commenter recommended explicitly stating that Regulation A issuers are
subject to ``public business entity'' requirements if the final rules
do not provide for the use of, or a non-costly transition from,
financial statements based on alternatives under U.S. GAAP for non-
public business entities.\417\ One commenter limited its recommendation
with respect to the applicability of alternatives under U.S. GAAP for
non-public business entities to Tier 1 issuers and to entities whose
financial statements are required to be included in offering statements
relying on Tier 1.\418\ Another commenter noted that significant
acquired businesses will qualify as ``public business entities''
because their financial statements are filed with the Commission.\419\
As a result, financial statements of those businesses would also need
to be revised, and an issuer would potentially need to have their
financial statements prepared and audited a second time under U.S. GAAP
applicable to public business entities.
---------------------------------------------------------------------------

    \413\ ABA BLS Letter; BDO Letter; Letter from Frederick D.
Lipman, Blank Rome LLP, March 17, 2014 (``Blank Rome Letter'');
Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y
Letter; KPMG Letter; Karr Tuttle Letter; McGladrey Letter; MoFo
Letter; PwC Letter; WR Hambrecht + Co Letter.
    \414\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo
Letter; WR Hambrecht + Co Letter.
    \415\ ABA BLS Letter.
    \416\ McGladrey Letter.
    \417\ KPMG Letter.
    \418\ E&Y Letter.
    \419\ Deloitte Letter.
---------------------------------------------------------------------------

    Several commenters recommended allowing issuers under Regulation A
to defer adopting new or revised accounting standards effective for
public companies if non-public business entities have a delayed
effective date (similar to accommodations for emerging growth companies
under Section 102(b) of the JOBS Act).\420\ Two commenters recommended
either clarifying how the disclosure requirements for pro forma
financial information in Part F/S for Tier 1 issuers differ from Rule
8-05 of Regulation S-X or requiring such Tier 1 issuers to follow Rule
8-05.\421\ One commenter recommended allowing companies formed within
nine months of the filing date of the offering statement to provide
only a discussion of their financial condition and operations since
inception, rather than financial statements as of a date within nine
months of the date of filing.\422\ This commenter further recommended
aligning the financial statement updating requirements with the timing
of periodic reports (e.g., allowing for 120 days before year end
financial statements are required in the offering statement, rather
than 90 days).\423\ This commenter also recommended that the Commission
consider additional scaling for Regulation A offerings in the
requirements concerning the financial statements of: Acquired or to-be-

acquired businesses; guarantors of issuers of guaranteed securities;
and, affiliates that collateralize an issuance.\424\
---------------------------------------------------------------------------

    \420\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter.
    \421\ CAQ Letter; PwC Letter.
    \422\ E&Y Letter.
    \423\ Id.
    \424\ Id.
---------------------------------------------------------------------------

    Another commenter recommended that Tier 2 issuers not be subject to
Rule 8-04(b)(3) of Regulation S-X when the to-be-acquired business has
significant loss operations.\425\ This commenter recommended at least
not applying Rule 8-04(b)(3) in situations where companies intend to
eliminate the losses by dropping certain products or service lines of
business that produced the loss. Another commenter recommended
clarifying whether financial statements should also be dated within
nine months of the qualification date of the offering statement.\426\
---------------------------------------------------------------------------

    \425\ Blank Rome Letter.
    \426\ E&Y Letter (referring to paragraphs (a)(3)(i) and (b)(2)
of Part F/S of proposed Form 1-A).
---------------------------------------------------------------------------

    One commenter made a number of specific recommendations that we
clarify language in particular paragraphs of the proposed requirements
for financial statements in Part F/S of Form 1-A.\427\ A different
commenter indicated that proposed Form 1-A seemed to require issuers to
disclose ``selected financial information'' and objected to any such
requirement as being more onerous than the requirements otherwise
applicable to smaller reporting companies.\428\
---------------------------------------------------------------------------

    \427\ E&Y Letter, Appendix B.
    \428\ CAQ Letter. See Section II.C.3.a. above.
---------------------------------------------------------------------------

    Several commenters specifically supported allowing Canadian issuers
to prepare their financial statements in accordance with IFRS as issued
by the IASB, as proposed.\429\ More generally, many commenters
recommended allowing foreign issuers to use IFRS as issued by the IASB
to prepare their financial statements.\430\ One commenter recommended
allowing U.S. companies to use IFRS when conducting offerings in
Canada.\431\ This comment was made within the context of providing U.S.
companies the ability to list on a Canadian exchange without being
subject to resale restrictions imposed by Regulation S. Three
commenters specifically opposed adding an XBRL requirement.\432\
---------------------------------------------------------------------------

    \429\ ABA BLS Letter; Canaccord Letter; MoFo Letter; NASAA
Letter 2; PwC Letter.
    \430\ ABA BLS Letter (although supporting excluding non-Canadian
foreign companies); Andreessen/Cowen Letter; Canaccord Letter
(stating generally that the Commission should clarify that companies
may use IFRS); CAQ Letter; Deloitte Letter; PwC Letter.
    \431\ Karr Tuttle Letter.
    \432\ BIO Letter; MoFo Letter; U.S. Chamber of Commerce Letter.
---------------------------------------------------------------------------

(c) Final Rules for Financial Statements
    As discussed more fully below, we are adopting requirements for
financial statements in Part F/S of Form 1-A with changes from the
proposed rules that are designed to simplify and lower the cost of
compliance for issuers, while maintaining important investor
protections. As proposed, the final rules require Tier 1 and Tier 2
issuers to file balance sheets and other required financial statements
as of the two most recently completed fiscal year ends (or for such
shorter time that they have been in existence). With the exception of
the requirement to file two years of balance sheets, the final rules
largely maintain the existing financial statement requirements of
current Part F/S for Tier 1 offerings, while requiring Tier 2 issuers
to file audited financial statements in Part F/S.
    Financial statements for U.S.-domiciled issuers will be required to
be prepared in accordance with U.S. GAAP, as is currently the case.
Canadian issuers, however, may prepare financial statements in
accordance with either U.S. GAAP or International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards
Board (IASB).\433\
---------------------------------------------------------------------------

    \433\ If the financial statements comply with IFRS as issued by
the IASB, such compliance must be unreservedly and explicitly stated
in the notes to the financial statements and the auditor's report
must include an opinion on whether the financial statements comply
with IFRS as issued by the IASB. See General Rule (a)(2) to Part F/S
of Form 1-A.
---------------------------------------------------------------------------

    Additionally, consistent with the suggestions of commenters and in
order to be consistent with the treatment of emerging growth companies
under Section 102(b)(1) of the JOBS Act, the final rules permit
issuers, where applicable, to delay the implementation of new
accounting standards to the extent such standards provide for delayed
implementation by non-public business entities.\434\ In this regard,
with respect to the delayed implementation of new or revised financial
accounting standards, if the issuer chooses to take advantage of the
extended transition period to the same extent that a ``non-issuer''
company is permitted to, the issuer:
---------------------------------------------------------------------------

    \434\ CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter. See
also Section 7(a)(2)(B) of the Securities Act, 15 U.S.C.
77g(a)(2)(B), and Section 13(a) of the Exchange Act, 15 U.S.C.
78m(a).
---------------------------------------------------------------------------

     Must disclose such choice at the time the issuer files the
offering statement; and
     May not take advantage of the extended transition period
with respect to some standards and not others, but must apply the same
choice to all standards.\435\
---------------------------------------------------------------------------

    \435\ See paragraph (a)(3) of Part F/S of Form 1-A.
---------------------------------------------------------------------------

    However, issuers electing not to use this accommodation must forgo
this accommodation for all financial accounting standards and may not
elect to rely on this accommodation in any future filings.\436\
---------------------------------------------------------------------------

    \436\ Id.
---------------------------------------------------------------------------

    As proposed, the final rules require issuers conducting Tier 1
offerings to follow the requirements for the form and content of their
financial statements set out in Part F/S, rather than following the
requirements in Regulation S-X.\437\ However, consistent with a comment
received,\438\ in certain less common circumstances, such as for an
acquired business or subsidiary guarantors, Part F/S directs issuers
conducting Tier 1 offerings to certain portions of Regulation S-X that
provide guidance on when financial statements for entities other than
the issuer are required.\439\ In Tier 1 offerings the form and content
of the financial statements for those other entities also follow the
requirements set out in Part F/S. We believe this guidance will assist
issuers with compliance with the general requirements for financial
statement disclosure in these less common circumstances and is an
appropriate change in the final rules. In an effort to reduce
confusion, as suggested by commenters,\440\ the final rules also direct
issuers to Rule 8-05 of Regulation S-X for pro forma information
disclosure requirements. Additionally, the final rules require
compliance with Rule 8-06 of Regulation S-X for real estate operations
acquired because real estate companies and REITs are eligible issuers.
---------------------------------------------------------------------------

    \437\ See paragraph (b) of Part F/S of Form 1-A.
    \438\ E&Y Letter.
    \439\ We are updating the requirements for financial statements
of businesses acquired or to be acquired in Part F/S to refer to the
requirements of Rule 8-04 of Regulation S-X. We are also providing
specific references to the relevant provisions of Regulation S-X
regarding the requirements for financial statements of guarantors
and the issuers of guaranteed securities (Rule 3-10 of Regulation S-
X), financial statements of affiliates whose securities
collateralize an issuance of securities (Rule 3-16 of Regulation S-
X), financial statements provided in connection with oil and gas
producing activities (Rule 4-10 of Regulation S-X), pro forma
financial information (Rule 8-05 of Regulation S-X) and income
statements for real estate operations acquired or to be acquired
(Rule 8-06 of Regulation S-X). The financial statements provided in
these circumstances would only be required to be audited to the
extent the issuer had already obtained an audit of those financial
statements for other purposes.
    \440\ CAQ Letter; PwC Letter.
---------------------------------------------------------------------------

    The final rules require Tier 2 issuers to follow the financial
statement requirements of Article 8 of Regulation S-X, as if the issuer
were a smaller reporting company, unless otherwise

noted in Part F/S.\441\ This requirement also includes any financial
information required for Tier 1 offerings, as discussed above, such as
acquired businesses required by Rule 8-04 and 8-05 of Regulation S-
X.\442\
---------------------------------------------------------------------------

    \441\ See paragraph (c) of Part F/S of Form 1-A.
    \442\ Tier 2 issuers would, however, follow paragraphs (c)(1) of
Part F/S of Form 1-A with respect to the age of the financial
statements and the periods to be presented. In Tier 2 offerings, the
form and content of financial statements for other entities follow
the requirement of Article 8 of Regulation S-X.
---------------------------------------------------------------------------

    As adopted, financial statements in a Tier 1 offering are not
required to be audited. Consistent with the suggestions of
commenters,\443\ and in order to avoid potential confusion as to the
presentation of financial statements, issuers in Tier 1 offerings that
do not provide audited financial statements must label their financial
statements as unaudited. However, the final rules clarify that, if an
issuer conducting a Tier 1 offering has already obtained an audit of
its financial statements for other purposes, and that audit was
performed in accordance with U.S. GAAS or the standards of the PCAOB,
and the auditor followed the independence standards of either Rule 2-01
of Regulation S-X or the independence standards of the AICPA, then
those audited financial statements must be filed.\444\ We believe the
requirement to file already available audited financial statements will
benefit investors. The auditor need not be registered with the PCAOB.
While audited financial statements are not generally required to be
filed for Tier 1 offerings, allowing auditors to follow the
independence standards of the AICPA or Rule 2-01 of Regulation S-X is
consistent with the suggestions of most commenters and will provide
smaller issuers that seek to submit ``audited'' financial statements in
Tier 1 offerings with greater flexibility in satisfying the financial
statement requirements.\445\ We agree that, when available, financial
statements that satisfy the financial statement requirements and that
have been audited by an auditor that meets the independence standards
of the AICPA should be deemed ``audited'' for purposes of Tier 1
offerings.
---------------------------------------------------------------------------

    \443\ CAQ Letter; E&Y Letter; KPMG Letter.
    \444\ See CAQ Letter (requesting clarification on this issue).
    \445\ While not a requirement, issuers in Tier 1 offerings may
have independent business reasons why they seek to provide, or
investors that may otherwise demand, audited financial statements.
---------------------------------------------------------------------------

    Issuers conducting Tier 2 offerings are, by contrast, required to
have their financial statements audited. The auditor of financial
statements being filed as part of a Tier 2 offering must be independent
under Rule 2-01 of Regulation S-X and must comply with the other
requirements of Article 2 of Regulation S-X, but need not be PCAOB-
registered.\446\ In a change from the proposed rules, and consistent
with the suggestions of commenters,\447\ the final rules require
issuers conducting Tier 2 offerings to provide financial statements
that are audited in accordance with either U.S. GAAS or the standards
issued by the PCAOB.
---------------------------------------------------------------------------

    \446\ See paragraph (c)(1)(iii) of Part F/S of Form 1-A.
    \447\ ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte
Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR
Hambrecht + Co Letter.
---------------------------------------------------------------------------

    As noted above, one commenter indicated that, because Regulation A
issuers are not ``issuers,'' as defined by Section 2(a)(7) of the
Sarbanes-Oxley Act of 2002, AICPA rules would require the audit to be
compliant with U.S. GAAS even if the auditor has conducted the audit in
accordance with PCAOB standards. Staff of the Commission consulted with
the AICPA on this issue and has been advised that an audit performed by
its members of an issuer conducting an offering pursuant to Regulation
A would be required to comply with U.S. GAAS in accordance with the
AICPA's Code of Professional Conduct.\448\ As a result, an auditor for
a Regulation A issuer who is conducting its audit in accordance with
PCAOB standards would also be required to comply with U.S. GAAS, and
the auditor would need to comply with the reporting requirements of
both the AICPA standards and the PCAOB standards. As further noted by
this commenter,\449\ there may be some question as to whether an
auditor can currently comply with both sets of standards when issuing
its auditor's report. Commission staff also consulted with the AICPA on
this issue and has been informed that the AICPA will consider taking
action to address this potential conflict so that an auditor's report
would be able to comply with both sets of auditing standards.
---------------------------------------------------------------------------

    \448\ The AICPA Code of Professional Conduct is available at:
http://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf.
    \449\ See KPMG Letter.
---------------------------------------------------------------------------

    Thus, requiring issuers in Tier 2 offerings to have their financial
statements audited in accordance with PCAOB standards would have the
effect of requiring issuers to comply with two sets of auditing
standards and potentially result in audits for Tier 2 issuers being
subject to additional incremental costs than would be required for
registered offerings (which are only subject to PCAOB auditing
standards). To avoid such a result, the final rules permit Tier 2
issuers the option of following U.S. GAAS or the standards of the
PCAOB.\450\
---------------------------------------------------------------------------

    \450\ As discussed above, however, compliance with PCAOB
standards could also require compliance with U.S. GAAS.
---------------------------------------------------------------------------

    We believe that providing issuers with this option could help
reduce the cost of required audits in Tier 2 offerings while
maintaining appropriate safeguards for investors. We believe audits
conducted in accordance with U.S. GAAS provide sufficient protection
for investors in Regulation A offerings, especially in light of the
requirement that auditors for Tier 2 offerings must be independent
under Rule 2-01 of Regulation S-X. Moreover, we believe that the
flexibility adopted in the final rules is more appropriately tailored
for the different types of issuers likely to conduct Tier 2 offerings
because it will not only eliminate the potential that existed under the
proposed rules that some issuers would need to have their financial
statements audited a second time under PCAOB standards, but also
continue to permit issuers, such as those that may seek concurrent
registration of a class of securities under the Exchange Act, to comply
with the PCAOB standards if they so choose.\451\
---------------------------------------------------------------------------

    \451\ See, e.g., Section II.E.3.c (Exchange Act Registration of
Regulation A Securities) below.
---------------------------------------------------------------------------

    An issuer that includes financial statements audited in accordance
with U.S. GAAS and PCAOB standards will likely incur additional
incremental costs compared with an issuer that includes financial
statements audited only in accordance with U.S. GAAS. However, we
assume that an issuer would only elect to comply with both sets of
auditing standards because it has concluded that the benefit of doing
so (for example, to facilitate Exchange Act registration) justify these
additional incremental costs. Commission staff understands that many
firms that conduct audits using PCAOB standards have developed their
methodology in a manner that would comply with both sets of standards,
which could help contain the costs related to complying with both U.S.
GAAS and PCAOB auditing standards.
    An issuer conducting a Regulation A offering that seeks to
concurrently register its securities under the Exchange Act would be
required to file audited financial statements that are prepared in
accordance with the standards of the PCAOB by an auditor that is PCAOB-
registered.\452\ The final rules therefore provide Regulation A

issuers with the option to provide financial statements in Part F/S of
Form 1-A that comply with correlating requirements under the Exchange
Act.\453\
---------------------------------------------------------------------------

    \452\ See Section 12 of the Exchange Act, Section 102 of the
Sarbanes Oxley Act of 2002 and Article 2 of Regulation S-X.
    \453\ If the final rules did not permit issuers to prepare
audited financial statements in accordance with the standards of the
PCAOB, Regulation A issuers that rely on the amendments to Form 8-A
adopted today in order to register a class of securities pursuant to
Section 12 of the Exchange Act would have to have their financial
statements audited a second time under PCAOB standards by a PCAOB
registered auditor.
---------------------------------------------------------------------------

    The Form 1-A financial statement requirements are being further
updated to be consistent with the timetable for ongoing reporting.\454\
The final rules extend the permissible age of financial statements in
Form 1-A to nine months, in order to permit the provision of financial
statements that are updated on a timetable consistent with our
requirement for semiannual interim reporting.\455\ As proposed, the
final rules add a new limitation on the age of financial statements at
qualification, under which an offering statement cannot be qualified if
the date of the most recent balance sheet included under Part F/S is
more than nine months before the date of qualification.\456\ For
filings made more than three months but no more than nine months after
the end of the issuer's most recently completed fiscal year end,
issuers are required to include a balance sheet as of the two most
recently completed fiscal year ends.\457\ For filings made more than
nine months after the end of the issuer's most recently completed
fiscal year end, the balance sheet is required to be dated as of the
two most recently completed fiscal year ends and an interim balance
sheet must be included as of a date no earlier than six months after
the end of the most recently completed fiscal year.\458\ If interim
financial statements are required, they are required to cover a period
of at least six months.\459\ Requiring issuers to file interim
financial statements no older than nine months and covering a minimum
of six months has the beneficial effect of eliminating what would
otherwise be a requirement for certain issuers to provide quarterly
interim financial statements during the qualification process and is
consistent with the timing of the ongoing reporting requirements
adopted today.\460\ We are generally maintaining the requirement of
existing Form 1-A concerning the date after which an issuer must
provide financial statements dated as of the most recently completed
fiscal year, but are changing the interval from 90 calendar days to
three months, which we believe will simplify compliance by allowing
issuers to follow full months. In order to further simplify compliance
with the final rules, we also revised Part F/S of Form 1-A to
streamline the application of, and simplify the language in, the rules
without substantively changing the required content.
---------------------------------------------------------------------------

    \454\ Our final rules for ongoing reporting are discussed in
Section II.E.1. below.
    \455\ See paragraph(s) (b)(3)-(4) of Part F/S of Form 1-A for
Tier 1 issuers, which also apply to Tier 2 issuers by virtue of
paragraph (c)(1) of Part F/S of Form 1-A.
    \456\ Id.
    \457\ See paragraph (b)(3)(A) of Part F/S of Form 1-A.
    \458\ See paragraph (b)(3)(B) of Part F/S of Form 1-A.
    \459\ See paragraph (b)(4) of Part F/S of Form 1-A.
    \460\ See, e.g., discussion in Section II.E.1. below.
---------------------------------------------------------------------------

    Although we solicited comment on whether issuers conducting Tier 2
offerings should be required to provide their financial statements to
the Commission and on their corporate Web sites in interactive data
format using XBRL, we are not adopting any such requirement in the
final rules.\461\ Commenters that addressed this issue opposed
requiring the use of XBRL in Regulation A filings.\462\ We agree and do
not believe that requiring the use of XBRL in Regulation A filings
would be an appropriately tailored requirement for smaller issuers at
this time.\463\
---------------------------------------------------------------------------

    \461\ Data becomes interactive when it is labeled or ``tagged''
using a computer markup language such as XBRL that software can
process for analysis. For a discussion of current financial
statement interactive data requirements, see Rel. No. 33-9002 (Jan.
30, 2009) [74 FR 6776].
    \462\ BIO Letter; MoFo Letter; US Chamber of Commerce Letter.
    \463\ We recognize, however, that future technological
developments may lessen the burden to smaller issuers associated
currently with XBRL, at which time we may revisit this initial
determination.
---------------------------------------------------------------------------

    On December 23, 2013, after we proposed rules for Regulation A, the
Financial Accounting Standards Board (FASB) and Private Company Council
(PCC) issued a guide for evaluating financial accounting and reporting
for non-public business entities.\464\ The PCC was created in 2012 by
the FASB and the Financial Accounting Foundation (FAF) to improve the
standard-setting process, and provide for accounting and reporting
alternatives, for non-public business entities under U.S. GAAP.\465\ As
the standards for non-public business entities are new, there are
currently very few distinctions between U.S. GAAP for public and non-
public business entities. Over time, however, more distinctions between
non-public business entity and public company accounting standards
could develop.
---------------------------------------------------------------------------

    \464\ The Private Company Decision-Making Framework: A Guide for
Evaluating Financial Accounting and Reporting for Private Companies
(the ``PCC Guide''), available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163703583.
    \465\ For a brief history behind the creation of the PCC, see:
http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1351027243391.
---------------------------------------------------------------------------

    Issuers that offer securities pursuant to Regulation A will be
considered ``public business entities'' as defined by the FASB and,
therefore, ineligible to rely on any alternative accounting or
reporting standards for non-public business entities.\466\ Even though
issuers of securities in a Regulation A offering fit within the
definition of ``public business entity,'' the Commission retains the
authority to determine whether or not such issuers would be permitted
to rely on the developing non-public business entity standards.\467\
---------------------------------------------------------------------------

    \466\ See numbered paragraph 12 of the PCC Guide, p. 3.
    \467\ Id.
---------------------------------------------------------------------------

    The distinction between public and non-public business entity
standards was not directly contemplated in the Proposing Release, as
the FASB/PCC Guide was issued after the Regulation A proposal was
approved by the Commission.\468\ Commenters, however, generally
expressed concern about the costs associated with requiring non-public
business entities (e.g., non-Exchange Act reporting companies) to
follow public company U.S. GAAP accounting standards, particularly on a
going forward basis.\469\ Commenters also expressed concern about the
potential that an issuer would need to have its financial statements
prepared and audited a second time, which would likely increase the
costs associated with any previously obtained financial statements by a
non-public business entity that would not comply with the financial
statement requirements of an exemption that requires such issuer to
follow the standards applicable to public business entities.\470\
---------------------------------------------------------------------------

    \468\ The Commission approved the proposed rules on December 18,
2013, while the PCC Guide was issued on December 23, 2013.
    \469\ ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter
1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo
Letter; WR Hambrecht + Co Letter.
    \470\ Id.
---------------------------------------------------------------------------

    The final rules do not allow Regulation A issuers to use the
alternatives available to non-public business entities under U.S. GAAP
in the preparation of their financial statements. One of the
significant factors considered by the FASB in developing its definition
of ``public business entity'' was the number of primary users of the
financial statements and their access to

management.\471\ As the FASB noted, ``users of private company
financial statements have continuous access to management and the
ability to obtain financial information throughout the year.'' \472\ As
the number of investors increases and the ability to influence
management decreases, it is important that all investors receive or
have timely access to comprehensive financial information. As a result,
the Commission believes that investor protection is enhanced by
Regulation A issuers providing financial statements prepared in the
same manner as other entities meeting the FASB's definition of ``public
business entity.''
---------------------------------------------------------------------------

    \471\ PCC Guide, p. 6.
    \472\ Id.
---------------------------------------------------------------------------

c. Part III (Exhibits)
    We proposed to maintain the existing exhibit requirements in Part
III of Form 1-A. Additionally, we proposed to continue to permit
issuers to incorporate by reference certain information in documents
filed under Regulation A that is already available on EDGAR, but also
require issuers to describe the information incorporated by reference
and include a hyperlink to such exhibit on EDGAR.\473\ As proposed,
issuers also would have to be subject to the ongoing reporting
obligations for Tier 2 offerings in order to avail themselves of this
accommodation.
---------------------------------------------------------------------------

    \473\ See General Instruction III to proposed Form 1-A and
discussion in Section II.C.3.b(1). above regarding incorporation by
reference in Part II of Form 1-A. The hyperlink must be active at
the time of filing, but need not remain active after filing.
---------------------------------------------------------------------------

    We did not receive any comments on the proposed exhibit
requirements for Part III of Form 1-A, and are adopting the proposed
exhibit requirements substantially as proposed. As adopted, issuers
will be required to file the following exhibits with the offering
statement: Underwriting agreement; charter and by-laws; instrument
defining the rights of securityholders; subscription agreement; voting
trust agreement; material contracts; plan of acquisition,
reorganization, arrangement, liquidation, or succession; escrow
agreements; consents; opinion regarding legality; ``testing the
waters'' materials; appointment of agent for service of process; and
any additional exhibits the issuer may wish to file.\474\ In a change
from the proposed requirements, however, the final rules no longer
require issuers to file schedules (or similar attachments) to material
contracts in all instances. As adopted, issuers are permitted to
exclude schedules (or similar attachments) to material contracts if not
material to an investment decision or if the material information
contained in such schedules is otherwise disclosed in the agreement or
the offering statement. Any material contract filed in response to Item
17, however, must contain a list briefly identifying the contents of
all omitted schedules, together with an agreement to furnish
supplementally a copy of any omitted schedule to the Commission upon
request.
---------------------------------------------------------------------------

    \474\ See Part III (Exhibits) of Form 1-A.
---------------------------------------------------------------------------

    We are adopting final rules that permit issuers to incorporate by
reference certain information that is already available on EDGAR. In a
change from the proposed rules, incorporation by reference will not be
limited to documents previously filed pursuant to Regulation A and will
not be limited to issuers subject to Tier 2 ongoing reporting
obligations. We believe that this change will continue to facilitate
the provision of required information to investors, while taking a
consistent approach to information previously provided to the
Commission and publicly available on EDGAR. Issuers that seek to
incorporate by reference are further required to describe the
information incorporated by reference and include a hyperlink to such
exhibit on EDGAR.\475\ As proposed, such issuers must be subject to the
ongoing reporting obligations for Tier 2 offerings. Additionally, as
proposed, to the extent post-qualification amendments to offering
statements must include audited financial statements, the final rules
require the consent of the certifying accountant to the use of such
accountant's report in connection with amended financial statements to
be included as an exhibit.\476\ The final rule, however, clarifies that
the requirement to file the consent of the certifying accountant only
applies where the financial statements required to be filed are
amended.\477\
---------------------------------------------------------------------------

    \475\ See General Instruction III to Form 1-A. The hyperlink
must be active at the time of filing, but need not remain active
after filing.
    \476\ This is consistent with current practice under Regulation
A, but will be made an express requirement under the final rules.
See Rule 252(f)(1)(ii).
    \477\ See id.
---------------------------------------------------------------------------

d. Signature Requirements
    Similar to the requirement for issuers in registered offerings, we
proposed to require issuers to manually sign a copy of the offering
statement before or at the time of filing and retain it for a period of
five years.\478\ Issuers would be required to produce the manually
signed copy to the Commission, upon request.\479\ Additionally, we
proposed to eliminate the requirement that, where an issuer filing a
Form 1-A is a Canadian issuer, its authorized representative in the
United States is required to sign the offering statement.\480\ Also, we
proposed to maintain the requirement that Canadian issuers file a Form
F-X \481\ to provide an express consent to service of process in
connection with offerings qualified under Form 1-A. This treatment is
similar to requirements for Canadian companies making filings under the
multijurisdictional disclosure system.\482\
---------------------------------------------------------------------------

    \478\ See Instructions 2 and 3 to Signatures in proposed Form 1-
A; cf. Rule 402(e), 17 CFR 230.402(e).
    \479\ Id.
    \480\ See 17 CFR 230.252(f) (2014) and Instruction 1 to
Signatures of Form 1-A (2014).
    \481\ 17 CFR 239.42.
    \482\ See Rel. No. 33-6902 (June 21, 1991) [56 FR 30036]
(adopting the multijurisdictional disclosure system).
---------------------------------------------------------------------------

    We did not receive any comments on this aspect of the proposal, and
are adopting these provisions, as proposed, in the final rules.\483\
---------------------------------------------------------------------------

    \483\ See Instructions to Signatures, Form 1-A.
---------------------------------------------------------------------------

4. Continuous or Delayed Offerings and Offering Circular Supplements
a. Proposed Rules
    Rule 251(d)(3) currently allows for continuous or delayed offerings
under Regulation A if permitted by Rule 415.\484\ By reference to the
undertakings of Item 512(a) of Regulation S-K,\485\ Rule 415 does not
necessarily require every change in the information contained in a
prospectus to a registration statement in a continuous offering to be
reflected in a post-effective amendment.\486\ On the other hand,
currently Regulation A requires every revised or updated offering
circular in a continuous offering to be filed as an amendment to the
offering statement to which it relates and to be qualified in a process
similar to the Commission staff review, comment and qualification
process for initial offering statements.\487\ The requalification

process can be costly and time consuming for smaller issuers conducting
continuous offerings of securities pursuant to Regulation A. We
proposed to clarify in the rules for Regulation A the scope of
permissible continuous or delayed offerings and the related concept of
offering circular supplements.
---------------------------------------------------------------------------

    \484\ 17 CFR 230.415. Certain shelf offerings, however, are only
permissible in offerings on Form S-3, which Regulation A issuers are
ineligible to use. See, e.g., Rule 415(a)(1)(x).
    \485\ 17 CFR 230.415(a)(3).
    \486\ See 17 CFR 229.512(a)(1) (requiring issuers to file a
post-effective amendment for purposes of an update under Section
10(a)(3) of the Securities Act, to reflect any facts or events
arising after effectiveness that, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, or to include, subject to certain
exceptions, any material information with respect to the plan of
distribution not previously disclosed (or material changes to
information previously disclosed) in the registration statement).
    \487\ See 17 CFR 230.253(e) (2014); 17 CFR 230.252(h)(1) (2014).
---------------------------------------------------------------------------

    Rule 415 attempts to promote efficiency and cost savings in the
securities markets by allowing for the registration of certain
traditional and other shelf offerings.\488\ Prior to the adoption of
final rules today, Rule 251(d)(3) of Regulation A allowed for
continuous or delayed offerings under Regulation A if permitted by Rule
415.\489\ When Rule 415 was adopted, the Commission recognized that
certain traditional shelf offerings have been allowed by administrative
practice for many years despite the absence of such a rule.\490\ Since
Rule 415 only addresses registered offerings, however, the precise
scope of continuous or delayed offerings under Regulation A has been
unclear.
---------------------------------------------------------------------------

    \488\ See Rel. No. 33-6499 [48 FR 52889] (Nov. 23, 1983) (noting
the efficiency and cost savings issuers experienced during the
eighteen month trial period for a previous temporary version of the
rule).
    \489\ 17 CFR 230.415.
    \490\ Certain ``traditional shelf offerings'' have been allowed
since at least 1968 by the Commission's guides for the preparation
and filing of registration statements, such as Guide 4, and related
administrative practice. See id.; see also Rel. No. 33-4936 [33 FR
18617] (Dec. 9, 1968) (adopting Guide 4 and other Commission
guides).
---------------------------------------------------------------------------

    The proposed rules would clarify the scope of permissible
continuous or delayed offerings under Regulation A and the related
concept of offering circular supplements, and otherwise continue to
allow for certain traditional shelf offerings to promote flexibility,
efficiency, and to reduce unnecessary offerings costs.\491\ Further, as
proposed, an issuer's ability to sell securities in a continuous or
delayed offering would be conditioned on being current with the Tier 2
ongoing reporting requirements at the time of sale.\492\
---------------------------------------------------------------------------

    \491\ See Proposing Release, at Section II.C.4.
    \492\ Proposed Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------

    To provide clarity regarding the application of Rule 415 concepts
to Regulation A offerings, we proposed to add a provision to Regulation
A similar to Rule 415, but with limitations that we believed would be
appropriate for Regulation A. The provision would establish time limits
similar to those in Rule 415 and make conforming changes as
necessary.\493\
---------------------------------------------------------------------------

    \493\ Proposed Rule 251(d)(3).
---------------------------------------------------------------------------

    In the Proposing Release we proposed excluding types of shelf
offerings that cannot be conducted under existing Regulation A, such as
offerings requiring registration on Form F-6, offerings requiring
primary eligibility to use Forms S-3 or F-3,\494\ offerings conducted
by issuers ineligible to use Regulation A,\495\ as well as certain
offerings that we do not currently believe would be appropriate to
include in the Regulation A framework. Further, we proposed prohibiting
all ``at the market'' offerings under Regulation A.\496\
---------------------------------------------------------------------------

    \494\ See also fn. 484 above.
    \495\ Rule 415(a)(1)(xi) discusses investment companies and
BDCs.
    \496\ See proposed Rule 251(d)(3)(ii).
---------------------------------------------------------------------------

    Additionally, as proposed, changes in the information contained in
the offering statement would no longer necessarily trigger an
obligation to amend.\497\ Offering circulars for continuous Regulation
A offerings would, however, continue to be required to be updated
annually through the filing of a post-qualification amendment. These
annual post-qualification amendments would include updated financial
statements and post-qualification amendments would also be required
when updating the offering circular to reflect facts or events arising
after qualification which, in the aggregate, represent a fundamental
change in the information set forth in the offering statement.\498\
---------------------------------------------------------------------------

    \497\ See proposed Rule 252(h)(2).
    \498\ Id.
---------------------------------------------------------------------------

    In addition to these post-qualification amendments to the offering
statement that must be qualified, we also proposed to allow issuers to
use offering circular supplements in certain situations.\499\ Further,
we proposed to permit issuers in continuous offerings to qualify
additional securities in reliance on Regulation A by a post-
qualification amendment.\500\
---------------------------------------------------------------------------

    \499\ See proposed Rule 253(g).
    \500\ See proposed Rule 251(d)(3)(i)(F) and note to proposed
Rule 253(b).
---------------------------------------------------------------------------

    We also proposed provisions similar to Rule 424 that would require
issuers omitting certain information from an offering statement at the
time of qualification, in reliance on proposed Rule 253(b), to file
such information as an offering circular supplement no later than two
business days following the earlier of the date of determination of
such pricing information or the date of first use of the offering
circular after qualification.\501\ Further, these proposed provisions
would require offering circulars that contain substantive changes in
information previously provided in the last offering circular (other
than information omitted in reliance on proposed Rule 253(b)) to be
filed within five business days after the date such offering circular
is first used after qualification.\502\ Offering circular supplements
that are not filed within the required time frames provided by the
proposed rules would be required to be filed as soon as practicable
after the discovery of the failure to file.\503\
---------------------------------------------------------------------------

    \501\ See proposed Rule 253(g).
    \502\ See proposed Rule 253(g)(2).
    \503\ See proposed Rule 253(g)(4).
---------------------------------------------------------------------------

b. Comments on Proposed Rules
    Commenters were generally supportive of the proposed modernization
of Regulation A's offering process, in general, and the provisions for
continuous or delayed offerings, in particular.\504\ Two commenters,
however, recommended allowing for at the market offerings under
Regulation A.\505\ Additionally, one commenter recommended allowing for
at the market offerings in non-penny stocks on established trading
markets.\506\ Another commenter recommended allowing for at the market
offerings in securities that qualify for the actively-traded securities
exceptions in Rules 101 and 102 of Regulation M.\507\ This commenter
suggested that the offering amount could be determined by using the
calculation set forth in Securities Act Rule 457(c) \508\ as of a
specified date within five business days of qualification of the
offering statement.
---------------------------------------------------------------------------

    \504\ See, e.g., ABA BLS Letter; KVCF Letter; OTC Markets
Letter; Paul Hastings Letter.
    \505\ OTC Markets Letter; Paul Hastings Letter.
    \506\ OTC Markets Letter. This commenter also recommended that
securities offered under Regulation A that are not penny stocks and
that trade on an established public market should be treated as
having a ``ready market'' and thus be considered eligible for margin
purposes, which the commenter believed would increase the value of
securities and their liquidity.
    \507\ Paul Hastings Letter. Regulation M was adopted by the
Commission in 1996 and is intended to prevent potentially
manipulative practices by underwriters, issuers, selling
securityholders, and other participants in a securities offering.
See Rel. No. 38067 (December 20, 1996) [62 FR 520].
    \508\ Rule 457(c) specifies that Securities Act registration
fees for securities offered on the basis of fluctuating market
prices shall be calculated as follows: Either the average of the
high and low prices reported in the consolidated reporting system
(for last sale reported over-the-counter securities) or the average
of the bid and asked price (for other over-the-counter securities)
as of a specified date within 5 business days prior to the date of
filing the offering statement.
---------------------------------------------------------------------------

c. Final Rules
    We believe the proposed rules sufficiently update existing rules,
while providing issuers with adequate flexibility with respect to, and
additional guidance on, the permissible scope of continuous or delayed
Regulation A offerings and offering

circular supplements. We are adopting these rules as proposed.
    The final rules add Rule 251(d)(3) to Regulation A, without changes
from the proposed rule. This provision is similar to Rule 415, but its
scope is limited to permissible Regulation A offerings.\509\ In this
regard, the final rules for Regulation A will continue to allow for
certain traditional shelf offerings to promote flexibility, efficiency,
and to reduce unnecessary offerings costs.\510\ The final rules will
condition the ability of an issuer to sell securities in a continuous
offering on being current in its annual and semiannual report filing,
if required under Rule 257(b), at the time of sale.\511\ As we
indicated in the Proposing Release, we believe this additional
condition will not impose incremental costs on issuers, which are in
any case required to update their offering statement and to file such
ongoing reports, and will promote parity of information in the
secondary markets.
---------------------------------------------------------------------------

    \509\ Rule 251(d)(3).
    \510\ See Rel. No. 33-6499, at IV.A. (``[T]he procedural
flexibility afforded by the Rule enables a registrant to time its
offering to avail itself of the most advantageous market conditions
. . . registrants are able to obtain lower interest rates on debt
and lower dividend rates on preferred stock, thereby benefiting
their existing shareholders.'').
    \511\ This condition only applies to continuous offerings under
Rule 251(d)(3)(i)(F).
---------------------------------------------------------------------------

    As proposed, the final rules provide for the following types of
continuous or delayed offerings:
     Securities offered or sold by or on behalf of a person
other than the issuer or its subsidiary or a person of which the issuer
is a subsidiary;
     securities offered and sold pursuant to a dividend or
interest reinvestment plan or an employee benefit plan of the issuer;
     securities issued upon the exercise of outstanding
options, warrants, or rights;
     securities issued upon conversion of other outstanding
securities;
     securities pledged as collateral; or
     securities that are part of an offering which commences
within two calendar days after the qualification date, will be offered
on a continuous basis, may continue to be offered for a period in
excess of 30 days from the date of initial qualification, and will be
offered in an amount that, at the time the offering statement is
qualified, is reasonably expected to be offered and sold within two
years from the initial qualification date.\512\
---------------------------------------------------------------------------

    \512\ Id.
---------------------------------------------------------------------------

    Notwithstanding the suggestions of commenters regarding at the
market offerings, we continue to believe that such offerings are not
appropriate for Regulation A offerings, particularly at the outset of
the adoption of today's amendments to the existing rules. While it is
possible that a market in Regulation A securities may develop that is
capable of supporting primary and secondary at the market offerings,
rather than permit such offerings at the outset, we believe that any
determination as to whether the exemption would be an appropriate
method for such offerings should occur in the future. Further, an
offering sold at fluctuating market prices may not be appropriate
within the context of an exemption that is contingent upon not
exceeding a maximum offering size.
    Under the final rules, as proposed, changes in the information
contained in the offering statement will no longer necessarily trigger
an obligation to amend.\513\ Offering circulars for continuous or
delayed Regulation A offerings will continue to be required to be
updated, and the offering statements to which they relate requalified
annually to include updated financial statements, and otherwise as
necessary to reflect facts or events arising after qualification which,
in the aggregate, represent a fundamental change in the information set
forth in the offering statement.\514\ In addition to post-qualification
amendments to the offering statement that must be qualified, the final
rules also will allow issuers to use offering circular supplements in
certain situations.\515\ Further, issuers in continuous offerings will
be permitted to qualify additional securities in reliance on Regulation
A by a post-qualification amendment.\516\
---------------------------------------------------------------------------

    \513\ Rule 252(f)(2).
    \514\ Id.
    \515\ Rule 253(g).
    \516\ Rule 251(d)(3)(i)(F) and note to Rule 253(b).
---------------------------------------------------------------------------

    The final rules will, as proposed, permit offering circular
supplements to be used for final pricing information, where the
offering statement is qualified on the basis of a bona fide price range
estimate.\517\ Additionally, the final rules permit offering circulars
to omit information with respect to the underwriting syndicate
analogous to the provisions for registered offerings under Rule
430A.\518\ However, the final rules do not allow an issuer to omit the
volume of securities (the number of equity securities or aggregate
principal amount of debt securities) to be offered.\519\ The final
rules also permit, as proposed, offering circular supplements to
reflect a decrease in the volume of, or to change the price range of,
the securities offered in reliance on a qualified offering statement
under Regulation A, so long as the decrease in the volume of securities
offered or change in the price range would not materially change the
disclosure contained in the offering statement at qualification.\520\
Notwithstanding this provision, any decrease in the volume of
securities offered and any deviation from the low or high end of the
price range may be reflected in the offering circular supplement filed
with the Commission if, in the aggregate, the decrease in volume and/or
change in price represent no more than a 20% change from the maximum
aggregate offering price calculable using the information in the
qualified offering statement.\521\ Under no circumstances, however,
would an issuer be able to amend its offering statement or rely on the
provisions for offering circular supplements where the maximum
aggregate offering price resulting from any changes in the price of the
securities would exceed the offering amount limitation set forth in
Rule 251(a) or if the increase in aggregate offering price would result
in a Tier 1 offering becoming a Tier 2 offering.\522\
---------------------------------------------------------------------------

    \517\ Rule 253(b)(2). The bona fide price range estimate may not
exceed $2 for offerings where the upper end of the range is $10 or
less and 20% if the upper end of the price range is over $10.
    \518\ Rule 253(b) (also permitting the omission of underwriting
discounts or commissions, discounts or commissions to dealers,
amount of proceeds, conversion rates, call prices and other items
dependent upon the offering price, delivery dates, and terms of the
securities dependent upon the offering date, so long as certain
conditions are met).
    \519\ Rule 253(b)(4).
    \520\ See note to Rule 253(b).
    \521\ Id.
    \522\ Id.
---------------------------------------------------------------------------

    We are also adopting as proposed provisions similar to Rule 424
that require issuers omitting certain pricing and price-related
information from an offering statement at the time of qualification, in
reliance on Rule 253(b), to file such information as an offering
circular supplement no later than two business days following the
earlier of the date of determination of such pricing information or the
date of first use of the offering circular after qualification.\523\
These provisions require offering circulars that contain substantive
changes (other than information omitted in reliance on Rule 253(b)) in
information previously provided in the last offering circular to be
filed within five business days after the date such offering circular
is first used after qualification.\524\ Offering circular supplements
that are not filed within the required time frames provided by the
rules are required to be

filed as soon as practicable after the discovery of the failure to
file.\525\
---------------------------------------------------------------------------

    \523\ Rule 253(g)(1).
    \524\ Rule 253(g)(2).
    \525\ Rule 253(g)(4).
---------------------------------------------------------------------------

5. Qualification
    Under existing Regulation A, an offering statement is generally
only qualified by order of the Commission in a manner similar to a
registration statement being declared effective.\526\ In such
instances, the issuer includes a delaying notation on the cover of the
Form 1-A stating that the offering statement shall only be qualified by
order of the Commission.\527\ In order to remove a delaying notation,
an issuer must file an amendment to the offering statement indicating
that the offering statement will become qualified on the 20th calendar
day after filing.\528\ An offering statement that does not include a
delaying notation will be qualified without Commission action on the
20th calendar day after filing.\529\
---------------------------------------------------------------------------

    \526\ 17 CFR 230.252(g)(2) (2014).
    \527\ Id.
    \528\ 17 CFR 230.252(g)(3) (2014).
    \529\ 17 CFR 230.252(g)(1) (2014).
---------------------------------------------------------------------------

    We proposed to alter the qualification process of existing
Regulation A. As proposed, an offering statement could only be
qualified by order of the Commission, and the process associated with
the delaying notation would be eliminated. A few commenters generally
supported the proposed elimination of qualification without Commission
action.\530\ No commenters opposed this aspect of the proposal.
---------------------------------------------------------------------------

    \530\ CFA Letter; CFA Institute Letter; MCS Letter.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, final rules that
require Commission action before a Regulation A offering statement may
be qualified. The final rules modify the proposed rules by permitting
the offering statements to be declared qualified by a ``notice of
qualification'' issued by the Division of Corporation Finance, pursuant
to delegated authority, rather than requiring the Commission itself to
issue an order.\531\ The notice of qualification is analogous to a
notice of effectiveness in registered offerings.\532\ We are therefore
amending the Commission's organization rules, as they relate to the
delegated authority of the Director of the Division of Corporation
Finance, to permit the Division to issue qualification orders pursuant
to Regulation A.\533\ The final rules also eliminate the risk that an
issuer may exclude a delaying notation either in error or in an effort
to become qualified automatically without review and comment by the
Commission staff. Given the electronic filing processes we are
adopting,\534\ the scaled disclosure requirements for Tier 1 and Tier 2
offerings,\535\ and the preemption of state securities law registration
and qualification requirements for Tier 2 offerings,\536\ we believe it
is appropriate to ensure that the Commission staff has the opportunity
to review and comment on an offering statement before it becomes
qualified.
---------------------------------------------------------------------------

    \531\ See Rule 252(e).
    \532\ See 17 CFR 200.30-1(a)(5) (The Director of the Division of
Corporation Finance has the delegated authority to declare
registration statements to be effective within shorter periods of
time than 20 days after filing, consistent with Section 8(a) of the
Securities Act (15 U.S.C. 77h).
    \533\ Rule 30-1(b)(2)-(4).
    \534\ See discussion in Section II.C.1. above.
    \535\ See discussion in Section II.C.3.b. above.
    \536\ See discussion in Section II.H.3. below.
---------------------------------------------------------------------------

D. Solicitation of Interest (Testing the Waters)

1. Proposed Rules
    Under Securities Act Section 3(b)(2)(E), issuers may test the
waters for interest in an offering--without restriction as to the types
of investors solicited--before filing an offering statement on such
terms and conditions as the Commission prescribes. We proposed to
permit issuers to use testing the waters solicitation materials both
before and after the offering statement is filed, subject to issuer
compliance with the rules on filing of solicitation materials and
disclaimers.\537\ As we noted in the Proposing Release, the investor
protections with respect to solicitation materials in existing
Regulation A would remain in place as these materials remain subject to
the antifraud and other civil liability provisions of the federal
securities laws.\538\ As proposed, testing the waters materials used by
an issuer or its intermediaries after publicly filing an offering
statement would be required to include a current preliminary offering
circular or contain a notice informing potential investors where and
how the most current preliminary offering circular can be obtained. We
further proposed to require issuers to publicly file their offering
statements not later than 21 calendar days before qualification so that
any solicitation made in the 21 calendar days before the earliest date
of potential sales of securities would be conducted using the most
recent version of the preliminary offering circular. The proposed rules
would amend the requirements for submission or filing of solicitation
materials, so that such material would be submitted or filed as an
exhibit when the offering statement is either submitted for non-public
review or filed (and updated for substantive changes in such material
after the initial non-public submission or filing) but would no longer
be required to be submitted at or before the time of first use.
---------------------------------------------------------------------------

    \537\ This timing is similar to the ``testing the waters''
permitted for emerging growth companies under new Section 5(d) of
the Securities Act, added by the JOBS Act, which can also be
conducted both before and after filing of a registration statement.
Under Section 5(d), no legending or disclaimers are required, but
testing the waters is limited to potential investors that are
``qualified institutional buyers'' or institutional ``accredited
investors.''
    \538\ The Commission's antifraud liability provisions in Section
17 of the Securities Act, 15 U.S.C. 77q, apply to any person who
commits fraud in connection with the offer or sale of securities.
Section 3(b)(2)(D) of the Securities Act, 15 U.S.C. 77c(b)(2)(D),
states that the civil liability provisions of Section 12(a)(2) apply
to any person offering or selling securities under Regulation A. See
also Rel. No. 33-6924, at fn. 48.
---------------------------------------------------------------------------

    As proposed, Rule 255(b) would require all soliciting materials to
bear certain legends or disclaimers.\539\ Further, we did not propose
to limit testing the waters to QIBs and institutional accredited
investors (as is currently the case with testing the waters by emerging
growth companies under Securities Act Section 5(d)).
---------------------------------------------------------------------------

    \539\ Proposed Rule 255(b). As proposed, Rule 255(b) would
largely follow similar provisions in the context of registered
offerings. See Rule 134(d), 17 CFR 230.134(d) (requiring a
disclaimer for solicitations of interest in registered offerings).
---------------------------------------------------------------------------

2. Comments on Proposed Rules
    Most commenters generally supported the proposed amendments to the
testing the waters provisions.\540\ Several commenters, however,
recommended requiring the filing of testing the waters materials prior
to first use.\541\ These commenters suggested that the antifraud and
other civil liability provisions of the federal securities laws are not
an adequate substitute for the investor protections afforded by an
advance filing requirement for solicitation materials. They further
suggested that their concerns about the proposed testing the waters
provisions are compounded by an access equals delivery model of final
offering circular delivery. One commenter recommended allowing states
to have immediate access to all testing the waters materials filed with
the Commission.\542\ Another commenter recommended making the filing of
testing the waters materials a condition to the exemption,\543\ while a
third commenter specifically opposed that recommendation.\544\
---------------------------------------------------------------------------

    \540\ BIO Letter; Letter from Daniel McElroy, DuMoulin Black
LLP, April 1, 2014 (``DuMoulin Letter''); Ladd Letter 2; Paul
Hastings Letter; Richardson Patel Letter.
    \541\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \542\ Ladd Letter 2.
    \543\ MCS Letter.
    \544\ BIO Letter.

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

    Two commenters recommended ensuring that any testing the waters
materials that are filed with the Commission be kept confidential, at
least until the offering statement is qualified.\545\ One commenter
recommended removing any requirement to file testing the waters
materials publicly,\546\ while another commenter recommended not
requiring testing the waters materials to be filed for Tier 2
offerings.\547\ One commenter supported the use of legends on testing
the waters materials or, in lieu of legends, restricting testing the
waters to certain types of investors, such as QIBs and accredited
investors.\548\
---------------------------------------------------------------------------

    \545\ Heritage Letter; Ladd Letter 2.
    \546\ BIO Letter.
    \547\ MoFo Letter.
    \548\ CFA Institute Letter.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission provide market
participants with communication safe harbors from Section 12(a)(2)
liability for regular business communications by a Regulation A
issuer.\549\
---------------------------------------------------------------------------

    \549\ ABA BLS Letter; Canaccord Letter; CFIRA Letter 1; CFIRA
Letter 2; MoFo Letter; Public Startup Co. Letter 6; WR Hambrecht +
Co Letter. See also discussion of Section 12(a)(2) liability in
Proposing Release, Section II.B.7.
---------------------------------------------------------------------------

3. Final Rules
    We are adopting testing the waters provisions in the final rules as
proposed. Under the final rules, issuers will be permitted to test the
waters with all potential investors and use solicitation materials both
before and after the offering statement is filed, subject to issuer
compliance with the rules on filing and disclaimers.\550\
---------------------------------------------------------------------------

    \550\ Rule 255. For a discussion of the use of solicitation
materials as it relates to (i) the doctrine of integration, see
Section II.B.5.c. above and Rule 255(e), and (ii) the application of
state securities laws, see Section II.H.3. below.
---------------------------------------------------------------------------

    The final rules require, as proposed, that testing the waters
materials used by an issuer or its intermediaries after the issuer
publicly files an offering statement be accompanied by a current
preliminary offering circular or contain a notice informing potential
investors where and how the most current preliminary offering circular
can be obtained.\551\ This requirement may be satisfied by providing
the URL where the preliminary offering circular or the offering
statement may be obtained. Solicitation materials will remain subject
to the antifraud and other civil liability provisions of the federal
securities laws.\552\ Further, the final rules require issuers and
intermediaries that use testing the waters materials after publicly
filing the offering statement to update and redistribute such material
in a substantially similar manner as such materials were originally
distributed to the extent that either the material itself or the
preliminary offering circular attached thereafter becomes inadequate or
inaccurate in any material respect.\553\
---------------------------------------------------------------------------

    \551\ Rule 255(b)(4).
    \552\ See fn. 538 above.
    \553\ Issuers would not, however, be required to update and
redistribute solicitation materials to the extent that: (i) Any such
changes occur only with respect to the preliminary offering
circular, (ii) no similar changes are required in the solicitation
materials previously relied upon, and (iii) such materials included
(when originally distributed) a URL where the preliminary offering
circular or the offering statement may be obtained and that URL
continues to link to the most recent version of the preliminary
offering circular. See Rule 255(d).
---------------------------------------------------------------------------

    As discussed in Section II.C.2. above, first-time issuers that are
eligible for, and elect to, non-publicly submit draft offering
statements are required to publicly file their offering statements not
later than 21 calendar days before qualification so that any
solicitation of interest made in the 21 calendar days before the
earliest date of potential sales of securities by such issuers will be
conducted while potential investors have access to the most recent
version of the preliminary offering circular. Additionally, in light of
the preemption of state securities laws registration requirements in
the final rules for Tier 2 offerings, the 21 calendar day requirement
will enable state securities regulators to require such issuers to file
such materials with them for a minimum of 21 calendar days before any
potential sales to investors in their respective states.\554\
---------------------------------------------------------------------------

    \554\ See fn. 277 above.
---------------------------------------------------------------------------

    As proposed, the final rules require that issuers submit or file
solicitation materials as an exhibit when the offering statement is
either submitted for non-public review or filed (and update for
substantive changes in such material after the initial non-public
submission or filing). However, issuers are no longer required to
submit solicitation materials at or before the time of first use.\555\
The treatment of solicitation materials in Regulation A offerings is
generally consistent with the Commission staff's treatment of
solicitation materials used by emerging growth companies under
Securities Act Section 5(d), with two exceptions that we believe will
provide investors in Regulation A offerings with additional
protections:
---------------------------------------------------------------------------

    \555\ Rule 255.
---------------------------------------------------------------------------

     Solicitation materials used in Regulation A offerings are
required to be included with the offering statement; \556\ and
---------------------------------------------------------------------------

    \556\ See Item 17 (Exhibits), Part III of Form 1-A.
---------------------------------------------------------------------------

     solicitation materials used by Regulation A issuers that
file an offering statement with the Commission will be publicly
available as a matter of course.
    Contrary to the views of commenters that suggested we keep
solicitation materials confidential, or not require such materials to
be filed (either publicly or at all), we believe the submission and
filing requirements for solicitation materials are important elements
of the final rules for the use of solicitation materials.\557\ We
believe that issuers should be accountable for the content of
solicitation materials and that such information must be consistent
with the information contained in the offering circular. We believe
that making these materials publicly available as an exhibit to the
offering statement, and thereby subjecting them to staff review and
comment and scrutiny by the public, will help ensure that issuers use
solicitation materials with appropriate caution. However, for the
reasons discussed in Section II.F. below, we do not believe that the
filing of such materials should be a condition to relying on the
Regulation A exemption.
---------------------------------------------------------------------------

    \557\ BIO Letter; Heritage Letter; Ladd Letter 2; MoFo Letter.
---------------------------------------------------------------------------

    We are adopting as proposed the required legends for solicitation
materials. The legends provide that sales made pursuant to Regulation A
are contingent upon the qualification of the offering statement.\558\
Additionally, to provide greater flexibility when using solicitation
materials, the final rules eliminate, as proposed, the requirement in
existing Regulation A for testing the waters materials to identify the
issuer's chief executive officer, business, and products. Solicitation
materials used before qualification will, therefore, be required to
bear a legend or disclaimer indicating that: (1) No money or other
consideration is being solicited, and if sent, will not be accepted;
(2) no sales will be made or commitments to purchase accepted until the
offering statement is qualified; and (3) a prospective purchaser's
indication of interest is non-binding.\559\ While the expansion of use
of solicitation materials after filing may result in investors
receiving more sales literature in marketed offerings, in such
circumstances, potential investors will also be afforded more time with
the preliminary offering circular before making an investment decision
because, as noted above, testing the waters materials used by an issuer
or its intermediaries after the issuer publicly

files an offering statement must be accompanied by a current
preliminary offering circular or contain a notice informing potential
investors where and how the most current preliminary offering circular
can be obtained.\560\
---------------------------------------------------------------------------

    \558\ See Rule 255(a).
    \559\ See Rule 255(b).
    \560\ Cf. The Regulation of Securities Offerings, Rel. No. 33-
7606A, at 78 (Nov. 17, 1998) [63 FR 67174] (discussing the
importance of providing a preliminary prospectus in conjunction with
the distribution of sales materials).
---------------------------------------------------------------------------

    We believe the approach to solicitation materials that we are
adopting today is consistent with existing Regulation A that allows
issuers to test the waters and will make the use of solicitation
materials more beneficial for issuers and investors. For issuers, the
final rules will generally reduce compliance burdens and entirely
eliminate the filing requirement for issuers that, after testing the
waters, decide not to proceed with an offering. With respect to
investors, we note that the final rules contain significant safeguards
that should help mitigate the concerns expressed by some commenters
that not requiring testing the waters materials to be submitted or
filed with the Commission before first use will result in a reduction
in investor protections.\561\ These include the requirements to make
the most recent preliminary offering circular available with
solicitation materials after filing, to redistribute solicitation
materials after filing to the extent that either the material itself or
the preliminary offering circular attached thereafter becomes
inadequate or inaccurate in any material respect, to deliver the
preliminary offering circular at least 48 hours in advance of sale if
the issuer is not subject to a Tier 2 reporting obligation, to deliver
the final offering circular (or a notice of the final offering
circular) no later than two business days after sale in all instances,
and the minimum 21 calendar day filing requirement for issuers that
non-publicly submit draft offering statements as well as the continued
application of the antifraud provisions of the federal securities laws.
Additionally, state securities regulators have the ability under the
final rules to require issuers to file with them any materials required
to be filed with the Commission.\562\ From an investor protection
standpoint, we also note that sales under Regulation A may occur only
in connection with a qualified offering statement that is filed with
the Commission and that is subject to review by the staff.
---------------------------------------------------------------------------

    \561\ See fn. 541 above.
    \562\ See also fn. 277 above and discussion in Section II.H.
below. Where states elect to require issuers to file such
information with them, their respective securities regulators will,
for example, have access to solicitation materials relied upon by
first-time issuers that non-publicly submit draft offering
statements for a minimum of 21 calendar days before the first date
of any potential sales.
---------------------------------------------------------------------------

    Lastly, to address the concerns of commenters regarding an issuers'
ability to conduct routine communications with customers and suppliers
at or near the time of a contemplated Regulation A offering,\563\ we
are confirming, consistent with Rule 169's existing exemption from
Sections 2(a)(10) and 5(c) of the Securities Act for regularly released
factual business communications,\564\ that we do not believe such
communications constitute solicitation of interest materials under
Regulation A. Ultimately, whether or not a communication is limited to
factual business information depends on the facts and circumstances,
but issuers may generally look to the provisions of Rule 169 for
guidance in making this determination in the Regulation A context. More
generally, we note that factual business information means information
about the issuer, its business, financial condition, products,
services, or advertisement of such products or services.\565\ Factual
business information generally does not include such things as
predictions, projections, forecasts, or opinions with respect to
valuation of a security.\566\ The approach we are taking today with
respect to factual business information is consistent with the
Commission's stated position on such communications for registered
offerings and clarifies its application to Regulation A solicitation of
interest materials.
---------------------------------------------------------------------------

    \563\ See fn. 549 above
    \564\ 17 CFR 230.169.
    \565\ See Rel. No. 33-5180 (Aug. 20, 1971) (Guidelines for
Release of Information by Issuers Whose Securities are in
Registration).
    \566\ Id.
---------------------------------------------------------------------------

E. Ongoing Reporting

    Section 3(b)(2) of the Securities Act requires issuers to provide
annual audited financial information on an ongoing basis and expressly
provides that the Commission may consider whether additional ongoing
reporting should be required. Specifically, Section 3(b)(4) grants the
Commission authority to require issuers ``to make available to
investors and file with the Commission periodic disclosures regarding
the issuer, its business operations, its financial condition, its
corporate governance principles, its use of investor funds, and other
appropriate matters, and also may provide for the suspension and
termination of such a requirement with respect to that issuer.''
    As we noted in the Proposing Release, we are mindful that a one-
size-fits-all ongoing reporting regime may not be suitable for all
types of entities and investors.\567\ In the final rules for Regulation
A, we have endeavored to achieve an appropriate balance between the
costs and benefits associated with the provision of ongoing information
about issuers of Regulation A securities to investors in such
securities and any market that develops.
---------------------------------------------------------------------------

    \567\ See Proposing Release, at Section II.E.
---------------------------------------------------------------------------

1. Continuing Disclosure Obligations
a. Proposed Rules for Continuing Disclosure Obligations
    Regulation A currently requires issuers to file a Form 2-A with the
Commission to report sales and the termination of sales made under
Regulation A every six months after qualification and within 30
calendar days after the termination, completion, or final sale of
securities in the offering.\568\ We proposed to rescind Form 2-A, but
to continue to require Regulation A issuers to file with the Commission
electronically on EDGAR after the termination or completion of the
offering the information generally disclosed in Form 2-A.\569\ As
proposed, issuers conducting Tier 1 offerings would be required to
provide this information on Part I of proposed Form 1-Z not later than
30 calendar days after termination or completion of the offering,\570\
while issuers conducting Tier 2 offerings have the flexibility to
provide this information on either Part I of Form 1-Z at the time of
filing an exit report or proposed Form 1-K as part of their annual
report, whichever is filed first.\571\
---------------------------------------------------------------------------

    \568\ See 17 CFR 230.257 (2014); see also 17 CFR 239.91 (Form 2-
A).
    \569\ We did not propose to continue to require issuers to
disclose the use of proceeds currently disclosed in Form 2-A, as
issuers would already have to disclose this information in Part II
of proposed Form 1-A and changes in the use of proceeds after
qualification not previously disclosed may require issuers to file a
post-qualification amendment or offering circular supplement to
update such disclosure. See discussion of continuous or delayed
offerings and offering circular supplements in Section II.C.4.
above.
    \570\ Proposed Form 1-Z (exit report) is discussed in Section
II.E.4. below.
    \571\ Proposed Rule 257(a), (b)(1).
---------------------------------------------------------------------------

    As proposed, Tier 2 issuers would be subject to a Regulation A
ongoing reporting regime that would require, in addition to annual
reports and summary information about a recently completed offering,
semiannual reports on proposed Form 1-SA, current event reports on
proposed Form 1-U, and, when eligible and electing to do so, notice to
the Commission of the suspension of ongoing reporting

obligations on Part II of proposed Form 1-Z. All of these reports would
be filed electronically on EDGAR.
b. Comments on the Proposed Rules
    We received both general comments and specific comments on the
proposed forms. These comments are discussed in turn below.
General Comments
    Commenters generally approved of the continuing disclosure
obligations for Tier 2 offerings.\572\ One commenter noted favorably
that professional fees, other costs, and the time burden associated
with the proposed rules would likely be substantially lower for
Regulation A issuers than for issuers subject to Exchange Act
reporting.\573\ Another commenter remarked that the proposed ongoing
reporting regime strikes an appropriate balance between the benefits of
disclosure and costs to issuers.\574\
---------------------------------------------------------------------------

    \572\ ABA BLS Letter; Campbell Letter; Canaccord Letter; CFA
Letter; McCarter & English Letter; NASAA Letter 2; Letter from Jason
Coombs, Co-Founder and CEO, Public Startup Company, Inc., March 26,
2014 (``Public Startup Co. Letter 5''); US Alliance Corp. Letter;
WDFI Letter.
    \573\ US Alliance Corp. Letter.
    \574\ McCarter & English Letter.
---------------------------------------------------------------------------

    Other commenters expressed general support, but also recommended
changes to the semiannual reporting requirement or the content of Form
1-U.\575\ One commenter supported the general policy that it should not
be easier or harder to exit the Regulation A reporting system than it
would be to exit the Exchange Act reporting system.\576\ Several
commenters recommended including an ongoing disclosure requirement for
Tier 1 issuers, including disclosure at a level lower than what was
proposed for Tier 2,\577\ ongoing disclosure with yearly audited
financials,\578\ or some unspecified continuous disclosure
obligation.\579\ Another commenter recommended extending continuing
disclosure obligations into Tier 1, but further suggested that the
Commission replace any requirement to provide audited financial
statements with an affidavit from management attesting to the accuracy
of the financial statements.\580\ A few commenters generally
recommended reducing the disclosure burden on Tier 2 issuers.\581\ One
of these commenters recommended making continuing disclosure
requirements contingent upon factors other than offering size, such as
whether the issuer has taken steps to foster a market in its
securities.\582\ This commenter also recommended allowing issuers to
either avoid ongoing reporting or to file only financial statements and
a management letter regarding operations and results if, shortly after
commencing the offering upon qualification, issuers have less than 300
record holders. Another commenter recommended allowing Canadian
companies to rely on Rule 12g3-2(b) to avoid having to file ongoing
reports under Regulation A.\583\ As an alternative, this commenter
recommended allowing Canadian companies to furnish reports under cover
of Form 6-K rather than using the Regulation A reports. One commenter
recommended that, to the extent that the final rules allow foreign
private issuers to use Regulation A, such issuers should be permitted
to follow the ongoing reporting rules applicable to them in the
Exchange Act context in lieu of Regulation A ongoing reporting
requirements,\584\ while another commenter specifically opposed this
suggestion.\585\ Another commenter recommended requiring officers,
directors, and controlling shareholders of companies that offer
securities under Regulation A to make ongoing disclosure of
transactions in company securities, similar to reporting on Forms 3, 4,
and 5 and Schedules 13D, 13G, and 13F in the registered context.\586\
---------------------------------------------------------------------------

    \575\ ABA BLS Letter; Canaccord Letter; NASAA Letter 2; WDFI
Letter.
    \576\ ABA BLS Letter (raising the issue particularly with
respect to ``very small issuers'' under Tier 2).
    \577\ Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure
requirements could parallel Tier 2's requirements but without the
requirement for semiannual reports).
    \578\ Ladd Letter 2.
    \579\ SVB Financial Letter.
    \580\ Public Startup Co. Letter 5.
    \581\ Heritage Letter; IPA Letter (providing estimated costs of
compliance for offering statement and periodic reports).
    \582\ Heritage Letter.
    \583\ DuMoulin Letter.
    \584\ McCarter & English Letter (noting Exchange Act Form 20-F,
40-F, Form 6-K, and ongoing home country reports).
    \585\ Andreessen/Cowen Letter.
    \586\ OTC Markets Letter.
---------------------------------------------------------------------------

Comments on Form 1-K
    One commenter recommended revising proposed Form 1-K to expressly
not require the disclosure of an issuer's plan of operations, as
described in Item 9(c) of Part II of Form 1-A.\587\ This commenter
further recommended clarifying whether a Tier 2 issuer is required to
comply with Rules 3-10, 3-16, and 8-04 of Regulation S-X in Form 1-K,
in light of the reference to segmented data in Item 7(b) to Part F/S of
proposed Form 1-A.\588\ This same commenter recommended that the
Commission clarify whether a Tier 2 issuer is required to comply with
Rule 8-04 of Regulation S-X in proposed Form 1-K, particularly with
respect to probable acquisitions.\589\
---------------------------------------------------------------------------

    \587\ E&Y Letter (noting the Commission's intent to follow this
approach, as mentioned in the Proposing Release at fn. 397).
    \588\ Id.
    \589\ Id.
---------------------------------------------------------------------------

Comments on Form 1-SA
    Several commenters recommended requiring or permitting quarterly
reporting rather than semiannual reporting on proposed Form 1-SA.\590\
One of these commenters stated that quarterly reporting is standard in
the United States and is not overly burdensome.\591\ Two other
commenters stated that quarterly reporting was necessary for investor
protection and to reduce the risk of insider trading.\592\ Other
commenters noted that quarterly reporting might be preferred by market
participants but supported a semiannual requirement.\593\
---------------------------------------------------------------------------

    \590\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; OTC
Markets Letter; WDFI Letter.
    \591\ OTC Markets Letter.
    \592\ Massachusetts Letter 2; WDFI Letter.
    \593\ B. Riley Letter; Milken Institute Letter.
---------------------------------------------------------------------------

    One commenter agreed with our proposal not to require Tier 2
issuers to have their Form 1-SA financial statements reviewed by an
independent accountant, particularly with respect to smaller
issuers.\594\ Another commenter recommended either requiring the
financial statements in Form 1-SA to be reviewed by an independent
accountant or requiring issuers to disclose on Form 1-SA that the
financial statements were not subject to review.\595\ Yet another
commenter recommended that there be no requirement to provide Rule 3-16
of Regulation S-X financial statements or summarized financial
information in semiannual reports (to align with requirements for
existing registrants that are not required to include this in Form 10-
Q).\596\ This commenter also recommended clarifying if the financial
statements in Form 1-SA can be presented using a condensed format
consistent with Rule 8-03(a) of Regulation S-X and if additional
disclosure requirements of Rule 8-03(b) are applicable.\597\ This same
commenter recommended removing Item 3(d) of Form 1-SA, because neither
this statement nor a statement of changes in stockholders' equity is an
existing requirement on Form 10-Q.\598\
---------------------------------------------------------------------------

    \594\ ABA BLS Letter. As proposed, such reviews would not be
required for any Form 1-SA filing.
    \595\ KPMG Letter.
    \596\ E&Y Letter.
    \597\ Id.
    \598\ Id.

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

Comments on Form 1-U
    Commenters made a number of suggestions regarding the current
report requirements. Some commenters recommended eliminating the
requirement to file Form 1-U for the smallest issuers, based on a
measure such as asset size or market capitalization.\599\ Other
commenters recommended extending the proposed filing requirement from
four business days after the triggering event to fifteen business days
after such event.\600\ Several commenters recommended changing or
clarifying the ``fundamental change'' standard in Item 1 of proposed
Form 1-U.\601\ One of these commenters expressed concerns about whether
this item will be consistently interpreted and whether the use of the
term ``fundamental change,'' in light of the use of the same term in
Item 512 of Regulation S-K, would cause additional confusion.\602\ This
commenter further recommended that, for contracts involving business
acquisitions, the measurement of significance in this item should be
limited to the investment test and the numerical threshold should be
increased to at least 50% to be more consistent with the stated
disclosure objective. Three commenters recommended moving to a
materiality standard so as to be consistent with the standards in the
anti-fraud provisions of federal securities laws, suggesting that this
would help avoid confusion.\603\ One commenter recommended allowing
(but not requiring) Tier 1 issuers to report material information on
Form 1-U, including the financial statements of significant acquired
businesses.\604\
---------------------------------------------------------------------------

    \599\ ABA BLS Letter; Milken Institute Letter.
    \600\ ABA BLS Letter; E&Y Letter; Milken Institute Letter.
    \601\ E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI
Letter.
    \602\ E&Y Letter. For description of Item 512, see fn. 486
above.
    \603\ Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
    \604\ E&Y Letter. Two commenters made a similar recommendation
without specifying which form should be used for that purpose. See
ABA BLS Letter; Canaccord Letter.
---------------------------------------------------------------------------

    Other commenters suggested changes to the substance of what would
need to be reported on Form 1-U. One commenter generally recommended
cross-referencing existing disclosure requirements when a proposed
disclosure standard is meant to be the same.\605\ For example, this
commenter suggested that Form 1-U include a cross-reference to Form 8-K
when disclosure requirements are meant to be the same. One commenter
recommended permitting companies to disclose: (1) A change in
accountants in the next periodic filing instead of reporting it on Form
1-U if the change does not involve a disagreement or reportable event
(as defined in Item 304 of Regulation S-K); and (2) sales of equity
securities in the next periodic filing if the price was not below that
of previous primary offerings.\606\ Two of these commenters recommended
eliminating the requirement to report unregistered sales of securities
on Form 1-U, or to raise the reporting threshold to only cover
offerings that represent at least 10% of the issuer's pre-transaction
outstanding shares.\607\
---------------------------------------------------------------------------

    \605\ PwC Letter.
    \606\ E&Y Letter.
    \607\ ABA BLS Letter; MoFo Letter.
---------------------------------------------------------------------------

c. Final Rules for Continuing Disclosure Obligations
    We are adopting rules for continuing disclosure obligations under
Regulation A generally as proposed, with certain technical
modifications and clarifications. The final rules eliminate Form 2-A
and in its place require the disclosure of similar information pursuant
to Part I of Form 1-Z for Tier 1 issuers and, depending on when the
issuer's offering is terminated or completed, in either Form 1-K or
Part I of Form 1-Z for Tier 2 issuers. As proposed, the respective
disclosure requirements in Part I of Forms 1-K and 1-Z will include the
date the offering was qualified and commenced, the amount of securities
qualified, the amount of securities sold in the offering, the price of
the securities, the portions of the offering that were sold on behalf
of the issuer and any selling securityholders, any fees associated with
the offering, and the net proceeds to the issuer.\608\ We believe that
summary information and data about an issuer and its Regulation A
offering is most valuable when obtained after the offering is completed
or terminated.\609\ Therefore, as proposed, issuers will only be
required to disclose such information after the termination or
completion of the offering.
---------------------------------------------------------------------------

    \608\ See Part I of Form 1-K and Part I of Form 1-Z. For
clarification purposes, we have changed the references in Part I in
these forms from ``number of securities'' to ``amount of
securities.'' These changes should avoid confusion when reporting
debt offerings where a quantifiable number of securities is not
being offered. In such cases, issuers will be able to report the
aggregate sales of securities in the offering.
    \609\ Additionally, in continuous offerings, issuers are
required to file post-qualification amendments with the Commission
every twelve months to the extent that sales are ongoing at that
time. See Rule 252(f)(2)(i).
---------------------------------------------------------------------------

    As noted in the Proposing Release, we are concerned that uniform
ongoing reporting requirements for all issuers of Regulation A
securities could disproportionately affect issuers in smaller
offerings. For that reason, the final rules do not require any ongoing
reporting for issuers conducting Tier 1 offerings, other than the
disclosure of the summary information discussed above.\610\ Issuers in
smaller offerings will, however, have the option to conduct a Tier 2
offering and subject themselves to ongoing reporting and other Tier 2
requirements.\611\
---------------------------------------------------------------------------

    \610\ See Rule 257(a).
    \611\ An issuer offering up to $20 million in a Tier 2 offering
would, in addition to providing ongoing reports to the Commission on
an annual and semiannual basis, with interim current event updates,
be required to file audited financial statements in the offering
statement, just as issuers in larger Tier 2 offerings are required
to do. See Section II.C.3.b(2)(c). above.
---------------------------------------------------------------------------

    The final rules for ongoing reporting for Tier 2 issuers are being
adopted as proposed, except where noted below, and will require issuers
to file annual reports on Form 1-K,\612\ file semiannual reports on
Form 1-SA,\613\ file current event reports on Form 1-U,\614\ and
provide notice to the Commission of the suspension of their ongoing
reporting obligations on Part II of Form 1-Z.\615\ All reports for Tier
1 and Tier 2 offerings are required to be filed electronically on
EDGAR.\616\
---------------------------------------------------------------------------

    \612\ Rule 257(b)(1).
    \613\ Rule 257(b)(3).
    \614\ Rule 257(b)(4).
    \615\ Rule 257(d)(2).
    \616\ Subject, in certain cases, to the hardship exemptions set
forth in Rules 201 and 202 of Regulation S-T. 17 CFR 232.201-202.
---------------------------------------------------------------------------

    As discussed above, commenters suggested that the Commission
consider various potential changes to the proposed ongoing reporting
requirements for Tier 2 issuers, including: Extending ongoing reporting
to Tier 1 offerings with some modifications; increasing the ongoing
reporting requirements for Tier 2 issuers to include analogs to
Exchange Act Forms 3, 4, and 5 and beneficial ownership reporting on
Schedules 13D, 13G and 13F; basing the ongoing reporting requirements
on characteristics of the issuer, such as whether the issuer has taken
steps to foster a secondary market; or providing different requirements
for Canadian companies or foreign private issuers. Another commenter
suggested that we allow issuers to either avoid ongoing reporting or to
file only financial statements and a management letter regarding
operations and results if, shortly after commencing the offering upon
qualification, issuers have less than 300 record holders.\617\
---------------------------------------------------------------------------

    \617\ Heritage Letter.
---------------------------------------------------------------------------

    We do not, however, believe that the changes suggested by
commenters

described above are advisable at this time. Instead, we believe the
approach to ongoing reporting adopted in the final rules is preferable
and will support a regular flow of information about issuers conducting
Tier 2 offerings, which will benefit investors in these larger
offerings and also help foster the development of a secondary market in
such securities, while balancing the compliance burden that would be
imposed on smaller issuers. We do not believe that requiring ongoing
reporting for Tier 1 issuers, other than the requirement to file a Form
1-Z upon completion or termination of the offering, is necessary for
Tier 1 offerings. We believe issuers in Tier 1 offerings will be small
companies whose businesses revolve around products, services, and a
customer base that will likely be more local in nature than issuers in
Tier 2 offerings.\618\ Further, we believe Tier 1 offerings will be
conducted by issuers that are unlikely to seek the creation of a
secondary trading market in their securities.\619\ In light of this, we
do not believe that it is necessary to require ongoing reporting for
Tier 1 issuers. Consistent with our experience under existing
Regulation A, we do not believe that a lack of ongoing reporting for
issuers in Tier 1 offerings will adversely affect investors that base
purchasing decisions on the narrative and financial statement
disclosure requirements included in the offering statement and, with
respect to continuous offerings lasting for more than one year, updated
annually by post-qualification amendment thereafter. Further,
notwithstanding the suggestions of some commenters,\620\ we believe
that adopting different ongoing reporting requirements for Canadian
issuers \621\ would not be consistent with our goal to adopt a uniform
reporting standard for Tier 2 issuers that provides investors with
certainty as to the amount of information they can expect to receive
from an issuer in a Tier 2 offering on an ongoing basis. We believe
that the final rules will provide investors and potential investors
with the information they need to make investment decisions and
facilitate capital formation for smaller companies.
---------------------------------------------------------------------------

    \618\ See fn. 830 in Section II.H.3. below.
    \619\ See discussion of the nature of offerings in Section
II.H.3. below.
    \620\ DuMoulin Letter; see also McCarter & English Letter.
    \621\ Commenters also suggested that their proposed ongoing
reporting for Canadian issuers apply to foreign private issuers. As
noted above in Section II.B.1.c., however, non-Canadian foreign
issuers are not eligible under Regulation A.
---------------------------------------------------------------------------

    We are therefore adopting the following ongoing reporting
requirements for Tier 2 offerings:
(1) Annual Reports on Form 1-K
    As proposed and adopted, Form 1-K will consist of two parts: Part I
(Notification) and Part II (Information to be included in the report).
The contents of and requirements for Part I and Part II are, with the
exception of technical amendments to the forms, amendments that are
necessary to reflect corresponding changes to the required audit
standards of financial statements filed under Part F/S of Form 1-A, and
additional guidance designed to streamline disclosure, adopted without
changes from the proposed rules.
(a) Part I (Notification)
    As adopted, Part I of Form 1-K will be an online XML-based fillable
form that will include certain basic information about the issuer,
prepopulated on the basis of information previously disclosed in Part I
of Form 1-A, which can be updated by the issuer at the time of filing.
Additionally, if at the time of filing the Form 1-K an issuer has
terminated or completed a qualified Regulation A offering, the issuer
will be required to provide certain updated summary information about
itself and such offering in Part I, including the date the offering was
qualified and commenced, the amount of securities qualified, the amount
of securities sold in the offering, the price of the securities, the
portions of the offering that were sold on behalf of the issuer and any
selling securityholders, any fees associated with the offering, and the
net proceeds to the issuer.
    As proposed and adopted, issuers will only be required to fill out
the XML-based portion of Part I of Form 1-K that relates to the summary
information about a terminated or completed offering once per offering.
An issuer that elects to terminate its ongoing reporting obligation
under Tier 2 of Regulation A after terminating or completing an
offering, in a fiscal year other than the fiscal year in which the
offering statement was qualified, but before reporting the required
summary information on Form 1-K, will be required to file the summary
offering information in Part I of Form 1-K by filing a Form 1-Z (exit
report) that includes such information.\622\
---------------------------------------------------------------------------

    \622\ General Instruction (3) to Form 1-Z.
---------------------------------------------------------------------------

    The summary information disclosed will facilitate analysis of
Regulation A offerings by the Commission, other regulators, third-party
data providers, and market participants and thereby enable the
Commission and others to evaluate the use and effectiveness of
Regulation A as a capital formation tool.\623\ The fillable form will
enable issuers to provide the required information in a convenient
medium and capture relevant data about the recently terminated or
completed Regulation A offering. The required disclosure will be
publicly available on EDGAR. Consistent with Part I of Form 1-A, the
issuer will not be required to obtain specialty software to file Part I
of Form 1-K on EDGAR.
---------------------------------------------------------------------------

    \623\ See also discussion in Section II.E.4. below.
---------------------------------------------------------------------------

(b) Part II (Information To Be Included in the Report)
    As with Part II of Form 1-A, the final rules require that the
issuer submit Part II of Form 1-K electronically as a text file
attachment containing the body of the disclosure document and financial
statements, formatted to be compatible with the EDGAR filing system.
Part II will require issuers to disclose information about themselves
and their business based on the financial statement and narrative
disclosure requirements of Form 1-A.\624\
---------------------------------------------------------------------------

    \624\ Part II of Form 1-K.
---------------------------------------------------------------------------

    As adopted, Item 2 to Part II of Form 1-K (Management's Discussion
and Analysis of Financial Condition and Results of Operation) requires
issuers, by cross-reference to the requirements of Form 1-A, to provide
information for the two most recently completed fiscal years. As
suggested by one commenter,\625\ we are clarifying that the Form 1-K
cross-reference to the requirements of Item 9 to Part II of Form 1-A
does not require issuers to include the additional MD&A disclosure
required in Item 9(c) for issuers that have not received revenue from
operations during each of the three fiscal years immediately before the
filing of the offering statement (or since inception, whichever is
shorter).\626\
---------------------------------------------------------------------------

    \625\ E&Y Letter.
    \626\ See Item 2 to Part II of Form 1-K.
---------------------------------------------------------------------------

    Additionally, we are revising the financial statement requirements
in Item 7 to Part II of Form 1-K. As proposed, Form 1-K directed
issuers to the financial statement requirements of Part F/S of Form 1-
A. We are revising this portion of the form so as to include the
financial statement requirements directly in Item 7 to Part II of Form
1-K. We believe this change to Item 7 will make it easier for issuers
to comply by clarifying, as one commenter recommended,\627\ the
specific portions of Regulation S-X relating to financial

statements for entities other than the issuer that are required in Form
1-K. Additionally, since Tier 2 issuers are now permitted to file
financial statements that are audited in accordance with either U.S.
GAAS or the standards of the PCAOB, a corresponding change has been
made to the financial statement requirements of Item 7 of Form 1-
K.\628\ As proposed, the auditor of financial statements would need to
be independent under Rule 2-01 of Regulation S-X and must comply with
the other requirements of Article 2 of Regulation S-X, but need not be
PCAOB-registered. Further, in comparison to the proposed rules, Item
7(a) no longer requires issuers to provide a list of the financial
statements included in Form 1-K at the beginning of the financial
statement section. We eliminated this requirement in the final rules
because we do not believe that there is a need for a separate list of
the financial statements at the beginning of this section, when the
financial statements themselves will be labeled.
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    \627\ E&Y Letter.
    \628\ See discussion in Section II.C.3.b(2)(c). above.
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    Form 1-K will permit issuers to incorporate by reference certain
information previously filed on EDGAR, but will require issuers to
include a hyperlink to such material on EDGAR.\629\ In a change from
the proposed rules, the final rules do not limit the availability of
incorporation by reference to information previously filed pursuant to
Regulation A. We believe that this change will facilitate the provision
of required information to investors, while taking a consistent
approach to information previously provided to the Commission and
publicly available on EDGAR. Additionally, to avoid unnecessary
repetition of disclosure items, Form 1-K encourages issuers to cross-
reference items within the form, where applicable.\630\ Further, in
order to avoid incorporation by reference to stale information without
requiring the latest version of the document to be filed, Form 1-K
indicates that, if any substantive modification has occurred in the
text of any document incorporated by reference since such document was
filed, the issuer must file with the reference a statement containing
the text and date of such modification.\631\ Form 1-K will cover:
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    \629\ General Instruction D. to Form 1-K. The hyperlink to EDGAR
need only be active at the time of filing of the Form 1-K. Cf.
Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
    \630\ Id. Issuers may, for example, add a cross-reference to
disclosure in the financial statements. We have clarified, however,
that like with Form 1-A, they may not add a cross-reference within
the financial statements themselves to disclosures elsewhere.
    \631\ Id.
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     Business operations of the issuer for the prior three
fiscal years (or, if in existence for less than three years, since
inception);
     Transactions with related persons, promoters, and certain
control persons;
     Beneficial ownership of voting securities by executive
officers, directors, and 10% owners;
     Identities of directors, executive officers, and
significant employees, with a description of their business experience
and involvement in certain legal proceedings;
     Executive compensation data for the most recent fiscal
year for the three highest paid executive officers or directors;
     MD&A of the issuer's liquidity, capital resources, and
results of operations covering the two most recently completed fiscal
years; and
     Two years of audited financial statements.\632\
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    \632\ Part II of Form 1-K.
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    We anticipate that issuers will generally be able to use the
offering materials as a basis to prepare their ongoing disclosure.
    As adopted in the final rules, Form 1-K includes requirements for
financial statements prepared on the same basis, and subject to the
same requirements as to audit standards and auditor independence, as
the financial statements required in the Regulation A offering circular
for Tier 2 offerings.\633\ Form 1-K must be filed within 120 calendar
days after the issuer's fiscal year end.\634\ A manually signed copy of
the Form 1-K must be executed by the issuer and related signatories
before or at the time of filing and retained by the issuer for a period
of five years.\635\ Issuers will be required to produce the manually
signed copy to the Commission, upon request.\636\ Any amendments to the
form must comply with the requirements of the applicable items and be
filed under cover of Form 1-K/A.\637\
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    \633\ See Item 7 (Financial Statements), Part II of Form 1-K.
    \634\ See General Instruction A.(2), Form 1-K.
    \635\ See General Instruction C., Form 1-K.
    \636\ Id.
    \637\ See Rule 257(c) (also requiring the signature on behalf of
an authorized representative of the issuer and the inclusion of any
specified certifications).
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(2) Semiannual Reports on Form 1-SA
    We are adopting final rules for semiannual interim reporting for
Regulation A issuers generally as proposed, with technical amendments
and additional guidance designed to streamline the disclosure
requirements for Tier 2 issuers and harmonize them with the
requirements of issuers subject to an ongoing reporting obligation
under the Exchange Act.\638\ As proposed, we continue to believe that a
semiannual, rather than a quarterly, reporting requirement strikes an
appropriate balance between the need to provide information to the
market and the cost of compliance for smaller issuers, especially given
the further flexibility provided to issuers in Form 1-U to provide
quarterly information if they elect to do so.\639\ Issuers will be
required to provide semiannual reports on Form 1-SA that, much like
reports on Form 10-Q, consist primarily of financial statements and
MD&A.\640\ Unlike Form 10-Q, however, Form 1-SA does not require
disclosure about quantitative and qualitative market risk, controls and
procedures, updates to risk factors, or defaults on senior
securities.\641\ We do not believe such disclosure is necessary for
ongoing reports under Regulation A, as we believe such disclosure is
not applicable to, or appropriately tailored for, the types of issuers
likely to conduct Regulation A offerings.
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    \638\ Rule 257(b)(3); Form 1-SA.
    \639\ Consistent with the suggestions of commenters, we are
clarifying that issuers seeking to voluntarily report information to
the market on a more frequent basis may do so under the final rules
for current reporting on Form 1-U. See discussion in Section
II.E.1.c(3). below; see also discussion in Section II.E.2.c. below
regarding the provision of ongoing reports as it applies to
Securities Act Rule 144.
    \640\ See Part I (Financial Information) of Form 10-Q, 17 CFR
249.308a.
    \641\ See Item 3 and Item 4 of Part I of Form 10-Q.
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    Consistent with the technical, specialized suggestions of several
commenters,\642\ we are including provisions in Form 1-SA that will
help issuers comply with the form requirements, eliminate potential
confusion over such requirements, and streamline and harmonize
disclosure to make the requirements for Tier 2 issuers no more onerous
than, and consistent with, the ongoing disclosures required of smaller
reporting companies under the Exchange Act. Specifically, the final
rules:
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    \642\ See, e.g., E&Y Letter; KPMG letter.
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     Add clarifying language to Item 1 (Management Discussion
and Analysis of Financial Condition and Results of Operations) of Form
1-SA to indicate that compliance with this disclosure requirement only
applies to the interim financial statements required by Item 3 to Form
1-SA and that, similar to our clarification of Form 1-K's requirements,
issuers are not required to

include the additional MD&A disclosure required by Item 9(c) of Form 1-
A; \643\
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    \643\ See Section II.F.1.c.(1)(b) above for a discussion of this
clarification in Form 1-K.
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     Update the financial statement disclosure requirements of
Form 1-SA to more clearly delineate the requirements for compliance
with Item 3 of Form 1-SA;
     Provide that the financial statements that must be
included pursuant to Item 3 may be condensed, in addition to being
unaudited, and that the financial statements are not required to be
reviewed;
     Amend the final form to note that additional guidance on
the presentation of financial statements and footnotes and other
disclosures can be found in Rule 8-03 of Regulation S-X; \644\
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    \644\ Tier 2 issuers are required under Part F/S of Form 1-A to
provide financial statements that comply with Article 8 of
Regulation S-X.
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     Revise the requirements of Item 3(e) of Form 1-SA to match
the disclosure language contained in Rule 3-10 of Regulation S-X for
smaller reporting companies;
     Delete the requirement in Item 3(d) of proposed Form 1-SA
to present interim statements of changes in financial position for the
period between the end of the preceding fiscal year and the end of the
interim period covered by this report, and for the corresponding period
of the preceding fiscal year, as this is not required of issuers under
Rule 8-03 of Regulation S-X; and
     Make the ongoing reporting requirements under Item 3 of
Form 1-SA more consistent with what is required of issuers subject to
an ongoing reporting obligation under the Exchange Act, consistent with
the suggestion of one commenter,\645\ by eliminating the line item
requirements of Item 3(f) and (g), as Rule 3-16 and Rule 4-10 of
Regulation S-X generally do not require the disclosure of such
information other than in registration statements and annual reports.
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    \645\ E&Y Letter.
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    As adopted, Form 1-SA will require disclosure of updates otherwise
reportable on Form 1-U. The final rules permit issuers to incorporate
by reference in Form 1-SA certain information previously filed on
EDGAR, but must include a hyperlink to such material on EDGAR.\646\ In
a change from the proposed rules, the final rules do not limit the
availability of incorporation by reference to information previously
filed pursuant to Regulation A. We believe that this change will
continue to facilitate the provision of required information to
investors, while taking a consistent approach to information previously
provided to the Commission and publicly available on EDGAR.
Additionally, in a change from the proposed form that seeks to avoid
unnecessary repetition of disclosure items, Form 1-SA encourages
issuers to cross-reference items within the form, where
applicable.\647\ Further, in order to avoid incorporation by reference
to stale information without requiring the latest version of the
document to be filed, Form 1-SA indicates that, if any substantive
modification has occurred in the text of any document incorporated by
reference since such document was filed, the issuer must file with the
reference a statement containing the text and date of such
modification.\648\
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    \646\ General Instruction D. to Form 1-SA. The hyperlink to
EDGAR need only be active at the time of filing of the Form 1-SA.
Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
    \647\ Id. Issuers may, for example, add a cross-reference to
disclosure in the financial statements. We have clarified, however,
that like with Form 1-A, they may not add a cross-reference within
the financial statements themselves to disclosures elsewhere.
    \648\ Id.
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    Form 1-SA must be filed within 90 calendar days after the end of
the first six months of the issuer's fiscal year.\649\ The first such
obligation to file will commence immediately following the most recent
fiscal year for which full financial statements were included in the
offering statement, or, if the offering statement included financial
statements for the first six months of the fiscal year following the
most recent full fiscal year, for the first six months of the following
fiscal year.\650\ As proposed, a manually signed copy of the Form 1-SA
must be executed by the issuer and related signatories before or at the
time of filing, retained by the issuer for a period of five years, and
produced by the issuer to the Commission, upon request.\651\ The final
rules require, as proposed, any amendments to the form to comply with
the requirements of the applicable items and be filed under cover of
Form 1-SA/A.\652\
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    \649\ See General Instruction A.(2), Form 1-SA.
    \650\ For example, where an offering statement is filed in
October 2015 and includes full financial statements for the fiscal
years ended December 31, 2014 and December 31, 2013 and interim
financial statements for the six months ended June 30, 2015 and June
30, 2014 and is qualified in December 2015, the Form 1-SA will not
be required until within 90 days following the first six months of
the following fiscal year (i.e., within 90 days following June 30,
2016).
    If, however, the offering statement is filed in March 2015 and
qualified in June of 2015 than the first Form 1-SA would cover the
six months ended June 30, 2015 and June 30, 2014 and would not be
required to be filed until within 90 days following June 30, 2015.
    \651\ See General Instruction C. to Form 1-SA.
    \652\ See Rule 257(c).
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(3) Current Reports on Form 1-U
    In addition to the annual report on Form 1-K and semiannual report
on Form 1-SA, the final rules require issuers to submit current reports
on Form 1-U. The final rules are being adopted largely as proposed with
one change and some technical amendments and additional guidance
designed to ease compliance with the final rules and eliminate
potential confusion as to the scope and applicability of the disclosure
requirements. The final rules require issuers to submit a report on
Form 1-U when it experiences one (or more) of the following events:
     Fundamental changes; \653\
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    \653\ As discussed below, disclosure pursuant to this
requirement is limited to the entry into or termination of material
definitive agreements resulting in fundamental changes in the nature
of an issuer's business. More generally, a fundamental change in the
nature of an issuer's business includes major and substantial
changes in the issuer's business or plan of operations or changes
reasonably expected to result in such changes, such as significant
acquisitions or dispositions, or the entry into, or termination of,
a material definitive agreement that has or will result in major and
substantial changes to the nature of an issuer's business or plan of
operations.
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     Bankruptcy or receivership;
     Material modification to the rights of securityholders;
     Changes in the issuer's certifying accountant;
     Non-reliance on previous financial statements or a related
audit report or completed interim review;
     Changes in control of the issuer;
     Departure of the principal executive officer, principal
financial officer, or principal accounting officer; and
     Unregistered sales of 10% or more of outstanding equity
securities.
    Additionally, as proposed, Item 9 of final Form 1-U contains
provisions for disclosing other events not directly required of issuers
in the form. As noted above in the context of suggestions by commenters
to require or permit quarterly reporting by issuers,\654\ issuers that
elect to provide relevant information to the market on, for example, a
quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1-
U.\655\
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    \654\ See fn. 639 and 604 above.
    \655\ An issuer seeking to, for example, report information that