issuers to continue their offerings and provide investors with
disclosure and an option to cancel their investment commitments after a
disqualifying event first arises would provide sufficient investor
protections, as it would treat issuers with older disqualifying events
differently from issuers with more recent disqualifying events,
prohibiting the former from engaging in a Regulation A or Regulation
Crowdfunding offering but permitting the latter to engage in the
offering with only updated disclosure provided.\581\
---------------------------------------------------------------------------

    \581\ See CrowdCheck Letter.
---------------------------------------------------------------------------

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
    Pursuant to the Congressional Review Act,\582\ the Office of
Information and Regulatory Affairs has designated these rules a ``major
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \582\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(b) of the Securities Act,\583\ Section 3(f)
of the Exchange Act,\584\ and Section 2(c) of the Investment Company
Act \585\ require us, when engaging in rulemaking that requires us to
consider or determine whether an action is necessary or appropriate in
(or, with respect to the

Investment Company Act, consistent with) the public interest, to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation. In
addition, Section 23(a)(2) of the Exchange Act requires the Commission
to consider the effects on competition of any rules the Commission
adopts under the Exchange Act and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\586\
---------------------------------------------------------------------------

    \583\ 15 U.S.C. 77b(b).
    \584\ 15 U.S.C. 78c(f).
    \585\ 15 U.S.C. 80a-2(c).
    \586\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We have considered the economic effects of the final amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be
quantified.\587\ Consequently, while we have, wherever possible,
attempted to quantify the expected economic effects, much of the
discussion remains qualitative in nature.
---------------------------------------------------------------------------

    \587\ For example, as discussed in the Proposing Release and
noted by commenters (see, e.g., Better Markets Letter; CFA Letter;
Letter from Healthy Markets Association dated March 16, 2020 (``HMA
Letter''); and NASAA Letter), scaled disclosures and a lack of
secondary trading complicate the gathering of performance data on
all exempt offerings. Where available, such data is not necessarily
directly comparable to public market returns. See Proposing Release,
at note 372. The analysis of available evidence on the performance
of exempt offerings can be found in Report to Congress on Regulation
A/Regulation D Performance. See also CCA Letter (discussing evidence
on the performance of crowdfunding offerings) and Letter on the
Concept Release from AngelList Venture dated September 14, 2020
(``AngelList Letter'') (discussing evidence on the performance of
investments through their platform).
---------------------------------------------------------------------------

A. Broad Economic Considerations

    The final amendments will simplify, harmonize, and improve certain
aspects of the Commission's exempt offering framework, including
Regulation D, Regulation A, Regulation Crowdfunding, and other related
rules. By providing a more streamlined and consistent exempt offering
framework, these amendments are expected to incrementally facilitate
capital formation through exempt offerings, expanding issuers' ability
to pursue positive net present value (``NPV'') investment and growth
opportunities. For example, the amendments to Regulation A and
Regulation Crowdfunding that raise offering limits and incrementally
facilitate compliance are expected to draw a larger and more
diversified set of issuers, including issuers with high growth
potential and associated high financing needs that might otherwise
forgo these exemptions due to the costs of compliance combined with the
existing, lower limits.\588\ The final amendments may also address
current uncertainties in the ability to use exempt offerings prior to,
or concurrent with, registered offerings, which could ease the path to
a registered offering for some private issuers.
---------------------------------------------------------------------------

    \588\ The amended offering limits also may attract financial
intermediaries that might presently opt out of this market segment
because of fixed costs of due diligence and marketing or a small
issuer pool.
---------------------------------------------------------------------------

    We recognize that many of the issuers that rely on the amended
exemptions likely would have relied on an exemption from registration
without the final amendments.\589\ For example, issuers using amended
Regulation A, Regulation Crowdfunding, or Rule 504 might have relied on
these exemptions in their current form, or, alternatively, relied on
Rule 506 of Regulation D, which does not have an offering limit and
does not require the filing of an offering statement or ongoing
disclosures. The substitution between different offering methods is
likely to limit the economic effects of the amendments. Nevertheless,
the increased flexibility afforded by the amendments may enable some
issuers to optimize their financing strategy and reduce their financing
costs, helping them fund a broader range of investment projects and
growth opportunities. Financing cost savings and enhanced ability to
fund positive-NPV investment opportunities would in turn benefit
shareholders through greater shareholder value.
---------------------------------------------------------------------------

    \589\ Aggregate conditions, such as a prolonged period of low
interest rates, may also contribute to sustained reliance on exempt
offerings. See, e.g., Elisabeth de Fontenay, The Deregulation of
Private Capital and the Decline in the Public Company. 68 Hastings
L. J. 445 (2017), at footnote 7; McKinsey, Private Markets Come of
Age: McKinsey Global Private Markets Review (2019), https://
www.mckinsey.com/~/media/mckinsey/industries/
private%20equity%20and%20principal%20investors/our%20insights/
private%20markets%20come%20of%20age/private-markets-come-of-age-
mckinsey-global-private-markets-review-2019-vf.ashx (noting the role
of low interest rates in investor pursuit of high-yield investments,
including in private capital markets).
---------------------------------------------------------------------------

    The amendments may also provide incrementally greater choice of
investment opportunities for investors. Importantly, the investor
protections applicable to these exemptions will continue to provide
significant safeguards against the risk of losses for non-accredited
investors. The amendments we are adopting could expand non-accredited
investor access to investment opportunities, such as through the
following:
     Amendments to Regulation A, Regulation Crowdfunding, and
Rule 504, which do not limit the number of non-accredited investors,
may attract additional issuers or larger offerings.
     Amendments to Regulation Crowdfunding will increase
investment limits for the subset of non-accredited investors whose
annual income diverges from net worth, which may allow such investors
to participate in more crowdfunding offerings.
     Amendments to Rule 506(b) may on the margin lead to
additional offerings that permit non-accredited investors; however, the
35-person cap on the number of non-accredited purchasers in any Rule
506(b) offering in a 90-day period and the historically low proportion
of Rule 506(b) offerings with non-accredited investors are expected to
significantly limit this effect.
    Greater flexibility under the amendments may enable non-accredited
investors to optimize their capital allocation through incrementally
greater access to exempt offering investment opportunities. The
magnitude of the effect would depend on several factors, including:
     Whether issuers switch between offering methods that allow
non-accredited investors, in which case the set of investment
opportunities for non-accredited investors may change very little.
     Whether issuers prefer accredited investors due to their
industry connections and expertise or due to the potential costs of
having multiple non-accredited investors (e.g., capitalization table
concerns in light of subsequent financing plans \590\ or Section 12(g)
registration thresholds, costs of investor relations, or risks of
proprietary information disclosure).
---------------------------------------------------------------------------

    \590\ See, e.g., supra Section II.F.
---------------------------------------------------------------------------

     Whether non-accredited investors choose not to invest in
exempt offerings (e.g., due to illiquidity; transaction, search, due
diligence, and agency costs; or investment minimums).
     The efficiency of portfolio allocation of non-accredited
investors. Such efficiency would depend on such investors' skill at
obtaining and analyzing information about issuers that provide less
disclosure compared to registered offerings.\591\ Non-accredited
investors may in some cases benefit from monitoring and screening by
accredited investors, although the effect may be limited if the
securities held by accredited investors offer different terms or
payoffs.\592\
---------------------------------------------------------------------------

    \591\ See also Proposing Release, at note 375.
    \592\ See also Proposing Release, at note 376. Differences in
payoffs may be compensation for value added by the expertise,
advice, governance, and network connections contributed by large
investors.

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

    Today non-accredited investors may invest in a wide range of
financial assets with high risk or due diligence costs, both as part of
the securities market (e.g., leveraged investments in individual listed
securities; short positions; holdings of registered securities of
foreign, small-cap, and over-the-counter (OTC) issuers; and holdings of
registered nontraded securities, including REITs and structured notes)
and outside the securities market (e.g., futures, foreign exchange,
real estate, individual small businesses, peer-to-peer lending, and
financial transactions that entail high risk or leverage). Thus, the
incremental effects on non-accredited investors of potential additional
investment in exempt offerings under the amendments should be assessed
relative to the existing market conditions.
    Some commenters expressed concerns that facilitating capital
raising through exempt offerings may incrementally contribute to the
ongoing decline in U.S. registered offerings, limiting the overall set
of investment opportunities and information available to non-accredited
investors.\593\ While the aggregate trend of the decline in U.S.
registered offerings, which dates back to the aftermath of the 2000
stock market crash, is an important element of the baseline, we expect
the amendments being adopted in this release to have at most a marginal
impact on this trend for the following reasons:
---------------------------------------------------------------------------

    \593\ See, e.g., Better Markets Letter; Letter from Center for
American Progress, et al. dated May 26, 2020 (``CAP, et al.
Letter''); CFA Letter; and HMA Letter.
---------------------------------------------------------------------------

     Amendments to individual exemptions that have the greatest
potential to result in the growth in capital raising pursuant to those
exemptions relative to the baseline affect the market segments that are
relatively small in absolute terms today (Regulation A, Regulation
Crowdfunding, and Rule 504). While individual issuers may realize
significant gains in the form of greater availability or decreased cost
of capital, the aggregate effects of the amendments on the market as a
whole are likely to be modest in absolute terms. Moreover, issuers that
rely on Regulation A, Regulation Crowdfunding, and Rule 504 tend to be
at a much earlier stage of development than a traditional IPO
issuer.\594\ While expanded offering limits may attract some additional
issuers that are larger or more mature, the typical issuer relying on
these exemptions--especially Regulation Crowdfunding--is unlikely to be
able to conduct a traditional IPO at the issuer's present stage of
development. This should mitigate concerns about increased substitution
of traditional IPOs for Regulation Crowdfunding or Regulation A under
the amendments.
---------------------------------------------------------------------------

    \594\ See infra note 596.
---------------------------------------------------------------------------

     While changes to the disclosure requirements for sales to
non-accredited investors under Rule 506(b) will reduce the cost to
issuers of sales to such investors and may draw additional issuers to
allow non-accredited investors in Rule 506(b) offerings, Rule 506(b)
offerings with non-accredited investors currently comprise a relatively
small portion of the market. Almost all such offerings report only
having accredited investors.\595\ Exempt offering integration
amendments are most likely to affect issuers that rely on multiple
exemptions, particularly ones involving non-accredited investors. We
believe that the added flexibility and reduced cost of capital raising
may be highly beneficial to the affected issuers--particularly for
smaller issuers and issuers that lack an established network of angel
investors or venture backing and thus rely on a combination of capital
raising strategies to finance their growth. Nevertheless, for the
majority of non-reporting issuers that raise financing from accredited
investors without general solicitation (see Table 6 below), the
integration amendments will likely have limited effects.
---------------------------------------------------------------------------

    \595\ See supra note 127.
---------------------------------------------------------------------------

     Further, the integration amendments we are adopting
include provisions intended to facilitate exempt and registered
offerings occurring close in time and, as such, may make it easier for
some issuers to attempt registered offerings. For some issuers looking
to do bridge financing right before an IPO, the additional certainty
provided by the new integration rule may allow them to accelerate the
process of initiating the IPO (or at least provide additional certainty
that the prior offering will not be integrated with the IPO).
    To the extent that the amendments contribute to some substitution
between registered and exempt offerings, it is important to consider
any such substitution in the context of other economic channels through
which the amendments affect capital allocation and the availability of
investable opportunities:
     We do not expect the amendments to deter a significant
proportion of the issuers that are large and mature enough to be on the
cusp of going public from pursuing a public offering. Such issuers
likely already have a developed network of angel investors and/or
backing from venture capitalists on which they can rely to raise the
necessary amount of financing today. Thus, such issuers' decision to go
public is likely driven more by the benefits of being a reporting
company (relative to the cost of a registered offering and being a
reporting company).\596\
---------------------------------------------------------------------------

    \596\ One commenter stated that ``[w]hile we do not disagree
with the statement that provisions of the Release would not be
expected to `deter a significant portion' of issuers from pursing a
public offering, we believe . . . that the provisions of the Release
would be expected to contribute to a lower (rather than higher)
number of SEC-registered companies.'' See CII Letter. However, the
data on IPO issuer age and size over time appears to support our
view. See, e.g., Jay R. Ritter, Initial Public Offerings: Median Age
of IPOs Through 2019, (Jan. 14, 2020), available at https://site.warrington.ufl.edu/ritter/files/2020/02/IPOs2019Age.pdf (citing
median IPO issuer age during 2001 through 2019 as ten years) and Jay
R. Ritter, Initial Public Offerings: Sales Statistics Through 2019,
(Mar. 10, 2020), available at https://site.warrington.ufl.edu/ritter/files/IPOs2019_Sales.pdf (citing in Table 12 median sales of
IPO issuers, expressed in 2005 dollars, as approximately $47 million
in 2019). By comparison, the age and size of Regulation A and
Regulation Crowdfunding issuers is much smaller. The median
Regulation Crowdfunding issuer had no revenues and had an age of
approximately two years. See Table 9 below. The median Regulation A
issuer had no revenues and had an age of approximately three years.
See 2020 Regulation A Review, at Table 5. In Regulation D offerings,
the median issuer age is two years; the median non-fund issuer size
(revenues), where reported, is $1 million-$5 million; to the extent
that the offering proceeds can serve as a proxy for issuer size and
financing needs in offerings without an offering limit, the median
Rule 506(b) reported proceeds were $1.5 million. See Table 7 below.
Thus, we continue to believe that the amendments to offering limits
and integration provisions will not result in significant
substitution between new IPO activity and additional exempt
offerings.
---------------------------------------------------------------------------

     Additional flexibility in access to capital can help
existing issuers meet their financing needs at a lower cost and
allocate capital to growth opportunities more efficiently, with the
resulting benefits for economic growth, competition, and capital
markets as a whole.
     The amendments might have the most significant effects on
smaller growth issuers that presently lack sufficient access to
financing that they require to develop their business model and gain
scale. Such issuers may face significant financing constraints and lack
an established network of angel investors or venture capital backing
and may be too early in their lifecycle to be a candidate for a public
offering. Thus, if the flexibility added by the amendments allows some
of these small issuers to raise enough external financing to develop
their business model and scale up to a point where they may become
viable candidates for a public offering, the amendments might diversify
the pool of prospective issuers that are able to conduct a registered

offering, which could result in a higher number of IPOs in the
future.\597\
---------------------------------------------------------------------------

    \597\ Private capital can provide a critical lifeline to startup
and other small private firms to proceed from a development stage to
implementing their business model, generating revenue, and growing
in size. Larger firms, firms past the development stage, and firms
that have venture capital backing (although private capital may also
take other, non-venture capital forms) are more likely to achieve a
successful IPO exit (as opposed to, for instance, being acquired by
a larger competitor). See, e.g., Annette B. Poulsen & Mike
Stegemoller, Moving from Private to Public Ownership: Selling out to
Public Firms versus Initial Public Offerings, 37 Fin. Mgmt. 81
(2008), at Table 7; James C. Brau, Bill Francis & Ninon Kohers, The
Choice of IPO versus Takeover: Empirical Evidence, 76 J. Bus. 583
(2003), at 583; Onur Bayar & Thomas Chemmanur, What Drives the
Valuation Premium in IPOs versus Acquisitions? An Empirical
Analysis, 18 J. Corp. Fin. 451 (2012), at Table 3. See also supra
note 596 (discussing the substantial size of a typical IPO issuer).
---------------------------------------------------------------------------

     Overall, expanded access to capital may draw new
businesses to capital markets, which might have otherwise found a
securities offering to be impractical or too costly. Without a
securities offering, some of these businesses might not have been able
to grow their operations (and in the process create value for their
owners).
    Some of the amendments affect the same offerings and issuers or
have mutually reinforcing or partly offsetting effects, which makes it
more difficult to draw conclusions about the net effects of the final
amendments package as a whole. For example, it is difficult to predict
how the amendments that expand, simplify, and increase the uniformity
of integration safe harbors will affect issuer reliance on individual
exemptions. Nevertheless, we expect that these integration amendments
will overall facilitate capital formation by harmonizing requirements,
reducing legal costs, and providing additional flexibility to issuers
seeking an exemption from registration or transitioning to a registered
offering. The amendments to offering limits for individual exemptions
may lead to increased substitution between exemptions. On the other
hand, Regulation Crowdfunding amendments relaxing investment limits and
raising offering limits may result in mutually reinforcing benefits for
capital formation.
    Finally, we recognize that the amendments to exemptions that are
relatively infrequently used today compared to Rule 506(b) of
Regulation D (such as Regulation Crowdfunding, Regulation A, Rule 504,
and Rule 506(c)) are likely to have limited aggregate economic effects
on issuers and on investors in absolute terms, even if the percentage
changes in the offering activity conducted under those exemptions are
significant.
    Recently, the Commission amended the accredited investor
definition.\598\ Those amendments may affect the economic effects of
the amendments considered here. In particular, some of the economic
effects of the amendments discussed here that facilitate exempt
offerings to accredited investors (e.g., expanded integration safe
harbors, exemption of accredited investors from Regulation Crowdfunding
investment limits) will be amplified to the extent that issuers can
offer securities to an expanded pool of accredited investors. In turn,
some of the effects of the amendments discussed here that facilitate
exempt offerings to non-accredited investors (e.g., expanded offering
limits under Regulation A, Regulation Crowdfunding, and Rule 504,
testing-the-waters and crowdfunding vehicle provisions of amended
Regulation Crowdfunding, and amendments to non-accredited investor
disclosure requirements under Rule 506(b)) may be smaller to the extent
that issuers able to access an expanded accredited investor pool become
less reliant on exempt offerings to non-accredited investors.
---------------------------------------------------------------------------

    \598\ See Amending the ``Accredited Investor'' Definition, Rel.
No. 33-10824 (Aug. 26, 2020) [85 FR 63726 (Oct. 9, 2020)].
---------------------------------------------------------------------------

B. Baseline

    We examine the economic effects of the final amendments relative to
the baseline, which comprises the existing regulatory requirements
(described in detail in Section I above) and market practices related
to exempt offerings (described below).
    Generally, the parties affected by the amendments include current
and prospective issuers and investors in exempt offerings. To the
extent that the amendments affect how issuers choose between registered
and exempt offerings, the amendments also might affect issuers and
investors in the registered offering market. In cases where
intermediaries are involved in exempt offerings and either receive
transaction-based compensation or perform some of the offering-related
or compliance functions on behalf of issuers, intermediaries will also
be affected by the amendments. In particular, Regulation Crowdfunding
requires offerings to be conducted through an intermediary's online
platform. Thus, to the extent that the amendments affect Regulation
Crowdfunding offering activity, they are expected to have direct
effects on all crowdfunding intermediaries. In other instances, the
effects of the amendments on intermediaries might be more limited
(e.g., intermediaries might verify investor status for issuers under
Rule 506(c), be authorized by some issuers to test the waters with
investors prior to an offering, or be drawn to the Regulation A market
if they find that the increase in the offering limit makes underwriting
more cost-effective).
    Below we present data on the recent state of the market affected by
the amendments. In 2019, registered offerings accounted for $1.2
trillion (30.8 percent) of new capital, compared to approximately $2.7
trillion (69.2 percent) that we estimate was raised through exempt
offerings.\599\ Of the approximately $2.7 trillion estimated as raised
in exempt offerings in 2019, the following table shows the amounts that
we estimate were raised under each of the identified exemptions.\600\
---------------------------------------------------------------------------

    \599\ Unless otherwise indicated, information in this release on
Regulation D, Regulation A, and Regulation Crowdfunding offerings is
based on analyses by staff in the Commission's Division of Economic
Risk and Analysis of data collected from SEC filings.
    \600\ ``Other exempt offerings'' includes Section 4(a)(2),
Regulation S, and Rule 144A offerings. The data used to estimate the
amounts raised in 2019 for other exempt offerings includes: (1)
Offerings under Section 4(a)(2) of the Securities Act that were
collected from Thomson Financial's SDC Platinum, which uses
information from underwriters, issuer websites, and issuer
Commission filings to compile its Private Issues database; (2)
offerings under Regulation S that were collected from Thomson
Financial's SDC Platinum service; and (3) resale offerings under
Rule 144A that were collected from Thomson Financial SDC New Issues
database, Dealogic, the Mergent database, and the
Asset[hyphen]Backed Alert and Commercial Mortgage Alert
publications, to further estimate the exempt offerings under Section
4(a)(2) and Regulation S. We include amounts sold in Rule 144A
resale offerings because those securities are typically issued
initially in a transaction under Section 4(a)(2) or Regulation S but
generally are not included in the Section 4(a)(2) or Regulation S
data identified above. These numbers are accurate only to the extent
that these databases are able to collect such information and may
understate the actual amount of capital raised under these offerings
if issuers and underwriters do not make this data available. The
data on Rule 144A debt offerings from Mergent is available only
through the end of August 2019. We have extrapolated the data to
obtain a full calendar year.

    Table 5--Overview of Amounts Raised in the Exempt Market in 2019
------------------------------------------------------------------------
                                                        Amounts reported
                                                         or estimated as
                       Exemption                         raised in 2019
                                                            (billion)
------------------------------------------------------------------------
Rule 506(b) of Regulation D...........................            $1,492
Rule 506(c) of Regulation D...........................                66
Regulation A: Tier 1..................................             0.044
Regulation A: Tier 2..................................             0.998
Rule 504 of Regulation D..............................             0.228
Regulation Crowdfunding...............................             0.062
Other exempt offerings................................             1,167
------------------------------------------------------------------------

    The following table \601\ summarizes recent data on the Regulation
D market.
---------------------------------------------------------------------------

    \601\ This table includes offerings by pooled investment funds.
Information on Regulation D offerings, including offerings under
Rule 504 and Rule 506, is based on staff analysis of data from Form
D filings on EDGAR. The amount raised is based on the amounts
reported as ``Total amount sold'' in all Form D filings (new filings
and amendments) on EDGAR. Subsequent amendments to a new filing were
treated as incremental fundraising and recorded in the calendar year
in which the amendment was filed. It is likely that the reported
data on Regulation D offerings underestimates the actual amount
raised through these offerings. First, Rule 503 of Regulation D
requires issuers to file a Form D no later than 15 days after the
first sale of securities, but a failure to file the notice does not
invalidate the exemption. Accordingly, it is possible that some
issuers do not file Form D for offerings relying on Regulation D.
Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10 percent.

                                  Table 6--Offerings Under Regulation D in 2019
----------------------------------------------------------------------------------------------------------------
                                           Rule 504             Rule 506(b)                 Rule 506(c)
----------------------------------------------------------------------------------------------------------------
Number of New Offerings...........  476..................  24,636...............  2,269.
Amount Reported Raised............  $0.2 billion.........  $1,491.9 billion.....  $66.3 billion.
----------------------------------------------------------------------------------------------------------------

    As can be seen from Table 6, Rule 506(b) dominates the market for
exempt securities offerings. Amounts raised under Rule 506(b) also
exceeded the amounts raised in the registered market, estimated to be
$1.2 trillion in 2019.\602\
---------------------------------------------------------------------------

    \602\ See also Concept Release; and Scott Bauguess, Rachita
Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.: An
Analysis of the Market for Unregistered Securities Offerings, 2009-
2017 (U.S. Sec. and Exch. Comm'n, Division of Economic and Risk
Analysis White Paper, Aug. 1, 2018), available at https://www.sec.gov/dera/staff-papers/white-papers/dera_white_paper_regulation_d_082018.
---------------------------------------------------------------------------

    The table below presents summary statistics for Regulation D
offering and issuer characteristics over 2009-2019.

  Table 7--Summary of Regulation D Issuer and Offering Characteristics,
                             2009-2019 \603\
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of issuers..........................  173,697.
Number of Offerings........................  242,070.
Amounts Reported Sold......................  $13,576 billion.
Mean Amount Sold (if reported).............  $58 million.
Median Amount Sold (if reported)...........  $1.50 million.
Mean Offer Size (if reported)..............  $71 million.
Median Offer Size (if reported)............  $2.25 million.
Median Years Since Incorporation...........  2.
Median Issuer Size (if reported):
    Private Funds (Net Asset Value)........  $25 million-$50 million.
    Non-Fund Issuers (Revenue).............  $1 million-$5 million.
Used Intermediary..........................  20%.
Total Investors:
    As reported in initial Form D filings..  3.4 million.
    All filings, including amendments......  5.9 million.
Average Investors/Offering (if reported)...  10.
------------------------------------------------------------------------

    The table below \604\ summarizes amounts sought and reported raised
in offerings under Regulation Crowdfunding since its inception.\605\
---------------------------------------------------------------------------

    \603\ See also supra note 601. The number of issuers is based on
a unique Central Index Key (CIK) identifier. Number of offerings
represents all new offerings initiated during the period 2009
through 2019, as represented by a Form D filing, and offerings
initiated prior to 2009 but continuing into the period 2009 through
2019 (as represented by an amendment filed). Amounts Reported Sold
is calculated as described above and includes amounts sold reported
in initial Form D filings and incremental amounts sold reported in
amendment filings. Total number of investors, as reported in Form D
and Form D/A filings, is calculated similarly. Issuers are not
required to file a Form D at the close of offering. Not all
offerings report amounts raised sold in their initial Form D filing.
    \604\ See supra note 599. Issuers that have not raised the
target amount or not filed a report on Form C-U are not included in
the estimate of proceeds.
    \605\ For a discussion of the Regulation Crowdfunding market,
see also 2019 Regulation Crowdfunding Report.

     Table 8--Regulation Crowdfunding Offering Amounts and Reported Proceeds, May 16, 2016-December 31, 2019
----------------------------------------------------------------------------------------------------------------
                                                                                Aggregate
                                                      Number          Average         Median         (million)
----------------------------------------------------------------------------------------------------------------
Target amount sought in initiated offerings.....           2,003         $63,791         $25,000          $126.9
Maximum amount sought in initiated offerings....           2,003         599,835         535,000         1,174.2
Amounts reported as raised in completed                      795         213,678         106,900           169.9
 offerings......................................
----------------------------------------------------------------------------------------------------------------

    Given the offering limits, crowdfunding is used primarily by
relatively small issuers. The table below \606\ presents data on the
characteristics of issuers in crowdfunding offerings.
---------------------------------------------------------------------------

    \606\ See supra note 599. The estimates are based on data from
Form C or the latest amendment to it, excluding withdrawals. See
also 2019 Regulation Crowdfunding Report.

     Table 9--Characteristics of Issuers in Regulation Crowdfunding
                Offerings, May 16, 2016-December 31, 2019
------------------------------------------------------------------------
                                              Average         Median
------------------------------------------------------------------------
Age in years............................             2.9             1.8
Number of employees.....................             5.3             3.0
Total assets............................        $455,280         $29,982
Total revenues..........................        $325,481              $0
------------------------------------------------------------------------

    Based on information in new Form C filings, the median crowdfunding
offering was by an issuer that was incorporated approximately two years
prior to the offering and employed about three people. The median
issuer had total assets of approximately $30,000 and no revenues (just
over half of the offerings were by issuers with no revenues).
Approximately ten percent of offerings were by issuers that had
attained profitability in the most recent fiscal year prior to the
offering.
    The following table \607\ summarizes amounts sought and reported
raised in offerings under Regulation A since the effective date of the
2015 Regulation A amendments.
---------------------------------------------------------------------------

    \607\ The estimates include post-qualification amendments and
exclude abandoned or withdrawn offerings. See also 2020 Regulation A
Review.

   Table 10--Regulation A Offering Amounts and Reported Proceeds in $ Million, June 19, 2015-December 31, 2019
----------------------------------------------------------------------------------------------------------------
                                             Tiers 1 & 2                 Tier 1                   Tier 2
----------------------------------------------------------------------------------------------------------------
All Filed Offerings:
    Aggregate dollar amount sought...  $11,170.2 million......  $1,101.5 million.......  $10,068.6 million.
    Number of offerings..............  487....................  145....................  342.
    Average dollar amount sought.....  $22.9 million..........  $7.6 million...........  $29.4 million.
Offerings Qualified by Commission
 Staff:
    Aggregate dollar amount sought...  $9,094.8 million.......  $759.0 million.........  $8,335.8 million.
    Number of offerings..............  382....................  105....................  277.
    Average dollar amount sought.....  $23.8 million..........  $7.2 million...........  $30.1 million.
Capital Reported Raised:
    Aggregate dollar amount reported   $2,445.9 million.......  $230.4 million.........  $2,215.6 million.
     raised.
    Number of issuers reporting        183....................  39.....................  144.
     proceeds.
    Average dollar amount reported     $13.4 million..........  $5.9 million...........  $15.4 million.
     raised.
----------------------------------------------------------------------------------------------------------------

    As can be seen, Tier 2 accounted for the majority of Regulation A
offerings (70 percent of filed and 73 percent of qualified offerings),
amounts sought (90 percent of amounts sought in filed offerings and 9
percent of amounts sought in qualified offerings), and reported
proceeds (91 percent) during this period.
    Because reliance on integration safe harbors is not required to be
disclosed, we lack a way to reliably quantify the pool of issuers and
offerings that would be affected by the amended approach to
integration. Nevertheless, some indication of the scope of issuers
affected by integration provisions may come from indirect sources: In
2019, based on the analysis of Form D filings, we estimate that
approximately 1,256 issuers other than pooled investment funds filed
more than one Form D (excluding amendments) and an additional 258
issuers filed one new Form D and either had a registration statement
declared effective, had a Regulation A offering statement qualified, or
filed a new or amended Form C. Many private placements, however, rely
on Section 4(a)(2) rather than on the Regulation D safe harbor. We lack
data on Section 4(a)(2) offerings due to the absence of filing or
disclosure requirements associated with this statutory exemption. Also,
for issuers filing forms for multiple offerings, in most cases we
cannot reliably determine if, and when, proceeds were raised or the
offering closed, or whether the specific offerings were eventually
subject to integration or not. For instance, a closeout filing on Form
D is

not required, making it difficult to know when the offering closed or
how much was raised. Similarly, proceeds data for Regulation A and
Regulation Crowdfunding can be lagged or incomplete.
    Except where specified otherwise, the analysis is based on
available data through the most recently completed calendar year
(2019). Subsequent to the end of the period analyzed here, as of
September 2020, the U.S. market has experienced significant
macroeconomic and market dislocations related to the global effects of
COVID-19 and the related response.\608\ These factors are expected to
have a negative market-wide impact on the levels of offering activity
(including under Regulation A, Regulation D, and Regulation
Crowdfunding).\609\ Offering activity data through the second quarter
of 2020 is likely not reflective of the full-year effects of this shock
due to significant lags in the completion of offerings and reporting of
proceeds data: For the twelve months ending June 2020, approximately
$1.50 trillion in proceeds was reported under Regulation D (including
$0.2 billion under Rule 504, $1,430.8 billion under Rule 506(b), and
$68.6 billion under Rule 506(c)); $1.3 billion under Regulation A; and
$88 million under Regulation Crowdfunding (compared to approximately
$1.56 trillion in proceeds under Regulation D; $1 billion under
Regulation A and approximately $62 million under Regulation
Crowdfunding during calendar year 2019).\610\ Irrespective of these
short-term fluctuations, we believe that the economic analysis
considerations discussed below generally continue to apply. Inherent
cyclicality of offering activity, irrespective of the cause of the
macroeconomic shock, is a part of the baseline and prior academic
research.\611\ While macroeconomic shocks generally reduce capital
formation levels (due to both supply and demand factors), which in the
short run will negatively affect offering activity incremental to the
rule in absolute terms, the effects of the economic considerations we
discuss below are likely to remain applicable over the medium- to long-
run, which encompasses periods of sustained growth interspersed with
market contractions.
---------------------------------------------------------------------------

    \608\ See, e.g., Scott R. Baker, Nicholas Bloom, Steven J.
Davis, Kyle J. Kost, Marco C. Sammon, & Tasaneeya Viratyosin, The
Unprecedented Stock Market Impact of COVID-19, (NBER Working Paper
26945, 2020). See also Maryam Haque, Startup Ecosystem Faces Capital
Crunch over Coming Months--What We Expect & Why It Matters, (NVCA
White Paper, 2020), https://nvca.org/wp-content/uploads/2020/04/Startup-Ecosystem-Faces-Capital-Crunch-over-Coming-Months-5.pdf.
    \609\ For a discussion of the effects of COVID-19 and temporary
relief for Regulation Crowdfunding issuers, see Temporary Amendments
Adopting Release and Temporary Amendments Extension.
    \610\ As an important caveat, Regulation A and Regulation
Crowdfunding issuers were also provided temporary relief from
certain periodic reporting requirements on March 26, 2020. Thus,
proceeds information reported as of June 30, 2020, may be incomplete
to the extent that issuers had offering proceeds but availed
themselves of this relief. See SEC Rel. No. 33-10768 (Mar. 26, 2020)
Relief for Form ID Filers and Regulation Crowdfunding and Regulation
A Issuers Related to Coronavirus Disease 2019 (COVID-19) [85 FR
17747 (Mar. 31, 2020)].
    \611\ See, e.g., Michelle Lowry, Why Does IPO Volume Fluctuate
So Much? 67 J. Fin. ECON. 3 (2003); Chris Yung, Gonul Colak, & Wei
Wang, Cycles in the IPO Market, 89 J. Fin. Econ. 192 (2008); Amy
Dittmar & Robert Dittmar, The Timing of Financing Decisions: An
Examination of the Correlation in Financing Waves, 90 J. Fin. Econ.
59 (2008).
---------------------------------------------------------------------------

    Further, on May 4, 2020, the Commission adopted temporary final
rules under Regulation Crowdfunding to facilitate capital formation for
small businesses impacted by COVID-19, which include, among other
things, an exemption from certain financial statement review
requirements for issuers offering $250,000 or less of securities in
reliance on Regulation Crowdfunding within a 12-month period.\612\
These temporary final rules were subsequently extended and apply to
offerings initiated under Regulation Crowdfunding between May 4, 2020,
and February 28, 2021.\613\
---------------------------------------------------------------------------

    \612\ See Temporary Amendments Adopting Release.
    \613\ See Temporary Amendments Extension.
---------------------------------------------------------------------------

C. Economic Effects of the Final Amendments

1. Integration
    The final amendments will revise the framework for integration
analysis. As discussed in greater detail in Section II.A, the
amendments update and expand existing integration provisions to provide
greater uniformity and flexibility to issuers regarding integration of
offerings. Considered together, the final amendments are expected to
facilitate compliance and reduce issuer costs through greater
consistency and uniformity across exemptions, and thus promote the use
of exemptions by issuers that undertake multiple offerings.
a. Benefits
    The final amendments expand and simplify the integration framework,
provide greater uniformity in integration tests applicable across
offering types, and in many cases shorten the period of time that
issuers must wait between offerings to rely on a safe harbor from
integration. The amendments are expected to reduce the cost of
compliance with the integration requirements for issuers, which was
generally supported by commenters.\614\ In particular, the reduction in
certain safe harbor periods from six months to 30 days is expected to
facilitate compliance for issuers that might need to adjust their
financing strategy as a result of evolving business circumstances,
growing financing needs, or an inability to attract sufficient capital
through a single offering method. A six-month waiting period between
consecutive offerings, or the need to assess whether consecutive
offerings can be treated as separate offerings or whether they must be
integrated, can significantly limit such issuers' ability to raise
sufficient capital or react to dynamic business conditions. Similarly,
expanding the bright-line safe harbors from integration to a broader
set of offering types generally reduces the need for an issuer to
conduct an in-depth facts-and-circumstances analysis, as Rule 152(b)
states that ``[n]o integration analysis under paragraph (a) of this
section is required, if any of the following non-exclusive safe harbors
apply.'' This is expected to reduce the costs for issuers seeking to
raise capital through multiple offering exemptions. Overall, greater
emphasis in the integration analysis on whether a particular offering
satisfies the registration requirements or conditions of the specific
exemption is expected to reduce integration-specific compliance
efforts. The amendments are expected to reduce the costs of compliance
with the provisions of the exemptions for issuers that conducted an
offering before, or close in time with, another offering. The resulting
decrease in compliance costs may encourage additional issuers to pursue
one or more exempt offerings or to pursue a private placement and a
registered offering.
---------------------------------------------------------------------------

    \614\ See supra notes 39-41 and accompanying text.
---------------------------------------------------------------------------

    The amendments are expected to be particularly beneficial to young,
financially constrained, or high-growth issuers whose capital needs,
and thus preferred capital raising methods, may change more frequently.
The flexibility may be especially valuable in cases where one or more
of the exempt offerings conducted by an issuer is subject to offering
limits, as well as in cases where an issuer conducts multiple offerings
that are subject to different solicitation, disclosure, offering size,
or investor requirements. Overall, this flexibility may promote capital
formation and enable issuers to optimize their financing strategy so as
to attain a lower overall cost of capital

while raising the required amount of external financing. The described
benefits also are expected to accrue to the shareholders of those
issuers through enhanced shareholder value, particularly if the
increased flexibility in accessing external financing enables issuers
to more efficiently pursue high-growth investment opportunities.
    The described benefits may be limited in cases of amendments that
codify existing guidance, to the extent that the market has already
developed similar practices. Further, if issuers in certain exempt
offerings, such as offerings under Rule 506(c), Regulation A, or
Regulation Crowdfunding, account for most of the use of the integration
safe harbor amendments, the aggregate effects of the integration
amendments are expected to be limited, given the relatively small
market share of these exemptions, compared to the far more prevalent
Rule 506(b) and Section 4(a)(2) offerings.\615\ Because Rule 506(b)
does not impose an offering limit, and most such offerings do not
involve non-accredited investors,\616\ many issuers are likely able to
meet their financing needs without having to conduct multiple
offerings, which may further limit the effects of the integration
amendments.
---------------------------------------------------------------------------

    \615\ We recognize that other amendments we are adopting in this
release, such as increased offering limits under Regulation A and
Regulation Crowdfunding, increased investment limits under
Regulation Crowdfunding, and additional optional means of
verification of accredited investor status under Rule 506(c), might
increase the use of Regulation A, Regulation Crowdfunding, and Rule
506(c).
    \616\ We recognize that the amendments to non-accredited
investor disclosure requirements might increase the incidence of
non-accredited investors in Rule 506(b) offerings.
---------------------------------------------------------------------------

b. Costs
    The amendments could on the margin result in additional financing
being raised from non-accredited investors without registration
requirements.\617\ The disclosure requirements of all of these
exemptions are less extensive than the requirements associated with a
registered offering, which could result in less public disclosure
generally if companies that would have become reporting companies
decide to remain non-reporting companies.
---------------------------------------------------------------------------

    \617\ For example, conducting a Rule 506(b) offering and a
Regulation A or Regulation Crowdfunding offering may enable an
issuer to reach a broader non-accredited investor base and/or raise
a greater amount of non-accredited investor capital. Certain
exemptions (Regulation Crowdfunding, Regulation A Tier 2) also
conditionally exempt securities offered under the respective
exemption from the number of shareholders of record for purposes of
Section 12(g). See supra note 52 and accompanying text (discussing
commenters that opposed the integration amendments because they
would allow an issuer to do indirectly what it cannot do directly).
For example, one commenter stated that the amendments would allow
issuers to ``easily avoid registration requirements by dividing
large financings into multiple smaller exempt offerings separated by
only a brief period of time.'' See R. Rutkowski Letter. Another
commenter stated that, under the proposed integration framework,
``the original goal of preventing issuers from artificially
separating related transactions into multiple offerings to avoid the
registration requirement is gone under this approach.'' See CFA
Letter. Requiring no integration so long as each individual offering
satisfies a particular exemption, according to this commenter,
``subverts the purpose of integration, which specifically looks at
the totality of a financing scheme rather than different components
in isolation.'' Id. This commenter stated that the proposal ``would
enshrine a framework that effectively allows concurrent and serial
offerings that are clearly part of a single plan of financing to
avoid integration.'' Id.
---------------------------------------------------------------------------

    Another potential concern is that a decrease in the integration of
multiple offerings might result in inadvertent overlaps in solicitation
of investors for offerings with different communications provisions.
For example, Rule 506(b) and Section 4(a)(2) offerings, which do not
allow general solicitation, may be preceded by offerings relying on
exemptions that allow general solicitation (such as Regulation
Crowdfunding, Regulation A, or Rule 506(c)), which could condition the
market for the subsequent private placement offering. This may
marginally increase risks to non-accredited investors that may
participate in the subsequent private placement offering to the extent
such investors rely on the general solicitation, because private
placement offerings incorporate fewer investor protections.\618\
Several factors are expected to largely alleviate these potential risks
to investors. Importantly, the amendments do not alter the substantive
requirements, including investor protections, associated with
individual offering methods. The amendments more closely align issuer
efforts to comply with integration provisions and requirements of the
respective exemptions, including, importantly, the investor protection
provisions of each respective exemption. Moreover, nothing in the
amendments eliminates the requirements of the respective exemption or,
in the context of registered offerings, the registration and gun
jumping provisions of the Securities Act. New Rule 152 specifies that
the provisions of the rule will not have the effect of avoiding
integration for any transaction or series of transactions that,
although in technical compliance with the rule, is part of a plan or
scheme to evade the registration requirements of the Securities Act.
Further, issuers remain prohibited from using general solicitation in a
Rule 506(b) offering, through any means, irrespective of the
integration amendments.
---------------------------------------------------------------------------

    \618\ For instance, Regulation A and Regulation Crowdfunding
offerings are subject to more extensive substantive disclosure
requirements. Rule 506(c) offerings do not incorporate disclosure
requirements but require verification of accredited investor status,
reducing the likelihood of inadvertent non-accredited investor
participation, compared to a Rule 506(b) offering.
---------------------------------------------------------------------------

    The amendments contain several other specific safeguards that are
expected to minimize potential costs and risks to investors. Rule
152(a)(1) requires that for an exempt offering prohibiting general
solicitation, the issuer must have a reasonable belief, based on the
facts and circumstances, with respect to each purchaser in the exempt
offering prohibiting general solicitation, that the issuer (or any
person acting on the issuer's behalf) either did not solicit such
purchaser through the use of general solicitation, or established a
substantive relationship with such purchaser prior to the commencement
of the exempt offering prohibiting general solicitation. This provision
is expected to minimize the effect on investors of possible
solicitation overlaps in cases of multiple offerings. This provision
further bolsters existing solicitation restrictions in the individual
exemptions and, crucially, focuses the integration analysis on the
requirement that the issuer comply with solicitation restrictions
intended to protect investors.
    Further, Rule 152(a)(2) provides that an issuer conducting two or
more concurrent exempt offerings permitting general solicitation, in
addition to satisfying the particular requirements of each exemption
relied on, general solicitation offering materials for one offering
that include information about the material terms of a concurrent
offering under another exemption may constitute an offer of the
securities in such other offering, and therefore the offer must comply
with all the requirements for, and restrictions on, offers under the
exemption being relied on for such other offering, including any legend
requirements and communications restrictions. This requirement will
strengthen investor protection by assuring that one exemption is not
being improperly used to make offers under the second exemption,
without being subject to the same offering restrictions. The legend
requirement will provide notice to investors and thereby help minimize
potential confusion about the offering methods, reducing the risk of
uninformed investor decisions as a result of reliance on preliminary
information contained in such solicitations.

    The amended non-exclusive safe harbors from integration are
designed to minimize potential risks to investors. The 30-day period in
the first safe harbor is expected to minimize inadvertent overlaps
between offerings and investor solicitation for different offerings
while providing issuers greater flexibility to adjust their financing
strategy as a result of evolving circumstances. For an exempt offering
for which general solicitation is not permitted that follows by 30
calendar days or more an offering that allows general solicitation, the
provisions of Rule 152(a)(1) shall apply,\619\ which is expected to
further mitigate such concerns. In addition, if an issuer conducts more
than one offering under Rule 506(b), the number of non-accredited
investors purchasing in all such offerings within 90 calendar days of
each other may not exceed 35. This requirement is expected to address
concerns that failure to integrate multiple Rule 506(b) offerings could
result in sales to a large number of non-accredited investors.
---------------------------------------------------------------------------

    \619\ The provision requires that the issuer must have a
reasonable belief, based on the facts and circumstances, with
respect to each purchaser in the exempt offering prohibiting general
solicitation, that the issuer (or any person acting on the issuer's
behalf) either: (i) Did not solicit such purchaser through the use
of general solicitation, or (ii) established a substantive
relationship with such purchaser prior to the commencement of the
exempt offering prohibiting general solicitation.
---------------------------------------------------------------------------

    The second safe harbor involves offerings under Rule 701 or
Regulation S. As discussed above, offers and sales pursuant to Rule 701
and employee benefit plans are limited to employees, consultants and
advisors, with whom the issuer has written compensation plans or
agreements. Given the relationship between these investors and the
issuer, excluding such offerings from integration is not likely to
raise meaningful investor protection concerns. The amendments also
codify a long-standing Commission position with respect to integration
of offshore transactions made in compliance with Regulation S with
registered domestic offerings or domestic offerings that satisfy the
requirements for an exemption from registration under the Securities
Act.\620\ When determining the availability of this safe harbor, it
will still be necessary to assess each transaction separately for
compliance with Regulation S or the other exemption. After considering
commenter input, to avoid disruption to the existing Regulation S
market practices, we are not adopting the proposed amendment to
Regulation S that would have changed the definition of ``directed
selling efforts'' in Rule 902 nor the proposed requirement that a
Regulation S issuer that engages in general solicitation activity
prohibit resales to U.S. persons of the Regulation S securities for a
period of six months from the date of sale except to QIBs or IAIs. We
recognize that general solicitation activity undertaken in connection
with offers and sales under an exemption from registration concurrent
with a Regulation S offering may raise concerns about flowback of the
Regulation S securities to the United States. However, the Commission
has previously addressed the risks related to abuse of Regulation S by
imposing enhanced restrictions applicable to offshore sales of equity
securities of domestic issuers \621\ and we are of the view that these
existing requirements will continue to be effective in addressing such
concerns.
---------------------------------------------------------------------------

    \620\ See Offshore Offers and Sales (Regulation S), Release No.
33-7505 (Feb. 17, 1998) [63 FR 9632 (Feb. 25, 1998)] (``Offshore
Offers and Sales Release''), at Section III.C.1.
    \621\ See Offshore Offers and Sales Release.
---------------------------------------------------------------------------

    The third safe harbor concerns offerings for which a Securities Act
registration statement has been filed following a completed or
terminated offering. The third safe harbor provides that an offering
for which a Securities Act registration statement has been filed will
not be integrated if it is made subsequent to a terminated or completed
offering for which general solicitation is not permitted. Because
private placements would continue to restrict general solicitation, the
impact on investors in the private placement, most of which are deemed
to have the financial sophistication and ability to sustain the risk of
loss of investment or fend for themselves, is likely to be minimal. In
turn, because private placements do not permit general solicitation,
and because the extensive registration requirements apply to the
registered offering, it is unlikely to have any impact on investors in
the registered offering. The third safe harbor also provides that a
registered offering will not be integrated if made subsequent to a
completed or terminated exempt offering for which general solicitation
is permitted but that was either limited to QIBs and IAIs, or was
terminated or completed more than 30 calendar days prior to
commencement of the registered offering. This is similar to current
Rule 147(h), Rule 147A(h), and Rule 255(e) of Regulation A. Because of
the extensive protections built into the registration requirements and
the 30-day waiting period that would apply if a solicitation involved
investors other than QIBs or IAIs, this safe harbor is unlikely to have
adverse impacts on investors in the registered offering. In cases where
solicitation was limited to QIBs and IAIs, due to the sophistication of
those investors, we do not believe that the lack of a 30-day waiting
period in the integration safe harbor meaningfully affects investor
protection. The amendment is also consistent with Securities Act
Section 5(d) and Rule 163B, which allow solicitation of QIBs and IAIs
at any time prior to a registered offering.
    The fourth safe harbor extends the approach in Regulation A and
Rules 147 and 147A and in the guidance regarding Regulation
Crowdfunding to provide that offers and sales made in reliance on an
exemption for which general solicitation is permitted will not be
integrated if made subsequent to any prior terminated or completed
offering. The disclosure and substantive requirements of these
exemptions should minimize potential costs to investors from not
integrating these offerings with prior offers and sales.
    We believe these amendments appropriately calibrate the effort
required on the part of issuers to address potential overlaps between
multiple offerings by the same issuer that may raise investor
protection concerns. Overall, because the amendments contain anti-
evasion language and issuers must continue to meet the conditions of
each exemption they are relying on, and because investor protection
provisions of each exemption as well as general antifraud provisions
continue to apply, the amendments are not expected to have significant
adverse effects on investor protection.
    We recognize that issuers seeking to rely on one or more of the
integration provisions will incur costs of analyzing the facts and
circumstances of the contemplated offerings and/or the respective
integration safe harbors. While we believe that the amendments
substantially simplify and streamline the integration safe harbors, we
recognize that some issuers might find that navigating the amended
integration framework requires additional time and effort. Because use
of the integration safe harbors will remain voluntary, we expect that
issuers will only rely on the safe harbors if such reliance might
reduce their compliance costs.
c. Effects of Efficiency, Competition, and Capital Formation
    The amended integration provisions are expected to improve capital
formation by enabling issuers to combine financing under different

exemptions and registered offerings more optimally as part of their
financing strategy. However, the net capital formation benefits may be
modest for issuers that do not need multiple offerings (e.g., relying
on a single Rule 506(b) offering with no, or few, non-accredited
investors but seeking a larger amount of financing).
    It is unclear how the integration amendments will affect
competition for investor capital. To the extent the amendments reduce
issuer compliance costs associated with accessing a broader range of
offering exemptions, competition for investor capital in those market
segments might increase. However, net effects on overall competition
for investor capital may be limited to the extent that issuers
reallocate between offering exemptions or additional investor capital
is drawn to these markets under the amendments.
    As discussed above, the amendments might offer the greatest
benefits to smaller issuers that have varying financing needs or to
issuers that need to rely on multiple offering exemptions to meet their
financing needs (e.g., because they lack an established accredited
investor network to support financing exclusively through Rule 506(b)
and need to rely on non-accredited investors or general solicitation).
    By streamlining and harmonizing integration safe harbors, the
amendments are expected to improve the efficiency and reduce the cost
of an issuer's compliance efforts, particularly for issuers conducting
multiple offerings.
d. Reasonable Alternatives
    As an alternative, we could adopt a uniform safe harbor with a time
period other than 30 days (e.g., 15, 45, 60, 75, or 90 days). Compared
to the final amendments, the alternative of a universal safe harbor
with a shorter (longer) time period would reduce (increase) the
likelihood that multiple offerings are integrated and, accordingly,
reduce (increase) issuer costs of compliance. Compared to the final
amendments, the alternative of a safe harbor with a shorter (longer)
time period would provide issuers with greater (lower) flexibility in
tailoring their capital raising strategy to changing financing needs
and market conditions. Compared to the final amendments, such an
alternative also might increase (reduce) the number of instances where
issuers improperly divide a single plan of financing into multiple
offerings.
    As another alternative, we could replace the integration doctrine
with general anti-evasion principles \622\ or a disclosure
requirement.\623\ Compared to the amendments, this alternative would
increase the likelihood that multiple offerings could be conducted
consistent with Section 5 or the terms of any applicable exemptions
and, accordingly, reduce costs of compliance for some issuers that seek
to avoid or postpone registration. However, conducting an anti-evasion
analysis or providing disclosures in cases of multiple offerings under
this alternative could increase compliance costs for some issuers,
compared to the amendments, depending on the nature of the disclosure
requirement and issuer circumstances. Compared to the final amendments,
this alternative would provide issuers with greater flexibility in
tailoring their capital raising strategy to changing financing needs
and market conditions. However, compared to the final amendments, such
an alternative also would likely increase the number of instances where
issuers improperly divide a single plan of financing into multiple
offerings, even in the presence of general anti-evasion or disclosure
requirements.
---------------------------------------------------------------------------

    \622\ See CrowdCheck Letter. In a comment on the Concept
Release, this commenter explained its view that the ``integration
doctrine should only be retained as an anti-avoidance mechanism
where an issuer artificially divides an offering in order to comply
with a number-of-investors or dollar offering limit.'' See
CrowdCheck Concept Release Letter.
    \623\ See J. Clarke Letter (suggesting to replace the concept of
integration with a form required by all issuers to file and keep
current describing all historical and current exempt and registered
offerings made by the issuer).
---------------------------------------------------------------------------

    The amendments replace the five-factor test. As another
alternative, we could codify the use of the five-factor test for all
analyses of integration.\624\ Compared to the final amendments, such an
alternative could be more successful in identifying instances where
issuers improperly divide what is economically a single offering into
multiple offerings to avoid exemption limitations. However, it also
would result in additional costs for issuers and reduced flexibility to
combine multiple offering methods.
---------------------------------------------------------------------------

    \624\ See CFA Letter; and Md. St. Bar Assoc. Letter (suggesting
that the five-factor test be retained).
---------------------------------------------------------------------------

2. General Solicitation and Offering Communications
a. ``Demo Days'' and Similar Events
    As discussed in greater detail in Section II.B.1 above, we are
adding certain ``demo day'' communications to the list of
communications that will not be deemed general solicitation. In a
change from the proposal, in response to comments, we are expanding the
types of entities that may sponsor an event in reliance on the
exemption to include State governments and instrumentalities of State
and local governments (in addition to local governments, as proposed).
We are also revising the definition of ``angel investor group'' to
specify that, such a group must have ``defined'' processes and
procedures for making investment decisions, but that such processes and
procedures do not necessarily need to be written. In response to
commenters,\625\ we are also revising the information that issuers may
convey about an offering of securities during a ``demo day'' to add the
unsubscribed amount in an offering. These changes may incrementally
increase the reliance on the exemption, compared to the proposed
provision. In addition, as discussed above, to address concerns raised
by commenters with respect to the possibility of offering-related
communications being made broadly to non-accredited investors, we are
adopting certain limitations on the pool of investors that may
virtually attend such events. This change may incrementally reduce
reliance on the exemption, compared to the proposed provision.
---------------------------------------------------------------------------

    \625\ See, e.g., IAA Letter; ACA Letter; Transcript of SEC Small
Business Capital Formation Advisory Committee (May 8, 2020),
available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, at 70. An issuer would also be able to
disclose at a ``demo day,'' as proposed, that (i) it is in the
process of offering or planning to offer securities; (ii) the type
and amount of securities being offered; and (iii) the intended use
of the proceeds of the offering.
---------------------------------------------------------------------------

i. Benefits
    The amendments to Rule 148 specify that certain limited ``demo
day'' activities would not be deemed general solicitation. These events
are generally organized by a group or entity (such as a university,
angel investors, an accelerator, or an incubator) that invites issuers
to present their businesses to potential investors, with the aim of
securing investment. These amendments are expected to benefit issuers
by expanding the range of options for communicating about their
business with prospective investors without incurring the cost of
restrictions associated with general solicitation and by allowing them
to more efficiently access potential investors, as supported by various
commenters.\626\ These benefits may be relatively more pronounced for
small and emerging issuers that may not have a sufficient existing
angel investor network to rely on in a Rule 506(b) or Section 4(a)(2)
offering. The additional restrictions on the virtual participation of
prospective

investors in ``demo day'' events excluded from the definition of
general solicitation are expected to reduce the likelihood of non-
accredited investor participation, thus decreasing potential risk to
investors.
---------------------------------------------------------------------------

    \626\ See supra note 216.
---------------------------------------------------------------------------

ii. Costs
    Several commenters expressed concern about the effect of the
amendments on investors,\627\ for example, because such expanded use of
``demo day'' activities could lead to an increase in instances of
fraud.\628\ Overall, we expect costs to investors from the ``demo day''
amendments to be modest because the amendments significantly restrict
permissible activities of ``demo day'' sponsors. In particular, the
sponsor of the seminar or meeting will not be allowed to: make
investment recommendations or provide investment advice to attendees of
the event; engage in any investment negotiations between the issuer and
investors attending the event; charge attendees of the event any fees,
other than reasonable administrative fees; receive any compensation for
making introductions between event attendees and issuers or for
investment negotiations between such parties; or receive any
compensation with respect to the event that would require registration
of the sponsor as a broker-dealer or an investment adviser. These
restrictions are expected to mitigate the risk that investors would be
improperly induced into an investment as a result of misleading
information or sales pressure from financially incentivized ``demo
day'' sponsors.
---------------------------------------------------------------------------

    \627\ See supra note 222.
    \628\ See Better Markets Letter.
---------------------------------------------------------------------------

iii. Effects on Efficiency, Competition, and Capital Formation
    The final amendments are expected to make it easier for issuers to
participate in ``demo days'' without incurring the costs of
restrictions associated with general solicitation. To the extent that
the amendments encourage some additional issuers to participate in
``demo days,'' and such participation facilitates their efforts to
raise capital, issuers might realize capital formation benefits.
Overall, the effects of the amendments on efficiency, competition, and
capital formation are expected to be modest because issuers may offer
securities to the same individuals and groups other than through a
``demo day''.
iv. Reasonable Alternatives
    As an alternative, we could limit the ``demo day'' exception under
the amendments by prohibiting any form of control or affiliation with
the issuer or group of issuers, prohibiting entities whose sole or
primary purpose is to attract investors to private issuers, and
limiting issuer's discussion to factual business information and
prohibiting discussion of any potential securities offering, as
suggested by one commenter.\629\ This alternative would potentially
reduce the risk of investors receiving biased information about the
investment opportunity at the ``demo day''. However, the restrictions
under this alternative could significantly reduce the flexibility for
issuers to solicit prospective investors and raise capital.
---------------------------------------------------------------------------

    \629\ See NASAA Letter.
---------------------------------------------------------------------------

    As another alternative, we could adopt a definition of general
solicitation that would either narrow or expand the scope of
communications that constitute general solicitation. The alternative of
narrowing (expanding) the scope of communications that constitute
general solicitation, either through changes to the examples of
communications that constitute general solicitation or through a
definition of general solicitation, would provide greater (lower)
flexibility to issuers with regard to the manner of communicating
offers of securities and reaching prospective investors, potentially
expanding (limiting) the ability of issuers that lack an established
network of investors with whom they have a pre-existing relationship to
raise capital through an exempt offering. Narrowing (expanding) the
scope of communications that constitute general solicitation also could
expose investors, including non-accredited investors, to more (fewer)
offers of securities from prospective issuers. Additional offers of
securities might reduce investor search costs for investors eligible
and seeking to invest in the offerings of issuers that engage in
solicitation, enabling investors to potentially make more informed
decisions and allocate capital more efficiently to a broader range of
investment opportunities, and vice versa. The alternative of providing
a specific definition of general solicitation might incrementally
reduce the compliance costs of issuers to determine whether
communications that fall outside the list of provided examples
constitute general solicitation. However, this alternative could
decrease the flexibility for issuers to consider all relevant facts and
circumstances in determining whether a particular communication
constitutes general solicitation.
    As another alternative, we could simplify the existing framework
for all exempt offerings by deregulating offers, thus eliminating
general solicitation restrictions and focusing on disclosure
requirements for sales.\630\ This alternative would significantly
expand the options for pre-offering and offering-related
communications, giving issuers greater flexibility and reducing costs
compared to the final amendments, some of which expand pre-offering
communications but impose additional conditions (such as filing and
legending). However, by shifting the investor protections to
requirements for sales and antifraud provisions, this alternative might
result in investors that are used to relying on information in offers
having to wait for the disclosures required in conjunction with a sale.
---------------------------------------------------------------------------

    \630\ See CrowdCheck Letter.
---------------------------------------------------------------------------

b. Solicitations of Interest and Other Offering Communications
    As discussed in greater detail in Section II.B.2 above, we are
adopting a generic test-the-waters exemption that would permit an
issuer to use testing-the-waters materials for an offer of securities
prior to making a determination as to the exemption under which the
offering may be conducted. In connection with this exemption, we are
requiring that the generic solicitation materials be made publicly
available as an exhibit to, or with, the offering materials filed with
the Commission, if the Regulation A or Regulation Crowdfunding offering
is commenced within 30 days of the generic solicitation. Further, if
the issuer sells securities under Rule 506(b) within 30 days of the
generic solicitation to non-accredited investors, the issuer would be
required to provide such investors with any written communication used
under the generic testing-the-waters exemption. We are also expanding
permissible offering communications under Regulation Crowdfunding by
permitting testing the waters prior to filing a Form C with the
Commission. Issuers will be required to use legends and to include any
solicitation materials with the Form C that is filed with the
Commission. The economic effects of the amendments will be limited if
issuers are reluctant to test the waters, for example, as a result of
the filing requirements or applicable State restrictions. Finally, as
discussed in Section II.B.3 above, we are amending Rule 204 to expand
communications permissible under Regulation Crowdfunding after the
filing of Form C.

i. Benefits
    In general, allowing issuers to gauge interest through expanded
testing the waters is expected to reduce uncertainty about whether an
offering could be completed successfully.\631\ Allowing solicitation
prior to conducting an offering will enable issuers to determine market
interest in their securities before incurring the costs of preparing
and conducting an offering. Testing the waters before filing can reduce
the risk of a failed offering and the associated reputational costs.
If, after testing the waters, the issuer is not confident that it would
attract sufficient investor interest, the issuer could consider
modifying offering plans or the target amount of the offering,
reconsidering the contemplated offering structure and terms, postponing
the offering, or exploring alternative methods of raising capital. This
option might be useful for smaller issuers, especially early stage
issuers, first-time issuers, issuers in lines of business characterized
by a considerable degree of uncertainty, and other issuers with a high
degree of information asymmetry. The ability to engage in testing-the-
waters communications might attract certain issuers--those that may be
uncertain about the prospects of raising investor capital--to consider
using an exempt offering, thus potentially promoting competition for
investor capital as well as capital formation. Importantly, the
amendments could benefit issuers that find after testing the waters
that their offering is unlikely to be successful and choose not to
proceed with an offering, thus saving disclosure preparation and filing
costs (including, where applicable, the cost of review or audit of
financial statements by an independent accountant), lowering the risk
of disclosure of potentially sensitive proprietary information to
competitors and mitigating the reputational cost from a failed
offering.
---------------------------------------------------------------------------

    \631\ See supra notes 233 (discussing commenter support for
generic testing the waters) and 253 (discussing commenter support
for testing the waters under Regulation Crowdfunding) and
accompanying text.
---------------------------------------------------------------------------

    Enabling issuers to engage in generic testing-the-waters
communications prior to determining the specific exemption type may
provide additional flexibility to gauge market interest that is likely
to be especially valuable for smaller, less well known issuers that may
lack an accurate understanding of prospective investor demand for their
securities. Similarly, permitting issuers to solicit investor interest,
orally or in writing, in Regulation Crowdfunding offerings is expected
to benefit issuers by enabling them to gauge investor interest in a
prospective Regulation Crowdfunding offering before incurring the full
costs of preparing and filing an offering circular.
    The requirement to include legends is expected to provide notice to
investors of the preliminary nature of these communications. Issuers
that proceed with an offering under Regulation A or Regulation
Crowdfunding after testing the waters will be required to include as
exhibits to the offering statement any written materials used in a
generic testing-the-waters communication within 30 days prior to the
filing of a Regulation A or Regulation Crowdfunding offering statement.
Issuers will also be required to include as exhibits any Regulation
Crowdfunding testing-the-waters materials. Combined, these requirements
are expected to provide informational benefits to investors and allow
them to compare the solicitation materials with the offering statement
disclosures, leading to potentially more informed investment decisions.
The requirement to provide materials used for a generic testing-the-
waters solicitation to any non-accredited investors in a Rule 506(b)
offering that occurs within 30 days of such solicitation is expected to
incrementally enhance the ability of investors in the offering to make
informed decisions.
    The amendments expanding communications permissible under
Regulation Crowdfunding after the filing of Form C are expected to
benefit issuers by allowing greater flexibility to communicate with
prospective investors about the offering.\632\ In addition to
permitting oral communications, in response to comments received, we
are expanding the information that an issuer may provide in accordance
with Rule 204 to include a brief description of the use of proceeds of
the offering and information on the progress of the offering toward its
funding goals. We are also amending Rule 204 to clarify that an issuer
may provide information about the terms of an offering under Regulation
Crowdfunding in the offering materials for a concurrent offering (such
as a Form 1-A for a concurrent Regulation A offering or a Securities
Act registration statement). Being able to communicate with prospective
investors outside the communications channels provided by the online
crowdfunding platform is expected to facilitate the efforts of issuers
to solicit prospective investors and advertise the offering,
potentially resulting in a higher rate of offering success and more
capital formation, particularly for lesser known, small issuers. Off-
portal communications about the terms of the offering are also expected
to incrementally improve the information available to investors and
reduce costs of searching for information about offering terms for some
prospective investors (e.g., investors that may have prior knowledge
of, or be customers of, the issuer) that would prefer to find out about
offering terms without first reviewing the crowdfunding platform's
website and communications channels. Should such prospective investors
decide to invest in an offering, they would still have to do so through
the portal and would have access therein to the filed offering
materials, other offering information, and investor education materials
required by Regulation Crowdfunding. Communications intended to drive
traffic to the intermediary's website, and therefore to the issuer's
offering, would continue to be governed by the Regulation Crowdfunding
advertising restrictions.
---------------------------------------------------------------------------

    \632\ See supra note 269 (discussing commenters that supported
expanded oral communications by Regulation Crowdfunding issuers).
---------------------------------------------------------------------------

ii. Costs
    We recognize that there might also be potential costs associated
with expanding the use of testing-the-waters communications in
connection with a contemplated Regulation Crowdfunding offering or
another exempt offering. If the contents of the offering circular
differ substantively from the material distributed through testing-the-
waters communications, and if investors rely on testing-the-waters
materials when making investment decisions, this might lead investors
to make less informed investment decisions.\633\ For example, if the
information conveyed through testing-the-waters communications is an
incomplete representation of the risk of an offering, and if investors
fail to read the subsequent offering circular before making the
investment decision, they might make a less informed investment
decision. These investor costs might be exacerbated to the extent that,
currently, investors in Regulation Crowdfunding offerings are likely to
be small and potentially limited in their capacity to process
information contained in testing-the-waters communications. The removal
of accredited investor investment limits under the Regulation
Crowdfunding amendments is expected to increase the participation of
accredited investors in such offerings

and thus the average Regulation Crowdfunding investor's size and
financial sophistication.
---------------------------------------------------------------------------

    \633\ See supra notes 237 (discussing commenters that expressed
concern about generic testing the waters) and 258 (discussing
commenters that opposed testing the waters under Regulation
Crowdfunding), and accompanying text.
---------------------------------------------------------------------------

    These potential investor protection concerns are expected to be
alleviated by several factors:
     The application of the antifraud provisions of the Federal
and State securities laws; \634\
---------------------------------------------------------------------------

    \634\ Testing-the-waters communications under Regulation
Crowdfunding would be treated as offers of securities, similar to
testing-the-waters communications under Regulation A, Section 5(d),
and the recently adopted Rule 163B.
---------------------------------------------------------------------------

     For issuers that proceed with a Regulation Crowdfunding
offering:
    [cir] The availability of an offering circular, allowing investors
to review disclosures compliant with Regulation Crowdfunding prior to
investing;
    [cir] The requirement that written testing-the-waters materials be
included with Form C, allowing the public and Commission staff to
review written solicitation materials and compare them to the contents
of the offering circular;
    [cir] The availability of investor education materials required to
be provided by crowdfunding intermediaries before investing; and
    [cir] The continued application of other provisions of Regulation
Crowdfunding, including ones expected to provide additional investor
protection, such as investment limits for non-accredited investors,
offering limits, crowdfunding intermediary requirements, periodic
reporting requirements, and issuer eligibility restrictions; and
     The reputational incentives of issuers and intermediaries,
as well as the risk of litigation (particularly for issuers and
intermediaries that have assets and that engage in testing-the-waters
communications).
    Further, concerns about costs of expanding testing-the-waters
communications to investors should be considered in the context of the
baseline. Investors in Regulation Crowdfunding offerings today might
perform an incomplete analysis of the offering risks if they base their
investment decision on the promotional video or summary information
from the crowdfunding platform's campaign page and fail to review the
entire contents of the offering materials. Low investment minimums
(many around $100, and some as low as $25) might make it optimal for
investors to allocate a limited amount of time to due diligence
regarding prospective crowdfunding investments. While some unscrupulous
issuers might seek to disseminate misleading information through
testing-the-waters communications, such issuers or intermediaries
already could engage in misleading communications today, and such
misleading offering communications would remain violations of the
antifraud provisions of the Federal securities laws.
    The amendments to Rule 204 of Regulation Crowdfunding expanding the
ability to advertise the ongoing offering and discuss it in off-portal
oral and written communications with prospective investors might
similarly result in some investors receiving incomplete information
about the offering from the issuer, and, if such investors fail to
review the offering circular and other filed offering materials,
potentially making less well informed investment decisions.\635\
---------------------------------------------------------------------------

    \635\ See supra note 270 (discussing commenters that opposed
expanded oral communications by Regulation Crowdfunding issuers).
---------------------------------------------------------------------------

    Several factors are expected to mitigate potential costs to
investors due to expanded off-portal communications:
     The availability of the offering circular containing
disclosures compliant with Regulation Crowdfunding prior to investing,
as well as the continued applicability of Rule 204 requirements, such
as the requirement to include a link directing the potential investor
to the intermediary's platform where the Form C disclosure document is
available;
     The application of antifraud provisions of Federal and
State securities laws;
     The availability of investor education materials required
to be provided by funding portals;
     The other provisions of Regulation Crowdfunding, including
ones expected to provide additional investor protection, such as
investment limits, offering limits, crowdfunding intermediary
requirements, periodic reporting requirements, and issuer eligibility
restrictions, continue to apply; and
     The reputational incentives of issuers, as well as the
risk of litigation (for issuers with assets).
    The amendments that allow issuers to engage in testing the waters
prior to determining the specific exemption type might lead to investor
confusion with regard to the regulatory framework applicable to the
contemplated offering, particularly for non-accredited investors that
may be less sophisticated. However, for issuers that proceed with an
exempt offering, the investor protections of the respective exemption
would continue to apply. Importantly, because investors would be able
to review the offering circular that clearly delineates the exemption
relied on for issuers that proceed with a Regulation A or Regulation
Crowdfunding offering, investors are expected to receive the disclosure
necessary to reach an informed investment decision. Furthermore, should
an issuer elect to proceed with a Regulation A or Regulation
Crowdfunding offering within 30 days of a generic testing-the-waters
communication, the testing-the-waters materials must be filed as an
exhibit to, or with, the offering statement, enabling investors and the
Commission staff to review testing-the-waters materials and compare
them against the disclosures in the offering statement. In cases where
an issuer decides to proceed with a Rule 506(c) offering after testing
the waters, non-accredited investors that might have received
solicitations would remain restricted from participation in a Rule
506(c) offering.
    In cases of issuers that choose not to proceed with a Rule 506(c),
Regulation A, or Regulation Crowdfunding offering following testing the
waters for an exempt offering, but that choose instead to undertake an
exempt offering under an exemption that does not permit general
solicitation, the amendments are not expected to have significant
effects on investors in such a private placement or registered
offering. Restrictions specific to private placements, including a
restriction on general solicitation for a Rule 506(b) or a Section
4(a)(2) offering would continue to apply in that case. In cases of
issuers proceeding with a registered offering, gun jumping provisions
of the Securities Act and other investor protections associated with
registered offerings (including staff review, Section 11 liability,
disclosure requirements in the registration statement, and Exchange Act
reporting requirements) would continue to apply.
    Because the use of testing-the-waters communications will remain
voluntary, we anticipate that issuers will rely on testing-the-waters
communications only if the benefits anticipated by issuers justify the
expected costs. Issuers that elect to test the waters may incur costs,
including direct costs of identifying prospective investors and
developing testing-the-waters solicitation materials; indirect costs of
potential disclosure of proprietary information to solicited investors;
and in some instances, potential legal costs associated with liability
arising from testing-the-waters communications with prospective
investors. We note that issuers that proceed with an exempt offering
without testing the waters similarly might incur costs of searching and
soliciting investors, either on their own or through an intermediary.

iii. Effects of Efficiency, Competition, and Capital Formation
    The expansion of permissible testing the waters prior to exempt
offerings is expected to facilitate capital formation for small issuers
by giving prospective issuers that might not otherwise consider an
exempt offering a low-cost method of assessing investor interest in a
potential offering and efficiently adjusting their financing strategy
to reflect information about market demand. These effects are expected
to be particularly significant for issuers contemplating Regulation
Crowdfunding offerings that presently have to incur the compliance
costs of preparing and filing Form C and the risk of disclosure of
proprietary information to competitors, as well as the reputational
risk of a failed offering, and do not have a cost-effective way of
gauging investor demand. Similarly, the amendments to expand
permissible issuer communications in Regulation Crowdfunding offerings
might promote capital formation in the Regulation Crowdfunding market
by allowing issuers to more effectively reach prospective investors as
part of marketing the offering and to more efficiently structure the
offering based on feedback from prospective investors. Combined, these
amendments might make it easier for the smallest issuers with low
investor recognition and limited or no securities offering experience
to access the Regulation Crowdfunding market or issue securities
pursuant to another offering exemption, resulting in potential positive
effects on competition. To the extent that these amendments result in
issuers switching between offering exemptions, the net effects on
capital allocation might be modest. However, in that scenario some
issuers might still benefit from a lower cost of capital if they are
able to obtain preliminary information that helps them to identify the
most cost-effective offering method and terms that are likely to
attract sufficient investor demand.
iv. Reasonable Alternatives
    The final amendments permit testing-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 testing-
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 testing-the-waters
communications be filed. As an alternative, we could have permitted
testing-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 final
amendments in light of the legend requirements, antifraud 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.
    The final amendments permit testing-the-waters communications in
connection with Regulation Crowdfunding offerings prior to the filing
of Form C. As an alternative, we could permit testing-the-waters
communications both before and after the filing of Form C.\636\ This
alternative would provide greater flexibility to issuers compared to
the final amendments, potentially increasing the likelihood that the
issuer would raise the desired amount of capital. This option might be
most useful for smaller and early stage issuers. This alternative might
also require investors to expend additional effort to compare testing-
the-waters communications after the filing of an offering statement
with the filed offering statement disclosures. However, the incremental
economic effects of this alternative on investors and issuers might be
limited because of the advertising permitted under Rule 204 and because
the incremental costs of filing testing-the-waters materials might
discourage the use of testing the waters after the filing of Form C
under this alternative.
---------------------------------------------------------------------------

    \636\ Under Regulation A, testing the waters is permitted before
and after the filing of Form 1-A before the qualification of Form 1-
A. However, unlike Regulation Crowdfunding, Regulation A issuers are
not able to accept investor commitments between the filing and the
qualification of Form 1-A. Under Regulation Crowdfunding, issuers
may accept investor commitments upon the filing of Form C because
Commission qualification is not applicable to Form C. Thus,
permitting testing-the-waters communications before the filing of
Form C would be more consistent with the testing-the-waters
communications permissible under Regulation A, before investor
commitments may be accepted.
---------------------------------------------------------------------------

    As an alternative, we could require testing the waters to be
conducted through a registered intermediary, as suggested by some
commenters.\637\ Including the registered intermediary in the testing-
the-waters process under the alternative could provide an additional
layer of investor protections, compared to the amendments,
particularly, for non-accredited investors that could participate in a
Regulation Crowdfunding offering if it is launched. However, such
benefits may be attenuated by the other investor protections included
in the amendments (such as the filing requirement and the availability
of the offering circular containing disclosures compliant with
Regulation Crowdfunding prior to investing), and in the event the
offering is launched, by the general investor protections of Regulation
Crowdfunding. Compared to the amendments, this alternative could result
in additional costs for issuers that already incur various other costs
to launch a small offering. By limiting the options for testing-the-
waters communications to intermediary-facilitated communications, this
alternative also could reduce issuer ability and flexibility to reach
prospective investors.
---------------------------------------------------------------------------

    \637\ See NextSeed Letter; and CrowdCheck Letter.
---------------------------------------------------------------------------

    Issuers that proceed with a Regulation Crowdfunding offering will
be subject to a filing requirement with respect to written testing-the-
waters communications, consistent with Rule 255 of Regulation A. As an
alternative, we could allow testing-the-waters communications prior to
a contemplated Regulation Crowdfunding offering but not impose a filing
requirement. As another alternative, we could waive the filing
requirement for testing-the-waters communications prior to any exempt
offering, including a Regulation A offering. Issuers that have elected
to use testing-the-waters communications have already incurred the cost
of preparing the materials, so the incremental direct cost of the
requirement to file the materials with the Commission 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 testing-the-waters
communications under Rule 255 and under the amendments could be
directed at any investor, including non-accredited investors. On
balance, we believe that the requirements governing the use of testing-
the-waters communications appropriately balance the goals of providing
flexibility to issuers and protection to investors.
    Amended Rule 204 allows oral communications with prospective
investors once the Form C is filed, so long as the communications
comply with the requirements of Rule 204, and moderately expands the
information that an issuer may provide in accordance with that rule. 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, as suggested by some
commenters.\638\ 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.
---------------------------------------------------------------------------

    \638\ See supra note 271.
---------------------------------------------------------------------------

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 amendments add a new item to
the non-exclusive list in Rule 506(c) that allows 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 that the investor continues to qualify as an accredited
investor 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. After considering commenter input, we are adding a five-year
limitation on the use of this verification method, after which the
issuer must take reasonable steps to verify that the investor is an
accredited investor.
a. Benefits
    The addition to the non-exclusive list in Rule 506(c) concerning
verification of investors for which the issuer previously took
reasonable steps to verify 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.\639\ 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.
---------------------------------------------------------------------------

    \639\ See supra note 284 and accompanying text.
---------------------------------------------------------------------------

b. Costs
    Generally, because the amendment represents an incremental revision
to the principles-based approach to verification in Rule 506(c), its
costs are expected to be modest. However, we recognize that some
previously verified investors that experience changes in financial
circumstances and lose accredited investor status over time might
provide written representations that they are accredited
investors,\640\ 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. Further, consistent
with some commenters' suggestions,\641\ in a change from the proposal,
we are adopting a time limit in conjunction with this additional means
of verification of accredited investor status. We expect this time
limit will further mitigate the likelihood of the costs to investors
described above.
---------------------------------------------------------------------------

    \640\ See supra note 288.
    \641\ See supra note 290.
---------------------------------------------------------------------------

c. Effects on Efficiency, Competition, and Capital Formation
    Generally, because the final amendments represent an incremental
revision to the principles-based approach to verification in Rule
506(c), we expect modest effects on efficiency, competition, and
capital formation.
d. Reasonable Alternatives
    We are adopting amendments to the existing non-exclusive list of
verification methods. As an alternative, we could rescind the non-
exclusive list. Compared to the final 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 are allowing issuers to establish that a previously verified
investor remains accredited for up to a five-year period if the
investor provides a representation to that effect and the issuer is not
aware of information to the contrary. As an alternative, as proposed,
we could allow issuers to make such a determination for an unlimited
period of time. Compared to the final amendments, this alternative
could reduce costs for issuers with repeat investors through less
frequent verification of investor status. At the same time, this
alternative could increase the likelihood of having 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.
    As another alternative, we could adopt additional means of
verification of accredited investor status (such as

investment amounts \642\ or self-certification \643\) as suggested by
some commenters.\644\ Compared to the final amendments, these
alternatives would further reduce the costs of accredited investor
status verification for issuers. However, they would result in a
significantly higher likelihood of non-accredited investors becoming
purchasers in an offering involving general solicitation under Rule
506(c). In particular, self-certification would be a significantly less
rigorous means of verification that, in conjunction with general
solicitation, could significantly increase risks to non-accredited
investors. Relatedly, the alternative of basing verification on the
amount invested would increase the likelihood that a non-accredited
investor participates in an offering. Moreover, this alternative would
increase risks to such non-accredited investors because they would be
more likely to have an underdiversified position in the event they
allocate a high investment amount to an investment opportunity under
Rule 506(c) to meet the verification requirement, resulting in a
greater risk of losses to such investors.
---------------------------------------------------------------------------

    \642\ See, e.g., CrowdCheck Letter; Invesco Letter; and NextSeed
Letter.
    \643\ See, e.g., Sen. Toomey Letter; IPA Letter; and NextSeed
Letter. See also D. Burton Letter; and J. Clarke Letter.
    \644\ See supra note 290.
---------------------------------------------------------------------------

    As another alternative, we could amend Rule 506(c) to add the fact
that an offering is conducted through a registered intermediary to the
optional means of accredited investor status verification, building on
the suggestion of one commenter.\645\ The benefit of this alternative
compared to the amendments would be to reduce costs for issuers. As
some commenters have stated, the requirement to take reasonable steps
to verify accredited investor status has generally impacted issuers'
willingness to use Rule 506(c).\646\ However, because this alternative
would not involve verifying each purchaser's accredited investor
status, it could significantly increase the likelihood of non-
accredited investors that learned about the offering through general
solicitation under Rule 506(c) becoming purchasers in the offering,
with the associated increase in risks to such investors.
---------------------------------------------------------------------------

    \645\ See, e.g., TIAA Letter (recommending not requiring
verification for offerings involving a registered investment
adviser, broker-dealer placement agent or other such intermediary).
    \646\ See supra note 285.
---------------------------------------------------------------------------

4. Disclosure Requirements
a. Required Disclosures to Non-Accredited Investors in Rule 506(b)
Offerings
    The amendments to Rule 502(b) generally align financial disclosure
requirements for non-reporting companies that sell to non-accredited
investors under Rule 506(b) with the disclosures required for offerings
under Tier 1 and Tier 2 of Regulation A, which also allows sales to
non-accredited investors.
i. Benefits
    The amendments to the Rule 502(b) disclosure requirements for sales
to non-accredited investors will 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.\647\ 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
$386,876 ($95,000) for fiscal years ending in 2018 or 2019.\648\ We
recognize that these costs may differ from the costs incurred by
issuers in Rule 506(b) offerings to non-accredited investors. Overall,
relatively few non-accredited investors participated in Rule 506(b)
offerings affected by these amendments. 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, between approximately 4.6
percent and 9.5 percent had at least one non-accredited investor.\649\
---------------------------------------------------------------------------

    \647\ See supra note 313.
    \648\ Estimates reflect data as recorded in Audit Analytics as
of August 26, 2020, including the full set of filings due for fiscal
year ending in 2019.
    \649\ See supra note 127. This estimate is based on the analysis
of 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.
---------------------------------------------------------------------------

    Lowering costs of sales to non-accredited investors under Rule
506(b) may 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 may 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 an increase in sales to non-accredited investors under
Rule 506(b), if any, will be due to 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.
ii. Costs
    Scaling Rule 502(b) disclosure requirements for sales to non-
accredited investors--and particularly repealing the requirement to
provide audited balance sheets in offerings up to $20 million--can
result in less informed investor decisions by some non-accredited
investors.\650\ For instance, to the extent that audited financial
statements are valuable for informed investment decisions,\651\ 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 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. Costs to investor protection from scaling the audit
requirement in Rule 506(b) offerings with non-accredited purchasers may
be higher than in Regulation A offerings because Rule 506(b) offerings
do not undergo Commission review.\652\ The requirement that non-
accredited investors must satisfy the knowledge and experience standard
of 17 CFR 230.506(b)(2)(ii) (``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.
---------------------------------------------------------------------------

    \650\ See supra note 314.
    \651\ 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).
    \652\ See NASAA Letter.
---------------------------------------------------------------------------

    In evaluating the investor costs of the 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