Regulation A Tier 1 offerings, offering statement disclosure
requirements in Regulation A and Regulation Crowdfunding offerings, as
well as investment limit, periodic disclosure, and funding portal
requirements in Regulation Crowdfunding offerings). If non-accredited
investors remain infrequently represented in Rule 506(b) offerings, the
aggregate impacts on costs to investors may be limited. However, the
aggregate impacts on investor protection could be amplified if the
scaled requirements encourage additional issuers to accept non-
accredited investors in Rule 506(b) offerings.
iii. Effects on Efficiency, Competition, and Capital Formation
    If scaled financial statement disclosures lead to more non-
accredited investor offerings under Rule 506(b), and if such investors
contribute additional capital the issuers would not have otherwise
raised from accredited investors, the amendments may incrementally
promote capital formation through Rule 506(b). If non-accredited
investor capital drawn to Rule 506(b) offerings is mostly reallocated
from other offerings to non-accredited investors (e.g., registered
offerings or offerings under Regulation A, Regulation Crowdfunding,
Rule 504, Rule 147/147A, etc.), the net effects on aggregate capital
formation will be limited. However, in that instance, issuers may still
benefit if they are able to obtain a lower cost of capital under the
amendments (e.g., because of lower compliance costs in Rule 506(b)
offerings, even after providing disclosures to non-accredited
investors, or because non-accredited investors in Rule 506(b) offerings
provide better financing terms).
    Streamlining disclosure requirements in Rule 506(b) offerings with
non-accredited investors to be more aligned with those under Regulation
A is expected to make compliance more efficient for those issuers that
undertake these types of offerings along with Rule 506(b) offerings to
non-accredited investors.
    The amendments also may incrementally increase the availability of
Rule 506(b) offerings that allow non-accredited investors, potentially
enabling more efficient allocation of capital of non-accredited
investors among investment alternatives that are otherwise unavailable
to them. While non-accredited investors can participate in other exempt
offerings, Rule 506(b) offerings account for the largest share of the
exempt offerings market and draw issuers that typically do not
participate in Regulation A or Regulation Crowdfunding offerings. The
majority of Rule 506(b) offerings are by issuers that are not reporting
companies. While non-accredited investors can invest in registered
offerings, in most cases issuers in registered offerings have a
different profile than issuers in private placements.\653\ Expanding
opportunities

for investment in operating company and exempt investment fund
offerings under Rule 506(b) might allow non-accredited investors to
construct a more efficient portfolio.\654\ However, as discussed above,
the amendments also may in some cases result in less informed
investment decisions, lowering the efficiency of capital allocation.
---------------------------------------------------------------------------

    \653\ Investors in public firms can access more extensive
disclosures and rely on the protections of the Securities Act
registration and Exchange Act reporting regimes. Listed public firms
are more likely to have analyst coverage, which may provide
additional information to investors.
    Past academic studies comparing private and publicly listed
firms arrive at somewhat mixed conclusions about investment and
innovation behavior of such firms. For example, one study finds that
public firms' patents rely more on existing knowledge, are more
exploitative, and are less likely in new technology classes, while
private firms' patents are broader in scope and more exploratory.
See Huasheng Gao, Po-Hsuan Hsu, & Kai Li, Innovation Strategy of
Private Firms, 53 J. Fin. & Quantitative Analysis 1 (2018). See also
Daniel Ferreira, Gustavo Manso, & Andr[eacute] C. Silva, Incentives
to Innovate and the Decision to Go Public or Private, 27 Rev. Fin.
Stud. 256 (2014) (showing, in a theoretical model, that private
ownership creates incentives for innovation). Another study shows
that public firms in external finance dependent (but not in internal
finance dependent) industries spend more on research and development
and generate a better patent portfolio than their private
counterparts. See Viral Acharya & Zhaoxia Xu, Financial Dependence
and Innovation: The Case of Public versus Private Firms, 124 J. Fin.
Econ. 223 (2017). A different U.S. study finds that listed firms
invest less and are less responsive to changes in investment
opportunities compared to observably similar, matched private firms,
especially in industries in which stock prices are particularly
sensitive to current earnings. See John Asker, Joan Farre-Mensa, &
Alexander Ljungqvist, Corporate Investment and Stock Market Listing:
A Puzzle?, 28 Rev. Fin. Stud. 342 (2015). But see Naomi E. Feldman
et al., The Long and the Short of It: Do Public and Private Firms
Invest Differently? (Working Paper, 2019) (finding that public firms
invest more in long-term assets--particularly innovation--than
private firms). See also Vojislav Maksimovic, Gordon M. Phillips, &
Liu Yang, Do Public Firms Respond to Investment Opportunities More
than Private Firms? The Impact of Initial Firm Quality (Nat'l Bureau
of Econ. Research, Working Paper No. 24104, Dec. 2017) (finding that
public firms respond more to demand shocks after their IPO and are
more productive than their matched private counterparts,
particularly in industries that are capital intensive and dependent
on external financing); and Sandra Mortal & Natalia Reisel, Capital
Allocation by Public and Private Firms, 48 J. & Quantitative
Analysis 77 (2013) (a cross-country study showing that public listed
firms take better advantage of growth opportunities than private
firms, although the differential only exists in countries with well-
developed stock markets).
    Some studies also find that private and public firms differ in
their financing, cash, and payout decisions, cost of capital, and
other characteristics. See, e.g., Kim P. Huynh, Teodora Paligorova,
& Robert Petrunia, Debt Financing in Private and Public Firms, 14
Annals Fin. 465 (2018); Huasheng Gao, Jarrad Harford, & Kai Li,
Determinants of Corporate Cash Policy: Insights from Private Firms,
109 J. Fin. Econ. 623 (2013); Sandra Mortal, Vikram Nanda, & Natalia
Reisel, Why Do Private Firms Hold Less Cash than Public Firms?
International Evidence on Cash Holdings and Borrowing Costs, 113 J.
Banking & Fin. 1 (2020); Roni Michaely & Michael R. Roberts,
Corporate Dividend Policies: Lessons from Private Firms, 25 Rev.
Fin. Stud. 711 (2012); Menachem Abudy, Simon Benning, & Efrat Shust,
The Cost of Equity for Private Firms, 37 J. Corp. Fin. 431 (2016);
Ilan Cooper & Richard Priestley, The Expected Returns and Valuations
of Private and Public Firms, 120 J. Fin. Econ. 41 (2016); and Serkan
Akguc, Jongmoo Jay Choi, & Suk-Joong Kim, Do Private Firms Perform
Better than Public Firms? (Working Paper, 2015).
    \654\ In portfolio theory, constraining the set of investment
opportunities yields a potentially inferior optimal portfolio.
However, the presence of information frictions due to a lack of
investor sophistication might reverse this general prediction and
result in lower portfolio risk-adjusted returns. See supra note 591.
---------------------------------------------------------------------------

    The incremental economic effects of the amendments to non-
accredited investor disclosures in Rule 506(b) offerings discussed
above might be modest, relative to the baseline, for several reasons:
(i) While non-accredited investors are not subject to investment limits
in Rule 506(b) offerings, their participation in Rule 506(b) offerings
remains highly limited by the restriction that no more than 35
investors participate and that such investors must meet the knowledge
and experience standard of the rule; (ii) non-accredited investors may
be unwilling to participate in the majority of Rule 506(b) offerings
because of the higher due diligence and transaction costs, potentially
higher investment minimums that may be inconsistent with optimal
diversification in their portfolio, and significantly lower liquidity
involved in private placements due to transferability restrictions and
a highly limited secondary market; (iii) issuers may be unwilling to
accept non-accredited investors in Rule 506(b) offerings for reasons
other than the cost of disclosures (e.g., a preference to attract
accredited investors that may be able to bring a larger amount of
capital and business expertise, an unwillingness to expand the
capitalization table that may make future angel investors or venture
capital (``VC'') funding less interested in providing funding to the
issuer, an unwillingness to increase the number of non-accredited
investors that may draw the issuer incrementally closer to the Section
12(g) registration threshold, or concerns about investor relations and
risk of litigation involving less informed investors); and (iv) even
though required disclosures to non-accredited investors would be scaled
under the amendments, the direct and indirect costs of such disclosures
(such as risks of disclosure of proprietary information to a broader
range of investors) may discourage issuers from selling to non-
accredited investors in Rule 506(b) offerings.
iv. Reasonable Alternatives
    We are repealing audit requirements for Rule 506(b) offerings of up
to $20 million involving non-accredited investors. As an alternative,
we could repeal audit requirements for all Rule 506(b) offerings,
irrespective of offer size. As compared to the proposal, this
alternative would result in additional compliance cost savings for
issuers in Rule 506(b) offerings with sales to non-accredited investors
and might induce additional Rule 506(b) issuers to accept non-
accredited investors. However, the relative benefits of compliance cost
savings under this alternative might have a more limited impact in
larger offerings. Further, such an alternative could increase costs to
non-accredited investors as a result of less well informed investment
decisions, particularly if non-accredited investors, which are not
subject to investment limits in Rule 506(b), invest significant amounts
in large Rule 506(b) offerings without the benefit of audited financial
statements. Limitations on the number and types of non-accredited
investors that are eligible to participate in Rule 506(b) offerings (no
more than 35 non-accredited investors are allowed to participate and
such investors must possess sophistication) would limit the aggregate
costs to non-accredited investors under this alternative. Such an
alternative would also be inconsistent with the requirements applicable
to other larger offerings available to non-accredited investors,
including larger offerings under Regulation A Tier 2 and registered
offerings, both of which require audited financial statements.
    Under the final amendments, audited financial statement disclosures
will not be required for sales to non-accredited investors in Rule
506(b) offerings of up to $20 million by non-reporting issuers,
irrespective of how much capital is invested by non-accredited
purchasers. As another alternative, we could require audited financial
statement disclosures in Rule 506(b) offerings by non-reporting issuers
that have up to $20 million in sales to non-accredited investors. On
the one hand, this alternative would reduce costs for non-reporting
issuers with limited sales to non-accredited investors under Rule
506(b). On the other hand, each non-accredited investor that is a
purchaser in such an offering may incur a potentially significant loss
of information and increase in due diligence costs, which do not depend
on the amount of capital committed by other non-accredited investors to
this offering.
    As another alternative, rather than scale disclosure requirements
in Rule 506(b) offerings by non-reporting issuers of up to $20 million
with sales to non-accredited investors, we could waive the requirements
for disclosures to non-accredited investors altogether. This
alternative would result in significantly lower compliance costs for
issuers and could encourage more issuers to sell securities to non-
accredited investors under Rule 506(b). However, the loss of
information to non-accredited investors could significantly reduce
their ability to allocate capital in an informed manner, particularly
because a lack of a secondary trading market in many cases precludes
effective price discovery through other sources. Alternatively, we
could require issuers to provide the same disclosures to non-accredited
investors if they provide any disclosures, such as a private placement
memorandum, to accredited investors. While such a provision could
significantly lower non-accredited investor information risk and due
diligence costs in some cases, without dramatically increasing issuer
costs (because they already would have to incur many of the direct
costs to provide the disclosure to accredited investors), non-
accredited investors might suffer a significant loss of information in
cases where the issuer's disclosures to accredited investors are
limited. The existing requirement that the non-

accredited investor satisfy the knowledge and experience standard of
Rule 506(b)(2)(ii), as well as the continued application of the
antifraud provisions of the Federal securities laws, might mitigate
some of the investor protection risks under this alternative.
    We are extending the disclosure requirements of Regulation A Tier 2
for sales to non-accredited investors by non-reporting issuers under
Rule 506(b), irrespective of the size of the Rule 506(b) offering above
$20 million. As an alternative, we could extend the financial statement
requirements of Regulation A Tier 2 to sales to non-accredited
investors in offerings under Rule 506(b) up to $75 million (the amended
Regulation A Tier 2 offer limit), and continue to apply the existing
financial statement disclosure requirements (that are aligned with the
financial statement disclosure requirements applicable to registration
statements) to Rule 506(b) offerings exceeding $75 million that include
sales to non-accredited investors. Compared to the final amendments,
this alternative might increase compliance costs for non-reporting
issuers seeking to raise over $75 million under Rule 506(b) and sell
securities to non-accredited investors. At the same time, these
financial statement disclosures may lower the risk of less informed
investment decisions by non-accredited investors in such offerings
compared to the proposal, particularly for small and pre-revenue
issuers with large financing needs. However, the impact of this
alternative may be modest because relatively few offerings would be
affected by this alternative compared to the final amendments. We
estimate that in 2019 there were approximately 383 offerings under Rule
506(b) by non-reporting issuers other than pooled investment funds with
offer sizes in excess of $75 million (excluding undefined offer sizes),
of which between 3.1 percent and 4.4 percent of offerings involved non-
accredited investors.\655\ This alternative might also decrease the
willingness of non-reporting issuers to accept non-accredited investors
in Rule 506(b) offerings exceeding $75 million, resulting in
potentially fewer investment opportunities for non-accredited investors
compared to the proposal.
---------------------------------------------------------------------------

    \655\ See supra note 127. This estimate is based on the analysis
of Form D data in initial Form D filings with reported offer size,
excluding pooled investment fund issuers and reporting issuers.
Reporting issuers are identified based on 2019 filings of annual
reports or amendments to them.
---------------------------------------------------------------------------

    As another alternative, we could extend Regulation Crowdfunding
financial statement disclosure requirements to Rule 506(b) offerings
with non-accredited purchasers, as suggested by one commenter.\656\
Under such an alternative, issuers in offerings above $107,000 and up
to $5 million (the amended Regulation Crowdfunding limit) would have to
provide non-accredited purchasers with financial statements that have
been either reviewed or audited by an independent accountant (depending
on offering size). Compared to the amendments, which only require
audited financial statements in offerings with non-accredited
purchasers of above $20 million, this alternative could provide non-
accredited purchasers in such offerings with additional certainty about
financial statement disclosures. However, it also would introduce
additional costs for such issuers to obtain an independent accountant
review \657\ or audit of its financial statements.
---------------------------------------------------------------------------

    \656\ See, e.g., J. Clarke Letter.
    \657\ In the Regulation Crowdfunding Adopting Release, the
Commission estimated review costs to be approximately $1,500 to
$18,000. See Regulation Crowdfunding Adopting Release, at 71499.
Recent reports and commenters estimate such costs at between $1,500
and $6,000. See Temporary Amendments Adopting Release, at 27127.
---------------------------------------------------------------------------

b. Simplification of Disclosure Requirements in Regulation A Offerings
    The final amendments extend to Regulation A issuers certain
accommodations presently available to reporting companies, namely: (1)
The option to redact confidential information from material contracts
and certain other agreements filed as exhibits without a need to submit
a confidential treatment request; (2) the option to redact information
that would constitute a clearly unwarranted invasion of personal
privacy in any exhibit; and (3) the option of incorporating by
reference financial statement information into Regulation A offering
statements. The amendments also eliminate the requirement to file a
draft offering statement as a separate exhibit with Form 1-A and
instead enable automated public dissemination of the draft offering
statement through EDGAR, similar to the framework in place for
registered offerings. In addition, the amendments permit the Commission
to declare an offering statement, or a post-qualification amendment to
such offering statement, abandoned, consistent with the rule applicable
to registered offerings.
i. Benefits
    Extending to Regulation A issuers the option to redact confidential
information from material contracts and certain other agreements filed
as exhibits without a need to submit a confidential treatment request--
provided that information is not material and is the type of
information that the issuer both customarily and actually treats as
private and confidential--is expected to reduce disclosure costs for
Regulation A issuers and expedite the filing process by eliminating the
need to file a confidential treatment application and the associated
cost, which was supported by the commenters that addressed these
amendments.\658\ Similarly, extending to Regulation A issuers the
option to redact information that would constitute a clearly
unwarranted invasion of personal privacy in any exhibit is expected to
reduce disclosure costs and expedite the filing process for affected
Regulation A issuers. These accommodations are currently available to
reporting companies. Submitting a confidential treatment request
requires a filer to prepare a detailed application to the Commission
that identifies the particular text for which confidential treatment is
sought, a statement of the legal grounds for the exemption, and an
explanation of why, based on the facts and circumstances of the
particular case, disclosure of the information is unnecessary for the
protection of investors. If the Commission staff issues comments on the
application, the filer might need to revise and resubmit the
application. These requirements impose direct compliance costs on
filers, for instance, in the form of legal counsel costs. For filers
not willing or not able to incur such costs, inclusion of confidential
information of proprietary value in a material contract or similar
exhibit that is filed publicly can result in significant indirect costs
due to the disclosure of sensitive information to potential
competitors. While under the amendments, filers would still need to
determine whether information they are redacting is material, they will
not need to follow the confidential treatment application process.
---------------------------------------------------------------------------

    \658\ See supra note 326.
---------------------------------------------------------------------------

    Based on EDGAR filings analysis, we have identified 11 issuers in
qualified Regulation A offerings that have also filed confidential
treatment applications as of December 2019. We lack data to determine
how many of those filers had filed confidential treatment applications
with regard to information that could be redacted under the amendments.
In general, more than 90 percent of the confidential treatment requests
granted by the Commission in fiscal year 2018

were made in reliance on the exemption concerning competitive harm. It
is also difficult to gauge how many filers had proprietary information
in material contracts or similar exhibits but opted not to file a
confidential treatment request due to legal and other costs of
preparing such a request. One commenter on the FAST Act Modernization
Release estimated that legal fees for confidential treatment requests
ranged from $35,000 to over $200,000,\659\ while another commenter
estimated that attorneys and paralegals at the company spend an average
of 80 hours each quarter preparing redacted exhibits and related
confidential treatment requests.\660\ According to another commenter,
the cost savings of streamlining the confidential treatment process are
expected to be relatively more impactful for smaller filers because
such issuers have a lower threshold for determining whether a contract
is material and therefore required to be filed publicly, as well as for
issuers in industries that are associated with more confidential
treatment requests, such as biotechnology.\661\ We generally expect
similar cost savings from extending this accommodation to Regulation A
issuers.
---------------------------------------------------------------------------

    \659\ See FAST Act Modernization Release, at note 341.
    \660\ See FAST Act Modernization Release, at note 342. Under the
amendments, filers will still need to prepare redacted exhibits and
in some cases filers will incur costs to respond to a staff request
to demonstrate that redacted information was not material.
    \661\ See FAST Act Modernization Release, at note 343 and
accompanying text.
---------------------------------------------------------------------------

    Similarly, extending to Regulation A issuers the option of
incorporation by reference of previously filed financial statement
information into the offering statement, consistent with the current
rules applicable to registered securities offerings filed on Form S-1,
is expected to incrementally reduce Form 1-A preparation costs.
    Enabling automated dissemination of draft offering statements in
lieu of the existing exhibit filing requirement, consistent with the
process of dissemination of draft registration statements, is expected
to incrementally reduce filer effort to prepare the offering statement
and promote greater efficiency of the filing process and regulatory
harmonization.
    Similarly, permitting the Commission to declare an offering
statement, or a post-qualification amendment to such offering
statement, abandoned, consistent with the rule applicable to registered
offerings, is expected to promote greater regulatory harmonization and
to incrementally promote efficiency of the filing process in cases
where only a post-qualification amendment, rather than the entire
offering, is abandoned. The amendments are expected to benefit
investors by reducing potential investor confusion arising from the
presence of the unqualified post-qualification amendment on EDGAR.
ii. Costs
    The extension of the option to redact confidential information from
material contracts filed as exhibits to Regulation A filings is not
expected to result in a significant loss of information to investors
because of the condition that any information being omitted not be
material. Filers electing to rely on this accommodation would still
need to incur costs to determine that information meets the standard
for redaction, as they do today when they file a confidential treatment
request, but they would not incur the cost of preparing a confidential
treatment application.\662\ One potential cost of the final amendments
to Regulation A investors is that information might be redacted by
filers that would not otherwise be afforded confidential treatment by
the staff. However, based on previous experience and a review of
confidential treatment applications by reporting companies, we believe
that such instances would be rare.\663\
---------------------------------------------------------------------------

    \662\ Filers may be asked by the Commission staff to provide on
a supplemental basis an unredacted copy of the exhibit and provide
an analysis of why the redactions are consistent with the redacted
exhibit rules, which might result in incremental additional costs.
    \663\ See FAST Act Modernization Release, at Section VI.D.2.
---------------------------------------------------------------------------

    Allowing Regulation A issuers to rely on incorporation by reference
of financial statement information from previously filed periodic
reports may marginally increase search time for potential investors.
Instead of having all the information available in one location,
investors may need to separately access the incorporated reports in
order to price the offered security. However, the inclusion of
hyperlinks should facilitate the retrieval of such information by
investors. As a result, any increase in the costs to investors of
assembling and assimilating necessary information is expected to be
minimal. We do not have data to assess if, and to what extent, the Form
1-A revision would be burdensome to investors.
iii. Effects on Efficiency, Competition, and Capital Formation
    Extending certain disclosure accommodations presently available to
reporting companies to Regulation A issuers is expected to have an
incremental beneficial effect on capital formation under Regulation A
by reducing disclosure and compliance costs required to undertake a
Regulation A offering. If lower compliance costs encourage new issuers,
particularly smaller issuers with less compliance experience that might
not have otherwise been able to access external financing, to raise
capital under Regulation A, the amendments may, on the margin, promote
competition. Compliance cost savings may have relatively greater
benefits for smaller issuers to the extent that such costs have a fixed
component.
    If the amendments marginally reduce the amount of information
available to investors such that the ability to make informed
investment decisions is affected, they may result in less efficient
capital allocation and, for Regulation A securities with a secondary
market (e.g., OTC-quoted Regulation A securities), less informationally
efficient secondary market prices.
iv. Reasonable Alternatives

    The amendments will permit Regulation A issuers to incorporate
previously filed financial statements by reference. As an alternative,
we could also permit forward incorporation by reference on Form 1-A
with the same conditions as the ones for forward incorporation by
reference available to smaller reporting companies on Form S-1. Forward
incorporation by reference allows an issuer to automatically
incorporate by reference periodic and current reports filed subsequent
to the qualification of the registration statement. This would result
in compliance cost savings for Regulation A issuers and allow for
greater regulatory harmonization and more uniformity in disclosure
requirements applicable to different categories of offerings by small
issuers. Forward incorporation by reference would eliminate the need
for Regulation A issuers to update information in a qualified Form 1-A
filing that has become stale or is incomplete and file post-
qualification amendments solely related to updating information from
periodic reports, thereby reducing compliance costs.\664\ By avoiding
the need to file certain post-qualification amendments, under this
alternative Regulation A issuers might be able to move more quickly and
at a lower cost to raise capital when favorable market conditions
occur. Forward incorporation by reference, however, could increase
investor search costs and eliminate the benefit of staff review of
post-qualification amendments. Because issuers with a relatively higher
level of information risk--for instance, issuers not current in their
reports, blank check companies, shell companies (other than business
combination related shell companies), and penny stock issuers, as well
as issuers whose reports are not available on a website maintained by
or for the issuer--would be ineligible for forward incorporation under
this alternative, the increase in investor information gathering costs
under this alternative might be small.
---------------------------------------------------------------------------

    \664\ We lack data for a reliable estimate of the number of
affected issuers because it is difficult to determine which of the
post-qualification filings solely update information from periodic
reports versus other information, such as offering price, amount
sought, offering deadline, as well as financial information. Based
on the analysis of EDGAR filings from June 2015 through December
2019, we estimate that the average (median) issuer in a qualified
Regulation A offering has filed 1.7 (0) post-qualification
amendments.
---------------------------------------------------------------------------

    The disclosure simplification amendments will apply to all
Regulation A issuers. As an alternative, we could extend the provisions
only to Regulation A issuers that are reporting companies. This
alternative would be generally consistent with the treatment of
reporting companies in registered offerings. It would decrease the
potential for loss of information available to Regulation A investors
about material contracts and similar agreements and marginally reduce
their costs of retrieving financial statement information from
previously filed periodic reports that are incorporated by reference
for issuers other than reporting companies. However, this alternative
also would decrease the benefits of the rule, compared to the
proposal.\665\
---------------------------------------------------------------------------

    \665\ The change to permit Exchange Act registrants to use
Regulation A was adopted in December 2018 and approximately 17
Exchange Act registrants sought to use Regulation A to conduct an
offering in 2019, of which 11 of those offerings were qualified.
---------------------------------------------------------------------------

c. Confidential Information Standard
    As discussed in Section II.D.3 above, the current requirements for
registrants to file material contracts as exhibits to their disclosure
documents permit registrants to redact provisions or terms of exhibits
required to be filed if those provisions or terms are both (i) not
material and (ii) would likely cause competitive harm to the registrant
if publicly disclosed. We are adopting as proposed the amendments to
the exhibit filing requirements by removing the competitive harm
requirement and replacing it with a standard more closely aligned with
the Supreme Court's definition of ``confidential'' that permits
information to be redacted from material contracts if it is the type of
information that the issuer both customarily and actually treats as
private and confidential and that is also not material. These
amendments are expected to benefit issuers through greater regulatory
simplification and harmonization of the requirements governing
confidential information in exhibits with the Supreme Court's
definition, enabling more efficient compliance and greater flexibility
to redact confidential information from exhibits. To the extent that
the amendments makes the option to redact certain information from
exhibits more attractive to issuers, it may result in a marginally
decreased availability of information to investors.
    As an alternative, as suggested by one commenter, we could have
extended the amendments to include participation agreement and
administrative contract exhibits to Form N-6.\666\ This alternative
would be unlikely to result in significant benefits to issuers because
information contained in such exhibits is already disclosed to
investors in other contexts and, in our staff's experience, these
exhibits do not contain confidential or proprietary information.
---------------------------------------------------------------------------

    \666\ See Comm. of Annuity Insurers Letter.
---------------------------------------------------------------------------

5. Offering and Investment Limits
a. Offering and Investment Limits Under Regulation A, Regulation
Crowdfunding, and Rule 504
    As proposed, the final amendments increase the 12-month offering
limit for Regulation Crowdfunding, presently set at $1.07 million, to
$5 million; the 12-month offering limit for Regulation A Tier 2,
presently set at $50 million, to $75 million with the associated
revision of the 12-month offering limit for sales by existing affiliate
security holders from $15 million to $22.5 million; and the 12-month
offering limit for Rule 504, presently set at $5 million, to $10
million.
    We can gain some insight into the likely capital formation benefits
of a higher offering limit from repeat issuers that have raised
multiple rounds of financing under the capped offering exemptions. Some
of those issuers might have had to raise financing over multiple years
because of the existing offering limits. The following table examines
total proceeds per issuer reported raised during 2016 through 2019.

   Table 11--Capital Raising During 2016-2019 by Repeat Issuers Using
                           Affected Exemptions
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of Regulation A issuers that raised at     14.
 least $50 million.
Average (median) amount reported raised.........  $13.4 million ($5.0
                                                   million).
Number of Regulation Crowdfunding issuers that    51 (27).
 raised at least $1.0 million ($1.07 million).
Average (median) amount reported raised.........  $213,678 ($106,900).
Number of Rule 504 issuers other than pooled      7.
 investment funds that raised at least $5
 million.
Average (median) amount reported raised.........  $384,200 ($100,000).
------------------------------------------------------------------------

    Some of the existing issuers under the exemptions being amended
have conducted other types of offerings that are not subject to
offering limits. Information about offering sizes in Rule 506 can
provide additional insights for the review of the offering limits for
Regulation A, Regulation Crowdfunding, and Rule 504.\667\ Generally,
however, we do not know whether those issuers used Rule 506 because the
offering limits of the exemptions being amended were too low for their
needs or for other reasons. The table below shows the capital raising
under Rule 506 in 2019 by issuers using offering exemptions being
amended.\668\
---------------------------------------------------------------------------

    \667\ We focus on Rule 506 offerings due to data limitations.
First, reporting companies are ineligible under Rule 504.
Additionally, we have identified only one Regulation Crowdfunding
issuer that has undertaken a registered offering as of December 31,
2019. Further, very few Regulation A issuers have undertaken a
registered offering during this period, resulting in a lack of
reliable data on such issuers' registered offering proceeds. From
June 19, 2015, through December 31, 2019, we identified 14 issuers
in qualified Regulation A offerings that had a registration
statement declared effective, based on the analysis of EDGAR
filings. These were issuers that proceeded to list on an exchange
after their Regulation A offering and then sought follow-on
financing through a registered offering.
    \668\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.

    Table 12--Capital Raising Under Rule 506 in 2019 by Issuers Using
                           Affected Exemptions
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of Regulation A issuers raising financing  34.
 under Rule 506.
Average (median) amount reported raised under     $5.8 million ($0.2
 Rule 506 per Regulation A issuer.                 million).
Number of Regulation Crowdfunding issuers         139.
 raising financing under Rule 506.
Average (median) amount reported raised under     $2.4 million ($0.2
 Rule 506 per Regulation Crowdfunding issuer.      million).
Number of Rule 504 issuers raising financing      110.
 under Rule 506.
Average (median) amount reported raised under     $1.4 million ($0.3
 Rule 506 per Rule 504 issuer.                     million).
------------------------------------------------------------------------

    Evidence in Tables 11 and 12 suggests that most issuers that rely
on Regulation A, Regulation Crowdfunding, and Rule 504 tend to raise
amounts of financing, both under these exemptions and when they raise
financing under Rule 506, which has no offering limit, that are below
the existing offering limits. This observation is based on the pool of
issuers attracted to these offering exemptions with the provisions that
are in place today. It is likely that issuers with larger financing
needs forgo the exemptions with offering limits that are too low for
their financing needs. Expanding the offering limits is therefore
expected to attract additional issuers to these exemptions.
    It is difficult to predict how many new issuers will be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the amended
offering limits. Because of potential unobservable differences in
issuer characteristics, comparisons presented below are intended as
illustrative examples. The table below \669\ examines the use of other
securities offering methods by issuers that raised amounts above the
existing limits but below the amended offering limit thresholds, some
of which may consider using the amended exemptions. We consider (1)
Rule 506 and registered offerings for purposes of analyzing the amended
offering limit threshold under Regulation A; (2) Regulation A, Rule
504, and Rule 506 offerings for purposes of analyzing the amended
offering limit threshold under Regulation Crowdfunding; and (3)
Regulation A and Rule 506 offerings for purposes of analyzing the
amended offering limit threshold under Rule 504.\670\ Information on
amounts raised under Section 4(a)(2), Section 3(a)(11), and Rules 147/
147A is not available to us.
---------------------------------------------------------------------------

    \669\ For purposes of this table, Regulation A issuers are
defined as issuers in qualified Regulation A offerings from June
2015 through December 2019; Rule 504 issuers are defined as issuers
in new and amended Rule 504 offerings from 2016 through 2019;
Regulation Crowdfunding issuers are issuers in Regulation
Crowdfunding offerings from May 2016 through December 2019. Data on
Rule 506 financing is based on total proceeds reported raised per
issuer in new and amended Form D filings from 2019. Pooled
investment funds are excluded.
    \670\ For purposes of analyzing the amended offering limit
thresholds under Regulation Crowdfunding and Rule 504, we do not
consider registered offering activity, as registered offerings are
not likely to be a cost-effective alternative at those offer sizes.

Table 13--Evaluation of Offering Limit Amendments Based on Evidence From
            Select Other Securities Offering Methods in 2019
------------------------------------------------------------------------

------------------------------------------------------------------------
  Regulation A: Offering limit increase from $50 million to $75 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $50
 million and up to $75 million:
    Rule 506 \a\...........................................          171
    Registered offerings \b\...............................           57
------------------------------------------------------------------------
 Regulation Crowdfunding: Offering limit increase from $1.07 million to
                               $5 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $1.07
 million and up to $5 million:
    Regulation A \c\.......................................           13
    Rule 504 \d\...........................................           55
    Rule 506 \e\...........................................        4,004
------------------------------------------------------------------------
    Rule 504: Offering limit increase from $5 million to $10 million
------------------------------------------------------------------------
Number of issuers in offerings that raised above $5 million
 and up to $10 million:
    Regulation A \f\.......................................           10

    Rule 506 \g\...........................................        1,618
------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and
  blank check companies and limit the exemption to U.S. and Canadian
  issuers, so for comparability pooled investment funds and issuers
  outside the U.S. and Canada are excluded from the Rule 506 proceeds
  used in this estimate. Reporting companies are eligible to rely on
  Regulation A under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in
  SDC Platinum for U.S. public offerings of equity, debt, and
  convertible securities with issue dates in 2019, excluding withdrawn,
  postponed, and rumored offerings, asset-backed securities offerings,
  blank check issuers, investment fund issuers, and issuers outside the
  U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds
  reported in 2019 are considered, as opposed to cumulative proceeds
  reported from June 2015 through December 2019. Regulation Crowdfunding
  eligibility criteria limit the exemption to U.S. issuers and exclude
  Exchange Act reporting companies, so for comparability non-U.S.
  issuers and reporting companies are excluded from the Regulation A
  proceeds used in this estimate.
\d\ Regulation Crowdfunding eligibility criteria exclude investment
  companies and Exchange Act reporting companies and limit the exemption
  to U.S. issuers, so for comparability pooled investment funds and non-
  U.S. issuers are excluded from Rule 504 proceeds used in this
  estimate. Reporting companies are ineligible under Rule 504.
\e\ Regulation Crowdfunding eligibility criteria exclude investment
  companies and Exchange Act reporting companies and limit the exemption
  to U.S. issuers, so for comparability pooled investment funds,
  reporting companies, and non-U.S. issuers are excluded from Rule 506
  proceeds used in this estimate. Reporting companies are identified
  based on annual reports or amendments to them filed in 2019.
\f\ For purposes of this table, only incremental Regulation A proceeds
  reported in 2019 are considered, as opposed to cumulative proceeds
  reported from June 2015 through the end of the period. Rule 504
  eligibility criteria exclude Exchange Act reporting companies, so for
  comparability reporting companies are excluded from the Regulation A
  proceeds used in this estimate.
\g\ For comparability with other estimates in this table, we exclude
  reporting companies and pooled investment funds from Rule 506 proceeds
  used in this estimate. Reporting companies are identified based on
  annual reports or amendments to them filed in 2019.

    Given the scale of Regulation A offering activity today, the number
of Rule 506 and registered offerings in the $50 million to $75 million
range suggests potential for a significant relative increase in
Regulation A activity under the amended offering limit. As a crucial
caveat, issuers choosing to rely on Rule 506 or registered offerings
today may be inherently different from the types of issuers that might
find Regulation A attractive under the amended limit. Further, the
number of Rule 506 offerings in the $1.07 million to $5 million range
significantly exceeds the absolute number of Regulation Crowdfunding
offerings today, which thus may suggest potential for a significant
relative increase in Regulation Crowdfunding activity under the amended
offering limit. Similarly, the number of Rule 506 offerings in the $5
million to $10 million range significantly exceeds the absolute number
of Rule 504 offerings today, which thus may suggest potential for a
significant relative increase in Rule 504 activity under the amended
offering limit. As a caveat, issuers choosing to rely on Rule 506 today
may be inherently different from the types of issuers that might find
Regulation Crowdfunding or Rule 504 attractive under the amended
limits. Importantly, historical use of other offering methods may not
fully represent potential future use of the exemptions being amended,
particularly if the amendments facilitate offerings by issuers that may
not currently rely on securities offerings. We lack data or a
methodology to predict how many new issuers that would not have
otherwise undertaken any securities offering will be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the
amendments.
    As discussed above, in response to commenters, we also are
extending for an additional 18 months the temporary relief from certain
financial statement review requirements for eligible issuers offering
up to $250,000 of securities in reliance on Regulation Crowdfunding in
a 12-month period. The temporary final rules adopted on May 4, 2020,
and subsequently extended on August 28, 2020, serve as the economic
baseline against which the costs and benefits, as well as the impact on
efficiency, competition, and capital formation, of these amendments are
measured. Consistent with the existing temporary relief, the
eligibility criteria exclude (1) issuers that were organized or had
operations for less than six months prior to the commencement of the
offering and (2) issuers that were not compliant with Regulation
Crowdfunding requirements with regard to any prior offerings in which
they sold securities. Historical data provides an indication of the
potential share of offerings eligible for the extended relief among all
offerings. From the inception of Regulation Crowdfunding through
December 31, 2019, we estimate that 1,537 (approximately 77 percent of
the total number of crowdfunding offerings during this period) were
initiated by 1,407 issuers that were eligible or would have been
eligible for the relief under the six-month eligibility criteria.\671\
It is more difficult to estimate the percentage of prior Regulation
Crowdfunding issuers that would not be eligible because they were not
compliant with one or more of the requirements of Regulation
Crowdfunding in a prior offering. From inception through December 31,
2019, we estimate that there were 149 repeat Regulation Crowdfunding
issuers, including 116 such issuers that had reported successful
completion of at least one Regulation Crowdfunding offering on Form C-
U.\672\ We are unable to predict precisely the number of issuers likely
to rely on this provision among eligible issuers.\673\ A review of new
filings made on Form C on or after May 4, 2020, provides some
information about issuer reliance on this provision under the existing
temporary relief. As of September 30, 2020, we find that, of the 400
new offerings on Form C by eligible issuers (excluding filings
withdrawn as of September 30, 2020, and duplicate filings, across
offerings of all sizes), 53 offerings, or 13% provided certified

rather than reviewed financial statements.\674\
---------------------------------------------------------------------------

    \671\ For this estimate, eligibility was estimated approximately
based on the issuer having been formed at least six months prior to
the filing date of the offering as reported in the XML portion of
Form C and having had (1) either positive assets, revenues, net
income, debt, accounts receivable, cost of goods sold, taxes paid,
or employees in the most recent fiscal year reported in the XML
portion of Form C, or (2) a prior Regulation Crowdfunding offering.
In addition, we recognize that many of the past Regulation
Crowdfunding issuers may meet the six-month eligibility criterion as
of the effective date of these amendments, should they wish to avail
themselves of the relief for a follow-on offering under Regulation
Crowdfunding.
    \672\ This figure likely provides a lower bound on the number of
issuers that have initiated a follow-on offering after successfully
completing a prior offering due to incomplete reporting of offering
proceeds on Form C-U. Follow-on issuance activity may differ from
historical data due to changes in the crowdfunding market as a
result of confounding market factors and continued uptake of the
relief under the temporary rules by past issuers. See also Temporary
Amendments Adopting Release, at 27124.
    \673\ For a more detailed discussion, see Temporary Amendments
Adopting Release, at 27124-5.
    \674\ See supra note 671 for the definition of eligible issuer
used in this estimate. This estimate may represent a lower bound
because reliance on the provisions is not disclosed in a structured
data or in a standardized format and was evaluated based on manual
review of filings for mention of the temporary rules. Of the issuers
in the 53 offerings, we identified 48 as first-time issuers and five
as repeat Regulation Crowdfunding issuers based on having made a
prior filing on Form C. Each of the five repeat Regulation
Crowdfunding issuers had made a filing on Form C-U and a filing on
Form C-AR (annual report), however, our review did not examine the
details of these filings for specific content. In addition to the
issuers in the 53 offerings discussed above (which listed dates of
organization that were six months or more prior to filing), we
examined all issuers using reviewed financial statement relief
between May 4, 2020, and September 30, 2020, and we identified four
issuers (all of which were first-time issuers) in offerings seeking
above $107,000 and up to $250,000 that listed a date of organization
that was less than six months prior to filing. We could not confirm,
based on the filings, whether the issuers may have been organized
prior to the date listed, such as in a different corporate form
(e.g., a limited liability company instead of a corporation). Our
review of the recent Regulation Crowdfunding filings focused on the
use of the relief and the small sample size on which these estimates
are based limits our ability to draw systematic inference about
issuers relying on the relief.
---------------------------------------------------------------------------

i. Benefits
    The amended Regulation A Tier 2, Regulation Crowdfunding, and Rule
504 offering limits are expected to increase capital formation in those
markets by enabling existing issuers that are approaching offering
limits to raise larger amounts of financing, as well as by drawing new
issuers that are deterred by relatively low offering limits today.\675\
---------------------------------------------------------------------------

    \675\ See supra notes 363 and 365 (noting commenters supporting
the benefits of an increased Regulation A limit); supra note 419
(noting commenters supporting the benefits of an increased
Regulation Crowdfunding limit); and supra note 397 (noting
commenters supporting the benefits of an increased Rule 504 limit).
Many individual commenters recommended raising the Regulation
Crowdfunding limit in light of economic concerns raised by COVID-19.
---------------------------------------------------------------------------

    We recognize that these benefits will be limited if issuers raise
amounts below the limit. We note that some commenters suggested that
there is not compelling evidence of the need for increased offering
limits in Regulation A, Regulation Crowdfunding, or Rule 504 or that
more information is needed to determine whether such an increase is
appropriate.\676\ While historical utilization rates for these
exemptions have not reached offering limits for the average issuer, it
is important to note that estimates from past data obtained under the
existing limits are inevitably subject to selection bias--high-growth
issuers or larger issuers with considerable financing needs may forgo
these offering methods because it may not make sense for such issuers
to incur the cost of an offering with a lower offering limit in
addition to pursuing other financing options. Similarly, the high fixed
cost of due diligence and marketing related to the kinds of small
issuers and offerings represented in the market today may cause
intermediaries to be unwilling to participate in the Regulation A
market under the existing offering limits. As a result, if smaller
issuers, issuers with a lower growth rate, or issuers without
intermediaries are overrepresented in the Regulation A market today,
they may account for relatively low average proceeds raised. Thus,
historical utilization rates could fail to capture the potentially
expanded pool of prospective issuers with larger financing needs that
may consider these exemptions, and pursue larger offerings, under the
amendments, as well as the potentially expanded pool of intermediaries
and investors that are expected to be drawn to the Regulation A market
under the amended offering limit. Similarly, startups whose financing
needs may exceed the existing $1.07 million annual Regulation
Crowdfunding limit or the existing $5 million Rule 504 limit--such as
startups with a significant growth potential--may be reluctant to
consider Regulation Crowdfunding or Rule 504 because even after they
incur the cost of compliance and other offering costs, they would still
have to resort to other financing to meet their remaining financing
needs. Thus, the existing offering limits likely shape the composition
of issuers, intermediaries, and investors attracted to these
exemptions. While it is possible that low utilization will continue to
be driven by factors other than the offering limit, significant caution
is warranted with respect to any prediction of future utilization under
an expanded offering limit extrapolated from historical data.
---------------------------------------------------------------------------

    \676\ See supra notes 370, 425, and 398.
---------------------------------------------------------------------------

    The effects on aggregate capital formation will also be limited if
the issuers drawn to the amended exemptions are switching from other
securities offering methods; \677\ however, such issuers may still
benefit from optimizing their financing strategy and lowering their
cost of capital.
---------------------------------------------------------------------------

    \677\ See supra note 427 (discussing concerns of commenters
about substitution between registered offering and exempt offering
markets).
---------------------------------------------------------------------------

    The amendments also may lead to changes in the composition of the
pool of issuers relying on these exemptions by drawing a larger and
more diversified set of issuers with high growth potential and
financing needs in excess of the existing limits.\678\ Today such
startups may forgo an exemption with an offering limit in favor of a
Rule 506 offering. A broader and more diversified range of investment
opportunities may benefit investors in these market segments,
particularly non-accredited investors that seek exposure to private
companies but are constrained from participation in private placements.
The amended offering limits also may make the exemptions more
attractive to a broader range of intermediaries, some of which may be
deterred from participating in these markets today by fixed costs
(e.g., due diligence, compliance, crowdfunding platform operation,
etc.) in proportion to potential compensation.\679\
---------------------------------------------------------------------------

    \678\ See, e.g., supra note 365 (discussing comment letters that
suggested that an increase in the Regulation A offering limit could
encourage development of the smaller initial public offering market,
encouraging more issuers to conduct offerings and providing more
investment opportunities for investors).
    \679\ See, e.g., supra note 366 (discussing commenters that
suggested that the higher offering limits would improve the
economics for issuers and broker dealers to participate in the
Regulation A market).
---------------------------------------------------------------------------

    Under the existing rules, Regulation A Tier 2 offerings are not
subject to State registration and qualification requirements. We are
not making changes to this provision, which will continue to apply to
Tier 2 offerings up to the amended offering limit. Under the existing
rules, Regulation Crowdfunding offerings up to $1.07 million similarly
are preempted from State registration and qualification requirements
under Section 4(a)(6). The amendments we are adopting in this release
extend the preemption of State registration and qualification
requirements to Regulation Crowdfunding offerings in excess of $1.07
million and not exceeding the amended offering limit ($5 million). This
provision will benefit prospective issuers seeking above $1.07 million
in a 12-month period under Regulation Crowdfunding through lower costs
of compliance and a more streamlined offering process than if the
offering had been subject to State review. An additional benefit to our
approach is that issuers and intermediaries will potentially incur
lower legal costs due to greater certainty as to the application of
preemption to Regulation Crowdfunding offerings above $1.07
million.\680\ Rule 504 offerings will remain subject to State
registration and qualification requirements. Because issuers in small
offerings continue to have a choice of securities offering exemptions,
issuers that seek to avail themselves of the State review regime

may continue to do so through a Regulation A Tier 1 or a Rule 504
offering.
---------------------------------------------------------------------------

    \680\ See supra Section II.E.3.c.
---------------------------------------------------------------------------

    The temporary final rules currently in effect serve as the economic
baseline against which the benefits of the amendments extending the
relief from certain Regulation Crowdfunding financial statement review
requirements are measured. Thus, we do not expect additional
significant benefits to result from the extension. Extension of the
temporary relief will allow small businesses to continue to avail
themselves of the benefits of the relief as they do today under the
baseline,\681\ particularly in the face of significant challenges
facing small businesses as a result of the COVID-19 crisis.\682\ While
the existing temporary rule specifies that it applies to issuers
affected by COVID-19, the extension of this relief under the final
rules does not include this condition. Given the broad scope of the
direct and indirect impact that COVID-19 has had on small business
issuers and the continuing challenges they face, we do not expect this
change in conjunction with the 18-month extension to have a substantial
economic impact.\683\ We note that several commenters supported
extending the temporary relief.\684\
---------------------------------------------------------------------------

    \681\ The relief allows issuers to raise capital without
incurring costs and delays involved in an independent accountant's
review of their financial statements. This incrementally enhances
the efficiency of conducting the offering and yields capital
formation benefits for eligible issuers. See also Temporary
Amendments Adopting Release, at 27127. The upfront costs of
obtaining a review report may be nontrivial for small issuers,
particularly issuers experiencing declines in internal cash flows as
a result of the COVID-19 crisis. In the Crowdfunding Adopting
Release, the Commission estimated review costs to be approximately
$1,500-$18,000. See Crowdfunding Adopting Release, at 71499. More
recent information about the costs of a review report is available
from commenters and industry sources. For example, one industry
source estimates the cost of a review as $2,000-$2,450 for a single-
owner LLC/S-Corp/Sole Proprietor issuer that has not previously had
a review or audit but is in possession of full financial records and
$2,400-$2,950 for a single-owner issuer that has not previously had
a review or audit and instead tracks financials in a spreadsheet
format. These are estimates based on a hypothetical issuer. Costs
may vary depending on the accountant and the issuer's circumstances.
See CrowdfundCPA Crowdfunding Audit/Review Cost Calculator,
available at: http://crowdfundcpa.com/cost-estimate---calculator.html (retrieved April 22, 2020). A commenter on the
Concept Release stated that it has ``interviewed dozens of CPA firms
and found that the average cost of reviewing a company that has two
years of financial history is at least $6,000'' and that ``[f]or a
company with no history, this quote (from many CPA firms) has been
in the $1,500 to $2,500 range.'' See Letter from Mainvest (Sep. 24,
2019), available at: https://www.sec.gov/comments/s7-08-19/s70819-6193357-192513.pdf.
    \682\ See infra note 695.
    \683\ See id.
    \684\ See supra note 449.
---------------------------------------------------------------------------

ii. Costs
    The amendments may increase aggregate potential investor
losses.\685\ Increased offering limits under Regulation A Tier 2,
Regulation Crowdfunding, and Rule 504 may make it easier for smaller,
higher-risk issuers to access capital through these exemptions.\686\
The increased offering limits could also make the exemptions more
attractive to issuers that cannot meet more restrictive requirements
applicable to larger offerings today, resulting in potentially greater
representation of such issuers among the issuers relying on the amended
exemptions.\687\ For example, some issuers seeking up to $5 million
that are unable to meet State or Commission qualification requirements
under Regulation A would instead be able to offer $5 million, rather
than only $1.07 million, under Regulation Crowdfunding, which does not
require State or Commission review prior to sales. As another example,
some issuers seeking up to $75 million in an offering and also seeking
to avoid the more extensive periodic reporting, beneficial ownership
reporting, proxy disclosure, and 17 CFR 243.100 through 243.103
requirements associated with being a public reporting company would be
able to forgo registration and offer up to $75 million, rather than $50
million, under Regulation A. Issuers seeking up to $75 million and
seeking to avoid restrictions on testing the waters with individual
investors, as well as unlisted issuers seeking to avoid State law
restrictions on primary offers and sales, may find amended Regulation A
Tier 2 to be increasingly attractive compared to a registered offering.
To the extent that issuers under Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 are subject to fewer rules and requirements
or fail to comply with those rules and requirements, investors may be
at an increased risk of loss.\688\
---------------------------------------------------------------------------

    \685\ See, e.g., CFA Letter (expressing concern about the
negative effects of increasing the use of Regulation A for non-
accredited investors and increased risks of investor losses); R.
Rutkowski Letter (expressing concern about risk to non-accredited
investors in Regulation A and Regulation Crowdfunding offerings);
and Morningstar Letter (noting a lack of investment advice such as
from a broker or investment adviser that investors might have access
to with regard to an investment in a public company).
    \686\ See, e.g., Md. St. Bar Assoc. Letter (expressing concern
that Regulation Crowdfunding will draw non-accredited investors to
issuers that accredited investors refused to fund and further
stating that companies that require more than $50 million every 12
months should be raising capital through registered offerings rather
than Regulation A); B. Richardson Letter (discussing uncertainty
about Regulation Crowdfunding issuer outcomes); Better Markets
Letter (stating that early-stage companies have a high risk of
failure and that retail investors cannot adequately diversify among
such firms due to the ``dearth of investable funds''); CFA Letter
(stating that ``worse deals are sold to members of the general
public subject to Reg. A, Reg. CF, and Rule 504''); CFA Institute
Letter (stating that increased offering limits ``may attract other
high-risk issuers''); AFREF Letter and R. Rutkowski Letter
(expressing concern about risk to retail investors from the
expansion of offering limits under Regulation A, Regulation
Crowdfunding, and Rule 504). See also CFA Institute Letter (noting
``the outsized role played by a single industry--real estate--in
Regulation A markets''). Real estate issuers have accounted for the
majority of financing under Regulation A to date. See Report to
Congress on Regulation A/Regulation D Performance, at p. 32. We
recognize that unlisted REITs, including Regulation A REITs, may
pose risks to some non-accredited investors. We note that such
investors already may invest in unlisted REITs that are registered
under Section 12(g). See Investor Bulletin: Non-traded REITs,
available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html. Although Regulation A Tier 2 REIT offerings
are eligible for certain additional relief relative to unlisted
REITs registered under Section 12(g) (including testing the waters
and semi-annual rather than quarterly reporting), Regulation A Tier
2 offerings are subject to non-accredited investor investment
limits. The ability to access unlisted real estate offerings may
offer benefits--as well as risks--to investors. Real estate is
associated with considerable returns among private funds (to which
non-accredited investors generally lack access). See Report to
Congress on Regulation A/Regulation D Performance, at Table 14. Real
estate also accounts for the largest share of non-fund Regulation D
offerings (to which non-accredited investors also rarely have access
today). See id, at Figure 9. Non-accredited investor access to real
estate private equity through Regulation A could expand their
investable opportunity set and potential for diversification,
allowing them to potentially construct more efficient portfolios.
See, e.g., IPA Letter (supporting ``increased access to investment
strategies with low correlation to the equity markets, including net
asset value real estate investment trusts (``REITs''), lifecycle
REITs, business development companies, interval funds and direct
participation programs . . . individual investor access to a wide
variety of asset classes that have historically been available only
to institutional investors''). See also supra note 654.
    \687\ See, e.g., CFA Institute Letter (expressing concern about
risks to non-accredited investors from adverse selection in
Regulation A and Regulation Crowdfunding offerings); and Md. St. Bar
Assoc. Letter.
    \688\ See, e.g., CII Letter (discussing concerns about
Regulation A issuer compliance); NASAA Letter (recommending
strengthening corporate governance and disclosure obligations and
rescinding preemption of State securities regulation to increase the
regulatory oversight of these companies making them more attractive
to and safer for investors); and J. Marks Letter (expressing concern
about Regulation Crowdfunding issuer compliance). See also, e.g.,
Mercer Bullard, Crowdfunding's Culture of Noncompliance: An
Empirical Analysis, 24 Lewis & Clark L. Rev. 899 (2020).
---------------------------------------------------------------------------

    The increased offering limits for Regulation A Tier 2, as well as
the increased offering limit for Regulation Crowdfunding (combined with
the Regulation Crowdfunding qualified purchaser amendments) also will
expand the scope of offerings that are not subject to State
registration and qualification requirements, potentially increasing
risk of investor losses to the

extent not mitigated by other investor protection provisions. Rule 504
offerings will remain subject to State registration and qualification
requirements.
    The investor costs described above are expected to be mitigated by
the investor protection provisions of each exemption. In particular,
Regulation A Tier 2 offerings will remain subject to offering statement
and ongoing disclosure requirements, non-accredited investor investment
limits, bad actor disqualification provisions, and issuer eligibility
requirements, and will continue to be required to undergo Commission
qualification before sales can be made. Regulation Crowdfunding
offerings will remain subject to offering statement and periodic
disclosure requirements, intermediary requirements, including investor
education and measures to reduce the risk of fraud, as well as non-
accredited investor investment limits, bad actor disqualification
provisions, and issuer eligibility requirements. Moreover, costs to
investors are expected to be further mitigated by the continued
application of the antifraud provisions of Federal and State securities
laws and the role of reputational incentives of issuers and, if
applicable, intermediaries, in these offerings. Rule 504 offerings will
remain subject to issuer eligibility requirements, bad actor
disqualification provisions, and State registration and qualification
requirements.
    As discussed above, the temporary final rules currently in effect
serve as the economic baseline against which the costs of the
amendments extending the relief from certain Regulation Crowdfunding
review requirements are measured. Thus, we do not expect additional
significant costs to result from the extension. We recognize that costs
to investors associated with the temporary final rules will continue to
be incurred under the amendments extending the rules, similar to the
baseline.\689\ Importantly, several provisions of the temporary rules
are expected to continue to mitigate potential risks to investors.
Issuers relying on the temporary rules must still provide prominent
disclosure that financial information certified by the principal
executive officer of the issuer has been provided instead of financial
statements reviewed by a public accountant that is independent of the
issuer. Moreover, temporary relief from the review report requirement
does not preclude liability in instances of materially misleading
financial disclosures provided at the time of the offering, and general
anti-fraud provisions and liability for offers under Regulation
Crowdfunding will continue to apply. Finally, the remaining investor
protections of Regulation Crowdfunding continue to provide significant
safeguards for investors in offerings reliant on the temporary relief
from the review report requirement.
---------------------------------------------------------------------------

    \689\ Although a review report provides a more limited level of
assurance compared to an audit report, reviewed financial statements
confer valuable informational benefits to investors. See, e.g., Brad
A. Badertscher et al., Verification Services and Financial Reporting
Quality: Assessing the Potential of Review Procedures (Simon Bus.
Sch., Working Paper No. FR 17-17, July 2018) (``[B]oth reviews and
audits yield significantly better reporting quality scores and lower
cost of debt than zero-verification compilations. However, model-
based reporting quality scores of reviews and audits are
indistinguishable statistically, on average. Regarding broader
economics, we find that relative to compilations, reviews yield more
than half the added interest rate benefit associated with an audit,
at considerably less than half the added cost. Overall, our results
suggest reviews may provide a cost-effective verification
alternative to audits, and the potential of analytical procedures
warrants more attention by audit researchers and regulators.'');
Evisa Bogdani, Monika Causholli & W. Robert Knechel, The Role of
Assurance in Equity Crowdfunding (Working Paper, 2019) (finding that
``firms that provide either reviewed or audited financial statements
are more likely to reach their target capital, attract a greater
number of investors, and raise more capital relative to firms that
only provide management-certified financial statements'' in equity
crowdfunding). Thus, in cases of issuers temporarily exempted from
the review report requirement, particularly in an environment of
heightened market uncertainty, investors may have less information
in making their investor decisions and may incur additional risks.
Exemptive relief from the review report requirement also may
continue to weaken the incentives of some issuers to provide
compliant financial statement disclosures since they no longer would
be required to undergo a review by an independent accountant and to
provide such a report to investors, resulting in potentially less
informative financial disclosures provided to investors in affected
offerings. For example, some financial statement disclosures
provided by issuers below the existing review report threshold are
not prepared in a U.S. GAAP-compliant manner. See, e.g., Letter from
CrowdCheck (Oct. 30, 2019) commenting on the Concept Release,
available at: https://www.sec.gov/comments/s7-08-19/s70819-6368811-196431.pdf. However, to the extent that issuer financial disclosures
are historical in nature, such disclosures might be relatively less
meaningful for purposes of assessing the current financial condition
and growth prospects of an issuer that was financially sound but has
experienced significant adverse effects as a result of the COVID-19
crisis. Further, historical financial disclosures may be
incrementally less meaningful for evaluating the business of a
recently formed or development-stage issuer. See, e.g., Letter from
Mainvest (stating that ``a company with no operating history simply
does not have historical financial information that can be reviewed.
Issuers on our platform unfortunately are required to get CPA
reviews of a balance sheet with almost no zeros [sic]. This adds
practically no value to investor protections and significantly
increases up-front costs to companies.'').
---------------------------------------------------------------------------

iii. Effects on Efficiency, Competition, and Capital Formation
    The amendments to the Regulation A, Regulation Crowdfunding, and
Rule 504 offering limits are expected to increase capital formation in
those markets and to provide issuers that cannot meet their financing
needs under existing exemptions with a means of raising external
financing and potentially lowering their cost of capital (e.g., as a
result of economies of scale and fixed cost of initiating an offering),
resulting in more efficient allocation of capital to growth
opportunities. The capital formation effects of the amendments are
expected to be more limited if issuers raise amounts of financing below
the amended offering limits or if some of the capital raised under the
amended exemptions would have been otherwise raised through other
securities offering methods. For example, raising the Regulation
Crowdfunding offering limit may draw some of the issuers that would
have otherwise sought between $1.07 and $5 million under Rule 504, Rule
506, or Regulation A. Similarly, raising the Rule 504 offering limit
may draw some of the issuers that would have otherwise sought between
$5 and $10 million under Rule 506 or Regulation A. Those scenarios
entail the switching of issuers between offering methods rather than
new capital formation.
    As discussed above, these amendments may enable some issuers to
delay or forgo a registered offering, thereby avoiding the associated
costs of Exchange Act registration and being a public reporting
company. For example, the higher offering limits for the discussed
exemptions may allow more issuers to raise capital from non-accredited
investors without registration. This could result in less disclosure
and lower liquidity for some of these investors. However, this
possibility must be considered in the context of the baseline, under
which those issuers otherwise might have relied on Rule 506, which
significantly limits non-accredited investor access and, for non-
accredited investors that do invest, restricts resales as well as
limits the ability to obtain current information about the issuer.
Alternatively, issuers on the margin between a Regulation A Tier 2
offering and a registered offering might have registered their
securities but not listed on an exchange in a traditional public
offering (due to cost, small size, lack of underwriter or institutional
investor interest, etc.). As a result, their securities would have no
secondary market or be quoted over-the-counter, which affords only
marginal

benefits, if any, of liquidity and information availability compared to
a Regulation A Tier 2 offering.
    If the amended offering limits draw additional issuers to these
exemptions, which accept an unlimited number of non-accredited
investors, the amendments could expand the set and nature of investable
opportunities for non-accredited investors seeking exposure to issuers
that have not yet registered an offering. The effects on competition
for investor capital will depend on how the additional investor capital
drawn to the affected markets compares to the amount of additional
financing sought by issuers in these markets. By promoting access to
external financing for smaller issuers, the amendments may increase
product market competition among small issuers and between small
issuers and more established issuers.
    As discussed above, the temporary final rules currently in effect
serve as the economic baseline against which the economic effects of
the amendments extending the relief from the review report requirements
are measured. Thus, we do not expect additional significant effects on
efficiency, competition, or capital formation to result from the
extension.
iv. Reasonable Alternatives
    As an alternative, we could have adopted different offering limits.
For example, we could have adopted smaller increases to the offering
limits, such as an adjustment to the existing offering limits to
reflect the rate of inflation since the enactment of the JOBS Act in
April 2012.\690\ As another alternative, we could have adopted larger
increases in the offering limits, as suggested by some commenters.\691\
Compared to the final amendments, a higher (lower) offering limit could
make an offering under the exemption more (less) cost-effective for
issuers (and if applicable, intermediaries) facing fixed offering and
due diligence costs, resulting in larger (smaller) capital formation
benefits. Compared to the final amendments, a higher (lower) offering
limit could draw a larger (smaller) pool of additional issuers to the
respective segment of the exempt market and potentially expand
investment opportunities for non-accredited investors seeking exposure
to issuers that have not yet registered their securities. The net
impacts of these alternatives on capital formation, investor
protection, and competition could be limited if most of the incremental
offering activity under these alternatives is due to issuers switching
between various offering methods. Even if most of the additional
issuers under these alternatives would have otherwise raised financing
through another offering method, such issuers might still be able to
benefit from a lower cost of capital under the alternative of increased
offering limits. The net impacts of the alternative would be further
attenuated to the extent that the majority of issuers continue to raise
amounts below the offering limits.\692\ As a caveat, similar to the
discussion above, existing data on issuers approaching the offering
limits may not be representative of the amounts that would be raised if
a different pool of issuers or investors is drawn to the respective
market segment under alternative offering limits.
---------------------------------------------------------------------------

    \690\ The Regulation A offering limit has not been adjusted for
inflation since the enactment of the JOBS Act. Between April 2012,
when the JOBS Act was enacted, and December 2019, the rate of CPI
inflation was 11.7 percent according to Bureau of Labor Statistics
(``BLS'') data. Adjusting for inflation would yield a Regulation A
limit of $55.845 million ($50 million x 1.1169). The Regulation
Crowdfunding offering limit was last adjusted for inflation in April
2017. Between April 2017 and December 2019, the rate of CPI
inflation was 5.09 percent, according to BLS data. Adjusting for
inflation would yield a Regulation Crowdfunding offering limit of
$1.124 million ($1.07 million x 1.0509). The Rule 504 offering limit
was raised to $5 million in October 2016. Between October 2016 and
December 2019, the rate of CPI inflation was 6.31 percent. Adjusting
for inflation would yield a Rule 504 offering limit of $5.316
million ($5 million x 1.0631).
    \691\ For instance, some commenters have suggested raising the
Regulation A offering limit to $100 million. See supra note 367.
Some commenters have suggested raising the Regulation Crowdfunding
offering limit above $5 million. See supra note 421.
    \692\ For example, the average (median) Regulation Crowdfunding
offering reported proceeds of $213,678 ($106,900) between the
inception of Regulation Crowdfunding (May 16, 2016) through December
31, 2019; the average (median) Regulation A issuer reported raising
$13.4 million ($5.0 million) between the effective date of 2015
Regulation A amendments (June 19, 2015) and December 31, 2019.
---------------------------------------------------------------------------

    It is difficult to predict how many new issuers that would not have
otherwise engaged in a securities offering would be drawn to the
respective exempt market segment under these alternatives, compared to
the amended offering limits. The table below examines the use of
alternative securities offering methods that are most likely to be
relied on by issuers that raise amounts above existing offering limits
but below several alternative offering limit thresholds to illustrate
the potential number of additional issuers that presently utilize other
offering methods that do not have a cap but that might see the amended
exemption as an option under these alternatives. The caveats that
accompany Table 12 continue to apply.

 Table 14--Evaluation of Alternatives to the Amended Offering Limits Using Evidence From Capital Raising in 2019
                                Through Select Other Securities Offering Methods
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                             Evaluation of Alternative Regulation A Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $50 million and up to:                           Number of       Number of
                                                                                issuers in      issuers in
                                                                                offerings      registered
                                                                                under Rule 506   offerings \b\
                                                                                \a\
----------------------------------------------------------------------------------------------------------------
$55.845 million (inflation adjustment)..........................................              51              17
$60 million.....................................................................              85              29
$70 million.....................................................................             144              46
$75 million (amended offering limit)............................................             171              57
$80 million.....................................................................             198              72
$90 million.....................................................................             231              90
$100 million....................................................................             270             122
$110 million....................................................................             298             143
$120 million....................................................................             315             151
$125 million....................................................................             325             162
----------------------------------------------------------------------------------------------------------------

                        Evaluation of Alternative Regulation Crowdfunding Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $1.07 million and up to:         Number of       Number of       Number of
                                                                    issuers in      issuers in      issuers in
                                                                     offerings       offerings       offerings
                                                                  under Rule 504  under Rule 506       under
                                                                        \c\             \d\        Regulation A
                                                                                \e\
----------------------------------------------------------------------------------------------------------------
$1.124 million (inflation adjustment)...........................               2             104               0
$2 million......................................................              31           1,542               2
$3 million......................................................              44           2,662               7
$4 million......................................................              51           3,388              10
$5 million (amended offering limit).............................              55           4,004              13
$6 million......................................................  ..............           4,454              15
$7 million......................................................  ..............           4,813              17
$8 million......................................................  ..............           5,127              20
$9 million......................................................  ..............           5,333              21
$10 million.....................................................  ..............           5,567              23
$15 million.....................................................  ..............           6,233              29
$20 million.....................................................  ..............           6,604              31
----------------------------------------------------------------------------------------------------------------
                               Evaluation of Alternative Rule 504 Offering Limits
----------------------------------------------------------------------------------------------------------------
Number of issuers that raised above $5 million and up to:                            Number of       Number of
                                                                                issuers in      issuers in
                                                                                offerings       offerings
                                                                                under Rule 506       under
                                                                                \f\        Regulation A
                                                                                \g\
----------------------------------------------------------------------------------------------------------------
$5.316 million (inflation adjustment)...........................  ..............             152               0
$6 million......................................................  ..............             464               2
$7 million......................................................  ..............             834               4
$8 million......................................................  ..............           1,166               7
$9 million......................................................  ..............           1,377               8
$10 million (amended offering limit)............................  ..............           1,618              10
$15 million.....................................................  ..............           2,315              16
$20 million.....................................................  ..............           2,695              18
$25 million.....................................................  ..............           2,974              19
----------------------------------------------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and blank check companies and limit the
  exemption to U.S. and Canadian issuers, so for comparability pooled investment funds and issuers outside the
  U.S. and Canada are excluded from the Rule 506 proceeds used in this estimate. Reporting companies are
  eligible to rely on Regulation A under the 2018 amendments.
\b\ Registered offering proceeds are based on gross proceeds reported in SDC Platinum for U.S. public offerings
  of equity, debt, and convertible securities with issue dates in 2019, excluding withdrawn, postponed, and
  rumored offerings, asset-backed securities offerings, blank check issuers, investment fund issuers, and
  issuers outside the U.S. and Canada.
\c\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
  opposed to cumulative proceeds reported from June 2015 through December 2019. Regulation Crowdfunding
  eligibility criteria limit the exemption to U.S. issuers and exclude Exchange Act reporting companies, so for
  comparability non-U.S. issuers and reporting companies are excluded from the Regulation A proceeds used in
  this estimate.
\d\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
  companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds and non-U.S.
  issuers are excluded from Rule 504 proceeds used in this estimate. Reporting companies are ineligible under
  Rule 504.
\e\ Regulation Crowdfunding eligibility criteria exclude investment companies and Exchange Act reporting
  companies and limit the exemption to U.S. issuers, so for comparability pooled investment funds, reporting
  companies, and non-U.S. issuers are excluded from Rule 506 proceeds used in this estimate. Reporting companies
  are identified based on annual reports or amendments to them filed in 2019.
\f\ For purposes of this table, only incremental Regulation A proceeds reported in 2019 are considered, as
  opposed to cumulative proceeds reported from June 2015 through the end of the period. Rule 504 eligibility
  criteria exclude Exchange Act reporting companies, so for comparability reporting companies are excluded from
  the Regulation A proceeds used in this estimate.
\g\ For comparability with other estimates in this table, we exclude Exchange Act reporting companies and pooled
  investment funds from Rule 506 proceeds used in this estimate. Reporting companies are identified based on
  annual reports or amendments to them filed in 2019.

    After considering these alternatives and public comment, we
continue to believe that the amended offering limits are most likely to
provide meaningful capital formation benefits and increased access to
investment opportunities to investors while representing a balanced
approach to expansion of the respective offering exemptions.
    We are amending the Regulation A Tier 2 offering limit but not the
Tier 1 offering limit. As an alternative, we could amend the Tier 1
offering limit, as suggested by one commenter.\693\ For example, we
could raise the Tier 1 offering limit proportionately to the increase
in the Tier 2 offering limit, by 50 percent, from $20 million to $30
million. The economic effects of this alternative are similar to the
ones considered above. A higher (lower) Tier 1 offering limit could
draw more (fewer) issuers to Tier 1 of Regulation A. Some of the
additional issuers drawn to Tier 1 under this alternative might be
switching from Tier 2 or other exempt offering methods, which might
limit the net impact on capital formation.\694\ Even

in that case, some issuers switching from Tier 2 or other offering
methods might be able to decrease their cost of capital.
---------------------------------------------------------------------------

    \693\ See Chamber of Digital Commerce Letter. But see CII
Letter; NASAA Letter; and CrowdCheck Letter (opposing an increase in
the Tier 1 offering limit).
    \694\ For example, from June 2015 through December 2019, we have
identified seven Tier 2 issuers that reported raising between $20
million and $30 million in financing under Regulation A and that
could become newly eligible to raise the same amount of financing
under Tier 1, if it were amended under this alternative. However,
they also might not choose to switch to Tier 1 if they find Tier 2
to be more attractive (e.g., due to preemption of State review or an
easier path to quotation on the upper tiers of the OTC market in the
presence of periodic reports required by Tier 2). For example, from
June 2015 through December 2019, we estimate that 112 Tier 2 issuers
reported raising up to $20 million in financing under Regulation A
even though that amount would have made them eligible to use Tier 1
as well. Further, some issuers might still prefer Tier 2 because it
allows issuers to undertake an offering with a higher maximum
offering amount, which provides issuers with flexibility to raise
more capital without having to undergo a re-qualification (e.g., if
market conditions improve) even if the average issuer's proceeds do
not reach the amount sought.
---------------------------------------------------------------------------

    We are raising the Regulation Crowdfunding offering limit to $5
million, which may create redundancies between Regulation Crowdfunding
and Rule 504. The amended Rule 504 offering limit also may create
redundancies between Rule 504 and Regulation A. As an alternative, we
could eliminate Rule 504. Such an alternative might contribute to
regulatory simplification. However, it also might be disruptive for
those issuers that rely on Rule 504 and find it to be cost-effective
for their financing strategy (e.g., due to a lack of the intermediary
and periodic reporting requirements).
    We are extending temporary relief from the review report
requirement for eligible issuers in Regulation Crowdfunding offerings
of up to $250,000 for an additional 18 months. As an alternative, we
could have amended the Regulation Crowdfunding offering limit but not
extended the temporary relief from certain review requirements for
eligible issuers in offerings of up to $250,000. As a general matter,
the flexibility to access limited amounts of capital under Regulation
Crowdfunding on an expedited basis, without incurring the cost of an
independent accountant's review report, facilitates capital formation
and reduces some of the barriers to accessing capital markets for the
smallest issuers, allowing some issuers to raise additional capital or
to optimize their financing cost through a more efficient and
streamlined offering process. By providing targeted relief in a market
segment that primarily attracts small businesses, which are
disproportionately affected by downturns, the amendments extending the
temporary relief also serve to incrementally enhance competition
between small businesses and larger businesses (which tend to be less
financially constrained).\695\ The alternative of not extending the
relief would impose costs and reduce the flexibility for small issuers
adversely affected by COVID-19 seeking to meet their financing needs
through Regulation Crowdfunding. It also would create competitive
disparities for otherwise similar issuers that initiate offerings of
this size before and after the expiration of the existing relief
(February 28, 2021).
---------------------------------------------------------------------------

    \695\ Research has related small size to financing constraints,
and conversely, larger size to being less financially constrained.
See, e.g., Nathalie Moyen, Investment--Cash Flow Sensitivities:
Constrained versus Unconstrained Firms, 59 J. FIN. 2061 (2004);
Christopher Hennessy, Amnon Levy, & Toni Whited, Testing Q Theory
with Financing Frictions, 83 J. FIN 691 (2007). Other studies also
show that diversified firms can rely on internal capital markets to
mitigate financing constraints. See, e.g., Venkat Kuppuswamy &
Bel[eacute]n Villalonga, Does Diversification Create Value in the
Presence of External Financing Constraints? Evidence from the 2007-
2009 Financial Crisis, 62 MGMT. SCI. 905 (2016) (showing that ``the
value of corporate diversification increased during the 2007-2009
financial crisis'' and that ``conglomerates' access to internal
capital markets became more valuable''). See also, e.g., several
recent working papers examining impacts of the COVID-19 crisis on
small businesses: Alexander W. Bartik et al., How Are Small
Businesses Adjusting to COVID-19? Early Evidence from a Survey,
(Nat'l Bureau of Econ. Research, Working Paper No. 26989, 2020);
Jose Maria Barrero, Nicholas Bloom, & Steven J. Davis, COVID-19 Is
Also a Reallocation Shock, (Nat'l Bureau of Econ. Research, Working
Paper No. 27137, 2020); John Eric Humphries, Christopher Neilson, &
Gabriel Ulyssea, The Evolving Impacts of COVID-19 on Small
Businesses Since the CARES Act, (Cowles Foundation, Discussion Paper
No. 2230, 2020); Robert W. Fairlie, The Impact of COVID[hyphen]19 on
Small Business Owners: Evidence from the First Three Months after
Widespread Social-Distancing Restrictions, 29 J. Econ. Mgmt.
Strategy 727 (2020).
---------------------------------------------------------------------------

    We recognize that the alternative of allowing the temporary relief
to expire could incrementally decrease concerns about investor
protection compared to extending the relief.\696\ Generally, however,
the aggregate incremental effect of the temporary rules on retail
investor protection is likely limited by various factors, including the
tailoring of the relief (through the eligibility requirements and the
narrow scope and time-limited nature of the relief) and the modest size
of the Regulation Crowdfunding market compared to other market segments
that draw retail investors.\697\ Further, issuers are required to
disclose reliance on the temporary relief to investors, enabling more
informed decisions. In addition, several essential safeguards contained
in the 2015 Regulation Crowdfunding rules continue to apply, such as
offering and investment limits, the use of registered crowdfunding
intermediaries to conduct Regulation Crowdfunding offerings, other
disclosure requirements of Form C, and annual report obligations. While
we recognize that there may be somewhat greater investor protection
concerns with an extension of the temporary final rules compared to an
alternative of allowing the temporary relief to expire, overall we do
not believe the difference to be significant in light of the other
features of these offerings.
---------------------------------------------------------------------------

    \696\ See also Temporary Amendments Adopting Release, at 27122;
Better Markets Letter.
    \697\ See also Temporary Amendments Extension, at 54489.
---------------------------------------------------------------------------

    We could also extend the relief from review report requirements for
eligible issuers in offerings of up to $250,000 for a shorter or longer
time period than specified in these amendments. The alternative of
extending the relief for a shorter (longer) time period would lead to
fewer (more) potential issuers being afforded the flexibility in
capital raising under the temporary rules, compared to the amendments.
Because of the severe and continuing economic impact of the COVID-19
crisis, we believe that the extension of the temporary rules is
appropriate.
    As another alternative, we could permanently raise the financial
statement requirement thresholds, for instance, in proportion to the
increase in the offering limit: $500,000 for reviewed financial
statements (in lieu of $107,000); $2.5 million for audited financial
statements for follow-on offerings (in lieu of $535,000); and $5
million for audited financial statements for initial offerings (in lieu
of $1.07 million).\698\ As another alternative, we could waive certain
other disclosure requirements (e.g., progress updates and/or annual
reports) for the lower tier of crowdfunding offerings (e.g., offerings
up to $250,000 or $1 million) to make crowdfunding offerings more cost-
effective for the smallest issuers, many of which have not yet begun
generating revenue and might not have enough liquid assets or access to
loans to cover the compliance costs of a Regulation Crowdfunding
offering. Scaling disclosure requirements for Regulation Crowdfunding
offerings under these alternatives could attract a larger set of early
stage issuers that seek to raise small amounts of capital to Regulation
Crowdfunding while providing a degree of independent verification of
accounting quality for larger crowdfunding offerings in a more cost-

effective manner than with an audit.\699\ Scaling disclosure
requirements under this alternative, however, would result in
information loss to investors, potentially contributing to less well
informed investment decisions, greater risk of investment losses, and
less efficient allocation of capital. Moreover, this alternative could
attract high-risk issuers to the lower crowdfunding tier, which could
undermine future capital raising in that market tier.
---------------------------------------------------------------------------

    \698\ See, e.g., Wefunder Letter (recommending a $1 million
threshold for reviewed financial statements and a $5 million
threshold for audited financial statements); CCA Letter
(recommending increasing the reviewed financial statements threshold
to $500,000 and the audited financial statements threshold to $5
million for initial offerings).
    \699\ See supra note 689.
---------------------------------------------------------------------------

b. Investment Limits Under Regulation Crowdfunding
    The final amendments revise Regulation Crowdfunding investment
limits.\700\ As proposed, the amended limits will be based on the
greater of, rather than the lower of, an investor's annual income or
net worth. Further, as proposed, the amended limits will only apply to
non-accredited investors.
---------------------------------------------------------------------------

    \700\ See supra Section II.E.3.
---------------------------------------------------------------------------

i. Benefits
    The amendments will increase the maximum amount that can be
invested across all Regulation Crowdfunding offerings by the subset of
non-accredited investors whose net worth and annual income diverge.
This may benefit issuers by increasing the amount of capital formation
and/or by lowering the overall costs of soliciting non-accredited
investors. Relaxing the investment limitation may also benefit the
affected subset of non-accredited investors by enabling them to achieve
more efficient portfolio allocations and enhanced upside from investing
in early-stage companies. Because crowdfunding issuers commonly set
investment minimums, relaxing the investment limitation may allow the
affected investors to invest in a larger number of crowdfunding
issuers, holding invested amounts constant, which may result in greater
diversification within the crowdfunding category of the investor's
portfolio. However, a larger aggregate investment in the crowdfunding
category may reduce the diversification of the investor's overall
portfolio, holding portfolio size constant. The effect of the
amendments on portfolio diversification will also depend on how much
investors allocate to different crowdfunding securities, out of the
allowable limit, relative to non-crowdfunding securities, and on the
correlations between crowdfunding and non-crowdfunding securities
chosen by investors for their portfolios.
    The amendments will also remove the investment limitation for
accredited investors in Regulation Crowdfunding, harmonizing the
treatment of accredited investors across Regulation Crowdfunding,
Regulation A, Regulation D, and private placements not reliant on
Regulation D.\701\ Accredited investors are expected to possess the
capability to evaluate larger crowdfunding investments and the
resulting financial risk. Removing the investment constraint may
benefit such investors by allowing them to allocate their capital more
efficiently within their overall investment portfolio. It may also
create stronger incentives to perform due diligence, screen, and
monitor crowdfunding issuers, which may have positive spillovers for
non-accredited investors in Regulation Crowdfunding. It is possible
that accredited investors will simply reallocate capital between
exemptions (e.g., in cases of side-by-side Regulation Crowdfunding/Rule
506(c) offerings). Accredited investors may also continue to favor
private placements, which do not cap offering size and allow them to
capitalize more fully on their due diligence, with fewer spillovers to
the rest of the market (because information about investments is
private, there is less free riding on large investors' due diligence)
and more bargaining power to negotiate offering terms.
---------------------------------------------------------------------------

    \701\ See also supra note 431 (discussing commenters that
supported the amendments).
---------------------------------------------------------------------------

    We lack the data to assess how many investors may be affected by
the described amendments to investment limits because investor
information generally is not available and is not required to be
disclosed. Based on a subset of data made available by one crowdfunding
intermediary,\702\ among non-accredited investors with available
information on annual income and net worth, revising the investment
limits as described can increase the investment limit by 98 percent for
the median non-accredited investor in that subset. In addition,
approximately nine percent of investors in the examined subset of data
were accredited and thus will no longer be subject to investment limits
under the amendments. The economic effects of the amendments will be
mitigated to the extent that investors may invest amounts below the
investment limits.\703\ We cannot determine whether these results are
representative of the distribution of investors on other funding
portals or during other time periods, or how that distribution may
change under the amendments if new investors and issuers are drawn to
Regulation Crowdfunding.
---------------------------------------------------------------------------

    \702\ See 2019 Regulation Crowdfunding Report, at notes 91-93
and accompanying text. Information on amounts invested by an average
investor or the number of investors per offering is not available
for the full sample of Regulation Crowdfunding offerings.
Information on offerings from one intermediary from May 2016 through
September 2018 provides some insight into the typical investment
size, investor composition, and number of investors in crowdfunding
offerings. For purposes of these estimates, we exclude investments
redirected to a Rule 506(c) offering; offerings that were not funded
(i.e., were either canceled or ongoing) or had missing data;
observations where an investor made but subsequently withdrew the
commitments, yielding a cumulative investment of zero; and investor
observations with missing accredited investor status.
    \703\ See 2019 Regulation Crowdfunding Report, at 40 (``For most
investors with available data on annual income and net worth
(approximately 30% of investors in offerings funded on the
platform), cumulative amounts invested during the entire considered
period (almost 2.5 years) through this intermediary's platform did
not reach the investment limit, with fewer than 10% of investors on
the platform investing amounts exceeding their 12-month investment
limit over the entire 2.5-year period. According to information
provided by another intermediary respondent to the lookback survey,
the median (average) crowdfunding investment through its platform
was $1,335 ($500), with investors making an average of 2.7
investments and approximately 40% of investors making two or more
investments. According to information provided by a different
intermediary respondent, the average investment was approximately
$992, and investors made an average of 1.5 investments. Based on
available data, we are unable to determine whether these investors
also invested in crowdfunding offerings through other crowdfunding
platforms; thus, these estimates are likely to represent a lower
bound on average investment amounts.'').
---------------------------------------------------------------------------

ii. Costs
    The final amendments to Regulation Crowdfunding investment limits
may increase the magnitude of investor losses, particularly if some
investors inefficiently under-diversify their portfolios and take on
too much risk from crowdfunding investments.\704\ For example, relaxing
investment limits may enable some non-accredited investors to make
larger investments in crowdfunding offerings based on an incomplete
assessment of information about the securities offered, with the
resulting potential for increased investor losses that they may be less
able to bear. However, other investor protection provisions of
Regulation Crowdfunding, such as issuer disclosure requirements and
investor education and other intermediary requirements, may partly
mitigate these risks. The potential costs of the amendments should be
considered in the context of the baseline, under which non-accredited
investors are permitted to invest unlimited amounts in both listed and
unlisted registered securities and in

Regulation A Tier 1 securities,\705\ as well as up to ten percent of
the higher of income or net worth in each offering of Regulation A Tier
2 securities, and thus they already may be in a position of making
investments which also may result in considerable risk to investor
portfolios.
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    \704\ See, e.g., CII Letter (opposing increasing investment
limits for non-accredited investors); Morningstar Letter (opposing
increasing investment limits for non-accredited investors due to a
lack of investment advice and the difficulty of detected scams);
NASAA Letter; and CFA Letter.
    \705\ In contrast to Regulation Crowdfunding securities, sales
and offers of unlisted registered securities and Regulation A Tier 1
securities are subject to State registration requirements,
including, in some states, merit review.
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    The final amendments removing investment limits for accredited
investors in Regulation Crowdfunding offerings are not expected to
result in a negative effect on investor protection given that
accredited investors generally have the capacity to fend for themselves
and greater ability to withstand financial losses. Because accredited
investors are not subject to investment limitations in offerings under
Regulation A, in offerings under Regulation D, in other private
placements, or in registered offerings, they may simply reallocate
capital between holdings of securities issued under other exemptions.
It is also possible that accredited investors investing large amounts
may continue to prefer private placements, as discussed above.
iii. Effects on Efficiency, Competition, and Capital Formation
    The described amendments to Regulation Crowdfunding investment
limits may incrementally promote capital formation through Regulation
Crowdfunding, particularly for issuers that may attract accredited
investors or non-accredited investors who have a greater disparity
between income and net worth. The revised investment limits may allow
some investors that were constrained by existing investment limits to
attain a more efficient portfolio allocation. For other investors,
relaxing investment limits may enable an inefficiently high exposure to
crowdfunding investments, resulting in under-diversification. If the
amendments increase accredited investor participation in Regulation
Crowdfunding offerings, the average intensity of monitoring and
screening of issuers by investors may increase, with potential positive
spillovers for small investors that lack the expertise and incentives
to engage in comparable monitoring and screening. This may lead to
greater efficiency of capital allocation in the Regulation Crowdfunding
market. Removing accredited investor investment limits may lead to a
reallocation of investment opportunities in that market segment from
non-accredited investors to accredited investors, as indicated by one
commenter.\706\
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    \706\ See J. Pampena Letter (suggesting the change may eliminate
investment opportunities for non-accredited investors). According to
the commenter, if accredited investors are permitted to invest under
Regulation Crowdfunding without an investment limit, investment from
accredited investors will rapidly satisfy the offering limits of
these mostly small offerings.
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    Depending on how the additional investor capital drawn to
Regulation Crowdfunding compares to the amount of additional financing
sought by issuers in these markets after the amendments, the amendments
may affect competition among issuers for investor capital.
    The net impacts of the amendments may be attenuated if the
additional capital is reallocated from other offerings that either do
not have investment limits or that have less stringent investment
limits (e.g., Rule 506, other private placements, or Regulation A).
iv. Reasonable Alternatives
    As an alternative, we could align Regulation Crowdfunding
investment limits with those of Regulation A Tier 2--apply the ten-
percent limit on a per-offering basis to all non-accredited investors--
rather than apply a two-tier limit (five percent for non-accredited
investors with a lower income and net worth and ten percent for other
non-accredited investors) across all Regulation Crowdfunding offerings
in a twelve-month period. Compared to the final amendments, this
alternative would have expanded investment limits, particularly for
non-accredited investors with lower income and net worth and for
investors that participate in multiple Regulation Crowdfunding
offerings, yielding potential increases in capital formation benefits
and non-accredited investor access to startup investment opportunities.
However, this alternative also might have increased investor losses per
investor and decreased diversification for some non-accredited
investors, compared to the final amendments.
    As another alternative, we could have increased or lowered the
numerical thresholds in investment limits under Regulation
Crowdfunding. For example, we could scale up the $2,200 numerical
threshold in the investment limit in proportion to the increase in the
offering limit (from $2,200 to $11,000). This alternative would
increase (decrease) capital formation benefits while increasing
(decreasing) the magnitude of potential investor losses per non-
accredited investor, particularly for non-accredited investors with
lower income and net worth, compared to the final amendments.
    As another alternative, we could require verification of accredited
investor status under Regulation Crowdfunding, similar to Rule
506(c).\707\ Under this alternative, the likelihood of non-accredited
investors that could have been mistakenly identified as accredited
investors without verification incurring losses from a large investment
under Regulation Crowdfunding would be decreased compared to the
amendments. However, issuers would incur additional costs of
verification of investor status under this alternative (whether in the
form of the cost passed along to the issuer by an intermediary, or the
cost incurred by the issuer directly). While such additional costs
would be smaller for issuers with a prior or concurrent Rule 506(c)
offering, for the typical Regulation Crowdfunding issuer that is small,
with limited internal cash flows and no prior offering experience, such
costs may serve as a significant barrier to accepting accredited
investors in a Regulation Crowdfunding offering.
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    \707\ See, e.g., J. Clarke Letter; Raise Green & New Haven Comm.
Solar Letter; and Honeycomb Letter (supporting self-verifications).
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6. Eligibility Requirements in Regulation Crowdfunding and Regulation A
a. Eligibility Requirements Under Regulation Crowdfunding
    The final rules will allow crowdfunding issuers to raise capital
through a crowdfunding vehicle, substantially as proposed. Such
crowdfunding vehicles will be formed by or on behalf of the underlying
crowdfunding issuer to serve merely as a conduit for investors to
invest in the crowdfunding issuer and will not have a separate business
purpose. This approach is designed to allow investors in the
crowdfunding vehicle to achieve the same economic exposure, voting
power, and ability to assert State and Federal law rights, and receive
the same disclosures under Regulation Crowdfunding, as if they had
invested directly in the underlying crowdfunding issuer in an offering
made under Regulation Crowdfunding. As discussed in Section II.F.2
above, after considering public comment, we are not adopting the
proposal to limit the types of securities that may be offered and sold
in reliance on Regulation Crowdfunding.
i. Benefits
    The final rules will benefit issuers by allowing them to reduce the

administrative complexities associated with a large and diffuse
shareholder base.\708\ Commenters generally supported permitting
crowdfunding issuers to use crowdfunding vehicles.\709\ As discussed in
Section II.F.1.c above, under the final rules, natural person investors
in the crowdfunding vehicle will be excluded from the number of holders
of record for purposes of Section 12(g). We expect this provision to
significantly increase the utility of the crowdfunding vehicle
structure to issuers, especially in offerings that attract small
investors, and potentially make it easier for Regulation Crowdfunding
issuers to raise capital from venture capitalists and other large
investors in the future. However, the effect on all except the largest
crowdfunding issuers may be limited due to the availability of the
conditional exemption in Exchange Act Rule 12g-6.
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    \708\ See also Proposing Release, at note 420.
    \709\ See supra note 480. But see CFA Letter and CII Letter.
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    Currently, some early-stage issuers with high growth potential that
have a chance of attracting VC funding in the future may avoid
conducting an offering under Regulation Crowdfunding due to concerns
about a large and unwieldy capitalization table. By potentially
alleviating some of these concerns, the final rule may encourage
additional issuers with high growth potential to consider pursuing an
offering under Regulation Crowdfunding. Because these issuers might
presently offer securities only to accredited investors or a few non-
accredited investors through offerings under Rule 506 or through other
private placement offerings, the final rule may benefit non-accredited
investors by expanding their access to investment opportunities in
startups with high growth potential that are early in their lifecycle.
    As discussed in Section II.F.1 above, the use of a crowdfunding
vehicle will be subject to certain conditions designed to ensure that
investors achieve the same economic exposure, voting power, and ability
to assert State and Federal law rights, and receive the same
disclosures under Regulation Crowdfunding, as if they had invested
directly in the crowdfunding issuer in an offering made under
Regulation Crowdfunding, thereby minimizing any potential adverse
effects for investors of investing in a crowdfunding issuer through
such an offering structure. The crowdfunding vehicle and the
crowdfunding issuer also will be co-issuers in the offering, with the
resulting joint liability for offers and sales, and the offering must
comply with Section 4(a)(6) of the Securities Act and Regulation
Crowdfunding.
    The required transparency and single-purpose nature of the
crowdfunding vehicle, combined with the continued application of the
substantive and disclosure requirements of Regulation Crowdfunding and
the antifraud provisions of the Federal and State securities laws, are
expected to provide significant investor protections for crowdfunding
vehicle investors under the final rules.
ii. Costs
    The use of crowdfunding vehicles may result in additional offering
costs. The costs of forming and operating the crowdfunding vehicle will
be incurred by the crowdfunding issuer, which may decrease the overall
economic benefits of the offering for all investors in the crowdfunding
issuer, including investors in the crowdfunding vehicle. However, to
the extent that the crowdfunding vehicle yields benefits for the
crowdfunding issuer, including expanded potential for future funding
rounds due to the treatment of the crowdfunding vehicle under Section
12(g), reduced capitalization table concerns and greater efficiency of
administration of a large and diffuse investor base, these economic
benefits of a crowdfunding vehicle may offset the additional costs. The
balance of these tradeoffs is likely to vary depending on the issuer's
offering experience, potential for raising follow-on financing from a
large investor, costs associated with the formation and operation of
the crowdfunding vehicle, and the number of investors participating in
the crowdfunding offering. Because the use of the crowdfunding vehicle
structure will be voluntary, we expect issuers to use a crowdfunding
vehicle only when the issuers determine that the benefits justify the
costs.