Exit Report on Form 1-Z
Proposed Rules
Summary Information on Terminated or Completed Offerings
As discussed in Section II.E.1. above, we proposed to rescind Form 2-A but to continue to require Regulation A issuers to file the information generally disclosed in Form 2-A with the Commission electronically on EDGAR. Consistent with the related portion of proposed Form 1-K,727 we proposed to convert the Form 2-A information into an online XML-based fillable form with indicator boxes or buttons and text boxes to be filed electronically with the Commission as Part I of proposed Form 1-Z (exit report).
Issuers conducting Tier 1 offerings would be required to provide this information on Form 1-Z not later 30 calendar days after termination or completion of the offering, while issuers conducting Tier 2 offerings would be required to provide this information on Form 1-Z at the time of filing the exit report, if not previously provided on Form 1-K as part of their annual report.728 As proposed, the summary offering information disclosed on Form 1-Z would be publicly available on EDGAR (but not otherwise required to be distributed to investors) and would include the date the offering was qualified and commenced, the number of securities qualified, the number of securities sold in the
727 See also discussion in Section II.C.1. (Electronic Filing; Delivery Requirements) and Section II.C.3.a. (Part I (Notification)) above.
728 See Section II.E.1. above for a discussion of the requirements for proposed Form 1-K.
offering, the price of the securities, any fees associated with the offering, and the net proceeds to the issuer.
Termination or Suspension of Tier 2 Disclosure Obligations
We further proposed to permit a Tier 2 issuer that has filed all ongoing reports required by Regulation A for the shorter of (1) the period since the issuer became subject to such reporting obligation or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z to immediately suspend its ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and
offers or sales made in reliance on a qualified offering statement are not ongoing.729 In
such circumstances, an issuer’s obligation to continue to file ongoing reports in a Tier 2 offering under Regulation A would be suspended immediately upon the filing of a notice with the Commission on Part II of proposed Form 1-Z. A manually signed copy of the Form 1-Z would have to 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.730 Issuers would be required to produce the manually signed copy to the Commission, upon request.731
We further proposed that issuers’ obligations to file ongoing reports in a Tier 2 offering under Regulation A would be automatically suspended upon registration of a class of securities under Section 12 of the Exchange Act or effectiveness of a registration
729 See proposed Rule 257(d)(2).
730 See Instruction to proposed Form 1-Z.
731 Id.
statement under the Securities Act, such that Exchange Act reporting obligations would always supersede ongoing reporting obligations under Regulation A. If an issuer terminates or suspends its reporting obligations under the Exchange Act and the issuer is eligible to suspend its Regulation A reporting obligation by filing a Form 1-Z at that time, the ongoing reporting obligations would terminate automatically and no Form 1-Z filing would be required to terminate the issuer’s Regulation A reporting obligation. If the issuer is not eligible to file a Form 1-Z at that time, it would need to recommence its
Regulation A reporting with a report covering any financial period not completely covered by an effective registration statement or filed Exchange Act report.732
Final Rules
Summary Information on Terminated or Completed Offerings
The single commenter on this issue approved of the proposed requirement to file summary information after the termination or completion of a Regulation A offering under both tiers.733 We are adopting this requirement without changes.
Termination or Suspension of Tier 2 Disclosure Obligations
We are adopting, with a change from the proposal, final rules that will permit issuers that conduct a Tier 2 offering to terminate or suspend their ongoing reporting obligations on a basis similar to the provisions that allow issuers to suspend their ongoing
732 See proposed Rule 257(d)(1) and (e).
733 CFA Institute Letter.
reporting obligations under Section 13 and Section 15(d) of the Exchange Act.734 As proposed, the final rules permit a Tier 2 issuer that has filed all reports required by Regulation A for the shorter of: (1) the period since the issuer became subject to such reporting obligation, or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z to immediately suspend its ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.735 In a change from the proposal, in order to be consistent with Title VI of the JOBS Act, the final rules permit banks or bank holding companies736 to immediately suspend their ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 1,200 persons, instead of 300 persons, and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.737 As proposed, an issuer’s obligation to continue to file
734 See Exchange Act Section 15(d), 15 U.S.C. 78o(d); Exchange Act Rule 12h-3, 17 CFR 240.12h-3.
735 Rule 257(d)(2).
736 The Commission recently proposed changes to its rules regarding Exchange Act registration to implement Title V and Title VI of the JOBS Act. See Rel. No. 33-9693 (Dec. 18, 2014) [79 FR 78343]. These proposed changes would, among other things, apply the registration thresholds applicable to banks and bank holding companies, as set forth in Section 12(g) of the Exchange Act, to savings and loan holding companies. Should we adopt this provision in the final rules for Section 12(g), we would anticipate making a corresponding change to the termination provisions of Rule 257(d).
737 Rule 257(d)(2). The final rules, as they apply to the number of record holders of other types of issuers, are adopted without changes from the proposal. Although Rule 257(d)(2) relies on the definition of “held of record” in Rule 12g5-1, issuers seeking to terminate or suspend their Tier 2
ongoing reports in a Tier 2 offering under Regulation A will be suspended immediately upon the filing of a notice to the Commission on Part II of proposed Form 1-Z.738 As proposed, a manually signed copy of the Form 1-Z 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.739 Issuers must produce the manually signed copy to the Commission, upon request.740
We otherwise adopt the proposed rules for the termination or suspension of a Tier 2 ongoing reporting obligation as proposed and without changes.
Insignificant Deviations from a Term, Condition or Requirement
We did not propose any changes to the existing insignificant deviation provisions of Rule 260. Rule 260 provides that certain insignificant deviations from a term, condition or requirement of Regulation A will not result in the issuer’s loss of the exemption from registration under Section 5 of the Securities Act.741 The provisions of Regulation A regarding issuer eligibility, offering limits, offers, and continuous or delayed offerings of Regulation A are deemed to be significant to the offering as a whole, and any deviations from these provisions result in the issuer’s loss of the exemption.
ongoing disclosure obligations are specifically excluded from relying on the amendment to such definition, which exclude securities issued in Tier 2 offerings. See Rule 12g5-1(a)(7) and Section
II.B.6 above.
738 Id. In this regard, we have clarified that the Commission may only deny a Form 1-Z filing if the issuer is ineligible to use the form. See Rule 257(d)
739 See Instruction to Form 1-Z.
740 Id.
741 17 CFR 230.260.
One commenter generally supported the concept of allowing for insignificant deviations from the rules without the loss of the exemption.742 This commenter recommended that the Commission give notice of violations and allow companies to have an opportunity to cure any such violation. The commenter also recommended imposing lesser sanctions, such as fines, if less significant violations could not be cured. Another commenter recommended including deviations from the prohibitions on the timing of sales and the amounts sold to investors on the list of matters deemed significant in proposed Rule 260, noting that, in its view, it would be difficult for issuers to show a good faith and reasonable attempt was made to comply with the requirements of
Rule 251(d)(2).743 This commenter noted that issuers, investors and state regulators need
clear boundaries to know what actions will disqualify an offering from exemption and thus, with respect to the proposed provisions for Tier 2 offerings, would result in a loss of state preemption.
The final rules maintain the existing provisions for insignificant deviations, as proposed. Under the final rules, a failure to comply with a term, condition or requirement of Regulation A will not result in the loss of the exemption for any offer or sale to a particular individual or entity, if the person relying on the exemption establishes that:
The failure to comply did not pertain to a term, condition or requirement directly intended to protect that particular individual or entity;
The failure to comply was insignificant with respect to the offering as a whole, provided that any failure to comply with the offering limitations, issuer eligibility
742 Heritage Letter.
743 MCS Letter.
criteria, or requirements for offers or continuous or delayed offerings will be deemed to be significant to the offering as a whole; and
A good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of Regulation A.744
We believe that provisions for insignificant deviations serve an important function by allowing for certain errors that can occur in the offering process, while clearly delineating those provisions from which an issuer may not deviate. We believe the current provisions provide assurances to investors that issuers will not be able to deviate from certain fundamental requirements in the rules and avoid undue hardship that could befall issuers for inadvertent errors, such as loss of the exemption and, with respect to Tier 2 offerings, the loss of preemption of state securities law registration and qualification requirements. We are not expanding the list of provisions from which an issuer may not deviate. We note that whether a deviation from the requirements would be significant to the offering as a whole would depend on the facts and circumstances related to the offering and the deviation. We also note that in certain situations, such as in the event of pre-qualification sales, it may be difficult for issuers to establish a good faith attempt at compliance. In such circumstances, an issuer would not be able to rely on the provision.
Bad Actor Disqualification
Proposed Rules
Under Securities Act Section 3(b)(2)(G)(ii), the Commission has discretion to issue rules disqualifying certain felons and other ‘bad actors’ from using amended
744 Rule 260.
Regulation A. Such rules, if adopted, must be “substantially similar” to those adopted to implement Section 926 of the Dodd-Frank Act, which requires the Commission to adopt disqualification rules for securities offerings under Rule 506 of Regulation D. The Commission adopted the disqualification provisions required by Section 926 in
Rule 506(d) together with a related disclosure requirement in Rule 506(e) on July 10, 2013.745
We proposed amendments to Regulation A’s bad actor disqualification provisions that would make those provisions substantially similar to those adopted under Rule 506 of Regulation D. We also sought comment on the proposed disqualification rules and the categories of persons and types of events covered by the proposed rules. Additionally, we sought comment more broadly on the interpretation of the phrase “voting equity securities,” as it appears in “any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power,” a category of covered persons in Rule 506(d) and the proposed disqualification provisions for Regulation A as well as our proposed rules for securities-based crowdfunding transactions.