Resource Guide: SEC Regulation A + Plus

We are further providing issuers under both tiers with the

1086 See fn. 772 above.
1087 See, e.g., Public Startup Co. Letter 1.
1088 Guzik Letter 1; ICBA Letter.
1089 Guzik Letter 1 (suggesting that Tier 1 ongoing disclosure requirements could parallel Tier 2’s requirements, but without the requirement for semiannual reports); Ladd Letter 2; Public Startup Co. Letters 1 and 5; SVB Financial Letter.
1090 Campbell Letter.
1091 BDO Letter; CAQ Letter; Deloitte Letter; E&Y Letter; KPMG Letter; McGladrey Letter.
1092 See Section II.C.3.b(1). above.
accommodation provided to emerging growth companies in Securities Act Section 7(a) to use the extended transition periods applicable to private companies for complying with new or revised accounting standards under U.S. GAAP. Additionally, we have provided Tier 1 issuers with additional flexibility with respect to auditor independence standards.
As noted in Section II.H.3. above, however, we do not agree with the position of some commenters that preemption of state securities laws registration and qualification requirements is necessary or appropriate for Tier 1 offerings.1093 We note that some commenters who suggested that preemption of state securities laws may improve the attractiveness of Tier 1 offerings did so on the condition that other aspects of the tier should change accordingly, namely 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.D.3.b(2)(c). above, we have not adopted such changes in Tier 1.
Additionally, as noted in Section II.I. above, we do not believe that the creation of a third tier, as suggested by some commenters, would meaningfully alter a smaller entity’s options for capital formation under Regulation A. While a third tier may provide issuers with some additional flexibility for capital formation under Regulation A, this additional flexibility would have potential costs. For example, a third tier may unnecessarily complicate compliance with Regulation A for smaller entities, 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.

1093 See Section II.H.3. above.
In the light of the changes discussed above, we believe that the final rules we are adopting today provide smaller issuers with an appropriately tailored regulatory regime that takes into account the needs of small entities to have a viable capital formation option in Regulation A, while maintaining appropriate investor protections.
Small Entities Subject to the Rules

For purposes of the Regulatory Flexibility Act, under our rules, an issuer (other than an investment company) is a “small business” or “small organization” if it has total assets of $5 million or less as of the end of its most recent fiscal year and is engaged or proposing to engage in an offering of securities which does not exceed $5 million.1094
While Regulation A is available for offerings of up to $50 million in securities in

a 12-month period, only offerings up to $5 million in securities in a 12-month period will constitute offerings by small entities under the definition set forth above. It is difficult to predict the number of small entities that will use Regulation A due to the many variables included in the amendments. Nevertheless, we believe that the final rules for
Regulation A will increase the overall number of Regulation A offerings of $5 million or less due to the ability to non-publicly submit draft offering statements for review by the Commission’s staff, the expanded use of solicitation of interest materials, the ability to electronically file and transmit offering statements and offering circulars, the potential for preemption of state regulatory review if the issuer elects to conduct a Tier 2 offering, and other significant changes summarized in Section II. above.

1094 Securities Act Rule 157 [17 CFR 230.157]. We note that currently this rule refers to “the dollar limitation prescribed by Section 3(b) of the Securities Act.” The JOBS Act amended Section 3(b) of the Securities Act. The former Section 3(b) is now Section 3(b)(1), and a new Section 3(b)(2) was added. To retain the meaning of Rule 157, we are adopting a technical correction to replace the reference to “Section 3(b)” with a reference to “Section 3(b)(1).”
Regulation A is currently limited to offerings with an aggregate offering price and aggregate sales of $5 million or less.1095 From 2009 through 2014, 158 issuers filed offering statements and 36 offering statements were qualified by the Commission, or an average of approximately six qualified offering statements per year. Of the 36 offering statements that were qualified, 28 included financial statements indicating that the issuer had total assets of $5 million or less (as of the most recent balance sheet included in such issuer’s offering statement at the time of qualification), or an average of approximately five qualified offering statements per year in which the issuer indicated it had total assets
of $5 million or less. Based on these data, and for the reasons discussed above, we believe that at least five small businesses will conduct offerings under Regulation A per year.
Reporting, Recordkeeping, and Other Compliance Requirements

As discussed above in Section II., the final rules include reporting, recordkeeping and other compliance requirements. In particular, the final rules impose certain reporting requirements on issuers offering and selling securities in a transaction relying on the exemption provided by Section 3(b) and Regulation A. The final rules require that issuers relying on the exemption file with the Commission certain information specified in Form 1-A about the issuer and the offering, including the issuer’s contact information; use of proceeds from the offering; price or method for calculating the price of the securities being offered; business and business plan; property; financial condition and results of operations; directors, officers, significant employees and certain beneficial

1095 As explained in Section II.B.3. above, aggregate sales under Regulation A include prior sales generated from Regulation A offerings that occurred in the 12 months preceding the current offering.
owners; material agreements and contracts; and past securities sales.1096 Such issuers are also required to provide information on the material factors that make an investment in the issuer speculative or risky; dilution; the plan of distribution for the offering; executive and director compensation; conflicts of interest and related party transactions; and financial statements. Similar to existing Regulation A, for Tier 1 offerings, Form 1-A does not require the financial statements to be audited unless the issuer has already had them audited for another purpose.
As discussed above in Section II.E.1.c., issuers conducting Tier 2 offerings are also required to file annual reports on new Form 1-K, semiannual updates on new Form 1-SA, current event reporting on new Form 1-U, and to provide notice to the
Commission of the termination of their ongoing reporting obligations on new Form 1-Z.

An issuer subject to the Tier 2 periodic and current event reporting described above is required to provide information annually on Form 1-K, including the issuer’s business and business plan; conflicts of interest and related party transactions; executive and director compensation; financial condition and results of operations; and audited financial statements. The semiannual update on Form 1-SA consists primarily of unaudited, interim financial statements for the issuer’s first two fiscal quarters and information regarding the issuer’s financial condition and results of operations. The current event reporting on Form 1-U requires issuers to disclose certain major developments, including changes of control; changes in the principal executive officer and principal financial officer; fundamental changes in the nature of business; material transactions or corporate events; unregistered sales of five percent or more of outstanding