cost of the requirement to file the materials with the Commission would
be relatively low. We recognize that this

alternative could reduce the indirect costs of some issuers by limiting
the ability of the issuer's competitors to discover information about
the issuer or the costs associated with requesting confidential
treatment for the proprietary portions of the information. However, we
note that this information may become available to competitors in any
event through the solicitation process or as part of the offering
materials (to the extent that the offering materials contain similar
information). Furthermore, removing the requirement to publicly file
the materials for issuers that proceed with an offering might result in
adverse effects on the protection of investors to the extent that it
may facilitate fraudulent statements by issuers to all or a selected
group of investors that might fail to compare the statements in the
solicitation materials against the offering circular. This
consideration is especially salient because test-the-waters
communications under Rule 255 and under the proposed amendments could
be directed at any investor, including non-accredited investors. On
balance, we believe that the proposed rule's requirements governing the
use of test-the-waters communications appropriately balance the goals
of providing flexibility to issuers and protection to investors.
    We are proposing to permit test-the-waters communications about a
contemplated exempt offering for issuers that have not yet narrowed
their offering plans to a specific exemption, so long as the test-the-
waters materials contain required legends and, should an issuer proceed
with an exempt offering under Regulation A or Regulation Crowdfunding
within 30 days, that written test-the-waters communications be filed.
As an alternative, we could have proposed permitting test-the-waters
communications in conjunction with a contemplated exempt offering that
does not currently permit such communications, but required the issuer
to have determined and to specify in a legend the offering exemption
that would be used. Compared to the proposal, by informing solicited
investors about the contours of the exempt offering that is being
contemplated, this alternative could potentially increase the utility
of the information in the solicitation to prospective investors (e.g.,
whether the offering would be open to non-accredited investors, and if
it is, whether investment limits or other requirements apply). However,
because small and early stage issuers might be testing-the-waters to
gauge their optimal offering strategy, including how much capital might
in principle be raised (and thus, whether a Regulation A offering, or
for instance, a Regulation Crowdfunding offering, is more cost-
effective), such an alternative would significantly limit the
flexibility of issuers to obtain valuable information from pre-offering
communications. It also may not result in meaningful investor
protection benefits compared to the proposed amendments in light of the
legending requirements, anti-fraud provisions, and, for issuers that
proceed with an offering, the exhibit filing requirements and other
investor protections specific to the respective exemption the issuer
uses.
    We are proposing to amend Rule 204 to state that oral
communications with prospective investors are permitted once the Form C
is filed, so long as the communications comply with the requirements of
Rule 204. As an alternative, we could expand Rule 204 further,
broadening the range of terms an issuer may advertise or not
restricting the scope of issues that may be addressed in offering
advertisements. Such an alternative would provide greater flexibility
to issuers to advertise the offering to prospective investors, which
might increase the likelihood of offering success and yield capital
formation benefits. However, such an alternative might increase
information processing challenges for investors--particularly less
sophisticated investors--that might incur greater effort to compare the
more extensive advertising content with the offering statement
disclosure, or if they are unable to validate the extended advertising
content against the offering statement disclosure, potentially be at
risk of less informed investment decisions.
Request for Comment
    94. Would extending the option to test-the-waters about a
contemplated Regulation Crowdfunding offering, as proposed, benefit
issuers? If so, how? Would it impose costs on investors? If so, which
costs? How could such costs be mitigated?
    95. Would extending the option to test-the-waters about a
contemplated exempt offering, as proposed, for issuers still
determining the offering exemption they plan to rely on, benefit
issuers? Which issuers would benefit the most from such an extension?
Would it impose costs on investors? If so, which costs? How could such
costs be mitigated?
    96. Which factors might increase the utility of the proposed
amendments to issuers?
    97. What would be the economic effects of the alternative of
permitting test-the-waters communications for Regulation Crowdfunding
issuers without a filing requirement? Would it result in costs to
investors?
    98. Would issuers benefit from the proposed amendments specifying
that oral communications are permitted in Regulation Crowdfunding
offerings once the Form C is filed? What would be the costs and
benefits of the alternative of expanding the scope of permissible
advertising or not limiting the scope of permissible advertising?
3. Rule 506(c) Verification Requirements
    As discussed in Section II.C above, to address some of the concerns
about challenges and costs associated with accredited investor status
verification in Rule 506(c) offerings, the proposed amendments would
add a new item to the non-exclusive list in Rule 506(c) that would
allow an issuer (or those acting on its behalf) to establish that an
investor remains an accredited investor as of the time of sale if the
issuer (or those acting on its behalf) previously took reasonable steps
to verify that investor as an accredited investor, the investor
provides a written representation to that effect to the issuer (or
those acting on its behalf), and the issuer (or those acting on its
behalf) is not aware of information to the contrary.
Benefits
    The proposed addition to the non-exclusive list in Rule 506(c)
concerning verification of investors for which the issuer previously
took reasonable steps to very accredited investor status is expected to
reduce the cost of verification for issuers that may opt to engage in
more than one Rule 506(c) offering over time with potential repeat
investors. This new method also may help reduce the risk of harm to
investors from continually having to provide financially sensitive
information to the issuer (or those acting on its behalf) when the
additional investor protection benefits of doing so are limited given
the pre-existing relationship between the issuer (or those acting on
its behalf) and such investors.
Costs
    Generally, because the proposed amendment represents an incremental
revision to the principles-based approach to verification already
incorporated in Rule 506(c), the costs of the proposed amendment are
expected to be modest. However, we recognize that some previously
verified investors that lose accredited investor status over time might
provide written

representations that they are accredited investors, and if issuers are
not aware of information to the contrary, such issuers might sell
securities to those non-accredited investors under Rule 506(c). As
noted above, we expect these risks would be mitigated by the pre-
existing relationship between the issuer (or those acting on its
behalf) and such investors.
Effects on Efficiency, Competition, and Capital Formation
    Generally, because the proposed amendments represent an incremental
revision to the principles-based approach to verification already
incorporated in Rule 506(c), the anticipated effects of the proposed
amendments on efficiency, competition, and capital formation are
expected to be modest.
Reasonable Alternatives
    We are proposing amendments to the existing non-exclusive list of
verification methods. As an alternative, we could rescind the non-
exclusive list. Compared to the proposed amendments, this alternative
could reduce costs for some issuers that presently feel constrained to
use one of the listed verification methods, even though other, less
costly methods may be better suited for their particular facts and
circumstances. However, the effects of eliminating the non-exclusive
list might be limited if issuers that presently rely on the listed
verification methods continue to do so under a more principles-based
approach.
    We have proposed to allow issuers to establish that a previously
verified investor remains accredited if the investor provides a
representation to that effect and the issuer is not aware of
information to the contrary. As an alternative, we could allow issuers
to make such a determination only for a specific period of time, after
which an issuer must verify investor status again to account for
potential changes in investor income or net worth. This alternative
would result in greater costs, relative to the proposed amendments,
stemming from more frequent verification of investor status for repeat
purchasers of the issuer's securities. At the same time, this
alternative could reduce the likelihood of investors that previously
were accredited but subsequently exited accredited investor status
(e.g., due to a change in income or net worth) and thus may have a
lower ability to incur the risks of a Rule 506(c) offering becoming
purchasers in a Rule 506(c) offering.
Request for Comment
    99. What are the economic effects of the alternative of rescinding
the non-exclusive list of verification methods?
    100. What are the economic effects of the alternative of allowing
issuers to establish that a previously verified purchaser remains an
accredited investor, provided that an investor makes a written
representation to that effect, on a time-limited, rather than
indefinite, basis?
4. Disclosure Requirements
a. Required Disclosures to Non-Accredited Investors in Rule 506(b)
Offerings
    The proposed amendments to Rule 502(b) would scale financial
disclosure requirements for non-reporting companies that sell to non-
accredited investors under Rule 506(b) generally to align those
requirements with the disclosures required for offerings under Tier 1
and Tier 2 of Regulation A, which also allows sales to non-accredited
investors.
Benefits
    The proposed amendments to the Rule 502(b) disclosure requirements
for sales to non-accredited investors would lower the burden of
preparing financial disclosures, particularly the costs of audited
financial statements, for issuers in Rule 506(b) offerings up to $20
million that would no longer be subject to those requirements.\392\ We
do not have information on the costs of an audit in Rule 506(b)
offerings involving sales to non-accredited investors. As a proxy, we
consider audit costs reported by Regulation A Tier 2 issuers and
smaller reporting company issuers. Based on Regulation A Tier 2
offerings qualified from June 2015 through December 2019, the average
(median) audit cost, where reported, was $29,015 ($12,319). Based on
information from Audit Analytics, the average (median) audit fees,
where available, for reporting companies with market capitalization up
to $75 million were $321,695 ($83,000) for years ending in 2018 or
2019.\393\ We recognize that these costs may differ from the costs
incurred by issuers in Rule 506(b) offerings to non-accredited
investors. We estimate that in 2019 among new Rule 506(b) offerings by
non-reporting issuers other than pooled investment funds seeking up to
$20 million, only 4.6 percent (565 out of 12,404) had at least one non-
accredited investor.\394\
---------------------------------------------------------------------------

    \392\ See, e.g., letter from McCarter & English LLP dated
September 24, 2019 (stating that the ``[t]he [Rule 506(b)] exemption
imposes significant disclosure requirements for issuances made to
such non-accredited investors, which, when combined with the
relatively low number of permitted non-accredited investors, makes
this particular facet of the Rule 506(b) exemption impracticable in
the vast majority of private placement transactions and therefore
little-used.'').
    \393\ Data on audit fees for years ending in 2019 is incomplete
and reflects data as recorded in Audit Analytics as of February 20,
2020.
    \394\ 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. Most Rule 506(b) offerings had no or few non-accredited
investors. See supra note 94.
---------------------------------------------------------------------------

    Lowering costs of sales to non-accredited investors under Rule
506(b) might expand access to capital for some issuers that are not
able to obtain sufficient external financing through other methods or
through sales of securities to accredited investors only under Rule
506(b). Compliance cost savings in the offering process and expanded
access to external financing are expected to enhance shareholder value
and thus benefit the issuer's existing shareholders.
    As a result of lower disclosure costs, some issuers in Rule 506(b)
offerings that presently do not sell securities to non-accredited
investors might be more willing to sell securities to non-accredited
investors, which could increase the number of issuers subject to the
amendments compared to the estimates above. If the amendments result in
more issuers selling securities to non-accredited investors under Rule
506(b), those non-accredited investors could benefit from an expanded
set of investment opportunities, which might allow them to allocate
their capital more efficiently. These benefits might be attenuated if
the increase in sales to non-accredited investors under Rule 506(b) is
driven by issuers switching from Rule 504, Regulation A, or Regulation
Crowdfunding offerings, which also accept non-accredited investors, to
Rule 506(b), resulting in little change in the set of investment
opportunities available to non-accredited investors. It is difficult to
predict whether any increase in sales to non-accredited investors under
Rule 506(b) as a result of the proposed amendments would involve the
participation of additional non-accredited investors in Rule 506(b)
offerings or greater participation by existing non-accredited investors
in other issuers' Rule 506(b) offerings. Due to the limited data
disclosed about investors on Form D, we cannot estimate the number of
unique non-accredited purchasers in such offerings because a single
investor may be a

purchaser in multiple Rule 506(b) offerings in a given year.
Costs
    The proposed amendments to scale and streamline Rule 502(b)
requirements regarding disclosures applicable to sales to non-
accredited investors, particularly the repeal of the requirement to
provide audited balance sheets in offerings up to $20 million, could
result in less informed investor decisions by some non-accredited
investors. For instance, to the extent that audited financial
statements are valuable for informed investment decisions,\395\ scaled
disclosures in offerings of up to $20 million might cause some non-
accredited investors to incorrectly value the offered securities and to
make less well informed investment decisions. Further, the proposed
elimination of audit requirements for disclosures to non-accredited
investors in Rule 506(b) offerings of up to $20 million might encourage
some issuers with relatively higher information risk to sell securities
to non-accredited investors given the absence of investment limits in
such offerings. The requirement that non-accredited investors must
satisfy the knowledge and experience standard of Rule 506(b)(2)(ii) in
order to be eligible to participate in an offering under such rule is
expected to mitigate some of these costs. Further, in the aggregate
these costs to investors are expected to be limited by the cap on the
number of non-accredited investors that can participate in a Rule
506(b) offering.
---------------------------------------------------------------------------

    \395\ See, e.g., Erik Boyle & Melissa Lewis-Western, The Value-
Add of an Audit in a Post-SOX World (Working Paper, Apr. 2018)
(finding that an audit continues to be associated with reduced
financial statement error at public companies post-SOX and that the
size of the effect is economically significant); Petro Lisowsky &
Michael Minnis, The Silent Majority: Private U.S. Firms and
Financial Reporting Choices (Univ. of Chi. Booth Sch. of Bus.,
Research Paper No. 14-01, Apr. 12, 2018) (finding that ``[n]early
two-thirds [of private firms] do not produce audited GAAP financial
statements. Moreover, while firms with external capital are more
likely to produce audited GAAP statements, we find that thousands of
firms with external debt and dispersed ownership do not. Equity and
trade credit are potentially more important factors than debt in
affecting private firms' production of audited GAAP reports.
Finally, young, high growth firms lacking tangible assets are
significantly more likely to produce audited GAAP reports relative
to established firms with physical assets, suggesting that audited
financial reports play an important information role in capital
allocation when business activity is less verifiable.''); Michael
Minnis, The Value of Financial Statement Verification in Debt
Financing: Evidence from Private U.S. Firms, 49 J. Acct. Res. 457
(2011) (showing the value of audited financial statements for
private debt pricing); David W. Blackwell, Thomas R. Noland, & Drew
B. Winters, The Value of Auditor Assurance: Evidence from Loan
Pricing, 36 J. Acct. Res. 57 (1998) (finding cost of debt reductions
in a small sample of small private firms with audited financial
statements); and Jeong[hyphen]Bon Kim et al., Voluntary Audits and
the Cost of Debt Capital for Privately Held Firms: Korean Evidence,
28 Contemp. Acct. Res. 585 (2011) (confirming the result in a Korean
sample). See also Ciao-Wei Chen, The Disciplinary Role of Financial
Statements: Evidence from Mergers and Acquisitions of Privately Held
Targets, 57 J. Acct. Res. 391 (2019) (examining ``whether requiring
the disclosure of audited financial statements disciplines managers'
mergers and acquisitions (M&As) decisions'' and finding that ``the
disclosure of private targets' financial statements is associated
with better acquisition decisions . . . [and] that this disciplining
effect of disclosure is more pronounced when monitoring by outside
capital providers is more difficult and costly'').
    However, two studies using survey data from the Federal
Reserve's Survey of Small Business Finances do not find that an
audit is significantly associated with a lower interest rate in
small privately held firms. See Kristian D. Allee & Teri Lombardi
Yohn, The Demand for Financial Statements in an Unregulated
Environment: An Examination of the Production and Use of Financial
Statements by Privately-Held Small Businesses, 84 Acct. Rev. 1
(2009); and Gavin Cassar, Christopher D. Ittner, & Ken S.
Cavalluzzo, Alternative Information Sources and Information
Asymmetry Reduction: Evidence from Small Business Debt, 59 J. Acct.
& Econ. 242 (2015).
---------------------------------------------------------------------------

    In evaluating the investor costs of the proposed amendments, we
consider the baseline, which includes similarly scaled requirements for
financial disclosures required to be made to non-accredited investors
in Regulation A Tier 1 and Regulation Crowdfunding offerings of the
same size. However, those offering types are associated with certain
additional provisions intended to protect non-accredited investors,
which are not afforded to non-accredited purchasers in Rule 506(b)
offerings (e.g., Commission qualification and state registration of
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 of the proposed amendments on costs to investors may
be limited. However, the aggregate impacts of the proposed amendments
on investor protection could be amplified if the scaled requirements
encourage additional issuers to accept non-accredited investors in Rule
506(b) offerings.
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 in the offering, the proposed
amendments might incrementally promote capital formation through Rule
506(b). If non-accredited investor capital drawn to Rule 506(b)
offerings under the proposed amendments 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
might be limited. However, in that instance, issuers might benefit
under the proposed amendments if non-accredited investor offerings
under Rule 506(b) enable them to obtain a lower cost of capital (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 proposed 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.\396\ 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.\397\ However, as discussed above,
the proposed amendments also might in some cases result in less
informed investment decisions, lowering the efficiency of capital
allocation.
---------------------------------------------------------------------------

    \396\ 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 R&D 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. Fin. & 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, J.
Banking & Fin. (in-press, 2019); 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).
    \397\ In portfolio theory, constraining the set of investment
opportunities yields a potentially inferior optimal portfolio. See,
e.g., Bodie et al. 2013, supra note 375. 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 375.
---------------------------------------------------------------------------

    The incremental economic effects of the proposed 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 which 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 VCs 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
proposed amendments, the direct and indirect costs of such disclosures
(such as risks of disclosure of proprietary information to a broader
range of investors) might discourage issuers from selling to non-
accredited investors in Rule 506(b) offerings.
Reasonable Alternatives
    We are proposing to repeal 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.
    We are proposing not to require audited financial statement
disclosures 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 propose not to 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 anti-fraud provisions of the
federal securities laws, might mitigate some of the investor protection
risks under this alternative.
    We are proposing to extend 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
propose to 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 proposed 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 proposed 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 proposal. 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 approximately 12
(3.1 percent) offerings involved non-accredited investors.\398\ 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.
---------------------------------------------------------------------------

    \398\ This estimate is based on the analysis of Form D data for
initial Form D filings during 2018 by issuers other than pooled
investment funds and reporting issuers. Reporting issuers are
identified based on 2018 filings of annual reports or amendments to
them.
---------------------------------------------------------------------------

Request for Comment
    101. What would be the benefits of scaling disclosure requirements
for sales to non-accredited purchasers in Rule 506(b) offerings by non-
reporting issuers, as proposed? Would the proposed amendments encourage
additional non-reporting issuers to sell securities to non-accredited
investors in Rule 506(b) offerings? Would sophisticated non-accredited
investors participating in such offerings incur costs as a result of
the amendments waiving the audit requirements in offerings up to $20
million?
    102. What would be the costs and benefits of the alternative of
extending scaled disclosure requirements to non-reporting issuers in
Rule 506(b) offerings up to $75 million that involve sales to non-
accredited investors?
    103. What would be the costs and benefits of alternative approaches
to reducing the costs of disclosures to non-accredited purchases in
Rule 506(b) offerings, such as conditioning the disclosure requirement
on the number or amount of sales to non-accredited investors rather
than aggregate offering size or waiving the audit requirement
irrespective of offering size? Would such alternative approaches result
in additional investment opportunities for sophisticated non-accredited
investors? Would such alternative approaches result in a decrease in
investor protection? What additional investor protections (such as
investment limits) would effectively mitigate potential costs to
investors in this scenario?
b. Simplification of Disclosure Requirements in Regulation A Offerings
    The proposed amendments would 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; and (2) the option of
incorporating by reference financial statement information into
Regulation A offering statements. The proposed amendments also would
eliminate the requirement to file a draft offering statement as a
separate exhibit with Form 1-A and would instead enable automated
public dissemination of the draft offering statement through EDGAR,
similar to the framework in place for registered offerings. In
addition, the proposed amendments would 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.
Benefits
    The proposed amendments 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, are
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. This
accommodation is currently available to reporting companies pursuant to
amendments recently adopted in the FAST Act Modernization Release.
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 proposed amendments, filers would still
need to determine whether information they are redacting is material,
they would not need to follow the confidential treatment application
process.
    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 proposed
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
rulemaking estimated that legal fees for confidential treatment
requests ranged from $35,000 to over $200,000,\399\ 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.\400\ 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 companies have a lower threshold for determining whether a
contract is material and therefore required to be filed publicly, as
well as for companies in industries that are associated with more
confidential treatment requests, such as biotechnology.\401\ We
generally expect similar cost savings from extending this accommodation
to Regulation A issuers.
---------------------------------------------------------------------------

    \399\ See FAST Act Modernization Release, at note 341.
    \400\ See FAST Act Modernization Release, at note 342. Under the
proposed amendments, filers would still need to prepare redacted
exhibits and in some cases filers would incur costs to respond to a
staff request to demonstrate that redacted information was not
material.
    \401\ See FAST Act Modernization Release, at note 343 and
accompanying text.
---------------------------------------------------------------------------

    Similarly, the proposed amendments 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, are expected to incrementally reduce Form 1-A
preparation costs.
    The proposed amendments that would enable automated dissemination
of draft offering statements in lieu of the existing exhibit filing
requirement, consistent with the process of dissemination of draft
registration statements, are expected to incrementally reduce filer
effort to prepare the offering statement and promote greater efficiency
of the filing process and regulatory harmonization.
    Similarly, the proposed amendments that would 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, are 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 proposed amendments are expected
to benefit investors by reducing potential investor confusion arising
from the presence of the unqualified post-qualification amendment on
EDGAR.
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.\402\ One potential cost of the proposed
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.\403\
---------------------------------------------------------------------------

    \402\ 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 redacted information is not material and
would likely cause it competitive harm if publicly disclosed, which
might result in additional costs.
    \403\ See FAST Act Modernization Release, at Section VI.D.2.
---------------------------------------------------------------------------

    The proposed amendment to allow Regulation A issuers to rely on
incorporation by reference of financial statement information from
previously filed periodic reports could 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.
Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments extending certain disclosure accommodations
presently available to reporting companies to Regulation A issuers are
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 proposed
amendments might, on the margin, have a favorable effect on
competition. Compliance cost savings might have relatively greater
benefits for smaller issuers to the extent that compliance costs
involved in the preparation of disclosures being omitted or subject to
forward incorporation include a fixed component.
    To the extent that the proposed amendments might marginally reduce
the amount of information available to investors such that the ability
to make informed investment decisions is affected for the typical
investor, the proposed amendments might 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 security prices in the secondary market.
Reasonable Alternatives
    The proposed amendments would 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.\404\ 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.
---------------------------------------------------------------------------

    \404\ 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 proposed disclosure simplification amendments would apply to
all Regulation A issuers. As an alternative, we could propose to 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.\405\
---------------------------------------------------------------------------

    \405\ 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.
---------------------------------------------------------------------------

Request for Comment
    104. Would Regulation A issuers benefit from the proposed option to
redact certain information from material contracts and similar
agreements? What would be the costs to investors and other market
participants, if any?
    105. Would Regulation A issuers benefit from the proposed option to
incorporate previously filed financial statements by reference? What
would be the costs to investors and other market participants, if any?
    106. What would be the costs and benefits of the alternative of
allowing Regulation A issuers to rely on forward incorporation by
reference, subject to the conditions imposed on SRC issuers that rely
on forward incorporation by reference in Form S-1?
5. Offering and Investment Limits
a. Offering Limits Under Regulation A, Regulation Crowdfunding, and
Rule 504
    The proposed amendments would raise 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. Table 15 examines total
proceeds per issuer reported raised during 2016-2019.

   Table 15--Capital Raising During 2016-2019 by Repeat Issuers Using
               Offering Exemptions Proposed To Be Amended
------------------------------------------------------------------------

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

    Some of the existing issuers under the exemptions proposed to be
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.\406\ Generally,
however, we do not know whether those issuers used Rule 506 because the
offering limits of the exemptions proposed to be amended were too low
for their needs or because other types of offerings were optimal for
their capital raising strategy for other reasons. Table 16 shows the
capital raising under Rule 506 in 2019 by

issuers using offering exemptions proposed to be amended.\407\
---------------------------------------------------------------------------

    \406\ 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. Finally, 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 have 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.
    \407\ 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 16--Capital Raising Under Rule 506 in 2019 by Issuers Using
               Offering Exemptions Proposed To Be Amended
------------------------------------------------------------------------

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

    Evidence in Tables 15 and 16 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. As an important caveat, this inference 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 would forgo the exemptions with offering
limits that are too low for their financing needs. Expanding the
offering limits as proposed thus might attract additional issuers to
these exemptions.
    It is difficult to predict how many new issuers would be drawn to
Regulation Crowdfunding, Regulation A, and Rule 504 under the proposed
offering limits. Because of potential unobservable differences in
issuer characteristics, comparisons presented below are intended purely
as illustrative examples and not as estimates of the amounts that would
be raised under Regulation A, Regulation Crowdfunding, and Rule 504 if
the offering limits are amended as proposed. Table 17 \408\ examines
the use of other securities offering methods by issuers that raised
amounts above the existing limits but below the proposed offering limit
thresholds, some of which might consider the amended exemptions. We
consider (1) Rule 506 and registered offerings for purposes of
analyzing alternative offering limit thresholds under Regulation A; (2)
Regulation A, Rule 504, and Rule 506 offerings for purposes of
analyzing alternative offering limit thresholds under Regulation
Crowdfunding; and (3) Regulation A and Rule 506 offerings for purposes
of analyzing alternative offer limit thresholds under Rule 504. For low
offering limit thresholds, we do not consider registered offering
activity as registered offerings are not likely to be a cost-effective
alternative for such issuers. Information on amounts raised under
Section 4(a)(2), Section 3(a)(11), and Rules 147/147A is not available
to us.
---------------------------------------------------------------------------

    \408\ 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 17--Evaluation of Proposed Amendments to Offering Limits Based on
     Evidence From Select Other Securities Offering Methods in 2019
------------------------------------------------------------------------

------------------------------------------------------------------------
 Regulation A: Proposed 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
------------------------------------------------------------------------
    Rule 504: Proposed 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 \c\....................................              10
    Rule 506 \d\........................................           1,618
------------------------------------------------------------------------
  Regulation Crowdfunding: Proposed 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 \e\....................................              13
    Rule 504 \f\........................................              55
    Rule 506\ g\........................................           4,004
------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and
  blank checks 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 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.

\d\ Rule 504 eligibility criteria exclude Exchange Act reporting
  companies, so for comparability we exclude reporting companies from
  Rule 506 proceeds used in this estimate. Reporting companies are
  identified based on annual reports or amendments to them filed in
  2019. For comparability with other analyses, although pooled
  investment funds are eligible to rely on Rule 504, we focus on
  operating companies and exclude pooled investment funds.
\e\ 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.
\f\ 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.
\g\ 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.

    Evidence from Table 17 indicates that most of the Rule 506 activity
by the types of issuers that would be eligible to take advantage of the
proposed offering limits was concentrated at lower offering limit
thresholds. Although there are relatively few Rule 506 or registered
offerings in the $50 million to $75 million range, those numbers were
comparable with the relatively modest absolute numbers of Regulation A
offerings and thus might suggest potential for a significant percentage
jump in Regulation A activity under the proposed offering limit. As a
crucial caveat, issuers choosing to rely on Rule 506 or registered
offerings today might be inherently different from the types of issuers
that might find Regulation A attractive under the proposed offering
limit. Importantly, we recognize that historical use of other offering
methods may not fully represent potential future use of the exemptions
being amended, particularly if the amended rules facilitate offerings
by issuers that might not currently rely on securities offerings. We
lack data or a methodology that would allow us to predict how many new
issuers that would not have otherwise undertaken any securities
offering would be drawn to Regulation Crowdfunding, Regulation A, and
Rule 504 under the proposed offering limits. Finally, the economic
effects of the proposed amendments are expected to be limited in cases
of issuers seeking and raising amounts of financing below existing, or
amended, offering limits.
Benefits
    The proposed amendments to raise Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 offering limits might increase the potential
for 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 may be deterred by
relatively low offering limits today. The benefits under the proposed
approach are expected to be partly attenuated to the extent that some
issuers drawn to the amended exemptions might be switching from other
securities offering methods; however, such issuers might still be able
to optimize their financing strategy and lower their cost of capital.
    Amendments that increase the offering limits of Regulation A Tier
2, Regulation Crowdfunding, and Rule 504 also might improve the
composition of the pool of issuers relying on these exemptions. The
amended exemptions could draw a larger and more diversified set of
issuers with high growth potential that may require financing in excess
of the existing limits. Today such startups might forgo an exemption
with an offering limit in favor of a Rule 506 offering, which does not
cap the offer amount. A broader and more diversified range of
investment opportunities might 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 might make the exemptions
more attractive to a broader range of intermediaries. Some
intermediaries might be deterred from participating in these markets
today by fixed costs (e.g., due diligence, compliance, crowdfunding
platform operation, etc.) in proportion to potential transaction-based
compensation.
Costs
    The proposed amendments to raise Regulation A Tier 2, Regulation
Crowdfunding, and Rule 504 offering limits might increase aggregate
potential investor losses in those offerings. Amendments that increase
the offering limits of Regulation A Tier 2, Regulation Crowdfunding,
and Rule 504 could make the exemptions more attractive to issuers that
are unable to meet more restrictive requirements applicable to larger
offerings today, resulting in higher-risk issuers potentially being
overrepresented among the issuers relying on the amended exemptions.
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.\409\ 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 Regulation FD 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 also seeking to avoid
restrictions on test-the-waters communications with individual
investors and unlisted companies seeking to avoid blue sky restrictions
on primary offers and sales might also find Regulation A Tier 2 to be
relatively more attractive than a registered offering under the
proposed amendments. These investor costs are expected to be partly
mitigated by the investor protection provisions of each exemption, as
well as by the continued application of the anti-fraud provisions of
federal and state securities laws and the role of reputational
incentives of issuers and, if applicable, intermediaries, in these
offerings.
---------------------------------------------------------------------------

    \409\ See also, e.g., Mercer Bullard (2019) Crowdfunding's
Culture of Noncompliance: An Empirical Analysis, 24 Lewis & Clark L.
Rev. (forthcoming).
---------------------------------------------------------------------------

Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments to the Regulation Crowdfunding, Regulation
A, 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
proposed amendments are expected to be partly attenuated if issuers
raise amounts of financing below amended offering limits or if some of
the capital raised under the amended exemptions would have been
otherwise raised through other securities offering methods, such as
Rule 506. As another example, raising the Regulation Crowdfunding
offering limit might draw some of the issuers that would have otherwise
sought between $1.07 and $5 million under Rule 504 or Regulation A. As
a further example, raising the Rule 504 offering limit might draw some
issuers that would have otherwise used Regulation A to raise up to $10
million in a regional offering.
    As discussed above, these amendments might 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 three
discussed exemptions, combined with the proposed amendments expanding
the integration safe harbors, might allow a broader range of issuers to
raise capital from non-accredited investors to meet their financing
needs without registration. As a result some of these non-accredited
investors might receive less disclosure and face lower liquidity of
their holdings. However, this possibility must be weighed against the
baseline conditions in which those issuers might have relied on Rule
506, which significantly limits non-accredited investor access and, for
non-accredited investors that invest, restricts resales and limits the
ability to obtain current information about the issuer. Under the
baseline, those same issuers on the margin between a Regulation A and a
registered offering might have alternatively 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 would afford only
marginal benefits, if any, of liquidity and information availability
compared to, for instance, 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 proposed amendments could expand the set and nature of
investable opportunities for non-accredited investors seeking exposure
to companies that have not yet registered an offering. Depending on how
the additional investor capital drawn to the affected markets compares
to the amount of additional financing sought by issuers in these
markets under the amendments, the amendments might affect competition
among issuers for investor capital. By promoting access to external
financing for smaller issuers, the proposed amendments might increase
product market competition among small issuers and between small
issuers and more established industry firms.
Reasonable Alternatives
    We are proposing to raise the 12-month offering limits for
Regulation A from $50 million to $75 million; for Rule 504, from $5
million to $10 million; and for Regulation Crowdfunding, from $1.07
million to $5 million. As an alternative, we could have proposed
different offering limits. For example, we could have proposed smaller
increases in 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.\410\ As another alternative, we could have
proposed larger increases in the offering limits.\411\ Compared to the
proposed 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 proposed 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.\412\ 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.
---------------------------------------------------------------------------

    \410\ 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 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).
    \411\ For instance, some commenters have suggested raising the
Regulation A offering limit to $100 million. See, e.g., Goodwin
Letter (recommending a $100 million limit); and CrowdCheck Letter
(noting that life sciences companies would benefit from a $100
million limit).
    \412\ 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; the
average (median) Rule 504 issuer (excluding pooled investment funds)
reported raising a total of $386,162 ($100,000) across Rule 504
offerings in 2016 through 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 proposed offering limits. Table 18 below examines the use of
alternative securities offering methods that are most likely to be
relied upon 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 and footnotes that accompany Table 17 continue to apply.

  Table 18--Evaluation of Alternatives to the Proposed 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     Number of issuers in  Number of issuers in
raised above $50 million and  offerings under Rule  registered offerings
           up to:                    506 \a\                 \b\
------------------------------------------------------------------------
$55.845 million (inflation                      51                    17
 adjustment)................
$60 million.................                    85                    29
$70 million.................                   144                    46
$75 million (proposed                          171                    57
 offering limit)............
$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 Rule 504 offering limits
-------------------------------------------------------------------------
   Number of issuers that       Number of issuers   Number of issuers in
 raised above $5 million and   in offerings under      offerings under
           up to:                 Rule 506 \f\        Regulation A \g\
------------------------------------------------------------------------
$5.316 million (inflation                      152                     0
 adjustment)................
$6 million..................                   464                     2
$7 million..................                   834                     4
$8 million..................                 1,166                     7
$9 million..................                 1,377                     8
$10 million (proposed                        1,618                    10
 offering limit)............
$15 million.................                 2,315                    16
$20 million.................                 2,695                    18
$25 million.................                 2,974                    19
------------------------------------------------------------------------

                        Evaluation of alternative Regulation Crowdfunding offering limits
-----------------------------------------------------------------------------------------------------------------
                                                   Number of issuers    Number of issuers   Number of issuers in
    Number of issuers that raised above $1.07      in offerings under   in offerings under     offerings under
               million and up to:                     Rule 504 \e\         Rule 506 \f\       Regulation A \g\
----------------------------------------------------------------------------------------------------------------
$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 (proposed 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
----------------------------------------------------------------------------------------------------------------
\a\ Regulation A eligibility criteria exclude investment companies and blank checks 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 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.
\d\ Rule 504 eligibility criteria exclude Exchange Act reporting companies, so for comparability we exclude
  reporting companies from Rule 506 proceeds used in this estimate. Reporting companies are identified based on
  annual reports or amendments to them filed in 2019. For comparability with other analyses, although pooled
  investment funds are eligible to rely on Rule 504, we focus on operating companies and exclude pooled
  investment funds.
\e\ 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.
\f\ 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.
\g\ 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.

    After considering these alternatives, we believe that the proposed
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 proposing to amend 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. For example, we could raise the Tier 1
offering limit proportionately to the proposed 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.\413\ Even in that case, some issuers switching from
Tier 2 or other offering methods might be able to decrease their cost
of capital.
---------------------------------------------------------------------------

    \413\ 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
greater confidence and 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 proposing to raise the Rule 504 offering limit, which
further increases potential redundancies between Regulation A Tier 1
and Rule 504. As an alternative, we could eliminate one of these two
offering exemptions after amending the other one as proposed (e.g.,
eliminate Rule 504, or eliminate Regulation A Tier 1 and raise the Rule
504 offering limit to $20 million). Such an alternative might
contribute to regulatory simplification. However, it also might be
disruptive for those issuers that rely upon the exemption eliminated or
find it to be cost-effective for their financing strategy (e.g., a lack
of Commission review or extensive Commission disclosure requirements in
Rule 504 offerings or the higher offering limit of Regulation A Tier
1).
    We have proposed to increase the Regulation Crowdfunding offering
limit to make the offering process more cost-effective and to promote
capital formation under this exemption. However, we have not proposed
to amend the Regulation Crowdfunding thresholds for different tiers of
financial statement requirements, which govern the required standard of
financial statement review, and accordingly, costs. As an alternative,
we could raise such thresholds, for instance, in proportion to the
proposed 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).\414\ 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.\415\ 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 issuers of greater risk to the lower crowdfunding offering
tier, which could undermine future capital raising in that market tier.
---------------------------------------------------------------------------

    \414\ See, e.g., Wefunder Letter (recommending a $1 million
threshold for reviewed financial statements and a $5 million
threshold for audited financial statements).
    \415\ 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.'')
---------------------------------------------------------------------------

Request for Comment
    107. What are the economic effects of the proposed increases to the
offering limits under Regulation A, Regulation Crowdfunding, and Rule
504? What are the likely effects of the proposed changes on issuers,
investors, and other market participants? Which categories of issuers
are most likely to benefit from the proposed changes? Are the proposed
changes likely to change the pool of issuers drawn to these offering
exemptions? Are the proposed changes likely to affect intermediaries in
these markets?
    108. Are the proposed changes to Regulation A, Regulation
Crowdfunding, and Rule 504 offering limits likely to promote capital
formation? Would the proposed changes improve access to capital for new
issuers that are presently unable to access securities markets, or
would the proposed changes mainly result in switching of issuers
between offering methods? Would the proposed changes be likely to allow
issuers to decrease their cost of raising capital under these
exemptions?
    109. What alternative offering limits should we consider for
Regulation A Tier 2, Regulation Crowdfunding, and Rule 504, relative to
the proposed limits of $75 million, $5 million, and $10 million,
respectively? For example, should we instead consider adjusting those
limits for inflation? What would be the economic effects of such a
change on issuers, investors, and other market participants?
    110. Should we consider the alternative of also amending the
Regulation A Tier 1 offering limits? If so, what would be the economic
effects of such a change on issuers, investors, and other market
participants?
    111. Would the offering limits as proposed to be revised introduce
redundancies (for instance, between Rule 504 and Regulation A Tier 1)?
If so, how should we address those redundancies? For example, should we
eliminate any of the existing exemptions to promote greater
harmonization? What would be the economic effects of such changes on
issuers, investors, and other market participants?

    112. What would be the costs and benefits of the alternative of
scaling up financial statement thresholds in Regulation Crowdfunding in
proportion to the proposed change in the offering limit (from $107,000,
$535,000, and $1.07 million to $500,000, $2.5 million, and $5 million,
respectively)?
    113. What would be the costs and benefits of the alternative of
waiving certain disclosure requirements (e.g., review and/or audit of
financial statements, progress updates, and periodic reports) for
issuers in the smallest Regulation Crowdfunding offerings (e.g., up to
$1 million)?
b. Investment Limits Under Regulation Crowdfunding
    We are proposing to increase Regulation Crowdfunding investment
limits.\416\ The amended limits would be based on the greater of,
rather than the lower of, an investor's annual income or net worth and
would only apply to non-accredited investors.
---------------------------------------------------------------------------

    \416\ See supra Section II.E.3.
---------------------------------------------------------------------------

Benefits
    The proposed amendments to Regulation Crowdfunding investment
limits would increase the amounts that can be invested by a given
investor, potentially resulting in greater capital formation or lower
aggregate costs of soliciting investors and investor relations. The
proposed amendments also would allow some investors, particularly non-
accredited investors with a significant disparity between income and
net worth and accredited investors, to invest a larger amount in
crowdfunding securities. Relaxing such investment restrictions might
enable some of those investors to reach more efficient investment
allocations in their portfolios as well as realize enhanced upside from
investing in successful early stage companies. Given the investment
minimums established by the issuer for each offering, some investors
might be able to invest in a larger number of crowdfunding issuers,
resulting in greater diversification within the crowdfunding category
of their portfolio (but not necessarily within the portfolio overall)
under the proposed amendments to the investment limits.
    Accredited investors in particular are expected to possess the
capability to evaluate larger crowdfunding investments and the ability
to bear resulting financial risk. Thus, allowing such investors to
invest a larger amount in crowdfunding offerings, if desired, might
enable them to allocate their capital more efficiently. Allowing
accredited investors to invest in crowdfunding issuers without a
limitation also might create stronger incentives to perform due
diligence and screening before a crowdfunding investment as well as to
continue to monitor the issuer's activities after investing, relative
to investors that only commit a nominal amount of capital. Under the
baseline, accredited investors are not subject to investment
limitations in offerings under Regulation A and Regulation D offerings
or in private placements. It is therefore possible that some accredited
investors would simply reallocate capital between holdings of
securities issued under other exemptions, including, in some cases,
securities of the same issuer issued under other exemptions (for
instance, in cases of side-by-side Regulation Crowdfunding/Rule 506(c)
offerings). It is also possible that accredited investors investing
large amounts might continue to prefer private placements, even if
Regulation Crowdfunding investment limits are amended, because private
placements allow accredited investors greater bargaining power to
negotiate more favorable terms with issuers. In addition, private
placements result in fewer information spillovers than Regulation
Crowdfunding offerings (e.g., depending on the platform, small
investors may be able to observe large investments, and thus free-ride
on large investors' screening and due diligence efforts).
    We lack the data to assess how many investors may be affected by
the proposed amendments to Regulation Crowdfunding investment limits,
in part because investor information generally is not available and is
not required to be disclosed in the course of an offering or upon
completion of an offering. Based on a subset of data made available by
one crowdfunding intermediary,\417\ among non-accredited investors with
available information on annual income and net worth, revising the
investment limits as proposed could 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 would no longer be subject to
investment limits under the proposed amendments. The economic effects
of the proposed amendments would be mitigated to the extent that
investors might invest amounts below the investment limits.\418\ 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 proposed
amendments if new investors are drawn to Regulation Crowdfunding.
---------------------------------------------------------------------------

    \417\ 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.
    \418\ 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 look-back 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.'').
---------------------------------------------------------------------------

Costs
    The proposed amendments to Regulation Crowdfunding investment
limits may increase the magnitude of investor losses if some investors
inefficiently increase portfolio allocations to the crowdfunding
category resulting in under-diversification. In particular, relaxing
investment limits might enable some less sophisticated investors to
make larger investments in crowdfunding securities based on an
incomplete assessment of information about those securities, with the
resulting potential for increased investor losses. The resulting
increased risk of investor losses might be relatively more costly for
investors with a decreased ability to bear risk due to their more
limited income or net worth. However, other investor protection
provisions of Regulation Crowdfunding, such as issuer disclosure
requirements and investor education and other intermediary
requirements, might partly mitigate these risks to investors.

Further, such potential costs of the proposed amendments should be
weighed against the baseline, which includes provisions generally
allowing non-accredited investors to invest unlimited amounts in listed
and unlisted registered securities and in Regulation A Tier 1
securities,\419\ as well as up to ten percent of the higher of income
or net worth in each offering of Regulation A Tier 2 securities, which
also may result in considerable risk to investor portfolios.
---------------------------------------------------------------------------

    \419\ 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.
---------------------------------------------------------------------------

    The proposed amendments removing investment limits for accredited
investors in Regulation Crowdfunding offerings are not expected to
result in significant costs to investors 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 and in private placements, they may simply reallocate
capital between holdings of securities issued under other exemptions.
It is also possible that accredited investors investing large amounts
might continue to prefer private placements, as discussed above.
Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments relaxing Regulation Crowdfunding investment
limits might incrementally promote capital formation through Regulation
Crowdfunding, particularly for issuers that might be attractive to
accredited investors or non-accredited investors who have a greater
disparity between income and net worth (e.g., retired investors with
high net worth relative to income or young investors with high income
relative to savings). The net impacts of the proposed amendments on
aggregate capital formation might be limited to the extent that some of
the issuers and investors, and some of the financing raised, could be
reallocated from other offering methods that either do not have
investment limits (e.g., some of the accredited investors in Regulation
Crowdfunding offerings under the proposed amendments might be switching
from Rule 506 or Regulation A offerings) or that have less stringent
investment limits (e.g., some of the non-accredited investors in
Regulation Crowdfunding offerings under the proposed amendments might
be switching from Regulation A offerings). On the one hand, raising
investment limits might allow some investors, particularly accredited
investors and more sophisticated non-accredited investors, that were
previously constrained by existing investment limits to attain a more
efficient portfolio allocation. On the other hand, for some less
sophisticated investors, relaxing investment limits might enable an
inefficiently high exposure to crowdfunding investments resulting in
overall under-diversification in their portfolios.
    If the proposed amendments increase the participation of accredited
investors in Regulation Crowdfunding offerings, the average intensity
of monitoring and screening of issuers by investors might increase as a
result, with potential positive spillovers for small investors that
lack the expertise and incentives to engage in comparable monitoring
and screening. This might lead to greater alignment of valuations in
Regulation Crowdfunding offerings with underlying fundamental values
and overall greater efficiency of capital allocation in this market.
    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
might affect competition among issuers for investor capital.
Reasonable Alternatives
    We are proposing to revise Regulation Crowdfunding investment
limits for non-accredited investors (to be based on the greater of,
rather than the lesser of, an investor's net worth or annual income)
and to rescind the investment limits for accredited investors, similar
to Tier 2 of Regulation A. As an alternative, we could make other
changes to Regulation Crowdfunding investment limits to increase the
utility of the exemption to issuers and to expand access of non-
accredited investors to startup investment opportunities. For example,
one alternative would be to align the Regulation Crowdfunding
investment limits fully with those of Regulation A Tier 2 (i.e., to
define the limit per offering as 10 percent of the greater of net worth
or annual income instead of the two-tier 5 percent/10 percent limit for
all Regulation Crowdfunding offerings an investor invests during a
given twelve-month period). Compared to the proposed amendments, this
alternative would expand investment limits, particularly for non-
accredited investors with lower income and net worth and for investors
that participate in multiple Regulation Crowdfunding offerings, which
might potentially increase capital formation benefits relative to the
proposed amendments, as well as expand non-accredited investor access
to startup investment opportunities. However, this alternative also
might result in increased magnitude of investor losses per investor and
an inefficient decrease in diversification for some non-accredited
investors, compared to the proposal.
    As another alternative, we could increase or lower 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 proposed 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 a low income and net
worth, compared to the proposal.
Request for Comment
    114. What would be the economic effects of the proposed changes to
the Regulation Crowdfunding investment limits? Would the proposed
changes to remove the limits on accredited investors benefit issuers
and investors? Would the proposed changes to use the greater of, rather
than the lesser of, standard with respect to a non-accredited
investor's net worth or annual income benefit issuers and investors?
Are the proposed changes likely to promote capital formation? Would the
proposed changes impose costs on issuers, investors, and other market
participants?
    115. What would be the economic effects of the alternative
amendments to Regulation Crowdfunding investment limits, such as
adjusting the investment limit thresholds in proportion to the
adjustment in the offering limit; using different (lower or higher)
numerical thresholds for non-accredited investor investment limits; or
aligning non-accredited investor investment limits with those in
Regulation A Tier 2? Would such alternatives benefit issuers,
investors, and other market participants? Would such alternatives
impose costs on issuers, investors, and other market participants? What
alternative investment limit amendments should we consider, and what
would be the economic effects of those alternatives?

6. Eligibility Requirements in Regulation Crowdfunding and Regulation A
a. Eligibility of Crowdfunding Vehicles Under Regulation Crowdfunding
    The Commission is proposing a new rule under the Investment Company
Act that would allow crowdfunding issuers to raise capital through a
crowdfunding vehicle. Such crowdfunding vehicles would 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 would
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.
Benefits
    The proposed rule would benefit issuers by enabling them to
maintain a simplified capitalization table after a crowdfunding
offering (versus having an unwieldy number of shareholders), which can
make issuers more attractive to future VC and angel investors, and by
reducing the administrative complexities associated with a large and
diffuse shareholder base. Several commenters have indicated that these
factors may have contributed to the relatively modest use of the
Regulation Crowdfunding exemption since its adoption.\420\ A
crowdfunding vehicle may constitute a single record holder for purposes
of Section 12(g), rather than treating each of the crowdfunding
vehicle's investors as record holders as would be the case if they had
invested in the crowdfunding issuer directly. An issuer's use of a
crowdfunding vehicle therefore could allow crowdfunding issuers to
raise capital in certain circumstances without being required to
register under Section 12(g).\421\
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    \420\ See 2017 Treasury Report; 2017 Forum Report; Iownit
Letter; Rep. McHenry Letter; Wefunder Letter; AOIP Letter; MainVest
Letter; and J. Schocken Letter. See also Rep. McHenry Letter (with
respect to later financing rounds). The SPV structure has been
successfully adopted as an option in crowdfunding offerings in other
countries. See, e.g., Robert Wardrop & Tania Ziegler, A Case of
Regulatory Evolution--A Review of the UK Financial Conduct
Authority's Approach to Crowdfunding, CESifo DICE Rep., June 2016,
at 23 (referencing the use of SPVs in real-estate crowdfunding in
the UK). Today, SPVs are allowed to participate in Rule 506
offerings without limitation.
    \421\ However, securities issued pursuant to Regulation
Crowdfunding are conditionally exempted from the record holder count
under Section 12(g) if the following conditions are met: The issuer
(i) is current in its ongoing annual reports required pursuant to
Regulation Crowdfunding; (ii) has total assets as of the end of its
last fiscal year of $25 million or less; and (iii) has engaged the
services of a transfer agent registered with the Commission. Thus,
the concern about exceeding the Section 12(g) thresholds would be
most pronounced for Regulation Crowdfunding issuers whose assets,
including funds raised in the offering, might exceed $25 million.
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    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 their
capitalization table. By alleviating these concerns, the proposed rule
might 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 proposed
rule might 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 would be subject to certain conditions designed to ensure that
investors attain 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 permitting such an offering structure. The
crowdfunding vehicle and the crowdfunding issuer also would be co-
issuers in the offering, with the resulting joint liability for offers
and sales.
    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 anti-fraud provisions of the federal and state securities laws, are
expected to provide significant investor protections for crowdfunding
vehicle investors under the proposed rule.
Costs
    The use of crowdfunding vehicles could result in additional
offering costs. The costs of forming and operating the crowdfunding
vehicle would be incurred by the crowdfunding issuer, which could
decrease the overall economic benefits of the offering for all
shareholders and for investors in the crowdfunding vehicle. However, to
the extent that the crowdfunding vehicle could yield benefits for the
crowdfunding issuer, including expanded potential for future funding
rounds due to reduced capitalization table concerns and greater
efficiency of administration of a large and diffuse investor base,
these economic benefits of a crowdfunding vehicle could 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
creation and administration of the crowdfunding vehicle, and the number
of small investors participating in the crowdfunding offering. Because
the use of the crowdfunding vehicle structure would be voluntary, we
expect issuers would use a crowdfunding vehicle only where the issuer
determined that the benefits justify the costs.
    If the crowdfunding vehicle is administered by an external entity
on behalf of the issuer, the associated fees might depend on other
business between the external administrator and the issuer. On the one
hand, administration fees might be reduced in instances where an issuer
obtains a bundle of other services related to the offering from the
external administrator or where an administrator seeks future business
of the issuer related to other offerings. On the other hand,
administration fees might be increased to compensate for discounted
fees for other services related to this or other offerings. Several
factors are expected to mitigate concerns about administration fees.
Competition among external service providers might put downward
pressure on such fees. The requirement that crowdfunding vehicle costs
be incurred by the crowdfunding issuer rather than the crowdfunding
vehicle ensures a degree of alignment of interests of crowdfunding
vehicle investors and the crowdfunding issuer with respect to
crowdfunding vehicle costs. The highly limited scope of permissible
activities of the crowdfunding vehicle, as proposed, would further
limit potential discretion related to fees.
    As discussed above, the proposed conditions for the use of
crowdfunding vehicles are expected to minimize agency conflicts
incremental to a

crowdfunding vehicle.\422\ The crowdfunding vehicle structure is not
expected to significantly affect information processing costs for
investors, compared to a direct crowdfunding offering, because of the
transparency and single-purpose nature of the crowdfunding vehicle, as
well as the provisions designed to ensure that crowdfunding vehicle
investors receive the same disclosures under Regulation Crowdfunding,
as if they had invested directly in the crowdfunding issuer.
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    \422\ Small investors in a direct crowdfunding offering might
face agency conflicts today. However, we do not expect the proposed
amendments would result in significant additional agency conflicts
for investors in crowdfunding vehicle offerings.
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Effects on Efficiency, Competition, and Capital Formation
    The proposed rule is expected to enhance capital formation by
making Regulation Crowdfunding more attractive to issuers. If the
incremental financing is largely due to issuers switching from other
securities offering methods to Regulation Crowdfunding, the net impact
of the proposed amendments on the aggregate amount of capital formation
might be minimal. However, the proposed amendments might affect the
cost of capital. By giving crowdfunding issuers the flexibility to
conduct a crowdfunding offering via a crowdfunding vehicle, the
proposed rule might make crowdfunding offerings to individual investors
more attractive to a broader range of issuers, enabling such issuers to
diversify their financing strategy at an early stage of their operation
and in some cases potentially obtain a lower cost of capital or greater
amounts of capital than they would otherwise. The amendments might be
especially beneficial for crowdfunding businesses with high growth
potential by helping them attract institutional investors or other
large investors in the future, thus enabling a potentially more
efficient financing and growth strategy.
    Further, the ability to use a crowdfunding vehicle might expand the
investment opportunities available to non-accredited investors and, as
a result, potentially affect the efficiency of their capital
allocation. If the proposed amendments draw additional issuers that
would have otherwise considered only private placements to Regulation
Crowdfunding, broader access to those investment opportunities could
enable non-accredited investors to allocate their capital more
efficiently.
    The proposed amendments might promote competition. By making
Regulation Crowdfunding attractive to a broader subset of small
issuers, the proposed amendments are expected to incrementally broaden
access to funding for small and early stage issuers, many of which have
not participated in other securities offerings and are otherwise highly
financially constrained. Expanding access to capital for small and
early stage issuers might, on the margin, encourage new entry and
promote competition between small issuers and more established industry
competitors. The aggregate effects of the proposed amendments on
competition among prospective issuers for investor capital are
difficult to predict and would depend on the relative effects of the
proposed amendments on issuer and investor willingness to participate
in Regulation Crowdfunding offerings.
Reasonable Alternatives
    As an alternative, we could require that a registered investment
adviser manage the crowdfunding vehicle, as suggested by some
commenters and the 2017 Treasury Report.\423\ Under this alternative,
investors in crowdfunding vehicles could benefit because an investment
adviser is a fiduciary subject to the requirements of the Investment
Advisers Act and regulations thereunder. The proposed rule's
conditions, however, are designed to limit the crowdfunding vehicle's
activities to that of acting as a conduit to hold the securities of the
crowdfunding issuer without the ability for independent investment
decisions to be made on behalf of the crowdfunding vehicle. Any
incremental benefits of this alternative to investors therefore could
be limited. In addition, given the relatively small amount of capital
that can be raised through Regulation Crowdfunding, it may not be
economically feasible to require a registered investment adviser to
manage the crowdfunding vehicle.
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    \423\ See Iownit Letter; NASAA Letter; and CrowdCheck Letter.
See also 2017 Treasury Report.
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    As another alternative, we could allow crowdfunding vehicles but
remove some of the requirements in the proposed rule, such as the
restrictions on the permissible activities and other provisions
intended to provide the investor with the same economic exposure,
rights, and disclosures as they would have if they invested in a direct
Regulation Crowdfunding offering or the requirement that crowdfunding
vehicle costs be borne by the crowdfunding issuer. Removing these
restrictions would increase the flexibility for issuers in structuring
their crowdfunding offering and potentially make Regulation
Crowdfunding more attractive as a capital raising option. However, it
also could lead to agency conflicts and weaken investor protections for
crowdfunding vehicle investors, compared to the proposed rule's
conditions. Some of these additional costs to investors might be partly
mitigated by the substantive and disclosure requirements of Regulation
Crowdfunding, however, and might be compensated in the form of higher
returns.
    Similarly, we could modify some of conditions in the proposed rule
so that an investor in a crowdfunding vehicle would still achieve the
same economic exposure, and receive the same disclosures, as if he or
she had invested in the crowdfunding issuer directly, while providing
greater flexibility for crowdfunding vehicles and their investors to
determine other aspects of the crowdfunding vehicle's operations. For
example, rather than requiring a crowdfunding vehicle to vote and
participate in tender or exchange offers or similar transactions only
in accordance with the instructions it receives from its investors, we
could allow a crowdfunding vehicle and its investors to determine these
matters. A crowdfunding vehicle, for example, could disclose to its
investors at the time of its initial offering that the vehicle will
cast all of its votes in accordance with the instructions of a majority
of its security holders. Another example would be to permit a
crowdfunding vehicle and its investors to determine how the
crowdfunding vehicle will exercise any rights under state or federal
law, rather than providing each investor the ability to assert those
rights as proposed.
    These and similar modifications would provide additional
flexibility for crowdfunding vehicles and the crowdfunding issuers
using the vehicles to raise capital. If this greater flexibility would
result in additional offerings under Regulation Crowdfunding, this
could provide capital formation benefits to issuers and benefit
investors by providing additional investment options. These and similar
modifications could, however, result in offering terms that may be less
advantageous for investors relative to the proposal. The net benefits
and costs to investors would therefore depend on the extent to which a
more flexible approach would result in additional Regulation
Crowdfunding offerings relative to the proposed rule and the terms of
those offerings.
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