Disclosure Format and Content
Under the existing Regulation A, issuers can choose among three models for providing narrative disclosure in Part II of the offering statement: Model A, Model B, and Part I of Form S-1. Similar to the proposal, the final rules eliminate Model A but preserve Model B, with certain changes to the contents, and Part I of Form S-1.982
We believe that eliminating Model A, which uses a question-and-answer format,
may benefit investors by avoiding possible confusion that could result from the lack of uniformity of information presented in the question-and-answer format. Several commenters disagreed with the elimination of the Model A format, recommending that an updated version of the Model A disclosure format be retained.983 The Model A format may be easier to understand for non-accredited investors, who may lack the sophistication to analyze information presented in alternative disclosure formats.
Compared to other formats, the Model A format might also result in lower costs of initial preparation of the offering statement, including, in some instances, lessen the need to retain outside securities counsel.984 While a question-and-answer format may lower the cost of initial preparation, it often requires more substantive revisions after filing and before qualification, in order for the disclosure to sufficiently address the form requirements. We believe that most of the benefits associated with the lower cost of
981 See Securities Offering Reform, Rel. No. 33-8591.
982 See Section II.C.3.b for a more detailed description.
983 See BIO Letter; Karr Tuttle Letter; NASAA Letter 2; Verrill Dana Letter 1; WDFI Letter.
984 See Karr Tuttle Letter and WDFI Letter. The Karr Tuttle Letter also refers to the experience of issuers in Rule 504 offerings, indicating that NASAA’s Form U-7, upon which Model A is based, has proved convenient for issuers in Rule 504 offerings qualified by states without the use of securities counsel.
initial preparation are negated subsequently during the qualification process. Consequently, we are not persuaded that there are sufficient benefits to retaining the Model A format.
The changes to Model B include updated disclosure requirements, including a new section containing management discussion and analysis of the issuer’s liquidity, capital resources and business operations. While these updates may impose costs on the issuer, they are expected to increase investor protection and informational efficiency of prices by providing important information to investors. The updated disclosure requirements are, however, generally designed to assist issuers with more guidance as to the required disclosures that, while they may increase the cost to issuers associated with the initial preparation of the offering circular, should lower the overall cost of, and time to, qualification, when the process is considered in its entirety. Overall, we believe that the availability of two alternative disclosure formats—a revised Model B format and Part I of Form S-1—provides sufficient flexibility to issuers in choosing their disclosure format while preserving the benefits of disclosure of relevant information to prospective investors.
Some commenters suggested eliminating all three disclosure formats and instead creating a new disclosure format similar to Part I of Form S-1 that would reference Regulation S-K requirements (with reduced disclosure requirements in some instances).985 Another commenter recommended reducing the disclosure requirements
for offerings of $2 million or less,986 while another suggested increasing disclosure
985 See Canaccord Letter; CFIRA Letter 1; E&Y Letter; Ladd Letter 2; McCarter & English Letter; WR Hambrecht + Co Letter.
986 See Campbell Letter.
requirements as an issuer grows in size and complexity.987 We recognize that scaling the disclosure requirements for Form 1-A, as suggested by commenters, could ease compliance costs for Regulation A issuers. However, additional scaling of disclosure requirements within tiers may reduce the comparability of disclosures within the same tier and result in pricing inefficiencies.
Audited Financial Statements
The final rules require issuers conducting Tier 2 offerings to include audited financial statements in their offering materials. Audited financial statements should provide investors in Tier 2 offerings with greater confidence in the accuracy and quality of the financial statements of issuers seeking to raise larger amounts of capital. This, in turn, could benefit issuers by lowering the cost of capital or increasing the amount of capital supplied by investors.
We recognize that audited financial statements could also entail significant costs to issuers, and that the costs of an audit could discourage the use of Tier 2 offerings.
Based on data from registered IPOs below $50 million in 2014 by issuers that would have been potentially eligible for amended Regulation A, average total accounting fees amounted to 1.65% of gross offering proceeds, where reported separately.988
The final rules require issuers in Tier 2 offerings to include audited financial
987 See SVB Letter.
988 This estimate is based on Thomson Reuters SDC data on IPOs with issue dates in 2014, excluding offerings from non-Canadian foreign issuers, blank check companies, and investment companies. Offerings with 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. Accounting fees include the cost of preparing accounting statements, in addition to the cost of an audit. We also note that costs incurred by issuers in registered IPOs may not be representative of costs incurred by issuers in Tier 2 offerings. We lack the information to provide a quantitative estimate of audit costs that would be incurred by Regulation A issuers in Tier 2 offerings.
statements in their offering circulars that are audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants (AICPA) (referred to as U.S. Generally Accepted Auditing Standards or GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB), as suggested by some commenters.989 We expect this provision in the final rules to provide issuers with flexibility that may help contain issuer compliance costs, compared to requiring financial statements that are audited in accordance with the standards of the PCAOB. As noted above,990 because AICPA rules would require an audit of a Regulation A issuer conducted in accordance with PCAOB standards to also comply with U.S. GAAS, an issuer who includes financial statements audited in accordance with PCAOB standards will likely incur additional incremental costs compared with an issuer who includes financial statements audited only in accordance with U.S. GAAS. However, we assume that an issuer would only elect to comply with both sets of auditing standards because it has concluded that the benefits of doing so (for example, to facilitate Exchange Act registration) justify these additional incremental costs.
As an alternative, we could have not required the audited financial statements until after the first year of operation as a “public startup company” or indefinitely for issuers that are pre-revenue or that have paid-in capital, assets and revenues below a modest threshold, as suggested by commenters.991 While this alternative may decrease issuer compliance costs, it may also lower the accuracy of information provided to
989 See ABA BLS Letter; BDO Letter; Canaccord Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter; MoFo Letter; WR Hambrecht + Co Letter.
990 See Section II.C.3.
991 See Public Startup Co. Letter 3 (also suggesting three tiers, where at least the first two would not require this) and Public Startup Co. Letter 11.
investors in Tier 2 offerings, resulting in reduced investor protection. The large offering limit in Tier 2 offerings may make some of the fixed costs of an audit relatively less burdensome. In addition, we note that smaller issuers may opt to forgo the cost of an audit and elect a Tier 1 offering or a Regulation D offering, which does not require audited financial statements.
On the other hand, other commenters advised the Commission to require audited financial statements for Tier 1 offerings.992 While we acknowledge that requiring audited statements is likely to result in stronger investor protections due to reduced likelihood of fraudulent financial statements being presented, this alternative would likely place a relatively greater burden on smaller issuers due to the fixed-cost nature of some of the audit costs. Also, given the relatively low maximum offering size for Tier 1, this could result in Tier 1 offerings becoming not cost-effective.
Other Accounting Requirements
The final rules permit Canadian issuers to prepare financial statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This is expected to benefit Canadian issuers that currently use IFRS as issued by the IASB by helping such issuers contain compliance costs associated with Regulation A offerings, compared to requiring Canadian issuers to prepare financial statements in accordance with U.S. GAAP. Several commenters specifically supported allowing Canadian issuers to prepare their financial statements in accordance with IFRS as issued by the IASB.993
992 See Guzik Letter 1 and Milken Institute Letter.
993 See ABA BLS Letter; Canaccord Letter; NASAA Letter 2; MoFo Letter; PwC Letter.
Continuous and Delayed Offerings