Resource Guide: SEC Regulation A + Plus

Regulation A.
Technical and Conforming Amendments

The final rules for Regulation A amend existing Rules 251-263.854 The amendments take into account changes to Regulation A associated with the addition of Section 3(b)(2) to the Securities Act, and the items detailed in this release.

854 17 CFR 230.251 through 230.263.
As a result of the revisions to Regulation A, we are adopting conforming and technical amendments to Securities Act Rules 157(a),855 505(b)(2)(iii),856 and Form 8-A. Additionally, we are revising Item 101(a)857 of Regulation S-T858 to reflect the mandatory electronic filing of all issuer initial filing and ongoing reporting requirements under Regulation A. We are also revising Item 101(c)(6)859 of Regulation S-T to remove the reference to paper filings in a Regulation A offering, and removing and reserving
Item 101(b)(8)860 of Regulation S-T dealing with the optional electronic filing of Form F-X by Canadian issuers.
ECONOMIC ANALYSIS‌

In this section, we analyze the expected economic effects of the final rules relative to the current baseline, which is the market situation in existence today, including current methods of raising up to $50 million in capital available to potential issuers. Our analysis considers the anticipated costs and benefits for market participants affected by the final rules as well as the impact of the final rules on efficiency, competition, and capital formation relative to the baseline. This includes the likely economic effects of the specific provisions of the final rules related to the scope of the exemption, the format and contents of the offering statement, solicitation of interest, ongoing reporting, insignificant deviations, bad actor disqualification, and relationship with state securities law.
The final rules to implement Section 401 of the JOBS Act and amend

855 17 CFR 230.157(a).
856 17 CFR 230.505(b)(2)(iii).
857 17 CFR 232.101(a).
858 17 CFR 232.10 et seq.
859 17 CFR 232.101(c)(6).
860 17 CFR 232.101(b)(8).
Regulation A seek to promote capital formation, efficiency and competition for small companies, and provide for meaningful investor protection. We are mindful of the costs imposed by, and the benefits to be obtained from, our rules. Securities Act
Section 2(b)861 and Exchange Act Section 3(f)862 require us, when engaging in

rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.
Exchange Act Section 23(a)(2)863 requires us, when adopting rules under the Exchange

Act, to consider the impact that any new rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.

The final rules include provisions mandated by the statute as well as provisions that rely on our discretionary authority. As a result, while many of the costs and benefits of the final rules stem from the statutory mandate of Title IV of the JOBS Act, certain benefits and costs are affected by the discretion we exercise in connection with implementing this mandate. For purposes of this economic analysis, we address the benefits and costs resulting from the mandatory statutory provisions and our exercise of discretion together because the two types of benefits and costs are not readily separable. We also analyze the benefits and costs of significant alternatives to the final rules that were suggested by commenters and that we considered. Many of the benefits and costs discussed below are difficult to quantify when analyzing the likely effects of the final
861 15 U.S.C. 77b(b).
862 15 U.S.C. 78c(f).
863 15 U.S.C. 78w(a)(2).
rules on efficiency, competition, and capital formation. For example, the extent to which the amendments to Regulation A will promote future reliance by issuers on this offering method, and the extent to which future use of Regulation A will affect the use of other offering methods, is difficult to precisely estimate. Similarly, there is some uncertainty as to the effect of some of the provisions in the final rules on investor protection.
Therefore, much of the discussion is qualitative in nature but, where possible, we attempted to quantify the potential costs and benefits of the final rules.
Broad Economic Considerations
One of the primary objectives of Section 401 was to expand the capital raising options available to smaller and emerging companies and thereby to promote capital formation within the larger economy.864 With this objective in mind, and as background to our analysis of the likely costs and benefits of the final rule provisions, we consider the broader impact of amended Regulation A on capital formation. As discussed below, this will depend on whether issuers that currently raise capital elect to rely on amended Regulation A in place of other offering methods and whether issuers that have been unable to raise capital, or raise enough capital, avail themselves of amended Regulation A because it is preferable over other capital rising methods otherwise available to them. To the extent that amended Regulation A provides a method of raising capital for issuers

864 Congress enacted Section 3(b)(2) against a background of public commentary suggesting that Regulation A, an exemption for small offerings originally adopted by the Commission in 1936 under the authority of Section 3(b) of the Securities Act, should be expanded and updated to make it more useful to small issuers. H.R. 1070 (Small Company Capital Formation Act of 2011) was introduced in April 2011. In its September 2011 report, the Committee on Financial Services noted: “H.R. 1070, the Small Company Capital Formation Act, raises the offering threshold for companies exempted from registration with the U.S. Securities and Exchange Commission (SEC) under Regulation A from $5 million–the threshold set in the early 1990s–to $50 million. Raising the offering threshold helps small companies gain access to capital markets without the costs and delays associated with the full-scale securities registration process…” See H.R. Rep. No. 112-206 (2011).
that currently have no method of doing so, it could enhance the overall level of capital formation in the economy in addition to any redistributive effect that could arise from issuers changing their capital raising methods.
The impact of the final rules on an issuer’s ability to raise capital will also depend on whether new investor capital is attracted to the Regulation A market, and on whether investors reallocate existing capital among various types of offerings. Investor demand for securities offered under amended Regulation A will depend on the expected risk, return and liquidity of the offered securities, and in particular, how these characteristics compare to what investors can obtain from securities in other exempt offerings and in registered offerings. Investor demand also will depend on whether Regulation A disclosure requirements are sufficient to enable investors to evaluate the aforementioned characteristics of Regulation A offerings.
To assess the likely impact of the final rules on capital formation, we consider the features of amended Regulation A that potentially could increase the use of Regulation A by new issuers and by issuers that already rely on private and registered offerings.
The amendments to Regulation A we are adopting remove certain burdens identified by commenters and others in existing Regulation A. Offerings relying on existing Regulation A must be qualified by the states and the Commission, which also requires a review and qualification process for issuers to access capital.865 Amended

865 See GAO Report. According to the GAO Report, the limited use of Regulation A appears to have been influenced by multiple factors, including “the type of investors businesses sought to attract, the process of filing the offering with SEC, state securities laws, and the cost-effectiveness of Regulation A relative to other SEC exemptions. For example, identifying and addressing individual state’s securities registration requirements can be both costly and time-consuming for small businesses, according to research, an organization that advocates for small businesses, and securities attorneys that GAO interviewed. Additionally, another SEC exemption [Regulation D] is viewed by securities attorneys that GAO met with as more cost-effective for small businesses…”
Regulation A removes the requirement of state qualification for Tier 2 offerings, thereby eliminating the cost and other burdens of the duplicative review under existing Regulation A. Issuance costs may also be reduced, as a percentage of proceeds, by increasing the maximum offering size from $5 million annually under existing Regulation A, to $20 million for Tier 1 offerings and to $50 million for Tier 2 offerings relying on amended Regulation A.
We believe that the potential use of amended Regulation A for Tier 2 offerings depends largely on how issuers perceive, the trade-off between the costs of qualification and ongoing disclosure requirements and the benefits to issuers from access to a broad investor base, expansion of the offering size, the preemption of state securities law registration requirements and the potential for enhanced secondary market liquidity.
With respect to Tier 1 offerings, the potential use of amended Regulation A depends largely on how issuers perceive the trade-off between state review and qualification requirements, limited disclosure requirements (with potentially greater information asymmetry between issuers and investors) and the $20 million maximum offering size.
We also recognize that the level of investor protection resulting from the final rules is an important consideration that could affect the ultimate use and success of amended Regulation A. For example, if preempting state review of Tier 2 offerings, or not requiring audited financials or ongoing disclosures in Tier 1 offerings, leads to undisclosed risks or misconduct in the offering process, then investors may be unwilling to participate in those types of Regulation A offerings. On the other hand, Commission staff review of the offerings and investment limitations for Tier 2 offerings may mitigate
some of these concerns for certain investors.

Many of the potential issuers of securities under amended Regulation A may be small companies, particularly early-stage and high-growth companies, seeking capital through equity-based financing because they do not have sufficient collateral or the cash flows necessary to support the fixed repayment schedule of debt financing.866 Currently, these companies often seek capital from institutional or accredited investors through offerings that are exempt from registration under the Securities Act or through registered public offerings. In the future, whether issuers opt to rely instead on Regulation A will depend on the perceived utility of the amended Regulation A exemption compared to:
other available exemptions from registration, and (ii) registered public offerings.

Below we discuss each of these considerations in turn.
Some issuers may prefer to offer securities under amended Regulation A relative to using other offering methods exempt from registration because of potentially limiting features associated with the other exemptions. In particular, securities sold pursuant to the exemptions from registration under Regulation D,867 which account for a significant amount of exempt offerings,868 are generally subject to restrictions on resale or limits on participation by non-accredited investors in ways that can limit the ability to raise capital. In contrast to Rule 506 of Regulation D, companies relying on amended Regulation A

866 See Berger, Allen N., and Gregory F. Udell, 1998, The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle, Journal of Banking and Finance 22(6), pp. 613–673.
867 17 CFR 230.500 through 230.508.
868 See V. Ivanov, and S. Bauguess, 2013, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012, available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf.
can sell securities to an unlimited number of non-accredited investors,869 and the securities will not be restricted securities for purposes of the federal securities laws, which will allow for a more diffuse investor base and potential liquidity benefits.
The use of amended Regulation A may also depend on whether companies considering seeking capital through an exempt offering believe that the benefits from access to a broader investor base under amended Regulation A offset the costs of qualification and, with respect to Tier 2 offerings, ongoing disclosure requirements. Other offering exemptions could remain attractive relative to amended Regulation A. For example, general solicitation is now permissible under Rule 506(c) of Regulation D. Issuers relying on Rule 506(c) to solicit offerings may now more easily reach institutional and accredited investors, making it less necessary for them to seek capital from a broader
non-accredited investor base, especially if trading platforms aimed at accredited investors in privately placed securities continue to develop.870
Finally, the conditional exemption from registration of a class of securities under Section 12(g) available to some Tier 2 issuers may encourage them to pursue a Regulation A offering as a means to avoid the associated costs and requirements of Exchange Act registration and reporting.871 This effect may be limited by the imposition of the conditions on the Section 12(g) exemption, in particular, the condition limiting the availability of the exemption to smaller companies that do not exceed certain thresholds

869 Non-accredited investors in Tier 2 offerings will be subject to an investment limitation.
870 For example, “NASDAQ Private Market’s affiliated marketplace is an electronic network of Member Broker-Dealers who provide accredited institutions and individual clients with access to the market. Companies use a private portal to enable approved parties to access certain information and transact in its securities.” See NASDAQ Private Market overview, available at: https://www.nasdaqprivatemarket.com/market/overview.
871 See Section II.B.6.c.
for public float or, in the absence of float, revenues. Larger issuers of Regulation A securities or issuers using Regulation A to raise capital as part of a growth strategy, or seeking to increase liquidity through a broader investor base, may still be subject to a Section 12(g) registration requirement in the future.
The trade-offs between amended Regulation A and a registered offering are somewhat different. In a registered offering, issuers can offer the securities directly to all potential investors, without a limitation on the aggregate offering amount and with no resale restrictions. Moreover, securities issued through registered offerings often trade on national securities exchanges and can offer a degree of liquidity to investors that is generally not available for securities issued in private offerings. However, the issuance costs associated with small registered public offerings are generally a significant percentage of proceeds and issuers in registered offerings must bear the costs arising from ongoing disclosure requirements under the Exchange Act. These costs are perceived to be one of the determinants of the relatively low incidence of initial public offerings (“IPOs”) over the past decade and may be a motivating factor for potential
issuers to prefer offering securities under amended Regulation A.872 Relative to

registered public offerings, offerings under amended Regulation A will provide smaller issuers with access to sources of capital without necessarily imposing the full ongoing

872 See IPO Task Force, Rebuilding the IPO On-Ramp (Oct. 20, 2011), available at: http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (“IPO Task Force”).
There are other possible explanations for the decline in IPOs, for example, macro-economic effects on investment opportunities in the economy and the cost of capital. See Lowry, M., 2003, Why does IPO volume fluctuate so much? Journal of Financial Economics 67(1), pp. 3–40.
Another possible explanation is an increase in the benefits of being acquired by a larger entity relative to the benefits of operating as an independent firm. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692.
reporting requirements of the Exchange Act.

The use of amended Regulation A may depend on the extent to which companies considering a traditional IPO believe that amended Regulation A is a viable alternative. These potential issuers will need to assess whether the cost savings from reduced reporting requirements under amended Regulation A offset the potential reduction in secondary market liquidity compared to registered offerings that meet the listing requirements of national securities exchanges. In particular, securities listed on a national securities exchange are likely to benefit from increased liquidity as a result of greater access to potential investors and a lower level of information asymmetry due to more extensive reporting requirements. At present, only some securities issued under existing Regulation A trade over-the-counter, with the majority not known to trade in any secondary market.
The liquidity trade-off faced by issuers considering amended Regulation A relative to other exempt or registered offering methods may ultimately center on whether the ongoing reporting requirements of Tier 2 offerings can generate sufficient information for secondary markets to provide the intended liquidity benefits. Academic studies have found a close relationship between disclosure requirements and liquidity.873

873 For example, one study found improved liquidity at companies that chose to comply with Exchange Act reporting requirements in order to remain eligible for quotation on OTCBB. See Bushee, B., and C. Leuz, 2005, Economic consequences of SEC disclosure regulation: Evidence from the OTC bulletin board, Journal of Accounting and Economics 39(2), pp. 233–264.
Another study found significant decreases in liquidity for issuers that deregistered their securities, with the subsequent loss of liquidity attributed to decreased disclosure separate from the effect of delisting from a major exchange. This study also shows that some companies choose to deregister under Section 12(b) and trade on less liquid OTC markets instead of trading on national securities exchanges, indicating that, for such companies, the expected costs of reporting under the Exchange Act outweigh the expected liquidity benefits. See Leuz, C., A. Triantis, and T. Wang, 2008, Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations, Journal of Accounting and Economics 45(2-3), pp. 181–208.
The disclosure requirements in the final rules seek to balance the burden of disclosure requirements on issuers and the demand of investors for information by offering issuers a capital raising option with lower compliance costs while still mandating relevant information about the issuer and the securities for the market.
Overall, amended Regulation A could increase the aggregate amount of capital raised in the economy if used by private issuers that have until now been limited in their ability to raise capital through other types of exempt offerings or by smaller private issuers that seek a public market for their securities but that are not sufficiently large to bear the fixed costs of being an Exchange Act reporting company. The impact of amended Regulation A on capital formation could also be redistributive in nature by encouraging issuers to shift from one method of capital raising to another. This potential outcome may have significant net positive effects on capital formation and allocative efficiency by providing issuers with access to capital at a lower cost than alternative capital raising methods and by providing investors with additional investment opportunities.
The net effect of the final rules on capital formation will depend on whether issuers that rely on amended Regulation A do so in addition to or instead of other methods of raising capital. The effect will also depend on whether investors find Regulation A disclosure requirements and investor protections to be sufficient to evaluate the expected return and risk of such offerings and to choose between offerings reliant on Regulation A, other exempt offerings and registered offerings. Due to a lack of data, we are not able to estimate the effects of the final rules on the potential rate of substitution between alternative methods of raising capital and amended Regulation A and the overall
expansion, if any, in capital raising by potential issuers eligible for amended Regulation A.
Baseline

As we described in the Proposing Release, the baseline for our economic analysis of amended Regulation A is market conditions as they exist today, in which issuers seeking to raise capital through securities offerings must register the offer and sale of securities under the Securities Act unless they can rely on an exemption from registration under the federal securities laws.874 The baseline discussion below also includes a description of investors in offerings of similar amounts and a discussion of the role of intermediaries that may be affected by the final rules.
Current Methods of Raising up to $50 Million of Capital

Issuers seeking to raise up to $50 million over a twelve-month period are expected to be affected directly by amended Regulation A. As we described in the Proposing Release, while there are a number of factors that companies consider when determining how to raise capital, one of the primary considerations is whether to issue securities through a registered public offering or through an offering that is exempt from Securities Act registration and ongoing Exchange Act reporting requirements. The choice of offering method may depend on the size of the issuer, the type of investors the issuer seeks to attract and the amount of new capital sought. Registered offerings entail considerable initial and ongoing costs that can weigh more heavily on smaller issuers,

874 Other rules mandated by the JOBS Act have been proposed but not adopted by the Commission.
The baseline does not account for potential changes that may result from future adoption of proposed rules.
providing incentives to remain private and to raise capital outside of public markets.875 To the extent that these issuance costs constrain small firms’ access to capital, they may result in underinvestment in some value-generating projects and thus potentially less efficient allocation of capital to investment projects. This section describes the various currently available offering methods and the prevalence of their use.
Exempt Offerings
Currently, small issuers can raise capital by relying on an exemption from registration under the Securities Act, such as Section 3(a)(11),876 Section 4(a)(2),877 Regulation D,878 and Regulation A. Each of these exemptions, however, has requirements that may limit its utility for issuers. For example, the exemption under Securities Act Section 3(a)(11) is limited to intrastate offerings, and Regulation D offerings may limit or prohibit participation by non-accredited investors. Additionally, offerings relying on existing Regulation A require preparation of offering materials and qualification of an offering statement by the Commission and may require qualification or registration in multiple states.879 The table below summarizes the main features of each exemption.

875 See IPO Task Force.
876 Under Securities Act Section 3(a)(11), except as expressly provided, the provisions of the Securities Act (including Section 5 registration requirement) do not apply to a security that is “part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory.” 15 U.S.C 77c(a)(3)(a)(11).
877 Securities Act Section 4(a)(2) provides that the provisions of Section 5 shall not apply to “transactions by an issuer not involving a public offering.” 15 U.S.C. 77d(4)(a)(2).
878 Regulation D contains rules providing exemptions and safe harbors from the Securities Act’s registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the Commission. 17 CFR 230.504, 505, 506.
879 See Campbell, R., 2005, Regulation A: Small business’ search for a moderate capital, Delaware Journal of Corporate Law 31(1), pp. 77–123. See also GAO Report.
Type of Offering
Offering Limit880
Solicitation
Issuer and Investor Requirements
Filing Requirement
Resale Restrictions
Blue Sky Law Preemption
Section 3(a)(11)
None
No limitations
All issuers and investors must be resident in state
None
Restricted in some cases881
No
Section 4(a)(2)
None
No general solicitation
Transactions by an issuer not involving any public offering882
None
Restricted securities
No
Regulation A883
$5 million with $1.5 million limit on secondary sales
Testing the waters permitted before filing
U.S. or Canadian issuers, excluding investment companies, blank-check companies, reporting companies, and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights
File testing the waters materials, Form 1-A, Form 2-A
No
No
Rule 504 Regulation D
$1 million
General solicitation permitted in some cases884
Excludes investment companies, blank-check companies, and Exchange Act reporting companies
File Form D885
Restricted in some cases886
No
Type of Offering
Offering Limit887
Solicitation
Issuer and Investor Requirements
Filing Requirement
Resale Restrictions
Blue Sky Law Preemption
Rule 505 Regulation D
$5 million
No general solicitation
Unlimited accredited investors and up to 35 non-accredited investors
File Form D888
Restricted securities
No

880 Aggregate offering limit on securities sold within a twelve-month period.
881 Resale restrictions are determined by state securities laws, which typically restrict in-state resales for a one-year period.
882 Section 4(a)(2) of the Securities Act provides a statutory exemption for “transactions by an issuer not involving any public offering.” See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (holding that an offering to those who are shown to be able to fend for themselves is a transaction “not involving any public offering.”)
883 This description is based on Regulation A before the adoption of the final rules today.
884 No general solicitation or advertising is permitted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption for sales to accredited investors with general solicitation.
885 Filing is not a condition of the exemption.
886 Restricted unless the offering is registered in a state requiring the use of a substantive disclosure document or sold under a state exemption for sale to accredited investors.
887 Aggregate offering limit on securities sold within a twelve-month period.
888 Filing is not a condition of the exemption.
Rule 506
Regulation D
None
General
solicitation permitted in some cases889
Unlimited accredited
investors. Limitations on non-accredited investors890
File Form D891
Restricted
securities
Yes

While we do not have data on offerings relying on an exemption under Section 3(a)(11) or Section 4(a)(2), available data related to Regulation D and Regulation A filings allow us to gauge how frequently issuers currently use these exemptions when raising capital.
Regulation A Offerings

As we described in the Proposing Release, issuers rarely rely on existing Regulation A to raise capital. The chart below, from the GAO Report shows the number of filed and qualified Regulation A offerings in fiscal years 1992 to 2011.892
Data from GAO Report: Regulation A offerings filed and qualified, 1992-2011

889 No general solicitation or advertising is permitted under Rule 506(b). General solicitation and general advertising permitted under Rule 506(c), provided all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited investor status.
890 Under Rule 506(b), offerings may involve an unlimited number of accredited investors and up to 35 non-accredited investors. Under Rule 506(c), all purchasers must be accredited investors.
891 Filing is not a condition of the exemption.
892 For the purposes of this chart, a Regulation A offering is considered “filed” when the Commission receives a potential issuer’s offering materials through Form 1-A. A Regulation A offering is considered qualified after the Commission staff has reviewed the offering materials and determined that all conditions have been met. Therefore, offerings that are filed and not qualified are either pending, withdrawn, or abandoned.

In calendar years 2012 to 2014, 26 Regulation A offerings, excluding amendments, were qualified by the Commission.893
Section 402 of the JOBS Act required the GAO to study the impact of state securities laws on Regulation A offerings. The GAO examined: (1) trends in Regulation A filings, (2) differences in state registration of Regulation A filings, and (3) factors that may have affected the number of Regulation A filings. In its July 2012 report on Regulation A, the GAO cited four factors affecting the use of Regulation A offerings:
costs associated with compliance with state securities regulations, or blue sky laws;

the availability of alternative offering methods exempt from registration, such as Regulation D offerings; (3) costs associated with the Commission’s filing and qualification process; and (4) the type of investors businesses sought to attract.
As identified by the GAO, compliance with state securities laws is one of the factors that impacts the use of existing Regulation A. The GAO did not provide an

893 In cases in which an issuer made multiple Form 1-A filings over this time period, only the first qualified offering by that issuer was included in the number of qualified Regulation A offerings. The estimate also excludes amendments filed on Form 1-A/A, including post-qualification amendments to earlier Form 1-A filings, as well as abandoned and withdrawn filings.
estimate of the compliance costs. For issuers seeking to offer securities in multiple states, differences in securities laws and applicable procedures across states may result in significant legal costs894 and a time consuming process for issuers, which could adversely affect their efforts to raise capital in a timely and cost-effective manner. NASAA has recently initiated a Coordinated Review Program for Regulation A offerings.895 Only a limited number of issuers have undergone state review through this process to date, so we are unable to conclude whether it may result in lower costs or a shorter amount of review time than was the case prior to its inception.
The GAO also identified costs associated with the Commission’s filing and qualification process for Regulation A offerings as another factor contributing to its limited current use. While existing Regulation A permits offerings to an unlimited number of non-accredited investors, the total offering amount must not exceed $5 million in a twelve-month period, limiting the opportunity to scale the fixed component of these costs as a percentage of proceeds.
As described above, a business that relies on Regulation A must file an offering statement with the Commission that must be qualified by Commission staff before the offering can proceed. From 2002 through 2011, Regulation A filings took an average of 228 days to qualify.896 Average time to qualification exceeded 300 days in 2012-2014.897

894 See discussion in Section III.I below.
895 A description of NASAA’s coordinated review program can be found at: http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a- offerings/. See discussion in Section III.I below.
896 See GAO Report.
897 This estimate is generated by staff from the Commission’s Division of Economic and Risk Analysis using Form 1-A filings and is determined as the difference between the filing date for the initial Form 1-A filing and the final disposition date for the final Form 1-A or 1-A/A filing through which the offering was qualified.
Factors that affect the time to qualification include the paper filing method, quality of the initial filing, time taken by the Commission staff, and time taken by the issuer to provide required information or address questions from previous correspondence with the Commission staff.
Our analysis of the Regulation A filings qualified between 2002 and 2014 shows that approximately half of the issuers operated in the financial industry and the majority of offerings involved equity securities. Offerings with affiliate sales were rare, likely due not only to the requirement of the existing Regulation A that the issuer have net income from continuing operations in the prior two years but also due to the perceptions that adverse selection concerns may limit investor demand in securities offerings with affiliate
sales.898

Regulation D Offerings‌

Based on the information available to us, it appears that the most common way to issue up to $50 million of securities is pursuant to an offering under a Regulation D exemption. Eligible issuers can rely on Rule 504 to raise up to $1 million within a twelve-month period, on Rule 505 to raise up to $5 million within a twelve-month period, and on Rule 506 to raise an unlimited amount of capital. In total, based on the analysis of offering amounts reported on Form D in calendar year 2014, Regulation D offerings accounted for over one trillion dollars. Most issuers choose to raise capital by relying on Rule 506, even when their offering size would have potentially permitted reliance on

898 See Bettis, J., J. Coles, and M. Lemmon, 2000, Corporate policies restricting trading by insiders, Journal of Financial Economics 57, pp. 191–220 (discussing adverse selection issues and corporate policies restricting trading by insiders. See also Michaely, R., and W. Shaw, 1994, The pricing of initial public offerings: Tests of adverse-selection and signaling theories, Review of Financial Studies 7(2), pp. 279–319 (analyzing the role of adverse selection and the possibility of informed trading in IPOs).
Rule 504 or Rule 505.899 For example, in 2014, we identified 11,228 Regulation D offerings that would have been potentially eligible to be conducted under amended Regulation A. Of those, 10,671 offerings relied on Rule 506, 376 on Rule 504, and 181 on Rule 505. We summarize their characteristics in the table below.
Regulation D offerings in 2014 by issuers that would be eligible to rely on amended Regulation A900

Rule 504
Rule 505
Rule 506
Offering size
≤$1M
≤$5M
≤$20M
$20-50M
Current Reg A Eligible
Yes
Yes
Up to $5M
No
Amended Reg A Eligible
Yes
Yes
Yes
Yes
Number of filings
376
181
10,071
600
Average offering amount ($ million)
0.4
1.4
3.2
31.6
Offerings with non-accredited investors
58%
31%
6%
2%
Median number of investors
3
7
6
9

As shown in the table above, approximately 95% of Regulation D offerings that would be eligible for amended Regulation A relied on Rule 506. A comparison of Rule 506 offerings over $20 million to those below $20 million shows that larger offerings generally had a higher number of investors and were less likely to have non-accredited investors.

Additional data on Regulation D offerings that would have been eligible for amended Regulation A exemption is provided in the graph below, which displays the offering size distribution of Rule 506 offerings and other Regulation D offerings that would have been potentially eligible for the amended Regulation A exemption in
899 This tendency could, in part, be attributed to two features of Rule 506: state securities law preemption and unlimited offering amount. See also GAO Report.
900 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings submitted for calendar year 2014. The numbers exclude offerings by reporting companies, non-Canadian foreign issuers and pooled investment funds, as well as offerings of interests in claims on natural resources, which are not eligible for amended Regulation A. We do not have a scalable way of excluding blank check companies, which are also not eligible for amended Regulation A, from this sample, which leads to a higher estimate of the number of issuers that would be eligible to rely on amended Regulation A.
calendar year 2014. Approximately 95% of Regulation D offerings that would have been potentially eligible for amended Regulation A had offering amounts below $20 million.
Distribution of offering size of Rule 506 offerings and other Regulation D offerings in 2014 by issuers that would be eligible to rely on amended Regulation A901

Approximately seventy percent of Regulation D issuers that would be eligible for amended Regulation A declined to disclose their revenue range in their Form D filings for 2014. Of the remaining 30%, 13% reported “no revenues.” The portion of issuers with no revenues is noteworthy because it may be more difficult for issuers without regular cash flows to obtain debt financing (without collateral or a guarantee).
Registered Offerings‌

Issuers may seek to raise capital by registering the offer and sale of securities

901 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings submitted for calendar year 2014.
under the Securities Act. In calendar year 2014, using data from Thomson Reuters, we identified 75 IPOs and 246 seasoned equity offerings (SEOs) of up to $50 million by issuers that would have been potentially eligible for amended Regulation A.902
There has been a general decline in the number of IPOs, particularly those undertaken by small firms, since the late 1990s.903 One possible reason behind the relatively low number of IPOs under $50 million is that public offerings may be too costly to be a viable capital raising option for smaller issuers.904 Fees paid to underwriters average 7% for IPOs, 5% for SEOs, and 1% for bond issuances.905 Issuers
conducting registered public offerings also incur Commission registration fees and FINRA filing fees, legal and accounting fees and expenses, transfer agent and registrar fees, costs associated with periodic reporting requirements and other regulatory requirements and various other fees.906 Two surveys cited in the IPO Task Force report

902 The sample excludes offerings from non-Canadian foreign issuers, blank check companies, and investment companies, which would not be eligible to rely on amended Regulation A. Offerings with gross proceeds below $1,000 are excluded to minimize measurement error. Issuers of interests in claims on natural resources, which also would not be eligible for amended Regulation A, were not separately eliminated due to data constraints.
903 See IPO Task Force. However, a recent study notes that the decline in IPOs has been partly reversed in 2012–2014. See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision, Journal of Financial Economics (forthcoming), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
904 Other potential reasons, such as macro-economic conditions, are discussed below.
905 See Chen, H., and J. Ritter, 2000, The seven percent solution, Journal of Finance 55(3), pp.
1105−1131; Abrahamson, M., T. Jenkinson, and H. Jones, 2011, Why don’t U.S. issuers demand European fees for IPOs? Journal of Finance 66(6), pp. 2055–2082; Corwin, S., 2000, The determinants of underpricing for seasoned equity offers, Journal of Finance 58(5), pp. 2249−2279; Huang, R., and D. Zhang, 2011, Managing underwriters and the marketing of Seasoned Equity Offerings, Journal of Financial and Quantitative Analysis 46(1), pp. 141–170; Fang, L., 2005, Investment bank reputation and the price and quality of underwriting services, Journal of Finance 60(6), pp. 2729−2761.
906 According to the survey cited in the IPO Task Force report, 92% of the surveyed CEOs listed the “Administrative Burden of Public Reporting” as being one of the most significant challenges of an IPO. See IPO Task Force.
concluded that regulatory compliance costs of IPOs average $2.5 million initially, followed by an average ongoing cost of $1.5 million per year.907
Because of the fixed-cost nature of some of the compliance-related fees associated with public offerings, compliance-related fees as a percentage of offering proceeds tend to decline as offering size increases, as illustrated in the table below. Offerings below $50 million, and especially offerings below $20 million, incur significantly higher registration, legal and accounting-related fees, as a percentage of proceeds.
Certain non-underwriter IPO-related fees as a percentage of offering proceeds from 1992-2014.908

Offering
≤$20M
Offering
$20-$50M
Offering
>$50M
SEC Registration Fees
0.11%
0.04%
0.03%
Blue Sky Fees
0.35%
0.05%
0.02%
Accounting Fees
1.38%
0.84%
0.56%
Legal Fees
2.32%
1.18%
0.81%

In addition to compliance costs, there are other possible explanations for the

907 See IPO Task Force. However, some studies conclude that the decline in U.S. small-firm IPOs predated the adoption of the Sarbanes-Oxley Act. See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692. See also Doidge, C., A. Karolyi, and R. Stulz, 2013, The U.S. left behind? Financial globalization and the rise of IPOs outside the U.S., Journal of Financial Economics 110(3), pp. 546–573.
908 Fee information is compiled from Thomson Reuters SDC data on IPOs for 1992–2014. The sample excludes offerings from non-Canadian foreign issuers, blank-check companies, and investment companies. Averages are computed based on observations with non-missing data (where a particular type of fees is separately reported). Offerings with gross proceeds below
$1,000 are excluded to minimize measurement error.
The analysis includes legal, accounting, blue sky, and registration fees, to which we collectively refer as “compliance fees”. Blue Sky Fees denotes fees and expenses related to compliance with state securities regulations. We note that Blue Sky fees associated with small registered offerings may over- or under-estimate similar expenses for Regulation A offerings of the same size.
trends in IPOs. A decline in public offerings also could result from macro-economic effects on investment opportunities and the cost of capital909 or an increase in the economies of scope from being acquired by a larger entity relative to the benefits of operating as an independent firm.910
Several other trade-offs may affect an issuer’s willingness to pursue an IPO. According to the IPO Task Force survey, 88% of CEOs that had completed an IPO listed “Managing Public Communications Restrictions” as one of the most significant challenges brought on by becoming a reporting company.911 Additionally, issuers in certain industries, such as high-technology sectors, may be sensitive to the costs of disclosure of proprietary information and may find private capital sources more attractive.912 Access to capital may be especially time-sensitive for the types of issuers most likely to conduct small offerings, such as startups and small businesses, rendering these issuers unwilling to go through a potentially lengthy registration process. Directors and officers of small issuers also may not want to subject themselves to the increased liability and takeover threats that come with dispersed ownership.913

The cost and disclosure requirements of IPOs have been affected by the recent adoption of scaled reporting requirements for emerging growth companies (EGCs) under Title I of the JOBS Act, which can ease the compliance obligations of certain issuers in
909 See Lowry, M., 2003, Why does IPO volume fluctuate so much? Journal of Financial Economics 67(1), pp. 3–40.
910 See Gao, X., J. Ritter, and Z. Zhu, 2013, Where have all the IPOs gone? Journal of Financial and Quantitative Analysis 48(6), pp. 1663–1692.
911 See IPO Task Force.
912 See Verrecchia, R., 2001, Essays on disclosure, Journal of Accounting and Economics 32, pp. 97– 180.
913 See Burkart, M., D. Gromb, and F. Panunzi, 2000, Agency conflicts in public and negotiated transfers of corporate control, Journal of Finance 55(2), pp. 647–677.
registered offerings. There is some evidence that Title I has contributed to an increase in IPO volume in 2012–2014, particularly in industries with high proprietary disclosure costs, such as biotechnology and pharmaceuticals.914 Some recent studies, however, suggest that the overall cost of going public for EGCs has not decreased whereas the indirect cost (e.g., IPO underpricing) has increased.915
Private Debt Financing

Equity, including principal owner equity, accounts for a significant proportion of the total capital of a typical small business. Other sources of capital for small businesses include loans from commercial banks, finance companies and other financial institutions, and trade credit.916
Borrowing is relatively costly for many early-stage issuers as they may have low

revenues, irregular cash-flow projections, insufficient assets to offer as collateral and high external monitoring costs.917 For example, a small growth company, such as a