suggested a general ``downward adjustment'' in such requirements.\195\
This sentiment was echoed by several other commenters, one of whom said
that the ``information requirements for non-accredited investors
frequently deter issuers from allowing such investors to participate in
exempt offerings,'' while another highlighted the ``risk and
uncertainty'' of attempting to comply with such disclosure
requirements.\196\ A few commenters noted that the disclosure
requirements in Rule 502(b) are ``burdensome.'' \197\
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    \195\ See Letter from Island Mountain Development Group dated
September 24, 2019.
    \196\ See CoinList Letter; and AngelList Letter. See also letter
from Rosebud Economic Development Corporation dated September 24,
2019; Davis Polk Letter; and letter from Ropes & Gray LLP dated
September 24, 2019. Further, another commentator highlighted
``issuers' justifiable fear of exposing themselves to the risk of
liability if required to provide specific information to purchasers,
and . . . the substantial professional service fees related to
providing information disclosures,'' as reasons for the lack of non-
accredited investor participation in offerings. See letter from
Robert Anderson, Samantha Prince, John Neil Conkle, and Sarah Zomaya
dated September 24, 2019. Yet another commenter highlighted the
substantial cost to issuers of preparing a Rule 506(b) disclosure
document for an offering including even a single non-accredited
investor. See letter from Joe Wallin et al. dated September 23,
2019.
    \197\ See Letter from the Committee on Capital Markets
Regulation dated September 19, 2019; and letter from Iownit Capital
Markets, Inc. dated September 24, 2019 (``Iownit Letter'').
---------------------------------------------------------------------------

    Some commenters stated that the Commission should consider scaling
the disclosure requirements depending on the amount of securities being
offered, eliminating or scaling the information requirements to the
extent that non-accredited investors are advised by a financial
professional affiliated with a registered broker-dealer or employed by
a registered investment adviser, and/or modifying the information
requirement for early stage issuers, similar to the scaled disclosure
requirement available to smaller reporting companies in registered
offerings.\198\ One commenter stated that overall financial disclosure
and reporting requirements should reflect the type of company and size
and type of offering, such that small issuers conducting smaller
offerings would not be held to the same standard as larger companies
raising larger amounts of capital.\199\ A few commenters suggested
harmonizing the Rule 502(b) disclosure requirements for non-accredited
investors with those in Form 1-A for offerings exempt from registration
pursuant to Regulation A.\200\
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    \198\ See NYSBA Letter; and ABA Letter.
    \199\ See AOIP Letter.
    \200\ See CrowdCheck Letter; and letter from Bybel Rutledge LLP,
dated September 24, 2019.
---------------------------------------------------------------------------

    Conversely, one commenter supported requiring mandatory disclosures
in offerings under Rule 506 to both accredited and non-accredited
investors.\201\ Another commenter suggested that the information
requirements in Rule 506(b) should be privately negotiated and
indicated that, with respect to non-accredited investors, the
information requirements have not caused ``significant problems.''
\202\
---------------------------------------------------------------------------

    \201\ See Letter from Xavier Becerra, California Attorney
General, et al., dated September 24, 2019 (``State Attorneys General
Letter'').
    \202\ See Letter from The Heritage Foundation, dated September
24, 2019.
---------------------------------------------------------------------------

    After considering the comments received, we are proposing to amend
Rule 502(b)'s requirements governing the financial information that
non-reporting companies must provide non-accredited investors
participating in Regulation D offerings to align with the financial
information that issuers must provide investors in Regulation A
offerings.\203\ For offerings of $20 million or less, Rule
502(b)(2)(i)(B)(1) would refer such issuers to paragraph (b) of part F/
S of Form 1-A, which applies to Tier 1 Regulation A offerings. For
offerings of greater than $20 million, Rule 502(b)(2)(i)(B)(2) would
refer issuers to paragraph (c) of part F/S of Form 1-A, which applies
to Tier 2 Regulation A offerings. This amendment would have the effect
of eliminating the current Rule 502(b) provisions that permit an
issuer, other than a limited partnership, that cannot obtain audited
financial statements without unreasonable effort or expense, to provide
only the issuer's audited balance sheet.\204\
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    \203\ We are not proposing to amend the current Rule 502(b)
disclosure requirements with respect to issuers that are subject to
the reporting requirements of the Exchange Act because the required
information is generally already prepared by the issuer and
available in order to comply with its Exchange Act reporting
obligations and the disclosure of such information in connection
with a Rule 506(b) offering is a negligible burden.
    \204\ See Rule 502(b)(2)(i)(B)(2) and (3).
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    In addition, under the proposed amendments, a foreign private
issuer that is not an Exchange Act reporting company would be required
to provide financial statement disclosure consistent with the
Regulation A requirements.\205\ The foreign private issuer would be
permitted to provide financial statements prepared in accordance with
either U.S. GAAP or

International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB). For business
combinations and exchange offers, we are proposing that an issuer that
is not an Exchange Act reporting company would provide financial
statements consistent with the Regulation A requirements.
---------------------------------------------------------------------------

    \205\ See proposed Rule 502(b)(2)(B). The term ``foreign private
issuer'' means any foreign issuer, other than a foreign government,
that does not meet the following criteria as of the last business
day of its most recently completed second fiscal quarter: (i) More
than 50 percent of the outstanding voting securities of such issuer
are directly or indirectly owned of record by residents of the
United States; and (ii) any of the following: (a) The majority of
the executive officers or directors are United States citizens or
residents; (b) more than 50 percent of the assets of the issuer are
located in the United States; or (c) the business of the issuer is
administered principally in the United States. See 17 CFR 230.405.
---------------------------------------------------------------------------

    We believe the proposed information requirements would
appropriately provide investors with material financial disclosure
about the issuer, enabling informed investment decisions. We
acknowledge that Tier 1 of Regulation A limits the sum of all cash and
other consideration to be received for the securities being offered
plus the gross proceeds for all securities sold pursuant to other
offering statements within the 12-month period before the start of and
during the current Regulation A offering, which differs from Regulation
D because it does not include any such lookback period.\206\ However,
aligning the financial statement information requirements in Rule
502(b) with those in Regulation A would establish greater uniformity in
the financial statement information requirements applicable to exempt
offerings, permitting issuers to more readily prepare for a variety of
types of exempt offerings and therefore avail themselves of the most
appropriate exemption from Securities Act registration for their
particular facts and circumstances, which may lower their cost of
capital. Although the information disclosed pursuant to Rule 502(b) is
not filed in a disclosure document with the Commission, the information
disclosed is subject to the anti-fraud provisions of the federal
securities laws and remains so under this proposal.
---------------------------------------------------------------------------

    \206\ See Rule 251(a)(1).
---------------------------------------------------------------------------

Request for Comment
    40. Are the current financial statement information requirements in
Rule 506(b) appropriate or should they be modified to align the
information requirements contained in Rule 502(b) applicable to non-
reporting companies with those of Regulation A, as proposed? How would
aligning such requirements affect capital raising under Rule 506(b)?
Would there be investor protection concerns regarding any reduction in
information required to be provided to non-accredited investors? Should
we retain the current Rule 502(b) provisions that permit an issuer,
other than a limited partnership, that cannot obtain audited financial
statements without unreasonable effort or expense, to provide only the
issuer's audited balance sheet?
    41. Should we allow the use of financial statements consistent with
Regulation A in offerings by non-reporting foreign private issuers and
in business combinations and exchanges by non-reporting issuers, as
proposed? Are there any unique considerations in these circumstances
that would warrant a different approach?
    42. Regulation Crowdfunding permits issuers to raise up to a
maximum aggregate amount of $1,070,000 through crowdfunding offerings
in any 12-month period, with financial statement requirements that vary
based on the size of the offering. Should we consider aligning the Rule
502(b) financial information requirements for non-reporting issuers
with those of Regulation Crowdfunding, or some combination of the
requirements in Regulation A and Regulation Crowdfunding?
    43. As proposed, non-reporting issuers conducting an offering of up
to $20 million would be subject to the Regulation A Tier 1 financial
information requirements, and issuers conducting an offering above that
amount would be subject to the Regulation A Tier 2 financial
information requirements. As an alternative, should we consider
requiring issuers conducting offerings above $50 million or $75 million
to comply with the financial information requirements applicable to
smaller reporting companies under Article 8 of Regulation S-X?
    44. Should we modify the Rule 502(b) financial information
requirement in some other way? If so, how should it be amended?
    45. Should we also amend the non-financial disclosure requirements
in Rule 502(b)?
    46. Should we, as proposed, retain the current Rule 502(b)
disclosure requirements for Exchange Act reporting companies? If not,
what should those requirements be?
    47. Should the fact that Regulation A limits the amount of proceeds
to be raised in a 12-month period before the start of and during an
ongoing offering, while Regulation D does not include any such lookback
period, impact the financial information requirements?
2. Confidential Information Standard
    In March 2019, the Commission adopted amendments to several rules
and forms that require registrants to file material contracts as
exhibits to their disclosure documents.\207\ The amendments in the FAST
Act Modernization Release permit registrants to redact provisions or
terms of exhibits required to be filed if those provisions or terms are
both (i) not material and (ii) would likely cause competitive harm to
the registrant if publicly disclosed. The ``competitive harm''
requirement was patterned on the standard then being used by the U.S.
Circuit Court of Appeals for the District of Columbia \208\ to define
what information was confidential under Exemption 4 of the Freedom of
Information Act (``FOIA''), which protects ``trade secrets and
commercial or financial information obtained from a person [if they
are] privileged or confidential.'' \209\
---------------------------------------------------------------------------

    \207\ See e.g., FAST Act Modernization Release, at text
accompanying notes 45-73 (amending paragraphs (b)(2)(ii) and
(b)(10)(iv) of Item 601 of Reg. S-K).
    \208\ See National Parks and Conservation Association v. Morton,
498 F.2d 765 (D.C. Cir. 1974); and National Parks and Conservation
Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976).
    \209\ 5 U.S.C. 552(b)(4).
---------------------------------------------------------------------------

    In June 2019, the Supreme Court rejected the Circuit Court's
longstanding test for determining what information was confidential
under Exemption 4 and adopted a new definition of ``confidential'' that
does not include a competitive harm requirement.\210\ The Supreme Court
stated that ``[a]t least where commercial or financial information is
both customarily and actually treated as private by its owner and
provided to the government under an assurance of privacy, the
information is `confidential' within the meaning of Exemption 4.''
\211\ We are proposing to adjust our exhibit filing requirements as
adopted in the FAST Act Modernization Release by removing the
competitive harm requirement and replacing it with a standard more
closely aligned with the Supreme Court's definition of
``confidential.'' Under the proposed amendments, information may be
redacted from material contracts if it is the type of information that
the issuer both customarily and actually treats as private and
confidential, and which is also not material.\212\ As discussed

below, we are also proposing to use this new standard in the proposed
exhibit requirements in Item 17 of Part III of Form 1-A.
---------------------------------------------------------------------------

    \210\ Food Marketing Institute v. Argus Leader Media, 139 S.Ct.
2356 (2019).
    \211\ Id. at 2366.
    \212\ We are proposing changes to the following rules and forms
to update the standard: Item 601(b)(2) and (10) of Regulation S-K
[17 CFR 229.601(b)(2) and (10)]; Form S-6 [17 CFR 239.16]; Form N-14
[17 CFR 239.23]; Form 20-F [17 CFR 249.220f]; Form 8-K [17 CFR
249.308]; Form N-1A [17 CFR 239.15A and 17 CFR 274.11A]; Form N-2
[17 CFR 239.14 and 17 CFR 274.11a-1]; Form N-3 [17 CFR 239.17a and
17 CFR 274.11b]; Form N-4 [17 CFR 239.17b and 17 CFR 274.11c]; Form
N-5 [17 CFR 239.24 and 17 CFR 274.5]; Form N-6 [17 CFR 239.17c and
17 CFR 274.11d]; and Form N-8B-2 [17 CFR 274.12].
---------------------------------------------------------------------------

Request for Comment
    48. We are proposing to amend our rules and forms to replace the
competitive harm standard with new language based on the Supreme
Court's definition of ``confidential.'' Are there other changes we
should make to our rules and forms in light of the Supreme Court
decision?
3. Proposed Amendments To Simplify Compliance With Regulation A
    In our review of the exempt offering framework, we identified
several areas where compliance with Regulation A is more complex or
difficult than for registered offerings and may not lead to greater
investor protection. We are proposing to simplify Regulation A by
aligning it with the rules for registered offerings regarding the
redaction of confidential information in material contracts, permitting
draft offering statements to be made public on EDGAR, permitting
incorporation by reference on Form 1-A, and permitting the declaration
of a post-qualification amendment as abandoned. Because these changes
would not reduce the disclosure available to investors, but would
simply harmonize the requirements for Regulation A offering statements
with those already in effect for registered offerings, we do not
believe there would be any negative implications for investor
protection.
a. Redaction of Confidential Information in Certain Exhibits
    We propose amending Item 17 of Form 1-A, which requires the filing
of certain documents as exhibits to Regulation A disclosure
documents,\213\ to provide companies with the option to file redacted
material contracts \214\ and plans of acquisition, reorganization,
arrangement, liquidation, or succession,\215\ consistent with the
recent amendments to Items 601(b)(2) and (10) of Regulation S-K.
Companies would still have the option to file such exhibits pursuant to
the existing confidential treatment application process, which would
remain unchanged.
---------------------------------------------------------------------------

    \213\ The exhibit requirements in Forms 1-K (Item 8) and 1-SA
(Item 4) require companies to file as exhibits to those forms the
exhibits required by Form 1-A, except for the exhibits required by
paragraphs 1, 12, and 13 of Item 17.
    \214\ See Item 17.6 of Form 1-A.
    \215\ See Item 17.7 of Form 1-A.
---------------------------------------------------------------------------

    Currently, if a company wishes to redact immaterial confidential
information included in a material contract or plan of acquisition,
reorganization, arrangement, liquidation, or succession required to be
filed as an exhibit to Regulation A disclosure documents, the company
must apply for confidential treatment of that information. More
specifically, the company must submit a detailed application to the
Commission that identifies the particular text for which confidential
treatment is sought, a statement of the legal grounds for the
exemption, and an explanation of why, based on the facts and
circumstances of the particular case, disclosure of the information is
unnecessary for the protection of investors. Commission staff evaluates
and grants or denies the request.
    As described in Section II.D.2 above, in March 2019, the Commission
amended several rules and forms to permit registrants to file redacted
documents without applying for confidential treatment.\216\ The rules
currently require registrants to mark the exhibit index to indicate
that portions of the exhibit or exhibits have been omitted, include a
prominent statement on the first page of the redacted exhibit that
certain identified information has been excluded from the exhibit
because it is both not material and would be competitively harmful if
publicly disclosed, and indicate with brackets where the information
has been omitted from the filed version of the exhibit.\217\ Redacted
exhibits are subject to compliance reviews by the staff. The process
for filing redacted exhibits was not extended to Regulation A offerings
at that time. As such, Regulation A issuers are still compelled to
submit an application for confidential treatment in order to redact
immaterial confidential information from material contracts and plans
of acquisition, reorganization, arrangement, liquidation, or
succession.
---------------------------------------------------------------------------

    \216\ See FAST Act Modernization Release, at text accompanying
notes 45-73 (amending paragraphs (b)(2)(ii) and (b)(10)(iv) of Item
601 of Reg. S-K).
    \217\ 17 CFR 229.601(b)(2) and (b)(10)(iv).
---------------------------------------------------------------------------

    As proposed, a new instruction would be added to Item 17 of Form 1-
A that would apply to paragraphs 6 and 7 of that item. This instruction
would include similar procedures to the recent amendments to Items
601(b)(2) and (10) of Regulation S-K for filing redacted material
contracts or plans of acquisition, reorganization, arrangement,
liquidation, or succession. Commission staff would continue to review
Forms 1-A filed in connection with Regulation A offerings and
selectively assess whether redactions from exhibits appear to be
limited to information that meets the appropriate standard.\218\ Upon
request, companies would be expected to promptly provide supplemental
materials to the staff similar to those currently required, including
an unredacted copy of the exhibit and an analysis of why the redacted
information is both not material and the type of information that the
company both customarily and actually treats as private and
confidential. Pursuant to Rule 83, companies would be permitted to
request confidential treatment of this supplemental information while
it is in the staff's possession. If the company's supplemental
materials do not support its redactions, the staff may request that the
company file an amendment that includes some, or all, of the previously
redacted information, similar to the process the staff currently
follows for confidential treatment requests in connection with
Regulation A offerings. After completing its review of the supplemental
materials, the Commission or its staff would return or destroy them at
the request of the company, as applicable.
---------------------------------------------------------------------------

    \218\ As noted in Section II.D.2 above, we are proposing to
amend the standard for redaction of information under this
streamlined process, which currently requires that the redactions
from exhibits be limited to information that is not material and
that would cause competitive harm if publicly disclosed. We are
proposing that the amended standard be patterned on the Supreme
Court's language set out in Food Marketing Institute.
---------------------------------------------------------------------------

Request for Comment
    49. Should we amend the Regulation A exhibit filing requirements as
proposed? Is there any reason not to extend this simplified
confidential treatment application process to Regulation A issuers? Do
our proposed amendments raise any investor protection concerns?
b. Amendment to Form 1-A Item 17.17(a) Requirement
    We are proposing to amend Item 17.17(a) of Form 1-A to harmonize
the procedures for publicly filing draft Regulation A offering
statements with those for draft Securities Act registration statements.
Instead of requiring documents previously submitted for non-public
review by the staff and related, non-public correspondence to be filed
as exhibits to a publicly filed offering statement, issuers conducting
offerings exempt from registration pursuant to Regulation A would be
able to make such documents available to the public via EDGAR to comply
with the requirements of Securities Act Rule 252(d).

    Today, issuers that are conducting Regulation A offerings are
permitted to submit non-public draft offering statements and amendments
for review by the Commission staff if they have not previously sold
securities pursuant to (i) a qualified offering statement under
Regulation A or (ii) an effective Securities Act registration
statement.\219\ Such issuers are also welcome to submit related non-
public correspondence to the Commission staff for review
confidentially. Current rules require that these non-public offering
statements, amendments and correspondence be publicly filed as an
exhibit to a publicly filed offering statement at least twenty-one
calendar days prior to the qualification of the offering
statement.\220\ Similarly, an EGC may, prior to its initial public
offering date, submit a draft registration statement and amendments to
the Commission for non-public review by the staff.\221\ However, unlike
issuers submitting Regulation A offering statements for non-public
review, there is no corresponding Securities Act rule or item requiring
registration statements and amendments confidentially submitted by EGCs
to be filed as an exhibit to a publicly filed registration statement.
Instead issuers satisfy their public filing requirement by logging into
their EDGAR account, selecting materials previously submitted non-
publicly, and releasing them for public dissemination.\222\ We propose
deleting paragraph (a) of paragraph 17 so that issuers would no longer
be required to file the non-public offering statements and related
amendments and correspondence as exhibits. Instead, Regulation A
issuers would be permitted to make previously non-public documents
available to the public on EDGAR using the same process as issuers
conducting a registered offering. We believe that this change would
simplify the process of moving from a draft offering statement to a
publicly filed document for issuers conducting Regulation A offerings,
and would save both time and money for such issuers. In addition,
because all previously submitted offering statements and related
amendments and correspondence would be available to the public on
EDGAR, rather than attached as exhibits to a given offering statement,
this change should make it easier for investors to learn about the
company and the Regulation A offering itself, furthering their ability
to make informed investment decisions.
---------------------------------------------------------------------------

    \219\ 17 CFR 230.252(d).
    \220\ Item 17, paragraph 17(a) of Form 1-A [17 CFR 239.90] and
17 CFR 230.252(d).
    \221\ Section 6(e)(1) of the Securities Act.
    \222\ See related announcement by the Division of Corporation
Finance, Draft Registration Statements to be Submitted and Filed on
EDGAR, Sept. 26, 2012, available at https://www.sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
---------------------------------------------------------------------------

Request for Comment
    50. Should we, as proposed, amend Form 1-A to allow non-public
draft offering statements, amendments and related non-public
correspondence to be made publicly available through the use of the
EDGAR system, rather than requiring issuers to file such documents as
exhibits to a publicly filed offering statement?
c. Incorporation by Reference of Previously Filed Financial Statements
in Form 1-A for Regulation A Offerings
    We are proposing to permit issuers to incorporate previously filed
financial statements by reference into a Regulation A offering
circular. The ability to incorporate financial statements by reference
to Exchange Act reports filed before the effective date of a
registration statement is permitted on Form S-1, subject to certain
conditions.\223\ Specifically, General Instruction VII of Form S-1
permits registrants that meet certain eligibility standards \224\ to
incorporate by reference the information required by Item 11 of Form S-
1, which includes information about the registrant, such as, among
other things, financial statement information meeting the requirements
of Regulation S-X.\225\ Regulation A issuers, however, are required to
include the issuer's financial statements, prepared in accordance with
the applicable requirements of Tier 1 or Tier 2 of Regulation A, in
their Regulation A offering circular that is distributed to
investors.\226\
---------------------------------------------------------------------------

    \223\ See General Instruction VII to Form S-1 [17 CFR 239.11].
    \224\ These criteria include, but are not limited to, that the
registrant: (i) Is subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, (ii) has filed all reports
and other materials required to be filed by Sections 13(a), 14, or
15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports and materials), (iii) has filed an annual report required
under Section 13(a) or Section 15(d) of the Exchange Act for its
most recently completed fiscal year and (iv) is not, and during the
past three years neither it nor any of its predecessors was: (a) A
blank check company; (b) a shell company, other than a business
combination related shell company; or (c) offering penny stock. The
registrant must make its periodic and current reports filed pursuant
to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference pursuant to Item 11A or Item 12 of Form S-
1 readily available and accessible on a website maintained by or for
the registrant and containing information about the registrant.
    \225\ See Item 12 to Form S-1 [17 CFR 239.11].
    \226\ See General Rule (a) to Part F/S of Form 1-A [17 CFR
239.90].
---------------------------------------------------------------------------

    In order to be able to incorporate previously filed financial
statements by reference into an offering circular filed pursuant to
Regulation A, we propose that, similar to the requirements in
connection with Form S-1, issuers must satisfy several criteria. As
proposed, issuers that have a reporting obligation under Rule 257 or
the Exchange Act must be current in their reporting obligations. In
addition, issuers would be required to make incorporated financial
statements readily available and accessible on a website maintained by
or for the issuer, and disclose in the offering statement that such
financial statements will be provided upon request.\227\
---------------------------------------------------------------------------

    \227\ General Instruction III(b) of Form 1-A [17 CFR 239.90]
requires the inclusion of a hyperlink in the offering circular to
material incorporated by reference which would include an issuer's
previously filed financial statements on EDGAR.
---------------------------------------------------------------------------

    Issuers conducting ongoing offerings would need to continue to file
post-qualification amendments to Form 1-A annually to include the
financial statements, either filed with such post-qualification
amendment or incorporated by reference to a previously filed periodic
or current report, that would be required to be included in a Form 1-A
as of such date.\228\ In addition, issuers would remain liable for such
financial statements under Section 12(a)(2) of the Securities Act to
the same extent as if they had been filed rather than incorporated by
reference.
---------------------------------------------------------------------------

    \228\ 17 CFR 230.252(f)(2)(i).
---------------------------------------------------------------------------

    Several commenters on the Concept Release supported allowing
incorporation by reference of the issuer's previously filed financial
statements into the Form 1-A.\229\ The ability to incorporate
previously filed financial statement information by reference should
decrease the existing filing burdens, allowing Regulation A issuers to
more easily satisfy their ongoing disclosure requirements. In addition,
although allowing incorporation by reference of previously filed
financial statements into an offering circular in connection with
offerings pursuant to Regulation A could increase the search time for
potential investors as those investors would need to separately access
the financial statements, we believe the impact of the proposal on
investors would be mitigated by the ready

availability of the information, particularly through the required
hyperlink in the offering statement.
---------------------------------------------------------------------------

    \229\ See CoinList Letter; CrowdCheck Letter; and letter from
Goodwin Procter LLP, dated September 24, 2019 (``Goodwin Letter'').
---------------------------------------------------------------------------

Request for Comment
    51. Should we amend Form 1-A to allow incorporation by reference of
an issuer's previously filed financial statements, as proposed? How
would such an amendment affect investors? Would this cause any increase
in costs for issuers, such as in connection with consent fees from
auditors?
    52. Should the ability to incorporate financial statements into an
offering circular by reference to previously filed documents be
conditioned on eligibility requirements, similar to those currently
applicable to issuers using Form S-1, as proposed? Are there other
eligibility requirements we should consider? Should the ability to
incorporate by reference financial statements into an offering circular
be limited to previously filed financial statements as proposed or
extended to include forward incorporation by reference to future
financial statements under Regulation A?
    53. Should we allow forward incorporation by reference in
Regulation A offerings? In order to forward incorporate Exchange Act
reports into a registration statement on Form S-1, a smaller reporting
company must be current in its reporting obligations by having filed an
annual report for its most recently completed fiscal year and all
required Exchange Act reports and materials during the 12 months
immediately preceding the Form S-1 filing (or such shorter period that
the smaller reporting company was required to file such reports and
materials). The smaller reporting company must also make its
incorporated Exchange Act reports and other materials readily available
and accessible on a website maintained by or for the issuer, and
disclose in the prospectus that such materials will be provided upon
request. If we were to permit forward incorporation by reference in
Regulation A offerings, should issuers be required to meet similar
requirements? Should issuers using forward incorporation by reference
still be required to file an annual post-qualification amendment to
their Form 1-A to include updated financial statements as well as to
reflect a fundamental change in the information set forth in the
offering statement?
d. Amendment to Abandonment Provision of Regulation A
    We are proposing to amend the abandonment provisions of Rule 259(b)
to permit the Commission to declare a post-qualification amendment to
an offering statement abandoned, consistent with Rule 479,\230\ the
rule applicable to registered offerings.
---------------------------------------------------------------------------

    \230\ 17 CFR 230.479.
---------------------------------------------------------------------------

    The current rule only permits the Commission to declare an offering
statement abandoned, and we believe there are situations where it would
be appropriate for the Commission to have the ability to declare a
specific post-qualification amendment abandoned, instead of the entire
offering statement. For example, we have observed some issuers
attempting to use post-qualification amendments for separate classes of
securities that are not otherwise being offered under the offering
statement. If an issuer failed to qualify a post-qualification
amendment for such a separate class, but otherwise was in compliance
with all of its Regulation A obligations, we believe it would be
appropriate for the Commission to have the ability to declare that
specific post-qualification amendment abandoned so as to avoid
potential investor confusion arising from the presence of the
unqualified post-qualification amendment on EDGAR.
Request for Comment
    54. Should we, as proposed, amend Rule 259(b) to permit the
Commission to declare a post-qualification amendment to an offering
statement, abandoned, consistent with the rule applicable to registered
offerings? Should we also provide notice to the issuer and a waiting
period prior to declaring a post-qualification amendment abandoned, as
is specified in Rule 479?

E. Offering and Investment Limits

    As part of our broad review of the exempt offering framework, we
examined the offering and investment limits established under
Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D.
These rules were developed with smaller issuers in mind to provide
exemptions from Securities Act registration and ongoing Exchange Act
reporting for securities offerings that comply with the respective
exemptions. The exemptions set forth a variety of requirements and
investor protections, including limits on the amount of securities that
may be offered and sold under the exemptions. Regulation A and
Regulation Crowdfunding also include limits on how much an individual
may invest. While these rules were each developed to provide exemptive
relief to smaller issuers, the exemptive limits vary considerably among
the rules and may not reflect current capital raising trends.\231\
---------------------------------------------------------------------------

    \231\ The Commission's Office of the Advocate for Small Business
Capital Formation noted in its 2019 Annual Report that companies are
seeking increased capital to fund early-stage operations, noting for
example that average seed funding increased from $1.3 million in
2010 to $5.7 million in 2018. See Annual Report for Fiscal Year
2019: Office of the Advocate for Small Business Capital Formation,
available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf.
---------------------------------------------------------------------------

    In the Concept Release, the Commission discussed Regulation A,
Regulation Crowdfunding, and Rule 504 and requested comment on the
rules generally and their respective exemptive limits.\232\ In
connection with that discussion, the Commission estimated that
approximately $2.9 trillion of new capital was raised through exempt
offering channels in 2018.\233\ However, of this amount, less than $3
billion (0.1 percent) was raised under Regulation A, Regulation
Crowdfunding, and Rule 504.\234\ After considering the comments
received, and based on our review of the current rules, we believe that
increasing the offering and investment limits of these rules and better
harmonizing the exemptions with each other could improve investor
access to these markets and issuers' ability to raise capital. The
following table summarizes the proposed changes to the offering and
investor limits.
---------------------------------------------------------------------------

    \232\ See Concept Release, at Sections II.C, II.D, and II.F.
    \233\ See Concept Release, at Section II.
    \234\ See Table 2 of the Concept Release estimating the amounts
raised under Regulation A ($736 million), Rule 504 ($2 billion), and
Regulation Crowdfunding ($55 million). Preliminary estimates from
2019 similarly reflect limited capital raising under the rules with
$1.042 billion raised under Regulation A, $228 million under Rule
504 and $62 million under Regulation Crowdfunding.

                           Table 9--Proposed Changes to Offering and Investment Limits
----------------------------------------------------------------------------------------------------------------
                                           Offering limits                      Investment limits
                                     ---------------------------------------------------------------------------
                                        Current      Proposed
                                         rules        rules          Current rules            Proposed rules
                                       (million)    (million)
----------------------------------------------------------------------------------------------------------------
Regulation A: Tier 1................          $20          $20  None...................  None.
Regulation A: Tier 2................           50           75  Accredited investors:    Accredited investors:
                                                                 No limits.               No limits.
                                                                Non-Accredited           Non-Accredited
                                                                 Investors: Limits        Investors: Limits
                                                                 based on the greater     based on the greater
                                                                 of an income or net      of an income or net
                                                                 worth standard.          worth standard.
Regulation Crowdfunding.............         1.07            5  All investors: Limits    Accredited investors:
                                                                 based on the lesser of   No limits.
                                                                 an income or net worth  Non-Accredited
                                                                 standard.                Investors: Limits
                                                                                based on the greater
                                                                                of an income or net
                                                                                worth standard.
Rule 504 of Regulation D............            5           10  None...................  None.
----------------------------------------------------------------------------------------------------------------

1. Regulation A
    In 2015, the Commission adopted final rules to implement Section
401 of the JOBS Act by creating two tiers of Regulation A offerings:
Tier 1, for offerings that do not exceed $20 million in a 12-month
period; and Tier 2, for offerings that do not exceed $50 million in a
12-month period.\235\ The Commission is required by Section 3(b)(5) of
the Securities Act to review the Tier 2 offering limit every two years.
---------------------------------------------------------------------------

    \235\ See 2015 Regulation A Release. See also supra Section
I.B.2.
---------------------------------------------------------------------------

    In the 2015 Regulation A Release, the Commission noted that some
commenters suggested that the Commission raise the proposed $50 million
Tier 2 offering limit to an amount above the statutory limit set forth
in Section 3(b)(2); however, the Commission did not believe an increase
was warranted at the time.\236\ The Commission explained that, while
Regulation A had existed as an exemption from registration for some
time, the 2015 amendments were significant. Accordingly, the Commission
believed that the 2015 amendments would provide for a meaningful
addition to the existing capital formation options of smaller issuers
while preserving important investor protections. The Commission also
expressed concern about expanding the offering limit of the exemption
beyond the level directly contemplated in Section 3(b)(2) at the outset
of the adoption of the amendments.
---------------------------------------------------------------------------

    \236\ See 2015 Regulation A Release, at text accompanying note
93.
---------------------------------------------------------------------------

    Since adoption of the 2015 amendments, the Commission has continued
to receive feedback on, and consider further enhancements to,
Regulation A. For example, the 2017 and 2018 Small Business Forums
recommended that the Commission increase the maximum offering amount
under Tier 2 of Regulation A from $50 million to $75 million.\237\
Similarly, a 2017 report by the Department of the Treasury also
recommended that the Tier 2 offering limit be increased to $75
million.\238\ In 2018, to implement changes mandated by Congress in the
Economic Growth Act, the Commission amended Regulation A to permit
Exchange Act reporting companies to rely on the exemption.\239\ Most
recently, in the Concept Release, the Commission requested comment on
whether to increase the Regulation A offering limit. Comments were
mixed, with some commenters supporting an increase in the offering
limit \240\ and others opposing an increase.\241\
---------------------------------------------------------------------------

    \237\ See 2018 Forum Report; and 2017 Forum Report.
    \238\ See A Financial System That Creates Economic
Opportunities--Capital Markets (October 2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury Report'').
    \239\ See the 2018 Regulation A Release.
    \240\ See, e.g., NYSBA Letter (supporting raising the threshold
to $75 million); CrowdCheck Letter (supporting raising the threshold
to $100 million); Goodwin Letter (supporting raising the threshold
to $100 million); letter from OTC Markets dated September 24, 2019
(supporting raising the threshold and noting the 2017 and 2018 Small
Business Forum and 2017 Treasury Report recommendations to raise the
threshold to $75 million); and IPA Letter (supporting raising the
threshold to $100 million).
    \241\ See, e.g., State Attorneys General Letter; Davis Polk
Letter; letter from the Council of Institutional Investors dated
October 3, 2019 (expressing its belief that the Commission should
not broaden or expand Regulation A without compelling evidence that
the change would benefit long term investors and the capital
markets); letter from Consumer Federation of America dated October
1, 2019 (``Consumer Federation Letter'') (suggesting that expansion
of Regulation A has been bad for investors and markets); letter from
Healthy Markets Association dated September 30, 2019 (``Healthy
Markets Letter'') (suggesting amended Regulation A has been bad for
investors and should be curtailed or eliminated); and NASAA Letter
(generally rejecting expansion of the availability of private
offerings and recommending more oversight by state regulators).
---------------------------------------------------------------------------

    Our Divisions of Corporation Finance and Economic and Risk Analysis
conducted a 2020 Regulation A Lookback Study and Offering Limit Review
Analysis (``2020 Regulation A Review'') as required by the 2015
Regulation A Release.\242\ The 2020 Regulation A Review takes into
consideration Regulation A market activity from the 2015 amendments
through December 2019; public comment following the 2015 amendments and
the Concept Release; and evidence from industry reports, the Small
Business Forums, and other public sources. During this period, $2.4
billion was reported raised by 183 issuers in ongoing and closed
offerings, including $230 million in Tier 1 and $2.2 billion in Tier 2
offerings.\243\ While the 2015 amendments have stimulated the
Regulation A offering market, aggregate Regulation A financing levels
remain modest relative to traditional IPOs and the Regulation D
market.\244\ The 2020 Regulation A Review notes that these financing
levels are likely related to a combination of factors, including the
pool of issuers and investors drawn to the market under

existing conditions; the availability to issuers of attractive private
placement alternatives without an offering limit; the availability to
investors of attractive investment alternatives outside of Regulation A
with a more diversified pool of issuers; limited intermediary
participation and a lack of traditional underwriting; and a lack of
secondary market liquidity.\245\
---------------------------------------------------------------------------

    \242\ See https://www.sec.gov/smallbusiness/exemptofferings/rega/2020Report. At the time of adoption of the 2015 amendments, the
Commission stated that the staff would study and submit a report to
the Commission no later than five years following the adoption of
the amendments on the impact of both Tier 1 and Tier 2 offerings on
capital formation and investor protection. See 2015 Regulation A
Release. The report includes a review of: The amount of capital
raised under the amendments; the number of issuances and amount
raised by both Tier 1 and Tier 2 offerings; the number of placement
agents and brokers facilitating the Regulation A offerings; the
number of federal, state, or any other actions taken against
issuers, placement agents, or brokers with respect to both Tier 1
and Tier 2 offerings; and whether any additional investor
protections appear necessary for either Tier 1 or Tier 2.
    \243\ Over this time period issuers sought $11.2 billion across
487 offerings, of which 382 were qualified offering statements
seeking up to $9.1 billion. See 2020 Regulation A Review.
    \244\ See 2020 Regulation A Review.
    \245\ See id.
---------------------------------------------------------------------------

    The 2020 Regulation A Review estimates that approximately 10
percent of issuers in Tier 2 offerings have reached the $50 million
offering limit across completed and ongoing offerings.\246\ Although
most issuers have not exhausted the existing Tier 2 offering limit, we
believe there are compelling reasons to consider raising that limit.
First, a higher offering limit, such as $75 million, may enhance
capital formation for those Regulation A issuers that have exhausted
existing offering limits.\247\ Further, while the offering limit
represents one factor in the use of Regulation A, issuers may choose to
forgo Regulation A if the offering limit is too low for their financing
needs. Evidence from public commentary since the 2015 amendments
indicates that a higher offering limit may help attract a larger and
potentially more seasoned pool of issuers and intermediaries \248\ or
institutional investors to the Regulation A market.\249\ In addition, a
higher offering limit may make Regulation A offerings more attractive
to Exchange Act reporting companies, which may be more established
companies.
---------------------------------------------------------------------------

    \246\ See id. at Table 4.
    \247\ Based on the available data, such issuers were almost
exclusively real estate issuers. See 2020 Regulation A Review.
    \248\ See 2020 Regulation A Review, at Section F.1. However, as
noted in the Regulation A review, the staff lacks data that would
allow it to assess how a specific offering limit increase would
affect the size and composition of the pool of prospective issuers,
intermediaries, and investors in the Regulation A market.
    \249\ See NYSBA Letter suggesting that many institutional
investors do not want to participate in smaller offerings where
their holdings will constitute a disproportionately large percentage
of the outstanding securities.
---------------------------------------------------------------------------

    Having considered the recent data, the 2020 Regulation A Review,
feedback that the Commission received in response to the Concept
Release and Small Business Forums, and in order to facilitate use of
Tier 2 Regulation A offerings, we are proposing to increase the maximum
offering amount under Tier 2 of Regulation A from $50 million to $75
million.\250\ Consistent with the Commission's approach to limitations
on secondary sales when adopting the Regulation A amendments, we are
also proposing to increase the maximum offering amount for secondary
sales under Tier 2 of Regulation A from $15 million to $22.5
million.\251\ Although some commenters suggested raising the offering
limit to $100 million,\252\ we believe that raising the maximum
offering amount to $75 million would provide an incremental approach to
increasing the threshold to a level that would permit issuers that have
exhausted existing offering limits to seek more capital under
Regulation A and may help attract a larger pool of issuers and
intermediaries to the Regulation A market.\253\ In addition, we believe
that the issuer eligibility requirements, content and filing
requirements for offering statements, and ongoing reporting
requirements for issuers in Tier 2 Regulation A offerings would
continue to provide appropriate protections for investors at this
higher offering limit.
---------------------------------------------------------------------------

    \250\ We are not proposing to raise the threshold for Tier 1
offerings at this time. While the Commission has received feedback
from market participants and commenters seeking an increase in the
Tier 2 offering limit, these commenters did not seek an increase in
the Tier 1 limit.
    \251\ The Commission observed in the Regulation A amendments
proposing and adopting releases that selling security holder access
to Regulation A has historically been an important part of the
exemptive scheme. See Amendments for Small and Additional Issues
Exemptions Under Section 3(b) of the Securities Act, Release No. 33-
9497 (Dec. 18, 2013) [79 FR 3925 (Jan. 23, 2014)], at Section
II.B.3; and 2015 Regulation A Adopting Release, at Section II.B.3.c.
Consistent with existing and historical provisions of Regulation A,
we are proposing to continue to permit secondary sales under
Regulation A up to 30 percent of the maximum offering amount
permitted under the applicable tier.
    \252\ See IPA Letter; and Goodwin Letter.
    \253\ Adjusted for inflation since enactment of the JOBS Act in
April 2012, the staff estimates that the Tier 2 offering limit would
be $55.845 million as of December 31, 2019. See infra note 411. We
note that adjusting the existing offering limit for inflation would
largely maintain the status quo and likely would not attract
additional institutional investors, intermediaries, or traditional
underwriters to the Regulation A market.
---------------------------------------------------------------------------

    Given the significant additional requirements for Tier 2 offerings,
including the requirement to provide audited financial statements, the
ongoing reporting requirements, and the investment limits for non-
accredited investors, the Commission expected Tier 2 offerings to be
national rather than local in nature.\254\ While issuers in Tier 2
offerings are required to qualify offerings with the Commission before
sales can be made pursuant to Regulation A, they are not required to
register or qualify their offerings with state securities regulators.
Section 18 of the Securities Act generally provides for preemption of
state law registration and qualification requirements for ``covered
securities.'' \255\ Section 18(b)(4)(D) of the Securities Act further
provides that securities issued pursuant to Section 3(b)(2) of the
Securities Act are covered securities if they are listed, or will be
listed, on a national securities exchange or if they are offered or
sold to a ``qualified purchaser,'' \256\ which the Commission has
defined to include any person to whom securities are offered or sold in
a Tier 2 offering.\257\ We propose to rely on our authority under
Section 18 of the Securities Act to continue to preempt Tier 2
offerings from state securities law registration and qualification
requirements, as we expect that these offerings would continue to be
more national in nature under the proposed amendments.
---------------------------------------------------------------------------

    \254\ See 2015 Regulation A Release, at text accompanying note
830.
    \255\ See 15 U.S.C. 77r(c).
    \256\ See 15 U.S.C. 77r(b)(4)(D).
    \257\ See 17 CFR 230.256.
---------------------------------------------------------------------------

2. Rule 504
    Rule 504 of Regulation D provides an exemption for eligible issuers
\258\ from registration under the Securities Act for the offer and sale
of up to $5 million of securities in a 12-month period.\259\ In 2016,
the Commission amended Rule 504 to raise the aggregate amount of
securities an issuer may offer and sell in any 12-month period from $1
million to $5 million, which is the maximum amount statutorily allowed
under Securities Act Section 3(b)(1).\260\ As discussed in the 2016
adopting release amending Rule 504, while a few commenters \261\ and
the 2015 Small Business Forum \262\ recommended that the Commission
increase the Rule 504 offering limit to $10 million, the Commission
determined not to use its exemptive authority under Section 28 of the
Securities Act to raise the maximum offering amount above $5 million at
that time.
---------------------------------------------------------------------------

    \258\ Issuers that are required to file reports under Exchange
Act Section 13(a) or 15(d); investment companies; blank check
companies; and issuers that are disqualified under Rule 504's ``bad
actor'' disqualification provisions are not eligible to use Rule
504.
    \259\ See Rule 504.
    \260\ See Intrastate and Regional Offerings Release. In light of
the increased offering threshold under Rule 504, the Commission
repealed Rule 505. Most issuers previously using Rule 505 are able
to conduct an offering up to $5 million under Rule 504.
    \261\ See id. at note 272.
    \262\ See Final Report of the 2015 SEC Government-Business Forum
on Small Business Capital Formation (November 2015), available at
https://www.sec.gov/info/smallbus/gbfor34.pdf (``2015 Forum
Report'').
---------------------------------------------------------------------------

    From 2009 through 2019, two percent of the capital raised in
Regulation D offerings under $5 million by companies other than pooled
investment funds was offered under Rule 504 (and under Rule

505, prior to its repeal), and 98 percent of the capital raised was
offered under Rule 506.\263\ Figure 1 and Figure 2 show the trends in
new offerings and capital raised under Rules 504 and 505 (including
pooled investment funds) during 2009-2019.\264\
---------------------------------------------------------------------------

    \263\ See Concept Release, at note 37 and accompanying text.
    \264\ Aggregate amounts shown here have been revised to cap
several outliers identified in the Form D data on Rule 504 reported
proceeds at the offer limit to address data noise.
[GRAPHIC] [TIFF OMITTED] TP31MR20.000

[GRAPHIC] [TIFF OMITTED] TP31MR20.001

    The figures show that the number of new offerings and the capital
reported raised has remained flat or declined since the adoption of the
changes in 2016. This data suggests that the higher threshold limits
have not encouraged more issuers to conduct new offerings under the
Rule 504 exemption, although those using the exemption are able to
raise more capital in each offering and in the aggregate.

    In the Concept Release, the Commission requested comment on whether
to increase the Rule 504 offering limit. One commenter supported
increasing the limit to the current level,\265\ while a few others
opposed increasing the limit.\266\ In addition, several commenters
expressed concern generally with creation and expansion of exemptions
and exceptions from the federal securities laws and broadly recommended
against such action without further study.\267\
---------------------------------------------------------------------------

    \265\ See letter from Conserve Financial, Inc., dated September
1, 2019 (supporting increasing the limit, but mistakenly
recommending an increase from $1 million to the current $5 million
offer limit).
    \266\ See, e.g., PIABA Letter; and NASAA Letter (recommending
Rule 504 be preserved in its current form).
    \267\ See Consumer Federation Letter; Healthy Markets Letter;
and State Attorneys General Letter.
---------------------------------------------------------------------------

    Given the limited number of issuers that have used amended Rule 504
to raise capital, we believe it may be appropriate to revisit the
Commission's decision in 2016 not to raise the offering limit to $10
million, as several commenters suggested at that time.\268\ In
considering the appropriate offering limit, we have been mindful of the
significant investor protections that accompany a Rule 504 offering.
Specifically, Rule 504 is not available to a development stage company
that either has no specific business plan or purpose or has indicated
that its business plan is to engage in a merger or acquisition with an
unidentified company.\269\ Also, unless certain conditions are
met,\270\ issuers relying on Rule 504 may not use general solicitation
or general advertising to market the securities, and purchasers in a
Rule 504 offering will receive securities that are subject to the
resale limitations in Rule 502(d).\271\ If the conditions in Rule
504(b)(1)(i) through (iii) are met, any non-accredited investors will
receive substantive disclosure documents made in accordance with state
law. In addition, ``bad actor'' disqualification and disclosure
requirements apply.\272\ Finally, Rule 504 offerings, like other exempt
offerings, are subject to the federal antifraud provisions.
---------------------------------------------------------------------------

    \268\ See Exemptions to Facilitate Intrastate and Regional
Securities Offerings, Release. No. 33-9973 (Oct. 30, 2015) [80 FR
69786 (Nov. 10, 2015)], at Section III.B.2.
    \269\ See Rule 504(a)(3).
    \270\ See Rule 504(b)(1)(i) through (iii). General solicitation
and general advertising are permitted and the resale limitations in
Rule 502(d) do not apply if the issuer offers and sells the
securities exclusively under state laws that require registration
and the public filing and delivery to investors of a substantive
disclosure document before sale; or in one or more states that do
not have a provision requiring registration or the public filing and
delivery of a disclosure document before sale under certain
conditions. In states that do not have a provision requiring
registration or the public filing and delivery requirements, general
solicitation and general advertising are permitted so long as: The
securities have been registered in at least one other state that
provides for such registration, public filing, and delivery before
sale; the issuer offers and sells securities in that other state
under those provisions; and the issuer delivers to all purchasers in
any state the disclosure documents mandated by the state in which it
registered the securities; or exclusively in a state according to an
exemption in such state that permits general solicitation and
advertising, so long as sales are made only to accredited investors.
    \271\ See Rule 502(d).
    \272\ See Rule 504(b)(3); see also Intrastate and Regional
Offerings Release, at Section III.B.3.
---------------------------------------------------------------------------

    Based on the recent data, feedback that we received, and in order
to facilitate the use of Rule 504, we are proposing to use our general
exemptive authority under Securities Act Section 28 to raise the
maximum offering amount under Rule 504 from $5 million to $10 million.
We believe that raising the threshold would permit issuers to seek more
capital at a lower marginal cost than under the current rule and may
encourage regional multistate offerings and the use of state
coordinated review programs, resulting in more issuers conducting
offerings under the exemption, which would further increase investment
opportunities for investors and the amount of capital raised under Rule
504.
3. Regulation Crowdfunding
    The Commission adopted Regulation Crowdfunding in 2015.\273\
Regulation Crowdfunding provides an exemption from registration for
certain crowdfunding transactions that raise up to $1.07 million in a
12-month period. To qualify for the exemption, transactions must meet a
number of statutory requirements, including limits on the amount an
issuer may raise, limits on the amount an individual may invest and a
requirement that the transactions be conducted through an intermediary
that is registered as either a broker-dealer or a ``funding portal.''
---------------------------------------------------------------------------

    \273\ See Crowdfunding Adopting Release.
---------------------------------------------------------------------------

    In 2019, the Commission staff undertook a study of the available
information on the capital formation and investor protection impacts of
Regulation Crowdfunding and summarized quantitative information, where
it was available to the staff, as well as qualitative observations of
Commission staff and FINRA staff, and input from market participants
regarding their experience with Regulation Crowdfunding.\274\
---------------------------------------------------------------------------

    \274\ See Report to the Commission: Regulation Crowdfunding
(June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf (``2019 Regulation Crowdfunding Report'').
---------------------------------------------------------------------------

    The study found that during the considered period, while the market
exhibited growth from 292 offerings initiated in the first year after
adoption to over 500 offerings in the second year, the number of
offerings and the total amount of funding were relatively modest.\275\
From May 16, 2016 through December 31, 2018 approximately 1,351
offerings were initiated under Regulation Crowdfunding and 519 were
completed.\276\ These offerings raised $108 million for issuers. In
contrast, over the same period approximately 12,700 issuers relied on
Regulation D to conduct offerings of up to $1.07 million (the 12-month
limit under Regulation Crowdfunding), totaling approximately $4.5
billion.\277\
---------------------------------------------------------------------------

    \275\ See id.
    \276\ See id. at 15.
    \277\ See Concept Release, at Section II.F.4.
---------------------------------------------------------------------------

    The study also found that the typical offering during the
considered period was small and raised less than the 12-month offering
limit.\278\ Of the offerings that were reported as completed based on a
review of progress updates on Form C-U, as of December 2019, Commission
staff estimated that the average offering raised approximately $213,678
and that just under 30 issuers reported raising at least $1.07 million
over the considered period (aggregating multiple offerings for issuers
that conducted more than one offering). Despite few issuers meeting the
offering limit, we have received feedback from market participants and
observers supporting a higher offering limit and note that the offering
limit may not reflect current capital raising trends.\279\ In addition,
some intermediaries suggested that, while few offerings reach the
current limit, many issuers choose not to utilize the crowdfunding
exemption because the limit is too low.\280\ In contrast, one
intermediary stated that the current $1.07 million offering limit is
appropriate, noting that most offerings are well below that level, and
another intermediary indicated that few potential issuers have
expressed interest in raising amounts above the limit.\281\
---------------------------------------------------------------------------

    \278\ See 2019 Regulation Crowdfunding Report, at Section I.
    \279\ See, e.g., 2017 Treasury Report, at 41 (recommending
``increasing the limit on how much can be raised over a 12-month
period from $1 million to $5 million, as it will potentially allow
companies to lower the offering costs per dollar raised''); 2017
Forum Report, at 18 (recommending a $5 million limit); and 2019
Forum Report (recommending that the Commission ``raise the maximum
limit on the overall deal.''). See also supra note 231 citing
average seed funding increasing from $1.3 million in 2010 to $5.7
million in 2018.
    \280\ See 2019 Regulation Crowdfunding Report, at 37.
    \281\ Id.

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

    Regulation Crowdfunding also limits the amount individual investors
are allowed to invest to no more than $107,000 across all Regulation
Crowdfunding offerings over the course of a 12-month period. In
addition, individual investors are further limited below $107,000 to:
     The greater of $2,200 or five percent of the lesser of the
investor's annual income or net worth, if either of an investor's
annual income or net worth is less than $107,000; or
     Ten percent of the lesser of his or her annual income or
net worth, if both annual income and net worth are equal to or more
than $107,000.\282\
---------------------------------------------------------------------------

    \282\ See Rule 100(a)(2).

Information on amounts invested by an average investor or the number of
investors per offering is not available for the full sample of
Regulation Crowdfunding offerings. However, information on offerings
from one intermediary from May 2016 through September 2018 provides
some insight into the typical investment size, investor composition,
and number of investors in crowdfunding offerings.\283\ In the sample,
accredited investors comprised approximately nine percent of investors
and accounted for approximately 40 percent of amounts invested in
funded offerings.\284\ Information provided by this and other
intermediaries indicates that amounts invested did not generally reach
investment limits.\285\
---------------------------------------------------------------------------

    \283\ This information is not required to be reported in
progress updates, but the intermediary was able to provide
information on approximately 31,500 unique crowdfunding investors in
this sample that used the platform during the considered period. See
2019 Regulation Crowdfunding Report, at III.C.2.b.
    \284\ See 2019 Regulation Crowdfunding Report, at Section
III.C.2.b.
    \285\ See id. For investors where data on annual income and net
worth was available, the amounts invested over the entire considered
period did not reach investments limits. Data from intermediaries
reflected that the average investment per issuer was generally less
than $1,000; however, the staff was unable to determine whether
these investors also invested in crowdfunding offerings through
other crowdfunding platforms. Thus, these estimates are likely to
represent a lower bound on average investment amounts.
---------------------------------------------------------------------------

    A number of market participants and observers have expressed
concerns about the investment limits.\286\ The 2018 Small Business
Forum recommended that the Commission increase the investment limits
for all investors,\287\ and the 2017, 2018, and 2019 Small Business
Forums, the SEC Small Business Capital Formation Advisory Committee,
and the 2017 Treasury Report all recommended that the investment limits
not apply to accredited investors, who face no such limits under other
exemptions.\288\ Alternatively, some market participants recommended
basing the limits on the greater of the investor's net worth or income,
noting that the accredited investor definition only requires the
investor to meet either the net worth or the income standard.\289\ This
change would be similar to Regulation A, where accredited investors are
not limited in the amount of securities they may purchase and other
investors are limited to purchasing in a Tier 2 offering no more than:
(a) Ten percent of the greater of annual income or net worth (for
natural persons); or (b) ten percent of the greater of annual revenue
or net assets at fiscal year-end (for non-natural persons).\290\
---------------------------------------------------------------------------

    \286\ See, e.g., 2017 Treasury Report; and 2018 Forum Report.
    \287\ See 2018 Forum Report.
    \288\ See, e.g., 2017 Treasury Report, at 41; 2018 Forum Report;
2017 Forum Report, at 17; Recommendation of the SEC Small Business
Capital Formation Advisory Committee regarding Regulation
Crowdfunding (Dec. 13, 2019), available at https://www.sec.gov/spotlight/sbcfac/recommendation-regulation-crowdfunding.pdf (``2019
Small Business Advisory Committee Recommendation on Crowdfunding'').
See also 2015 Forum Report (recommending increasing the investment
limit for accredited investors). In conjunction with removing the
investment limits for individual accredited investors, the 2018
Small Business Forum recommended verification of accredited investor
status.
    \289\ See id.
    \290\ See 17 Rule 251(d)(2)(i)(C). This limit does not, however,
apply to purchases of securities that will be listed on a national
securities exchange upon qualification.
---------------------------------------------------------------------------

    In the Concept Release, the Commission requested comment on whether
to increase the Regulation Crowdfunding offering limit and investment
limits.\291\ Numerous commenters supported raising the offering
limit,\292\ while some opposed an increase.\293\ Several commenters
additionally supported eliminating the investment limit for accredited
investors,\294\ while a few also opposed changing the investment
limit.\295\ Comments were mixed regarding whether to calculate the
investment limit based on either income or net worth, with some
commenters supporting,\296\ and others opposing \297\

changes to the investment limit calculations.
---------------------------------------------------------------------------

    \291\ See Concept Release, at Section II.F.
    \292\ See, e.g., AOIP Letter (recommending raising the threshold
to $10 million and suggesting there is negative selection bias as
quality companies seeking larger amounts of capital are discouraged
by the lower threshold); letter from Hamilton & Associates Law
Group, P.A. dated August 15, 2019; Wefunder Letter (recommending a
$5 million offering limit); Republic Letter (recommending raising
the limit to $10 or $5 million and suggesting the current limits
impair the utility of Regulation Crowdfunding, discourage issuers
from using the exemption and negatively impact the ability of
portals to sustain their business); Indemnis et al. Letter; CCMC
Letter (suggesting the low upper limit discourages issuers and
recommending a $5 million offering limit); A. Schwartz Letter
(recommending a $5 million offering limit); letter from Herwig
Konings, et al. dated September 24, 2019 (``H. Konings et al.
Letter'') (recommending a $5 million offering limit); CCA Letter
(recommending a $20 million offering limit in place of Regulation A
Tier I offerings); MainVest Letter (recommending a $5 million
offering limit and supporting financial review for companies raising
over $500,000 and an audit for those that have raised at least
$500,000); Silicon Prairie Letter (recommending the offering limit
be the maximum of the other exemptions); 2019 Small Business
Advisory Committee Recommendation on Crowdfunding; and Rep. McHenry
Letter.
    \293\ See Consumer Federation Letter (opposing any expansion
prior to the Commission examining non-compliance and remedying
deficiencies in the crowdfunding markets); and Healthy Markets
Letter (urging the Commission to pause the creation and expansion of
exemptions and exceptions to the federal securities laws). See also
State Attorneys General Letter (recommending that before making any
modifications to the current exemptions, the Commission gather data
on issuer and investor outcomes as well as retail investor demand
for exempt offerings, and analyze how the current framework is
impacting each of those categories); NASAA Letter (recommending not
expanding the market without corresponding regulations that will
increase protections for investors); and CrowdCheck Letter.
    \294\ See, e.g., AOIP Letter; Wefunder Letter; Republic Letter
(recommending intermediaries being required to take reasonable steps
to verify accredited investor status); Indemnis et al. Letter; A.
Schwartz Letter; C. Bilger Letter; Davis Polk Letter; CCA Letter;
Rep. McHenry Letter; 2019 Small Business Advisory Committee
Recommendation on Crowdfunding; and CrowdCheck Letter. See also
letter from Startup Practicum at the University of Miami School of
Law (``Startup Practicum Letter'') (recommending higher limits for
accredited investors); and MainVest Letter (recommending a $250,000
investment limit).
    \295\ See Consumer Federation Letter; Healthy Markets Letter;
and State Attorneys General Letter.
    \296\ See, e.g., AOIP Letter (recommending the elimination of
cumulative investment limits); Republic Letter (recommending using
the greater of two thresholds and applying the limits on a per
offering basis); C. Bilger Letter; CCA Letter; MainVest Letter
(noting investor confusion regarding the investor limits and
supporting mirroring the logic for requirements for investor
accreditation and providing more investors access to investment
opportunities); and 2019 Small Business Advisory Committee
Recommendation on Crowdfunding (recommending investment limits apply
on a per investment basis rather than annual limits, and calculating
limits based upon the greater of income or net worth). See also
Indemnis et al. Letter (not specifically addressing this issue, but
recommending raising the limits and applying the limits on a per
offerings basis); CCMC Letter (not specifically addressing the
issue, but supporting raising the current limits); A. Schwartz
Letter (recommending an individual investment limit of $5,000 per
investment as a simplification of the current rule that does not
seek sensitive financial information); Davis Polk Letter
(recommending harmonizing limits on investment amounts for non-
accredited investors across all exempt offerings); and Silicon
Prairie Letter (recommending raising the limits for non-accredited
investors to $10,000 or the use of a suitability test).
    \297\ See, e.g., Startup Practicum Letter (supporting the
current limits for non-accredited investors); Wefunder Letter
(suggesting that the focus should be on issuer quality, not
investment limits, but recommending rationalizing the limits with
other exemptions, such as using the Regulation A Tier 2 limit for
non-accredited investors). See also Consumer Federation Letter;
Healthy Markets Letter; State Attorneys General Letter; and H.
Konings, et al. Letter (both supporting the current investor limits,
and suggesting that they could be simplified to a single $25,000
investor yearly limit or a tiered cap base on income).
---------------------------------------------------------------------------

    Based on our consideration of the available data, our staff's 2019
Regulation Crowdfunding Report, the feedback that we received on the
Concept Release and from Small Business Forums and the Small Business
Capital Formation Advisory Committee, and in order to facilitate use of
Regulation Crowdfunding for capital raising, we are proposing to: (1)
Raise the issuer offering limits in Regulation Crowdfunding; and (2)
increase the investment limits by no longer applying those limits to
accredited investors and allowing investors to rely on the greater of
their income or net worth in calculating their investment limit.
    We are proposing to use our general exemptive authority under
Securities Act Section 28 to raise the offering limit in Regulation
Crowdfunding from $1.07 million to $5 million. Securities Act Section
4(a)(6) currently sets the maximum offering limit at $1.07 million
($1.0 million adjusted to reflect changes in the Consumer Price
Index).\298\ While over 500 offerings were completed pursuant to
Regulation Crowdfunding in the first year and a half that the exemption
was available, market participants have expressed concern that the
vitality of the market and the number of offerings is being constrained
by the $1.07 million offering limit. We believe that permitting larger
offerings under Regulation Crowdfunding may encourage more issuers to
use the exemption and additionally would lower the offering costs per
dollar raised for issuers. In so doing, these amendments would provide
issuers with greater access to investment capital and investors in
Regulation Crowdfunding offerings with more investment opportunities.
At the same time, we believe raising the offering limit would be
consistent with investor protection because existing Regulation
Crowdfunding requirements, including the intermediary requirements and
the eligibility, disclosure, and ongoing reporting requirements for
issuers would continue to provide appropriate investor protections at
this higher offering limit.
---------------------------------------------------------------------------

    \298\ See 15 U.S.C. 77d(a)(6) and 15 U.S.C. 77d-1(h). See also
Rule 100(a)(1) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    Regulation Crowdfunding's financial statement requirements are
based on the amount offered and sold in reliance on the exemption
within the preceding twelve month period, with progressively increasing
requirements and involvement of outside accountants as offering size
increases.\299\ While we are proposing to increase the overall offering
limits, we do not believe that it is necessary to adjust or increase
the financial statement requirements at this time. Any offerings in
excess of the current $1,070,000 offering limit would continue to be
subject to the financial statement requirements of Rule 201(t)(3). We
believe that this standard, which (1) requires the provision of audited
financial statements similar to the requirements for other exempt
offerings with higher offering limits and (2) currently applies to
issuers offering more than $535,000 of their securities, would be
sufficient for offerings subject to the increased $5 million offering
limit.
---------------------------------------------------------------------------

    \299\ See Rule 201(t) of Regulation Crowdfunding.
---------------------------------------------------------------------------

    We are also proposing to increase the investment limits for
investors in Regulation Crowdfunding offerings.\300\ First, we are
proposing to no longer apply any investment limits to accredited
investors. When the Commission considered investment limits for Tier 2
Regulation A offerings, it determined that such limitations were
unnecessary for accredited investors because these individuals satisfy
certain criteria that suggest they are capable of protecting themselves
in transactions that are exempt from registration under the Securities
Act.\301\ For similar reasons, we believe that investment limits for
accredited investors under Regulation Crowdfunding are unnecessary.
Accordingly, we believe it would be appropriate in the public interest
and consistent with the protection of investors to treat accredited
investors under Regulation Crowdfunding in the same manner as other
exempt offerings.
---------------------------------------------------------------------------

    \300\ Consistent with the current approach to investment limits,
an issuer would be able to rely on efforts that an intermediary is
required to undertake in order to determine that the investor is an
accredited investor, or that the aggregate amount of securities
purchased by an investor does not cause the investor to exceed the
investment limits, provided that the issuer does not have knowledge
that the investor had exceeded, or would exceed, the investment
limits as a result of purchasing securities in the issuer's
offering. See Instruction 3 to Rule 100(a)(2) of Regulation
Crowdfunding.
    \301\ See 2015 Regulation A Release, at note 145 and
accompanying text.
---------------------------------------------------------------------------

    Second, we are proposing to amend the Regulation Crowdfunding
calculation method for the investment limits for non-accredited
investors to allow them to rely on the greater of their annual income
or net worth. Currently, Regulation Crowdfunding imposes a limit that
is the lesser of a percentage of the investor's annual income or net
worth subject to an absolute maximum of $107,000.\302\ When adopting
Regulation Crowdfunding, the Commission considered whether to use a
``greater of'' or ``lesser of'' standard for the exemption's investment
limits and determined to use the ``lesser of'' standard at that time
due to concerns about investors incurring unaffordable losses.\303\ By
contrast, when the Commission considered investment limits for Tier 2
Regulation A offerings, it determined to permit investors to look to a
percentage of the greater of their annual income or net worth.\304\ At
that time, the Commission indicated that limiting the amount of
securities that a non-accredited investor can purchase in a particular
Tier 2 offering should help to mitigate concerns that such investors
may not be able to absorb the potential loss of the investment and that
a limitation based on a percentage of the greater of such investor's
net worth/net assets and annual income/revenue is generally consistent
with similar maximum investment limitations placed on investors in
Title III of the JOBS Act and would help set a loss limitation standard
in such offerings.\305\
---------------------------------------------------------------------------

    \302\ Rule 100(a)(2) of Regulation Crowdfunding is based on the
requirement in Section 4(a)(6) that provides an exemption where the
aggregate amount sold to an investor by an issuer does not exceed a
given percentage of the annual income or net worth of such investor.
The statutory language does not expressly provide that the investor
use the lesser of annual income or net worth.
    \303\ See Crowdfunding Adopting Release, at Section II.A.2.c.
    \304\ See Rule 251(d)(2)(i)(C)(2); and 2015 Regulation A
Release, at Section II.B.4.
    \305\ See Section 301 of the JOBS Act; and 2015 Regulation A
Release, at notes 161 and 162 and accompanying text.
---------------------------------------------------------------------------

    The proposed amendment would conform Regulation Crowdfunding with
Tier 2 of Regulation A and use a consistent approach to mitigate
concerns regarding the ability of investors to absorb losses incurred
in offerings conducted in reliance on the two exemptions. While the
Commission used a ``lesser of'' standard when initially implementing
the rule, in light of our experience with Regulation Crowdfunding since
its adoption and the concerns of commenters that the existing
investment limits may be hampering the utility of the exemption,\306\
we now believe it is appropriate to consider a less restrictive
approach. By permitting investors to use the greater of the income or
net worth threshold, investors would have more flexibility in making
their investment decisions. Moreover, we are not aware

of evidence since Regulation Crowdfunding's adoption to indicate this
market requires a more stringent approach to investment limits than
other exemptive regimes.\307\
---------------------------------------------------------------------------

    \306\ See, e.g., Republic Letter; CCA Letter; and MainVest
Letter.
    \307\ See 2019 Regulation Crowdfunding Report, at Section
III.C.3.
---------------------------------------------------------------------------

Request for Comment
    55. Should we, as proposed, increase the Regulation A Tier 2
offering limit from $50 million to $75 million? Is another limit more
appropriate, such as $100 million? What are the appropriate
considerations in determining a maximum offering size? In connection
with an increase, should we consider additional investor protections,
such as aligning standards for when an amendment to an offering
statement is required with those in registered offerings? Should we
instead simply adjust the offering limit for inflation?
    56. Should we increase the Regulation A Tier 1 offering limit?
Alternatively, we note that there is significant overlap between Rule
504 and Regulation A Tier 1 offerings. Should the threshold for Rule
504 be raised to $20 million such that Rule 504 might serve as a
replacement for Regulation A Tier 1 offerings? If so, should we
eliminate Tier 1 of Regulation A?
    57. Would increasing the maximum offering size encourage more
issuers to undertake Regulation A offerings? Would it attract more
institutional investors to the market?
    58. Would increasing the maximum offering size increase the risk to
investors? Is there any data available that shows an increase or
decrease in fraudulent activity in the Regulation A market as a result
of the 2015 or 2018 amendments?
    59. Should we, as proposed, increase the Rule 504 offering limit
from $5 million to $10 million? Is another limit more appropriate?
Would the increased offering limit encourage more regional multistate
offerings and state coordinated review programs? Are there additional
investor protections we should consider in connection with an increase?
    60. Should we, as proposed, increase the Regulation Crowdfunding
offering limit from $1.07 million to $5 million? Is another limit more
appropriate? Would increasing the limit encourage more issuers to use
Regulation Crowdfunding? Are there additional investor protections we
should consider in connection with the increase?
    61. In conducting our review and analysis of exempt offerings, we
and our staff relied on data collected from filings with the Commission
and third party data sources.\308\ In order to better analyze the
exempt offering markets, should we consider ways to enhance compliance
with Form D filing requirements?
---------------------------------------------------------------------------

    \308\ See supra notes 12 and 13.
---------------------------------------------------------------------------

    62. Should we remove investment limits for accredited investors in
Regulation Crowdfunding offerings as proposed? If so, should we require
verification of accredited investor status, as suggested by several
commenters? Should the limits be modified in some other way?
    63. Should we amend the method for calculating the investment
limits for non-accredited investors in Regulation Crowdfunding to allow
those investors to rely on the greater of their annual income or net
worth as proposed? Is there any evidence to suggest that a more
restrictive approach to investment limits is warranted for Regulation
Crowdfunding offerings? Should we align the non-accredited investor
limits in Regulation Crowdfunding with those in Regulation A Tier 2?
    64. The 2017 and 2018 Small Business Forums recommended that the
Commission amend Regulation Crowdfunding requirements for debt
offerings and small offerings under $250,000, such as by limiting the
ongoing reporting obligations to actual investors instead of the
general public, and scaling the requirements to reduce accounting,
legal and other costs of the offering. Further, the 2019 Small Business
Forum recommended that the Commission should provide an exemption for
investments of less than $25,000 for up to 35 non-accredited investors,
where all investors have access to the same disclosures about the
issuer. Should we consider creating a ``micro-offering'' tier of
Regulation Crowdfunding consistent with these recommendations? If so,
should that micro-offering exemption be limited to offerings of debt
securities conducted through an intermediary, but with no specific
disclosure requirements? Would an aggregate offering limit be
appropriate, such as $250,000, as recommended by the 2017 and 2018
Small Business Forums? Should such a micro-offering be available to
non-accredited investors? If so, should there be a limit on the number
of non-accredited investors that may participate? Should there be any
limit on how much a person can invest in any one offering or in all
such offerings during a specified time period?
    65. Should we extend federal preemption to secondary sales of
Regulation A or Regulation Crowdfunding securities, for example, by
expanding the definition of ``qualified purchaser''? Several Small
Business Forums, as well as the Commission's Advisory Committee on
Small and Emerging Companies, have recommended that the Commission
provide blue sky preemption for secondary trading of securities issued
under Tier 2 of Regulation A.\309\ Should we preempt state securities
registration or other requirements applicable to secondary sales of all
securities initially issued in a Tier 2 Regulation A offering? Should
we preempt state securities registration or other requirements
applicable to secondary trading of securities only of Regulation A Tier
2 issuers that are current in their ongoing reports? Should we
similarly preempt state securities registration or other requirements
applicable to secondary trading of securities of initially issued in a
Regulation Crowdfunding offering? Should such preemption only apply if
the Regulation Crowdfunding issuer is current in its ongoing reports?
What other steps should we consider to improve secondary trading
liquidity of securities exempt from registration under Regulation A or
Regulation Crowdfunding?
---------------------------------------------------------------------------

    \309\ See 2019 Forum Report (recommending federal preemption for
all resales of securities sold in a Regulation A Tier 2 offering,
provided that the issuer is current in its Tier 2 reporting); 2018
Forum Report; 2017 Forum Report; 2016 Forum Report; 2015 Forum
Report; Final Report of the 2014 SEC Government-Business Forum on
Small Business Capital Formation (May 2015), available at http://www.sec.gov/info/smallbus/gbfor33.pdf (``2014 Forum Report'');
Advisory Committee on Small and Emerging Companies: Recommendations
Regarding Secondary Market Liquidity for Regulation A, Tier 2
Securities (May 15, 2017) available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-051517-secondary-liquidityrecommendation.pdf. The 2017 Treasury Report also
recommended that state securities regulators update their
regulations to exempt from state registration and qualification
requirements secondary trading of securities issued under Tier 2 of
Regulation A or, alternatively, that the Commission use its
authority to preempt state registration requirements for such
transactions.
---------------------------------------------------------------------------

F. Regulation Crowdfunding and Regulation A Eligibility

    The Commission's exempt offering framework includes eligibility
restrictions. Specific eligibility restrictions excluding certain types
of entities or activities by issuers apply to both Regulation A\310\
and Regulation

Crowdfunding,\311\ respectively. While Regulation Crowdfunding does not
restrict the types of securities eligible to be sold under the
exemption, the types of securities eligible for sale under Regulation A
are limited to equity securities, debt securities, and securities
convertible or exchangeable to equity interests, including any
guarantees of such securities.\312\ Regulation A also specifically
excludes asset-backed securities.\313\
---------------------------------------------------------------------------

    \310\ See 17 CFR 230.251(b). Regulation A is not available to:
Issuers that are organized in or have their principal place of
business outside of the United States or Canada; investment
companies registered or required to be registered under the
Investment Company Act or BDCs; blank check companies; issuers of
fractional undivided interests in oil or gas rights, or similar
interests in other mineral rights; issuers that are required to, but
that have not, filed with the Commission the ongoing reports
required by the rules under Regulation A during the two years
immediately preceding the filing of a new offering statement (or for
such shorter period that the issuer was required to file such
reports); issuers that are or have been subject to an order by the
Commission denying, suspending, or revoking the registration of a
class of securities pursuant to Section 12(j) of the Exchange Act
that was entered within five years before the filing of the offering
statement; or issuers subject to ``bad actor'' disqualification
under 15 CFR 230.262.
    \311\ Section 4A specifically excludes: Non-U.S. issuers;
issuers that are required to file reports under Exchange Act Section
13(a) or 15(d); certain investment companies; and other issuers that
the Commission, by rule or regulation, determines appropriate. See
15 U.S.C. 77d-1. Regulation Crowdfunding further excludes: Issuers
disqualified under disqualification provisions that are
substantially similar to those in Rule 506(d); issuers that have
failed to comply with the annual reporting requirements under
Regulation Crowdfunding during the two years immediately preceding
the filing of the offering statement; and blank check companies. See
17 CFR 227.100(b).
    \312\ See 17 CFR 230.261.
    \313\ See Rule 251 (providing that only ``eligible securities''
can be offered or sold under Regulation A) and Rule 261 (defining
``eligible securities''). An asset-backed security generally means a
security that is primarily serviced by the cash flows of a discrete
pool of receivables or other financial assets, either fixed or
revolving, that by their terms convert into cash within a finite
time period, plus any rights or other assets designed to assure the
servicing or timely distributions of proceeds to the security
holders. See 17 CFR 229.1101(c).
---------------------------------------------------------------------------

    We are proposing amendments to the eligibility restrictions in
Regulation Crowdfunding and Regulation A. We are proposing to amend
Regulation Crowdfunding to permit the use of certain special purpose
vehicles to facilitate investing in Regulation Crowdfunding issuers,
and to limit the securities eligible to be sold under Regulation
Crowdfunding. We are additionally proposing to amend Regulation A to
harmonize its eligibility restrictions by excluding Exchange Act
registrants that are delinquent in their Exchange Act reporting
obligations from relying on the exemption.
    Table 10 below summarizes the proposed changes to the eligible
issuers and securities under Regulation Crowdfunding and Regulation A:

       Table 10--Summary of Proposed Changes to Eligibility Under Regulation Crowdfunding and Regulation A
----------------------------------------------------------------------------------------------------------------
                                             Eligible issuers                       Eligible securities
                                 -------------------------------------------------------------------------------
                                     Current rules      Proposed rules       Current rules      Proposed rules
----------------------------------------------------------------------------------------------------------------
Regulation Crowdfunding.........  Excludes special    Permits             No limits on types  Securities limited
                                   purpose vehicles.   crowdfunding        of securities.      to:
                                                       vehicles.                               Equity
                                                                                securities.
                                                                                Debt
                                                                                securities.

                                                                                Securities
                                                                                convertible or
                                                                                exchangeable for
                                                                                equity interests.

                                                                                Guarantees of any
                                                                                of the above-
                                                                                listed
                                                                                securities.
Regulation A....................  Excludes issuers    Excludes issuers    Securities limited  No change.
                                   that have not       that have not       to:.
                                   filed required      filed required      Equity
                                   reports in the      reports in the      securities..
                                   two prior years     two prior years     Debt
                                   under Regulation    under Regulation    securities..
                                   A.                  A or Section 13
                                                       or 15(d) of the     Securities
                                                       Exchange Act.       convertible or
                                                                           exchangeable for
                                                                           equity interests..

                                                                           Guarantees of any
                                                                           of the above-
                                                                           listed
                                                                           securities..
----------------------------------------------------------------------------------------------------------------

1. Regulation Crowdfunding Eligible Issuers
    Section 4A(f)(3) of the Securities Act prohibits investment
companies, as defined in the Investment Company Act (or companies that
are excluded from the definition of an investment company under section
3(b) or 3(c) of the Investment Company Act), from using the Regulation
Crowdfunding exemption.\314\ As a result, issuers may not use special
purpose vehicles that invest in a single company (``SPVs'') that are
investment companies (or companies that are excluded from the
definition of an investment company under section 3(b) or 3(c) of the
Investment Company Act) to conduct Regulation Crowdfunding offerings.
Thus, an investor purchasing securities in an offering under Regulation
Crowdfunding must hold the securities in his or her own name, which, as
discussed below, can create certain practical impediments to issuers'
use of the exemption. When adopting Regulation Crowdfunding, the
Commission did not create, as suggested by some commenters, an
exception to this statutory prohibition that would have allowed a
single purpose fund organized to invest in, or lend money to, a single
company, to use Regulation Crowdfunding.\315\ In explaining its
decision, the Commission stated that the primary purpose of Section
4(a)(6) is to facilitate capital formation by early stage companies
that might not otherwise have access to capital, and expressed its
belief that investment companies did not constitute the type of issuer
that Section 4(a)(6) and Regulation Crowdfunding were intended to
benefit.\316\
---------------------------------------------------------------------------

    \314\ See Section 4A(f)(3) of the Securities Act [17 CFR
227.100(b)(3)].
    \315\ See Crowdfunding Adopting Release, at 71397.
    \316\ Id.
---------------------------------------------------------------------------

    Since the adoption of Regulation Crowdfunding, the Commission has
received comments and recommendations from a variety of sources,
including certain of the annual Small Business Forums,\317\ the 2017
Treasury Report,\318\ and the Small Business Capital Formation Advisory

Committee \319\ on the potential benefits of allowing an SPV to conduct
a crowdfunding offering. In particular, public feedback has indicated
that allowing the use of such vehicles could address concerns
associated with managing the potentially large number of direct
investors that could result from a crowdfunding offering, as those
investments would be held through a single purpose entity.
---------------------------------------------------------------------------

    \317\ See 2017 Forum Report. See also 2014 Forum Report
(commenting on the proposing release for Regulation Crowdfunding).
    \318\ See 2017 Treasury Report.
    \319\ See 2019 Small Business Capital Formation Advisory
Committee Recommendation on Crowdfunding (recommending eligible
investors be allowed to invest through special purpose vehicles).
---------------------------------------------------------------------------

    The 2017 Small Business Forum recommended that the Commission
consider promoting simplification of the capitalization table of
Regulation Crowdfunding issuers by allowing the use of SPVs to
aggregate investors with appropriate conditions.\320\ Similarly, the
2017 Treasury Report recommended allowing the use of SPVs advised by a
registered investment adviser, which may mitigate crowdfunding issuers'
concerns about vehicles having an unwieldy number of shareholders and
surpassing the registration thresholds of Section 12(g).\321\ However,
the 2017 Treasury Report also recognized that it is critical to ensure
appropriate investor protections if any changes are made to Regulation
Crowdfunding, given the participation of non-accredited investors. In
light of risks that SPVs may weaken investors' ability to avail
themselves of protections available to direct investors, as well as
potential conflicts of interest between the issuer, lead investors, and
other investors, the 2017 Treasury Report recommended that any
rulemaking in this area prioritize: (1) Alignment of interests between
a lead investor and the other investors participating in the SPV; (2)
regular dissemination of information from the issuer; and (3) minority
voting protections with respect to significant corporate actions.\322\
---------------------------------------------------------------------------

    \320\ See 2017 Forum Report.
    \321\ See 2017 Treasury Report.
    \322\ See id. (noting that SPVs could potentially facilitate the
type of syndicate investing model that has developed in accredited
investor platforms, whereby a lead investor conducts due diligence,
pools the capital of other investors, and receives carried interest
compensation).
---------------------------------------------------------------------------

    In connection with the 2019 Regulation Crowdfunding Report, the
staff received similar feedback from market participants regarding
certain issues that may be discouraging companies from raising capital
through the exemption. As discussed in the 2019 Regulation Crowdfunding
Report, some intermediaries have told the staff that many issuers have
elected not to pursue an offering under Regulation Crowdfunding
because, without an SPV, a large number of investors on an issuer's
capitalization table can be unwieldy and potentially impede future
financing. These intermediaries frequently noted that allowing SPVs to
participate in Regulation Crowdfunding offerings may encourage use of
the exemption because it would help the issuer manage the size of its
capitalization table. Similarly, some intermediaries have reported that
issuers may be hesitant to offer voting rights to investors in
offerings under this exemption because of the logistical challenges of
seeking any required shareholder vote. In addition, several market
participants pointed to the other potential investor protections that
an SPV structure could provide. For example, some commenters noted that
an SPV could allow small investors to invest alongside a sophisticated
lead investor who may negotiate better terms, protect against dilution
by negotiating during subsequent financings, mentor the issuer, and
represent smaller investors on the board.
    Many of these views were echoed by commenters on the Concept
Release. For example, several commenters stated that private companies
do not use Regulation Crowdfunding to raise capital because the
capitalization table becomes unwieldy with several hundred investors,
and it is difficult to obtain consent or approval from hundreds of
investors as it relates to governance issues, strategic decisions, and
later financing rounds.\323\ These commenters urged the Commission to
permit issuers to raise capital under Regulation Crowdfunding through
an SPV to address these concerns.\324\ Some commenters suggested that
the Commission require a registered investment adviser to manage the
SPV to provide protection for the SPV's investors.\325\ In contrast,
one commenter opposed allowing crowdfunding issuers to use SPVs,
stating that because the dollar value of typical crowdfunding
transactions is small, there would not be enough money available to pay
an SPV manager, or the fees paid would need to come immediately from
the principal investment.\326\ This commenter also stated that the SPV
approach would make it difficult or impossible for crowdfunding
investors to exercise their basic rights under state corporation laws,
including voting for company directors, voting on material
transactions, rights of access to corporate records, and appraisal
rights.
---------------------------------------------------------------------------

    \323\ See Iownit Letter; Rep. McHenry Letter; Wefunder Letter;
AOIP Letter; MainVest Letter; and J. Schocken Letter.
    \324\ See AOIP Letter (noting that the use of an SPV can
streamline communications with investors, allow for a single entry
on the issuer's capitalization table, and allow for better
management of investor rights to assure no excessive dilution takes
place); Wefunder Letter; CCA Letter (``If the goal of some of these
issuers is to be acquired, then having a shareholder table that is
easy to manage would facilitate some of these acquisitions. An SPV
would be beneficial and have no downside since investors still
retain their voting rights.''); Rep. McHenry Letter; NYSBA Letter;
and CrowdCheck Letter. See also supplemental letter from Wefunder,
dated January 15, 2020 (suggesting the use of voting trusts as a
type of SPV solution for Regulation Crowdfunding offerings).
    \325\ See CrowdCheck Letter. See also NASAA Letter
(``crowdfunding funds could open the door to greater use of
crowdfunding by issuers and investors. Those corresponding investor
protections should require that any such funds be managed by a
registered investment adviser, issue a single class of securities,
be limited to investing in only a single crowdfunding offering, and
maintain certain mandatory disclosure obligations.'').
    \326\ See letter from William F. Galvin, Secretary of the
Commonwealth of Massachusetts, dated September 24, 2019 (``MA
Secretary Letter'').
---------------------------------------------------------------------------

    After considering this feedback, we are proposing a new exclusion
under the Investment Company Act for limited-purpose vehicles
(``crowdfunding vehicles'') that function solely as conduits to invest
in businesses raising capital through the vehicle under Regulation
Crowdfunding. Proposed Rule 3a-9 under the Investment Company Act would
exclude from the definition of ``investment company'' under that Act a
crowdfunding vehicle that meets conditions designed to require that it
function as a conduit for investors to invest in a business that seeks
to raise capital through a crowdfunding vehicle.\327\ As a result, SPVs
meeting the definition of a crowdfunding vehicle would be able to
utilize Regulation Crowdfunding.
---------------------------------------------------------------------------

    \327\ See proposed Rule 3a-9(a). A crowdfunding vehicle
complying with the proposed rule would not be an investment company
as defined in the Investment Company Act or an entity that is
excluded from the definition of investment company by section 3(b)
or section 3(c) of that Act, and would therefore not be precluded
from relying on Regulation Crowdfunding by Section 4A(f)(3) of the
Securities Act. See Rule 100(b)(3) of Regulation Crowdfunding [17
CFR 227.100(b)(3)].
---------------------------------------------------------------------------

    Because the rule we are proposing would not be aimed at allowing
investment companies or similar issuers to raise capital, but rather,
solely at facilitating crowdfunding offerings by eligible issuers, we
believe this approach would be consistent with the intent of Section
4(a)(6). Specifically, under the proposed rule, a crowdfunding vehicle
would serve merely as a conduit for investors to invest in a single
underlying issuer and would not have a separate business purpose. As
discussed below, our proposed approach would allow investors in a
crowdfunding vehicle to achieve the same economic exposure,

voting power, and ability to assert state and federal law rights, and
receive the same disclosures under Regulation Crowdfunding, as if they
had invested directly in the underlying issuer (``crowdfunding
issuer'') in an offering made under Regulation Crowdfunding. This
approach also would allow the crowdfunding issuer to maintain a
simplified capitalization table and, by reducing the administrative
complexities associated with a large and diffuse shareholder base,\328\
may encourage crowdfunding issuers to offer voting rights, or other
terms not currently offered as frequently to investors.
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    \328\ Shifting the administrative burden from the crowdfunding
issuer to the crowdfunding vehicle would, for example, allow a third
party (such as a funding portal) to more easily be engaged to handle
the burden.
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    A crowdfunding issuer would be defined as a company \329\ that
seeks to raise capital as a co-issuer in an offering with a
crowdfunding vehicle that complies with all of the requirements under
Section 4(a)(6) of the Securities Act and Regulation Crowdfunding.\330\
We propose to define a crowdfunding vehicle as an issuer \331\ formed
by or on behalf of a crowdfunding issuer for the purpose of conducting
an offering under Section 4(a)(6) of the Securities Act as a co-issuer
with the crowdfunding issuer, which offering is controlled by the
crowdfunding issuer. Because the crowdfunding vehicle would only be a
conduit for the crowdfunding issuer--and taking into account the
significant limitations on the nature and scope of the crowdfunding
vehicle's activities under the proposed rule--we believe that the
crowdfunding vehicle would function as a means for the crowdfunding
issuer to raise capital rather than an independent investment vehicle
that would need to be subject to regulation under the Investment
Company Act to protect its investors. Moreover, because the
crowdfunding vehicle's business would consist only of the purchase of
securities of the crowdfunding issuer, and would use the sale of its
own securities to make such purchases, the crowdfunding issuer and the
crowdfunding vehicle would be co-issuers under the Securities Act,
meaning each would be deemed to be the maker of any statements by the
crowdfunding vehicle and any material misstatements or omissions with
respect to the offering.\332\
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    \329\ Under the Investment Company Act, a company means a
corporation, a partnership, an association, a joint-stock company, a
trust, a fund, or any organized group of persons whether
incorporated or not; or any receiver, trustee in a case under title
11 of the United States Code or similar official or any liquidating
agent for any of the foregoing, in his capacity as such. 15 U.S.C.
80-2(a)(8).
    \330\ As co-issuers, the crowdfunding issuer and crowdfunding
vehicle would be jointly relying on Regulation Crowdfunding for the
combined offering of the crowdfunding issuer's securities and the
crowdfunding vehicle's securities.
    \331\ Under the Investment Company Act, an issuer means every
person who issues or proposes to issue any security, or has
outstanding any security which it has issued. 15 U.S.C. 80-2(a)(22).
    \332\ See, e.g., 17 CFR 230.140.
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    As co-issuers, the crowdfunding issuer and the crowdfunding vehicle
would be required to jointly file a Form C, providing all of the
required Form C disclosure with respect to (i) the offer and sale of
the crowdfunding issuer's securities to the crowdfunding vehicle and
(ii) the offer and sale of the crowdfunding vehicle's securities to
investors.\333\ For example, the Form C would be required to include
the crowdfunding issuer's financial statements. By jointly filing a
Form C describing both transactions and providing disclosure about both
co-issuers, investors would be provided all information necessary to
analyze both their direct investment in the crowdfunding vehicle and
the terms of the crowdfunding vehicle's investment in the crowdfunding
issuer.\334\ This approach also would allow investors to review the
entire business of the crowdfunding issuer and crowdfunding vehicle in
one location (avoiding any confusion that could arise if the
crowdfunding vehicle and crowdfunding issuer provided separate
disclosure on the separate transactions, for example, on separate Forms
C).
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    \333\ We are proposing to amend Rule 201 of Regulation
Crowdfunding and Form C to require disclosure about the co-issuer in
the offering statement. Because the crowdfunding vehicle is only
acting as a conduit for the crowdfunding issuer, we do not believe
that the individual investment limitations under Regulation
Crowdfunding should apply to transfer of the securities from the
crowdfunding issuer to the crowdfunding vehicle.
    \334\ See 17 CFR 227.201(m) (requiring a description of the
ownership and capital structure of the issuer, including ``a summary
of the differences between [the offered] securities and each other
class of security of the issuer''). If a crowdfunding issuer also
wanted to offer its own securities directly to investors pursuant to
Regulation Crowdfunding, it would have to file a separate Form C
with respect to that offering.
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    The conditions we are proposing for crowdfunding vehicles are
intended to address any specific investor protection concerns raised by
a vehicle that acts as a conduit for investments in a crowdfunding
issuer. First, the proposed rule includes several conditions designed
to require that the crowdfunding vehicle serve only as a conduit for
investors to invest in the crowdfunding issuer. Specifically, the
crowdfunding vehicle:
     Must be organized and operated for the sole purpose of
acquiring, holding, and disposing of securities issued by a single
crowdfunding issuer and raising capital in one or more offerings made
in compliance with Regulation Crowdfunding; \335\
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    \335\ See proposed Rule 3a-9(a)(1).
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     Would not be permitted to borrow money and would be
required to use the proceeds of the securities it sells solely to
purchase a single class of securities of a single crowdfunding issuer;
\336\
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    \336\ See proposed Rule 3a-9(a)(2).
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     Would be permitted to issue only one class of securities
in one or more offerings under Regulation Crowdfunding in which the
crowdfunding vehicle and the crowdfunding issuer are deemed to be co-
issuers under the Securities Act; \337\
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    \337\ See proposed Rule 3a-9(a)(3).
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     Would be required to obtain a written undertaking from the
crowdfunding issuer to fund or reimburse the expenses associated with
the crowdfunding vehicle's formation, operation, or winding up, and the
crowdfunding vehicle would not be permitted to receive other
compensation.\338\
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    \338\ See proposed Rule 3a-9(a)(4).
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    In addition, any compensation paid to any person operating the
crowdfunding vehicle must be paid solely by the crowdfunding
issuer.\339\ These conditions collectively would require the
crowdfunding vehicle to act as a conduit by limiting the scope of the
activities in which the crowdfunding vehicle could engage and limiting
the compensation it could receive.
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    \339\ Id. We preliminarily believe that a crowdfunding vehicle
complying with the proposed rule would not be a broker as defined in
Section 3(a)(4) of the Exchange Act or a dealer as defined in
Section 3(a)(5) of the Exchange Act. If, however, a crowdfunding
vehicle or a person operating the crowdfunding vehicle engages in
activities beyond the limited scope described above, they may need
to consider whether they would be required to register under Section
15(a) of the Exchange Act. See, e.g., SEC v. Helms, No. 13-cv-01036,
2015 WL 5010298, at *17 (W.D. Tex. Aug. 21, 2015) (``In determining
whether a person `effected transactions [within the meaning of
Section 3(a)(4)],' courts consider several factors, such as whether
the person: (1) Solicited investors to purchase securities, (2) was
involved in negotiations between the issuer and the investor, and
(3) received transaction-related compensation.'') (citing cases
initiated by the Commission). In the context of a dealer, a key
consideration in determining whether a person qualifies as a dealer
has been the regularity with which it engages in securities
transactions. See, e.g., Eastside Church of Christ v. Nat'l Plan,
Inc., 391 F.2d 357, 361-62 (5th Cir. 1968) (an entity that purchased
many securities for its own account as part of its regular business
and sold some of them was deemed a dealer).
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    These conditions also would prevent a crowdfunding vehicle from
bearing any of the costs associated with its formation, operation, or
winding up. We

believe it is appropriate for the crowdfunding issuer to bear these
costs because the crowdfunding issuer and all of its investors would
benefit from the ability to maintain a simplified capitalization table.
In addition, if a crowdfunding vehicle could use offering proceeds or
the assets held by the vehicle to cover its own expenses or the costs
of any person operating the crowdfunding vehicle, this could result in
investors obtaining different economic exposure if they were to invest
through a crowdfunding vehicle rather than investing in the
crowdfunding issuer directly.
    Second, the proposed rule includes several conditions designed to
provide investors in the crowdfunding vehicle with the same economic
exposure, voting power, and Regulation Crowdfunding disclosures as if
the investors had invested directly in the crowdfunding issuer.
    The crowdfunding vehicle would be required to maintain the same
fiscal year end as the crowdfunding issuer.\340\ This condition is
designed to align the Regulation Crowdfunding reporting requirements of
the crowdfunding issuer and crowdfunding vehicle, and avoid any
confusion that might arise if the two entities provided investors with
disclosure covering different fiscal periods. The crowdfunding vehicle
also would be required to maintain a one-to-one relationship between
the number, denomination, type and rights of crowdfunding issuer
securities it owns and the number, denomination, type and rights of its
securities outstanding.\341\ This condition is designed to provide an
investor in the crowdfunding vehicle the same economic exposure as if
he or she had invested directly in the crowdfunding issuer.
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    \340\ See proposed Rule 3a-9(a)(5).
    \341\ See proposed Rule 3a-9(a)(6).
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    The crowdfunding vehicle similarly would be required to seek
instructions from its investors with regard to two matters: (i) The
voting of the crowdfunding issuer securities it holds; and (ii)
participating in tender or exchange offers or similar transactions
\342\ conducted by the crowdfunding issuer.\343\ The crowdfunding
vehicle would be required to vote the crowdfunding issuer securities,
and participate in tender or exchange offers or similar transactions,
only in accordance with instructions from the investors in the
crowdfunding vehicle.\344\ This condition is designed to provide each
investor in the crowdfunding vehicle the same voting power as if the
investor had invested in the crowdfunding issuer directly. It also
would allow investors to participate in certain important transactions
related to the crowdfunding issuer securities should they arise.
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    \342\ An example of a similar transaction would be the
opportunity to sell alongside the crowdfunding issuer in an offer of
the crowdfunding issuer securities.
    \343\ See proposed Rule 3a-9(a)(7).
    \344\ See id.
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    The crowdfunding vehicle would receive all of the disclosures and
other information required under Regulation Crowdfunding from the
crowdfunding issuer and would then be required promptly to provide such
disclosures and information to the investors and potential investors in
the crowdfunding vehicle's securities and to the relevant
intermediary.\345\ Investors would therefore receive the same
disclosures required under Regulation Crowdfunding about a crowdfunding
issuer whether they invested in the issuer directly or through a
crowdfunding vehicle.