352 Item 13 of Offering Circular, Part II of Form 1-A. As adopted, Tier 2 issuers that have more than
$5 million in average total assets at year end for the last two completed fiscal years would be required to disclose related party transactions at a higher threshold (i.e., 1% or more) than was previously required under Regulation A, which required the disclosure of transactions in excess of
$50,000 in the prior two years.
353 Id.
354 See, e.g., Campbell Letter; MoFo Letter.
compensation data on an individual basis for the three highest paid officers or directors and on a group basis for all directors, as was proposed for both Tier 1 and Tier 2, issuers in Tier 1 offerings will instead be required to disclose only group-level compensation data as it applies to the three highest paid executives or directors and all directors as a
collective group, including the number of persons comprising such group, covering the period of the issuer’s last completed fiscal year.355 In this regard, the final rules for
Tier 1 offerings will continue to require the disclosure of important compensation data to investors, but on an aggregate, rather than individual, basis. The group-level disclosure format for the highest paid executives and all directors should help smaller issuers avoid some of the harm that could follow compensation disclosure of individual executives or directors to the market and competitors, especially when disclosure of such information would not necessarily be required in the context of a private placement or other exempt
offering.356 Further, the additional requirement to disclose the total number of persons
comprising any group for which group-level data is required to be disclosed will preserve the ability of investors in Tier 1 offerings to determine the average compensation paid to all persons within the group.357 Consistent with the suggestions of some commenters,358
355 See Item 11 of Offering Circular, Part II of Form 1-A. The number of persons comprising the director-level group data is also required of issuers providing compensation data under Tier 2.
356 For example, there are no rule-based disclosure requirements for private placements pursuant to Rule 506 of Regulation D, 17 CFR 230.500 et seq., when the issuer only sells to accredited investors. Contrary to the requirements of Regulation D, we believe mandated compensation (and other) disclosure is appropriate in the context of a public offering under Regulation A. Additionally, however, we believe that the final disclosure rules for such information are appropriately tailored to provide information to investors.
357 This requirement is a change to the disclosure requirements of group-level data in both Tiers. Although this information would have been ascertainable under Tier 2 by comparing the group- level disclosure of director compensation to the number of directors disclosed pursuant to Item 10 of the Offering Circular, we believe the change will facilitate investors’ calculations of average director compensation without significantly increasing the burden on Tier 2 issuers.
we believe that this change to the final rules will assist smaller issuers with more appropriately tailored executive compensation disclosure requirements and will provide investors with useful information.
We do not, however, believe that further scaling of smaller issuers’ MD&A is necessary under the final rules. As we noted in the Proposing Release, while the final rules provide issuers with more detailed instructions on MD&A disclosure, similar disclosure is already called for under existing requirements.359 The final MD&A requirements clarify existing requirements and will likely save issuers time by providing more express guidance regarding the type of information and analysis that should be included. We believe the clearer requirements will lead to improved MD&A disclosure, which will provide investors with better visibility into management’s perspective on the
issuer’s financial condition and operations. The final provisions for MD&A disclosure in the Offering Circular, however, are not as extensive as those required under Item 303 of Regulation S-K.360 As proposed, the final Offering Circular format includes detailed guidance and requirements similar to Item 303 with respect to liquidity, capital resources, and results of operations, including the most significant trend information,361 but does not separately call for disclosure of off-balance sheet arrangements or a table of contractual
358 Campbell Letter; MoFo Letter.
359 MD&A disclosure is specifically required by Model A. Model B calls for similar information in Item 6, which requires disclosure of the characteristics of the issuer’s operations or industry that may have a material impact upon the issuer’s future financial performance. Item 6 also requires disclosure of the issuer’s plan of operations and short-term liquidity if the issuer has not received revenue from operations during each of the three fiscal years immediately prior to filing the offering statement.
360 17 CFR 229.303.
361 17 CFR 303(a)(1)-(3). Cf. Form 20-F, at Item 5.
obligations.362 Similar to smaller reporting companies in registered offerings, Regulation A issuers are required to disclose information about the issuer’s results of operations for the two most recently completed fiscal years and interim periods, when applicable.363
Except as noted above, the updates to the Offering Circular disclosure requirements will not result in an overall increase in an issuer’s disclosure obligations. For example, as mentioned above, certain issuers will have a higher threshold for reporting related party transactions than would have previously been required under Regulation A. Additionally, Tier 1 issuers (which will likely be smaller companies) will, in comparison to the proposed rules, benefit from further scaling of related party transactions and compensation-related disclosures. Further, as proposed, all issuers will be permitted to provide more streamlined disclosure of dilutive transactions with insiders
by no longer being required to present a dilution table based on the net tangible book value per share of the issuer’s securities.364 While we disagree with commenters that suggested we should expand disclosure provisions related to dilution,365 the final rules, which reduce the disclosure time period from three years to one year, are consistent with
their view that the disclosure of this information should not depend on when such shares were acquired. We do not believe that information regarding dilution covering more than
362 An issuer may, however, be required to disclose such information during the course of the qualification process, if material to an understanding of the issuer’s financial condition.
363 When management’s discussion and analysis of the financial condition and results of operations is provided for interim period financial statements, any material change in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet should be discussed. Also, any material changes in results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year- to-date period of the preceding fiscal year shall be discussed. See Instruction 3 to Item 9(a) of the Offering Circular, Part II of Form 1-A.
364 See Item 4 (Dilution) of the Offering Circular, Part II of Form 1-A.
365 See NASAA Letter 2, at fn. 50; WDFI Letter, at 9.
the prior year is necessary for the smaller issuers likely to conduct Regulation A offerings, nor do we believe that a reduction in the required disclosure from three years to one year, as proposed and adopted, will negatively affect investor protection.
Additionally, the final provisions for MD&A disclosure clarify existing requirements and should benefit issuers by providing more express guidance regarding the type of information and analysis that should be included, including instructions about disclosure of operating results. We believe that these clarifications should also lead to improved MD&A disclosure, which will provide investors with better visibility into management’s perspective on the issuer’s financial condition and results of operations. Investors, particularly in Tier 2 offerings, will also benefit from disclosure that is more consistent across issuers in both registered offerings and Regulation A offerings.
We are making one change to the disclosure requirements of Item 6 (Use of Proceeds) in the final rules. As proposed, issuers were required to disclose if any material amount of other funds are to be used in conjunction with the proceeds raised in the offering. If so, an issuer would be required to state the amounts and sources of such other funds. The final rules include these proposed provisions, but add a requirement that the issuer further provide disclosure about whether such other funds are firm or contingent. While we did not receive any comment specifically addressing this issue, where applicable, this type of information would generally be required to be disclosed as part of the staff review and comment process before qualification. We believe an express
requirement in the final rules will ultimately save issuers time in the qualification process and therefore are including language addressing this issue in the final rules.366