Regulation A when compared to Commission review and qualification alone. To the extent that disclosure or merit review (if applicable to one of the participating jurisdictions in which the issuer is seeking to offer securities) standards of participating jurisdictions impose more extensive requirements on the issuer than Commission rules, some issuers may incur additional compliance expense or require additional time to address comments. In light of the recent efforts of state securities regulators to address concerns about the cost of state review and qualification of Regulation A offerings,
however, the ongoing implementation and development of the coordinated review program, particularly as it may operate within Tier 1 offerings, may, in the future,
1031 See Groundfloor Letter.
1032 See WDFI Letter.
provide additional data that will aid our future evaluation of whether such a program could effectively operate within the context of larger, more national Tier 2 offerings.
We believe the final rules strike appropriate balance between mitigating cost and time demands on issuers and providing investor protections.
PAPERWORK REDUCTION ACT
Background
Certain provisions of the final rules contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).1033 We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA and its implementing regulations.1034 While several commenters provided qualitative comments on the possible costs of the proposed rules and amendments, we did not receive comments on our PRA analysis and thus are adopting our estimates substantially as proposed, except as otherwise noted herein. The titles for the collections of information are:
“Regulation A (Form 1-A and Form 2-A)” (OMB Control Number 3235-0286);
“Form 1-K” (OMB Control Number 3235-0720);
“Form 1-SA” (OMB Control Number 3235-0721);
“Form 1-U” (OMB Control Number 3235-0722);
“Form 1-Z” (OMB Control Number 3235-0723);
1033 44 U.S.C. 3501 et seq.
1034 44 U.S.C. 3507(d) and 5 CFR 1320.11.
“Form 8-A” (OMB Control Number 3235-0056);
“Form ID” (OMB Control Number 3235-0328); and
“Form F-X” (OMB Control Number 3235-0379).1035
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. We applied for OMB control numbers for the new collections of information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB assigned a control number to each new collection, as specified above. Responses to these new collections of information would be mandatory for issuers raising capital under Regulation A.
The hours and costs associated with preparing disclosure, filing forms, and retaining records constitute reporting and cost burdens imposed by the collections of information. In deriving estimates of these hours and costs, we recognize that the burdens likely will vary among individual issuers based on a number of factors, including the stage of development of the business, the amount of capital an issuer seeks to raise, and the number of years since inception of the business. We believe that some issuers will experience costs in excess of the average and some issuers may experience less than the average costs.
Estimated Number of Regulation A Offerings
Data regarding current market practices may help identify the potential number of offerings that will be conducted in reliance on the final rules.1036 We estimate that there
1035 Although the final rules do not amend Form F-X, the total burden hours associated with that form may increase minimally as a result of the increased number of issuers relying on Regulation A. The Commission submitted the revised burden estimate for Form F-X to OMB for review in accordance with the PRA, although the potential minimal increase in burden hours was not noted in the Proposing Release.
are currently approximately 26 Regulation A offering statements filed by issuers per year.1037 While it is not possible to predict with certainty the number of offering statements that will be filed by issuers relating to offerings made in reliance on amended Regulation A, for purposes of this PRA analysis, we estimate that the number will be 250 offerings statements per year. We base this estimate on (i) the current approximate number of annual Form 1-A filings under the existing rules, plus (ii) 65 percent of the estimated number of registered offering of securities that would have been eligible to be conducted under Regulation A,1038 plus (iii) an additional 16 offerings that either would not otherwise occur or would have been conducted in reliance on another exemption from Securities Act registration, such as Regulation D.1039 For purposes of this PRA analysis, we assume that each offering statement for a unique Regulation A offering that is filed represents a unique issuer, such that approximately 250 issuers are estimated to conduct Regulation A offerings each year under the final rules.
PRA Reporting and Cost Burden Estimates
Regulation A (Form 1-A and Form 2-A)
Currently, Regulation A requires issuers to file a Form 1-A: Offering Statement and a Form 2-A: Report of Sales and Uses of Proceeds with the Commission.
Regulation A has one administrative burden hour associated with it, while current
1036 See Section III. above for a discussion of the data regarding current market practices.
1037 From 2009 through 2014, there were 158 Form 1-As filed with the Commission.
1038 See figures and graphs for registered offerings cited in Section III.B.b. above (citing approximately 320 registered initial public offerings or follow-on offerings in calendar year 2014 that would have been potentially eligible to be conducted under amended Regulation A).
1039 See figures and graphs for registered and exempt offerings under Regulation D cited in
Section III.B.1.a.ii. above (citing 11,228 issuances under Regulation D in calendar year 2014 that would have been potentially eligible to be conducted under amended Regulation A).
Form 1-A is estimated to take approximately 608 hours to prepare and Form 2-A is estimated to take approximately 12 hours to prepare.1040 We do not anticipate that the one administrative burden hour associated with Regulation A will change as a result of the final rules. As discussed more fully below, we believe the burden hours associated with Form 1-A will change, while Form 2-A and the associated burden hours are eliminated as a result of today’s proposal.1041
Under the final rules, an issuer conducting a transaction in reliance on Regulation A will be able to conduct either a Tier 1 offering or a Tier 2 offering.1042 In either case, a Regulation A issuer will continue to be required to file with the
Commission specified disclosures on a Form 1-A: Offering Statement.1043 An issuer will also be required to file amendments to Form 1-A to address comments from Commission staff and to disclose material changes in the disclosure previously provided to the Commission or investors.1044 In light of the electronic filing requirements for
Regulation A offering materials discussed above,1045 issuers are no longer required to file
a manually signed copy of Form 1-A with the Commission.1046 Issuers are, however, required to manually sign a copy of the offering statement before or at the time of non-public submission or filing that must be retained by the issuer for a period of five
1040 See Form 1-A at 1; Form 2-A at 1.
1041 See discussion in Section II.E. above. 1042 See discussion in Section II.B.3. above. 1043 See Rule 252.
1044 See Rule 252(f).
1045 See discussion in Section II.C.1. above.
1046 See discussion in Section II.C.3.d. above.
years and produced to the Commission, upon request.1047 As issuers are currently required to manually sign the Form 1-A and file it with the Commission, we do not anticipate that the Form 1-A retention requirement adopted in the final rules will alter an issuer’s compliance burden. As adopted, Form 1-A is similar to existing Form 1-A. In some instances, Form 1-A, contains fewer disclosure items than existing Form 1-A (e.g., Part I (Notification) of Form 1-A does not require disclosure of “Affiliate Sales”; Part II (Offering Circular) of Form 1-A requires a description of the issuer’s business for a period of three years, rather than five years). Part II of Form 1-A no longer permits
disclosure in reliance on the Model A disclosure format, but directs issuers to follow the provisions of Model B (renamed “Offering Circular”), Part I of Form S-1, or, where applicable, Part I of Form S-11.1048 In other instances, Form 1-A contains more disclosure items than existing Form 1-A (e.g., Part I of Form 1-A requires additional disclosure of certain summary information regarding the issuer and the offering; Part II of Form 1-A requires more detailed management discussion and analysis of the issuer’s liquidity and capital resources and results of operations). Form 1-A requires disclosure similar to that required in a Form S-1 registration statement for registered offerings under the Securities Act, but with fewer disclosure items (e.g., it requires less disclosure about
the compensation of officers and directors, and less detailed management discussion and analysis of the issuer’s liquidity and capital resources and results of operations) and,
1047 See Instruction 2 to Signatures in Form 1-A.
1048 See discussion at Section II.C.3.b. above.
under certain circumstances, Form 1-A does not require issuers to file audited financial statements.1049
We expect that issuers relying on Regulation A for Tier 1 offerings of up to
$20 million in a 12-month period will largely be at a similar stage of development to issuers relying on existing Regulation A and will therefore not experience an increased compliance burden with Form 1-A. Given the increased annual offering amount limit of
$50 million for Tier 2 offerings, however, we expect that issuers conducting such offerings pursuant to Regulation A may be at a more advanced stage of development than issuers offering securities under Tier 1. In such cases, the complexity of the required disclosure and, in turn, the burden of compliance with the requirements of Form 1-A may be greater for some issuers than for issuers relying on existing Form 1-A. We believe that the burden hours associated with amended Form 1 A will be greater than the current estimated 608 burden hours per response but will not be as great as the current estimated
972.32 burden hours per response for Form S-1. We therefore estimate that the total burden to prepare and file Form 1-A, as adopted today, including any amendments to the form, will increase on average across all issuers in comparison to existing Form 1-A to approximately 750 hours.1050 We estimate that the issuer will internally carry 75 percent of the burden of preparation and that outside professionals retained by the issuer at an average cost of $400 per hour will carry 25 percent.1051
1049 See discussion in Section II.C.3.b(2). above.
1050 By comparison, we estimate the burden per response for preparing Form S-1 to be 972.32 hours.
See Form S-1, at 1.
1051 The costs of retaining outside professionals may vary depending on the nature of the professional services. For purposes of this PRA analysis, however, we estimate that such costs will be an average of $400/hour, which is consistent with the rate we typically estimate for outside legal services used in connection with public company reporting.
We estimate that compliance with the requirements of a Form 1-A will require 187,500 burden hours (250 offering statements x 750 hours/offering statement) in aggregate each year, which corresponds to 140,625 aggregated hours carried by the issuer internally (250 offering statements x 750 hours/offering statement x 0.75) and aggregated costs of $18,750,000 (250 offering statements x 750 hours/offering statement x 0.25 x
$400) for the services of outside professionals. As stated above, we estimate that the proposed amendments to Regulation A will not change the one administrative burden hour associated with the review of Regulation A and will require 250 burden hours (250 offering statements x one hour/offering statement) in aggregate each year, which corresponds to 187 aggregated hours carried by the issuer internally (250 offering statements x 0.75) and aggregated costs of $25,000 (250 offering statements x one hour/offering statement x 0.25 x $400) for services of outside professionals. When combined with the estimates for Form 1-A, the administrative burden hour results in an estimated total compliance burden of 751 hours per offering statement and an estimated annual compliance burden of 187,750 hours (250 offering statements x 751 hours/offering statement) and aggregated costs of $18,775,000 (250 offering statements x 751 hours/offering statement x 0.25 x $400).
Form 1-K: Annual Report
Under the final rules, any issuer that conducts a Tier 2 offering pursuant to Regulation A is required to file an annual report with the Commission on Form 1-K: Annual Report.1052 A manually signed copy of Form 1-K must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for
1052 See Rule 257(b)(1).
a period of five years and, if requested, produced to the Commission.1053 We do not anticipate that the requirement to retain a manually signed copy of Form 1-K will affect an issuer’s compliance burden. We believe the compliance burden associated with disclosure provided in Form 1-K will be less than the compliance burden associated with reporting required under Exchange Act Sections 13 or 15(d). We also believe the burden is more analogous to the compliance burden attendant to Form 1-A. Unlike the disclosure required in Form 1-A, however, offering-specific disclosure in Form 1-K is not required. Additionally, under certain circumstances, an issuer will be required to disclose information similar to the information previously required of issuers on Form 2-A.1054 Unlike the disclosure previously required on Form 2-A, however, an issuer is not required to provide disclosure about the use of proceeds. We estimate that the burden to prepare and file a Form 1-K will be less than that required to prepare and file a Form 1-A. We estimate that compliance with Form 1-K will result in a burden of 600 hours per response.1055 We further estimate that 75 percent of the burden of preparation will be carried by the issuer internally and that 25 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. While we do not know the exact number of issuers that will conduct Tier 2 offerings in reliance on amended Regulation A, we estimate 75 percent of all issuers filing a Form 1-A (or 188 issuers, 250
1053 See General Instruction C to Form 1-K and related discussion in Section II.E.1.c. above.
1054 Id.
1055 We estimate that the burden of preparing the information required by Form 1-K will be approximately 3/4 of the burden for filing Form 1-A due to the lack of offering-specific disclosure and an issuer’s ability to update previously provided disclosure.
issuers x .75) will conduct Tier 2 offerings, enter the Regulation A ongoing reporting regime and therefore be required to file Form 1-K.1056
We estimate that compliance with the requirements of Form 1-K for issuers with an ongoing reporting obligation under Regulation A will require 112,800 burden hours (188 issuers x 600 hours/issuer) in the aggregate each year, which corresponds to 84,600 hours carried by the issuer internally (188 issuers x 600 hours/issuer x 0.75) and costs of
$11,280,000 (188 issuers x 600 hours/issuer x 0.25 x $400) for the services of outside professionals.
Form 1-SA: Semiannual Report
Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A will be required to file a semiannual report with the Commission on Form 1-SA: Semiannual Report.1057 A manually signed copy of the Form 1-SA must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to the Commission.1058 We do not anticipate that the requirement to retain a manually signed copy of the Form 1-SA will affect an issuer’s compliance burden. Issuers must provide semiannual updates on Form 1-SA, which, like a Form 10-Q,1059 consists primarily of financial statements and MD&A. Unlike Form 10-Q, Form 1-SA does not require disclosure regarding quantitative and qualitative market risk or controls and
1056 This estimate includes any special financial reports required to be filed on Form 1-K.
1057 See Rule 257(b)(3).
1058 See General Instruction C to Form 1-SA and related discussion in Section II.E.1.c(2). above.
1059 17 CFR 249.308a.
procedures.1060 We estimate, however, that on balance the reduction in burden attributable to eliminating these two items in Form 1-SA will be offset by the increased burden associated with requiring financial statement disclosure covering six months, rather than three months. We therefore believe the per response compliance burden of Form 1-SA will be similar to the compliance burden for issuers filing a Form 10-Q under the Exchange Act.1061 Therefore, for purposes of this PRA analysis, we estimate that the burden to prepare and file a Form 1-SA will equal the burden to prepare and file
Form 10-Q, which we have previously estimated as 187.43 hours per response.1062
Unlike Form 1-K, Form 1-SA does not require the provision of audited financial statements. We therefore believe, in comparison to Form 1-K, issuers filing a Form 1-SA will be able to prepare more of the required disclosures internally. Accordingly, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour.
We estimate that compliance with the requirements of Form 1-SA for issuers with an ongoing reporting obligation under Regulation A will require 35,237burden hours (188 issuers x 187 hours/issuer/filing x 1 filing/year) in the aggregate each year, which corresponds to 29,952 hours carried by the issuer internally (188 issuers x 187 hours/issuer/filing x 1 filing/year x 0.85) and costs of $2,113,872 (188 issuers x 187
1060 See discussion in Section II.E.1.c(2). above.
1061 Issuers will, however, have to file Form 1-SA, a semiannual report, less frequently than Form 10-Q, a quarterly report.
1062 See Form 10-Q, at 1.
hours/issuer/filing x 1 filing/year x 0.15 x $400) for the services of outside professionals.1063
Form 1-U: Current Reporting
Under the final rules, any issuer that conducts a Tier 2 offering in reliance on Regulation A is required to promptly file current reports on Form 1-U with the Commission.1064 A manually signed copy of the Form 1-U must be executed by the issuer and related signatories before or at the time of electronic filing, retained by the issuer for a period of five years and, if requested, produced to Commission.1065 We do not anticipate that the requirement to retain a manually signed copy of the Form 1-U will affect an issuer’s compliance burden. Issuers are required to file such reports in the event they experience certain corporate events, much the same way as issuers subject to an ongoing reporting obligation under the Exchange Act file current reports on
Form 8-K.1066 The requirement to file a Form 1-U, however, will be triggered by significantly fewer corporate events than those that trigger a reporting requirement on a Form 8-K, and the form itself will be slightly less burdensome for issuers to fill out.1067 Thus, the frequency of filing the required disclosure and the burden to prepare and file a Form 1-U will be considerably less than for Form 8-K. We estimate that the burden to prepare and file each current report will be 5 hours. While we do not know for certain how often an issuer would experience a corporate event that would trigger a current
1063 This estimate includes any special financial reports required to be filed on Form 1-SA.
1064 See Rule 257(b)(4).
1065 See General Instruction C to Form 1-U and related discussion in Section II.E.1.c(3). above.
1066 We estimate the burden per response for preparing a Form 8-K to be 5.71 hours. See Form 8-K, at 1.
1067 See discussion at Section II.E.1.c(3). above.
report filing on Form 1-U, we estimate that many issuers may not experience a corporate event that triggers reporting, while others may experience multiple events that trigger reporting. On average, we estimate that an issuer will be required to file one current report annually.1068 Therefore, we estimate that an issuer’s compliance with Form 1-U will result in an annual aggregate burden of 5 hours (1 current report annually x 5 hours per current report) per issuer.
As with Form 1-SA, we estimate that 85 percent of the burden of preparation will be carried by the issuer internally and that 15 percent will be carried by outside professionals retained by the issuer at an average cost of $400 per hour. We estimate that compliance with the requirements of Form 1-U will require 940 burden hours (188 issuers x 1 current report annually x 5 hours per current report) in aggregate each year, which corresponds to 799 hours carried by the issuer internally (188 issuers x 5 hours/issuer/year x 0.85) and costs of $56,400 (188 issuers x 5 hours/issuer/year x 0.15 x
$400) for the services of outside professionals.