Resource Guide: SEC Regulation A + Plus

The distinctions between the tiers in the final rules for purposes of the preemption of state securities law registration requirements are based only in part on the form distinctions and process requirements for issuers at the time of qualification at the federal level. The preemption of state securities law registration requirements in the final rules for Tier 2 offerings is additionally related to the inefficiencies of qualification at the state and federal level, the differing characteristics of Tier 1 and Tier 2 offerings, and the

831 Andreessen/Cowen Letter; Campbell Letter; Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public Startup Co. Letter 1; SVB Letter.
statutory purposes behind the enactment of the Efficiency Act that are served by deeming Tier 2 offerings to involve a covered class of securities.
While, as some commenters suggest, the review and qualification of Tier 1 offerings at the state level will involve inefficiencies to which Tier 2 issuers will not be subject, we believe that continued state involvement in Tier 1 offerings is consistent with the policy underlying the enactment of NSMIA that suggests that states should “generally retain their authority to regulate small, regional, or intrastate securities offerings.”832 As noted above, we believe that the implementation of NASAA’s multi-state coordinated review program has the potential to ameliorate some of these inefficiencies. We will observe issuers’ experience under the coordinated review program and amended Regulation A, and whether changes to the rule could be beneficial. We also believe that
the requirements for Tier 2 offerings will advance “the development of national securities markets and eliminate the costs and burdens of duplicative and unnecessary regulation.”833 The absence of preemption in Tier 2 offerings would unnecessarily subject issuers in such offerings to a substantial degree of duplication between federal and state securities regulation in the qualification of offering statements, which would

832 House Report, at 16. See also WDFI Letter, at 3 (“Given the relatively small size of these offerings and the low probability of attracting the attention of national broker-dealers to distribute them, these offerings are likely to be local in nature.”). The Commission is exploring the possibility of establishing a program whereby a representative of NASAA, or of a state securities regulator, would be assigned to work at the Commission in the Division of Corporation Finance to assist the staff as it implements the final rules.
833 House Report, at 16. While further preemption of state securities law regulation of the secondary trading of Regulation A securities issued in a Tier 2 offerings could, as some commenters suggest, further advance the development of a national securities market by easing the compliance obligations of investors that trade in the secondary markets, we believe that the approach to preemption of state securities laws adopted today is more appropriate at the outset and will afford the Commission time to subsequently review the development of, and consider potential changes to, the final rules for primary and secondary Regulation A markets.
raise the cost of capital to issuers without providing commensurate additional protection to investors or our markets.834
As noted above, under Section 18(c), the states retain authority to (1) investigate and bring enforcement actions with respect to fraudulent transactions, (2) require the filing of any documents filed with the Commission “solely for notice purposes and the assessment of any fee,” and (3) enforce filing and fee requirements by suspending offerings within a given state. We see no reason why state securities regulators could not continue to rely on the multi-state coordinated review program as a mechanism to allow Tier 2 issuers to make notice filings of their offering statements with the states consistent with Section 18(c). In this regard, notice filings of offering statements of Tier 2 issuers would be available to the states for a period of time prior to the qualification of the
offering.835 For example, the final rules for Regulation A require an issuer that non-

publicly submits its offering statement for review to the Commission to publicly file its offering statement and related documents with the Commission not less than 21 calendar days before qualification. At that time, the states would be permitted to require issuers to

834 See id.; see also, e.g., ABA BLS Letter, at 13 (noting the challenges posed to smaller companies that arise when having to respond to both federal and state reviews and coordinating overlapping or potentially inconsistent comments and approvals); Groundfloor Letter (noting the existence of, and additional costs associated with, duplicative qualification requirements at the state and federal level, as well as potential complications between investment limitations at the federal level and state suitability standards).
835 See, e.g., comment letters cited in fn. 788 above; see also Letter from A. Heath Abshure, President, NASAA, September 27, 2013 (comments on SEC. Rel. No. 33-9416 (Proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act)) (indicating that although “states are preempted from requiring registration of securities that are sold in compliance with Rule 506 . . . state regulators routinely review Form D filings to ensure that the offerings actually qualify for an exemption . . . and to look for “red flags” that may indicate a fraudulent offering. The absence of a Form D filing complicates our efforts to protect the investing public.”). The concerns of the states, as they relate to Form D filings, would be addressed in the final rules for Regulation A that require the filing with the Commission of substantive offering materials, thereby triggering any notice filing requirements with the states, before sales can be made.
also make notice filings of such materials with them and to assess any filing fees under Section 18(c)(2).
Additional Considerations Related to Smaller Offerings‌

As we noted in the Proposing Release, a number of factors have influenced the use of Regulation A in the form it has taken since its last substantive update in 1992, including the process of filing the offering statement with the Commission, state securities law compliance, the types of investors businesses seek to attract, and the cost- effectiveness of Regulation A relative to other exemptions.836 In developing the final rules we are adopting, we have attempted to create a more efficient and effective method to raise capital under Regulation A that incorporates important investor protections. We are also cognizant of how issuers seeking to raise relatively smaller amounts of capital could consider a range of possible approaches to capital raising.837
Under our proposal, offerings for up to $5 million conducted under Tier 1 would benefit from the proposed updates to Regulation A’s filing and qualification processes, but the proposed amendments did not otherwise substantially alter the existing exemption for such offerings.838 We were mindful of the possibility that additional changes to Tier 1 could expand its use by, and thus potentially benefit, issuers conducting smaller offerings. We therefore solicited comment on additional considerations with respect to

836 See, e.g., Proposing Release, at Section I.C.; see also GAO Report.
837 These methods include, for example, Rules 504, 505 and 506 under Regulation D and Section 4(a)(6) of the Securities Act and any rules adopted thereunder. See also Proposing Release, at Section II.I.
838 Some commenters at the pre-proposal stage suggested that the Commission should largely preserve the requirements of the then-existing Regulation A in the final rules. See Proposing Release, at fn. 505.
Tier 1 and a potential intermediate tier for offerings incrementally larger than Tier 1 offerings and how such offerings would affect investor protection and capital formation.
Many commenters recommended making changes to proposed Tier 1 to make it a more viable option for small business capital formation.839 Some of these commenters recommended preempting state regulation of Tier 1 offerings, as mentioned above.840 Two commenters recommended raising the offering limit of Tier 1 to $10 million or more.841 Several commenters recommended including an ongoing disclosure requirement for Tier 1 issuers, including disclosure at a level lower than what is required for Tier 2,842 ongoing disclosure with yearly audited financials,843 or some unspecified continuous disclosure obligation.844 One commenter recommended lowering the Tier 1 disclosure obligations from the current proposed requirements, particularly for offerings of $2 million or less.845 One commenter recommended expanding the offering limit for Tier 1 to $15 million and creating a new tier below Tier 1 with fewer disclosure requirements.846 Many commenters recommended changes to proposed Tier 1, but did

839 Andreessen/Cowen Letter; BDO Letter; Letter from Kevin Bernard, Sept. 3, 2014 (“Bernard Letter”); Campbell Letter; CAQ Letter; Deloitte Letter; E&Y Letter; Guzik Letter 1; Heritage Letter; ICBA Letter; KPMG Letter; Ladd Letter 2; McGladrey Letter; Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial Letter; Verrill Dana Letter 1; WR Hambrecht + Co Letter.‌
840 Andreessen/Cowen Letter; Bernard Letter; Campbell Letter; Guzik Letter 1; Heritage Letter; Ladd Letter 2; Milken Institute Letter; Public Startup Co. Letter 1; SVB Financial Letter.
841 Guzik Letter 1; ICBA Letter.
842 Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements, but without the requirement for semiannual reports).
843 Ladd Letter 2.
844 SVB Financial Letter.
845 Campbell Letter.
846 Public Startup Co. Letter 1. As mentioned in the relevant sections above, this commenter recommended three tiers based on offering size. The first tier could potentially only require state review and would be “local” in nature. This tier would include some form of ongoing reporting
not address preemption.847 Several of these commenters made recommendations with respect to the financial statement and auditing requirements in Form 1-A.848
The final rules for Regulation A take into account some of the suggestions by commenters on ways to improve the requirements for smaller offerings, particularly in Tier 1. The comments we received did not reflect any consensus on the particular provisions in Tier 1 that were most in need of amendment. As noted above, we do not agree that preemption of state securities laws registration and qualification requirements
is appropriate for Tier 1 offerings.849 Further, while some commenters suggested that

preemption of state securities laws may improve the attractiveness of Tier 1 offerings, they did so on the condition that other aspects of the tier should change accordingly, such as by requiring Tier 1 issuers to provide audited financial statements in the offering statement and possibly on an ongoing basis. For the reasons discussed in
Section II.C.3.b(2)(c) above, however, we have not adopted such changes in Tier 1. Alternatively, some commenters suggested that the Commission adopt a third tier either expressly or through the flexible applicability of the proposed tier requirements. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would also have potential costs. For example, a

with the states, but not audited financials. Instead directors and officers would have to certify under penalty of perjury that the financial statements were accurate. The second tier would only require audited financial statements if they were otherwise available, would preempt state review and would require periodic reporting. This tier might allow for more flexibility with respect to auditor independence. The third tier would require more reporting than currently proposed for Tier 2 and would appear to require PCAOB-registered auditors.
847 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; ICBA Letter; KPMG Letter; McGladrey Letter.
848 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter.
849 See Section II.H.3. above.
third tier may unnecessarily complicate compliance with Regulation A for smaller issuers, and could potentially confuse investors as to the type of Regulation A offering an issuer was undertaking and the type of information such investor could expect to receive as a result, thereby lessening the viability of the exemption as a whole. For this reason, we are not adopting a third or intermediate tier in Regulation A.
We are adopting certain changes in the final rules that are intended to make Tier 1 more useful for small business capital formation. As discussed above, in line with the suggestions of commenters, we have raised the offering limitation in Tier 1 to
$20 million in a 12-month period, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.850 With respect to the offering circular narrative disclosure requirements,851 we have adopted certain additional scaled disclosure requirements for Tier 1 that are intended to lessen the compliance obligations for issuers.
For example, Tier 1 issuers will be required to disclose related party transactions at the thresholds in current Regulation A, as opposed to the lower thresholds in the proposed rules, and simplified executive compensation data. We are further providing issuers under both Tiers with the accommodation provided to emerging growth companies in Securities Act Section 7(a) to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities. Lastly, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards. As originally proposed, an issuer electing to provide audited financial statements in a Tier 1 offering—even though audited financial

850 See Section II.B.3.c. above.
851 See Section II.C.3.b(1). above.
statements would not generally be required—would have had to engage the services of an auditor that followed the independence standards outlined in Article 2 of Regulation S-X. Commenters suggested that we should permit auditors of the financial statements of
Tier 1 issuers to alternatively follow the independence standards of the AICPA or Article 2 of Regulation S-X.852 In the view of these comments, allowing auditors of Tier 1 issuer financial statements the option to follow the independence standards of the AICPA would permit more issuers to include financial statements that would be deemed audited under the requirements for Tier 1 in the first instance, thereby avoiding any fees associated with an issuer having their existing financial statements audited a second time under PCAOB standards. As noted above,853 we agree with commenters that this accommodation may benefit smaller issuers in Tier 1 offerings who wish to file audited final statements for purposes of the offering statement and thus are adopting this suggestion.
In the light of the changes discussed above, we believe that the final rules we are adopting will provide Tier 1 issuers with a meaningful choice within Regulation A between the costs and benefits associated with compliance with the requirements for Tier 1 and Tier 2 and therefore do not believe that an intermediate or other tier is necessary at this time.

852 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter.
853 See Section II.C.3.b(2)(c). above.
Transitional Guidance for Issuers Currently Conducting Regulation A Offerings
While Regulation A has been used infrequently in recent years, there are issuers that are currently conducting, or that have filed offering statements, under the preexisting Regulation A rules. By way of transitional guidance, we are clarifying that issuers currently conducting sales of securities pursuant to a qualified Regulation A offering statement may continue to do so. Such offerings will be considered Tier 1 offerings after the effectiveness of the final rules. Qualified offering statements under the preexisting rules for Regulation A are, however, incompatible with the final requirements for Tier 2 offerings and, as discussed below, issuers that wish to transition to a Tier 2 offering will need to file a post-qualification amendment that satisfies the requirements for Tier 2.
Upon effectiveness of the final rules, issuers currently conducting Regulation A offerings under the preexisting rules must begin to comply with the final rules for Tier 1 offerings, including, for example, the requirement of electronic filing and the rules for post-qualification amendments, at the time of their next filing under Regulation A. Additionally, after effectiveness of the final rules, to the extent that issuers provided offering statements that were qualified using the Model A disclosure format of Part II of the Form 1-A, any subsequently required filing or amendment to such offering statement must be filed using a disclosure format that is permissible under the final rules for Tier 1 offerings. Model A will no longer be appropriate or permitted for post-qualification amendments of qualified offerings that pre-date effectiveness of the final rules. Lastly, an issuer that is offering securities pursuant to a qualified offering statement under the preexisting rules will, upon effectiveness of the final rules, no longer be required to file a
Form 2-A, but instead be required to file a Form 1-Z with the Commission electronically upon completion or termination of the offering.
Issuers that are currently in the review process for the qualification of a Regulation A offering statement may continue to follow the preexisting rules for Regulation A until the effective date of the final rules. On or after the effective date, such an issuer will be required to comply with the final rules, including the requirements for electronic filing and, where applicable, transitioning to a disclosure format that is approved for Regulation A offerings. The issuer may also elect to proceed at that time with its offering under the final requirements for either Tier 1 or Tier 2 offerings, provided it follows the requirements for the respective tiers.
Issuers in ongoing offerings that were qualified before effectiveness of the final rules that wish to transition to a Tier 2 offering may do so by filing a post-qualification amendment that satisfies all of the requirements for Tier 2. Such issuers will transition to the requirements for Tier 2 upon qualification of the post-qualification amendment. For purposes of calculating the maximum offering amount permissible under Rule 251(a), an issuer must reduce the maximum offering amount sought to be qualified under the final rules for the respective tiers by the amount which such issuer has sold during the previous 12-month period pursuant to the preexisting rules for