An issuer that includes financial statements audited in accordance with U.S. GAAS and PCAOB standards will likely incur additional incremental costs compared
450 As discussed above, however, compliance with PCAOB standards could also require compliance with U.S. GAAS.
451 See, e.g., Section II.E.3.c (Exchange Act Registration of Regulation A Securities) below.
with an issuer that includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefit of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs.
Commission staff understands that many firms that conduct audits using PCAOB standards have developed their methodology in a manner that would comply with both sets of standards, which could help contain the costs related to complying with both U.S. GAAS and PCAOB auditing standards.
An issuer conducting a Regulation A offering that seeks to concurrently register its securities under the Exchange Act would be required to file audited financial statements that are prepared in accordance with the standards of the PCAOB by an auditor that is PCAOB-registered.452 The final rules therefore provide Regulation A issuers with the option to provide financial statements in Part F/S of Form 1-A that comply with correlating requirements under the Exchange Act.453
The Form 1-A financial statement requirements are being further updated to be consistent with the timetable for ongoing reporting.454 The final rules extend the permissible age of financial statements in Form 1-A to nine months, in order to permit the provision of financial statements that are updated on a timetable consistent with our
452 See Section 12 of the Exchange Act, Section 102 of the Sarbanes Oxley Act of 2002 and Article 2 of Regulation S-X.
453 If the final rules did not permit issuers to prepare audited financial statements in accordance with the standards of the PCAOB, Regulation A issuers that rely on the amendments to Form 8-A adopted today in order to register a class of securities pursuant to Section 12 of the Exchange Act would have to have their financial statements audited a second time under PCAOB standards by a PCAOB registered auditor.
454 Our final rules for ongoing reporting are discussed in Section II.E.1. below.
requirement for semiannual interim reporting.455 As proposed, the final rules add a new limitation on the age of financial statements at qualification, under which an offering statement cannot be qualified if the date of the most recent balance sheet included under Part F/S is more than nine months before the date of qualification.456 For filings made more than three months but no more than nine months after the end of the issuer’s most recently completed fiscal year end, issuers are required to include a balance sheet as of the two most recently completed fiscal year ends.457 For filings made more than nine months after the end of the issuer’s most recently completed fiscal year end, the balance sheet is required to be dated as of the two most recently completed fiscal year ends and an interim balance sheet must be included as of a date no earlier than six months after the
end of the most recently completed fiscal year.458 If interim financial statements are required, they are required to cover a period of at least six months.459 Requiring issuers to file interim financial statements no older than nine months and covering a minimum of
six months has the beneficial effect of eliminating what would otherwise be a requirement for certain issuers to provide quarterly interim financial statements during the qualification process and is consistent with the timing of the ongoing reporting requirements adopted today.460 We are generally maintaining the requirement of existing Form 1-A concerning the date after which an issuer must provide financial statements
455 See paragraph(s) (b)(3)-(4) of Part F/S of Form 1-A for Tier 1 issuers, which also apply to Tier 2 issuers by virtue of paragraph (c)(1) of Part F/S of Form 1-A.
456 Id.
457 See paragraph (b)(3)(A) of Part F/S of Form 1-A.
458 See paragraph (b)(3)(B) of Part F/S of Form 1-A.
459 See paragraph (b)(4) of Part F/S of Form 1-A.
460 See, e.g., discussion in Section II.E.1. below.
dated as of the most recently completed fiscal year, but are changing the interval from 90 calendar days to three months, which we believe will simplify compliance by allowing issuers to follow full months. In order to further simplify compliance with the final rules, we also revised Part F/S of Form 1-A to streamline the application of, and simplify the language in, the rules without substantively changing the required content.
Although we solicited comment on whether issuers conducting Tier 2 offerings should be required to provide their financial statements to the Commission and on their corporate websites in interactive data format using XBRL, we are not adopting any such requirement in the final rules.461 Commenters that addressed this issue opposed requiring
the use of XBRL in Regulation A filings.462 We agree and do not believe that requiring
the use of XBRL in Regulation A filings would be an appropriately tailored requirement for smaller issuers at this time.463
On December 23, 2013, after we proposed rules for Regulation A, the Financial Accounting Standards Board (FASB) and Private Company Council (PCC) issued a guide for evaluating financial accounting and reporting for non-public business entities.464 The PCC was created in 2012 by the FASB and the Financial Accounting Foundation (FAF) to improve the standard-setting process, and provide for accounting
461 Data becomes interactive when it is labeled or “tagged” using a computer markup language such as XBRL that software can process for analysis. For a discussion of current financial statement interactive data requirements, see Rel. No. 33-9002 (Jan. 30, 2009) [74 FR 6776].
462 BIO Letter; MoFo Letter; US Chamber of Commerce Letter.
463 We recognize, however, that future technological developments may lessen the burden to smaller issuers associated currently with XBRL, at which time we may revisit this initial determination.
464 The Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the “PCC Guide”), available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2F DocumentPage&cid=1176163703583.
and reporting alternatives, for non-public business entities under U.S. GAAP.465 As the standards for non-public business entities are new, there are currently very few distinctions between U.S. GAAP for public and non-public business entities. Over time, however, more distinctions between non-public business entity and public company accounting standards could develop.
Issuers that offer securities pursuant to Regulation A will be considered “public business entities” as defined by the FASB and, therefore, ineligible to rely on any alternative accounting or reporting standards for non-public business entities.466 Even though issuers of securities in a Regulation A offering fit within the definition of “public business entity,” the Commission retains the authority to determine whether or not such issuers would be permitted to rely on the developing non-public business entity standards.467
The distinction between public and non-public business entity standards was not directly contemplated in the Proposing Release, as the FASB/PCC Guide was issued after the Regulation A proposal was approved by the Commission.468 Commenters, however, generally expressed concern about the costs associated with requiring non-public business entities (e.g., non-Exchange Act reporting companies) to follow public company
465 For a brief history behind the creation of the PCC, see: http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid
=1351027243391.
466 See numbered paragraph 12 of the PCC Guide, p. 3.
467 Id.
468 The Commission approved the proposed rules on December 18, 2013, while the PCC Guide was issued on December 23, 2013.
GAAP accounting standards, particularly on a going forward basis.469 Commenters also expressed concern about the potential that an issuer would need to have its financial statements prepared and audited a second time, which would likely increase the costs associated with any previously obtained financial statements by a non-public business entity that would not comply with the financial statement requirements of an exemption that requires such issuer to follow the standards applicable to public business entities.470
The final rules do not allow Regulation A issuers to use the alternatives available to non-public business entities under U.S. GAAP in the preparation of their financial statements. One of the significant factors considered by the FASB in developing its definition of “public business entity” was the number of primary users of the financial statements and their access to management.471 As the FASB noted, “users of private company financial statements have continuous access to management and the ability to obtain financial information throughout the year.”472 As the number of investors increases and the ability to influence management decreases, it is important that all investors receive or have timely access to comprehensive financial information. As a result, the Commission believes that investor protection is enhanced by Regulation A issuers providing financial statements prepared in the same manner as other entities meeting the FASB’s definition of “public business entity.”
469 ABA BLS Letter; Canaccord Letter; CAQ Letter; CFIRA Letter 1; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter.
470 Id.
471 PCC Guide, p. 6.
472 Id.
Part III (Exhibits)
We proposed to maintain the existing exhibit requirements in Part III of Form 1-A. Additionally, we proposed to continue to permit issuers to incorporate by reference certain information in documents filed under Regulation A that is already
available on EDGAR, but also require issuers to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR.473 As proposed, issuers also would have to be subject to the ongoing reporting obligations for Tier 2 offerings in order to avail themselves of this accommodation.
We did not receive any comments on the proposed exhibit requirements for
Part III of Form 1-A, and are adopting the proposed exhibit requirements substantially as proposed. As adopted, issuers will be required to file the following exhibits with the offering statement: underwriting agreement; charter and by-laws; instrument defining the rights of securityholders; subscription agreement; voting trust agreement; material contracts; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; “testing the waters” materials; appointment of agent for service of process; and any additional exhibits the issuer may wish to file.474 In a change from the proposed requirements, however, the final rules no longer require issuers to file schedules (or similar attachments) to material contracts in all instances. As adopted, issuers are permitted to exclude schedules (or similar attachments) to material contracts if not material to an investment decision or if the
473 See General Instruction III to proposed Form 1-A and discussion in Section II.C.3.b(1). above regarding incorporation by reference in Part II of Form 1-A. The hyperlink must be active at the time of filing, but need not remain active after filing.
474 See Part III (Exhibits) of Form 1-A.
material information contained in such schedules is otherwise disclosed in the agreement or the offering statement. Any material contract filed in response to Item 17, however, must contain a list briefly identifying the contents of all omitted schedules, together with an agreement to furnish supplementally a copy of any omitted schedule to the Commission upon request.
We are adopting final rules that permit issuers to incorporate by reference certain information that is already available on EDGAR. In a change from the proposed rules, incorporation by reference will not be limited to documents previously filed pursuant to Regulation A and will not be limited to issuers subject to Tier 2 ongoing reporting obligations. We believe that this change will continue to facilitate the provision of required information to investors, while taking a consistent approach to information previously provided to the Commission and publicly available on EDGAR. Issuers that
seek to incorporate by reference are further required to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR.475 As proposed, such issuers must be subject to the ongoing reporting obligations for Tier 2 offerings. Additionally, as proposed, to the extent post-qualification amendments to offering statements must include audited financial statements, the final rules require the consent of the certifying accountant to the use of such accountant’s report in connection with amended financial statements to be included as an exhibit.476 The final rule,
475 See General Instruction III to Form 1-A. The hyperlink must be active at the time of filing, but need not remain active after filing.
476 This is consistent with current practice under Regulation A, but will be made an express requirement under the final rules. See Rule 252(f)(1)(ii).
however, clarifies that the requirement to file the consent of the certifying accountant only applies where the financial statements required to be filed are amended.477
Signature Requirements
Similar to the requirement for issuers in registered offerings, we proposed to require issuers to manually sign a copy of the offering statement before or at the time of filing and retain it for a period of five years.478 Issuers would be required to produce the manually signed copy to the Commission, upon request.479 Additionally, we proposed to eliminate the requirement that, where an issuer filing a Form 1-A is a Canadian issuer, its authorized representative in the United States is required to sign the offering statement.480 Also, we proposed to maintain the requirement that Canadian issuers file a Form F-X481 to provide an express consent to service of process in connection with offerings qualified under Form 1-A. This treatment is similar to requirements for Canadian companies making filings under the multijurisdictional disclosure system.482
We did not receive any comments on this aspect of the proposal, and are adopting these provisions, as proposed, in the final rules.483