Discussion and analysis of the issuer’s liquidity and capital resources and results of operations through the eyes of management covering the two most recently completed fiscal years and interim periods, if required; and, for issuers that have not received revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter), the plan of operations for the 12 months following qualification of the offering statement, including a statement about whether the issuer anticipates that it will be necessary to raise additional funds within the next six months (Item 9: Management’s Discussion and Analysis of Financial Condition and Results of Operations);
Identification of directors, executive officers and significant employees with a discussion of any family relationships within that group, business experience during the past five years, and involvement in certain legal proceedings during the past five years (Item 10: Directors, Executive Officers and Significant Employees);
Group-level executive compensation disclosure for the most recent fiscal year for the three highest paid executive officers or directors with Tier 2 requiring individual disclosure of the three highest paid executive officers or directors (Item 11: Compensation of Directors and Executive Officers);
Beneficial ownership of voting securities by executive officers, directors, and 10% owners (Item 12: Security Ownership of Management and Certain Securityholders);
Transactions with related persons, promoters and certain control persons (Item 13: Interest of Management and Others in Certain Transactions);
The material terms of the securities being offered (Item 14: Securities Being Offered); and
Any events that would have triggered disqualification of the offering under Rule 262 if the issuer could not rely on the provisions in Rule 262(b)(1).335
The final rules eliminate Model A as a disclosure format for Regulation A offerings, as proposed. While some commenters suggested that the Commission should preserve Model A as an additional disclosure format for Part II of Form 1-A or update existing Model A with NASAA’s more recent Form U-7, we are not persuaded that a question-and-answer format should be retained in the final rules. As we noted in the Proposing Release, the Model A disclosure format has historically been used less frequently, and resulted in less-uniform disclosure and a longer time to qualification than
the Model B disclosure format.336 We do not believe that the use of Form U-7, which is
largely similar to Model A and is also in a question-and-answer format, will alter this result. While the question-and-answer disclosure format does provide issuers with additional flexibility, we believe that the Offering Circular disclosure format (formerly
335 See discussion of the final disqualification provisions in Section II.G. below. The final rules require issuers to provide this “bad actor” disclosure even if it elects to follow the Part I of Form S-1 disclosure format.
336 See Proposing Release, at Section II.C.3.
called Model B) and Part I of Forms S-1 or S-11 provide issuers with sufficient flexibility in choosing their disclosure format without any of the potential delays or uniform disclosure issues associated with Model A, either currently or even if it is updated with Form U-7. We are further concerned that a question-and-answer format may not best serve the interests of investors in Regulation A offerings by providing them with less- uniform disclosure in a potentially unfamiliar format. Additionally, we are concerned that a question-and-answer format may incorrectly lead issuers to believe that, despite the guidance contained in the form itself, less complete disclosure is required under this format, thereby causing unnecessary delays in the qualification process. Lastly, and particularly with respect to Tier 2 offerings, we do not believe that a question-and-answer format is appropriate for issuers and investors in larger-sized offerings that generally benefit from disclosure that is comparable between offerings in format and information disclosed. For similar reasons, we do not believe that this format is appropriate in
offerings of any size by issuers that seek to foster potential trading in the secondary markets.337
As proposed, the final rules will require issuers to provide disclosure in Part II of Form 1-A that follows the Offering Circular or Part I of Form S-1 disclosure format.
Additionally, we agree with commenters that certain additional disclosure requirements may be appropriate for offerings by REITs and similar issuers. The final rules, therefore, also permit issuers to follow, in addition to the Offering Circular and Part I of Form S-1 formats, the form disclosure requirements of Part I of Form S-11.338 An issuer may,
337 See Section II.E. below for a discussion of the final rules for ongoing reporting.
338 As proposed, issuers must choose one format to follow for the offering circular and may not combine items from different formats. See General Instruction II to proposed and final Form 1-A.
however, only use Part I of Form S-11 if the securities are eligible to be registered on that form. As proposed and adopted with respect to disclosure under Part I of Form S-1, issuers following Part I of Form S-11 may follow smaller reporting company narrative disclosure requirements if they meet the definition of that term in Securities Act
Rule 405.339
Contrary to the suggestions of some commenters, we are not adopting rules that would limit the number of risk factors disclosed. While we appreciate the concern that certain issuers and their advisors may take an overly cautious approach to the application of our disclosure requirements resulting in numerous risk disclosures, the decision as to the appropriate mix of information that should be disclosed to investors must be based on the particular facts and circumstances of each company. We do not believe that a limit on risk factor disclosure is an appropriate substitute for the judgments of issuers and their advisors. A form-based limitation on the number of risk factors, beyond the guidance in Item 3 of Part II, could lead to incomplete disclosure that may place investors at a higher risk of potential loss and issuers at a higher risk for potential litigation if it results in appropriate risk factors being excluded.
Further, we believe that certain other commenter concerns and suggestions as to specific narrative disclosures are already appropriately addressed by the final rules. For example, one commenter suggested that we require disclosure of the names of those holding more than 20% beneficial ownership of the issuer and a description of the