Form 10-K and Form 10-Q EDGAR
filings, Review of Accounting Studies 8(4), pp. 433-460.
    \977\ One study has examined the effect of the switch to EDGAR
filing for annual reports on Form 10-K on small versus large
investors. See Asthana, S., S. Balsam, and S. Sankaraguruswam, 2004,
Differential response of small versus large investors to 10-K
filings on EDGAR, Accounting Review 79(3), pp. 571-589.
    \978\ See Part I (Notification) of Form 1-A. As discussed more
fully in Section II.C.3.a., the cover page and Part I of current
Form 1-A would be converted into, and form the basis of, the XML-
based fillable form.
---------------------------------------------------------------------------

    At the same time, we recognize that an electronic filing
requirement may impose compliance costs on issuers, particularly,
issuers that have not previously used the EDGAR system, which include
filing Form ID (the application form for access codes to permit EDGAR
filing) \979\ and converting filings into EDGAR format. Some of these
compliance burdens will be mitigated by the savings of printing and
mailing costs.
---------------------------------------------------------------------------

    \979\ For purposes of the PRA, Form ID is estimated to result in
0.15 burden hours per form, for an additional aggregate annual
burden due to the rule amendments of 28.20 hours of in-house
personnel time. See Section IV.
---------------------------------------------------------------------------

    Some commenters have expressed investor protection concerns in
relation to the access equals delivery model (discussed in Section
II.C.1) arising from the perceived challenge of finding these materials
on EDGAR and not requiring delivery 48 hours in advance of sale in all
circumstances.\980\ As discussed above, we do not believe that access
to EDGAR generally has proven to be a challenge for investors in
registered offerings since the adoption of Securities Offering Reform
in 2005, nor do we believe that it will be a challenge for investors
under Regulation A or raise investor protection concerns, particularly
in light of our final delivery requirements (including, where
applicable, the inclusion of hyperlinks to offering materials on EDGAR
that must be provided to investors by issuers and intermediaries).
Additionally, given that the final offering circular delivery
obligations generally affect investors only after they have made their
investment decisions and that, taking into account advancements in
technology and expanded use of the Internet, investors will have access
to the final offering circular upon its filing, we believe that using a
means other than physical delivery to satisfy the final offering
circular delivery obligation will not have an adverse effect on
investor protection. Overall, we believe that there will be benefits to
issuers of streamlining delivery requirements for the final offering
circular, consistent with similar updates to delivery requirements for
registered offerings.\981\
---------------------------------------------------------------------------

    \980\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \981\ See Securities Offering Reform, Rel. No. 33-8591.
---------------------------------------------------------------------------

2. Disclosure Format and Content
    Under the existing Regulation A, issuers can choose among three
models for providing narrative disclosure in Part II of the offering
statement: Model A, Model B, and Part I of Form S-1. Similar to the
proposal, the final rules eliminate Model A but preserve Model B, with
certain changes to the contents, and Part I of Form S-1.\982\
---------------------------------------------------------------------------

    \982\ See Section II.C.3.b for a more detailed description.
---------------------------------------------------------------------------

    We believe that eliminating Model A, which uses a question-and-
answer format, may benefit investors by avoiding possible confusion
that could result from the lack of uniformity of information presented
in the question-and-answer format. Several commenters disagreed with
the elimination of the Model A format, recommending that an updated
version of the Model A disclosure format be retained.\983\ The Model A
format may be easier to understand for non-accredited investors, who
may lack the sophistication to analyze information presented in
alternative disclosure formats. Compared to other formats, the Model A
format might also result in lower costs of initial preparation of the
offering statement, including, in some instances,

lessen the need to retain outside securities counsel.\984\ While a
question-and-answer format may lower the cost of initial preparation,
it often requires more substantive revisions after filing and before
qualification, in order for the disclosure to sufficiently address the
form requirements. We believe that most of the benefits associated with
the lower cost of initial preparation are negated subsequently during
the qualification process. Consequently, we are not persuaded that
there are sufficient benefits to retaining the Model A format.
---------------------------------------------------------------------------

    \983\ See BIO Letter; Karr Tuttle Letter; NASAA Letter 2;
Verrill Dana Letter 1; WDFI Letter.
    \984\ See Karr Tuttle Letter and WDFI Letter. The Karr Tuttle
Letter also refers to the experience of issuers in Rule 504
offerings, indicating that NASAA's Form U-7, upon which Model A is
based, has proved convenient for issuers in Rule 504 offerings
qualified by states without the use of securities counsel.
---------------------------------------------------------------------------

    The changes to Model B include updated disclosure requirements,
including a new section containing management discussion and analysis
of the issuer's liquidity, capital resources and business operations.
While these updates may impose costs on the issuer, they are expected
to increase investor protection and informational efficiency of prices
by providing important information to investors. The updated disclosure
requirements are, however, generally designed to assist issuers with
more guidance as to the required disclosures that, while they may
increase the cost to issuers associated with the initial preparation of
the offering circular, should lower the overall cost of, and time to,
qualification, when the process is considered in its entirety. Overall,
we believe that the availability of two alternative disclosure
formats--a revised Model B format and Part I of Form S-1--provides
sufficient flexibility to issuers in choosing their disclosure format
while preserving the benefits of disclosure of relevant information to
prospective investors.
    Some commenters suggested eliminating all three disclosure formats
and instead creating a new disclosure format similar to Part I of Form
S-1 that would reference Regulation S-K requirements (with reduced
disclosure requirements in some instances).\985\ Another commenter
recommended reducing the disclosure requirements for offerings of $2
million or less,\986\ while another suggested increasing disclosure
requirements as an issuer grows in size and complexity.\987\ We
recognize that scaling the disclosure requirements for Form 1-A, as
suggested by commenters, could ease compliance costs for Regulation A
issuers. However, additional scaling of disclosure requirements within
tiers may reduce the comparability of disclosures within the same tier
and result in pricing inefficiencies.
---------------------------------------------------------------------------

    \985\ See Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd
Letter 2; McCarter & English Letter; WR Hambrecht + Co Letter.
    \986\ See Campbell Letter.
    \987\ See SVB Letter.
---------------------------------------------------------------------------

3. Audited Financial Statements
    The final rules require issuers conducting Tier 2 offerings to
include audited financial statements in their offering materials.
Audited financial statements should provide investors in Tier 2
offerings with greater confidence in the accuracy and quality of the
financial statements of issuers seeking to raise larger amounts of
capital. This, in turn, could benefit issuers by lowering the cost of
capital or increasing the amount of capital supplied by investors.
    We recognize that audited financial statements could also entail
significant costs to issuers, and that the costs of an audit could
discourage the use of Tier 2 offerings. Based on data from registered
IPOs below $50 million in 2014 by issuers that would have been
potentially eligible for amended Regulation A, average total accounting
fees amounted to 1.65% of gross offering proceeds, where reported
separately.\988\
---------------------------------------------------------------------------

    \988\ This estimate is based on Thomson Reuters SDC data on IPOs
with issue dates in 2014, excluding offerings from non-Canadian
foreign issuers, blank check companies, and investment companies.
Offerings with proceeds below $1,000 are excluded to minimize
measurement error. Issuers of interests in claims on natural
resources, which also would not be eligible for amended Regulation
A, were not separately eliminated due to data constraints.
Accounting fees include the cost of preparing accounting statements,
in addition to the cost of an audit. We also note that costs
incurred by issuers in registered IPOs may not be representative of
costs incurred by issuers in Tier 2 offerings. We lack the
information to provide a quantitative estimate of audit costs that
would be incurred by Regulation A issuers in Tier 2 offerings.
---------------------------------------------------------------------------

    The final rules require issuers in Tier 2 offerings to include
audited financial statements in their offering circulars that are
audited in accordance with either the auditing standards of the
American Institute of Certified Public Accountants (AICPA) (referred to
as U.S. Generally Accepted Auditing Standards or GAAS) or the standards
of the Public Company Accounting Oversight Board (PCAOB), as suggested
by some commenters.\989\ We expect this provision in the final rules to
provide issuers with flexibility that may help contain issuer
compliance costs, compared to requiring financial statements that are
audited in accordance with the standards of the PCAOB. As noted
above,\990\ because AICPA rules would require an audit of a Regulation
A issuer conducted in accordance with PCAOB standards to also comply
with U.S. GAAS, an issuer who includes financial statements audited in
accordance with PCAOB standards will likely incur additional
incremental costs compared with an issuer who includes financial
statements audited only in accordance with U.S. GAAS. However, we
assume that an issuer would only elect to comply with both sets of
auditing standards because it has concluded that the benefits of doing
so (for example, to facilitate Exchange Act registration) justify these
additional incremental costs.
---------------------------------------------------------------------------

    \989\ See ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
    \990\ See Section II.C.3.
---------------------------------------------------------------------------

    As an alternative, we could have not required the audited financial
statements until after the first year of operation as a ``public
startup company'' or indefinitely for issuers that are pre-revenue or
that have paid-in capital, assets and revenues below a modest
threshold, as suggested by commenters.\991\ While this alternative may
decrease issuer compliance costs, it may also lower the accuracy of
information provided to investors in Tier 2 offerings, resulting in
reduced investor protection. The large offering limit in Tier 2
offerings may make some of the fixed costs of an audit relatively less
burdensome. In addition, we note that smaller issuers may opt to forgo
the cost of an audit and elect a Tier 1 offering or a Regulation D
offering, which does not require audited financial statements.
---------------------------------------------------------------------------

    \991\ See Public Startup Co. Letter 3 (also suggesting three
tiers, where at least the first two would not require this) and
Public Startup Co. Letter 11.
---------------------------------------------------------------------------

    On the other hand, other commenters advised the Commission to
require audited financial statements for Tier 1 offerings.\992\ While
we acknowledge that requiring audited statements is likely to result in
stronger investor protections due to reduced likelihood of fraudulent
financial statements being presented, this alternative would likely
place a relatively greater burden on smaller issuers due to the fixed-
cost nature of some of the audit costs. Also, given the relatively low
maximum offering size for Tier 1, this could result in Tier 1 offerings
becoming not cost-effective.
---------------------------------------------------------------------------

    \992\ See Guzik Letter 1 and Milken Institute Letter.
---------------------------------------------------------------------------

4. Other Accounting Requirements
    The final rules permit Canadian issuers to prepare financial
statements in accordance with either U.S. GAAP or International
Financial Reporting

Standards (IFRS) as issued by the International Accounting Standards
Board (IASB). This is expected to benefit Canadian issuers that
currently use IFRS as issued by the IASB by helping such issuers
contain compliance costs associated with Regulation A offerings,
compared to requiring Canadian issuers to prepare financial statements
in accordance with U.S. GAAP. Several commenters specifically supported
allowing Canadian issuers to prepare their financial statements in
accordance with IFRS as issued by the IASB.\993\
---------------------------------------------------------------------------

    \993\ See ABA BLS Letter; Canaccord Letter; NASAA Letter 2; MoFo
Letter; PwC Letter.
---------------------------------------------------------------------------

5. Continuous and Delayed Offerings
    The final rules explicitly allow for continuous or delayed
offerings.\994\ As a result, it is now clear that eligible issuers have
greater flexibility to select the timing of their offerings. Such
flexibility is expected to benefit issuers by allowing them to adjust
their capital raising based on macro-economic factors or company
conditions.\995\ These factors should facilitate financing decisions
and capital market efficiency. For example, existing research on Rule
415 offerings in the registered offering market shows that costs of
intermediation in shelf offerings, and consequently the cost of raising
equity through shelf registration, are lower than through traditional
registration.\996\ The final rules condition the ability to sell
securities in a continuous or delayed Tier 2 offering on being current
with ongoing reporting requirements at the time of sale. This should
not impose incremental costs on eligible issuers as they already file
periodic updates and amendments.
---------------------------------------------------------------------------

    \994\ Existing Regulation A allows for continuous or delayed
offerings to the extent permitted by Rule 415. Since Rule 415 only
discusses ``registered offerings,'' the reference to it may have
caused confusion as to the scope of its application in Regulation A
offerings.
    \995\ See Bayless, M., and S. Chaplinsky, 1996, Is there a
window of opportunity for seasoned equity issuance? Journal of
Finance 51(1), pp. 253-278.
    \996\ See Bethel, J., and L. Krigman, 2008, Managing the cost of
issuing common equity: The role of registration choice, Quarterly
Journal of Finance and Accounting 47(4), pp. 57-85. We recognize
that the evidence based on registered offerings may not be
indicative of the effects on Regulation A offerings.
---------------------------------------------------------------------------

    The final rules restrict all ``at the market'' secondary offerings.
Existing Regulation A prohibited primary ``at the market'' offerings,
but did not necessarily restrict such offerings by selling
securityholders. Some commenters suggested allowing such offerings,
including primary offerings by the issuer.\997\ We recognize that not
allowing secondary ``at the market'' offerings may limit flexibility
for those issuers that are uncertain about the offering price that will
attract sufficient investor demand. However, the benefit of the new
restriction as it applies to secondary sales is that it helps ensure
that issuers do not lose their Regulation A exemption due to
unanticipated market factors by inadvertently offering securities in an
amount that exceeds the offering limitation. Future offerings made in
reliance on the final rules may provide more information to determine
whether a robust market capable of supporting ``at the market''
offerings develops and whether the Regulation A exemption could be an
appropriate method for such offerings in the future.
---------------------------------------------------------------------------

    \997\ See OTC Markets Letter and Paul Hastings Letter.
---------------------------------------------------------------------------

6. Nonpublic Review of Draft Offering Statements
    Under the final rules, issuers whose securities have not been
previously sold pursuant to a qualified offering statement under
Regulation A or an effective registration statement under the
Securities Act will be permitted to submit to the Commission a draft
offering statement for non-public review, so long as all such documents
are publicly filed not later than 21 calendar days before
qualification. The option of non-public submission of a draft offering
statement is expected to reduce the barriers to entry for issuers using
Regulation A. In this regard, a potential issuer could reduce the
amount of time between disclosing possibly sensitive information to its
competitors in its offering statement and the related sale of its
securities. Furthermore, companies that are tentative about conducting
an offering could start the qualification process and then abandon the
offering any time before the initial public filing without receiving
the related stigma in the market. To the extent that this accommodation
lowers the barriers to entry, it may encourage capital formation and
competition. Moreover, we do not believe that the option of draft
offering statement submission will significantly affect investor
protection. Disclosure requirements are unchanged for issuers that
elect the option of non-public submission of draft offering statement.
The initial non-public statement, all non-public statement amendments,
and all correspondence with Commission staff regarding such submissions
must be publicly filed and available on EDGAR as exhibits to the
offering statement not less than 21 calendar days before qualification
of the offering statement.

E. Solicitation of Interest (``Testing the Waters'')

    Under existing Regulation A, testing the waters is permitted only
until the offering statement is filed with the Commission, and
solicitation material is required to be filed prior to or concurrent
with first use. The final rules permit issuers to test the waters and
use solicitation materials both before and after the offering statement
is filed, subject to issuer compliance with the rules on filing
information and disclaimers.\998\ Under the final rules, testing the
waters materials will be required to be included as an exhibit to the
offering statement at the time of initial submission or filing with the
Commission, and updated thereafter.
---------------------------------------------------------------------------

    \998\ As noted in Section II.H.3. above, some state securities
laws may impose limitations on the use of testing the waters by Tier
1 issuers.
---------------------------------------------------------------------------

    In general, allowing issuers to gauge interest through expanded
testing the waters will reduce uncertainty about whether an offering
could be completed successfully. Allowing solicitation prior to filing
enables issuers to determine market interest in their securities before
incurring the costs of preparing and filing an offering statement. If
after testing the waters, the issuer is not confident that it will
attract sufficient investor interest, the issuer can consider alternate
methods of raising capital and thereby avoid the costs of an
unsubscribed or under-subscribed offering. Allowing testing the waters
at any time prior to qualification of the offering statement, rather
than only prior to filing of the offering statement with the
Commission, may increase the likelihood that the issuer will raise the
desired amount of capital. This option may be useful for smaller
issuers, especially early-stage issuers, first-time issuers, issuers in
lines of business characterized by a considerable degree of
uncertainty, and other issuers with a high degree of information
asymmetry. This provision may attract certain issuers--those that may
be uncertain about the prospects of raising investor capital--to
consider using amended Regulation A when they might not otherwise, thus
potentially promoting competition for investor capital as well as
capital formation in the Regulation A market.
    Expanding the permissible use of testing the waters communications
could also increase the type and extent of information available to
investors, which could lead to more efficient prices for the offered
securities. The final rules permit testing the waters for an expanded
period of time compared to the baseline. As a result, it may be easier

for investors to become aware of a larger and more diverse set of
investment opportunities in private offerings, which may allow these
investors to more efficiently allocate their capital. The net effect
could be to enhance both capital formation and allocative efficiency.
Further, requiring issuers using testing the waters solicitations after
the offering statement is publicly filed to provide the offering
statement with the testing the waters materials (or provide information
about where it can be accessed), and to update it and redistribute
updates in the event of material changes, will allow investors to make
informed investment decisions.
    We recognize that there may also be potential costs associated with
expanding the use of testing the waters communications. If the contents
of the offering circular differ substantively from the material
distributed through testing the waters communications, and if investors
rely on testing the waters materials, this may lead investors to make
less informed investment decisions. Some commenters were concerned that
the expanded use of permissible testing the waters may facilitate
misleading statements to investors and may lead to a heightened risk of
fraud.\999\ We believe, however, that this potential investor
protection concern is mitigated by the application of Section 12(a)(2)
liability to Regulation A offerings and the general anti-fraud
provisions of the federal securities laws.
---------------------------------------------------------------------------

    \999\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    We considered the alternative, suggested by some commenters,\1000\
of requiring submission and review of testing the waters materials
before or concurrent with first use, rather than at the time the
offering statement is submitted for non-public review or filed, which
could aid regulators in detecting fraudulent solicitation of interest
communications, potentially resulting in investor protection benefits.
However, requiring initial submission and review of testing the waters
materials prior to their use could dissuade issuers, particularly
smaller or less experienced issuers, from engaging in testing the
waters communications, thereby undermining many of the benefits of
permitting such communications discussed above.
---------------------------------------------------------------------------

    \1000\ See Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
---------------------------------------------------------------------------

    We also considered the views of other commenters who suggested we
relax some of the proposed requirements for the use of testing the
waters. For example, we could have treated the solicitation materials
as non-public when filed with the Commission, at least until the
offering statement is qualified,\1001\ or removed the requirement for
public filing of solicitation materials for all Regulation A offerings
or for Tier 2 offerings.\1002\ Issuers that have elected to use testing
the waters communications have already incurred the cost of preparing
the materials, so the incremental direct cost of the requirement to
file the materials with the Commission will be low. We recognize that
permitting issuers to file the solicitation materials non-publicly with
the Commission could reduce the indirect costs of some issuers by
limiting the ability of the issuer's competitors to discover
information about the issuer.
---------------------------------------------------------------------------

    \1001\ See Heritage Letter and Ladd Letter 2.
    \1002\ See BIO Letter and MoFo Letter.
---------------------------------------------------------------------------

    However, we note that this information may become available to
competitors in any event through the solicitation process and removing
the requirement to publicly file the materials may result in adverse
effects on the protection of investors to the extent that it may
facilitate fraudulent statements by issuers to all or a selected group
of investors that may fail to compare the statements in the
solicitation materials against the offering circular. On balance, we
believe that the final rule's requirements governing the use of testing
the waters communications appropriately balance the goals of providing
flexibility to issuers and protection to investors.

F. Ongoing Reporting

    Currently, Regulation A issuers do not have ongoing reporting
obligations. The final rules prescribe an ongoing reporting regime for
issuers that conduct Tier 2 offerings that requires, in addition to
annual reports on Form 1-K, semiannual reports on Form 1-SA, current
event reporting on Form 1-U, and notice to the Commission of the
suspension of ongoing reporting obligations on Form 1-Z.
    These reporting requirements will have benefits and costs. These
reporting requirements should strengthen investor protection and
decrease the extent of information asymmetries between issuers and
investors in the Regulation A market, relative to existing Regulation
A. Requiring ongoing disclosures for Tier 2 offerings will provide
investors with periodically updated information, allowing them to
identify investment opportunities best suited for their level of risk
tolerance and re-evaluate the issuer's prospects through time,
resulting in better informed investment decisions and improved
allocative efficiency of capital. By standardizing the content, timing,
and format of these disclosures, the amendments to Regulation A will
make it easier for investors to compare information across issuers,
both within and outside of the new Regulation A market.
    The additional reporting requirements for Tier 2 offerings increase
the availability of public information that can be used for valuing
securities. A reduction in information risk due to improvements in
disclosure can lower the issuer's cost of capital.\1003\ Because there
are no resale restrictions, some securities issued in amended
Regulation A offerings are likely to be quoted on the OTC market, and
required ongoing disclosure requirements will provide investors with
updated information about their underlying value, and as a result,
lower the inherent asymmetric information risks associated with trading
in this market.\1004\ The enhanced information environment should
facilitate more informationally efficient pricing and better liquidity
for amended Regulation A securities.\1005\ Tier 2 ongoing disclosure
requirements should also provide timely and relevant issuer information
at a lower cost to broker-dealers that initiate quotations and make
markets in these securities. Increased secondary market liquidity can
make securities more attractive to prospective investors, which can
promote capital formation. Hence, there may be significant benefits for
capital formation from the ongoing reporting requirements in the final
rules.
---------------------------------------------------------------------------

    \1003\ See Diamond, D., and R. Verrecchia, 1991, Disclosure,
liquidity, and the cost of capital, Journal of Finance 46(4), pp.
1325-1359; Easley, D., and M. O'Hara, 2004, Information and the cost
of capital, Journal of Finance 59(4), 1553-1583; Easley, D., S.
Hvidkjaer, and M. O'Hara, 2002, Is information risk a determinant of
asset returns? Journal of Finance 57(5), pp. 2185-2221.
    \1004\ See Ang, A., A. Shtauber, and P. Tetlock, 2013, Asset
pricing in the dark: The cross section of OTC stocks, Review of
Financial Studies 26(12), pp. 2985-3028.
    \1005\ See Graham, J., C. Harvey, and S. Rajgopal, 2005, The
economic implications of corporate financial reporting, Journal of
Accounting and Economics 40(1-3), pp. 3-73; Durnev, A., R. Morck,
and B. Yeung, 2003, Value enhancing capital budgeting and firm-
specific stock return variation, Journal of Finance 59(1), pp. 65-
106.
---------------------------------------------------------------------------

    Although reporting obligations for Tier 2 issuers are less
extensive than for reporting companies, we recognize that they will
still result in a significant direct cost of compliance. One commenter
estimated the qualification and reporting costs of a Tier 2 issuer to
be approximately $400,000 in the first year and $200,000 annually
thereafter (per issuer).\1006\ For the purposes of the PRA, we estimate
that compliance with

the requirements of Forms 1-K, 1-SA, and 1-U for issuers with an
ongoing reporting obligation under Regulation A will result in an
aggregate annual burden of 115,351 hours of in-house personnel time and
an aggregate annual cost of $13,450,272 for the services of outside
professionals.\1007\
---------------------------------------------------------------------------

    \1006\ See IPA Letter.
    \1007\ See Section IV below.
---------------------------------------------------------------------------

    In addition to the direct costs of preparing the mandatory
disclosures, issuers of securities in Tier 2 offerings will be subject
to indirect disclosure costs of revealing to their competitors and
other market participants information about their business not
previously required to be disclosed.\1008\ These disclosures can inform
the issuer's competitors about the issuer's strategic decisions
regarding investment, financing, management and other aspects of
business. For issuers seeking to reduce such costs of disclosure, Rule
506(c) of Regulation D could be more appealing. Based on the scope of
disclosures required, an issuer's combination of direct and indirect
costs of disclosure is likely to be lowest for a Regulation D Rule 506
offering, followed by a Tier 1 offering, a Tier 2 offering and,
finally, a registered public offering.
---------------------------------------------------------------------------

    \1008\ See Verrecchia, R., 2001, Essays on disclosure, Journal
of Accounting and Economics 32, pp. 97-180.
---------------------------------------------------------------------------

    We evaluate below the different provisions of the ongoing reporting
requirements and the alternatives we have considered.
1. Periodic and Current Event Reporting Requirements
    Currently, Regulation A issuers do not have ongoing reporting
obligations. Tier 2 issuers in a Regulation A offering will have
periodic and current event reporting obligations under the final rules.
As noted above, these ongoing reporting requirements will result in
both direct and indirect costs to Tier 2 issuers.
    Commenters made various suggestions for expanding the ongoing
disclosure requirements for Tier 2 issuers. For example, several
commenters suggested we require quarterly reporting instead of semi-
annual reporting.\1009\ Another commenter suggested we require
officers, directors and controlling shareholders of issuers that offer
securities under Regulation A to make ongoing disclosure of
transactions in company securities, similar to reporting on Forms 3, 4
and 5 and Schedules 13D, 13G and 13F in the registered securities
context.\1010\ While additional requirements that would bring the Tier
2 disclosure obligations closer to the reporting company disclosure
obligations are likely to have informational efficiency and investor
protection benefits, they are also likely to make Regulation A more
costly and less attractive to prospective issuers and may not promote
capital formation as much as the final rules.
---------------------------------------------------------------------------

    \1009\ See Massachusetts Letter 2; NASAA Letter 2; OTC Markets
Letter; WDFI Letter.
    \1010\ See OTC Markets Letter.
---------------------------------------------------------------------------

    Other commenters recommended reducing the continuing disclosure
burden on Tier 2 issuers \1011\ or making continuing disclosure
requirements contingent upon factors other than offering tier, such as
whether the issuer has taken steps to foster a market in its
securities.\1012\ These alternatives would likely reduce compliance
costs for Tier 2 issuers; however, they also may cause investors to
have less information upon which to make investment decisions,
resulting in weaker investor protections and less informationally
efficient prices.
---------------------------------------------------------------------------

    \1011\ See Heritage Letter and IPA Letter.
    \1012\ See Heritage Letter.
---------------------------------------------------------------------------

    Other commenters recommended requiring ongoing disclosures for
issuers in Tier 1 offerings, including disclosures at a level lower
than is required for Tier 2,\1013\ ongoing disclosure with yearly
audited financials,\1014\ or some unspecified continuous disclosure
obligation.\1015\ Such alternatives, particularly if accompanied by the
requirement of audited financial statements, would increase the
availability and quality of financial information provided to investors
in Tier 1 offerings and strengthen investor protection by enabling
investors to make better informed decisions. However, due to the fixed
component of disclosure costs, and the likely smaller size of Tier 1
offerings relative to Tier 2 offerings, such requirements may limit
capital formation and place Tier 1 issuers at a competitive
disadvantage relative to Tier 2 issuers. We note that small issuers
that value informational efficiency gains from ongoing disclosures
above the cost of such disclosures have the option of conducting a Tier
2 offering.
---------------------------------------------------------------------------

    \1013\ See Guzik Letter 1 (suggesting that Tier 1 ongoing
disclosure requirements could parallel Tier 2's requirements, but
without the requirement for semiannual reports).
    \1014\ See Ladd Letter 2.
    \1015\ See SVB Letter.
---------------------------------------------------------------------------

2. Termination and Suspension of Reporting and Exit Reports
    The final rules permit issuers in Tier 2 offerings that have filed
all periodic and current reports required by Regulation A for a
specified period to suspend their ongoing reporting obligation under
Regulation A at any time after completing reporting for the fiscal year
in which the offering statement was qualified, if the securities of
each class to which the offering statement relates are held of record
by fewer than 300 persons and offers or sales made in reliance on a
qualified Tier 2 offering statement are not ongoing. For banks or bank
holding companies, the termination threshold is fewer than 1,200
persons, consistent with Title VI of the JOBS Act. The option to cease
reporting could be beneficial, especially for issuers that do not seek
secondary market liquidity and for smaller issuers that find the costs
of compliance with the ongoing disclosure requirements to be a
relatively greater burden. At the same time, the option might be costly
for investors because it will decrease the amount of information
available about the issuer, making it more difficult to monitor the
issuer and accurately price its securities or to find a trading venue
that will allow liquidation of the investment. The public availability
of information in bank regulatory filings is expected to mitigate some
of these effects for bank issuers undertaking Regulation A offerings.
Termination of reporting also might make it easier for inside
shareholders to use an informational advantage to the detriment of
minority outside investors.
    The final rules require Tier 1 issuers to notify the Commission
upon completion of their offerings by filing Form 1-Z (exit report).
Issuers in Tier 2 offerings will be required to provide this
information on Form 1-Z at the time of filing the exit report, if they
have not previously provided this information on Form 1-K as part of
their annual report. Form 1-Z contains limited summary information
about the issuer and the completed offering and, therefore, should not
impose substantial additional compliance costs on the issuer.\1016\ The
enhanced availability of Form 1-Z information is likely to benefit
investors and facilitate evaluation of Regulation A market activity.
For example, this information should allow the Commission and others to
assess whether issuers have been able to raise the projected amount of
capital in Regulation A offerings. We recognize, however, that, since
information about the completed offering has value to an issuer's

competitors, its disclosure may also impose an indirect cost on
issuers.
---------------------------------------------------------------------------

    \1016\ For the purposes of the PRA, we estimate that filing the
Form 1-Z exit report will result in an aggregate annual burden of
235.5 hours of in-house personnel time. See Section IV below.
---------------------------------------------------------------------------

3. Exchange Act Registration
    Generally, an issuer of Regulation A securities would not be
subject to Exchange Act reporting obligations unless it separately
registers a class of securities under Section 12 of the Exchange Act or
conducts a registered public offering. This results in significantly
lower costs of periodic reporting for Regulation A issuers relative to
reporting companies.\1017\
---------------------------------------------------------------------------

    \1017\ Ongoing compliance costs were estimated to be $1.5
million per year, following an IPO, according to two surveys cited
in the IPO Task Force report.
---------------------------------------------------------------------------

    The final rules permit issuers seeking to register a class of
Regulation A securities under the Exchange Act to do so by filing a
Form 8-A in conjunction with the qualification of a Form 1-A that
follows Part I of Form S-1 or the Form S-11 disclosure model in the
offering circular. In some circumstances this option may provide more
flexibility, for instance, with respect to testing the waters, to
issuers seeking to register a class of securities. The obligation to
file ongoing reports in a Tier 2 offering is automatically suspended
upon registration of a class of securities under Section 12 of the
Exchange Act or registration of an offering of securities under the
Securities Act. Given that Exchange Act reporting obligations are more
extensive than those of Regulation A, the entry of such issuers into
the Exchange Act reporting system upon qualification of a Regulation A
offering statement is expected to have a beneficial effect on investor
protection and informational efficiency of prices. While registration
pursuant to the Exchange Act is likely to impose additional costs on
issuers, only issuers that opt into such registration are affected. As
a result, we anticipate that only those issuers for whom the perceived
benefits of registration justify the accompanying costs will elect to
use this provision.

G. Insignificant Deviations

    Under the final rules, offerings with ``certain insignificant
deviations from a term, condition or requirement'' of Regulation A
remain exempt from registration. This is the same as the rules in
existing Regulation A. As a result, the only change from the baseline
is that these rules will likely apply to a greater number of offerings
due to the expanded availability of amended Regulation A. Further, as
in existing Regulation A, the final rules explicitly classify as
significant those deviations that are related to issuer eligibility,
aggregate offering price, offers and continuous or delayed offerings.
This provision benefits investors by providing certainty about the
provisions from which the issuer may not deviate without losing the
exemption. At the same time, it enables issuers to continue to rely on
the exemption and obtain its capital formation benefits even if they
have an ``insignificant deviation'' from the final rules. This
provision may be especially beneficial for issuers with limited
experience with Regulation A offerings as their limited experience may
make them more susceptible to an inadvertent error. In this way, the
provision may encourage more issuers to engage in Regulation A
transactions and thereby facilitate capital formation.

H. Bad Actor Disqualification

    The final rules amend Rule 262 to include bad actor
disqualification provisions in substantially the same form as adopted
under Rule 506(d).\1018\ The final rules specify that the covered
person's status is tested at the time of filing of the offering
statement. Consistent with the disqualification provisions of Rule
506(d), the final rules add two new disqualification triggers to those
in existing Regulation A: Commission cease-and-desist orders relating
to violations of scienter-based anti-fraud provisions of the federal
securities laws or Section 5 of the Securities Act and the final orders
and bars of certain state and other federal regulators. While these
provisions may impose an incremental cost on issuers and other covered
persons relative to the cost imposed by the disqualification provisions
of existing Regulation A, they should strengthen investor protection
from potential fraud.
---------------------------------------------------------------------------

    \1018\ See 17 CFR 230.506(d).
---------------------------------------------------------------------------

    If one of these new triggering events occurred prior to the
effective date of the final rules, the event will not cause
disqualification, but instead must be disclosed on a basis consistent
with Rule 506(e). This approach will not preclude the participation of
bad actors whose disqualifying events occurred prior to the effective
date of the final rules, which could expose investors to the risks that
arise when bad actors are associated with an offering. These risks to
investors may be partly mitigated since investors will have access to
relevant information that could inform their investment decisions.
Disclosure of triggering events may also 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 issuers may,
accordingly, choose to exclude involvement by prior bad actors to avoid
such disclosures.
    We expect that the bad actor disqualification provisions in the
final rules will lead most issuers to restrict bad actor participation
in Regulation A offerings, which could help reduce the potential for
fraud in these types of offerings and thus strengthen investor
protection compared with an alternative of not including bad actor
disqualification provisions. 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 amended Regulation A. In addition, the
requirement that issuers determine whether any covered persons are
subject to disqualification might reduce the need for investors to do
their own investigations and could therefore increase efficiency.
    The disqualification provisions also impose costs on issuers and
covered persons. Issuers that are disqualified from using amended
Regulation A 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, calculated on the
basis of voting power, by individuals subject to disqualifying events.
    As discussed above, the final rules also provide a reasonable care
exception on a basis consistent with Rule 506(d).\1019\ We anticipate
that the reasonable care exception would result in benefits and costs,
compared with an alternative of not providing a reasonable care
exception. For example, a reasonable care exception could facilitate
capital formation by encouraging issuers to proceed with Regulation A
offerings in situations in which issuers otherwise might have been
deterred from relying on Regulation A if they risked potential
liability under Section 5 of the Securities Act for unknown
disqualifying events. This exception also could increase the potential
for fraud, compared with an alternative of not providing a reasonable
care exception, 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.
---------------------------------------------------------------------------

    \1019\ See Proposed Rule 262(b)(4).
---------------------------------------------------------------------------

    One commenter recommended revising the look-back periods for
disqualifying events to run from the time of sale rather than the time
of filing of the offering statement.\1020\ These changes would relax
the bad actor disqualification standard, by allowing bad actors to
participate in Regulation A offerings during the qualification process.
We believe that timing application of the bad actor disqualification
rules to the time of filing of the offering statement, as opposed to
the time of qualification, is therefore more appropriate under the
final rules.
---------------------------------------------------------------------------

    \1020\ See KVCF Letter.
---------------------------------------------------------------------------

I. Relationship With State Securities Law

    The final rules preempt state registration and qualification
requirements for Tier 2 offerings but preserve these requirements for
Tier 1 offerings, consistent with state registration of Regulation A
offerings of up to $5 million under existing Regulation A.
    The GAO Report found that compliance with state securities review
and qualification requirements was one of the factors that appeared to
have influenced the infrequent use of Regulation A by small
businesses.\1021\ Various commenters supporting preemption of state
securities laws in the final rules noted that state review of offering
statements is a significant impediment to the use of Regulation A and
that the process of qualification in multiple states will remain
inefficient despite NASAA's implementation of a coordinated review
program.\1022\ More broadly, commenters as well as the GAO Report
indicated that the existing regime of federal and state qualification
has been a significant disincentive to the use of Regulation A for
capital raising. With respect to time and compliance costs associated
with state qualification, we believe preemption will likely reduce
issuers' costs, although we lack comprehensive, independent data to
estimate the precise amount. Only a few commenters provided specific
monetary estimates of cost components. One commenter indicated that a
revenue-generating business seeking to conduct a debt or equity
offering under existing Regulation A can produce a conforming offering
statement for state and federal review for approximately $50,000.\1023\
According to another commenter, an issuer seeking state registration in
50 states would incur $80,000 to $100,000 in legal fees.\1024\
---------------------------------------------------------------------------

    \1021\ See GAO Report. The GAO Report also cites other factors
that may have discouraged issuer use of the Regulation A exemption,
including a comparatively low $5 million offering limitation, a slow
and costly filing process associated with Commission qualification,
and the availability of other exemptions under the federal
securities laws.
    A recent study performs a comparison of Rule 506 offerings with
Rule 505 and Rule 504 offerings that ``suggests that the Blue Sky
law preemption feature unique to Rule 506 offerings has greater
value to issuers than the unique features of Rule 504 or Rule 505
offerings.'' See Ivanov, V., and S. Bauguess, 2013, Capital raising
in the U.S.: An analysis of unregistered offerings using the
Regulation D exemption, 2009-2012, available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
    See also Leading Biosciences Letter referencing recommendations
supporting preemption from the SEC Government-Business Forum on
Small Business Capital Formation in 2011 and 2012. Similar
recommendations were made in the final report of the SEC Forum on
Small Business Capital Formation in 2013, available at: http://www.sec.gov/info/smallbus/gbfor32.pdf.
    \1022\ See ABA BLS Letter; Andreessen/Cowen Letter; Almerico
Letter; B. Riley Letter; BIO Letter; Campbell Letter; Canaccord
Letter; CFIRA Letter 1; CFIRA Letter 2; Congressional Letter 3;
DuMoulin Letter; Eng Letter; Fallbrook Technologies Letter; Gilman
Law Letter; Guzik Letter 1; Hart Letter; Heritage Letter; Huynh
Letter; IPA Letter; Edwards Wildman Letter; Kisel Letter; Kretz
Letter; KVCF Letter; Ladd Letter 2; Leading Biosciences Letter;
McCarter & English Letter; Methven Letter; Milken Institute Letter;
MoFo Letter; Moloney Letter; New Food Letter; OTC Markets Letter;
Paul Hastings Letter; Palomino Letter; Public Startup Co. (several
letters); REISA Letter; Richardson Patel Letter; SBIA Letter;
Staples Letter; Sugai Letter; SVB Letter; SVGS Letter; Unorthodocs
Letter; U.S. Chamber of Commerce Letter; Verrill Dana Letter 2;
Warren Letter; WR Hambrecht + Co Letter.
    \1023\ See Groundfloor Letter. This commenter does not
separately estimate the component of the cost due to state
registration.
    \1024\ See Letter from Paul Hastings, LLP, November 26, 2013.
     Another commenter referenced one issuer's offering in the State
of Washington in the amount of $750,000, with legal and accounting
expenses estimated at $10,000 and the offering statement prepared
without outside securities counsel and reviewed by the state within
less than three months. See WDFI Letter. We do not believe that this
cost estimate would be representative of costs for issuers
registering in multiple states rather than a single state or for
issuers involving outside securities counsel.
---------------------------------------------------------------------------

    As one commenter noted, ``[t]he challenges posed by the necessity
of responding to both federal and state reviews and coordinating
overlapping but potentially inconsistent comments and approvals have
helped to make the existing Regulation A scheme unworkable for most
smaller companies.'' \1025\ Preemption of state securities review and
qualification requirements for Tier 2 offerings will eliminate the
burdens of responding to multiple reviews and thus provide for a more
streamlined review process than exists under existing Regulation A. We
expect that this, in turn, will make Tier 2 a more attractive capital
raising option for issuers than existing Regulation A. Accordingly, we
believe that by eliminating the requirement for state qualification,
the final rules' preemption for Tier 2 offerings will result in greater
use of amended Regulation A and thereby facilitate capital formation.
---------------------------------------------------------------------------

    \1025\ See ABA BLS Letter.
---------------------------------------------------------------------------

    We recognize that commenters were divided on the issue of
preemption, and those who objected to preemption of state securities
review and qualification requirements cited benefits of state
review.\1026\ These include additional investor protection benefits
arising from the localized knowledge and resources of state regulators
that may aid in detecting fraud and facilitating issuer
compliance.\1027\ Some of these commenters also noted that the launch
of NASAA's coordinated review program could streamline state review of
offerings among participating states.
---------------------------------------------------------------------------

    \1026\ See ASD Letter; Cornell Clinic Letter; CFA Letter; CFA
Institute Letter; Groundfloor Letter (arguing that the Commission
should at least evaluate NASAA's coordinated review program for 12
months); Karr Tuttle Letter (acknowledging that state preemption may
still be necessary for states not participating in NASAA's new
coordinated review program); MCS Letter; Congressional Letter 2;
Congressional Letter 4; NASAA Letter 1; NASAA Letter 2; NASAA Letter
3; NDBF Letter; NYIPB Letter; ODS Letter; PRCFI Letter; Scherber
Letter; Secretaries of State Letter; Massachusetts Letter 1;
Massachusetts Letter 2; Tavakoli Letter; TSSB Letter; WDFI Letter.
One commenter stated its view that the Commission's proposal to
preempt state regulatory review contained little consideration of
the adverse costs that come with preemption, particularly the
potential harm to investors, including harm investors might incur in
the absence of state review in the area of small and thinly traded
company offerings. See NASAA Letter 2.
    \1027\ According to the 2014 NASAA enforcement report for 2013,
securities violations related to unregistered securities sold by
unlicensed individuals, including fraudulent offerings marketed
through the Internet, remain an important enforcement concern. The
report does not detail the number and category of violations by type
of exemption from registration. See NASAA Enforcement Report,
available at: http://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
---------------------------------------------------------------------------

    We acknowledge that the preemption of state qualification for Tier
2 offerings may have an impact on investor protection by eliminating
one level of government review. In addition, merit-based review of
offerings undertaken by some states may, in some cases, provide a level
of investor protections different from the disclosure-based review

undertaken by the Commission. State regulators may also have a better
knowledge of local issuers, which could help in detecting fraud,
especially in offerings by small, localized issuers. If investors
require higher returns because of a perceived increase in the risk of
fraud as a result of preemption, issuers may face a higher cost of
capital. We are unable to predict how the amendments to Regulation A
will affect the incidence of fraud that may arise in Regulation A
offerings.
    Several factors could mitigate these potential impacts. First,
under Section 18(c), the states retain the ability to require the
filing with them of any documents filed with the Commission and to
investigate and bring enforcement actions with respect to fraudulent
transactions. Second, we believe that amended Regulation A provides
substantial protections to purchasers in Tier 2 offerings. Under the
final rules, a Regulation A offering statement will continue to provide
substantive narrative and financial disclosures about the issuer.
Further, the final rules require offering statements to be qualified by
the Commission before an issuer can conduct sales. Additional investor
protections would be afforded by Regulation A's limitations on eligible
issuers and bad actor disqualification provisions. The final rules for
Tier 2 offerings provide further protection by requiring audited
financial statements in the offering circular, ongoing reporting, and
an investment limitation for purchasers who do not qualify as
accredited investors.
    The anticipated costs and benefits of state preemption will depend
on key offering characteristics and issuer disclosure requirements. In
particular, smaller offerings with a narrow investor base, such as
those expected to be conducted under Tier 1, are more likely to be
concentrated in fewer states and to benefit from geographic-specific
information of state regulators as part of the review process.\1028\ In
contrast, larger offerings that seek a broader investor base, such as
those expected to be conducted under Tier 2, are more likely to span
multiple states. For Tier 2 offerings, the additional disclosure,
audited financial statements, and transactional requirements relative
to Tier 1 offerings are expected to provide an additional layer of
investor protection, thus reducing the need for, and the expected
benefits of, state review. State preemption for Tier 2 offerings should
lower the compliance burdens imposed on issuers, and partly offset the
costs of the increased disclosure and transactional requirements.
---------------------------------------------------------------------------

    \1028\ We believe that issuers conducting Tier 1 offerings are
more likely to be smaller companies whose businesses revolve around
products, services, and a customer base that will more likely be
located within a single state or region or a small number of
geographically dispersed states. For example, based on our analysis,
issuers of securities in the seven offering statements qualified by
the Commission pursuant to Regulation A in 2014 indicated, on
average, that they were seeking qualification in approximately five
states per offering. The financial statements provided by these
issuers further indicated, on average, that issuers had
approximately $1.2 million in assets. No issuer indicated assets
greater than $3.6 million, while two issuers indicated assets of
less than $20,000. We recognize, however, that the characteristics
of Tier 1 issuers in Tier 1 offerings relying on amended Regulation
A in the future may differ from the characteristics of issuers that
rely on existing Regulation A (for example, due to the higher
maximum offering size for Tier 1 offerings in the final rules,
compared with the maximum offering size in existing Regulation A).
---------------------------------------------------------------------------

    In general, we expect that issuers in Tier 1 offerings will face
significantly lower offering costs as a result of not being subjected
to the requirements of audited financial statements and ongoing
reporting in the final rules. For these offerings, the local knowledge
of state regulators is anticipated to add value to the review process
to the extent that the issuer and the investor base are more likely to
be localized. Thus, state qualification is more likely to have
incremental investor protection benefits in Tier 1 offerings relative
to Tier 2 offerings. Moreover, to the extent that Tier 1 offerings are
more likely to be concentrated in fewer states, the cost of complying
with state review procedures is likely to be diminished for these types
of offerings.
    Some commenters also pointed to the increased burden on Commission
resources as a cost of state preemption.\1029\ Compared with the
baseline of the existing Regulation A, we anticipate a possible
increase in the burden on Commission resources as a result of the
increase in the Regulation A maximum offering size and other provisions
intended to make Regulation A more attractive to prospective issuers.
However, we believe this increase would also occur under the
alternative of no state preemption for Tier 2 offerings. While state
review of Tier 2 offerings could potentially confer incremental
investor protection benefits to the extent a thorough Commission staff
review is constrained by the increased burden on agency resources,
overall we do not believe this effect will be substantial.
---------------------------------------------------------------------------

    \1029\ See WDFI Letter and NASAA Letter 2.
---------------------------------------------------------------------------

    As an alternative to preemption for Tier 2 offerings, we considered
the option of state qualification by one state or a subset of states or
the option of state review under NASAA's coordinated review
program.\1030\ According to one commenter, the coordinated review
program creates value by defining concrete service standards regarding
the timeliness of various steps of the qualification process and by
introducing more legal certainty.\1031\ According to another commenter,
the coordinated review program will eliminate costs of identifying and
addressing individual state requirements and will provide an expedient
registration process.\1032\ We recognize that the coordinated review
process ultimately may reduce processing time and streamline certain
state requirements for issuers registering in multiple states when
compared to independent review conducted by individual states. To date,
however, we are aware of only a few issuers that have utilized the
coordinated review process, so currently there is limited evidence
available to us to evaluate the effectiveness and timeliness of
coordinated review, especially in the event that more potential
Regulation A issuers seek state qualification under this process. While
it is possible that the coordinated review process may reduce costs for
issuers as compared to individual state review and qualification, it
would add cost and complexity for issuers seeking an exemption under
amended Regulation A when compared to Commission review and
qualification alone. To the extent that disclosure or merit review (if
applicable to one of the participating jurisdictions in which the
issuer is seeking to offer securities) standards of participating
jurisdictions impose more extensive requirements on the issuer than
Commission rules, some issuers may incur additional compliance expense
or require additional time to address comments. In light of the recent
efforts of state securities regulators to address concerns about the
cost of state review and qualification of Regulation A offerings,
however, the ongoing implementation and development of the coordinated
review program, particularly as it may operate within Tier 1 offerings,
may, in the future, provide additional data that will aid our future
evaluation of whether such a program could effectively operate within
the context of larger, more national Tier 2 offerings.
---------------------------------------------------------------------------

    \1030\ A description of NASAA's coordinated review program can
be found at: http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/.
    \1031\ See Groundfloor Letter.
    \1032\ See WDFI Letter.

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

    We believe the final rules strike appropriate balance between
mitigating cost and time demands on issuers and providing investor
protections.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the final rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (PRA).\1033\ We published a notice requesting
comment on the collection of information requirements in the Proposing
Release, and we submitted these requirements to the Office of
Management and Budget (OMB) for review in accordance with the PRA and
its implementing regulations.\1034\ While several commenters provided
qualitative comments on the possible costs of the proposed rules and
amendments, we did not receive comments on our PRA analysis and thus
are adopting our estimates substantially as proposed, except as
otherwise noted herein. The titles for the collections of information
are:
---------------------------------------------------------------------------

    \1033\ 44 U.S.C. 3501 et seq.
    \1034\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation A (Form 1-A and Form 2-A)'' (OMB Control Number
3235-0286);
    (2) ``Form 1-K'' (OMB Control Number 3235-0720);
    (3) ``Form 1-SA'' (OMB Control Number 3235-0721);
    (4) ``Form 1-U'' (OMB Control Number 3235-0722);
    (5) ``Form 1-Z'' (OMB Control Number 3235-0723);
    (6) ``Form 8-A'' (OMB Control Number 3235-0056);
    (7) ``Form ID'' (OMB Control Number 3235-0328); and
    (8) ``Form F-X'' (OMB Control Number 3235-0379).\1035\
---------------------------------------------------------------------------

    \1035\ Although the final rules do not amend Form F-X, the total
burden hours associated with that form may increase minimally as a
result of the increased number of issuers relying on Regulation A.
The Commission submitted the revised burden estimate for Form F-X to
OMB for review in accordance with the PRA, although the potential
minimal increase in burden hours was not noted in the Proposing
Release.
---------------------------------------------------------------------------

    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. We applied for OMB control numbers
for the new collections of information in accordance with 44 U.S.C.
3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each
new collection, as specified above. Responses to these new collections
of information would be mandatory for issuers raising capital under
Regulation A.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collections of information. In deriving estimates of
these hours and costs, we recognize that the burdens likely will vary
among individual issuers based on a number of factors, including the
stage of development of the business, the amount of capital an issuer
seeks to raise, and the number of years since inception of the
business. We believe that some issuers will experience costs in excess
of the average and some issuers may experience less than the average
costs.

B. Estimated Number of Regulation A Offerings

    Data regarding current market practices may help identify the
potential number of offerings that will be conducted in reliance on the
final rules.\1036\ We estimate that there are currently approximately
26 Regulation A offering statements filed by issuers per year.\1037\
While it is not possible to predict with certainty the number of
offering statements that will be filed by issuers relating to offerings
made in reliance on amended Regulation A, for purposes of this PRA
analysis, we estimate that the number will be 250 offerings statements
per year. We base this estimate on (i) the current approximate number
of annual Form 1-A filings under the existing rules, plus (ii) 65
percent of the estimated number of registered offering of securities
that would have been eligible to be conducted under Regulation A,\1038\
plus (iii) an additional 16 offerings that either would not otherwise
occur or would have been conducted in reliance on another exemption
from Securities Act registration, such as Regulation D.\1039\ For
purposes of this PRA analysis, we assume that each offering statement
for a unique Regulation A offering that is filed represents a unique
issuer, such that approximately 250 issuers are estimated to conduct
Regulation A offerings each year under the final rules.
---------------------------------------------------------------------------

    \1036\ See Section III. above for a discussion of the data
regarding current market practices.
    \1037\ From 2009 through 2014, there were 158 Form 1-As filed
with the Commission.
    \1038\ See figures and graphs for registered offerings cited in
Section III.B.b. above (citing approximately 320 registered initial
public offerings or follow-on offerings in calendar year 2014 that
would have been potentially eligible to be conducted under amended
Regulation A).
    \1039\ See figures and graphs for registered and exempt
offerings under Regulation D cited in Section III.B.1.a.ii. above
(citing 11,228 issuances under Regulation D in calendar year 2014
that would have been potentially eligible to be conducted under
amended Regulation A).
---------------------------------------------------------------------------

C. PRA Reporting and Cost Burden Estimates

1. Regulation A (Form 1-A and Form 2-A)
    Currently, Regulation A requires issuers to file a Form 1-A:
Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds
with the Commission. Regulation A has one administrative burden hour
associated with it, while current Form 1-A is estimated to take
approximately 608 hours to prepare and Form 2-A is estimated to take
approximately 12 hours to prepare.\1040\ We do not anticipate that the
one administrative burden hour associated with Regulation A will change
as a result of the final rules. As discussed more fully below, we
believe the burden hours associated with Form 1-A will change, while
Form 2-A and the associated burden hours are eliminated as a result of
today's proposal.\1041\
---------------------------------------------------------------------------

    \1040\ See Form 1-A at 1; Form 2-A at 1.
    \1041\ See discussion in Section II.E. above.
---------------------------------------------------------------------------

    Under the final rules, an issuer conducting a transaction in
reliance on Regulation A will be able to conduct either a Tier 1
offering or a Tier 2 offering.\1042\ In either case, a Regulation A
issuer will continue to be required to file with the Commission
specified disclosures on a Form 1-A: Offering Statement.\1043\ An
issuer will also be required to file amendments to Form 1-A to address
comments from Commission staff and to disclose material changes in the
disclosure previously provided to the Commission or investors.\1044\ In
light of the electronic filing requirements for Regulation A offering
materials discussed above,\1045\ issuers are no longer required to file
a manually signed copy of Form 1-A with the Commission.\1046\ Issuers
are, however, required to manually sign a copy of the offering
statement before or at the time of non-public submission or filing that
must be retained by the issuer for a period of five years and produced
to the Commission, upon request.\1047\ As issuers are currently
required to manually sign the Form 1-A and file it with the Commission,
we do not anticipate that the Form 1-A retention requirement adopted in
the final rules will alter an issuer's compliance

burden. As adopted, Form 1-A is similar to existing Form 1-A. In some
instances, Form 1-A, contains fewer disclosure items than existing Form
1-A (e.g., Part I (Notification) of Form 1-A does not require
disclosure of ``Affiliate Sales''; Part II (Offering Circular) of Form
1-A requires a description of the issuer's business for a period of
three years, rather than five years). Part II of Form 1-A no longer
permits disclosure in reliance on the Model A disclosure format, but
directs issuers to follow the provisions of Model B (renamed ``Offering
Circular''), Part I of Form S-1, or, where applicable, Part I of Form
S-11.\1048\ In other instances, Form 1-A contains more disclosure items
than existing Form 1-A (e.g., Part I of Form 1-A requires additional
disclosure of certain summary information regarding the issuer and the
offering; Part II of Form 1-A requires more detailed management
discussion and analysis of the issuer's liquidity and capital resources
and results of operations). Form 1-A requires disclosure similar to
that required in a Form S-1 registration statement for registered
offerings under the Securities Act, but with fewer disclosure items
(e.g., it requires less disclosure about the compensation of officers
and directors, and less detailed management discussion and analysis of
the issuer's liquidity and capital resources and results of operations)
and, under certain circumstances, Form 1-A does not require issuers to
file audited financial statements.\1049\
---------------------------------------------------------------------------

    \1042\ See discussion in Section II.B.3. above.
    \1043\ See Rule 252.
    \1044\ See Rule 252(f).
    \1045\ See discussion in Section II.C.1. above.
    \1046\ See discussion in Section II.C.3.d. above.
    \1047\ See Instruction 2 to Signatures in Form 1-A.
    \1048\ See discussion at Section II.C.3.b. above.
    \1049\ See discussion in Section II.C.3.b(2). above.
---------------------------------------------------------------------------

    We expect that issuers relying on Regulation A for Tier 1 offerings
of up to $20 million in a 12-month period will largely be at a similar
stage of development to issuers relying on existing Regulation A and
will therefore not experience an increased compliance burden with Form
1-A. Given the increased annual offering amount limit of $50 million
for Tier 2 offerings, however, we expect that issuers conducting such
offerings pursuant to Regulation A may be at a more advanced stage of
development than issuers offering securities under Tier 1. In such
cases, the complexity of the required disclosure and, in turn, the
burden of compliance with the requirements of Form 1-A may be greater
for some issuers than for issuers relying on existing Form 1-A. We
believe that the burden hours associated with amended Form 1-A will be
greater than the current estimated 608 burden hours per response but
will not be as great as the current estimated 972.32 burden hours per
response for Form S-1. We therefore estimate that the total burden to
prepare and file Form 1-A, as adopted today, including any amendments
to the form, will increase on average across all issuers in comparison
to existing Form 1-A to approximately 750 hours.\1050\ We estimate that
the issuer will internally carry 75 percent of the burden of
preparation and that outside professionals retained by the issuer at an
average cost of $400 per hour will carry 25 percent.\1051\
---------------------------------------------------------------------------

    \1050\ By comparison, we estimate the burden per response for
preparing Form S-1 to be 972.32 hours. See Form S-1, at 1.
    \1051\ The costs of retaining outside professionals may vary
depending on the nature of the professional services. For purposes
of this PRA analysis, however, we estimate that such costs will be
an average of $400/hour, which is consistent with the rate we
typically estimate for outside legal services used in connection
with public company reporting.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of a Form 1-A
will require 187,500 burden hours (250 offering statements x 750 hours/
offering statement) in aggregate each year, which corresponds to
140,625 aggregated hours carried by the issuer internally (250 offering
statements x 750 hours/offering statement x 0.75) and aggregated costs
of $18,750,000 (250 offering statements x 750 hours/offering statement
x 0.25 x $400) for the services of outside professionals. As stated
above, we estimate that the proposed amendments to Regulation A will
not change the one administrative burden hour associated with the
review of Regulation A and will require 250 burden hours (250 offering
statements x one hour/offering statement) in aggregate each year, which
corresponds to 187 aggregated hours carried by the issuer internally
(250 offering statements x 0.75) and aggregated costs of $25,000 (250
offering statements x one hour/offering statement x 0.25 x $400) for
services of outside professionals. When combined with the estimates for
Form 1-A, the administrative burden hour results in an estimated total
compliance burden of 751 hours per offering statement and an estimated
annual compliance burden of 187,750 hours (250 offering statements x
751 hours/offering statement) and aggregated costs of $18,775,000 (250
offering statements x 751 hours/offering statement x 0.25 x $400).
2. Form 1-K: Annual Report
    Under the final rules, any issuer that conducts a Tier 2 offering
pursuant to Regulation A is required to file an annual report with the
Commission on Form 1-K: Annual Report.\1052\ A manually signed copy of
Form 1-K must be executed by the issuer and related signatories before
or at the time of electronic filing, retained by the issuer for a
period of five years and, if requested, produced to the
Commission.\1053\ We do not anticipate that the requirement to retain a
manually signed copy of Form 1-K will affect an issuer's compliance
burden. We believe the compliance burden associated with disclosure
provided in Form 1-K will be less than the compliance burden associated
with reporting required under Exchange Act Sections 13 or 15(d). We
also believe the burden is more analogous to the compliance burden
attendant to Form 1-A. Unlike the disclosure required in Form 1-A,
however, offering-specific disclosure in Form 1-K is not required.
Additionally, under certain circumstances, an issuer will be required
to disclose information similar to the information previously required
of issuers on Form 2-A.\1054\ Unlike the disclosure previously required
on Form 2-A, however, an issuer is not required to provide disclosure
about the use of proceeds. We estimate that the burden to prepare and
file a Form 1-K will be less than that required to prepare and file a
Form 1-A. We estimate that compliance with Form 1-K will result in a
burden of 600 hours per response.\1055\ We further estimate that 75
percent of the burden of preparation will be carried by the issuer
internally and that 25 percent will be carried by outside professionals
retained by the issuer at an average cost of $400 per hour. While we do
not know the exact number of issuers that will conduct Tier 2 offerings
in reliance on amended Regulation A, we estimate 75 percent of all
issuers filing a Form 1-A (or 188 issuers, 250 issuers x .75) will
conduct Tier 2 offerings, enter the Regulation A ongoing reporting
regime and therefore be required to file Form 1-K.\1056\
---------------------------------------------------------------------------

    \1052\ See Rule 257(b)(1).
    \1053\ See General Instruction C to Form 1-K and related
discussion in Section II.E.1.c. above.
    \1054\ Id.
    \1055\ We estimate that the burden of preparing the information
required by Form 1-K will be approximately \3/4 \of the burden for
filing Form 1-A due to the lack of offering-specific disclosure and
an issuer's ability to update previously provided disclosure.
    \1056\ This estimate includes any special financial reports
required to be filed on Form 1-K.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-K for
issuers with an ongoing reporting obligation under Regulation A will
require 112,800 burden hours (188 issuers x 600 hours/issuer) in the
aggregate each year, which corresponds to 84,600 hours carried by the
issuer internally (188 issuers x 600

hours/issuer x 0.75) and costs of $11,280,000 (188 issuers x 600 hours/
issuer x 0.25 x $400) for the services of outside professionals.
3. Form 1-SA: Semiannual Report
    Under the final rules, any issuer that conducts a Tier 2 offering
in reliance on Regulation A will be required to file a semiannual
report with the Commission on Form 1-SA: Semiannual Report.\1057\ A
manually signed copy of the Form 1-SA must be executed by the issuer
and related signatories before or at the time of electronic filing,
retained by the issuer for a period of five years and, if requested,
produced to the Commission.\1058\ We do not anticipate that the
requirement to retain a manually signed copy of the Form 1-SA will
affect an issuer's compliance burden. Issuers must provide semiannual
updates on Form 1-SA, which, like a Form 10-Q,\1059\ consists primarily
of financial statements and MD&A. Unlike Form 10-Q, Form 1-SA does not
require disclosure regarding quantitative and qualitative market risk
or controls and procedures.\1060\ We estimate, however, that on balance
the reduction in burden attributable to eliminating these two items in
Form 1-SA will be offset by the increased burden associated with
requiring financial statement disclosure covering six months, rather
than three months. We therefore believe the per response compliance
burden of Form 1-SA will be similar to the compliance burden for
issuers filing a Form 10-Q under the Exchange Act.\1061\ Therefore, for
purposes of this PRA analysis, we estimate that the burden to prepare
and file a Form 1-SA will equal the burden to prepare and file Form 10-
Q, which we have previously estimated as 187.43 hours per
response.\1062\ Unlike Form 1-K, Form 1-SA does not require the
provision of audited financial statements. We therefore believe, in
comparison to Form 1-K, issuers filing a Form 1-SA will be able to
prepare more of the required disclosures internally. Accordingly, we
estimate that 85 percent of the burden of preparation will be carried
by the issuer internally and that 15 percent will be carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.
---------------------------------------------------------------------------

    \1057\ See Rule 257(b)(3).
    \1058\ See General Instruction C to Form 1-SA and related
discussion in Section II.E.1.c(2). above.
    \1059\ 17 CFR 249.308a.
    \1060\ See discussion in Section II.E.1.c(2). above.
    \1061\ Issuers will, however, have to file Form 1-SA, a
semiannual report, less frequently than Form 10-Q, a quarterly
report.
    \1062\ See Form 10-Q, at 1.
---------------------------------------------------------------------------

    We estimate that compliance with the requirements of Form 1-SA for
issuers with an ongoing reporting obligation under Regulation A will
require 35,237 burden hours (188 issuers x 187 hours/issuer/filing x 1
filing/year) in the aggregate each year, which corresponds to 29,952
hours carried by the issuer internally (188 issuers x 187 hours/issuer/
filing x 1 filing/year x 0.85) and costs of $2,113,872 (188 issuers x
187 hours/issuer/filing x 1 filing/year x 0.15 x $400) for the services
of outside professionals.\1063\
---------------------------------------------------------------------------

    \1063\ This estimate includes any special financial reports
required to be filed on Form 1-SA.
---------------------------------------------------------------------------

4. Form 1-U: Current Reporting
    Under the final rules, any issuer that conducts a Tier 2 offering
in reliance on Regulation A is required to promptly file current
reports on Form 1-U with the Commission.\1064\ A manually signed copy
of the Form 1-U must be executed by the issuer and related signatories
before or at the time of electronic filing, retained by the issuer for
a period of five years and, if requested, produced to Commission.\1065\
We do not anticipate that the requirement to retain a manually signed
copy of the Form 1-U will affect an issuer's compliance burden. Issuers
are required to file such reports in the event they experience certain
corporate events, much the same way as issuers subject to an ongoing
reporting obligation under the Exchange Act file current reports on
Form 8-K.\1066\ The requirement to file a Form 1-U, however, will be
triggered by significantly fewer corporate events than those that
trigger a reporting requirement on a Form 8-K, and the form itself will
be slightly less burdensome for issuers to fill out.\1067\ Thus, the
frequency of filing the required disclosure and the burden to prepare
and file a Form 1-U will be considerably less than for Form 8-K. We
estimate that the burden to prepare and file each current report will
be 5 hours. While we do not know for certain how often an issuer would
experience a corporate event that would trigger a current report filing
on Form 1-U, we estimate that many issuers may not experience a
corporate event that triggers reporting, while others may experience
multiple events that trigger reporting. On average, we estimate that an
issuer will be required to file one current report annually.\1068\
Therefore, we estimate that an issuer's compliance with Form 1-U will
result in an annual aggregate burden of 5 hours (1 current report
annually x 5 hours per current report) per issuer.
---------------------------------------------------------------------------

    \1064\ See Rule 257(b)(4).
    \1065\ See General Instruction C to Form 1-U and related
discussion in Section II.E.1.c(3). above.
    \1066\ We estimate the burden per response for preparing a Form
8-K to be 5.71 hours. See Form 8-K, at 1.
    \1067\ See discussion at Section II.E.1.c(3). above.
    \1068\ We have previously estimated that on average issuers file
one current report on Form 8-K annually. Although we believe that
the frequency of filing a Form 1-U will be considerably less than a
Form 8-K, we are estimating that each issuer will be required to
file one Form 1-U per year.
---------------------------------------------------------------------------

    As with Form 1-SA, we estimate that 85 percent of the burden of
preparation will be carried by the issuer internally and that 15
percent will be carried by outside professionals retained by the issuer
at an average cost of $400 per hour. We estimate that compliance with
the requirements of Form 1-U will require 940 burden hours (188 issuers
x 1 current report annually x 5 hours per current report) in aggregate
each year, which corresponds to 799 hours carried by the issuer
internally (188 issuers x 5 hours/issuer/year x 0.85) and costs of
$56,400 (188 issuers x 5 hours/issuer/year x 0.15 x $400) for the
services of outside professionals.
5. Form 1-Z: Exit Report
    Under the final rules, all Regulation A issuers are required to
file a notice under cover of Form 1-Z: Exit Report. Issuers conducting
Tier 1 offerings will be required to file Part I of Form 1-Z that
discloses information similar to the information previously required of
issuers on Form 2-A.\1069\ Issuers conducting Tier 2 offerings will
also be required to disclose the same information as issuers conducting
Tier 1 offerings in Part I of Form 1-Z, unless previously reported by
the issuer on Form 1-K. Issuers conducting Tier 2 offerings will also
be required to complete Part II of Form 1-Z in order to notify
investors and the Commission that it will no longer file and provide
annual reports pursuant to the requirements of Regulation A.\1070\ In
Tier 2 offerings, an issuer's obligations to file ongoing reports could
be terminated at any time after completion of reporting for the fiscal
year in which the offering statement was qualified, if the securities
of each class to which the offering statement relates are held of
record by fewer than 300 persons and offers and sales made in reliance
on a qualified offering statement are not ongoing.\1071\ A manually
signed copy of the Form 1-Z must be executed by the issuer and related
signatories before or at the time of electronic filing, retained

by the issuer for a period of five years and, if requested, produced to
Commission.\1072\ We do not anticipate that the requirement to retain a
manually signed copy of the Form 1-Z will affect an issuer's compliance
burden. We estimate that all of the issuers conducting Tier 1 offerings
(63 issuers, 250 total estimated issuers x 0.25) and 50 percent of
issuers conducting Tier 2 offerings (94 issuers, 188 issuers with an
ongoing reporting obligation x 0.50) will file a Form 1-Z in the second
fiscal year after qualification of the offering statement (157 total
issuers, 63 + 94). Although we believe that the vast majority of
issuers subject to ongoing reporting under Regulation A will qualify
for termination in the second fiscal year after qualification, we
believe that only half or 50 percent of such issuers will actually
choose to terminate their reporting obligations. An issuer may have
many reasons for continuing its reporting obligations, such as a desire
to facilitate continued quotations in the over-the-counter (OTC)
markets pursuant to revisions to Exchange Act Rule 15c2-11.\1073\
---------------------------------------------------------------------------

    \1069\ See discussion in Section II.E.4.b. above.
    \1070\ See Rule 257(d).
    \1071\ See Rule 252(f)(2).
    \1072\ See Instruction to Form 1-Z and related discussion in
Section II.E.4.b. above.
    \1073\ See discussion in Section II.E.2. above.
---------------------------------------------------------------------------

    The Form 1-Z is similar to the Form 15 that issuers file to provide
notice of termination of the registration of a class of securities
under Exchange Act Section 12(g) or to provide notice of the suspension
of the duty to file reports required by Exchange Act Sections 13(a) or
15(d).\1074\ Therefore, we estimate that compliance with the Form 1-Z
will result in a similar burden as compliance with Form 15 that is, a
burden of 1.50 hours per response. We estimate that 100% of the burden
will be carried by the issuer internally. We estimate that compliance
with Form 1-Z will result in a burden of 235.5 hours (157 issuers
filing Form 1-Z x 1.50 hours/issuer) in the aggregate.
---------------------------------------------------------------------------

    \1074\ We currently estimate the burden per response for
preparing a Form 15 to be 1.50 hours. See Form 15 at 1.
---------------------------------------------------------------------------

6. Form 8-A: Short Form Registration Under the Exchange Act
    Under the final rules, Regulation A issuers in Tier 2 offerings
that elect to list securities offered pursuant to a qualified offering
statement on a national securities exchange or that seek to register
the class of securities offered pursuant to a qualified offering
statement under the Exchange Act may do so by filing a Form 8-A (short
form) registration statement with the Commission.\1075\ In such
circumstances, an issuer will be required to comply with the form
requirements of Form 8-A, which will generally allow issuers to
incorporate by reference in the form information provided in the
related Form 1-A. While we do not know the exact number of issuers
conducting Tier 2 offerings that will seek to register a class of
securities under the Exchange Act at or near the time of qualification
of an offering statement, for purpose of this PRA analysis, we estimate
2 percent of all issuers filing a Form 1-A (or 5 issuers, 250 issuers x
.02) will elect to register a class of securities under the Exchange
Act and file a Form 8-A.
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    \1075\ See discussion in Section II.E.3. above.
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    The final rules do not alter the burden hour per response of Form
8-A, but rather amend the existing Form 8-A to permit issuers in Tier 2
offerings to rely on the form. Therefore, we estimate that compliance
with the Form 8-A will not change as a result of the final rules, a
burden of 3 hours per response.\1076\ We estimate that compliance with
Form 8-A by issuers conducting a Tier 2 offering will result in a
burden of 15 hours (5 issuers filing Form 8-A x 3 hours/issuer) in
aggregate each year. We estimate that 100% of the burden will be
carried by the issuer internally.
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    \1076\ 17 CFR 249.208a.
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7. Form ID Filings
    Under the final rules, an issuer will be required to file specified
disclosures with the Commission on EDGAR.\1077\ We anticipate that many
issuers relying on Regulation A for the first time will not have
previously filed an electronic submission with the Commission and so
will need to file a Form ID. Form ID is the application form for access
codes to permit filing on EDGAR. The final rules will not change the
form itself, but we anticipate that the number of Form ID filings will
increase due to an increase in issuers relying on Regulation A. For
purposes of this PRA analysis, we estimate that 75 percent of the
issuers who seek to offer and sell securities in reliance on amended
Regulation A will not have previously filed an electronic submission
with the Commission and will, therefore, be required to file a Form ID.
As noted above, we estimate that approximately 250 issuers per year
will seek to offer and sell securities in reliance on Regulation A,
which corresponds to approximately 188 additional Form ID filings. We
estimate that 100% of the burden will be carried by the issuer
internally. As a result, we estimate the additional annual burden will
be approximately 28.20 hours (188 filings x 0.15 hours/filing).\1078\
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    \1077\ See Rules 252 and 257.
    \1078\ We currently estimate the burden associated with Form ID
is 0.15 hours per response. See Form ID at 1.
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8. Form F-X
    Under the final rules, Canadian issuers are required to file a Form
F-X, which furnishes to the Commission a written irrevocable consent
and power of attorney at the time of filing the offering statement
required by Rule 252. It is used to appoint an agent for service of
process by Canadian issuers eligible to use Regulation A, issuers
registering securities on Forms F-8 or F-10 under the Securities Act or
filing periodic reports on Form 40-F under the Exchange Act, as well as
in certain other circumstances.
    The final rules will not change Form F-X itself, but will amend the
rules to allow for the form to be filed electronically for offerings
under Regulation A. Canadian companies are the only type of issuer that
will be required to use this form under the final rules and we estimate
that 100% of the burden will be carried by the issuer internally. We
estimate that approximately 2 percent of issuers utilizing amended
Regulation A will be Canadian companies (or 5 responses, 250 issuers x
0.02) resulting in an annual burden of approximately 10 hours (2 hours
per response x 5 responses).\1079\
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    \1079\ In this regard, we note that no Canadian issuers filed a
Form 1-A in 2013.
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D. Collections of Information Are Mandatory

    The collections of information required under Rules 251 through 263
will be mandatory for all issuers seeking to rely on the Regulation A
exemption. Responses on Form 1-A, Form 1-K, Form 1-SA, Form 1-U and
Form 1-Z will not be kept confidential, although an issuer may request
confidential treatment for non-publicly submitted offering materials,
or any portion thereof, for which it believes an exemption from the
FOIA exists.\1080\ It is anticipated that most material not subject to
a confidential treatment request will be made public when the offering
is qualified. A Form 1-A that is non-publicly submitted by an issuer
and later abandoned before being publicly filed with the Commission and
responses on Form ID will, however, remain non-public, absent a request
for

such information under the Freedom of Information Act.\1081\
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    \1080\ See Commission Rule 83, 17 CFR 200.83, and Securities Act
Rule 406, 17 CFR 230.406.
    \1081\ 5 U.S.C. 552. The Commission's regulations that implement
the Freedom of Information Act are at 17 CFR 200.80 et seq.
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V. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act, 5 U.S.C. 603. It
relates to the following:
     Amendments to Rule 157(a), Rules 251 through 263 of
Regulation A, Rule 505 of Regulation D, Form 1-A, Form 8-A, Rule 30-1
of the Commission's organizational rules, Rule 4a-1 under the Trust
Indenture Act, Rule 12g5-1 and Rule 15c2-11 under the Exchange Act, and
Item 101 of Regulation S-T;
     new Forms 1-K, 1-SA, 1-U, and 1-Z; and
     the rescission of Form 2-A.
    An Initial Regulatory Flexibility Analysis (IRFA) was prepared in
accordance with the Regulatory Flexibility Act and included in the
Proposing Release.

A. Need for the Rules

    The rule amendments, new forms, and rescission of Form 2-A are
designed to implement the requirements of Section 3(b)(2) of the
Securities Act and to make certain conforming changes based on our
amendments to Regulation A. Section 3(b)(2) directs the Commission to
adopt rules adding a class of securities exempt from the registration
requirements of the Securities Act for offerings of up to $50 million
of securities within a 12-month period, subject to various additional
terms and conditions set forth in Section 3(b)(2) or as provided for by
the Commission as part of the rulemaking process.
    Our primary objective is to implement Section 401 of the JOBS Act
by expanding and updating Regulation A in a manner that makes public
offerings of up to $50 million less costly and more flexible while
providing a framework for regulatory oversight to protect investors. In
so doing, we have crafted a revision of Regulation A that both promotes
small company capital formation and provides for meaningful investor
protection. We believe that issuers, particularly small businesses,
benefit from having a wide range of capital-raising strategies
available to them, and that an expanded and updated Regulation A could
serve as a valuable option that augments the exemptions from
registration more frequently relied upon, thereby facilitating capital
formation for small businesses.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on every aspect of
the IRFA, including the number of small entities that would be affected
by the proposed amendments, 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 rules. We did not
receive any comments specifically addressing the IRFA. We did, however,
receive comments from members of the public on matters that could
potentially impact small entities. These comments are discussed at
length by topic in the corresponding subsections of Section II. above.
    While the proposed rules contemplated that small entities would be
able to elect to proceed under the requirements of either Tier 1 or
Tier 2, as discussed more fully below, an entity considered a small
business under our rules would only be required to file ongoing reports
under Regulation A if it elected to conduct a Tier 2 offering.\1082\
The following discussion therefore focuses on the suggestions of
commenters, as they relate to the proposed and final requirements for
Tier 1 offerings, which is the tier most likely to be relied upon by
small entities.\1083\
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    \1082\ The distinction between a Tier 1 offering and Tier 2
offering is discussed in Section II. above.
    \1083\ For a more comprehensive discussion of commenter
suggestions as to the proposed rules for both Tier 1 and Tier 2 that
could potentially impact small entities, see Section II. above.
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    Many commenters recommended making changes to proposed rules that,
in their view, would make Regulation A a more viable capital raising
option for smaller issuers.\1084\ Some commenters recommended improving
the utility of Regulation A for smaller issuers by preempting state
regulation of Tier 1 offerings.\1085\ Others, however, opposed
preemption for all Regulation A offerings.\1086\ Some commenters
recommended that we adopt a third tier, either expressly or through
fleixble applicability of the proposed tier requirements.\1087\ Some
commenters suggested that raising the offering limit of Tier 1 from $5
million to $10 million or more would make Tier 1 more useful,\1088\
while others recommended including various forms of ongoing disclosure
at a level lower than what was proposed to be required for Tier
2.\1089\ One commenter suggested reducing the Tier 1 narrative
disclosure obligations, particularly for offerings of $2 million or
less, so that such requirements would be more appropriately tailored
for smaller issuers.\1090\ Several commenters made recommendations with
respect to the financial statement and auditing requirements in Form 1-
A, as they relate to the requirements for Tier 1.\1091\
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    \1084\ Andreessen/Cowen Letter; BDO Letter; Bernard Letter;
Campbell Letter; CAQ Letter; Public Startup Co. Letter 1; Deloitte
Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter;
KPMG Letter; McGladrey Letter; Milken Institute Letter; Ladd Letter
2; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co
Letter.
    \1085\ Andreessen/Cowen Letter; Bernard Letter; Campbell Letter;
Public Startup Co. Letter 1; Guzik Letter 1; Heritage Letter; Milken
Institute Letter; Ladd Letter 2; SVB Financial Letter.
    \1086\ See fn. 772 above.
    \1087\ See, e.g., Public Startup Co. Letter 1.
    \1088\ Guzik Letter 1; ICBA Letter.
    \1089\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure
requirements could parallel Tier 2's requirements, but without the
requirement for semiannual reports); Ladd Letter 2; Public Startup
Co. Letters 1 and 5; SVB Financial Letter.
    \1090\ Campbell Letter.
    \1091\ BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG
Letter; McGladrey Letter.
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    The final rules for Regulation A take into account some of the
suggestions by commenters on ways to make Tier 1 more useful for small
entities. For example, the final rules raise the offering limit of Tier
1 to $20 million. Also, with respect to the offering circular narrative
disclosure requirements,\1092\ we have adopted certain additional
scaled disclosure requirements for Tier 1 that are intended to lessen
the compliance obligations for smaller issuers. We are further
providing issuers under both tiers with the accommodation provided to
emerging growth companies in Securities Act Section 7(a) to use the
extended transition periods applicable to private companies for
complying with new or revised accounting standards under U.S. GAAP.
Additionally, we have provided Tier 1 issuers with additional
flexibility with respect to auditor independence standards.
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    \1092\ See Section II.C.3.b(1). above.
---------------------------------------------------------------------------

    As noted in Section II.H.3. above, however, we do not agree with
the position of some commenters that preemption of state securities
laws registration and qualification requirements is necessary or
appropriate for Tier 1 offerings.\1093\ We note that some commenters
who suggested that preemption of state securities laws may improve the
attractiveness of Tier 1 offerings did so on the condition that other
aspects of the tier should change accordingly, namely requiring Tier 1

issuers to provide audited financial statements in the offering
statement and possibly on an ongoing basis. For the reasons discussed
in Section II.D.3.b(2)(c). above, we have not adopted such changes in
Tier 1.
---------------------------------------------------------------------------

    \1093\ See Section II.H.3. above.
---------------------------------------------------------------------------

    Additionally, as noted in Section II.I. above, we do not believe
that the creation of a third tier, as suggested by some commenters,
would meaningfully alter a smaller entity's options for capital
formation under Regulation A. While a third tier may provide issuers
with some additional flexibility for capital formation under Regulation
A, this additional flexibility would have potential costs. For example,
a third tier may unnecessarily complicate compliance with Regulation A
for smaller entities, and could potentially confuse investors as to the
type of Regulation A offering an issuer was undertaking and the type of
information such investor could expect to receive as a result, thereby
lessening the viability of the exemption as a whole. For this reason,
we are not adopting a third or intermediate tier in Regulation A.
    In the light of the changes discussed above, we believe that the
final rules we are adopting today provide smaller issuers with an
appropriately tailored regulatory regime that takes into account the
needs of small entities to have a viable capital formation option in
Regulation A, while maintaining appropriate investor protections.

C. Small Entities Subject to the Rules

    For purposes of the Regulatory Flexibility Act, 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.\1094\
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    \1094\ Securities Act Rule 157 [17 CFR 230.157]. We note that
currently this rule refers to ``the dollar limitation prescribed by
Section 3(b) of the Securities Act.'' The JOBS Act amended Section
3(b) of the Securities Act. The former Section 3(b) is now Section
3(b)(1), and a new Section 3(b)(2) was added. To retain the meaning
of Rule 157, we are adopting a technical correction to replace the
reference to ``Section 3(b)'' with a reference to ``Section
3(b)(1).''
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    While Regulation A is available for offerings of up to $50 million
in securities in a 12-month period, only offerings up to $5 million in
securities in a 12-month period will constitute offerings by small
entities under the definition set forth above. It is difficult to
predict the number of small entities that will use Regulation A due to
the many variables included in the amendments. Nevertheless, we believe
that the final rules for Regulation A will increase the overall number
of Regulation A offerings of $5 million or less due to the ability to
non-publicly submit draft offering statements for review by the
Commission's staff, the expanded use of solicitation of interest
materials, the ability to electronically file and transmit offering
statements and offering circulars, the potential for preemption of