In order to avoid confusion and to facilitate the review of offering circulars by investors and the Commission’s staff, the final rules will also require issuers to indicate on the offering circular cover page which format they are following. See Part II(a)(1) of Form 1-A.
339 17 CFR 230.405.
issuer’s ownership and capital structure, including descriptions of the exercise of rights of principal shareholders.340 The final rules substantially address these topics. Item 12 of the Offering Circular, as proposed and adopted, requires disclosure relating to more than 10% beneficial ownership and Item 14, which is adopted as proposed, requires disclosure of the terms of all classes of outstanding capital stock.
As adopted, the Offering Circular includes disclosure based on disclosure guidelines set forth in the Securities Act Industry Guides as well as guidance applicable to limited partnerships and limited liability companies.341 As suggested by
commenters,342 in order to create more flexibility in disclosure matters for smaller
issuers, we are adding a materiality threshold for disclosure as it relates to time and dollar expenditures on research and development.343 Additionally, the final rules require issuers to provide financial statements, which in the case of Tier 2 offerings must be audited,344 as well as a section on management’s discussion and analysis (MD&A) of the issuer’s liquidity, capital resources, and results of operations.345 We are amending the MD&A disclosure requirements in Item 9 to align more closely with the language in
Regulation S-K that applies to domestic registrants346 and smaller reporting
340 CFA Institute Letter.
341 See Item 7(c)-(d) of Offering Circular, Part II of Form 1-A ; see also Rel. No. 33-6900 (June 17, 1991) [56 FR 28979] (setting forth the Commission’s view on the disclosure requirements for limited partnerships).
342 CFIRA Letter 1; MoFo Letter; WR Hambrecht + Co Letter.
343 Item 7(a)(1)(iii) of Offering Circular, Part II of Form 1-A.
344 See discussion in Section II.C.3.b(2)(c). below.
345 See Item 9 of Offering Circular, Part II of Form 1-A.
346 Item 9(b)(1) of Offering Circular, Part II of proposed Form 1-A is amended to track more closely the language and requirements of domestic issuers, as opposed to foreign private issuers. As proposed, the language more closely followed the requirements contained in Form 20-F for foreign private issuers.
companies.347 Consistency with Regulation S-K in this regard may assist companies with compliance with the rules for registered offerings to the extent Tier 2 issuers eventually become Exchange Act reporting companies, while also making sure that Regulation A issuers do not have a greater disclosure obligation than registered domestic issuers.348 Further, consistent with the proposed rules, issuers that have not generated revenue from operations during each of the three fiscal years immediately before the filing of the offering statement (or since inception, whichever is shorter) will be required to describe their plan of operations for the 12 months following qualification of the offering
statement.349 For companies that have been in existence for less than three years, the final rules clarify that this disclosure requirement applies to them since inception.350
The changes to the Offering Circular format adopted today will result in Offering Circular disclosure, particularly for Tier 2 offerings, more akin to what is required of smaller reporting companies in a prospectus for a registered offering. For example, the final rules require issuers in both Tier 1 and Tier 2 offerings to disclose beneficial
ownership of their voting securities, as opposed to record ownership of voting and non- voting securities.351 With respect to transactions with related persons, promoters, and certain control persons in Tier 2 offerings, issuers will no longer be required to disclose transactions in excess of $50,000 in the prior two years (or similar transactions currently
347 We are eliminating proposed Item 9(b)(2)-(3) of Offering Circular, Part II of Form 1-A. As proposed, these disclosures would have increased the disclosure obligations of Regulation A issuers in comparison to those required of smaller reporting companies under Item 305 of Regulation S-K. 17 CFR 229.305.
348 See also discussion of the final rules for simplifying Exchange Act registration of Tier 2 issuers in Section II.E.3.c. below.
349 Item 9(c) of Offering Circular, Part II of Form 1-A.
350 Id.
351 Item 12 of Offering Circular, Part II of Form 1-A.
contemplated), but rather must follow the requirements for smaller reporting company disclosure of transactions during the prior two fiscal years that exceed the lesser of
$120,000 or 1% of the average total assets at year end for the last two completed fiscal years.352 We originally proposed to apply this threshold to Tier 1 offerings also, but believe that the 1% of average total assets threshold could result in a lower disclosure threshold for smaller issuers than was otherwise required of such issuers under the existing rules. The final rules therefore preserve the related party transaction disclosure requirements of Regulation A, as they existed before the adoption of final rules today, for Tier 1 offerings so that issuers in such offerings are only required to disclose such transactions in excess of $50,000 in the prior two years (or similar transactions currently contemplated).353
In addition to preserving the related party transaction disclosure threshold for Tier 1 offerings, we are adopting a change applicable to Tier 1 that will provide an additional scaled disclosure option for issuers in the Offering Circular. This change is consistent with the general views of a number of commenters that urged the Commission to consider additional potential scaling for smaller issuers generally and Tier 1 offerings
in particular.354 The final rules alter the format of, but not the ultimate aggregate amount of information required to be disclosed in, the proposed executive compensation disclosure requirements for Tier 1 offerings. Instead of providing executive