617 Heritage Letter.
more local in nature than issuers in Tier 2 offerings.618 Further, we believe Tier 1 offerings will be conducted by issuers that are unlikely to seek the creation of a secondary trading market in their securities.619 In light of this, we do not believe that it is necessary to require ongoing reporting for Tier 1 issuers. Consistent with our experience under existing Regulation A, we do not believe that a lack of ongoing reporting for issuers in Tier 1 offerings will adversely affect investors that base purchasing decisions on the narrative and financial statement disclosure requirements included in the offering statement and, with respect to continuous offerings lasting for more than one year, updated annually by post-qualification amendment thereafter. Further, notwithstanding
the suggestions of some commenters,620 we believe that adopting different ongoing reporting requirements for Canadian issuers621 would not be consistent with our goal to adopt a uniform reporting standard for Tier 2 issuers that provides investors with
certainty as to the amount of information they can expect to receive from an issuer in a Tier 2 offering on an ongoing basis. We believe that the final rules will provide investors and potential investors with the information they need to make investment decisions and facilitate capital formation for smaller companies.
We are therefore adopting the following ongoing reporting requirements for Tier 2 offerings:
618 See fn. 830 in Section II.H.3. below.
619 See discussion of the nature of offerings in Section II.H.3. below.
620 DuMoulin Letter; see also McCarter & English Letter.
621 Commenters also suggested that their proposed ongoing reporting for Canadian issuers apply to foreign private issuers. As noted above in Section II.B.1.c., however, non-Canadian foreign issuers are not eligible under Regulation A.
Annual Reports on Form 1-K
As proposed and adopted, Form 1-K will consist of two parts: Part I (Notification) and Part II (Information to be included in the report). The contents of and requirements for Part I and Part II are, with the exception of technical amendments to the forms, amendments that are necessary to reflect corresponding changes to the required audit standards of financial statements filed under Part F/S of Form 1-A, and additional guidance designed to streamline disclosure, adopted without changes from the proposed rules.
Part I (Notification)
As adopted, Part I of Form 1-K will be an online XML-based fillable form that will include certain basic information about the issuer, prepopulated on the basis of information previously disclosed in Part I of Form 1-A, which can be updated by the issuer at the time of filing. Additionally, if at the time of filing the Form 1-K an issuer has terminated or completed a qualified Regulation A offering, the issuer will be required to provide certain updated summary information about itself and such offering in Part I, including the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer.
As proposed and adopted, issuers will only be required to fill out the XML-based portion of Part I of Form 1-K that relates to the summary information about a terminated or completed offering once per offering. An issuer that elects to terminate its ongoing reporting obligation under Tier 2 of Regulation A after terminating or completing an
offering, in a fiscal year other than the fiscal year in which the offering statement was qualified, but before reporting the required summary information on Form 1-K, will be required to file the summary offering information in Part I of Form 1-K by filing a Form 1-Z (exit report) that includes such information.622
The summary information disclosed will facilitate analysis of Regulation A
offerings by the Commission, other regulators, third-party data providers, and market participants and thereby enable the Commission and others to evaluate the use and effectiveness of Regulation A as a capital formation tool.623 The fillable form will enable issuers to provide the required information in a convenient medium and capture relevant data about the recently terminated or completed Regulation A offering. The required disclosure will be publicly available on EDGAR. Consistent with Part I of Form 1-A, the issuer will not be required to obtain specialty software to file Part I of Form 1-K on EDGAR.
622 General Instruction (3) to Form 1-Z.
623 See also discussion in Section II.E.4. below.
Part II (Information to be included in the report)
As with Part II of Form 1-A, the final rules require that the issuer submit Part II of Form 1-K electronically as a text file attachment containing the body of the disclosure document and financial statements, formatted to be compatible with the EDGAR filing system. Part II will require issuers to disclose information about themselves and their business based on the financial statement and narrative disclosure requirements of
Form 1-A.624
As adopted, Item 2 to Part II of Form 1-K (Management’s Discussion and Analysis of Financial Condition and Results of Operation) requires issuers, by cross- reference to the requirements of Form 1-A, to provide information for the two most recently completed fiscal years. As suggested by one commenter,625 we are clarifying that the Form 1-K cross-reference to the requirements of Item 9 to Part II of Form 1-A does not require issuers to include the additional MD&A disclosure required in Item 9(c) 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).626
Additionally, we are revising the financial statement requirements in Item 7 to Part II of Form 1-K. As proposed, Form 1-K directed issuers to the financial statement requirements of Part F/S of Form 1-A. We are revising this portion of the form so as to include the financial statement requirements directly in Item 7 to Part II of Form 1-K. We believe this change to Item 7 will make it easier for issuers to comply by clarifying,
624 Part II of Form 1-K.
625 E&Y Letter.
626 See Item 2 to Part II of Form 1-K.
as one commenter recommended,627 the specific portions of Regulation S-X relating to financial statements for entities other than the issuer that are required in Form 1-K. Additionally, since Tier 2 issuers are now permitted to file financial statements that are audited in accordance with either U.S. GAAS or the standards of the PCAOB, a corresponding change has been made to the financial statement requirements of Item 7 of Form 1-K.628 As proposed, the auditor of financial statements would need to be independent under Rule 2-01 of Regulation S-X and must comply with the other requirements of Article 2 of Regulation S-X, but need not be PCAOB-registered.
Further, in comparison to the proposed rules, Item 7(a) no longer requires issuers to provide a list of the financial statements included in Form 1-K at the beginning of the financial statement section. We eliminated this requirement in the final rules because we do not believe that there is a need for a separate list of the financial statements at the beginning of this section, when the financial statements themselves will be labeled.
Form 1-K will permit issuers to incorporate by reference certain information previously filed on EDGAR, but will require issuers to include a hyperlink to such material on EDGAR.629 In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. We believe that this change will 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. Additionally, to avoid
627 E&Y Letter.
628 See discussion in Section II.C.3.b(2)(c). above.
629 General Instruction D. to Form 1-K. The hyperlink to EDGAR need only be active at the time of filing of the Form 1-K. Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
unnecessary repetition of disclosure items, Form 1-K encourages issuers to cross- reference items within the form, where applicable.630 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-K indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.631 Form 1-K will cover:
Business operations of the issuer for the prior three fiscal years (or, if in existence for less than three years, since inception);
Transactions with related persons, promoters, and certain control persons;
Beneficial ownership of voting securities by executive officers, directors, and 10% owners;
Identities of directors, executive officers, and significant employees, with a description of their business experience and involvement in certain legal proceedings;
Executive compensation data for the most recent fiscal year for the three highest paid executive officers or directors;
MD&A of the issuer’s liquidity, capital resources, and results of operations covering the two most recently completed fiscal years; and
630 Id. Issuers may, for example, add a cross-reference to disclosure in the financial statements. We have clarified, however, that like with Form 1-A, they may not add a cross-reference within the financial statements themselves to disclosures elsewhere.
631 Id.
Two years of audited financial statements.632
We anticipate that issuers will generally be able to use the offering materials as a basis to prepare their ongoing disclosure.
As adopted in the final rules, Form 1-K includes requirements for financial statements prepared on the same basis, and subject to the same requirements as to audit standards and auditor independence, as the financial statements required in the Regulation A offering circular for Tier 2 offerings.633 Form 1-K must be filed within 120
calendar days after the issuer’s fiscal year end.634 A manually signed copy of the
Form 1-K must be executed by the issuer and related signatories before or at the time of filing and retained by the issuer for a period of five years.635 Issuers will be required to produce the manually signed copy to the Commission, upon request.636 Any amendments to the form must comply with the requirements of the applicable items and be filed under cover of Form 1-K/A.637
Semiannual Reports on Form 1-SA
We are adopting final rules for semiannual interim reporting for Regulation A issuers generally as proposed, with technical amendments and additional guidance designed to streamline the disclosure requirements for Tier 2 issuers and harmonize them with the requirements of issuers subject to an ongoing reporting obligation under the
632 Part II of Form 1-K.
633 See Item 7 (Financial Statements), Part II of Form 1-K.
634 See General Instruction A.(2), Form 1-K.
635 See General Instruction C., Form 1-K.
636 Id.
637 See Rule 257(c) (also requiring the signature on behalf of an authorized representative of the issuer and the inclusion of any specified certifications).
Exchange Act.638 As proposed, we continue to believe that a semiannual, rather than a quarterly, reporting requirement strikes an appropriate balance between the need to provide information to the market and the cost of compliance for smaller issuers, especially given the further flexibility provided to issuers in Form 1-U to provide quarterly information if they elect to do so.639 Issuers will be required to provide semiannual reports on Form 1-SA that, much like reports on Form 10-Q, consist primarily of financial statements and MD&A.640 Unlike Form 10-Q, however,
Form 1-SA does not require disclosure about quantitative and qualitative market risk, controls and procedures, updates to risk factors, or defaults on senior securities.641 We do not believe such disclosure is necessary for ongoing reports under Regulation A, as we believe such disclosure is not applicable to, or appropriately tailored for, the types of issuers likely to conduct Regulation A offerings.
Consistent with the technical, specialized suggestions of several commenters,642 we are including provisions in Form 1-SA that will help issuers comply with the form requirements, eliminate potential confusion over such requirements, and streamline and harmonize disclosure to make the requirements for Tier 2 issuers no more onerous than, and consistent with, the ongoing disclosures required of smaller reporting companies under the Exchange Act. Specifically, the final rules:
638 Rule 257(b)(3); Form 1-SA.
639 Consistent with the suggestions of commenters, we are clarifying that issuers seeking to voluntarily report information to the market on a more frequent basis may do so under the final rules for current reporting on Form 1-U. See discussion in Section II.E.1.c(3). below; see also discussion in Section II.E.2.c.below regarding the provision of ongoing reports as it applies to Securities Act Rule 144.
640 See Part I (Financial Information) of Form 10-Q, 17 CFR 249.308a.
641 See Item 3 and Item 4 of Part I of Form 10-Q.
642 See, e.g., E&Y Letter; KPMG letter.
Add clarifying language to Item 1 (Management Discussion and Analysis of Financial Condition and Results of Operations) of Form 1-SA to indicate that compliance with this disclosure requirement only applies to the interim financial statements required by Item 3 to Form 1-SA and that, similar to our clarification of Form 1-K’s requirements, issuers are not required to include the additional MD&A disclosure required by Item 9(c) of Form 1-A;643
Update the financial statement disclosure requirements of Form 1-SA to more clearly delineate the requirements for compliance with Item 3 of Form 1-SA;
Provide that the financial statements that must be included pursuant to Item 3 may be condensed, in addition to being unaudited, and that the financial statements are not required to be reviewed;
Amend the final form to note that additional guidance on the presentation of financial statements and footnotes and other disclosures can be found in Rule 8-03 of Regulation S-X;644
Revise the requirements of Item 3(e) of Form 1-SA to match the disclosure language contained in Rule 3-10 of Regulation S-X for smaller reporting companies;
Delete the requirement in Item 3(d) of proposed Form 1-SA to present interim statements of changes in financial position for the period between the end of the preceding fiscal year and the end of the interim period covered by this report, and
643 See Section II.F.1.c.(1)(b) above for a discussion of this clarification in Form 1-K.
644 Tier 2 issuers are required under Part F/S of Form 1-A to provide financial statements that comply with Article 8 of Regulation S-X.
for the corresponding period of the preceding fiscal year, as this is not required of issuers under Rule 8-03 of Regulation S-X; and
Make the ongoing reporting requirements under Item 3 of Form 1-SA more consistent with what is required of issuers subject to an ongoing reporting obligation under the Exchange Act, consistent with the suggestion of one commenter,645 by eliminating the line item requirements of Item 3(f) and (g), as Rule 3-16 and Rule 4-10 of Regulation S-X generally do not require the disclosure of such information other than in registration statements and annual reports.
As adopted, Form 1-SA will require disclosure of updates otherwise reportable on Form 1-U. The final rules permit issuers to incorporate by reference in Form 1-SA certain information previously filed on EDGAR, but must include a hyperlink to such material on EDGAR.646 In a change from the proposed rules, the final rules do not limit the availability of incorporation by reference to information previously filed pursuant to Regulation A. 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. Additionally, in a change from the proposed form that seeks to avoid unnecessary repetition of
disclosure items, Form 1-SA encourages issuers to cross-reference items within the form,
645 E&Y Letter.
646 General Instruction D. to Form 1-SA. The hyperlink to EDGAR need only be active at the time of filing of the Form 1-SA. Cf. Securities Act Rule 411(c) and Exchange Act Rule 12b-32.
where applicable.647 Further, in order to avoid incorporation by reference to stale information without requiring the latest version of the document to be filed, Form 1-SA indicates that, if any substantive modification has occurred in the text of any document incorporated by reference since such document was filed, the issuer must file with the reference a statement containing the text and date of such modification.648
Form 1-SA must be filed within 90 calendar days after the end of the first six months of the issuer’s fiscal year.649 The first such obligation to file will commence immediately following the most recent fiscal year for which full financial statements were included in the offering statement, or, if the offering statement included financial statements for the first six months of the fiscal year following the most recent full fiscal year, for the first six months of the following fiscal year.650 As proposed, a manually signed copy of the Form 1-SA must be executed by the issuer and related signatories before or at the time of filing, retained by the issuer for a period of five years, and produced by the issuer to the Commission, upon request.651 The final rules require, as they may not add a cross-reference within the financial statements themselves to disclosures elsewhere.
648 Id.
649 See General Instruction A.(2), Form 1-SA.
650 For example, where an offering statement is filed in October 2015 and includes full financial statements for the fiscal years ended December 31, 2014 and December 31, 2013 and interim financial statements for the six months ended June 30, 2015 and June 30, 2014 and is qualified in December 2015, the Form 1-SA will not be required until within 90 days following the first six months of the following fiscal year (i.e., within 90 days following June 30, 2016).
If, however, the offering statement is filed in March 2015 and qualified in June of 2015 than the first Form 1-SA would cover the six months ended June 30, 2015 and June 30, 2014 and would not be required to be filed until within 90 days following June 30, 2015.
651 See General Instruction C. to Form 1-SA.
proposed, any amendments to the form to comply with the requirements of the applicable items and be filed under cover of Form 1-SA/A.652
Current Reports on Form 1-U